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Are you aware of Credit Scoring changes coming soon?

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Mortgage and Lending MLS# 279272

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!

Comments (60)

Kim Hughes
Kim Hughes & Company - Mineola, TX
Professional Real Estate Virtual Assistant

Hi Loren,

 

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

Jan 08, 2009 12:17 PM
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

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?

Jan 08, 2009 12:38 PM
Eileen Liles
970-216-0530 http://WeSellDeltaCounty.com - Cedaredge, CO
Macht-Liles Real Estate Group - Cedaredge, CO

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

Jan 08, 2009 12:44 PM
Danielle Vinson
Sibcy Cline Realtors - Batavia, OH
www.sibcycline.com/dvinson

Great Post!

Jan 08, 2009 12:47 PM
Mindy & Jay Robbins
Robbins Real Estate - Dallas, TX
Expect Excellence from Robbins Real Estate

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?

Jan 08, 2009 01:15 PM
Roland Woodworth
Blue Cord Realty - Clarksville, TN
Blue Cord Realty

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

Jan 08, 2009 02:19 PM
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

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.

Jan 08, 2009 02:28 PM
Jonathan Kauffmann
Jonathan Kauffmann, Principal Broker of Nest Realty - Crozet, VA

Interesting info - thanks!

Nest Realty

Jan 08, 2009 03:06 PM
John Novak
Keller Williams Realty The Marketplace - Las Vegas, NV
Henderson, Las Vegas and Summerlin Real Estate

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.

Jan 08, 2009 03:09 PM
Lynda Eisenmann
Preferred Home Brokers - Brea, CA
Broker Associate ,CRS,GRI,SRES, Brea,CA, Orange Co

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???

Jan 08, 2009 03:17 PM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

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

Jan 08, 2009 03:51 PM
Mark Watterson
Salt Lake City, UT
Utah Real Estate

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. 

Jan 08, 2009 11:44 PM
Ken Offidani
Coldwell Banker Select Professionals - Lancaster, PA

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

Jan 09, 2009 12:17 AM
Diane Aurit
LKN Realty, LLC - Mooresville, NC
Lake Norman Real Estate

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

Jan 09, 2009 01:09 AM
Loren Johnson
White Bear Lake, MN
CMPS

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!

Jan 09, 2009 02:17 AM
Loren Johnson
White Bear Lake, MN
CMPS

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!

Jan 09, 2009 02:33 AM
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

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.

Jan 09, 2009 08:53 AM
Becky Brand
Shorewest Realtors - Oconomowoc, WI

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

Jan 09, 2009 08:54 AM
The Somers Team
The Somers Team at KW Philadelphia - Philadelphia, PA
Delivering Real Estate Happiness

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

Jan 09, 2009 12:36 PM
Heather Goodwin
Licensed by the Louisiana Real Estate Commission - Shreveport, LA
Results That Move You

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

Jan 10, 2009 02:28 PM