Credit where credit’s due

New consumer-friendly changes to the FICO formula could bump your credit score, make it easier to obtain mortgage financing

By Erik J. Martin
CTW Features

Smart borrowers know that a higher credit score can help them qualify for more desirable loans and lower interest rates. Now, the credit score most valued and used by lenders — your FICO score — is due to be recalibrated, making it easier for more Americans to obtain financing, including mortgage loans.

The Fair Isaac Corp. recently announced that, beginning this autumn, it will revamp its method for calculating credit scores, including dismissing records of late bill payments, which can negatively affect a consumer’s score, if those debts have been paid or resolved with a collection agency and giving less weight to unpaid medical bills that are with a collection agency.

A FICO score is a three-digit number — on a scale between 300 and 850 points — that is generated using a mathematical algorithm against the credit data found in your credit report, says Anthony Sprauve, senior consumer credit specialist with FICO, based in San Rafael, Calif. Sprauve says the new FICO changes will benefit consumers by helping lenders assess their creditworthiness more accurately.

“The next version of the FICO score, called FICO Score 9, will bypass all paid collections and will be able to distinguish between unpaid medical and unpaid nonmedical collection accounts,” Sprauve says. “Consumers with clean credit histories where the only negative is an unpaid medical debt collection could see their FICO score rise 25 points.”

The bottom line: Many will now be able to afford more house for the same monthly payment or pay less per month in mortgage payments, says Lee Gimpel, co-developer of the financial education tool The Good Credit Game, who’s based in Wilmington, N.C.

“An increase in your credit score may get you into the range where you can now be approved for a mortgage, if you were in a bad credit range previously. It also means that some people who already would have qualified for a mortgage will now qualify for a lower rate,” says Gimpel.

Gimpel notes that, while the forthcoming FICO recalibration may slightly increase your score automatically, there are other steps you can take to further augment your score. “First, you need to play to win. That means you need to use credit to have good credit,” he says. Of course, pay your credit card bill on time and in full, if possible. Gimpel also recommends not using more than 30 percent of your available credit, which can bring down your score.

Lastly, don’t jump from card to card. It can be tempting, for example, to sign up for a free airline miles card, earn the rewards, close the card and then apply for another rewards card. But opening and closing too many cards can damage your score. “A card with three years of history will help you more than one with three months of history,” Gimpel adds.

While FICO Score 9 will be available to lenders later this year, be aware that it may take longer before lenders adopt the new model. “Lenders need to first evaluate whether the scoring helps their portfolio or if it works, and this could be a slow process,” says Yael Ishakis, vice president and loan officer at First Meridian Mortgage in Brooklyn, N.Y. “The real change will occur when Fannie Mae and/or Freddie Mac insist that lenders run a borrower’s credit through the FICO Score 9 model.”

Sprauve notes that consumers can purchase their FICO score at or receive it for free if their lender participates in the FICO Score Open Access program. Currently, Barclaycard, First Bankcard, Discover card, Hyundai Motor Finance and Kia Motor Finance, PenFed, SECU and Sallie Mae are making free FICO scores available to their customers through this program.

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