Officials Agree: Credit Scoring System Needs Improvement

The Credit Scoring System Needs Improvement. The National Association of Realtors® (NAR) recently convened a group of industry executives. This was to examine credit scoring and how it may be improved. The committee, which included HUD Secretary Julian Castro, came to a shocking conclusion about credit score calculations. “We must adjust to reflect modern lifestyles, or millions of people will continue to be priced out of homeownership.”

HUD was looking into the credit scoring issue, Castro told the conference, as part of its drive to increase financial availability for Americans. New techniques of analyzing data are needed to represent the responsibility people demonstrate in their life, which is predictive of future behavior and mortgage repayment. “There was a chasm there,” the Secretary explained.

So what happened?

Attendees agreed that, while the housing market has improved in many ways, more balanced credit scores are still a requirement for obtaining financing. According to the National Association of Realtors, most conventional loans are now provided to borrowers with credit scores of approximately 740, up 20 points from before the housing bubble, when the average credit score was around 720.

Although the difference appears minor, Mark Zandi of Moody’s Analytics pointed out that the 20-point difference represented millions of borrowers. Furthermore, a 740 score is considerably more difficult to attain today than it was before the recession, simply because the economy is much harsher. Read on to see why the Credit Scoring System Needs Improvement.

How has credit usage and reporting changed?

The workshop recommended new measuring standards that better reflect evolving technologies, lifestyles, and demographic changes in the United States. Both the Homeownership Preservation Foundation and Fannie Mae endorsed including monthly rent and energy costs in credit scoring models.

Fair Isaac Corporation and VantageScore, two of the largest credit scoring companies, were also in attendance. Rent and energy bills, which aren’t traditionally considered expenses, had already been put to the test. But they hadn’t yet been factored into scoring models. Fair Isaac Corp., which creates FICO scores, said it has changed how it handles medical collections. This is to avoid unfairly penalizing consumers for non-recurring concerns.

In closing the conference, NAR President Chris Polychron said, “It’s such a crucial topic.” “We’d want to see these non-traditional history-based grading algorithms. We simply have a lot of work to do.”

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