Alternative Credit Scoring Models

Let’s say for a moment that you presently qualify to purchase a home. You’ve got a good job with substantial income, you’ve got more than enough for a down payment in savings and you have little to no current debt. The one thing that’s holding you back, however, is your FICO score.

Many would-be homeowners and many consumers in general run into this sort of conundrum every day – they’re otherwise ideal consumers if not for a past credit mistake that is still lingering. And in many cases, it’s these mistakes that are causing mortgage applications to either be denied or accepted with high interest rates.

The good news is that this could soon be changing when it comes to the mortgage lending process, as there’s been a recent push for government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, to consider alternative scoring models.

Alternative Scoring Models

Back in December of 2015, legislators introduced a bill in the U.S. House of Representatives that would permit Fannie Mae and Freddie Mac to use credit scoring methods aside from the FICO score when it comes to loan purchasing. The idea behind the bill is similar to the hypothetical scenario detailed in this article’s intro – it would give consumers an opportunity to buy a home who would be otherwise qualified if not for a poor FICO score or lack of a credit score altogether.

The bill is still in limbo, but the thought that an alternative credit score could soon be used by GSEs seems to be gaining momentum. According to reports, Freddie Mac representatives have already been considering several alternative credit scoring models.

Improving Your Credit Score

In the meantime, if you’re a consumer in the market for a home or similar large purchase but your credit score isn’t up to snuff, it’s always a good idea to take the initiative to improve it, whether GSEs have yet to use alternative scoring models or not. Here’s a look at some ways to get your FICO score back up to good or excellent status:

  • Pay bills on time: Set reminders, alerts or automatic payments to make sure that you’re not late on anything. Delinquencies and bills that go to collections can cause your score to take a big hit.
  • Reduce your credit utilization ratio: Say you have $10,000 worth of available credit, but are in debt $7,000 or so. You’re using 70 percent of your credit utilization ratio, which can cause your credit score to dip. For a better score, work to get your utilization ratio at or below 30 percent.
  • Don’t move debt around – pay it off: Focus on paying off high-interest accounts first so that you’ll save more long-term.
  • Check your report: One of every five Americans is estimated to have some sort of error on their credit report. If you don’t check it, you’ll never know if your score is low for the wrong reasons. Hence, it’s important to check your report at least once a year and immediately dispute inaccuracies.

Finally, it’s important to be patient. Credit repair doesn’t happen over night, it takes months of persistence and good consumer behavior. So be patient and stick to the credit repair plan that you’ve decided on.