What is your credit score?

 

Until recently, a credit score of 680 was something to be proud of. It meant you paid most of your bills on time and had a solid enough record to get a loan at the best rates.

Not anymore. That 680 is a second-tier score these days. Now, borrowers need at least 720 to get the biggest loans or the best terms, including a credit card with the longest 0% APR promotion or a jumbo mortgage. For millions of once-desirable consumers with scores between 680 and 720, that 40-point jump could cost thousands of dollars over the life of a typical loan.

Once that line has been drawn, there’s no wiggle room either. Lenders place borrowers into brackets, which means someone with a score of 719 is lumped into a bracket that starts as low as 690. That one measly point could cost more than $600 over the life of an average 36-month car loan, or $2,500 over the life of a 15-year home equity loan, according to Informa Research Services. The below chart is a good illustration of where your credit score falls:

* 750-849 – Excellent –Top 5%. This represents the best score range and best financing terms.

* 700-749 – Very Good – Qualifies a person for favorable financing.

* 675-699 – Average – A score in this range will usually qualify for most loans but will not qualify for the best terms and rates.

* 620-674 – Sub-prime – May still qualify, but will pay higher interest.

Many lenders consider 620 to 640 as the dividing line and once you fall below that mark, you will probably be required to pledge additional collateral and a shorter terms will be mandatory.

* 560-619 – Risky – Will have trouble obtaining a loan. Nearly 20% of American, according to Free Credit, have a score under 620.

* 500-559 – Very Risky – Need to work on improving your rating. Very difficult to get financing.

Why is your credit score so important?  Because in many cases it is the only data a bank has to determine if you are going to pay them back or not.  For their part, lenders say the credit scores aren’t arbitrary and that a score of 720 predicts the borrowers who are most likely to repay their debts and least likely to default. Take the following chart that shows delinquency levels based on credit scores:

Credit Score           Delinquency Rate         % of People
300-499                  87%                                     2%
500-549                  71%                                     5%
550-599                   51%                                     8%
600-649                   31%                                     12%
650-699                    15%                                     15%
700-749                    5%                                       18%
750-799                     2%                                       27%
800-850                     1%                                        13%

As for 680, it’s become a casualty of the market crash. When Fannie Mae and Freddie Mac were backing mortgages after the crash, they settled on the 720 threshold for the best pricing, says Keith Gumbinger, a vice president at HSH Associates, a mortgage-data tracking firm. At the time, most borrowers were afraid of lending to anyone, so 720 seemed plenty low. Because most mortgages are backed by Fannie or Freddie, the major lenders kept the same threshold, and as banks have started to put loans on their books again, it’s stuck.

Of course, while earning a 680 wasn’t all that difficult before the recession, the new good-credit bar of 720 is harder to reach. With more people out of work and unable to pay their bills, even consumers with previously envious credit scores might not reach 720. To get there, a consumer would need low balances on credit cards and a 15-year credit history — but might have missed a couple payments over the last two years. Someone who regularly pays on time could drop from the mid-700s if he applied for several new credit cards recently or if a person carries balances that are more than 30% of their credit line or those who have a short credit history but pay on time.

For someone on the cusp, the differences could be as small as one extra credit inquiry — like when a lender looks up your credit score before approving you for a loan, or if a prospective employer pulls your credit report without telling the credit bureaus it’s strictly for employment reasons. The same thing could happen if you’re suddenly using more of your available credit because you made a big purchase or even if you closed a credit card that had a $0 balance and a large available balance.

What’s a 680 to do? Sadly, not much beyond the regular steps to credit score maintenance, experts say. That means paying bills on time and keeping debts to a reasonable level.  And be patient.  As lending picks up, lenders will be forced to relax their standards once again. Within as early as six months to a year, 680 could be back on top.

For more information, go to http://www.myfico.com/CreditEducation/.

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