Credit scores

In the last few years FICO, the main purveyor of credit scoring technology, and other providers have worked to educate borrowers, providing information about what goes into credit scores and consumer guides on how to improve them.  Another recent consumer innovation is the ability to do credit score simulations online.

Using one of these simulators a consumer can, for example, test the effect of paying off one debt entirely in contrast to paying a portion of another or whether opening a new line of credit will have a positive or negative effect.  This, Crawford said, is a double edged sword.  Credit scoring companies now know that these simulators have given consumers the ability to game the system and must take this into account whenever they make changes to their models.  “People should know what is in their score and how to improve it,” he said, “but being able to manipulate it can invalidate the scorer’s model.”

In two respects credit scoring is not a static science.  From the consumer standpoint, Crawford said that what were considered acceptable credit scores before then started to decline in 2002.  A score of 700 used to be considered good, then 660; then suddenly it was 580.  That trend flipped in 2008 and since then scores have ramped up to what is now a 760 to 780 average for what is considered a prime score.  “We now have a strange situation,” he said, “with very low interest rates but very tight access to credit.  What used to be considered a good score, 720, is now one where lenders have to propose alternative programs.  We have swung from a standard that was way much low to one that is probably too high.”

lenders are happy right now with the tighter underwriting standards.  Behind their concerns about any loosening of them is an uncertainty both about the capital levels that will be required for holding mortgages and about the future of Fannie Mae and Freddie Mac.  “Until they have a higher comfort level they won’t be willing to accept more exposure to risk.”

He said that lenders, of course, use credit scoring as one in a whole arsenal of tools when they evaluate risk; appraisals, owner occupancy status, and other factors all enter into the equation.  In addition, Crawford said, credit scores are intended to predict success with a loan, not necessarily to predict success with a mortgage loan.  For this reason many lenders beef up scores by taking specific fields from them – for example the utilization rate of revolving debt – and wrapping them into their underwriting, thus multiplying the weight they carry.


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