FICO Changes May Ease Credit Access Young Americans and first-time homebuyers might be the biggest beneficiaries. A new calculation of credit scores soon could make it easier for millions of Americans to qualify for car loans and credit cards. The new methodology also could provide easier access to home mortgages after tight post-recession lending standards shut millions of potential new homebuyers, particularly young Americans, out of the market. The Fair Isaac Corp., which issues credit scores used in 90 percent of U.S. consumer lending decisions, said this week that it will give less weight to unpaid medical bills when assessing creditworthiness, starting this fall. It also won’t penalize a borrower’s credit score if they’ve had bills settled with a collection agency. Under FICOs current methodology, many potential borrowers either have been flat-out denied access to credit or forced to pay higher interest rates. Matt Fellowes, CEO of workforce optimization firm HelloWallet and a former Brookings Institution fellow, calls the changes “terrific improvements for consumers.” “These improvements seem to confirm what scholars have thought: The undermeasurement of risk leads to a systematic overstatement of risk and the overpricing of credit products,” Fellowes says. The revisions weren’t necessarily a response to peoples failures to pay medical bills, but rather intended to address punishment for bills they might not even know they had. “Oftentimes medical collection happens because of miscommunication between a consumer and their provider, or a consumer and the insurance company,” FICO spokesman Anthony Sprauve says. “What we found through research was that it wasn’t an indicator that someone was in trouble and was becoming a higher risk to lend to.” Over half of collections on credit reports are associated with medical bills, according to the Federal Reserve, and a May Consumer Financial Protection Bureau study found that some credit scoring models may overly penalize consumers because of medical debt. The score disadvantage – up to 25 points – could cost someone tens of thousands of dollars in interest over time on bigger loans like home mortgages. A CFPB representative tells U.S. News the bureau welcomes efforts to adjust how medical debt is weighed when determining a persons creditworthiness. The impact of the change could come sooner for those applying for car loans and credit loans, The Wall Street Journal reported Thursday. But the eventual difference for the home mortgage industry could be just as significant. “This move will ultimately make a real difference in the lives of millions of Americans, who have been shut out of the housing market or forced to pay higher mortgage interest rates because of flawed credit scores,” Steve Brown, president of the National Association of Realtors, said in a statement. “Since the housing crash, overly restrictive lending has been the greatest obstacle to homeownership.” About 15 percent of potential homebuyers are denied access to mortgages because of “excessive tightness” in credit scoring, says Lawrence Yun, chief economist for the realtors association, and the share of first-time buyers is at a historic low of 28 percent. In a more normalized economy, it should be at 40 percent. Furthermore, the homeownership rate of young Americans has “fallen precipitously,” Yun says. According to the Census Bureau, the rate was 35.9 percent for those under 35 in the second quarter of 2014, compared to the national rate of 64.7 percent. “Certainly people who have had more struggles during this current slow economic recovery would be the bigger beneficiaries with this new methodology, and no doubt it’s been the younger millennial generation that was impacted more during this current economic cycle,” Yun says. A 2013 study from Experian confirms that Americans ages 19 to 29 face the biggest obstacles when trying to access credit. They have the lowest number of credit cards with an average of 1.57 per person, compared with the overall average of 2.19. They also carry the lowest credit card balances – $2,682 – compared with the national average of $4,501. “This generation is not entering this phase of life with positive credit behavior, which attributes to their low average credit score of 628,” the study read. Americans have started stepping up their use of revolving credit, which includes credit card use, since the Great Recession. While the assessment changes are an advantage for consumers, Greg McBride – chief financial analyst for Bankrate – doesn’t anticipate they’ll bring about any immediate sweeping changes for overall household spending, which makes up the biggest part of the economy. “This is a positive for consumers, but it will only have an incremental impact on credit and borrowing,” he says. “This is not going to be jet fuel for the economy by any means.” U.S News & World Report
Posted on: Sat, 09 Aug 2014 16:13:23 +0000