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Are you aware of Credit Scoring changes coming soon?

Changes are finally coming to the "art" of credit scoring, the mathematical modeling of assigning a number score to how a Consumer uses credit. Soon, two of the three credit reporting bureaus will use a new model. Fair Isaac, the developer of FICO scores, has made the biggest change to its mathematical credit score model since it was introduced in 1989. Scores will still be on a 300- to 850-point scale. But the company estimates that 40% to 50% of borrowers' scores could go up or down by more than 20 points because of how the new model fine-tunes the variables it uses to evaluate consumers' credit use behavior.

For creditors, the new FICO score promises to reduce the risk of defaults, improving the predictability of defaults by 5% to 15%. Delinquencies are at their highest rate since 1992, when the economy was also in a recession.

Equifax and TransUnion will be the first credit reporting bureaus to roll out the changes over the next year. As credit has tightened because of the financial crisis, FICO scores are becoming increasingly important for borrowers looking to qualify for favorable terms. That puts high scorers in even a better position for pricing on loans.

Piggybacking - upping a score on someone else's back - won't be ruled out in the new FICO score. But it will make using that route to establishing credit harder and lengthier. The authorized user provision allows young adults to create a credit history by using and paying off accounts held by their parents. But it has also been subject to abuse, with high credit scorers selling their names to borrowers looking to improve scores. Fair Isaac estimates that 30% of U.S. credit card holders, or 60-75 million people, are authorized users. Fair Isaac has increased the number of groups that customers fall into from 10 to 12, taking into more account the number and magnitude of credit problems. Infrequent problem borrowers will no longer be lumped in with habitual delinquents. The new FICO model also focuses less on how many accounts a borrower has and more on the amount of balances carried.

The bottom line- know what your credit report looks like now, and work on improving any areas you can over the next 6 months. Sounds like another good New Year's resoloution to me!

Posted by Loren Johnson, CMPS on 01/08/2009 11:38 AM

Comments (61)

Credit Crisis in the Mortgage / Finance Channel

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61 Comments on Are you aware of Credit Scoring changes coming soon?

JAN

Wow I did not hear about the change. I am interested to hear more about how consumers will be affected, and what they can do.

Very good information for consumers. I know that many of my prospective home buyers are unaware of how their credit habits not only cost them money but harm their ability to get a home mortgage.

I hadn't heard anything about this -- thanks for the heads up!

Loren -

Thanks for the share on the FICO enhancements - will be looking for them during the year. Also good to advise our clients thinking of buying.

Have a great day, and a great weekend!

DEAN & DEAN'S TEAM CHICAGO

The way credit scoring is assessed needed a makeover IMO, so hopefully this is a good thing - but once again it shows that there is no time like right now to start working on improving your creidt score/history.

Great info, thanks Loren !

Thanks for the news. I agree that one or two time late payers should not be grouped in with habitual offenders - that makes sense.

Great. This is a byzantine system that is so crucial and so easily overlooked by consumers -- and everyone else.

The 3 bureaus are already confusing to understand. Hopefully the changes are for the better.

I heard heard somethign about this from my mortgage person earlier this week. Thanks for the post.

It would be very interesting if you could share some of the specific modeling changes planned for the Fair Isaac and the variables that will be adjusted.

Thanks for the reminder and the recommendation to get a current score so we can know the effect of the changes on our scores.

Thanks Loren, that's news I had not heard anywhere else. We stay on top of reports and scores in our household, always have. I have always thought if the scoring system is so important to every ones cost of borrowing, then the formulas for scoring should be transparent and available to us.

Kent Davis

Being that most folks have no idea how they calculate the current credit score now, they will probably not notice the change.

Very useful information for everyone - would be nice to see the improvements in credit scoring situation. Interesting post!

Thanks for all the responses! Of course, to protect their investment, the companies haven't given out much more information than what I printed above.

Vickie, as I find out any more specific changes in their weighting catagories, I'll pass them along.

Kent, it should be transparent, but then Fair Isaac wouldn't be a big $$$ company! :-). That's why I spend time going over credit reports with each one of my clients and make sure they understand how they work. I'm always amazed at how little most everyone knows about how their credit works.

Thanks for the great post. I had not heard this in the regular news and I was happy to be among the first to find out. Thanks!

