In the “wild west” days of real estate sales and financing it was simple … fog up a mirror and they’d find a product for you.
Well it has gotten harder to complete a loan process these days, and a lot of mortgage lenders are now instituting credit rate pricing. And about time.
If Jim has a 750 credit score and Susan has a 580 credit score … why should they pay the same rate on their home? Jim has worked hard to manage his credit and is after all a more financially secure risk than Susan is. Now it should never be entirely driven by the credit rating — however it has proven to be a great predictor for loans that will go bad.
Take a look at this information that I “stole” from Chris Rowe’s Facebook page and put into a new graph.
| Credit Score | Percent that Default |
|---|---|
| 499 or lower | 83% |
| 500-549 | 70% |
| 550-599 | 51% |
| 600-649 | 31% |
| 650-699 | 14% |
| 700-749 | 5% |
| 750-799 | 2% |
| 800 or higher | 1% |
Now when you combine these numbers to the amount that is put down on the loan and you have a pretty accurate gauge of how many loans in that bracket will enter into foreclosure. Of course, it doesn’t mean that just because someone has a 599 credit score they’ll go into default — but it does suggest that if you put enough 599 credit scores in a 
room half of them will be in default.
Is This a New Concept?
Now, this isn’t anything new, with Third Federal Savings & Loan offering some of the best rates in town. The reason is simple — they don’t mess around with anyone that isn’t an “A” buyer. What have they done? They’ve reduced their default rates by working with the best and can pass that savings on to the buyer.
Is Just Makes Sense
Now lets go back to our original explanation regarding Jim and Susan. If Susan has a 51% chance that she’ll be defaulting on the loan how is the bank going to protect itself? By charging Jim more than he might have paid otherwise so they can get the money back they’ll lose if Susan goes into default.
So Susan gets a “deal” for having worse credit than Jim.
The Downside: Credit is Debt Related
Now the downside to this equation is that the entire FICO Credit Score system is based upon having active debt and paying it on time. Those that are working hard to avoid living their lives in debt can – and often will – be penalized for being fiscally responsible.
Is there a good answer to that argument? No. It is a problem with the FICO Credit Score system from the beginning. It would take an extreme shift by the American consumer for this to change and it might come … just not sure how soon.
Until then, I think it is only fair that I pay at a price that is reflective of my risk to the bank rather than a pooled number where I’m paying for other people’s risk the bank has taken on.
Working with the customer and seeing us as person — what a unique concept.
