INTRODUCTION TO FICO
Fair, Isaac and Co is the San Rafael, California Company founded in 1956 by Bill Fair and Earl Isaac. They pioneered the field of credit scoring for financial companies. They have expanded their enterprise to cover decision systems, analytics and consulting. Every credit agency, and most lenders, calculates your credit score using software from FICO (Beacon) or in house software based on
What your score means.
According to Equifax, 51% of all the people with a credit score from 550-599 will default on their credit.
This rating system is meant to develop a snapshot of the risk you currently represent to a lender. Several parameters in your credit file, including length of credit history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a 3-digit score between about 300 and 950. There are other scores used by lenders and insurance companies (some of which are developed by FICO) such as Application and Behavior scores. These other scores take other information into account. Usually a lender will use a combination of your credit score with other factors when determining your risk. They all have the same objective, to determine the borrower's potential risk. Regardless of whether the score was generated by FICO or a system based on FICO parameters, they all yield an industry standard 3 digit score. This score places the borrower in one of 3 main categories. (We named the third one ourselves)
On average, 90 days after pulling a score, 74% of files are still within 20% of the original score.
Prime, Sub Prime, and Shafted
Prime
If your credit score is above 680, you are considered a "prime borrower" and will have no problem getting a good interest rate on your home loan, car loan, or credit card.
Sub Prime
If your credit score is below 680, you are "sub prime", and will likely pay a much higher interest rate on your loan.
Shafted
Below 560 is the shafted score. At least that is how most lenders and credit issuers perceive it. You can still get a credit card but you will likely be hit with a security deposit or high acquisition fee. In addition to that your interest rate will likely be 22 to 23%. You can forget about most home loans and the majority of new car loans at this score. Below 560 is no place to be. You will pay much, much more in higher interest and unnecessary fees. You may even pay more for your insurance rates. A very low score can even prevent you from getting a job with many companies.
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What is the Cost of Having a Low Score?
If you are making payments on a car, you are probably paying between $5,000 and $9,000 more in interest just for having bad credit. This added interest shows up every month in a higher payment.
| Credit Status |
Rate |
Payment |
Monthly Cost of Bad Credit |
Over 5 Years |
| Perfect |
10% |
$424.94 |
$0.00 |
$0.00 |
| Mildly damaged |
14% |
$465.37 |
$76.17 |
$4,722.54 |
| Damaged |
20% |
$529.88 |
$8,593.30 |
$8,593.30 |
Bad credit in auto financing can really hurt, but it is nothing compared to the cost of bad credit when a home is involved. A typical home can cost between $50,000 and $130,000 more in interest if you are buying the home with a low FICO score, as indicated below.
| Credit Status |
Rate |
Payment |
Monthly Cost of Bad Credit |
Over 30 Years |
| Perfect |
7% |
$655.23 |
$0.00 |
$0.00 |
| Mildly damaged |
9% |
$804.62 |
$139.31 |
$50,155.24 |
| Damaged |
12% |
$1,028.61 |
$363.30 |
$130,791.63 |
As you can see, having a low score can cost you hundreds of dollars per month. That is why it is very important to obtain and keep a high score.
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