Getting credit is about to get easier for people who may have previously struggled to get a mortgage because of their non-existent credit history.
The law rolling back Dodd-Frank regulations forces Fannie Mae and Freddie Mac as well as the Federal Housing Finance Agency to consider using updated credit scoring models that take into consideration other information about a person’s financial habits.
Currently, you need a credit history with at least six months of payment history on a credit card, a car loan, or a personal loan. That poses a problem for the 26 million people who are “credit invisible” which means that when a bank or lender wants to check their credit score, there’s no information available.
What the new law means for people with no credit history
Under the new legislation, the government forces Fannie Mae and Freddie Mac to use updated credit scoring models that look at non-debt based financial behavior. Examples include prompt utility payments and rent payments. Someone who pays all their bills on time but uses credit infrequently or has never used credit wouldn’t have a credit score, which is what mortgage lenders consider when deciding whether they’ll approve a loan or what rates you may qualify for.
The updated scoring model they’ll most likely use is VantageScore. There are several categories, and they are similar to the FICO score’s model. However, with VantageScore, if one category doesn’t apply because there’s no credit history, the other categories adjust to fill in the gaps.
When the new laws go into effect
In the near future, VantageScore will be available. The BCFP is interested in having other payment information included in credit scoring models so that people who are credit-invisible could possibly get a mortgage.
This means that even if you’ve never borrowed money but you have a payment history with a cell phone contract, electric bill, or rent, you could still have a credit score and credit history.
Before those changes take effect, it’s important for people who think they want to buy a house in the future to make sure they prioritize making all payments on time. A good way to build or improve your payment history may be to take out a personal installment loan. These loans allow you to make equal payments for a specified term, and are designed to fit into your budget. Planning for your future is always important and it’s never too early or a bad idea to set yourself up for the road ahead.
For more great information on all things credit-related, head to our 'Basics of Credit' reference page.
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