One of the hard realities of the past several years, from a financial perspective, has been the sheer number of defaults and foreclosures that we’ve seen in the home loan market. This has, as you can imagine, had a hugely detrimental impact on credit scores. Defaulting on your mortgage can knock your credit score from a nice spot at the top of the heap into a much less desirable position in the subprime arena. Unfortunately for many folks, losing value in their homes combined with the way in which the economic downturn has affected their incomes has led to this crisis.
Along the way, the formula used to calculate credit scores hasn’t really changed at all to meet that new reality. That’s changing, however.
Last month, the company that developed the FICO credit score formula announced that it will modify the way that credit scores are figured in the formula. Fair Isaac Corp., made the announcement based on the massive disruptions to the market and to credit scores that the housing bust as well as the recession and high unemployment numbers have had on the economy.
In addition to Fair Isaac Corp., VantageScore Solutions will be making similar changes. The VantageScore is a competitor to the FICO score, and that company is a joint venture from the national credit bureaus.
This all comes as a response to the erosion of creditworthiness that’s happened since things started taking a downturn in 2006. This has affected people from all walks of life, but it’s especially hit hard for people who at one time had stellar credit scores. Those borrowers, known as “super-prime” borrowers, have seen their delinquency rates increase more than 400 percent over just a two year period from June of 2007 to June of 2009. This pace is higher than it has been for prime borrowers or even for subprime borrowers.
One of the odd factors in this decision is that many homeowners are making strategic decisions about their credit. They’re becoming delinquent on home loans, but they’re continuing to pay credit cards, home equity loans and other types of credit. This unexpected development has caused creditors to rethink the way they look at creditworthiness.