The new bad news on credit scores

Chalk up another casualty of the recession.

A credit score of 680 use to be pretty good. Not any more, SmartMoney reports. 720 is the new normal.

For their part, lenders say the credit scores aren’t arbitrary and that a score of 720 predicts the borrowers who are most likely to repay their debts and least likely to default. At the same time, they’re more profitable than people with a perfect score of 850, because they’re also likely to carry a balance or incur fees – and therefore, to generate profit for the lender.

As for 680, it’s become a casualty of the market crash. When Fannie Mae and Freddie Mac were backing mortgages after the crash, they settled on the 720 threshold for the best pricing, says Keith Gumbinger, a vice president at HSH Associates, a mortgage-data tracking firm. At the time, most borrowers were afraid of lending to anyone, so 720 seemed plenty low. Because most mortgages are backed by Fannie or Freddie, the major lenders kept the same threshold, and as banks have started to put loans on their books again, it’s stuck.

With more people out of work and unable to pay their bills, even consumers with previously envious credit scores might not reach 720. 

To get there, a consumer would need low balances on credit cards and a 15-year credit history — but might have missed a couple payments over the last two years. Someone who regularly pays on time could drop from the mid-700s if he applied for several new credit cards recently. Other 720-scorers: Those who haven’t missed a payment but carry balances that are more than 30% of their credit line; or those who have a short credit history but pay on time.

That 680 is firmly second-tier these days.

Now, borrowers need at least 720 to get the biggest loans or the best terms, including a credit card with the longest 0% APR promotion or a jumbo mortgage. For millions of once-desirable consumers with scores between 680 and 720, that 40-point jump could cost thousands of dollars over the life of a typical loan.

Once that line has been drawn, there’s no wiggle room, either. Lenders place borrowers into brackets, which means someone with a score of 719 is lumped into a bracket that starts as low as 690. That one measly point could cost more than $600 over the life of an average 36-month car loan, or $2,500 over the life of a 15-year home equity loan, according to Informa Research Services. And that is “ludicrous on its face," says Ed Mierzwinski of the U.S. Public Interest Research Group. "Credit scores are a blunt tool being abused by creditors as if they were a sharp instrument.”