Sunday, November 11, 2012

What's UP with FICO Scores Lately?

The 2010 FICO(r)  Scoring model which was finally introduced in 2011 didn't seem to have a lot of effect on credit reports we see. Or did it?

With so much competition for mortgage loans against the backdrop of our housing crisis you'd think tinkering with the Credit Scoring system would be problematic. The purpose of these changes is to further define strong credit patterns and weed out non-issues which may cloud the picture. Lenders and other users of credit reports use scores and credit data to establish risk patterns so the new system supposedly refines some of their concerns.

To date, the complex nature of scoring has left the door open to abuse by some people attempting to game the system by piggybacking their otherwise null or bad credit onto a good credit history of a relative by being named a joint user of an account. The new system cannow recognize if only your joint accounts are in good standing - so having fake joint accounts could potentially backfire.

One of the more recent bugaboos is how 'disputes' are viewed by underwriters. More than one disputed account on a credit report can cause your loan to be denied (!). The practice of people disputing everything created a virtual storm; creditors were being forced to defend their records. So now, if a pattern of disputes is seen, the risk factor goes up dramatically.

Also previously one recent late payment could have very swift and negative effects on your score. The new system is taking into account the 'severity' of that late payment in terms of the kind of credit and your previous patterns to allow a certain margin of error. One late payment may have less effect than before but it's hard to say exactly the effect upon your report specifically (in light of many other factors) unless you'd like to pull your credit - then miss a payment and have another look!

Currently your balances carried (as a percentage of available credit) comprise about 30% of your score. The new model supposedly allows a higher factor of balances as long as your on-time payments trend is strong or you display a practice of paying down your balances. On time payments is the number one concern for most credit score models, comprising 35% of your FICO score. So the things you can control: your balances and your on time payments are the things that affect your scores the most. As it has always been.

One helpful change is the lower impact of small low balance debts like parking tickets - as long as you don't have a huge string of them indicating a pattern. Like the old system what matters is patterns of behavior that signal risk.  

I am often asked what can a person do about their lack of credit or how to improve or start a credit profile. I recommend you build your credit accounts and use mindfully and reasonably. It's important to take on debts you actually need and will be able to manage successfully within your current means. It's a huge mistake to take on large open balances if you don't have self control. The system is designed to determine if you are a 'good user' of credit. So use wisely!  

Since the new models were introduced we have seen more kinds of detail on reports. There is a great deal more 'flagging' of inaccurate or non matching data for example if your name is spelled wrongly or a digit of your birth date is off it can red flag your identity as a possible concern. All thanks to the Homeland Security laws tightening up on national security - your lender is now in the position of serving as watchdog for possible identity theft or unusual movement of money. So when your lender asks for a copy of your drivers license and a copy of a recent utility bill in your name and your Social Security Card and your marriage can bet something on your credit report has flagged your identity and the underwriter is just verifying you are who you say you are. It's all for your protection too.

As the lending landscape continues to observe  increasingly risk averse rules, it's important to have your credit in tip top shape. FICO scores do impact some loan programs more than others - either as a factor of interest rate, pricing of the rate, or other facors including loan to value and mortgage insurance requirements. 

What is considered a 'great' credit score has become somewhat elusive as the national average scores have fallen to between 690 and 700. In 2006 the average was in 720-740. Before, a FICO score over 680 was considered above average to excellent. Now a FICO score under 720 is less desirable and may impact your interest rate and terms offered.

These days, a FICO score under 640 is becoming problematic so your lender may recommend some work to improve your score work before making a loan application. Once your application is started, you are stuck with your score for that transaction. So it's important to review your credit well before you apply for a loan so you can rectify any issues with some breathing space.
Long term, the benefits of a bit of work on your on-time payment and balance habits will go a long way to insuring you get a great FICO score and better lending options.

All the best!  

© 2012 susan templeton