Credit Scores- A Beginner's Guide

Remember the school threat, “this will go on your permanent record”? 

I never actually saw my permanent record file, so I can’t verify how “permanent” it is. I do know that my grades are pretty permanent but, unless I’m applying for an advanced degree, I doubt anyone is going to be requesting that information. 

There is another permanent record that does follow us around. This record is our credit score. Whenever we apply for a credit card or loan, the lender will request a credit report. In most cases, lending institutions will also want to know our FICO® score. 

Rather than present a detailed analysis about credit scores and a breakdown of their mathematical derivatives let this be an introduction to credit scores. In particular, I’m going to describe the FICO® score. 

There are three major credit agencies. They are groups that track and report your use credit. 

• Equifax: 1-800-525-6285; www.equifax.com; P.O. Box 740241, Atlanta, GA 30374-0241

• Experian: 1-888-EXPERIAN (397-3742); www.experian.com; P.O. Box 9532, Allen, TX 75013

• TransUnion: 1-800-680-7289; www.transunion.com; P.O. Box 6790, Fullerton, CA 92834-6790

If you are ever denied credit you have the right to request a free copy of the report that was used to evaluate the decision. Contact the agencies or check the weblinks for more detailed information.

Now, on to the FICO® score. The reason you see a trademark is because this score was created (in 1956) by the Fair Isaac Corporation. They derived a sophisticated a methodology to determine a person’s likelihood to pay back a loan.

In their booklet, “Understanding your FICO^® score” (available for download in PDF format) Fair Isaac states,

“A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time …. Lenders use FICO® scores to help them make billions of credit decisions every year. Fair Isaac develops FICO® scores based solely on information in consumer credit reports maintained at the credit reporting agencies.”

If your credit score is too low, you may be denied a loan or credit card. If it is low, but acceptable, you may be offered credit at a higher interest rate. In other words, high risk borrowers will be required to pay more than a person who has wisely used credit. 

Here’s an example from the myFICO website for a $300,000 home loan
(30 year fixed interest rate using sample July 8, 2008 data):

FICO® Score	A.P.R.	Monthly payment *
760-850	6.19%	$1,836
700-759	6.41%	$1,879
660-699	6.70%	$1,935
620-659	7.51%	$2,099
580-619	9.45%	$2,512
500-579	10.31%	$2,702

As stated earlier, this is a snapshot and is subject to change based on the time the loan is requested, the loan amount and the customer’s credit history. The lesson, however, is obvious. The better the credit score- the lower the payment. 

To improve your credit score, here’s what FICO® has to say:
http://www.myfico.com/CreditEducation/ImproveYourScore.aspx 

If you’d like to know more about purchasing a home in Arizona, please let me know. I’m a real estate agent based near Phoenix. I can help you find your credit score. I work with experienced lenders who can let you know how much money you’re able to borrow and, from this, how much your monthly payment is expected to be.

I hope this has been a helpful guide. Call me any time, my advice is always free.

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Chuck Willman- Arizona Real Estate Expert
480.292.0600
www.AZvest.com
chuck@AZvest.com