The New Credit Rating System
 It used to be the case that lenders took a holistic approach
when deciding whether to make a loan to a prospective borrower. Home loans were primarily made by local
Savings and Loan Institutions that actually got to know their client's personal
situation. Length of time on job,
stability of income, amounts on deposit as well as regularity of payments were
all factors taken into consideration.
The now omnipresent FICO score (or Fair Isaac Company scoring system)
was not the dominant way of underwriting a loan until the early nineties. But as computers became an ever more
present part of our society, so computerized underwriting became the norm with
the single digit FICO score being the most efficient of all measures.
As the lending industry increased their reliance on the FICO
score, awareness grew in the borrowing public of how important one's FICO score
was to obtaining credit. Financial
mavens proclaimed the vital role of good credit in overall financial
planning. In time, one's FICO
score actually became a badge of merit, a measure of civic responsibility. "I have a 750 FICO score" people would
brag smugly when filling out a loan application without even being asked the
question.
And just when everyone finally began to understand the
somewhat enigmatic FICO scoring system, a new scoring system is
introduced. In order to understand
the relevance of the new system, I need to explain that under the old system
creditors would report your payment history to the three credit bureaus
(Transunion, Experian and Equifax) and each credit bureau would then apply Fair
Isaac's formula to their respective data.
The result was that you ended up with three slightly difference credit
scores from each of the bureaus.
Lender's adopted the practice of taking the middle score which means
that when a borrower is told they have a 750 score they really have more like a
730, 750, 790 (notice it is the middle score not the average of the three
scores). Sometimes this works but
sometimes the variance between the three scores can be problematic.
The new system called VantageScore was created by the credit
bureaus themselves. They got
together and shared their data to develop a single score. Great idea except the rating scale is
different. The FICO scale runs
from 300 to 850; the VantageScore starts at 501 and runs to 990. A 750 under the new scale would be a
subprime loan where under the old scale it was a stellar borrower. This is going to cause chaos unless the
VantageScore completely replaces the FICO score quickly. It seems unlikely at this point that
there will be a clean transition.
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LOL - Laughs OnLine
"Uh, how long can you hold your breath?"
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What's the big idea?
Unlike the universally feared and respected highway patrol
officer I discussed last week, the parking enforcement officer rarely gets to
confront the offender. Instead
they are reduced to leaving the parking ticket on the windshield. Isn't that a little like leaving a nasty
note when someone parks in your parking space? If feels very passive
aggressive. And we wonder why when
we risk our lives to race across the street as the officer is writing the
ticket screaming "I'm here! I'm here! I will move it now!" they calmly keep
writing? We are missing the point. That's the moment that validates their
role in law enforcement, the piece de resistance. We can't expect to take that from them for a mere $40 or $50
bucks. They have written many
faceless, empty tickets. We owe
them the opportunity to watch us grovel and then coldly strike down our plea
with contempt--those mighty enforcers of parking meter minute management.
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Share If You Care
Our goal with this newsletter is simple: Cover every important topic that might help homeowners and investors make more informed decisions concerning real estate. You can help in two ways:
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2) Forward this newsletter to anyone and everyone you know that owns or plans to own real estate!
Sincerely,
Kwame J. Granderson
Equinaire
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