Sounds confusing, doesn’t it?
The credit score is actually calculated using a
"scorecard" where you receive points for certain things. Creditors and lenders
who view your credit report do not get to see the scorecard, so they do not know exactly
how your score was calculated. They just see the final scores.
Basic guidelines on how to view the FICO scores
vary a little from lender to lender. Usually, a score above 680 will
require a very basic review of the entire loan package. Scores between
640 and 680 require more thorough underwriting. Once a score gets below
640, an underwriter will look at a loan application with a more cautious
approach. Many lenders will not even consider a loan with a FICO score
below 600, some as high as 620.
FICO Scores and Interest Rates
Credit scores can affect more than whether your loan gets approved
or not. They can also affect how much you pay for your loan, too. Some lenders establish a
"base price" and will reduce the points on a loan if the credit score is above a
certain level. For example, one major national lender reduces the cost of a loan by a
quarter point if the FICO score is greater than 725. If it is between 700 and 724, they
will reduce the cost by one-eighth of a point. A point is equal to one percent of the loan
amount.
There are other lenders who do it in reverse. They establish their
base price, but instead of reducing the cost for good FICO scores, they "add on"
costs for lower FICO scores. The results from either method would work out to be
approximately the same interest rate. It is just that the second way "looks"
better when you are quoting interest rates on a rate sheet or in an advertisement.
copyright 2006 by Terry
Light and RealEstate ABC, revised 2002
