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:
|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.