Out With The Old FICO Scoring System and In the With The New

By
Real Estate Agent with RE/MAX Associates CA BRE# 01048160

Just about the time when everyone was on the same page with the old FICO scoring system, Fair Isaac's Corp. is making some needed changes in the the way the formulas will be calculated. A glimpse of the new model will be available in Sept 2007. This change will only affect one reporting agency in 2007 and the others will implement it in 2008. Fair Isaacs says the new system is not that much different. The major change in the new system is in the way it looks at those that receive credit points who are authorized  users on someone else's credit card.

People with little credit history or with poor credit will likely see their scores change significantly when they close this loophole.  It will illuminate on the scores of millions of authorized users and their scores will be affected, either up or down as the system is implemented. 

This change will mostly effect  the  younger adults that are trying to establish credit by attaching themselves to their parents credit cards. They ride the coat tails of their established parents credit to be able to circumvent the time required to establish for themselves.  Married women who use the family credit cards, but have little credit on their own will also be affected. 

Fair Isaac is closing this loophole because the lending industry has complained about abuses and said that the loophole was distorting the borrowers' true credit risk. 

As a suggestion for those who become authorized users to help build their credit, they might consider switching to a joint account. That would allow the joint member to continue reaping the benefits of the primary cardholder's strong credit history. However it must be understood that doing so also  poses some risks for the primary holder of the credit card.  If the authorized user abuses the card it will affect the primary card holder credit as well.  The primary cardholder can expect to see a change in their respective credit score.   

As I was researching the available information for this post, it occurred to me that there is really no clear way for one to gather the information with any assurance that you have a handle on how their specific credit score was composed. Perhaps the new scoring system will take this into account and help create a more understandable way of how the score was composed.

MyFICO.com does give general guidelines on how the score is determined. Let me correct that, how your 3 scores are determined. Most people assume they have one FICO score when in fact there are 3. Each of the reporting agencies determines their own score based on what they have in their reports for the borrower seeking credit. So depending which one of the 3 reporting agencies (Experian,Equifax,and Trans-Union) individual score is used, will vary. Perhaps not by large numbers but they will each have a different score. 

On the site MyFICO.com these are the general guidelines of the composition of the score. 

35% of the score is determined by Payment History

30 % on Utilization ( by what percentage of your available credit are you using )

15% by your established Credit History

10% of the score based on Inquires

10% on your Mix of Credit ( installment credit, credit cards, mortgage, etc.) 

When a lender then quotes you your FICO Score, they are usually quoting your average score by adding up all three and taking the average.

If you were buying car for instance, the dealership may only use one credit reporting service. Your score might be very different than if you were applying for a loan to purchase property. The Mortgage Brokers will most always need to factor in as much information as possible for the underwriters of the loan to consider when determining loan approval. 

In adjusting the FICO scoring formula, Fair Isaccs who created and owns the formula, says that adjusting this formula is needed to protect the continued reliability and predictive power of the FICO Scores. Dr. Mark Green , the CEO of Fair Isaccs, said about the upcoming formula change, " We will do whatever it takes to protect the reliability and accuracy of FICO credit scores for lenders, and to ensure lenders can continue to use FICO scores with confidence when making their most important customer decisions". He added " We will continue working with lenders regulators and others in the credit reporting industry to end deceptive practices that misrepresent consumer credit histories for profit".

The new system will take some getting used to but in the longer run it may create a more reliable and accountable system. In the shorter run, a lot of people's scores will be changed and that may create some confusion and concerns for the borrowers.

The exact details of the new system will always be safeguarded by Fair Isaacs Corporation prevent competitors and critics from cracking their trusted system.

