Sounds confusing, doesn’t it?
The credit score is actually
calculated using a "scorecard" where you receive points for certain
things. Creditors and lenders who view your credit report do not get
to see the scorecard, so they do not know exactly how your score was
calculated. They just see the final scores.
Basic guidelines on how to view
the FICO scores vary a little from lender to lender. Usually, a score
above 680 will require a very basic review of the entire loan package.
Scores between 640 and 680 require more thorough underwriting. Once a
score gets below 640, an underwriter will look at a loan application
with a more cautious approach. Many lenders will not even consider a
loan with a FICO score below 600, some as high as 620.
FICO Scores and Interest
Rates
Credit scores can affect more
than whether your loan gets approved or not. They can also affect how
much you pay for your loan, too. Some lenders establish a "base price"
and will reduce the points on a loan if the credit score is above a
certain level. For example, one major national lender reduces the cost
of a loan by a quarter point if the FICO score is greater than 725. If
it is between 700 and 724, they will reduce the cost by one-eighth of
a point. A point is equal to one percent of the loan amount.
There are other lenders who do
it in reverse. They establish their base price, but instead of
reducing the cost for good FICO scores, they "add on" costs for lower
FICO scores. The results from either method would work out to be
approximately the same interest rate. It is just that the second way
"looks" better when you are quoting interest rates on a rate sheet or
in an advertisement.
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