FICO credit scores relating to home buying

If Somebody Called You a "660,"
Would or Should You Care?

These days, absolutely. That number represents a credit score that will allow most consumers to coast into a new mortgage and home, hands-down.

So how do borrowers find out where they stand? The simple answer is, they often can't, because many lenders, credit reporting agencies and scoring system developers treat customer ratings as privileged information.

If a person is declined for credit, or denied for employment or insurance or whatever, they're entitled to get a credit report to see what the negative information is, but they have no right to obtain their credit score or obtain any information about how the score was compiled," says Dale Hartley, a St. Petersburg, Fla., financial counselor and founder of the Web protest site

The credit score is a big wild card," he adds. "You're just wrapping everyone's life into one big number.

Many lenders -- from large, multinational credit card companies to neighborhood banks -- have used credit scoring in one form or another for more than 30 years. They have been able to do so largely because the biggest vendor of scoring systems, Fair, Isaac and Co. of San Rafael, Calif., developed a way to scan credit histories, run mathematical computations on them and produce numbers that predict to some degree who will default if given a loan and who won't. The widespread use of these systems drove the growth of instant credit card approvals and so-called risk-based pricing, the process by which two customers applying for the exact same loan on the same day might receive different terms, rates and credit limits because they have different scores.

Scoring benchmarks set
When the mortgage industry started clamoring for ever-speedier and technologically advanced ways to process and fund loans in the mid-1990s, scoring began dominating that part of the finance industry. Fannie Mae and Freddie Mac, the two corporations that buy loans from lenders, package them together and sell them off to Wall Street investors, began pushing clients to use computerized underwriting systems that compiled scoring information. They also set scoring benchmarks above and below which they probably would and wouldn't buy loans.

Credit scoring is prevalent in mortgage lending for the same reason it has been very predominant in consumer financing -- boats, cars, credit cards or whatever: The predictiveness of the scoring helps us better assess risk than the old ways of doing things," says Ginny Ferguson, co-owner of Heritage Valley Mortgage Inc. in Pleasanton, Calif. "To that end, credit scoring is a very good tool for all of us to utilize."

Yet the sudden appearance of the Fannie Mae and Freddie Mac benchmarks, which deemed borrowers with scores above 660 the golden children and those with scores below 620 the undesirables, wreaked havoc on consumers and corporations alike. Lenders had to abide by the rules in order to sell off their loans. But they weren't prepared to explain to Jane and John Doe how their score was computed or why it kept them from getting a mortgage.

What's the difference between a 600 and 620? Which blemish in our past pushed us over the edge? Will our score be higher in six months, or six days, if we pay the bills on time between now and then? Loan officers either didn't know or wouldn't say -- and there was nothing consumers could do about it.

Confusion and unfairness
Unfortunately for mortgage shoppers, the situation isn't much different now, because of the way the Fair Credit Reporting Act is written. One paragraph of the law requires credit agencies to disclose information in a person's file at the time it's requested, for example. But it continues to read, "except that nothing in this paragraph shall be construed to require a consumer reporting agency to disclose to a consumer any information concerning credit scores or any other risk scores or predictors relating to the consumer."

Is your credit score 666? Has your whole life been branded with this one ominous number?" asks Hartley, the counselor. "I think that's just the sheer unfairness of it."

Industry officials, while acknowledging that they haven't provided as much information about scoring as they should have, counter that people won't gain a lot by learning their scores. They point out that a score can change from one day to the next, and that a score pulled by a credit card lender might differ from one obtained by a mortgage company because each scoring system looks at different variables, depending on the type of financing somebody is trying to obtain. Lastly, they say giving out a score without any details about how it was computed has the potential to be more harmful than providing nothing at all.

Our position has always been that more education is better than less, but our difficulty, as well as everybody else's in the industry -- lenders and those people who develop scores, Fair, Isaac and others -- is how best to get that information out to consumers," says Norm Magnuson, vice president of public affairs for Associated Credit Bureaus Inc. The Washington-based group lobbies for credit agencies such as Experian, Trans Union LLC and Equifax Inc.