 

 

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shauwn nichols

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Rainer
9,358
Shawn Nichols
Homelink Real Estate - Red Bluff - Red Bluff, CA

Hello All,

Artur we all want our clients to get their loans.  If I had a client tell me they were going to change jobs, I would let them know that if they did their loan is dead in the water.  I would not tell them to wait until the loan funded and then change.  That has to be their decision.  As I posted before, any undue influence that makes a file fly that could not on its own merit, is questionable.  A sub-prime lender expects these things.  As long as they are working when they call, it is all they want to know.  Common sense is a rare thing with most people.  You are correct that it should be a no brainer, but it happens. 

If you tell them to fund and then quit, you have withheld information on the file and knowingly submitted a fraudulent loan.  Can it be proved? NO.  Will the lender demand that you buy back the loan?  Probably not.  But, was it fraud? Yes. 

This is in theory.  Every client has circumstances and you just need to play it by ear.  Am I a person who looks for fraud in a file?  Yes.  I do not want to ever have to buy back a loan or end up in court.  This is just my opinion.

Shawn Nichols

Jul 06, 2007 07:24 AM #87
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William Johnson
RE/MAX Associates - La Jolla, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE
Thanks Shawnfor adding into the discussion. I am staying out of this discussion however. Since I am not a lawyer, I never try and speculate on such things. But appreciate that you feel so strongly.
Jul 06, 2007 08:37 AM #88
Rainmaker
67,365
Brian C. Aber
CreditRepairVIP.com - Littleton, CO
Leading Credit Expert

It is unfortunate that we live in a time where we all have to watch out how we word certain statements to protect ourselves from further liability.  ie, "If I were you ..."  " I can't tell you not to, but ..."

If the client actually quit the job and lied about it, then I can see it constituting fraud ... but them waiting until closing of a deal to meet certain guidelines isn't fraud ... it's excellent time management and planning. 

What we need to do is make sure our clients are properly informed of their situation and the guidelines that will bind them.  All we can do is advise them on what is most likely the best proper plan for them.  After that we have to rely on them making up their own mind with the comfort of our counsel.

This is an almost impossible subject to close the matter on because it deals with "case by case" situations.  I'm glad we all agree on one thought, "Keep it legal .. help your client."

Cheers and enjoy your weekend!

Brian

 

Jul 06, 2007 08:59 AM #89
Rainer
42,460
Artur Urbanski
Cimpler Real Estate, Inc. - Burlingame, CA
Helping property owners to maximize property value
Shawn, you definitely have a good point. Once I re-read my entry I realized that it could be misinterpretted. I think that Brian summarized it really well. You have to deal with a situarion case by case and there are two guiding elements, do the best you can for your client, bur make sure it is legally and ethically correct. 
Jul 06, 2007 09:19 AM #90
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William Johnson
RE/MAX Associates - La Jolla, CA
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Brian and Artur, I am glad yoou both have come to an agreement. :)
Jul 06, 2007 11:10 AM #91
Anonymous
Susan Templeton, Loannetter

Loan Fraud is a federal felony. Mortgage professionals are licensed to qualify borrowers for specific programs and transactions in accordance with federal lending laws. The laws are also very clear that the borrower has the right to privacy in their dealings with their advisors. Our disclosure package includes 15 pages they must sign before I can present them to a lender. I am frankly surprised to hear realtors speaking about buyer's credit issues! I do appreciate your concerns since every seller wants to know the transaction will be completed. It is the mortgage professional's job to be sure (and there are many indicators) that borrowers are being truthful with us so that we put them into the right program...which they can afford. If they lie to us or we misrepresent them--we are liable!! I believe strongly in the responsibility to also protect the consumer from themselves...so I write blogs on the subject --if you are interested in my take....feel free! www.netcredit.blogspot.com

 

Jul 06, 2007 12:58 PM #92
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William Johnson
RE/MAX Associates - La Jolla, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Hello Susan,

The comments were are referring to was not in my original blog article. I amended my blog and included with in it comments another person made ( sort of a guest). seems he writes things that are way more controversial than I. My post was about the FICO scoring system changing.

