May
2008
Your Number Is Up!
“Back in the early 1990’s I said that we would all be a ‘number’
someday… that day has finally arrived.” Daniel Cabretta
Have you ever heard the phrase “You don’t want to be just a number?” Well,
guess what? Now you are. Officially – as of March 31, 2008 – all major
banks and financial institutions have gone to a form of mortgage pricing
based solely on credit scores… a system adopted and formed by the
country’s two largest sources of mortgage money: Fannie Mae & Freddie Mac.
Actually, credit scoring has been around for quite some time. However, it
wasn’t until the early 1990’s that mortgage lenders started to see scores
from the three major credit reporting agencies: Equifax, Experian, and
TransUnion. The thought at that time was to create a slow extinction of
traditional underwriters, loan originators and appraisers, and rely more
heavily on a computerized scoring model of the “Fair Isaac Corporation”.
Fair Isaac, or FICO as we call it, is a publicly
traded company that created the best known and most widely used
credit-scoring model in the United States. Your Fair Isaac score is
computed by Experian only… Equifax uses what is referred to as a “beacon
score” and TransUnion uses an “empirica score”. All three major scoring
models or versions for the different agencies were developed by FICO. Are
you confused yet? Take this on: Each credit bureau has about four versions
of their own different computation formulas for different forms of credit.
This is why the range of numbers (low to high, with high being the best) is
all over the board. I’ve personally heard of credit scores ranging anywhere
from 1 – 1,000… so let me set you all straight on how credit scoring
essentially works.
Common sense would tell you it should be harder to obtain a mortgage loan
than an auto loan or a small consumer loan… which sounds simple and fair
enough. Thus, the intensity would be greater if you apply for a mortgage
loan verses an auto loan. Different degrees of measured risk of default are
taken into account, along with various factors in a person’s financial
history. Each credit bureau uses its own computation model and its own
database that are independent of each other. If you apply for a mortgage,
your score will usually range from about 300-850 (850 being the best).
Don’t worry if your score isn’t quite 850. I’ve only seen a few above 820…
but anything above 780 is excellent. If you can manage to keep your score
above 680, you’re above average.
Here is why everyone seems confused with his or her FICO:
The days of letter-writing to document misreported information have been
gone for quite some time now. Unfortunately, when FICO scores drop due to
inaccuracies or identity theft, only time can ameliorate a low score… no
matter what you might hear to the contrary, there is no quick fix.
You might now be thinking of some of your past and present mistakes that
ultimately have affected your FICO score… mistakes I feel have to be made if
one is to grow and prosper. Like slamming your finger in the car door, you
simply must try and not make the same mistakes twice.
“You can be discouraged by failure, or you can learn from it. So go ahead
and make mistakes, make all you can. Because remember, that’s where you’ll
find success – on the far side of failure” Thomas John Watson SR.
Until next month, this is Danny On The Money.
Regards,
Daniel Cabretta
dannyonthemoney@sbcglobal.net
