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Fair Isaac Corp
CoreLogic Inc/United States
Federal National Mortgage Association
Federal Home Loan Mortgage Corp
(Updates with comment from credit counseling agency.)
We always knew that most people have decent credit. It turns out, about 44 percent of the U.S. population has crazy good credit. That’s according to a new way to model credit risk from Fair Isaac Corp. (FICO) and the data firm CoreLogic (CLGX).
On July 10 the companies launched a new credit score that combines the data that credit bureaus typically track, such as mortgages and credit cards, with outside data CoreLogic mined from public records, like property records and liens, and from its proprietary sources, such as short-term installment loans for used cars and rental information. “By having that added visibility, we are able to get a more precise score and picture of the borrower,” says Tim Grace, vice president of CoreLogic, based in Santa Ana, Calif.
The new score will not replace the traditional FICO score, at least not any time soon. Regular FICO scores are required by many lenders but banks can use the new score to supplement the regular score. For example, if your regular FICO is 680 but your new score is 720, a lender may take a deeper look and, over time, could depend on the new scores if banks find them to be more useful.
FICO offered a breakdown of the distribution of the new scores, in this accompanying chart. It shows a huge increase in the number of people with a credit score of 800 to 850, the highest possible bracket. That segment more than doubles, meaning that about 44 percent of U.S. borrowers present almost no credit risk.
The jump in that top tier is about equal to the decrease in the number of people with a score between 700 and 799. So there’s a big shift from good credit to fabulously good credit. On the lower end of the credit spectrum, slightly more people have scores between 560 and 639, but the changes generally are small. Grace says the combined data can be 10 percent more effective at predicting mortgage defaults for the riskiest 10 percent of borrowers.Fair Isaac Corp.
Overall, 70 percent of people have better credit under the new measurements than the standard FICO analysis, Grace said. The reason behind the shift is that the alternate analysis incorporates more factors in determining the likelihood someone will default. For example, if you have a second mortgage with a credit union, that would show up in the new score but not the old. Similarly, if you’re a renter, your landlord may have used CoreLogic’s systems to check your credit score originally, so if you have paid on time and haven’t been evicted, your credit score could benefit.
“This would give perhaps more opportunity for those that have been considered ‘unscorable’ with a thin credit file,” says Melinda Opperman, senior vice president at Springboard, a California-based non-profit credit counseling agency. “They will be able to gather more data to provide them a credit score.”
For consumers, the new measurement also means more data to monitor since credit bureaus can have inaccurate information that you must contest to remove from your record. Starting next year, you’ll be able to check your new credit report for free once a year on annualcreditreport.com, and if you want it before then, you can call 877-532-8778.
Twenty-five lenders are testing the product, Grace says, and he hopes that Fannie Mae (FNMA) and Freddie Mac (FMCC) will study using the score in their underwriting requirements. Since the dramatic shift is at the top, it’s unlikely that a whole lot more people will suddenly qualify for mortgages who didn’t before. (CoreLogic’s sampling showed that about 1 percent of borrowers would jump over 700, a threshold used by many lenders.)
Still, there could be a bigger effect on how much borrowers pay for money. With so many people now presenting almost no risk, they could take advantage of lower rates.