Another member of Actiive Rain suggested that I might want to include Shawn's remarks so I did. Shawn Harris, another blogger on ActiiveRain is the author from  at the notation I made of the inclusion of his remarks. Shawn gave permission to have his remarks included.

Thank you for commenting and I am sure Shawn will comment on your response, as I think what you are commenting on are his remarks exclusively.

Sincerely,
William

Jul 06, 2007 01:40 PM #93
Rainer
9,358
Shawn Nichols
Homelink Real Estate - Red Bluff - Red Bluff, CA

Hello All,

Hello William, I am sorry for the controversy.  I only really wanted to pass on information not sidetrack the main topic of the FICO system.  I enjoyed the original post and the topic was top notch.  I will try to keep with the program.

Thanks,

Shawn Nichols

Jul 07, 2007 05:25 AM #94
Rainer
42,460
Artur Urbanski
Cimpler Real Estate, Inc. - Burlingame, CA
Helping property owners to maximize property value

William,  based on discussion you triggered I feel that we need to discuss if agents should discuss FICO score with their clients. I very interested in your opinion.

Is it OK for real estate agents to coach their clients on how to improve FICO score 

 

Jul 07, 2007 09:50 PM #95
Rainer
155,621
R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham
Bank of England (NMLS#418481) - Raleigh, NC
Bob Mitchell (NMLS#1046286)

I"m still of the opinion that credit scoring should be made illegal. 

First it's discriminatory.   You mentioned the "mix" of credit.  This means that if you have accounts from a finance company you're more likely to get dinged on your credit score.  Who uses finance companies?  Not rich white people.  Poorer  people and people of color are the ones that turn to finance companies to finance purchases that richer people put on charge cards or pay cash for.

Second, it's unfair.  If you are going to be judged by a set of criteria, especially in something as important as your ability to borrower, shouldn't you have a right to know what that set of criteria is?

Third, it's inaccurate!  It's pretty much accepted fact that up to about 70% of credit reports contain inaccurate information.  That means that up to about 70% of credit scores are inaccurate.

If you'd like to know more about "Why Credit Scoring Should Be Illegal" click on the link and view my post.

 

Bob Mitchell

ValueList Real Estate Services, Inc. 

Jul 07, 2007 11:09 PM #96
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William Johnson
RE/MAX Associates - La Jolla, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Artur, Thanks for commenting and adding in your post link and the additional resource articles.Excellent post BTW.

Your post is superb and well illustrated from one perspective. The example you used was from an individual agent that knew about and understood the principles of credit repair. You asked me a question. Did I think real estate agents should discuss credit scores with their clients ? As we get more and more into the core of the service business and try to justify our existence , it might not be a bad idea to be providing agents that have an interest ,an opportunity to learn the subject and surrounding guidelines and be able to give this guidance to clients that want it. There are several other professions that might think we are usurping their territory and we best be able to give substantive proof of our expertise if it ever called out.

The real rub for financial planners, tax counseling, credit counseling companies it the type of license that might be required and if we are exceeding our real estate licensing limits when we counsel on credit repair. It is a difficult question to answer that is going to need others to decide.

It would seem to me that this should be at least within the context of services that we ( REALTORS) might be able to expand to but it will require some proof of expertise or certification that we are accomplished in this subject.

Other professions might see this in a different vain and we will likely need more training either way. Real Estate Counseling comes to mind. Real Estate Counseling is a unique profession in and of itself and yet we REALTORS on a regular basis, describe part of our service as counseling the client ( with no particular expertise, licensing or certification as a counselor). Maybe it is time to redefine this real estate profession and what is within it's domain and what is not. It is getting pretty muddy as these situations are occurring more and more often, almost commonplace.

To go back to answering your question, I don't know the answer. In a limited way, yes, I think we can and are helpful by assisting the Buyer in ways that may be beneficial them from our knowledge base. It may come down to a standard of practice. Should we know these things and if yes, prove the educational background. If No, then treading into these arenas will increase the liability and exposure should something go wrong with the advise or the understanding by the client of what was advised.

