A snapshot tells you what someone looked like at a particular moment in time. A long-running video of the same person may reveal patterns of behavior that tell you much more about a person.
That’s the difference between the traditional way lenders have evaluated credit scores in the past and newer methods that use trended credit data.
As its name suggests, trended credit data uncovers trends that show lenders how a prospective borrower has managed credit in the past. Trended credit can even predict how borrowers will act in the future, which is lenders’ greatest concern.
Almost overnight, trended credit has become the norm in mortgage underwriting.
Last September, Fannie Mae introduced trended credit its Desktop Underwriter program, the popular automated underwriting software used by lenders.
Equifax and TransUnion have followed suit and replaced their credit reports for mortgage origination with new products that include trended credit data.
Trended credit is augmenting, not eliminating, traditional credit scoring. Most lenders are using a blend of alternative, trended and traditional data when evaluating borrowers.
For some borrowers, trended credit is a godsend. No longer will they be victimized by a credit check that caught them after bad events, like a forgotten payment or a holiday buying spree that stretched their available credit too thin. These would have less impact on their chances for approval if they were rare events or anomalies.
New trended credit models also help younger borrowers with limited credit histories and members of underserved segments of the population who demonstrate responsible credit management.
For others, trended credit may make it harder to get approved for a mortgage. Trended credit can unearth poor credit behavior over time that a single good credit score would miss.
Some borrowers who qualify under traditional credit models may not make the grade today under trended credit.
Here are five tips to help buyers who have marginal credit scores take advantage of trended credit.
1. Trended credit penalizes ‘fair weather’ credit management
People who pay attention to their credit ratings only when they get serious about using it for a major purchase like a car or a home don’t fare as well with trended credit.
Under trended credit, higher credit scores achieved by a brief “crash” period of recovery have little impact if bad behavior returns and the borrower’s total debt load grows.
2. Consistent, long-term improvement is rewarded
Lenders like to see a steady, rising improvement over six months or more rather than a history of ups and downs.
3. ‘Maintenance’ management of revolving accounts is penalized
Making minimum payments on revolving accounts does not reduce debt, and it increases the amount of interest over time.
Ideally, lenders prefer to see borrowers pay off credit cards every month, but if they make more than the minimum payment at least the debt load is shrinking. Lenders do not like to see monthly minimum payments every month on revolving credit cards, especially if the balances are growing.
4. Positive improvement takes more time to register than negative behavior
Good credit management practices over the preceding six to 12 months are more important than older records, and over time, the borrower can atone for past sins.
However, if lenders see recent negative behavior, even over a short period like a month or less, that bad period will weigh heavily against borrowers, and their credit will drop very quickly and wipe out gains that took many months to achieve.
5. Short credit histories are not penalized
Unlike traditional scoring models that penalize young borrowers solely because they have short histories, trended credit is more focused on patterns of behavior. Good habits practiced over a short time, two years or less, will pay off for young borrowers.
Agents can help marginal borrowers get qualified by lenders who use trended credit by educating them about how trended credit works and helping them to implement a credit management plan that emphasizes timely payments, steady reduction of debt and special attention to paying off revolving credit accounts.
During the two to six months that it may take for a buyer to get a contract approved and to apply for a mortgage, a credit management plan that takes advantage of how trended credit works can make a real difference in a buyer’s chances of getting approved and the interest rate a lender will offer.
Steve Cook is editor and co-publisher of Real Estate Economy Watch. Visit him on LinkedIn and Facebook.
