Credit Talk
FICO Score Model Retooled
FICO has retooled their scoring models and the bottom line means forgiveness of small slip-ups in paying your bills, but consistent negligence will cost in drop of credit scores- and that could impact your home loan mortgage options. FICO estimates their new system will help lenders limit their default rate by between 5-15 percent.
The closure of the “authorized user” loophole, “piggybacking” on someone else’s good credit, is part of this retooling.
The purpose if this new scoring change is the response from lenders needing more efficient risk management tools.
Scores will still range from 300-850, and the new model will continue to factor the level of credit owed, payment histories, length of credit history, number of inquires into credit, and the type of credit used. Consumers who currently are considered low risk due to a few late payments or over-limit situations will score better with the new version, but high risk consumers will end up scoring lower and will find it harder to secure favorable rates on home loan programs, auto loans and extending of new credit.
FICO-08 has already been given to Experian, which has currently begun implementation, TransUnion expects to have the model available to lenders to test during the 2nd quarter of 2008. Equifax has disputes with Fair Isaac due its pending lawsuit with them, but intention is to distribute to the three major credit bureaus.
Closing Unused Credit Accounts - Fact or Fiction?
If you have ever had a financial advisor or loan officer advise you to close card accounts, it is one of the most harmful actions you can take if you are trying to achieve or maintain favorable FICO scores. Most loan officers and mortgage advisors are NOT well versed on the FICO scoring models. Actually keeping open any credit you have established for a long time will help to maintain or raise your scores.
You should not close an established, long-standing account even if you do not use them. The fallacy is that a credit card account no longer in use will hurt you because you have the ability to charge up debt, while technically that is a consideration – closing the long standing account will hurt you far more.
CREDIT TIP: If you have not used your credit card in 6 months, it is generally a good idea to purchase something using that credit card and then pay off the balance immediately. This will keep the long-standing account current, and will be counted positively for your credit score.
Straight Talk on FICO Scores for “Authorized Users”
Fair Issac – the creator of the FICO scoring model, has recently determined that “authorized users” on credit card accounts will no longer be scored in the same way the primary card holder is scored and reported to the credit agencies. It will not matter if you have been an authorized user on an account for 5 weeks or 5 years. If your credit score is based on being an authorized user on any account, your FICO score will change!
The primary user of a credit account will not be affected by this change. However, for “authorized users” who had counted on FICO scores being raised by the good credit of primary cardholders (parents etc.), this could be a very serious change for the authorized user.
What does this mean when trying to qualify for a mortgage? – It is possible if the credit score of the borrower cannot stand on their own credit worthiness, it may be difficult to be approved for a mortgage. If you have any further questions on your FICO score and how it could affect your ability to qualify for a mortgage, please contact me.