As I am writing this blog, the Presidential Election season has ended here in the U.S. and electoral votes are being tabulated. At the moment, Biden has 264 and Trump has 214 of the 270 votes needed to win. So, passions are obviously high, but we remain prayerful that all things will work together for good. Will Trump remain the People’s House (or the White House)? Will Biden be elected for an Obama 2.0 Administration? Will Trump vacate the premises if Biden is elected? We shall see…
Today, we’ll discuss a critical issue that may be impacted by the Presidential race – – Credit Scoring Mechanisms.
As you likely know, if you’ve read our website (https://blackwomenbuildingcredit.org), FICO is the credit-scoring giant that rates our credit-worthiness. FICO is updating its credit-scoring formula and this new FICO 10 T score incorporates “trended data,” which entails reviewing a consumer’s account balances and payment activity on loans and credit cards over the past 24 months.
How and when will the changes affect us?
Most consumers, or 110 million people, will see modest swings, if they see any change at all, according to FICO. But about 40 million people who already have favorable scores are expected to gain about 20 points, while another 40 million with lower scores will probably see a drop.
People applying for most mortgages will not be affected, at least for now. That’s because home loans guaranteed or backed by Fannie Mae and Freddie Mac, which include the vast majority of mortgages, are still required to use older versions of the FICO score.
FICO says that credit card and auto lenders that require a minimum score of 680 (on a scale of 300 to 850) may approve about 6% more applicants under 10 T compared with FICO 8, a model that lenders commonly use now.
Many other lenders are also using older FICO formulas, and it remains to be seen how quickly they adopt the new scoring method — or if they will decide to change.
The big credit-reporting companies — Equifax, Experian and TransUnion —are likely using this new scoring system already.
Who’ll benefit from this change?
- If you already have an above-average score, it may get even healthier
- If you steadily pay off debt over time, that will have a positive effect on your 10 T score
- Paying the full balance on your credit card each month is also good for your score
- If you pay only the minimum amount due for a while and later bump up your monthly payments, that also helps your score
- Plus, certain short-term changes in account activity may not hurt your score as much as they would have in the past
Who may take a hit with this new calculation?
- Consumers who have rising levels of credit card and other debt could see their FICO scores take a hit
- If you’ve had any recent late payments, they may be penalized more harshly
- If you pay off a large portion of credit card debt to decrease your credit-utilization ratio—especially if you take out a personal loan to do it—it won’t likely give your score as quick of a boost as under previous models
- Installment loans will carry LESS weight on the FICO model and this is the first time a FICO scoring model looks closely at how consumers are using personal loans to see if there is reason to penalize a borrower.
How Does this affect our Tribe?
According to Michelle Singletary’s blog, Credit Scores are Supposed to be Race Neutral, that’s Impossible, although credit scoring models can’t directly use a consumer’s race to calculate a score, there are other less obvious ways that the system puts Blacks at a disadvantage. Singletary goes on to say that the credit score is supposed to eliminate bias, thanks to the 1974 Equal Credit Opportunity Act that barred credit-score systems from using information such as sex, marital status, national origin, religion — or race.
But rental payments are not included in older credit scoring models. Although some lenders have updated to newer scoring models that include a loan applicant’s rental payments, many have not. Neglecting to consider these payments and other bills — such as utility or cellphone payments — disproportionately hurts Blacks.
Relatedly, Vice Presidential candidate Kamala Harris has put forward legislation that would reform credit scoring; specifically, it would include items that have not been traditionally considered when calculating credit scoring – – utility and cell phone bills as well as rent. Click here to read more.
What Action do you need to take?
It’s vital that you order and continuously monitor your credit reports.
Consumer complaints regarding credit reporting issues continue to pour into the Consumer Financial Protection Bureau (CFPB). Actually, credit reporting beefs have been one of the chief complaints historically, but the total number of complaints in this category rose by 86 percent during the COVID-19 pandemic.
For those of you in the U.S., as you toggle back and forth on your computer looking for current status on the presidential race, please download this doc and order your credit report!
Pre-COVID, you could get one free copy of your credit report from each credit bureau every 12 months, but in the midst of the pandemic, the big three credit bureaus (Equifax, Experian, and TransUnion) will give you FREE weekly credit reports through April 2021.