Changing FICO score calculations

The nation’s most used credit-scoring system, FICO, announced last week that it is changing the criteria used in calculating consumers’ scores.

Recently, the credit scoring provider presented to lenders that current credit score “cutoffs” were higher than necessary. They encouraged lenders to think about lowering minimum score requirements for consumer loan eligibility. It is hoped by doing so it will enable consumers to obtain lower interest rates for loans and ease consumer qualification restrictions.

The changes include reducing the effects of overdue medical bills on credit scores and expunging other past penalties of consumers who paid debts that were turned over to collection agencies. FICO contends a consumer whose only major delinquency is due to unpaid medical bills may see their credit score increase by 25 points due to the changes.

This change to FICO scores was prompted by a recent Consumer Financial Protection Bureau study that indicated both paid and unpaid medical debts were unfairly and adversely affecting consumers’ ratings.

Approximately 64 million Americans have a medical collection bill listed on their credit reports, according to the Magnify Money Website. The changes will not, however, remove any unpaid debts from a credit report and some lenders may consider those delinquencies in their lending decisions.

The FICO changes are expected to go into effect in the fall. However, it may take a year or more for consumers’ FICO scores to reflect these changes. It is hoped that consumers with less than stellar credit histories or high medical debts can more easily obtain mortgages. Also, borrowers with less of a penalty to their FICO scores for these items would be subject to lower interest rates on loans.

In June of this year, the average FICO score for a closed mortgage was 728. This was down from 742 in 2013, according to Ellie Mae. FICO scores range from 300 to 850. Borrowers with higher FICO scores, typically, pay a lower rate to borrow as they have a better credit history.

A consumer having a FICO score of 675 may be eligible for a 4.75% interest rate on a 30-year fixed-rate mortgage. This would cost approximately $2,090 per month in payments on a $400,000 mortgage, whereas a consumer with a 700 FICO score may qualify for a rate of 4.212% for a monthly payment of approximately $1,960.

As expected, two of the largest credit bureaus, Experian and TransUnion, recently stated that they have incorporated verified rental payment data into credit files. This data will be used to compute a consumer’s score when applying for a mortgage. According to TransUnion, the inclusion of rental data could raise some consumers’ scores. Mortgage rates continued to “roll back” last week, with the 30-year fixed-rate mortgage averaging a low for this year of 4.12%. According to Freddie Mac, mortgage rates are at the same low as a 30-year was this past May as well as during a week in July. Fixed-mortgage rates started this year at 4.5% and have decreased, although fears were that these rates would increase.

 

Mary Ann Clark is a Realtor with Coldwell Banker at 177 West Putnam Avenue in Greenwich. Questions or comments may be emailed to [email protected]

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