Credit Score Ratings May Not Accurately Reflect Credit Worthiness

March 29, 2010 - PRLog -- Fair Isaac Co., the company that calculates most of America’s credit scores, recently announced that consumers with credit scores in the high range of 760+ are now more likely to default on their mortgage loans than on their unsecured debt or auto loans. Consumers with credit scores in the average range of 700-709 are also more likely (25% more likely, according to the report) to default on mortgage loans than unsecured debt. FICO’s CEO, Mark Greene, said that this marks the first time in the company’s history that this trend has been reported, and is a shift from only two years ago when the opposite was true.

Falling housing prices is likely one of the main causes for this new trend, Fair Isaac Co. said. With the down housing market leaving most borrowers paying back more than their house is worth, more and more Americans underwater in their mortgages are choosing to simply leave them behind.

FICO reports that the unstable economy also contributed to borrowers with good credit scores walking away from their homes. Loan modification programs allow consumers to stay in their homes even if they miss payments, while credit card companies may close, raise rates, or charge fees if a customer misses a payment. Consumers may also be aware that their credit history will no longer allow them to open new lines of credit, especially after defaulting on current lines of credit. Shaky finances leave many using credit cards as a way to make ends meet. These people may not be willing to give up their cards, and may risk even their homes to ensure they don’t lose their available credit.

During the housing boom, subprime lenders relied on credit scores to extend loans to millions of Americans, requiring no documentation to prove a person’s ability to handle a mortgage. This practice contributed in large part to the current housing crisis as many of these types of borrowers were subsequently unable to maintain their home loan payments, creating millions of defaults and foreclosures. Economists now say that there might not have been any problem with the credit scores used to make these decisions, but rather that lenders simply should not have relied on them so heavily to make lending decisions.

In light of this new information and trend, it stands to reason that a credit score might not be the most reliable system for measuring the credit-worthiness of individuals. Sixteen states are already looking to ban employers from running credit checks on job applicants. Lawmakers and consumer advocates point out that running credit checks on job seekers with bad credit scores may cause them to be declined for a position, which may mean that those who need to work to get out of debt may be the ones least likely to get the opportunity to do so. Additionally, according to industry insiders, lenders are now beginning to question credit scores as they try to figure out why credit scores didn’t predict the default rates they are now facing.

Before making a drastic financial decision, like walking away from a home loan, consumers should consider consulting with someone in the financial industry, to asses their options. One option for consumers is to consider working with a debt settlement company. Debt settlement programs work by negotiating on a consumer’s behalf to secure settlement on their unsecured debt. With programs typically lasting three years or less, debt settlement allows a consumer to pay off debts owed to each creditor for less than their current balance with one lump sum payment. The settlements are binding and ensure that no further collection efforts or legal action will be taken on the settled accounts.

# # #

Debt Settlement America (DSA) is headquartered in Dallas, Texas and services clients across the nation. Since its inception in 2004, DSA has established itself as a leader in the debt settlement industry. DSA is a member of the US Chamber of Commerce, the Texas Association of Businesses, the American Bankers Association, and a Gold level member of the International Association of Professional Debt Arbitrators. DSA has been recognized as a TASC Best Practices accredited member company for the past three years.

To learn more about Debt Settlement America, or to receive a consultation free of charge, go to www.debt-settlement-america.com or call 866-387-3328.