Credit Score Overhaul to Affect Carmel Mortgage Outlook

Real Estate Agent with Heard Real Estate Team AB21400606

For any Carmel resident who has ever been stymied by seemingly arbitrary (or, put another way, nutty) lowering of his or her all-important credit score, next month’s beginning rollout of Fair Isaac’s new credit score model should be welcome news. It will be known as “FICO 9”—and promises to correct a few of the previous model’s inadequacies.

Why now? It’s been six years since San Jose’s Fair Isaac Co. last tinkered with their credit score methodology. Hmmmm…it’s been six years, too since the financial crisis of 2007-08, which Wikipedia correctly describes as “a major global recession characterized by various systemic imbalances…including high levels of household debt...”

You might expect that the accuracy of many credit scores could have been thrown off-kilter during the crisis—if not throughout the painfully slow recovery that’s followed. If, for example, someone is laid off, then suffers a sudden medical emergency, a formerly spotless credit history would be seriously distorted. Add in regulatory pressure on the banks, and many truly responsible individuals could suffer unfairly. As The Wall Street Journal summarized in a recent article: “Since the recession, many lenders have approved only the best borrowers, usually those with few or no blemishes on their credit report.”

Keep in mind that the whole purpose of a FICO credit score is to help lenders predict the likelihood that an individual will repay a debt. Lenders pay for accuracy in credit scores—and last year they bought 10 billion of them!

BUT…because of two specific problem areas, the scores gradually were becoming less reliable as predictors. First, there was the fact that once a bill was sent to collection, it showed as a black mark—one that could lower a credit score by as much as 100 points—even after it was paid. For as long as seven years after it was paid! So FICO 9 will not penalize borrowers with a collection on their report once no balance remains.

Then there was a problem with medical debt scoring. According to WSJ, as of last month, more than 64 million consumers had a medical collection on their credit report. That would account for many credit scores being adversely affected—sometimes even when it had been an insurance company which rejected the charge…and sometimes when the consumer wasn’t even notified of the situation! Worse yet, when a Consumer Financial Protection Bureau report came out in May, it found that many borrowers’ credit scores weren’t being raised even after they repaid such a debt. FICO 9 will count medical debt sent to collections as less important than other kinds of debt.

 The new scoring changes are expected to ease access to loans—Carmel mortgage loans included—without materially raising the risk exposure to lenders. But if history is any indicator, wholesale rejoicing may have to hold off for a while, because mortgage lenders can be slow to adopt changes in credit scoring. Nevertheless, if you are soon to start looking for a new Carmel home, I’d recommend checking your current credit report to be sure all is accurate. Then call me 317-800-5537!




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Tammy Lankford,
Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA
Broker GA Lake Sinclair/Eatonton/Milledgeville

We don't share an attitude about credit scores.  I've always though not paying your bills and having collections were perfectly good reasons for having a low score.  I am happy that someone who has paid a collection can get a bounce back in score though.  I see that as a good change.  But arbitrary and nutty aren't words I would have ever used for a score dropping because someone didn't pay something they actually owed.

Aug 17, 2014 11:29 PM #1
Sandy Padula and Norm Padula, JD, GRI
HomeSmart Realty West & Geneva Financial, Llc. - Carlsbad, CA
Presence, Persistence & Perseverance

Rodney: Great post and one that will affect many folks looking to get into home ownership. Thank you!

Aug 18, 2014 12:29 AM #3
Rodney Heard
Heard Real Estate Team - Carmel, IN
Results that move you!

Hi Tammy,

It is great that you have been so fortunate in your life. Even some of the wealthiest people in America have fallen on hard times and credit problems in their life. While you may have perfect credit at this time. No one can predict what life will throw at them. I would pray that you never have a medical problem, a sick child, with insurmountable medical bills or lose a career. No, by contrary I think it is the American way, The human way to make mistakes in life and be able to recoup from them.

Aug 18, 2014 12:41 AM #4
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Rodney Heard

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