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Fair Credit Reporting Act (FCRA), including Fair and Accurate Transactions Act (FACTA) of 2003 amendments
Almost every credit decision is based in part or entirely on a credit scoring system. The numerical system is referred
to as "your FICO score" or simply "your credit score". Fair Isaac Corp was FICO's developer, and despite the exaggerated claims of some, only the FICO developers hold all the secrets to your credit
score. To be fair, the basics of credit scoring are widely known and available to help consumers. Fair
Isaac completely changed the business of mortgage lending. It's also arguable that credit scoring was the most significant
credit analytic development in decades. It was a genuine game changer. Credit scoring was the forerunner
to a shift in risk-analysis during recent years. Underwriters essentially had a subjective duty eliminated and replaced
by a scoring system - the computer programmer. As credit scoring gradually (though it seems like overnight)replaced
part of the underwriter's process of evaluating creditworthiness, it was argued at the time that score driven credit decisions
failed to consider the "real life" events a human could. It was impersonal. On the other side of that
argument, less subjectivity (code for human error) would lead to analytical consistency and that would lead to the development
of new products, new pricing models, and new housing opportunities. Personally, I'd have to say the jury is still out
on whether or not credit scoring has proven to be a plus or minus for housing and housing finance. Nevertheless, credit
scoring IS the industry standard. It's fostered interesting new mortgage products and systemically changed how loans
are made and then sold to buyers of bonds. Your credit score affects the cost of your mortgage and whether certain mortgages
will be available to you. Best of all, monitoring your credit is cheap and it's easy, and, the rewards are very
tangible.  Credit Scoring and the Cost of Credit
Suppose you have a less satisfactory credit score. Your credit score has you in an awkward
predicament. You're going to need a lender eager to extend credit below a specific credit score. But more
important, you really want to know much more your credit will cost. Even though you're relieved to hear that
several lenders will work with your credit score, you can't help but feel a little-bit angry when they all inform you the
rate is 1% higher than the "best" rate. You were probably planning on the lower rates you've seen splattered
all over the news. That $250,000.00 loan you planned to finance over 30-years has cost you $56,456.00 in added interest
charges over the term of the loan - real money you could have saved with a better credit score. The point to
my poor story telling is good credit is no longer a matter of being approved or denied on a loan application. Your credit
score now plays a major role in determining your cost of credit. One additional point, the example above doesn't
apply to mortgages alone. If your credit score doesn't measure up you may find you'll have to pay more for other
forms of credit as well: car loans, personal loans, and credit cards, for example. Think of it like this.
Managing the cost of borrowing is a money management practice in much the same way saving and investing are money management
practices. What makes the two interesting is the less you pay for credit, the more you have to save and invest. |
