The use of different versions of credit scores for lending makes assessing downside risk of US consumer credit harder according to Fitch Ratings.
This is particularly true when lending, underwriting standards are relaxed amid a supportive economy, or when lenders are reaching for growth, the firm says, noting that it is essential to view credit scores alongside other key risk variables to most accurately assess default risk.
Fitch says that the mortgage industry does not currently use the latest FICO algorithms, which are not accepted by Fannie Mae and Freddie Mac, in favor of FICO 2, 4, or 5; while auto and credit card lenders tend to use the newer versions such as FICO 8 or 9.
The FICO 8 algorithm is more negatively impacted by high utilization of credit lines but is less punitive regarding one-off late payments, while FICO 9 differs when it comes to collections, factoring in rental payment history while putting less weight on delinquent medical collections.
Meanwhile, the alternative VantageScore 3.0 credit model, emphasizes credit utilization, credit inquiries and on-time payments, penalizing late mortgage payments more than other late payments.
Higher mortgage credit scores
Fitch also notes that FICO scores for mortgages are currently higher, partly due to a higher share of prime-sector originations post-recession against the backdrop of the benign economic environment.
The extended period of favorable economic conditions along with the strong labor market, rising wages, and low unemployment, are all adding to improved credit scores.
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