5 Factors in Credit Scoring

Why Your Credit Score is So Important

The credit scoring model seeks to quantify the likelihood of a consumer to pay off debt without being more than 90 days late at any time in the future. Credit scores have many different ranges, however, the score that is used by 90% of lenders and creditors in this country is the FICO score, and the FICO score range is 300 to 850. Credit scores can range between a low score of 300 and a high score of 850. The higher the score, the better it is for the consumer, because a high credit score translates into a low interest rate. This can save literally thousands of dollars in financing fees over the life of the loan.

Only one out of 1,300 people in the United States have a credit score above 800. These are people with a stellar credit rating that get the best interest rates. On the other hand, one out of every eight prospective home buyers is faced with the possibility that they may not qualify for the home loan they want because they have a score falling between 500 and 600.


    


The Five Factors of Credit Scoring

Credit scores are comprised of five factors. Points are awarded for each component, and a high score is most favorable. The factors are listed below in order of importance.

1. PAYMENT HISTORY - 35% IMPACT
   Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments and charge-offs all have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.

2. You Will Pay Higher Interest Rates

It just makes sense that if you have higher credit scores, you will pay a lower interest rate on your mortgage loan and will have to put less down. Fair Isaac's consumer website at

http://www.myfico.com offers a mortgage payment calculator that is updated regularly to show consumers how their FICO score can affect their interest rate.

Per myfico.com, if your credit scores are under 620, consumers could pay $1420 more per month than someone with a 720 credit score for a 30-Year Fixed Rate Mortgage with a loan principal amount of $300,000. That's an additional $17,040 per year, and approximately $511,151 over the life of the loan.

Of course, interest rates are determined by many factors but the bottom line is that individuals with low credit scores will pay nearly three times more in interest than those with strong credit scores.

3. Now You Will Be Subject To Loan Level Price Adjustment Fees (LLPA's) when applying for a conventional mortgage.

 Consumers with a middle score of less than 719 will now be charged the following LLPA fees, which were implemented by Fannie Mae and Freddie Mac on June 1, 2010:

FICO Score	LLPA You Will Pay
Below 620	3.000%
620-639	2.750%
640-659	2.250%
660-679	1.750%
680-699	0.750%
700-719	0.500%

For people experiencing the worst-case scenario, carrying a middle credit score of less than 620 could cost you an extra $8,250 upfront on a $300,000 loan amount.

4. You Will Pay More For Private Mortgage Insurance (PMI)

PMI is insurance that mortgage lenders require from most homebuyers who have less than a 20% down payment on their property. If your credit scores are marginal, your private mortgage insurance rate might be hundreds of dollars higher per month than you expect, and you usually don't find this out until closing. 

5. You Will Compromise Your Ability To Refinance For "Cash Out"

As you build equity in the ownership of your home, you may decide to borrow against that equity for the purpose of home improvement, debt consolidation, or even to pay college tuition for your children. Lower credit scores will not only affect your ability to take out a home equity line of credit (HELOC), but you will also have to pay higher interest rates and other upfront costs if you are approved.