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The facts behind low credit scores and mortgages

POSTED: August 31, 2008 5:03 a.m.

It’s not always easy to understand about Fannie Mae, Freddie Mac, sub-prime mortgages and credit scores. How do these things affect your life?

 

We see stories everyday about the large number of mortgages going into default and the federal government bailing out Fannie Mae and Freddie Mac.

 

It is our tax money that is being used to bail out mismanaged banks. What ever happened to personal responsibility and financial discipline?

 

We have become a society that believes everyone has an inalienable right to success. The fact is everyone has a right to try, but with that right also comes the right to fail.

 

Sometimes failure teaches us more valuable lessons than can a string of successes.

 

A good credit score is more important today than ever before. Credit scores are used by public utilities when determining whether consumers can connect to the utility, by landlords when deciding whether to rent to a person and by insurance companies when setting insurance premiums.

 

Many consumers with poor credit scores cannot obtain traditional loans and thus have little hope of moving up the economic ladder.

 

Bill Fair and Earl Isaac co-founded the Fair Isaac Company (FICO) in 1956 and constructed a mathematical model, which measures a consumer’s credit behavior and loan repayment history.

 

The model calculates a numerical score used to determine a consumer’s creditworthiness.

 

The calculation is the credit score or “FICO score.”

FICO scores range from 300 to 850. The lower the score, the higher the credit risk.

 

The Federal Deposit Insurance Corp. (FDIC) has determined that a score of 661 and above is considered a “prime” credit score and 660 or below is a “sub-prime” credit score.

 

There are three credit reporting agencies: Equifax, Experian and TransUnion.

 

Each agency assigns each consumer a unique FICO credit score. Therefore, it is important for consumers to know their credit score from each credit reporting agency.

 

Credit scores are also used in determining a job applicant’s employability.

 

Many employers look at an applicant’s education, experience, drug test results and credit score to assess a potential employee’s level of responsibility and financial discipline.

 

The automotive insurance industry has been using credit scores to determine the likelihood that a consumer will file a claim.

 

Studies have shown a high correlation between credit scores and driving behaviors. The worse drivers tend to have poorer credit ratings.

 

The “Ultimate Guide to a Better Credit Score” says that loan delinquency rates increase dramatically as a consumer’s FICO score decreases.

 

For example, the delinquency rate among all “prime” customers is only about 10 percent; for those “sub-prime” consumers with scores between 600 and 650, the delinquency rate is 31 percent; and for those with scores between 500 and 550, the delinquency rate is 71 percent.

 

In 2006, Rutgers University reported that approximately 91 million adult Americans were classified as sub-prime.

 

According to Fair Isaac, a 30-year mortgage costs 80 percent more for consumers with credit scores less than 580 than it does for consumers with credit scores above 760.

 

Clearly, a low credit score negatively impacts a consumer’s ability to access credit and to meet the financial challenges of everyday living.

 

What we need is a pro-active financial literacy education for our children starting in kindergarten. They need to learn that limited resources limit the choices available. Sometimes we cannot have both candy and ice cream. Insisting on more than we can afford often leads to late payments, low credit scores and financial difficulties.

 

Our biggest stumbling block, however, seems to be government at all levels wanting to do more for us with other people’s money. It’s time we got back to being personally responsible and financially disciplined.

 

Get in touch with me if you want to know more about credit scores.

 

Rep. Amos Amerson can be reached at 689 N. Chestatee Street, Dahlonega, GA 30533, (706) 864-6589, e-mail hamerson@alltel.net.  Or contact Gerald Lewy (706) 344-7788.  He’ll know how to get your message to me.

 

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