FICO scores are the most widely used credit scoring formula in the US. (Boomberg) An estimated 90% of all credit loan decisions (such as issuing a credit card or setting an interest rate on a home loan) are processed using this system, leading it to have a dramatic effect on your livelihood. Your score can either be beneficial or extremely detrimental. A poor score can prevent you from achieving a lower mortgage rate, or even keep you from qualifying for a loan altogether.
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In the past, the FICO scoring system has made it difficult for many Americans to receive lines of credit. Unpaid medical bills, recession, and natural disaster have impacted a large number of families. One in four U.S. families struggled to pay medical bills in 2012 and 10 percent said they had costs they couldn’t pay at all. (Boomberg) Given the critical role that credit scores play in consumers’ lives, it was essential for FICO to alter its scoring system.
With the changes FICO has set in motion, some individuals will be scored a little easier. The updated FICO will reduce the importance of overdue medical bills and remove blemishes on once late, paid-off accounts. The adjustments are expected to raise the median score for consumers. (Boomberg)
These changes are intended to reflect recent financial behavior and make lenders feel more confident in expanding lines of credit.
The challenger to the new FICO scoring system, VantageScore 3.0, will also bring big changes later this year.
VantageScore 3.0 is said to ignore paid collections, which is great news for those who have unknowingly had a medical bill or parking ticket slip into collections. (money.msn)
In addition, it allows people who infrequently use credit to obtain a VantageScore.
Lastly, the system does not “over react” to people affected by natural disasters or the economic recession. Lenders need to put in a special code on accounts and these negative scores will be ignored. The one downside to this is that along with skipped payments and other red marks, good behavior will also become invisible.
These new scoring systems will be ready by the end of the year. Perhaps we will see another increase in the housing market as a result.
But before you decide on purchasing a home just yet, remember–in order for any new score to benefit you, a lender has to choose to use it when evaluating your creditworthiness. Talk to your consumer lenders for more information.
For other news and real estate updates contact the experts at Prudential Beazley Real Estate at 706-863-1775.