Tuesday
March 16, 2010

According to a report released by FICO* at the end of February, recent credit behavior has shifted significantly from historical trends. Dr. Mark Greene, CEO of FICO, says:

“We’re identifying situations that to our knowledge have never been seen before. Economic instability is creating unknown risk in lender’s credit portfolios as well as counter-intuitive trends in consumer behavior.”

In 2005, credit card accounts were 3 times more likely to become 90 days delinquent than mortgages.  In 2008, credit card accounts were 1.6 times more likely to become delinquent than mortgages. 

For the first time in 2009, 0.3% of consumers with FICO scores between 760-789 (generally considered by lenders to be an excellent score worthy of their best loans) defaulted on their mortgages vs. 0.1% that defaulted on their credit cards! It is difficult to speculate what is causing the shift in people with high FICO scores to default on their mortgages rather than on their credit cards. However, the more value a home loses, the more likely an owner will consider what’s known as a “strategic default”. (See my article: “Should You Default On Your Mortgage?”) One possible reason may be that if a homeowner is faced with losing their home anyway, there is little reason to continue paying the mortgage. However, keeping their credit cards intact allows them to use the money to buy groceries or keep the lights turned on.  

In addition, FICO uncovered evidence that lenders tightened their criteria for new loans in 2008-2009 and began to “cherry pick” the kinds of borrowers they would extend credit to. In 2005, nearly 46% of consumers who opened a new mortgage had FICO scores below 700. In 2008, this dropped to just 25%. The credit card industry experienced a similar shift: in 2005, 51 % of consumers with a new credit card had FICO scores below 700. That dropped to just 38% in 2008.

To learn how you can prevent losing your home, go to my “Foreclosure Prevention” section now.

“To Your Success!”
mary!

 (*FICO is a trademark of the Fair Isaac Corporation which first developed a credit scoring system in 1958 to assist lenders in determining the creditworthiness of consumers. Lenders use a consumer’s FICO score to determine how much to loan and at what interest rate. )