How to Interpret a Score
The first step to interpreting a score is to identify the source of the credit score and its use. There are a number of scores based on various scoring models sold to lenders and other users. The most common system used was created by Fair Isaac Company and is called the FICO score. FICO produces scoring models that are most commonly used by Experian, Equifax, and Trans Union. FICO controls the majority of the credit score market. There are several other competing players that collectively share a very small percentage of the market.
In the United States, FICO risk scores range from 300- 850, with 723 being the average FICO score of people in the United States. The performance definition of the FICO risk score is to predict the likelihood that a consumer will go 90 days past due or worse in the subsequent 24 months after the score has been calculated. The higher the consumer’s score, the less likely he or she will go 90 days past due in the next 24 months after the score has been calculated. Different lending uses, which includes mortgage, automobile, and credit cards have different perimeters. FICO scores are adjusted according to the predictability of that use. For this reason, a person might have a higher credit score for a revolving credit card debt when compared to a mortgage credit score taken at the same point in time.
The interpretation of a credit score will vary by lender, industry, and the economy as a whole. While the score of 620 has historically been a divider between “prime” and “subprime”, all considerations about score revolve around the strength of the economy in general and investors’ appetites for risk in providing the funding for borrowers in particular when the score is evaluated. In 2010, the FHA (Federal Housing Administration) tightened its guidelines regarding credit scores to a small degree, but lenders who have to service and sell the securities packaged for sale into the secondary market largely raised their minimum score to 640 in the absence of strong compensating factors in the borrower’s loan profile. In another housing example, Fannie Mae and Freddie Mac began charging extra for loans over 75% of the value that have scores below 740. Furthermore, private mortgage insurance companies will not even provide mortgage insurance for borrowers with scores below 660. Therefore, “prime” is a product of the lender’s appetite for the risk profile of the borrower at the time that the borrower is asking for the loan.