New numbers have been released that I believe are very informative, but can also be scary unless something is done. When talking about FICO scores, remember the whole purpose of the system is to predict the statistical chance of a consumer being 90 days late, or more, in the next 24 months on an obligation. This model has been created to evaluate certain things on our individual credit reports that have been classified as predictive information, and then a 3-digit number is generated. These numbers most commonly have been said to range from 300 as the low to 850 as the high. This is not 100% accurate but for our purposes it is close enough.
All the information on our credit report is analyzed then a 3-digit number is produced to determine our credit score. Lenders, for example, love this system because it makes their job easier and faster. They have predetermined ranges that they use to approve clients and also know what rate to charge.
So for lenders, a lot of the guesswork is out of the equation. The model has always been somewhat secretive because the more information that we know as consumers, the less predictive the model becomes. Lenders take this number and base decisions from it.
Some of the new facts that are coming out are that a lot of lenders have not been validating the performance of their lending portfolio as often as the system would suggest. Most lenders want to re-evaluate their portfolio every six months, for whatever reason many of them have not been doing that and now we have even more problems when it comes to the stability of the credit arena.
To illustrate this let’s assume that a lender knows that if they have 10 borrowers with a 720 FICO score, one of those ten will become 90 days late or more in the next 24 months on any one payment. Also, let’s assume that if the same lender approved 10 people with a 650 FICO score that 5 of those will go on to become 90 days late or more in the next 24 months on a payment. Again these are not actual numbers just showing you how the system theoretically works. What has been found is that borrower’s that had a 720 three years ago are now performing more like borrowers with a 650.
What this tells us is that more and more people are having problems. But you can see how this can cause huge problems for lenders, if they give loans assuming that 1 in 10 will have problems in the next two years, but in reality it turns out that 5 out of ten are non-performing, this presents some huge challenges.
The most recent numbers say that 25.5% of the American population has a 600 FICO score or lower, and 35% has a 650 FICO score or lower. Lenders usually classify 650 or lower as subprime (talking about industries).
This tells us that 35% of US population is currently subprime or less, which equates to about 70,000,000 people! The scariest part about all this new information is that most people don’t drop down to the 600 category just by maxing out a credit card. Most of them get down to this level by a severe negative incident occurring on their credit report. The biggest problem with this is most of these people are not going to have the desire or the ability to just make a quick change and jump themselves back to the level they were before.
Most of these items will stay on the person’s report for 7 years. These people are in great need of credit repair.
This is important because it shows the real effect of the economy and the potential recovery as well. A lot of these 70,000,000 will not be able to buy houses, cars or other goods unless they make a huge change and become cash buyers for everything. Which is great until they need to, or want to, buy something they can’t just write a check for.
Looking at housing for example, prices steady or increase with demand. If more and more people are becoming credit challenged or just un-financeable the demand goes down which as we have all seen; slows, stops, or reverses financial recovery. Rates can be low, prices can be low, but if no one is out there that can qualify to buy the houses, we all have problems.
All the new legislation or potential legislation is making credit qualifying harder. I am not debating whether that is a good thing or not, but I am saying that credit as we know it is not going away.
The system is not going to change, and until we as Americans start getting educated and actively start implementing Credit Score Planning into our financial lives, the road to recovery is just going to get longer and longer.
Credit Education and Credit Repair works, but make sure you are working with an expert, get started today!
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