June 2007

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New FICO Score rules to affect millions

Change in credit-score process to have impact

FICO number likely to move significantly for those who have thin history of borrowing or poor record

By Vicki Lee Parker

In September, the FICO credit-scoring system is set to undergo a major overhaul. Fair Isaac Corp., the company that creates the formula used to calculate the score, is downplaying the change, saying that it won’t have much of an effect.

That’s not so clear, though.

Forty of the top 50 financial institutions in the country rely on FICO scores to determine whether to approve a loan and what rate to charge. Retailers, landlords, insurers, employers and utilities also use it to decide how to do business with you — or whether they should.

Any change in the way that scores are calculated affects millions.

Because Fair Isaac doesn’t want rivals to copy its formula, it isn’t giving out many details about the changes, but spokesman Chris Watts did say this:

Fair Isaac divides the population into 10 segments based on credit history and applies a different formula to each. Eight segments include people with good credit, and two are for people with serious problems.

Under the new system, the population will be divided into 12 segments: eight for people with good credit, and four for people with bad credit. That could result in a slight change — up or down — in many scores.

“This new system will give lenders more dependable scores for those higher-risk consumers and those who have little history,” Watts said.

Now, that’s not really a bad thing if your credit is pretty good, but if you’re on the margin or trying to establish your credit, it could mean trouble.

Because businesses interpret scores differently, a slight change could be the deciding factor in whether a landlord decides to rent to you or whether your bank decides to increase the interest rate on your mortgage or home-equity loan.

For example, according to Fair Isaac’s Web site (www.myfico.com), the difference between a score of 620 to 659 and one in the range of 660 to 699 can result in a $163 difference in the monthly payment on a 30-year mortgage.

Watts concedes that certain groups will feel the effect far more than others.

People with thin credit history or poor credit will probably see their score either jump or drop significantly, he said.

As it goes with most change, some people are going to be hurt through no fault of their own.

One adjustment to the current credit scoring system will be to stop giving credit points to those who are authorized users on someone else’s credit card. This change will affect about 30 percent of people with credit reports, or about 60 million consumers, said John Ulzheimer, president of educational services for Credit.com and a former manager with Equifax and Fair Isaac.

This change is going to affect: young adults trying to establish credit by attaching themselves to their parents’ credit cards; spouses — most of them women — who are authorized users on the family credit card; and people who are trying to re-establish credit by coattailing a family member’s good credit history.

Fair Isaac has closed this loophole because the lending industry has complained about abuses and said the loophole was distorting borrowers’ true credit risk.

First, those who became authorized users to help build up credit should consider switching to a joint account. That will allow the joint member to continue to reap the benefits of the primary cardholders’ strong credit history.

However, this option poses more risks to the primary holder of the credit card.

For example, if an authorized user abuses the card, the primary cardholder can revoke the users’ card by a mere phone call. However, it’s not as easy to remove a joint user. The primary cardholder would have to close the account and open a new one to remove the user from the account.

Written by Adam on June 25th, 2007 with no comments.
Read more articles on Credit Score and Credit Score Advice and Credit Score Tips and FICO Score.

5 Ways To Raise Your Credit Score

It’s not as hard as you think to raise your credit score. It’s a well known fact that lenders will give people with higher credit scores lower interest rates on mortgages, car loans and credit cards. If your credit score falls under 620 just getting loans and credit cards with reasonable terms is difficult.

There are more than 30 million people in the United States that have credit scores under 620 and if you’re probably wondering what you can do to raise your credit score for you.

Here are five simple tips that you can use to raise your credit score.

1. Get a copy of your credit report

Obtaining a copy of your credit report is a good idea because if there is something on your report that is incorrect, you will raise your score once it is removed. Make sure you contact the bureau immediately to remove any incorrect information.

Your credit report should come from the three major bureaus: Experian, Trans Union and Equifax. It’s important to know that each service will give you a different credit score.

2. Pay Your Bills On Time

Your payment history makes up 35% of your total credit score. Your recent payment history will carry much more weight than what happened five years ago.

Missing just one months payment on anything can knock 50 to 100 points off of your credit score.

Paying your bills on time is a single best way to start rebuilding your credit rating and raise your FICO score.

3. Pay Down Your Debt

Your credit card issuer reports your outstanding balance once a month to the credit bureaus. It doesn’t matter whether you pay off that balance a few days later or whether you carry it from month to month.

Most people don’t realize that credit bureaus don’t distinguish between those who carry a balance on their cards and those who don’t. So by charging less you can raise your credit score even if you pay off your credit cards every month.

Lenders also like to see a lot of of room between the amount of debt on your credit cards and your total credit limits. So the more debt you pay off, the wider that gap and the better your credit score.

4. Don’t Close Old Accounts

In the past people were told to close old accounts they weren’t using. But with today’s current scoring methods that could actually hurt your credit score.

Closing old or paid off credit accounts lowers the total credit available to you and makes any balances you have appear larger in credit score calculations. Closing your oldest accounts can actually shorten the length of your credit history and to a lender it makes you less credit worthy.

If you are trying to minimize identity theft and it’s worth the peace of mind for you to close your old or paid off accounts, the good news is it will only lower you score a minimal amount. But just by keeping those old accounts open you can raise your credit score.

5. Stay Out Of Bankruptcy

Bankruptcy is the single worst thing that will destroy your credit score. Bankruptcy will lower your credit score by 200 points or more and is very difficult to come back from.

Once your credit score falls below 620, any loan you get will be far more expensive. A bankruptcy on your credit record is reported for up to 10 years.

The reality of a bankruptcy is it will limit you to high-interest lenders that will squeeze out high interest rate payments from you for years.

It is better to get credit counseling to help you with your bills and avoid bankruptcy at all costs. By getting credit counseling instead of declaring bankruptcy you can raise your credit score over a much shorter period of time.

Gary Gresham is a mortgage loan officer and the webmaster for http://www.credit-repair-facts.com He offers you credit information, debt elimination programs and informative facts that give you the knowledge to correct your own credit and credit report. For more credit related articles go to: http://www.credit-repair-facts.com/articles_1.html

Written by Adam on June 6th, 2007 with no comments.
Read more articles on Credit Score and Credit Score Advice and Credit Score Tips and FICO Score and Improve Credit Score.