Usually the specific credit score that is required by a creditor for extending credit or for providing the best credit terms and best interest rates are not made public. Frequently information on this subject is mainly based on guesswork. The following is information on how some companies and agencies use credit scores for extending credit (or insuring loans). It offers some indication of how available credit is related to credit scores.
This large quasi-government agency purchases a high percentage of the country’s mortgages. In order for a lender to have the ability to sell its loans to Fannie Mae, it must meet the guidelines set forth by Fannie Mae.
Lenders are required by Fannie Mae to whenever possible measure credit using the classic FICO credit score. Different credit reporting agencies also refer to the classic FICO score by the following names:
– TransUnion FICO Risk Score, Classic 04
– Experian/Fair Isaac Risk Model V2SM
– Equifax Beacon 5.0
As of 2010, a 620 credit score was generally required by Fannie Mae in order for the federal government to insure a loan. Lenders may of course have their own requirements that are stricter than the ones that Fannie Mae requires.
The Federal Housing Administration (FHA)
The FHA, under the Department of Housing and Urban Development (HUD), insures mortgages in order to encourage lenders to offer loans for buying homes. Its criteria varies depending on how much the down payment is. Borrowers who have FICO scores lower than 579 are required to make a down payment of at least 10%. Those who have 580 and higher scores are only required to make a 3.5% down payment. Applicants whose credit scores are lower than 500 do not qualify for FHA insurance. In addition,lenders might have stricter requirements than the FHA, and individuals who have low scores most likely will be charged with higher interest rates.
The report from Experian Automotive analyzing auto loans for 2010’s third quarter showed just how few loans are granted to borrowers who have low credit ratings. The reported separated borrowers into nonprime (borrowers with 679 and lower scores) and prime (borrowers with 679 and above credit scores). Approximately 11% of loans were for borrowers with credit scores ranging from 620 to 679; approximately 7% of loans were for borrowers with 550 to 619 scores; and fewer than 2% of loans were for borrowers with credit scores lower than 550. Experian Automotive found that new car customers had an average credit score of 769, while used car buyers had a 683 average credit score.
Obtaining Your Credit Score
A creditor in certain situations is required to provide the credit score to you that it relied on in a credit decision or transaction. You can pay to receive your credit score as well. However, you might not need to pay, as we explain below.
When You Can Receive Your Credit Score For Free
There are some situations when you must be provided with your credit score that is connected with certain credit transactions. The following are the situations where this is applicable:
When you apply to get a residential mortgage. When you are applying for a loan to purchase a residential property, if a credit score is used by the lender, then your credit score must be disclosed, along with the range of potential scores the scoring model used for generating your score, up to four factors that affected your scored negatively in order of their importance, the date of when your score was generated, as well as the name of the entity providing the score (Fair Isaac, for example).
In addition, the lender must furnish you with a notice that includes the credit report agency’s contact information that provided the score. In general, Fannie Mae requires lenders wanting to sell their loans to them to obtain FICO credit scores from the three major credit reporting agencies, meaning you will be given all three of the scores.
When loan applications are evaluated by lenders through the use of an automated system, they are required to disclose either the credit reporting agency’s score or the system’s score as well as the key factors affecting it. (In this situation, if you get a score and it isn’t clear, make sure to ask your lender which one was provided to your – a credit reporting agency score or one obtain from its system.)
An adverse action is taken against you by a creditor. Starting on July 21, 2011, when your credit score is used by a creditor to make a decision that results in taking an adverse action against you, then your credit score must be revealed to you and you must be informed of your right to obtain a copy of your credit report for free. An adverse action by a creditor includes the following:
- Any action is taken or a determination is made in connection with a transaction or application initiated by you that is adverse to what your interests are.
- Makes changes to your account’s terms which are unfavorable (but doesn’t change the terms of substantially all or all other consumer accounts that are the same type as yours
- Terminates your account
- Refuses to grant credit that you requests
- Refuses to increase your credit limit.
The creditor is also required to disclose the credit file used to base the score on or name of the entity providing the score, the date the credit score was generated, the factors that affected your score adversely and the range of potential scores.
