Getting A Loan: New Credit Score Rules For 2011

If you thought getting a loan in this ongoing recession was hard, just wait; it’s about to get a lot more difficult. Although the past couple of years following the mortgage lending crisis have certainly put lenders on edge and forced them to pull the purse strings tighter and tighter, it seems that 2011 will bring a new ferocity to the vigor with which banks guard their money. And it all has to do with your credit score. Once upon a time, not too long ago, lenders were handing out loans like candy, seemingly without regard to the credit rating of the person obtaining the funds. Because of this, banks were left holding the bag when the bubble on the housing market burst and those who couldn’t afford to pay the loans they received in the first place began to default in droves. It seems they have now learned their lesson (albeit the hard way) and are looking more closely than ever at credit scores before agreeing to lend out their assets. Unfortunately, this close-fisted attitude, along with a new and more rigorous set of standards for scoring, looks to make it near impossible to meet the criteria required to secure a loan.

Most people are familiar with the scoring system known as FICO, a popular credit rating that allows banks to weigh an individual’s ability (and likelihood) to pay off a loan. This score is based on past history, income, and current debt. If you have made some large purchases (car, house) and paid them off (or are paying in a timely manner), you have likely built up a pretty good credit score. VantageScore is a newer system that has gained popularity since its inception in 2006. Each of them perform virtually the same function, but VantageScore claims to analyze a wider range of data over a longer period of time, which is probably why it has been gaining ground on FICO. In any case, these two systems share a common goal: to revamp the way credit scores are granted.

Both have announced plans to roll out a new ratings system this year, and they are characteristically in sync with their plans. They both want to change their scoring system to account for the changes in spending habits that have occurred since the beginning of the recession. It can’t have escaped anyone’s notice that many homes have gone into default and even foreclosure in the last 2-3 years, causing plenty of trouble for lenders (and ruining individual credit scores).

But the new scoring system is not so much interested in penalizing those who had poor ratings to begin with and then defaulted on home loans; it is aimed instead at homeowners who did have the money to pay but refused. The new systems seek out those who continued to meet other financial obligations (car payments, credit cards, bills, etc.), but decided to save the money that would otherwise go to the mortgage because their home had suddenly fallen under the heading of “bad” debt (in other words, they were paying more than their property was worth).

This new “recession-era credit scoring model” will help banks to protect themselves from future losses on those who clearly have no intention of paying should the recession worsen. It is a rather ingenious turn for companies that market their scoring systems to lenders, but unfortunately, it could spell disaster for would-be homeowners. With loans already hard to come by, this new model will make it even more difficult for potential borrowers to secure the funds needed to purchase a home (and it could mean that the recession continues to drag on as the housing market fails to re-inflate). However, it could also be a blessing in disguise. By protecting the banks and ensuring that those who cannot (or will not) pay off their loans are excluded from borrowing, we may end up with a stronger economy and more responsible individuals in the long run. Wouldn’t that be a startling turn of events?

Sarah Danielson writes for Upgradeable where you can find the right ram and laptop memory to get your computer running like a powerhouse.