Posted on Tuesday, 19th February 2008 by R.J.
For months now we’ve seen foreclosure after foreclosure and people getting relatively painlessly bailed out of their mortgages that they could never afford to begin with. Signed your life away on an ARM? Don’t worry, the government will step in and freeze your rate so, even though you don’t pay your bills, you can still have a comparable mortgage to responsible borrowers.
We’ve seen the commercials of dozens of lawyers recommending you file for bankruptcy as a first option. Don’t worry, you can still keep your house! And, of course, the car dealership commercials: Bankruptcy? No problem. We’ll still sell you another car you can’t afford.
You, being the responsible and trustworthy consumer you are, say to yourself “Where is the incentive for people that actually pay their bills and maintain a healthy FICO score?”
Well it turns out that Fair Isaac, the company that calculates consume credit scores for lenders, is developing a new system that they promise will favor borrowers that have been responsible in managing their credit.
The system has been in development since 2006, before the sub-prime mortgage crisis developed. Experian and TransUnion will implement the system soon, but its unclear if EquiFax will follow.
Here’s how the system works:
No more “renting” out your credit
Are you an authorized user on someone else’s credit card? Well be ready to take a FICO hit.
Due to abuse, the company will no longer be reporting this credit rating benefit to your credit file. In fact, there have been companies that have been “renting” good credit ratings by matching someone with a bad credit score with someone that allowed that person to become an authorized user “just on paper.”
Industry insiders estimate that this change will negatively affect upwards of 30 percent of credit files.
Occasional mistakes will be forgiven
Lets say you have a late payment of 90 days past due on your credit from two years ago. If this is uncommon in your credit history, it won’t affect your credit score as much as it used to. It will be treated as an “isolated delinquency.”
Routine late payments will still negatively impact your score.
Active use now matters
Your FICO score will now be more dependent on how often you use your credit cards.
Have a card that’s just been gathering dust in a drawer with a zero balance? That credit card’s weight will now be lowered, thus making it less important in calculating your score. The net result: your FICO score will drop.
Different types of credit will improve score
The system works to reward borrowers that can manage multiple kinds of debt. Have a mortgage, an auto loan, and well-managed credit card debt? Expect your score to go up.
As with the old system, if you carry balances near your limit on credit cards, it will still negatively impact your score. It’s best to spread your debt out over a few cards to keep their individual balances low.
Painlessly shop around for loans
If you’ve ever purchased a home or a car, the lender will typically tell you to not have your credit run until your loan goes through. This is because credit inquiries show up on your credit report and too many of them will lower your credit score, possibly hurting your chances at getting the best rate on the loan you are applying for.
With the new system, this is no longer a problem as the credit inquiries will be weighed less heavily. This change is because, according to Fair Isaac, the average person has more credit accounts and loans today than in the past.
So what does this all mean? You might consider holding off on any major purchases for a couple months. You might qualify for a better rate.
Tags: adjustable rate mortgage, ARM, arm rate freeze, bankruptcy, buying a car, consume credit, credit card debt, Credit Cards, credit score, fair isaac, fico, fico score, freeze ARM rate, rate freeze
Posted in Credit Scores | Comments (3)
February 19th, 2008 at 11:25 pm
I’ll believe it when I see it!
Credit Card delinquincies have been creeping up for quite some time now, and have been hit by the ‘credit crunch’ nearly as hard has the sub-prime mortgage market.
February 19th, 2008 at 11:26 pm
By the way, let me know if you’re interested in exchanging links - looks like we’ve both started this blogging gig at about the same time
Jonathan
February 25th, 2008 at 10:05 am
[…] as I’ve mentioned previously, piggybacking is a thing of the past because of these very companies. Fair Isaac, the people […]