Over the last few years, a number of exotic mortgage products, combined with loose lending practices and Wall Street hocus-pocus, dealt a devastating blow to our economy. Although the pace is slow, we are recovering. At the same time, many people are looking into steps we could take to avoid similar catastrophes in the future. Most of us would agree that a more thorough examination of a borrower’s overall financial behavior would have prevented the wave of foreclosures we’re currently experiencing. Enter CoreLogic. CoreLogic is an information broker, and the newest entrant into the credit reporting industry. The organization’s new CoreScore attempts to give lenders a deeper understanding of an individual’s spending habits.
What makes CoreLogic different? The information they collect isn’t typically captured by the three big credit bureaus, which is why many lenders are so interested. The CoreLogic organization has established relationships with a variety of stakeholders in the public and private sectors. Just about everyone from small, local lenders, to county courthouses provide records to the company. Until recently, the information CoreLogic gathered was primarily used for market research, but now it will be used to help assess our financial habits. For instance, if you rent an apartment or own a condo, any late rent payments or Homeowners’ Association dues are likely on file, in addition to the child support judgments, evictions and property liens reported by the courts. Payday lenders and small community banks also supply information on how you manage financial obligations. If you owe more on your home than what it’s worth, CoreLogic knows that, too. Not surprisingly, the inclusion of this kind of information in your credit profile has some consumer advocates concerned.
Chi Chi Wu, a staff lawyer at theNationalConsumerLawCenter, voiced her concerns in a New York Times article. She noted that “there is evidence that all (the new report) could do for a substantial portion of low- and moderate-income consumers is make their credit files worse.” Wu cited utility bills as an example. During the winter months, when heating bills climb, many customers fall behind. They get caught up later in the spring, but this inconsistent pay pattern has the potential to negatively impact a consumer’s CoreScore report. Ms. Wu also suggested some valid reasons why people may withhold their rent payment, for instance, if their landlord failed to address heating or hot water problems. Again, such legitimate activity would adversely affect the consumer. Wu also questions perhaps the largest threat to a consumer’s CoreScore profile – payday loans. According to Ms. Wu, “Payday loans and other high-cost credit are very onerous, and people have trouble paying them because they have a 400 percent A.P.R.” Many payday borrowers find themselves trapped in an unfortunate cycle, taking out one payday loan to repay another, thereby prolonging their indebtedness. Factoring payday loan payment histories into a credit score would penalize many consumers.
The CoreScore report is already available to lenders, and the corresponding credit score is currently in development with FICO, the developer of the most widely used credit scoring formula. The three major credit bureaus, Trans Union, Experian, and Equifax, apply FICO’s scoring model to the information in our reports to generate a credit risk score, a three-digit number ranging between 350 and 800, which describes how well we tend to manage our financial responsibilities. Based on this number, lenders can decide whether or not to lend us money, and if so, at what interest rate. If you have a high credit score, you’re a low risk. If you had a low credit score, you’re a high risk.
The CoreScore credit score is being created specifically for mortgage and home equity lenders; however, there’s a good chance that a more sophisticated tool will eventually be developed, one that will predict how we might behave under different loan terms. Because CoreLogic will be the country’s fourth major credit reporting bureau, it will be subject to the Fair Credit Reporting Act. Within a year, the new report will be available at AnnualCreditReport.com, and consumers will be entitled to one free copy every year.
What does this mean for you? Give the additional information considered by CoreLogic and the money you could lose through higher interest rates, it’s more crucial than ever that you do your best to make every payment on time and in full. The best way to make sure that happens is by preparing – and following – an accurate monthly budget. Until next time, I’m Thomas Fox for Cambridge Credit Counseling.