Historically, when pursuing a loan, banks will look at your FICO score. Thus, it is important to stay up-to-date on exactly how that score will be calculated; and there are changes that will go into effect soon. Specifically, increasing debt levels and falling behind on payments will now hit your credit score harder than before. The net result will likely widen the gap between those with good credit and those with bad credit.
Those with a credit score of 680 and above are already managing their debt and loan payments; it’s why they have a good credit score in the first place. Those individuals will likely see their credit score increase quicker than before. On the other hand, people with credit scores below 600 will see their scores decrease quicker than before. This runs contrary to what many credit reporting companies have done to create a more accurate picture of people’s creditworthiness. For example, credit reporting agencies utilize people’s utility payments and bank account balances in determining their credit score.
Lenders are free to choose whether to adopt the new FICO score calculations, or continue utilizing the older version. Unlike previous iterations of the FICO score, this new model will quantify how a borrower’s debt levels have changed over the previous two years (as opposed to the last month that was tracked); which will punish those with rising levels of debt.
At the end of the day, people who are able to afford homes in Encino, Sherman Oaks, or Studio City are generally good at managing their finances; thus, the changes in how their FICO score is calculated will benefit them greatly. More importantly, the better your FICO score (paired with historically low mortgage rates), the better situated you are to purchase high value homes. Similarly, with more people able to afford higher value homes, property values may see a noticeable increase after lenders opt to utilize the new FICO measurement.
At the Chernov Team we understand that knowledge is power, and knowledge of how your credit score is calculated is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.