There is another way around your question. Likely until the question takes a greater significance in the profession, those who could decide, won't. Lawyers on the other  hand, might also smell blood and go on the offensive. Those cases have in the past set case law and in many ways redefined what an agent is responsible for knowing and also what areas are considered not within their licensing domain legal,tax,construction,financial planning,etc. In each case, a specific license is involved. 

This might be a great thread for a whole new post on what the limits should or should not be in the real estate license. Brokers owners would probably like to keep it as simple and clear as possible. They may feel there is no real money in expanding the services as long as we remain a contingency industry. If we shifted to the legal profession model ( billable time, contingency fees in some cases, flat arranged fees in other situations) for sure we would likely be taking on more and more types of the possible services.

 

Jul 08, 2007 05:49 AM #97
Rainer
42,460
Artur Urbanski
Cimpler Real Estate, Inc. - Burlingame, CA
Helping property owners to maximize property value

 

William, thank you very much for your comments. Would it be OK to include them in my post, as you did it with Shawn's comments? I think that they would greatly enhance it.

Real Estate Counseling is what very experience agents and brokers already do. I believe that more and more agents will do it in the future, as our profession will be evolving and adapting to the influx of the on-line services.

Our profession is evolving; however, the real estate business model has not changed much over many years. Hundreds of entrepreneurs are trying to find a better one.  Once (and if) a better model takes a hold the licensing laws might have to change.

 

Jul 08, 2007 08:46 AM #98
Rainmaker
368,440
Miriam Bernstein, CRS
Rochester, NY
Very informative article, thanks so much for taking the time.  I have bookmarked.
Jul 08, 2007 09:06 AM #99
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William Johnson
RE/MAX Associates - La Jolla, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Hi Artur, I already used my comments as post. I never did that before and wouldn't do it again. Too confusing,lol

Jul 08, 2007 09:34 AM #100
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William Johnson
RE/MAX Associates - La Jolla, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE
Hi Miriam, Thanks for your comments and for book marking the article. I am so glad that something I had added here is useful for you. It is will be interesting to see what the scoring system actually looks like and how it will be used. Watch for it in late September.
Jul 08, 2007 09:51 AM #101
Rainer
42,460
Artur Urbanski
Cimpler Real Estate, Inc. - Burlingame, CA
Helping property owners to maximize property value

Good post.  I am preparing a few other posts. As we seem to share interest as well as some opinion I was thinking that we could try a joint post. Please let me know if you might be interested to discuss it and I check with Caleb how we could do it technically. I am curious how occasional joint post would work. Possibly we could open another way of expressing ourselves.

Jul 08, 2007 10:52 AM #102
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William Johnson
RE/MAX Associates - La Jolla, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Hi Artur, Like a joint collaboration?  It works in other wordpress driven blogs but can only have one author. As least as a collabrative effort. Not sure how two people do one post on ActiveRain. They would require a post to show as one member or another. Duplicating a post under two names would likely p--- them off big time, lol 

An interesting tought!
William

Jul 08, 2007 11:47 AM #103
Rainer
42,460
Artur Urbanski
Cimpler Real Estate, Inc. - Burlingame, CA
Helping property owners to maximize property value
William, just a thought at the moment. I will explore the idea with Caleb.
Jul 08, 2007 01:20 PM #104
Rainer
12,453
Paul Jones
Kansas City Regional Homes - Olathe, KS
PIC Properties - Kansas & Missouri

This was very well written.  I have previously read about the changes, but didn't go in depth on the topic.  You have made it clear what the change will be.  Thank you.

Aug 05, 2008 05:30 PM #105
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William Johnson
RE/MAX Associates - La Jolla, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Hi Paul, Thank You and I appreciate you locating this.

Aug 05, 2008 06:30 PM #106
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