Tuesday Jul 07 2009
New credit scoring system could shock many
By: Dena Kouremetis and Beth Mergens
Have you heard that 800 just might be the new 750? To what are we referring? It is that pesky credit score number wreaking havoc on consumers due to tough economic times. Homeowners who think they may finally have a handle on their finances are getting unpleasantly surprised when discovering that lines of credit once secured on their homes no longer exist, their lenders having closed their accounts without their knowledge. This can strike fear in consumers who once thought of these extra funds as a kind of lifeline and hedge against disaster. Remember those “happy” letters you once received from your credit-card company or bank informing you that now that you’ve paid down your credit card balance, your credit limit has been raised? Now, many consumers diligently attempting to pay down their credit card balances are doing so only to find their credit limits lowered instead of raised, as the credit crunch continue to take its toll. Banks and credit-card companies hit by charge-offs are tightening up their lending standards. According to AllBusiness.com’s Miranda Marquit, beginning this year, Fair Isaac Corporation, the organization behind the FICO score, is rolling out its new formula for credit scores. The result is a nearly complete overhaul of the mathematics behind the credit scoring system. “Technology and the prevalence of credit makes it easier to track consumers’ credit habits, and the new FICO credit scores will take this into account,” says Marquit. “Consumers will now fall into 12 groups, rather than 10, and credit problems and issues will be ranked according to number and magnitude more specifically than before.” Kiplinger reports that many borrowers will find a dramatic shift in their FICO scores with the new model, but the company estimates that up to 50 percent of borrowers’ scores could go up or down by more than 20 points because of the new variables it uses to evaluate consumers’ credit-use behavior. This will color what is now perceived as good, fair or bad credit. FICO is getting better and better at recognizing varying levels of consumer habits. It used to be when you were late on a payment your credit score would take an indiscriminate tumble. The new method will now sense finer nuances, however, examining how frequently you exceed the due date. In other words, a single late payment will not be as damaging to your credit score as it has been in the past. If cleaning up your credit is your goal, pay strict attention to paying bills on time, keep the ratio of overall debt to available credit below 30 percent, maintain long-standing, paid off accounts on the report (don’t close the accounts; just don’t use them), don’t take out any new credit, and keep in mind that the number of accounts and the various types of accounts (credit cards, retail credit, auto loans, mortgages, etc.) will impact your credit score. Although it is true that the technology used to track consumer habits has become extremely sophisticated, the bottom line is that an individual’s spending habits can also be incorporated into their credit score, so information is the key here. For more information on how credit scoring works, go to myfico.com. Visit writer Dena Kouremetis at communic8or.com. RE/MAX Broker Associate Beth Mergens may be reached at (916) 947-3993 or at FolsomLakeHomes.com.