New credit scoring model may boost some borrowers' scores

I have said for some time now that credit scores will be adjusted to reflect the current hard times for so many people. Although the article below is addressing small items under $100, it is probably the first in a series of algorithm changes that will eventually downplay late mortgage payments and perhaps even foreclosures. The times they are a-changin'!
Making the grade

By Amy Hoak, MarketWatch

CHICAGO (MarketWatch) -- Even the most responsible borrowers slip up sometimes.

Maybe a utility bill went unpaid after you moved and the missed payment went into collections. Or, perhaps there are unpaid library fines or parking tickets in collections that are hanging onto your credit history and affecting your FICO credit score, which is widely used by lenders to evaluate your ability to repay a debt.

With the newest version of the FICO credit-scoring system, however, minor delinquencies are now overlooked in calculating creditworthiness.

Under the updated scoring model, called FICO 08, small, missed payments lingering in collections with original amounts of $100 or less will no longer do damage to your credit score.

Consumers also are less likely to be penalized for any single delinquency if it occurred two or more years ago -- and if their credit history is otherwise unblemished, says FICO , formerly Fair Isaac Corp., which developed the FICO scoring system.

"There's more flexibility with missing a payment," said Careen Foster, director of global scoring product management for FICO. "If you have a more habitual pattern of paying accounts late...you're more likely to get penalized for that."

If a consumer's credit usage is high, that will be more likely to hurt his or her score with FICO 08. But getting close to your credit-card limits -- even if you always pay on time -- is penalized in some way in every FICO score, not only the recent edition, Foster said.

The new system has been available at all three credit bureaus -- Experian, TransUnion and Equifax -- since last month.

The changes were made to provide lenders with a better risk assessment of borrowers, said John Ulzheimer, president of consumer education for Credit.com, a consumer education and advocacy site. FICO decided that one small library fine didn't really predict whether a consumer was likely to default, for example.

With the changes, individuals who pose a low credit risk will probably see their scores rise a bit, and those who are high risk could see their scores drop, he adds.

FICO 08 also addresses "piggybacking," a practice used by credit-repair companies to help people improve their scores, Ulzheimer said. In piggybacking, an individual pays to become an authorized user on a stranger's account. The account holder gets paid for allowing the person to be associated with the account, and the new authorized user is able to improve his or her credit score.

"It was a practice to...misrepresent what your credit looks like to your bank," Foster said.

FICO 08 aims to single out individuals who are named as authorized sources through deceptive means, Ulzheimer said. Those people won't see their credit scores rise as a result. But the scores of legitimate authorized users will be treated as they always have been.
Adoption Rate

Borrowers shouldn't expect their credit to be graded by this new scale on every loan they now apply for. Not all lenders have adopted the new model, though more than 400 lenders are using or testing FICO 08, the company said.

In a statement, Equifax said, "Currently, many lenders and businesses are validating the new score within their systems, and adoption will vary by financial institution based on business requirements and market need."

Many credit-card companies, auto lenders, regional banks and credit unions may have already adopted FICO 08, Ulzheimer said. But for mortgages, lenders doing traditional conforming loans backed by Freddie Mac and Fannie Mae likely haven't made the move yet, he said. That's because they're waiting for Freddie and Fannie to approve its use. Freddie Mac and Fannie Mae "are essentially the lender... they're the ones that set the underwriting criteria," he said.

Ulzheimer said he expects Freddie and Fannie to adopt FICO 08 by the end of the year. Fannie declined to comment on FICO 08; Freddie wasn't able to provide a comment prior to publication.
Improve Your Credit

While FICO 08 will help consumers' credit scores in some cases, people still should take steps to improve their credit. Granted, it's impossible for consumers to calculate their FICO scores themselves, said Rodney Anderson, of Rodney Anderson Lending Services in Plano, Texas.

"It's almost like the Coca-Cola formula. No one has access to the Coca-Cola formula, no one has access to the FICO formula," he said.

