In Ken Harney’s column this week, Web Credit Scores Don’t Equal FICO Accuracy [WaPo], he discusses the problem with web-based credit score services.
FICO scores, developed by Fair Isaac Corp., are the predominant credit measure used by the mortgage industry. The scores run from 300 to 850 and are used to predict a borrower’s likelihood of future nonpayment, with higher scores indicative of better creditworthiness.
There are a wide array of other scoring models available online but most are not used by lenders which leads to widespread consumer confusion. Lenders use FICO scores to price mortgages. Lower FICO scores can cost applicants hundreds of dollars a month in higher interest payments and thousands of dollars over the term of the loan. Consumers often pre-screens themselves but can be surprised by the descrepency with the actual score.
“We’re getting a lot of angry conversations about ‘why is your score lower’ than what the consumer got somewhere else” online, Clemans said. But credit-reporting agencies are simply middlemen — purchasing reports and FICO scores from the three national credit bureaus, Equifax, Experian and TransUnion — and repackaging them for mortgage lenders.
With rising mortgage rates, there will be greater pressure placed on the credit scoring process as affordability weakens.