Why FICO Credit Scores Matter

How the world has changed! From simply needing to fog a mirror to qualify for a home loan to today's reality that forces prospective borrowers to leap multiple hurdles and clear dozens of obstacles, even if they have money in the bank, a solid job, and a six-figure income.

More and more people are jumping into the housing market, pushing sales up over year ago totals and yielding stiff competition for the most attractively priced homes, especially those under $400,000.

Yet many of these prospective borrowers run smack into a hesitancy on the part of lenders to write home loans to anyone.

Like deer in a headlight, lenders don't know which way home prices are going so some prefer to do nothing rather than risk writing more possibly bad loans on top of the thousands that have already yielded today's credit and financial crisis.

Over the coming weeks, this page will focus on the realities of landing a home loan in the new world, from the importance of a solid credit history to the differences among the relatively limited number of loans available today.

High on the list of topics buyers must understand is the importance of what is know as a FICO score, a number developed by the Fair Isaac Corp. that helps lenders and others predict how likely it is that a borrower will make credit payments on time.

Credit scores affect whether a borrower can get credit and what you pay for credit cards, auto loans, mortgages and other kinds of credit. For most kinds of credit scores, higher scores mean the borrower is more likely to be approved and pay a lower interest rate on new credit. Want to rent an apartment?

Without good scores, an apartment application may be turned down by the landlord.

FICO scores also may determine how big a deposit a borrower would have to pay for telephone, electricity or natural gas service. Having good credit scores makes financial dealings a lot easier and can save money in lower interest rates.

See the example below.

That’s why FICO scores are a vital part of a borrower's financial health.

FICO scores range from 300-850, and most people score in the 600s and 700s (higher FICO scores are better).

Lenders buy individual FICO scores from three national credit reporting agencies, also called credit bureaus: Equifax, Experian and TransUnion. In the eyes of most lenders, FICO credit scores above 700 are very good and a sign of good financial health. FICO scores below 600 indicate high risk to lenders and could lead lenders to charge you much higher rates or turn down your credit application.

Credit Scores Matter, a Lot!
Let’s say a buyer wants a thirty-year mortgage in the amount of $200,000 and their FICO credit scores is 720. They might qualify for a mortgage with a low 5.5 percent interest rate, assuming multiple other factors are on order, such as a solid job and a down payment. But if their FICO score is 580, they probably would pay 8.5 percent or more — at least 3 full percentage points more in interest. On a $200,000 mortgage loan, that 3 point difference will cost them $4,800 dollars a year, adding up to $144,000 dollars more over the loan’s 30-year lifetime.