Some concepts relating to the credit score and what constitutes a good FICO score has been discussed here.
In the late 1950s, loan underwriting had become quite complex in the lending sector. Furthermore, the introduction of consumer oriented services such as credit cards and bank overdraft for individuals, made things more difficult. In the wake of such a scenario, a need to devise a system to determine a person's creditworthiness, was felt.
FICO score by Fair Issac Corporation was introduced in the 1978, which facilitated the underwriting of loans, credit cards and bank overdraft.The FICO score, is basically a formula which is used to get a credit score, which in actuality, is a credit rating. The credit score is calculated by using a formula that has been devised by FICO (hence the name).
The formula considers a consumer's payment history, current liabilities, the total length of the credit history, new borrowings and lastly, the different types of credits, that have been used. Though this figure is not the only factor considered by a lender to approve a certain loan or credit.
This is due to the fact that the loan approval process and the interest rate, or APR, are determined with the help of this very score, and how high it is. Ergo, how costly your loan will be, is decided by the credit score. It follows that having a good credit score makes life easier.
Basics of a Good FICO Score
The definition of a good credit score, is indeed dynamic and has evolved with time. The following table depicts the interpretation of the credit score rating scale by FICO. The standard FICO score algorithm provides an output, that ranges from 500 to 850.
760 to 850
700 to 759
660 to 699
620 to 659
580 to 619
500 to 579
Very Poor Rating
These ranges are not going to change,but the scores prescribed for qualifications, are going to change drastically. This change is precautionary in nature and has been initiated after the sub-prime crisis that is still receding from the US economy. Thus, the condition for approval, or perquisite score, that is required to get a said loan has changed.
In a scenario where bad debt has become common place, bringing down big financial corporations, this was bound to happen. Getting a loan has become harder, but not impossible. A good credit score provides you with cheaper credit lines.
Approval and a Good FICO Score
The credit score scale is not going to change, however, the requisite scores would differ. The common connotation that 660 to 699 is a 'good' credit score is the same. As per the Federal Housing Administration (FHA), Freddie Mae and Fannie Mae guidelines, the minimum requisite credit score for getting a mortgage loan with a 3.5% down payment is 500.
Since this is a government aided/supported loan, the requisite score is down to 500, however, banks such as Wells Fargo, and Bank of America, which are the largest banks for mortgage lending, have started demanding scores, higher than 620/640.
For larger loans, like mortgage loans, auto loans and real estate loans, the requisites have been made stricter. In the approval process, income, other liabilities, and total number of credit cards are being considered by lenders. This step has been initiated to avoid some of the common problems that were encountered, during the sub-prime crisis.
This step avoids any kind of sub-prime lending. The risk is thus hedged, default probability is curbed and a substantial volume of return in assured. The smaller loans are however, quite easy to get and the credit score requirement is quite negligible, with most of the lenders demanding a good income and a rating of about 400.
A good FICO score range starts at about 660, however, it is always better to aspire towards the 850 mark, which is the highest one. This will take quite a bit of time and the best way to reach the highest credit score possible is plan all income and expenditures properly.