|
'Help People Understand' Scores
"I hope this information will help people to
better understand FICO scores and the value
for them of avoiding credit missteps. It
illustrates key points such as the higher
your score, the farther it can fall if you
stumble," says FICO spokesman Craig Watts.
"Getting and maintaining a good score isn't
complicated. We all just need to pay our
bills on time, keep credit card balances low
and take on new debt sparingly. "
The greater transparency about FICO scores
is important because American consumers'
ability to get credit rises and falls with
the number. FICO, the company that pioneered
credit scoring, assigns consumers a
three-digit number from 300 to 850,
depending on how well they handle credit.
Other companies also offer scores, but
FICO's version is the most widely used by
lenders in determining whether a consumer
can borrow, and at what rate.
FICO's credit score has been around for
decades, but only within the past decade
have consumers gradually gained access to
theirs. Though the raw numbers can be
purchased, how they're figured remains a
FICO secret, as closely guarded as the
formula for Coca-Cola. Until Thursday, FICO
revealed only broad categories of factors
influencing the score, but not the number of
points at stake for consumers who fail to
pay as agreed. The "damage points"
information, revealed in a report by
personal finance writer Liz Pulliam Weston,
will be made available through its
myFICO.com Web site starting this weekend.
FICO's information shows that bankruptcy
does the most serious damage to a credit
score (up to 240 points), followed by
foreclosure (up to 160 points) while maxing
out a credit card has the least numerical
impact (as few as 10 points).
Those with good or excellent credit --
so-called prime borrowers -- put more points
at risk with each mistake. For example,
someone with an average credit score of 680
who pays a bill 30 days late will see a drop
of 60 to 80
points. But for someone with an excellent
credit score -- 780 -- that same delinquency
can send a FICO score tumbling by 90 to 100
points.
The Cost in Dollars
In order to show just how badly a drop in
your FICO score can hurt your wallet, we
spoke with members of the home mortgage,
auto and credit card lending industries. We
presented hypothetical scenarios of a
consumer who decided to apply for a
$200,000, 30-year mortgage; a $20,000,
five-year auto loan and a credit card. While
all the industry insiders stressed that a
FICO score isn't the only factor in
determining who gets credit and at what cost
(other factors they cited include the
borrower's debt-to-income ratio and whether
they have already established a relationship
with the lender), they were able to provide
an idea of what a borrower who had the
following credit scores could expect.
For
a Consumer Who Started With a FICO Score of
780:
-
Following a 30-day late payment, the
consumer's car loan rate would jump
nearly 3 percent, costing the borrower
$26 more each month.
-
Following a debt settlement, the
consumer would pay as much as $109 more
each month on a home mortgage.
For
a Consumer Who Started With a FICO Score of
680:
-
Following a 30-day late payment, the
consumer would pay $41 more each month
for a car loan.
-
Following a 30-day late payment, the
consumer would pay as much as $95 more
each month on a home mortgage.
-
Following a debt settlement, the
consumer would no longer qualify for a
credit card.
Some Surprised By the Details
Consumer advocates say it's important for
borrowers to know what can damage their FICO
scores. "If they know it in advance, they
won't go out and step in a pile of doo-doo.
They won't go out and do some of these
things," says Linda Sherry, director of
national priorities with advocacy group
Consumer Action. Even experts found some
surprises in today's news. "FICO imposes
bigger hits than I would have thought for
being maxed out or 30-days late just once,
reinforcing my view that it is a cruder,
blunter instrument than they like to claim.
Nevertheless, it is a powerful, widely used
crude blunt instrument," says Ed Mierzwinski,
consumer program director for the U.S. PIRG
consumer advocacy group.
Of course, knowing the impact on a FICO
score and actually avoiding these mistakes
are two separate things: Amid rising
unemployment and other daily financial
struggles, paying bills and staying on-track
financially becomes a much bigger challenge
for many borrowers.
"Some of these things are out of their
control," Sherry says of consumers.
Additionally, as Weston points out,
consumers with identical FICO scores can
have different credit histories. That means
the same slip-up -- such as maxing out a
credit card -- could have different impacts
on consumers who have the same FICO score.
In the examples they provided, FICO assumed
each borrower had several active major
credit cards, a mortgage, car loan and
student loans.
Sherry acknowledges the benefit of putting a
number to a financial blunder. "I don't
think we necessarily knew the numbers that a
bankruptcy could apply to a credit score,"
Sherry says.
|
