About 40 million consumers who have fallen behind on their bills or have rising debt levels could see their credit scores fall significantly under changes being made to FICO.
Fair Isaac, which produces the widely used credit score, said the severity of the downward shift for those with the lowest credit scores, 600 or below, would depend on how recently the consumer had fallen behind and by how much.
About 40 million consumers who already have high credit scores, at least 680, could see it rise even further. “Consumers that have been managing their credit well . . . paying bills on time, keeping their balances in check are likely going to see a gain in score,” Dave Shellenberger, vice president of product management scores, said in a statement.
Overall about 110 million people will see their scores swing about 20 points in either direction, according to Fair Isaac. Companies could adopt the new scoring model as soon as this summer, the company said.
The changes come as consumers are accumulating record levels of debt that has worried some economists but has shown no sign of slowing amid a strong economy. Consumers are putting more on their credit cards and taking out more personal loans. Personal loan balances over $30,000 have jumped 15% in the past five years, Experian recently found.
Despite increasing debt loads, delinquency rates have remained relatively low. About 6% of consumers were late on a payment in 2019 compared with 15% in 2009, according to WalletHub.
The changes being implemented by Fair Isaac were first reported by The Wall Street Journal.
Fair Isaac periodically updates its scoring model. In recent years, the changes have generally raised consumers’ scores, increasing the population of people receiving credit card offers and loans.
FICO credit score ranges from a low of 300 to a high of 850. A high score – along with other financial factors – can translate into lower interest rates and more lending options for borrowers. A low score can make it difficult to get a credit card or rent an apartment.
Last year, Fair Isaac said the national average credit score had hit an all-time high of 706 compared with an all-time low of 686 during the Great Recession.
This new model will help reduce defaults, including a potential 9% reduction among new auto loans, Fair Isaac said. New scores, for example, could factor in consumers’ checking and savings account balances over two years rather than just a couple of months. That will give lenders more insight into how people are managing their credit, Fair Isaac said.
“Many lenders want to leverage the most comprehensive data possible to make precise lending decisions,” Jim Wehmann, executive vice president for Scores at FICO, said in a statement.
(c) 2020, The Washington Post · Renae Merle
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Any idea as to when this new change will take effect?
It would be nice to have an implementation date.
There seems to be about 50 “updates” and various versions that I have learned about that came out over the 16 years I’ve pulled 4-5 mortgage credit reports a week.
Different reporting agencies use different versions- different banks use different agencies.
Mortgage industry standard is pull from the 3 agencies- Experian, Transunion and Equifax then use the mid-score of the 3. Each of those even score a late or a derog differently. Equifax is usually the local reporting agency- I see Collections from $15 parking tickets, small lab/medical collections and small businesses report here- usually the lower score if any bumps. Then Transunion may have less reported but they are big ones- National Bank Revolving and they are the hardest to get any errors corrected.
Mortgages and Car Loans are quite different on the scoring models- as well as the Myfico.com and credit card companies that “try” to duplicate the agencies models.
So when these new things roll out- the most important thing is to know who is using that model and if it would benefit you?
I recently had a client showed me their 760 score for a car loan- they only pulled Equifax.
They had a 669 Transunion, 749 Equifax and 661 Experian. So mid-score was 669 which increased a mortgage rate from 3.875% if they had a 760 to a 4.625% with the 669.
The reason for the lower scores- a $5000 credit card with $3700 balance was only reporting to Transunion and Experian- but I was able to work with them and identified of we pay balance down under 30% we did a rapid rescore- and pulled the transunion up to 723 which was now the mid-score.
Point of the story- it’s a maze to figure out credit scores and it can be like playing monopoly with a 7 year old that likes to change the rules during the game.
I am reasonably wealthy and was always black balled for having too much credit. Then 07 came around and the stock market crashed. The credit card companies refused to honor my rewards the I earned and accumulated and cut my credit limit. After trying to reason with them I stopped paying them . So they basically shot themselves in the foot.
It’s a balance act…revolving is 30% of your score though. It’s always wise to keep one card active and under 15% at all times to maximize credit when needed.
I think consumers need to be aware that credit scoring models vary between the type of credit being pulled- a car loan, a mortgage loan and a apartment rental may all have a different model they use.
With this “modified” way of scoring is stating they would have to access an individuals checking and savings accounts over last 2 years- the only way I see that is if a borrower gives access to those accounts or if part of a Credit Unions process is to share that at time of credit pull?
I don’t see this being included in a Mortgage credit pull when a very successful and solid borrower may have little in checking and savings and a ton in a money market or IRA- earning more I teresr then having g a HUGE checking account.
It almost makes me think that some banks or credit unions are in support of creating “rules” to have people keep more money in their system to they can even more by loaning it out?