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Why You Shouldn't Be Too Excited about the New FICO 9 Scoring System...Yet

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Why You Shouldn't Be Too Excited about the New FICO 9 Scoring System...Yet

Last week, on August 7th to be precise, a highly anticipated announcement was made regarding the upcoming release of the new FICO 9 credit scoring system. FICO Score 9 will become commercially available in the fall of 2014 and will feature some pretty radical and exciting changes in the way that the scoring system calculates consumers' credit scores. The new scoring system features 12 scoring models which will be installed on the mainframes of the 3 major credit reporting agencies - Equifax, Trans Union, and Experian.

The Good News

In Fair Isaac Corporation's press release regarding FICO Score 9 it was revealed that there will be 2 major changes in the way the new credit score system treats certain types of collection accounts. First, paid collections will be ignored and bypassed. The bypassing of paid collections is a departure from previous versions of FICO scoring models which are currently in use by lenders today.

Under previous versions of FICO, paying or settling a collection account usually has no positive impact upon a consumer's credit scores whatsoever. The design objective of FICO scores, in other words what FICO scores are created to do,  is to predict the likelihood that a consumer will become 90 days past due on any account within the next 24 months. The reason that paying collections typically does nothing to help a consumer's FICO scores is due to the fact that current versions of FICO are built to be concerned with the fact that a collection account occurred in the first place. Whether a collection account has a $0 balance or a balance greater than $0, the negative score impact is likely the same. Bypassing paid collection accounts by FICO Score 9 will be a major change could cause credit score increases for many consumers.

The second major change being introduced with FICO Score 9 is how the scoring system treats medical collection accounts. Under previous versions of FICO, medical collections were just as damaging to a consumer's credit scores as non-medical collections. However, according to Fair Isaac Corporation, FICO Score  9 "...will help ensure that medical collections have a lower impact on the score." In fact, consumers whose only derogatory accounts are medical collections could expect to see a credit score increase of around 25 points.

Why You Shouldn't Be Too Excited Yet

FICO Score 9, scheduled to become commercially available in the fall of 2014, promises some changes which consumers and loan officers are excited to see. Unfortunately, the new scoring model will likely not be adopted by lenders for a very long time.

It is timely and expensive for lenders to upgrade to a new credit scoring model. Lenders do not change credit scoring models because a new one becomes commercially available either. It's not like lenders will line up around the block to purchase the new FICO Score 9 as if it were the hottest new smart phone release from Apple. Instead, lenders make a change because their own extensive research proves that the newer scoring model is more effective at accurately predicting risk than the previous version they have been using. Even then the change is likely to be slow because, after all, their current scoring model isn't broken, it just is less effective.

The previous version of FICO to be released, FICO 8, is only now being used by a majority of lenders. FICO 8 was released in 2009. In the mortgage industry where the credit scoring version choice is controlled by Fannie Mae and Freddie Mac, the version released prior to FICO 8 is still in use. It will likely be a very, very long time before the new FICO 9 Score is ever seen on a Residential Mortgage Credit Report (RMCR).

Additionally, there is no guarantee that the new FICO 9 Score will be adopted by lenders at all. Yes, FICO has been the undisputed leader in the credit scoring market for decades and they likely will remain the leader in the future. However, FICO is not without competition. VantageScore is the credit scoring product offered by the credit reporting agencies - Equifax, Trans Union, and Experian. While the vast majority of lenders continue to use FICO credit scoring models to calculate risk, VantageScore has been gaining ground little by little since its unveiling in 2006. 

michelle-black-credit-expert

Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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Credit Cards: Evil Traps or Useful Tools?

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Credit Cards: Evil Traps or Useful Tools?

Your credit scores are arguably the most important numbers in your life. After all, credit has an impact upon you when you apply for a mortgage, try to finance a vehicle, open a new utility account, and credit may even impact you when you apply for new insurance policy. In fact, building healthy credit scores is so important that you should consider it to be one of your top wealth building priorities. Building healthy credit scores is right up there on the financial importance scale with becoming debt free and saving for retirement.

In order to establish healthy credit scores, you have to prove that you are capable of managing credit responsibly. One of the best ways to prove that you can manage credit responsibly is to open credit card accounts. However, for many people it can be very intimidating to have open credit cards. If you have ever made credit mistakes in the past or if you have ever overextended yourself financially and found yourself underneath a crushing load of debt then it is understandable why you may be a little gun shy where credit cards are concerned.

It can be very tempting to avoid credit cards all together if you have ever made credit card management mistakes in the past. Unfortunately, avoiding credit cards might have negative repercussions where your credit scores are concerned. What you need to remember is that credit cards themselves are not evil. A properly managed credit card offers customers a lot of great benefits. Here are a couple of the best ones:

1. Fraud protection –
If someone steals your cash, you have no reliable way to get your money back. If someone steals your debit card, your personal money could be at risk (at least temporarily) while the bank investigates the unauthorized transactions. If someone steals your credit card then the bank’s money is on the line, not your own.

