Coverage: New math for credit scores

If you can’t get a loan based on your credit score, simply change it. The Fair Isaac Corp. is changing what’s included in its calculations, making it a little easier for some to get loans.

Annamaria Andriotis had this story in The Wall Street Journal:

A change in how the most widely used credit score in the U.S. is tallied will likely make it easier for tens of millions of Americans to get loans.

Fair Isaac Corp. said Thursday that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.

The moves follow months of discussions with lenders and the Consumer Financial Protection Bureau aimed at boosting lending without creating more credit risk. Since the recession, many lenders have approved only the best borrowers, usually those with few or no blemishes on their credit report.

The changes are expected to boost consumer lending, especially among borrowers shut out of the market or charged high interest rates because of their low scores. “It expands banks’ ability to make loans for people who might not have qualified and to offer a lower price [for others],” said Nessa Feddis, senior vice president of consumer protection and payments at the American Bankers Association, a trade group.

The New York Times story by Tara Siegel Bernard detailed who will benefit from the changes:

FICO credit scores, which have become consumers’ financial passport to just about everything from rental apartments to most loans, are based on the information in an individual’s credit reports, which are generated by the three major credit bureaus: Equifax, Experian and TransUnion. The scores are based on a 300- to 850-point scale.

Because of the new scoring model, individuals with a median score of 711 — and an otherwise clean credit history, except for unpaid medical debts — may see their FICO score rise by 25 points. As a result, many consumers may qualify for more attractive interest rates on various loans, potentially resulting in thousands of dollars in savings.

“It probably doesn’t mean the difference between an approval and a denial, but it can mean the difference in a more advantageous rate,” said John Ulzheimer, a credit expert at Credit Sesame, a consumer credit website, and a former FICO employee.

But consumers whose credit files are tarnished only by unpaid medical debts that went to collection agencies — but were ultimately settled or paid — are likely to see a much greater increase in their scores. “That is when you could expect to see your score go through the roof,” said Mr. Ulzheimer.

The new scoring approach came after FICO spoke with some of its largest customers, including major lending institutions, as well as regulators, who suggested that medical debt collections were unduly weighing on consumers’ scores. FICO said it then analyzed new data from the credit bureaus, and compared how consumer behavior varied depending on the type of collection debts on their credit reports.

Ruth Mantell said in a story for MarketWatch that easing the mortgage requirements was something some have been waiting to happen:

But it looks like some lenders are starting to ease standards – a development that many economists say is long overdue.

Fannie reported that the average credit score (as measured by FICO) for acquired single-family-home loans that were originated in the second quarter was 744, down from 753 in 2013 and a peak of 762 in 2010 and 2011, according to details in a credit supplement to the company’s quarterly earnings release. Similarly, Freddie reported that the average FICO score year-to-date was 742, down from 749 last year, and a recent peak of 756.

Those recent declines reverse a chunk of jumps up seen in 2008 and 2009. In 2007, Fannie’s average score was 716, while Freddie’s was 711. Moving average scores from the low-700s to the mid-700s can narrow the pool of eligible borrowers. According to April data from FICO, about 54% of the population has a credit score of at least 700. That proportion narrows to 38% when including just those with a score of at least 750.

Thursday’s reports follow data released earlier this week by the Federal Reserve showing that more banks are easing than tightening standards for prime residential mortgages, and that they’re seeing stronger demand for these loans for the first time in a year. Also this week, the Mortgage Bankers Association reported that its monthly gauge of mortgage-credit availability grew in July, but that access to credit is still much lower than sustainable levels seen before the bubble.

The move isn’t likely to bring loans to those who aren’t able to pay them back, but it might help some who have had past issues achieve home ownership. While that’s a good driver for the economy, it’s a move that could have long-term repercussions. Changing the rules is never easy, but if it makes safe credit obtainable then it’s likely to be worth the initial pain.