Why is Fair Isaac in Charge of Your Credit Score?

p>AMA logo and imageA recent study conducted by the online dating site Match.com reported that along with asking a first date about jobs, interests and family, more and more relationship-seekers are also inquiring about their prospective partner’s credit scores. For many, the credit score – those magical numbers between 300 and 850 that signify a person’s ability to pay back borrowed money – plays a defining role in all aspects of life. And now, with tighter mortgage lending standards in place, anyone seeking funding for home purchases needs to be familiar with what those numbers mean and how they affect a borrower’s loan options,

The keys to the credit report are held

by three major credit bureaus: Equifax, Experian and TransUnion. These bodies collect information from lenders about a borrower’s current status and credit history. This information is then compiled into the infamous credit report, which becomes available to any lender or company a borrower approaches about a loan, credit line or other lending arrangement.

Now, about that guy Fair Isaac. Information on those three credit reports is collected and crunched by the Fair Isaac Corporation, better known by the acronym FICO. It’s those credit scores, ranging from 300 (very bad) to 850 (perfect) that lenders use to determine creditworthiness. Although other credit scoring systems exist, such as VantageScore, Fair Isaac’s scoring remains the standard for most lenders.

The highest FICO scores – between 750 and 850 – qualify applicants for the best rates, more loan options and other perks. A score of 620 or lower places a borrower in the dreaded “subprime” category: still eligible for a loan based on the score and other factors, but at a higher risk for default. In general, borrowers need a FICO score of at least 500 to even be considered by most leading lenders. And scores in those lower brackets mean higher interest rates and limits on loan options.

A credit score isn’t the only factor in getting approved for a loan, though. Borrowers with lower scores but large cash reserves that can cover a large down payment may also be able to get financing. Likewise, a low debt to income ratio, or large amounts of available but unused credit, can play a role in balancing out a lower than optimal credit score.

Lending experts point out that often borrowers make the mistake of assuming that just because they have a low credit score or other blemishes in their financial history, they wont’ qualify for a mortgage, but it pays to consult with lenders to see what options are available. Although tighter lending standards are now in place in an effort to prevent the housing meltdown of a few years ago – a collapse caused largely by massive defaults among subprime borrowers. – loan servicers may consider an individual’s overall financial health and ability to repay in making the decision to finance.

With the lowest interest rates available to those with good, credit, investors following Jason Hartman’s guidelines for creating wealth through income property can take advantage of current conditions in the housing market to launch an investing career. Fair Isaac may have some control over your credit report – but other factors can make a difference as well. (Top image: Flickr/AndresRueda)
The American Monetary Association Team

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