Wow, I hadn't heard this at all. I think that's a great step forward to rely less on the number of open accounts (which -for all intensive purposes- is worthless to their repayment ability) and more on the balances they carry and how they have proven to handle credit in the past

This is such an important message to get out to everyone. I would love to know if it will hurt or help most.

Change sure is keeping us on our toes these days. Almost need to spend half the day relearning our new world.

It is about time that they did something about this...

Loren,

I was not aware of the upcoming changes for credit scoring. It is good to know that they added additional groups such that the infrequent problem borrowers will no longer be in the same group the habitual delinquents. Thank you for the info.

Loren, thanks so much for the heads up. I hadn't heard about this at all. Happy New Year!

Thanks for the heads up. First time I've heard about this..

Loren,

I am a retired Realtor that became tired of being retired! The definition of retirement according to my wife is; "Too much Husband, too little income". I thought I would take advantage of the fact that about 1 Zillion LO's have faded out of sight. It has not been easy after a ten year hiatus, I retired at age 50, but it sure has been fun. Best thing is I found AR.

But now a question from the new guy to the veteran. I have quite a few open lines of credit, many not used in over ten years. The accounts I (we) have open are very low in balance in comparison to the credit limit. I put very little on them but keep something going all the time. This is about eight accounts. I own two properties; the primary residence with a first of $166, 859.+/- and a rental free and clear. I do have a HELOC on the primary home at $42,381 with a credit limit of $50K. Now this is one of those too much credit extended to amount of available credit. But that is the only one; thanks to our son in California that got caught up in the Sub Prime mess, BK and foreclosure, which is where a great chunk of the balance has gone. The value on the primary home is about $275,000. This is down from $335 in late '06. The rental is still worth $195K but is tax assessed at $228K, only five years old.

OK, now the question I promise! I'm looking at putting a new first on the rental @$75K; Payoff the Heloc and the balance will be available just in case the kid is not out of the woods yet. Wouldn't this move ultimately improve my FICO based on the new criteria? I would show two mortgages on two separate properties with balances well within the safe range and no hi balance HELOC. Also, in the hopes my son is no longer in need of $$$$, I would have the excess after the HELOC payoff to add some additional principle reduction to both mortgages to further hedge my bet on declining balances. Is this valid thinking?

Ron Whitworth

Thanks for the interesting info. on the updates. I don't think most people will notice.

Thanks for the info. Its good news that the one timers won't be lumped withthe habitual delinquent credit abusers.

Loren, this is great advice. It's good to know! Thanks for the update. Deb

Aloha Loren,

I think Sarah Pappalardo's comment that the FICO scoring system being 'Byzantine' is right on the money. Apparently transparency is a word never used to describe anything related to credit or banking; I wonder why?

Peace,

Thanks for the info. will keep my eye on this.

Very good explanation of a complex topic.

I thought they were going to exclude piggyback accounts from scoring.... Which would hurt some honest people as much as it hurt the fraudsters. Some couples are authorized users on each other's accounts... which is legit. Too bad they can't figure out a way to keep the 'manipulators' from using piggyback.

Thanks for the information about the upcoming changes in credit score reports. Although I don't quite understand the methodology, I do appreciate the bottom line for clients. My hope is that the upgraded scoring will be more fair for all consumers.

Always like to stay abreast on things like this. Thank you for the post today.

Portsmouth NH Real Estate Patricia Aulson/ Hampton NH Real Estate

Its always geared to spenders rather than savers. They never take into account a person assets which is a real hole.

Hi Loren;

I hadn't heard anything about this, thank you for the info.................................

Loren-Good to know these changes are coming. Thanks for the heads up w/some very useful information.

Interesting!

Thanks Loren. We have a good credit score. I wonder how the change will effect our score.

Great info..I'm looking forward to hearing more when they come out with the details!

Thanks,

Cindy

I did not know this and am a bit disappointed that I have not heard this from my lenders. Many thanks for the information. Every bit of knowledge gives us all more power. Cheers..

it will be interesting to see the bell curve effects of credit defaults in the next couple of years and what they do the the scores... and what score is considered good.

I would like to see how well this strategy will work for the prediction of defaults. I do think that change is needed, there's that word again.