You are charged a higher interest rate by a creditor. In certain limited circumstances, started on January 1, 2011, if you are charged a higher annual percentage rate (APR) by a creditor than what they charge to other individuals, they must comply with specific notice obligations, and these might include providing you with your credit score. The new notice requirements apply when a consumer report is used by a creditor in connection with determining what regular APR should be charged for existing or new credit, and you are offered a rate that is less favorable than the interest rate that is offered to around 40% of other individuals who are offered a similar kind of credit.
There are many limitations and exceptions to the notice requirement.
- If you are given credit based on terms that you requested then the credit isn’t required to comply with the new notice rule.
- The new notice rules don’t need to be complied with if the creditor provides you with an “adverse action” notice.
- All the creditor needs to do is compare APR rate for a specific kind of credit (like variate rate home loans, new car loans, or student loans).
- If a certain credit card offer is sent by the creditor to just customers who have low creditor scores, for instance, it doesn’t need to inform you what credit card offers are made to other consumer groups.
- -Only the regular APRs need to be compared, and not other rates. Therefore another group of consumers can be given a credit offer that has the same APR, but offer certain consumer a plan with a default rate that is different than the one that applies for most consumer making a late payment and they are not inquired to disclose this to you.
Barring one of limitations or exceptions above, if you are offered a less favorable APR by a creditor than what is offered to around 40% of other borrowers, then either you must be informed of that, or your creditor score must be revealed to you as well as how it compares with the others (this is referred to as a credit score notice).
If there is no APR with the credit that you have request, the creditor must inform you whether the contract’s most important credit term is different for you compared to others. For instance, you may need to be informed that you are being charged a higher utility service deposit compared to what others are charged.
Creditors are required by your state to disclose your creditor score to you. Some states to require creditors to disclose your creditor score to you if a credit score was relied on for certain credit transactions: For instance, under California law, when your credit score is obtained by a car deal in connection with you apply for a vehicle lease or loan, then the dealer is required to provide you with your score, the credit reporting agency’s contact information that supplied your score, and information on the range of potential scores.
When You Unsure, Request Your Score Along With The Reasons For The Creditor’s Decision or Action
Under the new rules creditors are required in some situations to disclose your credit score (or give you the option of ordering a free credit report). However, these rules are complicated, overlap with other rules at times and have many exceptions. What that means is that it might be hard to know whether or not you are entitle to see your credit score or get a free credit report.
- The best thing to do is request more information any time you are denied credit, your credit card is cancels, your credit limit is reduced, or you are offered credit terms that are not as favor as you think you deserve or that you requested. In those situations, even when a creditor does not provide you with a credit score or a notice, always ask the following:
- The reasons why the creditor is not providing credit to you with more favorable terms, canceling your credit or lowering your credit limit.
- About the best terms and rate offered by the creditor.
- How the terms you are being offered by the creditor compared with the terms that others are being offered.
- Whether your credit score was used by the creditor in making its decision as well as a free copy of your credit score along with the most important factors that went into determining your score
The creditor might not agree to give you this information, however it never hurts to ask for it. Also, the creditor might be violating the law when you are given your credit score or notice when it is required.
Should You Pay To Obtain Your Credit Score?
Your credit score can also be obtained from Fair Isaac as well as other credit reporting agencies. These firms distribute or develop scores for a cost of approximately $15 to $20. Just be sure to watch for extra fees such as credit monitoring services, which can drive the price up.
However, it might not be worth it to pay to obtain your credit score. The companies that sell the scores are not required to you the credit scores that are actually used by creditors. They can instead sell you a credit score that has been developed for helping consumers understand credit scores. Even when you do receive the real credit score that some lenders use, since different scores are used by creditors (and generate their own scores at times), you can’t really be sure that the credit score that you purchase will be the one that a specific credit will be relying on.
For example, in 2008 Consumer Reports spent $130 to obtain 11 different credit scores on one person. The scores were different by as much as 72 points, and ranging from every from fair, to good to excellent credit risk. Consumer Reports concluded that it was most likely not worth paying for credit scores. Ultimately, the only way of ensuring your credit score is good is improving your credit history.