Just about everyone understands that your credit score is a very important number when it comes to your financial livelihood, but have you ever thought to understand why? The purpose of the FICO score is to predict the statistical chance of a consumer being 90 days late or more in the next two years.But more importantly let’s take a look at categorically how this breaks down in the eyes of your potential lender.
Below is a chart that indicates the odds of a consumer becoming 90 days late or more.
|
Score |
Odds |
|
800 & above |
1% |
|
750 to 799 |
2% |
|
700 to 749 |
5% |
|
650 to 699 |
14% |
|
600 to 649 |
31% |
|
550 to 599 |
51% |
|
500 to 549 |
70% |
|
Below 500 |
89% |
Here is a real world example of how this chart works.Let’s assume that two people come to you and ask to borrow $5,000 from you.The only difference is that one person has a FICO score of 740 and the other has a score of a 549.How long would it take you to decide who you would give the money too? Understand the person with a 549 score means there is a 70% chance that person will be 90 days late or more in the next two years vs. the person with the 740 who has only a 2% chance of being late! Do you think that if you decided to lend your money to both people that you might have different rates and or fees between the two loans?
I understand the credit scoring process can be frustrating and very complicated, but the purpose of the system is very clear.It is all about predictive information for the purposes of lenders deciding who to lend money too and with what terms.
Based on this chart you can see how critical a few points can be, in some instances it means over a 50% less chance of being 90 days late or more depending on the score.