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Home buyers and refinancers who've paid all their credit
card, mortgage and revolving debts on time could be in for an unexpected
bonus: A big jump in their credit scores, opening up the possibility of
lower interest rates and fees on future loans.
On
the other hand, under important credit-scoring changes now being
introduced to major lenders nationwide, some late-paying borrowers can
expect painful retribution: significant drops on their scores below where
they are today, potentially costing them more money the next time they
apply for a mortgage.
These little-publicized credit score changes are part of
a new, alternative approach being rolled out by the developer of "FICO"
scores, the dominant credit-risk ratings used by mortgage lenders, credit
card issuers, auto finance firms, insurance companies, employers and
landlords across the country. "FICO" is short for Fair, Isaac & Co., Inc.,
of San Rafael, California. The company calls the new alternative its "Next
Generation" scores, as distinct from the "Classic" FICO scores virtually
all lenders currently use to rate loan applicants' risk of future
defaults.
The new scores became available from all three national
credit repositories -- Equifax, Experian, and TransUnion -- last month,
and are expected to be rapidly adopted by banks and mortgage lenders.
The key to the "Next Generation" score is that it uses
complex statistical models to "see through" credit file data to better
identify loan applicants who represent the highest risks of delinquency or
foreclosure. Based on new analyses of tens of millions of consumer credit
files, the Next Generation scores "reward" some people -- moving them into
the heretofore rarefied "800" and higher score category. But it also
pushes other people below the "600" level that often triggers higher
interest rates and fees.
Under the FICO score system, consumer credit files are
risk-rated on a numerical scale from 300 to about 900. The higher you
score, the better credit risk you represent. Late payments, high credit
balances against credit limits, too few or too new credit lines, and other
factors lower scores. On-time payments, moderate to low credit balances
against limits, and active but prudent use of credit over extended periods
all tend to increase FICO scores.
Under the "Classic" FICO system now in use nationwide,
only 11 percent of borrowers get scores of 800 or higher. Fully 40 percent
of the credit-using population have scores of 699 or below. With the
introduction of Next Generation scores, however, 22 percent of all
borrowers will discover their scores have risen into the select 800-plus
category -- double the current proportion. On average, in fact, consumers
with relatively clean credit histories are likely to score 15 points
higher on the new system than under the current, "Classic" FICO. These are
people who manage their credit well, and have no delinquencies or
"derogatory" entries on their repository files.
On the other hand, certain borrowers will end up with
lower scores:
- Applicants with "thin" credit files that cover short
time spans. These tend to be people with one or two lines of credit or
who have only recently begun their credit lines. They sometimes score in
the 700s under today's FICO system, but will experience a 20-30 point
average decline under the new.
- People with serious credit problems -- collections,
charge-offs, and bankruptcies--can expect 10 to 15 point drops with Next
Generation scoring. However, other borrowers with less serious problems
-- a couple of 30-day late payments spread over several years, for
example -- may well get slightly higher scores.
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