Loan Modification May Increase Your Credit Score!

Amazing Insider Fact – Loan Modification may increase your credit score! Most lenders use a credit score developed by Fair Isaac Corporation. Fair Isaac is a third party that creates and sells credit-scoring models. Some lenders are using an alternate scoring model VantageScore. The three major credit bureaus, Experien, Trans-Union and Equifax created VantageScore to compete with Fair Isaac.

Fair Issac Scoring Model

There is not any hard data on how exactly how Fair Isaac treats loan modification. Anecdotal evidence is that loan modification causes a decrease in the credit score but there is no evidence I was able to find that quantifies the change in the Fair Isaac score from receiving a loan modification. My anecdotal research indicated that the Fair Isaac credit score will suffer greatly with a loan modification but I was unable to quantify the decrease in score.

VantageScore Scoring Model

VantageScore however, has provided hard data. According to a study released August 25, 2010 by VantageScore, loan modifications do not have much of a negative impact on the VantageScore credit score and in fact can INCREASE the score! What a surprise!

VantageScore Solutions researched more than 400,000 active consumer credit files. What VantageScore found was that a loan modification could potentially add 10 points to the credit score! The credit score increases because the partial forgiveness of principal will reduce the consumers overall utilization level, helping the score.

This remains true as long the existing loan remains intact and is not replaced with a new loan, preserving the “age” of the account. If a consumer's original loan is classified as new, VantageScore's research shows the score decrease to be minimal (2-14 points) without a partial charge-off.

According to VantageScore Solutions data, late payments on a mortgage have a far greater impact on a credit score than loan modifications. Late payment on a mortgage can cause a credit score to drop by 140 points. Loan modification on the other hand will do anything from adding 10 points to the credit score in the best scenario or reducing the credit score by 14 points in the worst-case scenario.

Fair Issac vs. VantageScore

So it appears that Fair Isaac and VantageScore take two totally different approaches to loan modification. Since each company can give you a different score by applying their mathematical credit scoring models to your individual situation, the best strategy to use if you have received a loan modification would be to apply for loans with companies that use the VantageScore model. Fair Isaac is used by many more lenders than VantageScore but at least you have an option!