Home Mortgage

Credit Score Formula Changes


The FICO credit scoring formula has changed, which can be a benefit or a detriment to mortgage borrowers depending on several factors. Credit scores are used by lenders in over 75% of their lending decisions, and the new formula is supposed to predict defaults better than the old one.

Amount of Available Credit

The ratio of amount owed relative to the amount of credit available has more influence in the new formula. The less available credit a borrower has on credit cards, the lower the score would be. More available credit would mean a better score. This change could have a broad impact on credit scores used by lenders to qualify borrowers if credit card issuers implement more cuts on their maximum limits. Scores may drop if the credit limit is reduced, whether there is a balance or not.

Number of Credit Accounts

Having too many credit card accounts was viewed as a negative factor, however, it appears that has been reversed, provided that the accounts have not been delinquent or overused. Having more open and active accounts could have a positive effect under the new scoring system. A potential negative aspect of this change is that more credit card issuers may close seldom used consumer accounts.

Isolated Credit Problems

The new scoring model will apparently be more forgiving to mortgage borrowers who only have one major negative problem on their credit report. The scoring model calculates the severity and frequency of negative items. Depending on the item reported, isolated problems will have less impact as opposed to continuous and recurring late payments and delinquencies. Mortgage lenders and borrowers should welcome this change because of the potential upside of good borrowers not being lumped into a category of repeat offenders.

Small Collection Accounts

Collection accounts with an original amount of less than $100 are disregarded. Another positive benefit for borrowers with minor debts owed from parking tickets, unpaid library fines, small medical bills, or other disagreements.