Credit bureaus change the procedure for determining the FICO credit rating

Photo: depositphotos

If you have heard that some people could increase FICO credit scores without doing anything, this is true.

According to a new study, many Americans will face a slight increase in credit scores - by less than 20 points - in the coming months. Hundreds of thousands of lucky people expect a super-increase - from 40 to 60 points and more. The overwhelming majority of consumers, however, will not feel any change in their points.

The changes are due to the upcoming policy initiatives of the three national credit bureaus - Equifax, Experian and TransUnion.

As part of an agreement with a group of state attorneys general, in early July, the bureau will stop collecting and reporting to the public information on almost all civil cases (monetary compensation awarded by the courts to the losing party in civil disputes) and about half of all tax liens (security interest on the property to secure payment tax).

The bureau determined that the accuracy of public records in these areas does not meet their quality standards. Thus, they are completely removed from the credit reporting.

Because these two items are traditionally considered serious negative indicators of a consumer's creditworthiness, they significantly lowered credit scores. But because errors in public records were often found—names were mixed up, Social Security numbers were missing—some Americans' credit scores were inflated. Advocates argued that this was unfair and could prevent a person from buying a house with a mortgage.

Now to the pioneering study of FICO (Fair Isaac Corp.), whose indicator is used for the vast majority of mortgage loans. Researchers estimate that from 12 to 14, millions of Americans have tax deposits in their current credit files that may be affected by the changes. When these items are removed, their FICO score will go up. (FICO scores range from 300 to 850, with higher scores indicating a lower likelihood of default).

Most affected consumers experienced increases in numbers from 1 to 19 points. But from 1 to 2, millions of consumers seem to expect an increase in points from 20 points to 39 points, and 300 thousands and more can see an increase in FICO by 60 points or higher, simply because negative information will be removed from their documents. Between 93% and 94% of all Americans do not have tax liens or court decisions in their cases and will not see changes in their FICO performance.

So what does this mean for potential home buyers? FICO researchers found that the majority of people with convictions and liens—92%—also have other negative information on their credit files. Their current average score is 565, which is well below what is required for most mortgages. Adding a few clauses will not help them, and they may not create serious problems for creditors.

Among the biggest winners, according to Ethan Dornhelm, FICO's director of analytics, will be people who already have solid FICO scores—they pay their bills on time, but somehow have a judgment or lien record on their credit reports. Once this data disappears, the 700 thousand of these people across the country who have no other negatives on file will see their FICO scores improve by 40 points or more. This could help lower interest rates and improve mortgage terms this summer.

All this can happen to you. Check your credit reports and see what might be hiding there.

Read also on ForumDaily:

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Personal experience: how I collapsed my credit rating and restored it in a year

Six credit cards that are easy to get

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