Hi Loren,

Thanks for this information. I am sending the link to this blog to all my clients.

I still don't get this! It is such a mystery. How does the consumer know what to do when it is not clear how the scores are calculated? Will there be more daylight shed on this?

Thanks so much. I haven't heard anything about these changes.

Great Post!

I read about these changes late last year. I think it would make more sense if Experian participates in the new scoring systems, Are they holding out?

Loren: Thanks for the heads up. I had not heard about this change.. It is about time they overhaul the credit scare system

I'll be curious how this will impact the loan pre-approvals for real estate. As long as their logic is sound, which I'm always doubtful on how things pan out regarding process and technology changes, time will tell.

Interesting info - thanks!

Nest Realty

This is definitely something for 2009 buyers to be aware of. Understanding how the changes affect their scores could save them a lot of money at closing and over the length of the mortgage.

Hi Loren,

Thanks for the info.

If you're open to another question, I've been told in the past new/recent credit can be a negative. Therefore is a person opens an account at a dept. store (for example) to save 10% on a purchase that could be detrimental to one's credit score. Yet while out the other day a fellow agent said that was no longer the case. Any thoughts on this???

I had not heard of these changes coming. It should be interesting to see what they bring.

JAN

So many are still clueless on the impact of a credit score (it has improved but we still need to educate many more) to their world. The more information that is published the better. Especially current change like this.

I did not hear about those changes! Nice article. Thanks!

Thank you so much for this great information. It is so important to stay educated on the lastest credit score changes!

Lynda,

Yes, opening a new credit account DOES affect a person's credit score...for 90 days. As soon as the account is opened, the amount on credit limit, etc., is sent to the 3 credit bureaus. However, since there is no bill sent out until a charge is made, and no payment can be recorded until it's sent back in by the consumer, and since databanks are updated every 2 weeks....it takes at least 90 days for 2 payments to show in the person's credit report. Until then, the bureaus treat it as though the consumer went and charged the account to the max, whatever it is. THAT's why a responsible mortgage person tells a buyer NOT to go buy furniture, etc. until the sale closes....because opening a larger account can change a person's credit score right before close....and that may derail a purchase!!

Thanks for responding!

Ron,

I hate giving advice when I don't know your income status, other asset information, and credit score. For sake of answering, I'll assume your credit is over 700 (mostly because you know how to use credit to get a good score- having open cards with low balances is the best way to raise a score!), and that your income, etc., is good.

Right now, banks are very afraid to lend anything on non-homesteaded properties...because of the high default rates the past few years. The interest rates you can get on your primary home are probably 1 1/2%-3% better than what you will be offered on your rental property. Since there will be some closing costs no matter what you do, and since HELOC rates are tied to the prime rate....right now near a historical low...your cheapest bet might be to talk to your current HELOC lender about raising your limit from the 50K now to 65K...which will still leave you with 20% equity in your home. You'll also have about 22K to lend to your son, if need be.

From a credit standpoint, the bureaus don't know what your home is worth, only that you have the HELOC. In the short term, raising your current limit....and not using it......will actually help your score. If you do have to pull 22K out, so it's maxed....it will be counterbalanced by the low balances you have on your other credit cards. Overall, there would be little downward impact to your score. If you take out a new loan on the rental home, it will affect your score more because since the payment rate isn't variable, you have no payment flexibility, and since THAT would be maxed, you're dinged more for admitting you own 2 homes than if you just own one with a HELOC.

Sorry for the long-winded answer, but I hope it helps! Good Luck!

Loren - I had heard about this new method as well and I am looking forward to seeing how it all plays out for my clients. With as much info as there is out there for the prospective homebuyer to educate themself before buying a home, it still shocks and amazes me the amount of people who are still absolutely clueless when it comes to their credit score. I still meet people regularly who have never seen their credit report (I work with a lot of first time buyers). I am constantly, educating everyone I meet to pull their own report at least once a year just so they know what is being reported on them.

Interesting post! I will be sure to ask my loan officer if he can offer any more details. Thanks for keeping us informed.

That is a perfect resolution for any consumer and/or professional ! To improve and to presever that credit score !!!

JAN

Thanks for this detailed info. I had read a little about this. It will be interesting to see how it plays out.

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