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By G. Steven Bray
The recent hacking of Equifax data has brought the credit bureaus into the headlines again. While the credit bureaus don’t control the FICO scoring model, the most popular model and the one the mortgage industry uses, the spotlight seems to have brought renewed attention to the fairness of credit scoring.
Yesterday, we discussed how FICO 4, the current model of choice in the mortgage industry, doesn’t seem to align with current credit risk factors. Congress is trying to force the industry to consider newer credit scoring models. So, let’s look at the potentially negative effects of the newer models. There will be winners and losers, and some of the losers may be surprised.
The current model rewards consumers who make on-time minimum payments on all their credit accounts. The account balance only seems to matter if the consumer allows it to exceed 30% of the available credit.
The newer models look at this a little differently. They reward consumers who make larger than minimum payments. They also penalize consumers who have large, unused available credit as that is credit that they suddenly could decide to use.
It may be years before any of these changes affect your ability to qualify for a mortgage. However, you are likely to start seeing them when you apply to other types of credit.