FICOs in flux: Think you're prime? Think again.

Good morning. We're big fans of real estate columnist Kenneth Harney, and his column this week is a keeper. He documents numerous ways in which the mortgage market is tightening, notably a raising of the bar on FICO scores.

Highlights:
--The "traditional cutoff point between prime and sub-prime loans -- a 620 FICO score -- has migrated upward in recent weeks. Some mortgage companies are posting 680 FICOs as the new demarcation line..."
--If you want a "limited documentation" loan, some lenders are now requiring a minimum FICO score of 720.
--"Some lenders are abandoning zero-down programs altogether, and others are requiring 10% minimum equity stakes."
--Geographical tightening: Harney reports on tightening loan standards in "areas where delinquency rates are high."

Your thoughts? Insights? Comments? E-mail story tips to lalandblog@yahoo.com.

Comments

[Kaye Thomas]

Both buyers and sellers need to learn what a FICO score means.. Buyers need to know where they fall to get the best rate they can and sellers need to know what a potential buyer's FICO score is and how it may affect their ability to close on a transaction.

[sheila]

i have to say that FICO scores are really misleading and skewed drastically towards allowing lenders to overcharge you for credit.

for example, if you carry a lot of debt, intentionally, at a very low interest rate (under 5%) which interest is also fully tax-deductible, you are a SMART manager of credit, but your FICO is much lower than someone who carries a smaller amount of non-tax-deductible debt at 24%. hmmm.

if you use a credit card for most of your bills, and pay it off in full every month and actually use the benefits (in my case, several free flights/year), then that is a SMART use of credit, but your score never reflects that you were able to borrow for free for 3 weeks, pay in full, and reap a financial benefit valued at roughly $10,000/year, but instead pretends like you carry that debt and other people don't have bills at all because they write checks. hmmm.

a collection agency is allowed to "revive" an old debt for no reason, and your score immediately drops 35 points, even though the old debt is still just what it was and just as old. what are we allowed to "revive" which will bump our scores that much?

minimum payments on "revolving credit" accounts (like credit cards) drop every month, assuming you pay every month (easy to see), and don't add to the charges (ditto), yet the FICO score behaves as though the payments will be the same amount forever. there are also secret percentages of credit limits built into the formula, so, for example, if you are $3 above 75% of your credit limit, you can be dinged well into double-digits.

lenders/creditors sell your loans, and merge (First USA, Bank One, Chase), often several times a year, and each time, the length of your account history drops back to zero and/or they make you cancel a card because of newfound redundancy and/or overexposure now that they've bought all three of your previously separate accounts.

i have been paying student loans for 10 years, but only have a 9-month credit history on them because they keep selling my loans. i used to have a First USA, a Bank One and a Chase card, but even though my payment history was perfect on all 3, they made me close one (that was 15 years old and had a zero balance) because they didn't want that much exposure from one cardholder. So, my credit score dropped again.

the whole thing is a scam and a LOT more attention should be paid to how this number works since it is now going to make or break a lot of otherwise very smart and responsible people. FICO actually gutted the formula a few years back and made it much more realistic, but none of the lenders would use the new system. one more reason they are to blame for giving out loans to the wrong people.