Credit Scoring Rules Are Changing

Credit scoring rules are changing.

In the past, your FICO scores were determined by comparing your behavior to others with similar characteristics. If someone with similar demographics who used credit like you went bankrupt, your score was lowered whether or not you were in financial trouble. And vice versa. If they did well, you were scored well, whether or not you teetered on the brink of insolvency.

However, as ABC News reports, banks are using new factors in determining your credit worthiness.  

Since 9/11, new laws and technology make data mining much easier and more efficient. Banks have taken advantage of this by employing behavioral analysis. They’re looking at not only yodur purchasing history now but also where you shop, as well.  

Some consumers have found their credit lines suddenly reduced.

Declining credit lines tend to reduce credit scores. And of course, this effects how you qualify for a mortgage.

When contacting the offending banks, affected consumers only receive the explanation that they were shopping at places where people in financial trouble were, as well.

It remains unclear what businesses are triggering this. Is Walmart a danger spot? Or Amazon.com? Both have been on purchase history lists of those with declining credit lines.

The rules for determining credit scores have gotten more complex and a bit more murky.

More at: New Credit Rules

When your credit score isn't what you thought

Re-fi’s are much the rage these days. We’re getting lots of calls with requests for mortgage quotes. At these times, a loan officer has to ask several questions before he can give an accurate quote. But one of the most important concerns their credit.

Three different consumer credit agencies, Equifax, Experian and Trans Union, dominate in American lending. When someone applies for a mortgage, the loan officer gets permission and then pulls the potential borrower’s credit from these three agencies.

Each of the credit agencies has their own algorithms to perform a statistical analysis of a consumer’s credit worthiness. The generated number varies from agency to agency because each has their own method of collecting data.

In turn, banks make many lending decisions on these scores. Instead of averaging the numbers, lenders tend to use the middle score of the three, somewhat ignoring the top and bottom numbers.

People who thought they had a score in the high 700’s might find their mid-scores in the mid 600’s. And vice versa. This is nothing new. Most people aren’t very good at just guessing their credit score.

A year ago, it wouldn’t have been a huge deal. Consumers basically fell into two camps. Prime and sub-prime. If a person’s FICO mid-score was above 620 they were considered prime. They got the same conventional rate as someone who’s FICO mid score was over 800.

No longer.

Conventional mortgage rates are now partially determined by what is called “risk-based pricing.” Your credit score makes a difference in determining your mortgage rate.