Getting ready to buy a house is exciting and can be a bit daunting. The first place to start is with your credit report – get a copy of your credit report and credit scores. It might be obvious to you why this is, but to make it clear in case you have any questions, every mortgage loan program in today’s market depends on your credit scores. Knowing your credit scores is important and knowing what impacts your credit scores is even more important.
FICO Credit Scoring Changes On The Way
We in the credit and lending industry are waiting for some changes that seem to be on their way from Fair Isaac Corporation, the company responsible for how your credit scores are calculated. The 3 credit reporting agencies, Trans Union, Equifax, and Experian, all use the credit scoring methods from Fair Isaac to generate your 3 credit scores. Trans Union calls their credit score Fico Classic, Experian calls their score Fair Isaac, and Equifax calls their score Beacon. Soon, Fair Isaac Corporation is expected to release a new credit scoring method which will change the way our scores are calculated.
Here is a brief summary of the changes:
1. In the past, applying for new credit could hurt your credit score. In some cases, applying for a mortgage or a car loan has had little impact on your credit score, while applying for numerous credit cards and consumer finance loans could seriously hurt your credit score. It appears like your scores might not be hit as hard when you shop for new credit.
2. Again, in the past, carrying a high balance against your limit did have a negative impact on your credit score, with the changes that we’re waiting for a high balance to limit is likely to hurt your score even more.
3. While having a credit account on your report that you did not use in the past, helped you, the credit scoring system is going to penalize your score if you do not use your active credit accounts more.
4. Your scores will be boosted if you have a more diversified credit portfolio that you actively use. In other words, you will get rewarded for have different types of credit accounts and that you use them.
One major change coming down the pipe is the new FICO scores will ignore the “Authorized User” account additions on credit reports. A recent method for rapidly raising credit scores was to add someone who has a low credit score to someone’s credit card account as an “authorized user” who has a very high credit score. The addition of the new good credit account would significantly increase the credit scores of the poorer credit score to the point of being able to apply and get credit in a much quicker fashion. This activity also went to the extreme of allowing someone to qualify for a home that was beyond their means or get into a loan program that perhaps should not have been in because of the “artificially” higher scores.
Another big change that is coming is the penalty to your credit score for the occasional late payment. Currently, a missed payment can seriously knock your credit score down – even with a perfect credit history up until that point. The scoring system will also be more tolerant of a onetime problem such as a repossessed car or credit account charge off. What the credit scoring system will be looking for is what does the rest of your accounts look like. “Are you paying them as agreed and is this an isolated set back” will the question that they ask as they evaluate your credit to give you a score.
So far, these changes have not hit the credit reporting agencies. It’s also not clear when they will be completely implemented. For the meantime practice some few simple rules which should keep you in good credit scores: pay your bills on time, keep your credit card balances at least 50% below their respective limits, keep paid credit card accounts open, make sure you use your credit card accounts, and get an installment loan and pay it off.
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