2. Credit Building Possibilities –
If you keep a $0 or very low balance on your credit cards and you always make your payments on time, you have the potential to receive a credit score boost from your well-managed credit card accounts. The longer you manage your credit cards properly, the better the impact may be upon your credit scores.

Consider the Facts

People who are determined to live a “plastic-free” life with a cash only payment mentality often wind up paying more money in the long run than those who have credit cards but manage them properly. Remember, credit cards are not evil or bad. Racking up a ton of credit card debt by overusing your credit cards is definitely a horrible idea. However, excessive credit card debt can absolutely be avoided if you manage your accounts properly.

Properly managed credit cards can be a powerful tool to help to build your credit scores. An individual with no credit scores (or low credit scores) will likely pay more for car insurance, home insurance, and utility deposits. Plus, while it would be nice to pay cash for a house, most of us have to take out a mortgage to in order to purchase a home. Without good credit scores you can expect to either be turned down for a mortgage or to perhaps pay a higher interest rate and down payment. A higher interest rate on your mortgage could cost you tens of thousands of extra dollars over the life of the loan.

The truth is that bad credit happens to good people all the time. Just because you have low credit scores does not mean that you are a horrible person. Low credit scores simply mean that either you have made credit management mistakes in the past or that you have been the victim of unfortunate circumstances. Either way, you deserve a second chance and you can absolutely make a plan to begin rebuilding healthier credit again today. However, swearing off the use of credit cards is not a good strategy.

If you need help developing a plan developing a plan to begin rebuilding healthier credit, CLICK HERE to schedule a no-obligation analysis with a HOPE Credit Expert.

CLICK HERE to check out some great reviews for secured credit cards. It is best to do your research BEFORE you apply.

michelle-black-credit-expert

Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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Why Credit Avoidance Is a Bad Strategy

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Why Credit Avoidance Is a Bad Strategy

The title of this piece alone is enough to ruffle the feathers of the die-hard believers in the cash-and-carry lifestyle. So, before I even begin with my explanation of the many ways that swearing off credit can come back to bite you, let me begin by stating that you can still live a debt free lifestyle while building a solid credit score. Don't believe me? Has your favorite financial guru told you otherwise? Before you shake your head and move on to the next item in your newsfeed, take 5 minutes to hear me out. Trust me, you will be glad that you kept reading.

Your Credit Score Is NOT Your Debt Score

Despite what you may have heard, credit scoring models do not reward consumers for going into debt. In fact, the truth is quite to the contrary. The idea that you have to carry a lot of debt in order to have good credit scores is completely false. It is 100% possible for you to be debt free and still have very good credit scores.

Credit scoring models like FICO pay a lot of attention to a consumer's debt load. Many consumers find it surprising that a whopping 30% of their FICO credit scores come from what is known as the "Debt Category" of their credit reports. Credit scoring models are constructed so that the more you owe, the worse it is for your scores. This fact is especially true when it comes to credit card debt. However, if you have credit cards with zero balances you will be heavily rewarded in the credit score department. Having credit card accounts which you keep paid off shows the credit scoring models that you are a good credit risk. Conversely, charge up more credit card debt than you can afford to pay off in a month and not only will you waste money on interest fees but your credit scores will also suffer.

Credit Matters In More Ways Than You Think

If you have experienced a financial disaster, bankruptcy, illness, or just plain bad financial decision making in the past then the idea of swearing off credit all together and adopting a cash-and-carry lifestyle can be tempting. Deciding to close your accounts and never again apply for another credit card or loan is a drastic decision, but plenty of people have proven that it is possible to live a life free from these traditional "trappings" of the credit world. However, what followers of this cash-and-carry lifestyle fail to consider is the fact that pretending their credit doesn't matter can cost a lot of money in the long run.

Thinking that your credit will only have an impact on your life if you intend to apply for a credit card or a loan is completely unrealistic. Like it or not, we live in a very credit driven world. Here are just 7 of the negative consequences to not having good credit.

Without good credit:

  1. It can be hard to qualify for an apartment.
  2. Getting a cell phone contract can be very problematic.
  3. Higher insurance premiums are probably in your future.
  4. Getting a job or a promotion may be difficult.
  5. Security deposits on utility accounts are higher.
  6. Receiving a security clearance for a job could be very tough.
  7. Qualifying to purchase a home might be impossible.

The Truth About Credit "Temptation"

Again, I agree with those who believe that debt is bad. Excessive debt will waste your hard-earned money, it will lower your credit scores, it can be bad for your marriage, and it can cause you a lot of worry and stress. However, the idea that swearing off credit cards in order to avoid the temptation to go into debt is an overly simplistic approach to a complicated problem.