I think there's value in knowing that there's scoring out there, but I'm not so sure there's value in going out there and" providing the number, he adds. A mortgage shopper might find out about a high score, consider it a free pass and say, " 'I'm golden. I can go out and get a house.' "

Instead, industry officials say potential borrowers should review their credit reports and figure out what needs to be fixed before applying for loans. Rather than obsess about how critically scoring systems look at a 30-day late mortgage payment two years ago or a $5,000 balance on a $5,100 limit credit card, they should focus on establishing solid credit histories. Besides, Fair, Isaac spent years developing its methodology and now generates revenue by selling its systems to clients. That means it wouldn't make much business sense for the company to provide detailed, proprietary information about how the calculations work.

A score is nothing more than a number," says Ferguson, the mortgage broker. "What is important to the consumer is understanding what things they are doing in their credit life -- payment history, types of credit, how much credit they're using."

A chance to sound off
Still, the FTC wants to give people a chance to sound off about disclosure and perhaps push for procedural changes in the way credit scores are treated. The agency's late afternoon session of the all-day forum will deal specifically with consumer access to scores and how it can be improved.

In the meantime, consumers can get hold of their scores by finding lenders who are willing to provide them. That's because current federal law, while not explicitly requiring loan officers to tilt their hands, doesn't prevent them from doing so either.

I don't think we get as many inquiries as you might think," says Daniel Gilbert, chief executive officer of Rock Financial Corp., a Bingham Farms, Mich.-based lender. "They're more concerned with, 'Am I approved on the loan.' "

But I don't see why they couldn't share that information with a customer."

The NAMB also is trying to educate its membership about scores and how to better explain them to consumers, according to Ferguson. That way, some of the mystery will be taken out of the process and people can become more comfortable with the way it works.

It's just like every other issue that comes to the forefront in every industry," she says. "Until the world really understands it, they're not going to be able to live with it very well and there's going to be a lot of controversy."

-- Posted: July 21, 1999

Most people never even see their credit score.
Credit scoring industry pioneer Fair, Isaac and Co. provides this peek of how someone with good credit and someone with bad credit might be treated under its system. While the company was willing to run the calculations for Bankrate.com (tm), it was not willing to share information about those calculations.

Example 1: Low/average-risk person with good credit score
(Date of report: 7-15-96)

This profile presents a certain degree of risk for the lender. First, the payment history raises some concerns due to the collection item and serious delinquency on the second bank card. Because these items are a few years old, they do not raise the level of risk of concern as much as they would if they had occurred recently, but they do affect the score. The balances outstanding also represent a certain level of risk. Although only a fairly small portion of the available credit has been used, it is still higher than optimal. However, the long file history and lack of recent inquiries or credit line openings are positive indicators. This profile would probably represent an acceptable risk level to most credit grantors.

Type of loan Dt reported Dt opened High credit Balance Current rating Delinq History
Bank card 6-96 3-85 $5,000 $1,500 Current None
Auto loan 6-96 7-92 $8,000 $2,000 Current None
Retail 9-87 3-96 Current $1,000 5-94 None
Bank card 5-94 11-84 $3,000 $0 Current 120+
4 yrs ago
Inquiries: None
Public record/Collection items: 1 collection item, 4 years ago, for $500
CREDIT SCORE: 706
Example 2: High-risk person with poor credit score
(Date of report: 7-15-96)

Most lenders would agree that this profile represents a high level of risk. First, one of the bank cards was delinquent the last time it was reported. Although the delinquency is minor -- only a 30-day rating -- it points to potential risk, given that the file history is quite short. The ratio of balances to high credit is also indicative of significant risk. The balances are quite large relative to their high credit amounts and the amount of time the accounts have been open. Also telling is the fact that all trade lines have balances. This profile, along with the short file history, strongly contributes to the high-risk ranking.

Type of loan Dt reported Dt opened High credit Balance Current rating Delinq History
Bank card 6-96 10-95 $3,000 $2,700 30 days None
Retail 5-96 11-95 $750 $300 Current None
Bank card 5-96 2-96 $1,500 $1,600 Current None
Retail 3-96 1-94 $500 $450 Current None
Inquiries: Bank: 7-1-96; Retail: 6-13-96; Bank: 2-7-96; Retail: 11-2-95; Bank: 3-23-95
Public record/Collection items: None
CREDIT SCORE: 585

FICO Scores By Michael D. Larson Bankrate.com

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