A borrower’s credit score is a key factor in the process of applying and gaining approval for a mortgage. The existing models for calculating credit scores is about to undergo a significant change.
The credit scoring giant Fair Isaac Corporation, commonly known as FICO®, has built a new suite of scoring models that will be available from all three credit reporting agencies (Experian, TransUnion and Equifax) to lenders by the end of 2020, according to the credit agency Experian. The new models will treat late payments and debt more severely, but will also now consider historical information about your credit card balances and payment amounts. Consumer FICO® scores will likely change as a result of the implementation of these new models.
How could these changes this impact borrowers? Consumers with high FICO scores who continue to manage their finances well may actually see an increase in their scores. Consumers with scores in the lower 600’s who struggle to make payments on time may see their credit score can go down further. If you are in the high 600’s and making payments on time and trending toward lower debt levels, your score could actually increase.
FICO has long used five main factors to formulate a borrower’s credit score, and these will remain in place. The main factors used to determine a credit score are:
- Payment history
- Dollar amount owed
- Age of credit history
- Credit mix
- New credit accounts
The major change to scoring centers around what is called trended credit data. Trended credit data provides a more complete risk assessment, enabling decisions to rely more on actual credit management behaviors of consumers and less on the length and depth of credit use history. Trended data offers a closer look at your financial picture over the last 24 months, specifically focusing on how you have managed your existing accounts.
It is estimated that 40 million Americans are likely to see their credit scores drop by 20 points or more, and an equal number should go up by as much.
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