Rules of the Game
Posted on March 16, 2006 - Filed Under Credit |
The entire "credit score process" is being overhauled. The new credit scores are coming!
In a nutshell, credit scores are going to be ranked between 500 and 990, where each level counts in a similar fashion to an academic grade; 9=A, 8=B, 7=C, 6=D, etc. For example, 900 and above is considered an "A" whereas 600 and below is considered an "F".
First, a positive note. The way the scores are setup now, people are always asking if their score is good or not. The only real barometer we seem to have is the national average (678). The next major milestone is 700. Beyond that, we’re not sure. This new scoring method squarely tells us whether we’ve been on Santa’s good or bad list.
Now the negative. The following statement caught my attention. Steven R. Katz, spokesman for Trans-Union said:
Home equity: The general rule of thumb is that you should not owe more than 80 percent of your home’s value, Katz said. "Little or no equity on your home is obviously a problem," he said.
It is statements like this that burn me up. "The general rule of thumb is . . ." Or "Little or no equity on your home is obviously a problem . . ." I’m sure Mr. Katz, living on his six figure salary can easily say these things. I wonder when these people are going to climb down from their glass cathedrals. Who is Mr. Katz to decide what the general rule of thumb is?
I can play this game too! Having a tiny group of people make decisions that affect millions is obviously a problem. The general rule of thumb is people who have done this have been dethroned. That’s why we don’t have royalty.
So what does this mean for investors? If you don’t own 20% of your investment property, your credit score will drop even if you have positive cash-flow. In all the research I’ve done on this, nowhere is there listed where your cashflow from your property is counted in your favor.
I certainly hope I’m wrong on this.
My only hope is that the lending institutions make these judgments for themselves. Afterall, they don’t make money unless they loan money. That’s what banks do. They loan money.
Estimated roll-out time for this new credit scoring system: 6 months.
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5 Responses to “Rules of the Game”
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Wow.. do we all get to start with a clean slate?
Wouldn’t that be nice…
Huh, that’s interesting. Are all three major credit bureaus (Equifax, Experian, TransUnion) going to use the same rating system?
Trisha, Yes they are. This new score will be called your “Vanguard” score. It is being developed to compete with the “Fico” score, which I found out is actually maintained by a separate company. The Big 3 want more money and that’s why this is coming about. They want to replace the FICO score with their own Vanguard score.
Credit scores are such nonsense but unfortunately we have to live with them. As I never tried to get a mortgage I don’t know that if I show them my real asset/debt picture that would make any difference to my interest rate vs. basing a credit score on credit cards that are only a few percent of my net worth.
uh. How on earth are they going to determine the value of the real estate? Or, they are simply going to go off the origional value of the loan? Something here stinks.