HOW THE FICO 10 SCORING MODEL IMPACTS YOUR ABILITY TO BUY A HOME
In the world of personal finance and lending, credit scores play a pivotal role in determining an individual’s creditworthiness and ability to buy a home. Among the various credit scoring models, FICO (Fair Isaac Corporation) has been a household name for decades, influencing loan approvals, interest rates, and financial opportunities and of course… qualifying for a home mortgage. Below we will highlight some of the changes and how you can use them to buy a home sooner than you thought possible.
The Foundation: Understanding FICO Scores
Before delving into the FICO 10 updates, let’s recap the basics. FICO scores, ranging from 300 to 850, offer lenders a snapshot of an individual’s credit risk. These scores are based on various factors, including payment history, amounts owed, length of credit history, types of credit used, and new credit inquiries. Higher scores indicate lower credit risk, thus improving the chances of securing favorable loan terms.
The Shift Towards FICO 10
One of the most notable recent developments is the introduction of FICO 10, the latest iteration of the FICO credit scoring model. Building upon its predecessor, FICO 9, this update seeks to provide lenders with a more comprehensive view of an individual’s creditworthiness.
1. Fine-Tuning Predictive Power
FICO 10 introduces refinements that enhance its predictive capabilities. For example, it takes a closer look at how a borrower’s credit balances change over time. This means that consistently carrying high balances on credit cards could potentially have a more negative impact on a FICO 10 score compared to previous models.
2. Trended Data Analysis
FICO 10 incorporates trended data analysis, which considers an individual’s historical credit behavior over the past 24 months. This allows lenders to gain insights into the trajectory of a borrower’s credit habits, offering a more nuanced assessment of their risk profile.
3. Stricter Punishment for Personal Loans
Another significant change is the heightened sensitivity to personal loans. FICO 10 places more emphasis on personal loan data, potentially leading to a greater impact on credit scores if a borrower has a history of defaulting on personal loans.
Inclusion of UltraFICO™ Score
In an effort to widen credit access, FICO has introduced the UltraFICO score. This innovative scoring model takes into account banking activity, including checking, savings, and money market accounts. By considering these factors, the UltraFICO score aims to assist individuals with limited credit history or those who are on the cusp of credit approval.
1. Alternative Data Consideration
UltraFICO leverages alternative data sources, such as account balances and transaction history, to evaluate creditworthiness. This can benefit those with thin credit files, such as younger individuals and newcomers to the credit system.
2. Opt-In Requirement
One distinctive aspect of the UltraFICO model is that it requires consumers to opt-in, allowing them to choose whether to include their banking information for scoring purposes. This puts control in the hands of the individual, enhancing privacy and transparency.
Navigating the Changes
As credit scoring models continue to evolve, consumers should remain proactive in managing their financial health. Here are a few strategies to consider:
1. Regularly Monitor Credit Reports:
Keeping an eye on your credit reports from all three major bureaus (Equifax, Experian, and TransUnion) can help you detect errors and inconsistencies that might impact your scores.
2. Diversify Credit Mix:
FICO models consider the types of credit accounts you have (credit cards, mortgages, installment loans, etc.). Maintaining a healthy mix can positively influence your credit score.
3. Practice Responsible Credit Behavior:
Timely payments and responsible credit utilization can significantly impact your credit scores over time. Consistency is key.
4. Understand the Models:
Educate yourself about the changes in FICO scoring models, like FICO 10 and UltraFICO, to make informed decisions about your financial actions.
With these changes to the way FICO calculates your scores, it is important that you opt-in to allowing alternative data to be included and build your scores from your regular payments of rent, cell phone bills, etc. While changes may cause initial adjustments, the fundamental principles of responsible credit management remain constant. Remember, a credit score is just one piece of the puzzle; responsible financial behavior and sound money management are the cornerstones of a healthy financial future. These are skills needed to become a successful homeowner.
– – –
If you feel you are ready to start the home buying journey, text the word START to (619) 848-3700 or visit our Start Page to schedule a FREE initial consultation.