A FICO score dropping like a rock is a nightmare for any lender or borrower, but current creditors usually have few weapons to punish your poor lending habits. Do not take this as carte blanche to fall behind on payments; if a falling FICO score is due to a negative item, it could cost you an account and/or your mortgage.
CARD Act Rules
Before 2010, credit card companies could raise your interest rate for defaulting on an account with another creditor -- called universal default. The CARD Act of 2010 overhauled the credit card industry and essentially eliminated universal default rate hikes. However, credit card companies can close your account when you miss payments on any other loan -- a common reason for a FICO score to drop -- and require immediate payment of the balance. This could cause you to default on the closed account and further drop your credit score.
Mortgages
In 2010, mortgage giant Fannie Mae issued a new rule that any creditor who resells its mortgages must perform a second credit check before closing on the property. If your score sees any significant drop or change in your creditworthiness occurs, the mortgage provider must resubmit the application to Fannie Mae. This might mean paying a higher interest rate on the mortgage or losing the mortgage completely, according to Smart Money.
Refinancing
Refinancing is taking out a new loan to pay off an old one. If you had a high FICO score when you took out the loan but now have a low one, refinancing might be impossible, which could end up costing you money, especially if interest rates have dropped significantly since the original application. This happens because you must apply for a refinance loan like you would any other credit.
Tip
A drop of a few points probably won't concern anybody. You can see a drop in your score due to quirks in the FICO scoring system. This sometimes happens when new lenders have a good score, but then see a drop when the FICO model lumps them in with older borrowers who have much better and longer credit profiles. The real problems start when you miss payments or default on a debt, so run a credit check on yourself and review any negative items. Remember, even if the lender cannot do anything to "punish" you now, future loans will probably be more expensive.
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