FICO, also known as Fair Isaac Corp which determines your credit score, has built a new set of scoring models that could affect your ability to obtain a home loan.
In the past, major credit reporting agencies such as Experian, Trans Union, and Equifax took a variety of factors to determine your credit score and history and how much of a risk you were when applying for a loan. But new factors will treat late payments and debt more severely and could even count lengthy historical information about credit card balances and payment amounts, which will affect your credit score or FICO score.
Homebuyers with high credit scores that manage their finances well can see an increase in their credit scores, but those who may have late payments, high credit card balances, or just more debt, in general, could see their credit score go down, even though they have not taken on any new debt. This will create a greater separation in the 600 range. If a consumer is lower than 600 and having a difficult time making payments on time, the credit score could drop even further. If the consumer has a high 600 credit score and continues to make payments on time lowering their debt, the score could actually increase.
According to the analytics of the FICO score, more than 40 million Americans could see their credit scores dropped by 20 points or more, or those that continue to make payments on time and reduce their debt could see the same amount of increase.
There are five main factors that determine your credit score including payment history, how much debt is owed, the age of credit history, a mix or variety of credit, and any new credit accounts. With this new scoring system, it will give lenders a more precise assessment of your credit risk considering longer historical data, on-time payments, and available credit.
This new data will feature a closer look at your financial picture over the last two years focusing on how you’ve managed existing accounts. From homebuyers or potential borrowers that have a lower than 600 credit score, the best way to increase it is to make on-time payments and pay down your debt as quickly as possible. Those who continue to miss payments or have blemishes on their credit will see an even larger decline in their credit scores. In addition, they may see more penalizations of scores to consumers who have ever-rising debt levels or fall extremely behind on loan payments. Given further delinquency, companies may flag certain consumers who sign up for personal loans and yet fail to pay on time or pay at all.
So what can borrowers or potential homebuyers do?
- Pay bills on time.
- Pay down credit card balances as quickly as possible by paying over the minimum amount.
- Bring any and all accounts current.
- Avoid any personal loans as they can rack up more debt and cause more damage to credit history.
- Don’t cancel credit cards because available credit shows a lower risk whereas maxed out cards with no availability show high risk.
If you’d like more information or would like to get a copy of your credit history to find out your availability on purchasing a home along Florida’s Gulf Coast, contact our office today.