A High Credit Score Is Not Necessary for the Best Loan Rate

My mortgage refinance is almost done. I will sign the docs this week. Long story short, I’m refinancing from a 15-year fixed at 3.75% to a 5/1 ARM at 2.625% with a negative $900 closing cost. It’s a great rate. Getting paid to do it makes it even better.

As part of the disclosure, the bank sent me my credit score from each of the three major credit bureaus. This time, in addition to the credit scores themselves, the paperwork also includes the percentiles for my scores. In other words, it shows how my scores compare to other people’s scores.

The percentiles came in with a small surprise.

Here are my scores and the percentiles:

Credit Bureau Model Score Percentile
Experian Fair Isaac V2 77x 65%
Equifax Beacon 5.0 FACTA 77x 70%
Trans Union FICO Risk Score Classic 04 76x 64%

I thought I have good credit scores but it turns out they are mediocre. 30-36% of the population have a better FICO score than I do. My scores are not that far above median. Grading on a curve, at 65-70 percentile, I would get a C, or at best a B-.

What? I have twenty years of credit history. I always paid my bills on time. I deserve an A! Not so fast. Others have a long credit history and pay their bills on time too. However, when it comes to what matters the most, a C grade is all it takes to get the best rate.

I don’t have a high credit score. I’m OK with it, because a high credit score is not necessary to get the best rate on a loan. A slightly above average score will do just fine.

Next time if you hear how your credit score is super-important, maybe from Suze Orman, remember this. Yes it is important for people whose scores are below average, in D or F grades, but if your credit score is above average, don’t worry about it.

Apply for a credit card if you want one. It doesn’t matter whether the card reports credit limit or not. If you don’t want a card any more, cancel it. It doesn’t matter whether it’s the oldest one or not. Live your life the way you want. Don’t arrange it just to appease the credit score formula.

Credit bureaus do a very good job at marketing. They make something that’s a non-issue to most people seem to matter a lot. This creates artificial demand from people to buy credit scores from them. Selling credit scores to consumers has become a big business.

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Comments

  1. Mike says

    Depends on the mortgage provider. I refied last year with Amerisave, and their rates are better if you have a FICO of over 800

  2. says

    @Mike – That I believe is a subtle form of bait and switch. It allows them to advertise a lower rate than other lenders. Amerisave shows its best rates to everybody but then charges you more if your credit score isn’t above 800, whereas other lenders give the best rates as long as the score is above say 720.

  3. schmoe says

    Something doesn’t make sense. Intuitively to me, twenty years of paying your bills on time should put you far higher in the percentiles. There is something we are not understanding. Perhaps their meaning of percentile is different than what we would guess it to be. Perhaps a credit score value has such a high margin of fuzziness that comparing two scores within thirty points of each other is meaningless.

  4. says

    @schmoe – There isn’t a misunderstanding of the percentiles. Alliant Credit Union gives free credit score updates to all members. I have an account there. They also put me in a “C” grade. Although the VantageScore Alliant gives uses a different numeric scale, it’s pretty clear about the letter grades.

    A = Higher than 84% of U.S. Consumers
    B = Higher than 64% of U.S. Consumers
    C = Higher than 44% of U.S. Consumers
    D = Higher than 19% of U.S. Consumers
    F = Lowest 19% of U.S. Consumers

    It doesn’t bother me at all I’m a C as I still get the best rates.

  5. KD says

    The different variety of credit you have availed also matters. So mortgage and Credit cards, car loans etc. I know one typically pays other bills in your name like electricity, heating, internet, cell phone, car insurance that check your credit but I don’t know if they affect your credit score.

  6. Mike says

    It’s probably a bit lower since you’ve done so many refinances in the past few years or so. The FICO computer probably sees too many inquiries.

    However, I agree, as long as you get the best rates it doesn’t matter. It’s funny to see how people obsess over getting the top credit score.

    I saw one of my scores above 800. To “improve” it, it suggested to open a department store credit card. I thought those were bad to have in the FICO model. Unbelievable.

  7. Lily says

    77x only puts you in the 65th percentile? That is disappointing to hear, since I have 75x. I am getting much worse rate quotes for 5/1 ARM with 25% down payment and very good debt to income ratio, 3% with 0 points.

  8. murray says

    I sell car insurance and also have annual credit monitoring. Many customers are concerned with the use of a credit base in determining there auto rate. I shop my auto insurance and have never seen any notice on my credit monitoring. With car insurance shopping, yes credit is used but does not seem to have any negative impact.

  9. LT says

    I refi with Wells Fargo and they do care about your credit score. 800+ will get you the best rates and the rates go up the lower your score is. At the time my score was in the 700′s and I got a good but not great rate.

    I’m one of those that pays for the credit score thing. It’s like a gym membership you don’t really use it anymore but too lazy to cancel. The funny thing is I checked it the other day and my score is 907, no lie. I’ve been meaning to ask people why it’s that high. Any thoughts anyone? It could be a typo. It’s from TransUnion. I haven’t checked the other two yet.

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