Playing numbers game on FICO credit scores

What constitutes a “good” credit score, anyway?

The answer, as for so many of life’s questions, is: It depends.

Until a week ago, I was under the impression that there was a score that separates good borrowers from bad. In fact, I thought it was 620 on an 850-point scale, because a major mortgage lender had told me so.

I dutifully put this number in print, which provoked arguments among readers who said, no, absolutely not, the “good” number was 660. You must be crazy, others said: It’s 680. To the contrary, it’s 720, insisted others.

These were opinions from well-informed people -- those who know that three mammoth companies track our credit histories and use them to compile a score that helps determine (along with other factors) whether we qualify for a mortgage, and at what interest rate.

In a way, they were all right.

I was writing about “FICO scores” -- FICO stands for Fair Isaac Corp., the company that developed the tool for analyzing credit risk -- because a GMAC Mortgage consumer survey had found a wealth of misconceptions about the scores. GMAC stated flatly that a score of 620 is necessary to secure the most favorable rate. But that number will vary by lender.

It’s a number with a history: When the concept of “credit scoring” took off in the 1990s, consumers with scores of 620 or 630 qualified for standardized lending, according to Craig Watts, a spokesman for Fair Isaac.

“If scores were above 620 or 630, mortgage lenders could use [Fannie Mae’s or Freddie Mac’s] standardized underwriting process” to make loans that Fannie and Freddie would be willing to buy and resell as securities, Watts said.

“If they were below that, [Fannie Mae and Freddie Mac] encouraged lenders to take a deeper look at that borrower’s risk level. That threshold has shifted over the decade, but it has stayed pretty firmly in the low-600s range,” Watts said.

But a score of 620 doesn’t mean you’re going to qualify for the best rate, he says. It means you “qualify for a standardized rate, or a prime rate. ‘Prime’ is a broad category, so lenders will have different loan products that classify as ‘prime’ rates.”

Lenders set their own credit-score benchmarks, depending on the level of risk they’re willing to take, Watts says. The lesson here for consumers: It pays to shop around. “For the best borrowers, you’re likely to get more points knocked off the loan fees [if you have the higher scores], or you’re likely to pay a fraction of a percent less in overall interest.”

Then there’s a whole other category of loans known as “subprime” for borrowers with spotty credit histories. These borrowers may qualify for mortgages, but they’ll pay more for the privilege.

How low can you go and still get a subprime loan? “When you get below 500, you’re getting into tenuous territory,” Watts says. “People who are below that may be qualified, but they might not want to pay the price for it. If you’re in the 300 or 400 range, God help you in finding a loan.”