If you’re working to maintain a good credit score, you’re not alone. Perhaps you’re a college student with HUGE student loan debts. Or, maybe you’re a startup with SBA loans trying to get your foot in the door (we hear ya’.) You might also be rebuilding your credit after a job loss, illness or other major life circumstances (See changes to medical bills, tax liens and judgments below). Credit report scoring model changes might affect your ability to get financing later on.
Let’s look at the good and bad news.
Good News First…
If you carry student loans or an existing mortgage, you might see little to no changes to your FICO score (yaay!). The FICO credit scoring model changes occurring this summer will be based on debt levels, payment histories and card balances (gulp).
Notice how we eased into the bad news?
Credit report scoring will affect 110 million consumers with credit cards by less than 20 points. However, there’s a light at the end of this tunnel because you CAN bring your card balances down. But, let’s go over how FICO breaks down debts first.
Your Credit Score
Scores range from 300-850 and the three bureaus that report your credit-worthiness (my precious!) are Equifax, TransUnion and Experian. Good scores are in the 670-739 range while anything less than 580 is bad…really bad. So, if you hear someone say, “Hey, I’ve got a 380,” let’s hope that’s their batting average.
Now, when it comes to debts, your score is divided into credit accounts, payment history, how much you owe and how long you’ve had credit.
It looks like this:
- 35% Card Payment History
- 30% Payments Owed
- 15% Length of Your Credit History
- 10% How Much New Credit You Have
And Now for Some Insightful News…
Judgments and tax liens are no longer added to credit reports. AND, credit reporting agencies have to wait 6 months before adding medical debts (major sigh of relief for those struggling with debts). However, here’s where it gets tricky…
The new scoring model’s 10T score uses your trended data, i.e., what you’ve done over the past two years. And, this is where you want to pay close attention (and don’t miss our credit tips at the end).
Let’s say you have $50,000 in credit and you carry a balance that’s $25,000. Your rate’s 50%. You might think, 50-50, not bad, right? Wrong! Consumers with scores of 795 only spend about… wait for it….7% of their card limits. Yeah, that’s a BIG gulp.
So, what can you do? There are ways to improve your score AND get better interest rates.
About 40 million consumers with good spending habits will see their scores go up 20 points or higher. So, how can you get in?
Credit report tips:
- Check your report’s accuracy with all three bureaus annually (get your free credit report)
- Dispute inaccurate charges or items over seven years old
- Pay off past-due bills, loans and collections
- Have no late payments, missed payments or past due notices for two years
- Pay your bills on time and don’t take out credit you don’t need or can’t afford
- Pay down your debts (snowball/avalanche methods)
- Apply for loans at credit unions where interest rates are significantly lower
- Pay existing cards off and keep accounts open to show your good payment history
- Contact a reputable debt consolidation agency if you’re underwater (gulp)
Ultimately, having credit is a HUGE responsibility. But, don’t beat yourself up. Many people started with credit cards in college but never learned how to maintain their credit. Because FICO credit reporting changes occur this summer, now’s the time to reduce debts and lock in lower interest rates at your local credit unions. Let’s face it. As your credit improves, you can secure that new mortgage or new auto loan with the best rates possible. It’s a great financial move that can fast-track your savings. And, who doesn’t love savings?