New Scoring Model Downplays Some Credit Negatives

Residential Neighborhood

Fair Isaac Corporation (FICO) is responsible for credit-scoring models used by the three credit bureaus – Trans Union, Experian and Equifax – and a large proportion of lenders in determining your credit worthiness.

The bureaus collect data from creditors such as banks, credit card companies, and auto finance companies. Each bureau enters the data into a scoring model and generates a credit score. Lenders take the middle of these three scores and use that number as your “score” when qualifying you for a mortgage.

Scores range from the mid-300s to the mid-800s. You want to be in at least the 640 range; anything below that will require you to use other things to offset the low score, such as a higher down payment. Anything above 740 will get you into the premium lending programs with lower interest rates (and lower mortgage payments).

Fair Isaac Corporation has devised a new credit scoring model, FICO09, with changes that could impact buyers who have had trouble qualifying for a mortgage because a collection appears on their credit score.

In the new model, a settled collection won’t be considered in calculating a credit score, and less weight will be placed on unpaid medical collections.

As even a small increase in a credit score can have a positive impact, the result could be that more people will be able to purchase a home.

FICO09 is available this year; however, it is not known yet whether credit bureaus and lenders will use it. Stay tuned.

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