New Credit Scoring Models: What You Need to Know

A new credit scoring model is being introduced in the mortgage industry, which may significantly boost the number of Americans receiving credit scores. However, experts caution that just because your score seems better on paper doesn’t guarantee loan approval.

Micah Smith, a credit repair expert and founder of Micah Abigail LLC, mentioned, “If you have poor credit, checking your score might feel encouraging, but that alone doesn’t mean you’ll qualify for a mortgage.” She also noted that around 33 million additional individuals could access their scores under this new system, although it’s yet to be officially approved.

Recently, the VantageScore 4.0 model entered the mortgage market, presenting competition to FICO 10T. Both represent updated credit formulas sanctioned by federal regulators, aimed at providing a clearer view of a borrower’s financial behavior.

FICO 10T uses “trend data,” analyzing how consumers manage payments and balances over time rather than relying on a solitary snapshot from a credit report. VantageScore 4.0 broadens the types of information that can affect scores, potentially offering scores to millions who previously had incomplete credit histories.

While both models represent advancements in credit scoring, it’s important to note that lenders get the final say on which algorithms they adopt for mortgage evaluations. “You really can’t choose between them; it’s up to the lender,” Smith explained. She emphasized that consumers should focus on fundamental credit-building practices that have proven effective over time.

If your score declines under the new system, Smith recommended a three-step approach to improve it over several months. Her advice includes regularly checking your credit report for errors, paying down credit card balances, and avoiding impulsive decisions. “You don’t want to chase trends or fall for gimmicks,” she cautioned.

Some experts have raised alarms that the shift toward the more lenient VantageScore 4.0 could lead to another housing crisis like the one that preceded the Great Recession. However, Smith argued that new safety measures are now in place. “We’ve learned from the past. Today’s lenders are much stricter with their standards,” she said.

Smith elaborated on the reckless lending practices of the past: “Back then, loans were made without proper documentation, and lenders faced no consequences for these sales.” Now, she believes lenders are more vigilant, ensuring borrowers can genuinely afford their loans. “The introduction of new algorithms isn’t problematic; what’s problematic is giving loans to unqualified individuals,” she stated.

As of Wednesday, the 30-year fixed mortgage interest rate sits at 6.04%, while the 15-year fixed rate is at 5.47%, inching closer to the 6% mark. Smith warned consumers against rushing into decisions just because a new scoring model is on the scene. It’s essential to grasp the intricacies involved.

“I want people to recognize the narratives surrounding these new scoring models,” she advised, highlighting the importance of understanding the source of information. “You can’t solely blame a scoring model for low scores; trust and consistency matter. If you develop good habits, your scores will improve over time, irrespective of the algorithms in use.”

In the end, it all comes down to maintaining timeless credit practices. “Mistakes happen, and as with anything, there are risks,” she noted. “Just make sure you’re fully informed before diving into any program.”