The company that created the most used credit score in the United States will change the way consumers qualify , widening the gap between those who consider themselves to be low and high credit risk and possibly making it difficult for many Americans to obtain loans, as reported on Thursday. The Wall Street Journal.
Under the new Fair Isaac Corp (FICO) parameters, consumers with already high scores (of approximately 680 or more) who continue to manage their loans well will probably get a higher number , while those with scores below 600 who continue to be delinquent in their payments will experience a greater decrease.
In the United States, credit reporting companies (the top three are Experian PLC, Equifax Inc. and TransUnion), collect data on consumers and compile it into credit reports that then determine their FICO scores.
It is on the basis of those scores that loans for credit cards, cars, houses, etc. are granted. The American consumer relies heavily on loans to finance those acquisitions.
The FICO score ranges from 300 to 850. Consumers with a FICO of 600 or less are considered less reliable for loans, and those with 650 or more are more likely to obtain money from financial institutions.
FICO updates its credit model every few years to reflect changes in the behavior of consumer loans. For example, the 2014 changes helped improve consumer credit scores.
A different scenario in 2020
In 2020, however, the picture is different.
According to the newspaper, loan losses due to non-payment continue to be low compared to the last recession, but consumer debts are at record levels.
Although in recent years, lenders had asked credit rating companies to help them find more customers, they are now worried that credit scores are making some consumers appear more solvent than they are and in the end cannot meet with the obligations of your debts.
In fact, the chief executive of Capital One Financial Corp., Richard Fairbank, warned in a earnings report call that consumers across the industry may not be as solvent as their scores suggest.
The changes in the FICO reports are intended to partially offset the effects of the agreements between the credit reporting companies and the states that date back to 2015, according to WSJ. Those - which sought to eliminate erroneous information from the credit reports - led to Equifax, Experian and TransUnion eliminating most of the liens and judgments for tax problems in the reports.
The decision to adopt the new FICO scores will depend on the lenders, who can usually decide which version of FICO to use. One of the new versions, called FICO 10 T, will give more importance to recent delinquent payments.
It is likely that consumers who are late or stop paying their debts will see that their credit scores fall more with this model, while those whose last payment delay has at least one year could see an improvement in their scores.
In other words, those who previously paid their credit card bills in full, but who went on to have increasing balances for several months, will likely end up with a lower score, while those who tend to increase the card debt for a month specific each year and then pay it quickly will probably experience a minor drop in your score, according to the daily cited.
Edited by Ivette Leyva.
