Anatomy of a Credit Score
Credit is becoming increasingly important for many reason but particularly when looking to buy, invest, refinance, etc. So just what is a credit score? To calculate a score, 22 pieces of data collected from the three major credit bureaus are used. The lowest possible score is 300 while the highest is 850.
The final number is a composite of individual ratings in five categories:
- Payment history (35% of the rating)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
- Debt (30%)
Income is not a factor. “A person can have a very high income and never pay their bills,” explained Craig Watts, public affairs manager for Fair Isaac Corp (FICO).
Fair Isaac calculates a FICO score based on the data provided by each credit bureau. It’s not uncommon to see up to a 50-point differential between ratings. The reason: Bureaus collect data at different times of the month, and one bureau may have inaccurate information.
The higher the score, the lower the risk you are to a creditor — and the less interest you’ll pay. Only 13% of the population has FICO scores of 800 or above; the median is 723. There is no single cut-off for loans, however, and cut-offs employed vary from industry to industry. Generally, borrowers with scores above 740 receive best rates.
To see how a change in your FICO score affects how much you’ll pay, consider this example. On a $350,000, 30-year fixed mortgage, you’ll pay 6.24% in interest and $2,153 a month if you score between 720 and 850. If your score drops to between 620 and 674, your interest rate jumps to 8.05%, and your monthly cost rises to $2,581. You will pay an additional $154,131 over the life of the loan, according to a calculator on myfico.com.
Ron J Howard
Homestone Mortgage
Senior Mortgage Banker/Broker
www.ronhowardseattle.com
CELL/DIRECT 206.852.7023
FAX 866.771.0128
EASTLAKE OFFICE
2345 Eastlake Ave E Suite 202 Seattle WA 98102