Unexpectedly Intriguing!
October 9, 2008

Raining Money Have you ever wondered just what it is that the loan officer sees when they look at you when you're applying for credit? Alternatively, if you're a lender who will be evaluating whether or not to give money to a loan applicant, what should you see?

We're going to answer all these questions today with our latest tool. What we've done is to reverse engineer the math behind the following chart to define a mathematical relationship between your FICO score and the probability that someone with your FICO score will be 90 days or more late on their debt payments:

Credit Delinquency Rates vs FICO Score, with Progressively Lowered FICO Scores Pushed by Government Supported Enterprises Fannie Mae and Freddie Mac

We have to thank Tom Blumer for the image above. He added the red lines on the chart to show just what additional risk the U.S. government-backed enterprises, Fannie Mae and Freddie Mac, were really taking on when they progressively lowered credit requirements for conventional mortgage loan applications in response to political pressure. As you can see, with each time the FICO score needed to obtain a conventional mortgage was lowered, the risk of borrower delinquencies on the credit extended to them rose substantially.

As an aside, that additional imposed risk helped to spark off the current crisis in the world's credit markets, ultimately thrusting both Fannie Mae and Freddie Mac and virtually the entire global financial industry into meltdown mode.

Let's get back to how you can benefit from using the tool below. If you're applying for credit, our tool will give you a pretty good idea of how much of a bad credit risk your lender statistically believes that you might be by providing the probability that you will, at least at one point in time, be 90 or more days late on making good on your obligation to pay back your debt. If you're in the lender's shoes, you'll have a pretty good indication of how much risk you're really taking on.

Either way, all we need is your FICO score, which you can obtain for free directly from the people who invented it, assuming that you don't already know....

Your Credit Rating
Input Data Values
Your FICO Score [Scores Range Between 300 and 850]


The Odds That You'll Be Late in Paying Back Your Debt
Calculated Results Values
Probability of Being 90+ Days Delinquent in Making Payments

In the tool above, the default value of 723 for the FICO score is the median FICO score in the United States.

The FICO score provides an assessment of the risk that you won't fully repay your debt obligations. It's a primary factor in determining whether or not your lender will give you a loan, how much your loan may be, or for that matter, how much it will cost you to borrow the money in the first place.

That last cost to you shows up in the interest rates that you are able to obtain. The lower your FICO score, the higher the risk is to the lender that you will not fulfill the terms of your loan agreement, and so the higher the interest rate you will have to pay as the lender seeks to recover as much of the money that you borrowed from them as possible before you might default on the loan.

Don't take our word for it. The folks at ScoreTruth.com explain it all pretty well. The numbers they present are based on an arbitrary population of 100,000 people:

The general breakdown of the credit score bell curve and the corresponding total delinquency rate (for each subsection of scores) looks something like this:

Table: Fico Score and Borrower Delinquency

Compare to the lowest score, or the 300-499 range. Only 1% of the population falls into this category! So it looks like much less of a total risk for the lender, right? Not when you consider that 87% of people in this category will have late payments—do the math and it makes 870 people. If you were a lender, you would want to steer clear of poor credit scores. If you had to make loans or extend credit into this category, you would probably try to make up for your losses by charging high interest rates—which is exactly what happens in the real world.

By contrast, individuals with high FICO scores can obtain loans at the lowest costs/interest rates. Here, lenders are statistically assured that the borrower will be able to fully satisfy the terms of their loan agreement.

Wouldn't you like cheap money? Or just to be able to get a loan? If so, we've offered a number of suggestions that can help you crank up your credit score! And if it helps motivate you, your payment history - the permanent record that tracks whether or not you've made your loan payments on time - accounts for 30% of your entire credit score.

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Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

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