Denver Real Estate Blog

All Consumers will see their FICO scores change.

Fair Isaacs Co. of Minneapolis, the company that devised the complex algorithm that computes the credit score used by 90 percent of the nation’s top 100 banks, has tweaked it so that bad credit risks will be more broadly separated from the good ones. The score is designed to predicts the likelihood a person will become 90 days late or more — seriously delinquent — on any credit obligation in the next two years.

Your credit score is relied on more and more in the granting and pricing of credit, insurance, cellphones, employment and utilities. The formula provides a score ranging from 300 to 850, with the top score “as rare as chicken teeth,” said said Craig Watts, spokesman for Fair Isaacs.

The median score nationally — where half the nation falls below and half above — is 725 with 13 percent of consumers scoring higher than 800. Three-quarters of Americans score at least 650. How important is a good score? Someone in Colorado with a 750 score will pay $771 on a $25,000 auto loan while someone with a 650 score will pay $822 a month.

Under the new scoring model, called FICO 08, consumers will see their scores change, some going up, others down. In part, it’s because the new formula, which is expected to see widespread use by summertime, will be more sensitive. It will grant some forgiveness for the financial stumbles that occur in life, meaning once-unfavorable delinquencies might not translate into years plagued by high interest rates.

In turn, the updated formula may penalize those who have tied up most of their available credit, even if their credit histories are spotless. Under the new scoring system, If you stumble once, FICO will be more tolerant of that if it’s balanced with other accounts showing a clean bill of health and good credit management. Although Fair Isaac will not reveal the details of the complex algorithm used to calculate credit scores, it will say what types of things are factored into it. Here’s a rundown Length of Credit History 15%, New Credit 10%, Types of Credit Used 10%, Amounts Used 30% and Payment History 35%.

What you can do

If the problem is high balances, then consumers ought to pay down the bills. If it’s a poor payment history, that takes a little more time to fade off the report.

FICO suggests three ways to improve: Pay bills on time, pay down high balances, and restrict new accounts to the times you need them. Keeping your credit debt to about 25 percent of your available credit is also a good benchmark. Too many inquiries — FICO lumps mortgage or car-loan inquiries into one so you’re not dinged too many times while shopping — can be bad.

How the new formula works

The new FICO 08 credit-scoring formula takes into account a variety of information that could raise or lower current scores. Here are a couple of scenarios to show the outcome:

Scenario 1: Bill and Jennifer each has had credit for about three years and each has five accounts on a credit report. Their separate credit scores are 665 and neither has any account 90 days or more past due, which is considered seriously delinquent. Under FICO 08, Jennifer’s score drops to 645; Bill’s rises to 685. Here’s why:

Jennifer has few active accounts compared with Bill and has one card that’s nearly maxed out. Bill’s accounts are all active, are paid on time and do not have high balances compared with their limits.

Scenario 2: Fred and Isabel each have as many as 20 accounts and opened new accounts the past year. They pay on time and each has a FICO score of 725. Under FICO 08, Isabel’s score rises to 745; Fred’s drops to 705. Here’s why:

Isabel has lower balances on her credit cards compared with the cards’ limits, and most of her accounts are actively used. A car loan is nearly paid off, showing good credit history. Fred has high balances on his cards and his auto loan is newer, so the balance hasn’t dropped much.

Source: Fair Isaacs Corp.

Improving a credit score

Whether a new or old formula is used to compute your credit score, the ways to improve it remain basically the same:

• Pay bills on time instead of moving balances and playing the revolving credit-card game.
• Get current on overdue accounts. Timely payments are critical to your score.
• Don’t use all your available credit. A good ratio is 25 percent of what you have.
• Don’t close accounts you’re not using unless you really don’t need them. It raises your use-to-limit ratio.
• Don’t apply for cards you don’t need. Too many new-card inquiries can hurt your score. It’s fine to check your own score though.
• Check all three credit-bureau reports annually and fix any inaccurate information immediately.

Mortgage Resource

Dawn-Renee Mack has been a Colorado mortgage professional for nearly a decade. She received formal education at Bradley University in Illinois. Today she leads an experienced lending team, which includes not only 30 years of combined mortgage experience but vast accounting experience as well, Mack firmly believes with each loan she originates for clients, to treat your family’s home mortgage as if it were her own. She looks at every situation with an eye for what is best in the present and what will also help you accomplish your long term financial goals.

Dawn-Renee’s lending team firmly believes that client education is vital to a homeowner’s financial success. Through education and excellent service, she elevates what is often perceived as a frustrating and confusing process to a smooth, seamless home-buying experience. “I think the most important aspect of my job besides the planning of my clients’ mortgage future is to make sure they are educated about the process itself. Familiarity with what to expect allows a homeowner to relax, and that is my ultimate goal. Buying a house should be a positive experience!” Focusing solely on mortgages for her entire financial career has allowed Dawn-Renee to become an expert in her field. She knows the ins and outs of widely divergent programs, ensuring that all of her clients get the best possible loan, regardless of their specific situation.

Dawn-Renee Mack has access to over 350 investors and thousands of loan programs is invaluable to my philosophy that I will find the loan that fits my client, not force my client into a loan box that is not in their best interest.”, says Mack. If you have any questions regarding the current mortgage market. Feel you could benefit from an evaluation of your current mortgage loan and or any loan program someone else has proposed and want to make sure it’s really something you should be involved in you can reach her directly at 303-691-5058.