The root of the problem which people who are afraid of credit need to address is the fact that having credit cards is not what caused their financial and credit problems. Problems of this nature are almost always caused by poor money management habits. Saying that credit cards cause people to go into debt is like saying that spoons make people fat.

Closing your credit card accounts is not going to eliminate the temptation to over spend. In fact, for the person who has truly mastered proper money management habits, the temptation to charge more than he/she can afford to pay on a credit card is no greater than the temptation to spend too much on a debit card. Cutting up your credit cards is simply not the answer to your financial problems.

If you have made credit or money mistakes in the past, you are not alone. Don't allow the mistake of your past to define you. Instead of feeling defeated and ashamed you can challenge yourself to try again.

You should not allow let fear or misguided advice cause you to believe that a life free from the world of credit is your answer. After all, in reality there is no such thing as leading a life which is unaffected by your credit. You can embrace this knowledge or you can try to hide from it. Either way, your credit is always going to have a big impact upon your life.  

michelle-black-credit-expert

Michelle Black is an 12+ year credit expert with HOPE4USA, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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3 BIG Myths That Can Hurt Your Credit

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3 BIG Myths That Can Hurt Your Credit

3 Big Myths That Can Hurt Your Credit

Let's face it, there is a lot of bad information floating around the internet about the subject of credit. Credit myths abound and blindly following information or advice from someone who is not truly qualified to give credit advice can cause some serious damage to your credit scores - not to mention it could cost you a lot of money. Even many financial "gurus" give alarmingly bad advice on their television programs, radio shows, and in books which can backfire on the consumers who follow the bad advice. Here are 3 big credit myths which you need to be aware of in order to avoid getting burned.

Myth #1: Closing Unused Credit Cards Will Help Your Credit Scores

Closing unused credit cards can potentially cause your credit scores to take a nose dive, though perhaps not for the reason you may think. You may have heard the idea that closing a credit card account causes you to lose the value of the age of the account, thus lowering your credit scores. Thankfully for consumers, this idea is a complete myth. Closing credit cards does NOT cause you to lose the value of the age of the card (at least not until the card has been closed for a full 10 years). In fact, closed credit card accounts even continue to age on your credit report.

However, closing a credit card account does have the potential to have a negative impact upon your balance to credit limit measurements - aka your revolving utilization ratio. When you close a card you no longer have access to the credit limit on the account. Therefore, especially if you owe a balance on the card which you close, it will appear to the credit bureaus that you owe more than you are authorized to use on the card which will have a very bad impact upon your credit scores.

Even if you do not owe money on the card you close it could still very likely harm your scores to close the account. Credit scoring models also care about your aggregate revolving utilization ratio (the relationship between the balances on all of your credit cards and the limits on your open credit cards). Closing an unused credit card will cause the limit on that account to no longer be included in the calculations for your aggregate revolving utilization ratio thus raising your aggregate utilization ratio if you have a balance on any credit card account. If your aggregate utilization ratio goes up, your scores will almost certainly go down.

Myth #2: You Should Carry a Balance On Your Credit Cards

Many people believe that it is wise to carry a balance on your credit cards from month to month in order to earn higher credit scores. This is another stubborn credit myth which simply refuses to die. In reality, credit scoring models reward consumers who do not carry any debt, especially those who carry zero credit card debt.

Having open credit cards on which you do not revolve balances from month to month is a huge plus in the credit score department. Consumers who only charge what they can afford to pay off on a monthly basis show the credit scoring models that they are responsible and a low credit risk for future lenders. Plus, as an added bonus, consumers who pay off their credit card balances every month do not waste a lot of money on interest fees.

Myth #3: Checking Your Credit Reports Will Lower Your Credit Scores

Whenever you or anyone else obtains a copy of your credit report a record of the credit pulled, known as an inquiry, is placed on your credit report. Some inquiries do have the potential to lower your credit scores, but when you pull a copy of your own credit report it is impossible for that inquiry to harm your scores. In fact, if you wish you can check your own credit reports and credit scores 500 times a day and it will not harm your scores in anyway whatsoever.

It is wise to be very selective about allowing a lender to pull your credit reports so that you do not have an excessive number of "hard" inquiries which do have the potential to lower your scores. However, you should never feel nervous to check your own credit reports and scores. Don't forget, every consumer has the right to access a free credit report from each of the 3 credit bureaus annually at annualcreditreport.com. If you want to access your credit scores from though, it will cost you a separate fee from each credit bureau. Check out GreatCredit101.com for cheaper options to access all 3 of your credit scores. 

michelle-black-credit-expert

Michelle Black is an 12+ year credit expert with HOPE4USA, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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