Have you heard? Amid consistently increasing short sales, foreclosures and small business loan defaults, the major credit reporting agencies will soon revise how they calculate credit scores. As the Wall Street Journal reports, credit bureaus intend to collect more information on banking behaviors, including "current bank balances, deposit records and withdrawal activity"-such as whether or not your paycheck is direct deposited.
Because credit is dynamic and constantly changing, this more detailed level of analysis provides an added dimension to your creditworthiness beyond the usual credit score "snapshot." It indicates the direction of behavioral trends that can better predict ahead of time which borrowers are likely to default on their loans. Thus, lenders can make a conclusive decision, even in the midst of financial activities, like rearranging your debt structure for improved cash flow, which may not be a default situation at all.
What Do These Changes Mean To You...
...As an individual?
Most definitely, your personal FICO or Vantage score will be affected. Your financial institutions already have the right to pull your credit report at any time as part of your agreement with them. Now, however, lenders may accept or reject your application or even close your credit card based not on actual defaults but on your borrowing and repayment patterns. Avoiding defaults will no longer be enough to preserve a good credit rating; it's also important to tighten up your daily habits on both the personal and business fronts.
...As a small business owner?
You might find your credit line pulled, or a business expansion loan application refused, due to factors related not to the activity of your business, but to financial patterns in your personal (or business) behavior, such as increasing credit card balances.
...As a real estate investor?
Banks will have more reasons to increase the interest rate they charge when initiating a loan or line of credit, and may choose to reduce or close your HELOC based on this more subtle information. You may find you have less ability to disguise a strategic maneuver on one property without possibly affecting your other holdings.
...As a residential or commercial landlord?
It is still unclear how much of this new information will be made available to landlords who run credit checks on potential tenants. Likely, these changes will be advantageous to you in the same way the banks are hoping it will help them screen bad credit risks.
What do you think about these credit scoring changes? Do you have more questions? Please comment below and I'll try to address them in a future post.