A couple weeks ago the Fair Isaac Corp., or FICO, announced that it will no longer penalize borrowers for certain debt-collection activities when calculating credit scores. A certain percentage of JMAC’s broker’s consumers are likely to see their FICO credit scores increase – not due to their debt payment habits, but instead due to changes of the credit-scoring model. And for many, a higher score will translate into thousands of dollars in savings over the life of a new home loan.
Our brokers know that a person’s spending and paying behavior are reflected in the credit report compiled by credit bureaus, and then those report entries are analyzed and evaluated by FICO proprietary scorecards to arrive at the score. So what goes into the credit scoring categories? A borrower’s payment history accounts for 35% of the score. This category includes a person’s payment record. Accounts are separated into installment (fixed payment period, like a mortgage or car loan) and revolving (open-ended such as credit card), and are either current, over 30, 60, or 90 days late, settled for less than the amount owed, or charged off. “Dings” on mortgages, such as short sales, foreclosures, and deeds-in-lieu, have a serious negative impact a credit score.
“Amounts Owed” account for 30% of a credit score: the more credit used out of the maximum amount available, the more it will reduce the score. The length of credit history accounts for 15% of the model. “New credit” is 10% of the weight in the model as is “types of credit”. Scoring models regard mortgages and car loans more seriously than credit card debt.
Fair Isaac Corp. says there are three significant changes to its metric, which it says is used in 90 percent of US consumer lending decisions. Debts that go to collections agencies and get repaid won’t count against a consumer’s FICO score. Medical debts will have a smaller effect on the score. And a change was made to the technique to analyze people’s creditworthiness if they don’t have much of a credit history. But JMAC brokers should know that it will take several months to actually make the changes in the model.