But by being proactive, you can start to work toward a higher score, something that will serve you well every time you apply for a loan.

Some suggestions:

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Monitor your credit reports and correct errors. Look not only for negative events on your record, but also examine the credit limits to make sure they're accurate. If the credit limits appear lower on the report than they actually are, that has the potential to hurt your score, Anderson said.
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Pay bills on time and keep card balances low. Your payment history, and the amount you owe on your accounts as a ratio of the amount of credit you have access to, are important components of your score, Foster said. FICO 08 is more sensitive to high credit usage, and consumers may see a lower score if their reported balance on one or more cards is near the account's limit.
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Take on new credit only when you need it. Some credit cards come with great offers, including a percentage off your bill if you sign up for one at the cash register. If you accept, make sure you're getting a big enough benefit to make it worthwhile -- taking on additional credit could end up dinging your score, Foster said

Delay and Pray

I'm back from burying Dad and helping Mom with her transition to a new reality. There is no way to delay the inevitable, and perhaps no way to prepare for it. Things kept rolling along in my absence with deals coming together and falling apart, all to the beat of giant juggernaut we call life.

Upon my return I spoke with Kelly, a longtime friend and client, about the current real estate market. When we began looking for a place for her to buy last April there were all of 67 properties along the 78 corridor. At the first of this week there were 57, most being short sales and in some state of negotiations presumably. In the end, nothing Kelly wants to buy.

So she asks me, 'What's going on? How long before the floodgates open?' A wonderful question, one that so many of us are pondering. My answer was along the lines of this great story from Marketplace radio on KPBS.org. Listen and learn:

http://marketplace.publicradio.org/display/web/2009/08/26/pm-banks-q/

My prediction is that as soon as the first time home buyer tax credit expires, there will be a flood of properties. The result of this I only dare to think.

Taxpayers Tax Breaks Do Have a Time Limit

The Clock is Ticking - Taxpayers Need to Act Fast to Take Advantage of Temporary Tax Breaks

^[1]RISMEDIA, August 7, 2009-If the first half of 2009 is any indication, taxpayers have their work cut out trying to keep up with available tax

New Credit Card Rules Spells Good News For Debt Relief

One of the greatest culprits for serious debt problems are credit cards. Obviously it is our bad use or management of credit cards that causes the debt problems, you can’t blame a gun for what its owner does with it. Nevertheless some guns are more trigger sensitive than others, and it’s not the same to own an automatic machine gun than an air gun. It’s all about understanding the rules of the game and what the real cost of your credit is. The Obama administration have backed the implementation of new credit card rules that will help many of us to save money and stop paying so much of it to the banks in fees and penalties.

What are the new rules?

Raise interest rates on existing balance. This is a great victory for consumers. This is a little known tool banks had in their arsenal of money making methods. In fact most of us probably didn’t know the bank could increase the rate of interest on our credit card without asking. If you think of it that is pretty crazy because the interest rates on credit cards are already huge.

Payments will pay off your most expensive debts first. Borrowers using credit cards, especially when transferring balance from one card to another, can find themselves with different rates of interest for debts on the same card. Previously there was not guideline or rule on which part of the debt banks must use your monthly payments to cover. Obviously banks had an incentive to pay the cheaper interest rates first and leave the most expensive rates to last. With this new credit card rule that will not be a legal course of action for banks that must allow borrowers to pay off their most expensive credit card debt first.

Other cards can’t penalize you for missing a deadline on another cards. We all know that banks are a closed knit community. They might compete against each other but when they are dealing with borrowers data, credit record and payment history they are happy to share their knowledge. They can still share information on delinquent credit card payers but can’t hold it against them.

None of these measures will stop the banking industry from making more and more money on our misuse of credit cards but it has plugged some holes banks will no longer abuse.

(by Andrew on July 29, 2009)

In order to take advantage of current, low mortgage rates and home buying opportunities, let's discuss your current debt and how to make it work for you. Give me a call at 760.740.5111