Credit scores are designed to predict a borrower's probability of repayment. In essence, they forecast the risk that a loan will not be repaid. Because FICO does such a good job of predicting delinquency, lenders rely heavily on the scores generated by the three major reporting bureaus.

An account becomes delinquent when the borrower files for bankruptcy, defaults on the loan, or falls at least 90 days behind on at least one account. Default rates by FICO score are as follows:

Score / Delinquency

800+/1%

750 - 799/2%

700 - 749/5%

650 - 699/15%

600 - 649/31%

550 - 599/51%

500 - 549/71%

Up to 499/87%

After looking at these numbers, put yourself in a lender's shoes. If you planned to lend money to a stranger, you too would deem FICO ratings to be important. Fortunately, the ratings system is forgiving. The good news is that the scoring model places the most emphasis on the previous 24 months. The algorithm is less concerned about financial woes that occurred in your past and more concerned about how things look right now. That means that an account sent to collections 4 years ago may have little impact on your rating whereas being 30 days late on your car payment and 60 days late on a charge card can be devastating to your score. If you are in the D+ range or have gone through foreclosure, do not fret. Simply pay your bills on time every month for at least 24 months, and you will see improvement. It's hard to believe, but even foreclosure is not as difficult to recover from as you would think. People with foreclosure blemishes on their profile get mortgages all the time -- as long as they pay their bills on time and put distance between the time they make mortgage application and the time the foreclosure occurred.

Copyright © 2008 Wade Young.

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