The Evolution of Credit Scoring

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There has been talk and research about unbalanced credit scores as of late.  A recent meeting held by the National Association of Realtors (NAR), between real estate and mortgage industry experts, concluded that the current state of credit scoring is unfair and needs to be improved.

The current calculation of credit scores is outdated and measurements don’t fit the up-and-coming minority and millennial consumers.  The system needs to be reconfigured and reanalyzed to reflect how current, responsible members of society live their lives and how their future behavior can be predicted based on paying down a mortgage.  If the system doesn’t get updated, we could be looking at millions of people falling out of the “great credit score” range and unable to become homeowners.

When you look at the recovered housing market, you should be able to make the conclusion that credit scores are more balanced, making it easier to obtain needed financing.  But that’s not the case.  A credit score of 740 will get you a conventional loan today, which is up 20 points since the housing boom.  Before this time, the average credit score was 720, which doesn’t seem like a huge difference.  The thing is, that 20-point gap includes millions of borrowers, and reaching 740 is a much harder obstacle today than it was before the downturn. As stated earlier, this could result in millions of people becoming unqualified for buying a home.

With changing technology, lifestyles, and demographic trends across the U.S., the need arises to reconnect the modern citizen to new measurement standards in credit scoring. We’ll have to wait and see how the NAR reacts to this needed improvement.