Credit Scoring Changes You Need to Know
- 2009 27 Jul
Remember the good ol' days when credit limits meant something, lenders reviewed credit applications, and the livin' was easy? I hate to break it to you, but those days are gone. Now, banks and credit card companies are thrilled when customers slip over their credit limits (read: big, fat, juicy fees), and lenders toss credit applications aside, relying solely on the applicant's credit score: that three-digit number that controls our lives.
Until recent years, consumers were not allowed to know their credit scores. Now that credit scoring is out in the open, it is still mysterious. Like it or not, though, our scores shape our financial futures. We dare not ignore them.
Your credit score determines how much interest you'll pay on a mortgage and how much you pay for your insurance. Credit scores are considered when employers make their hiring decisions. You need to know how to achieve a great FICO score. Good is considered 700 to 759, while 760 to 850 is excellent.
Recent changes to the most widely accepted scoring model, FICO 08, have proven advantageous for many consumers. This new version ignores small collections that may appear on your credit report. It is also less punishing for those who have had a serious setback, like repossession, provided their other active credit accounts be in good standing. The new version of the credit scoring formula allows some authorized-user information to be included when developing that person's credit score.
But it's not all good news. Here are three areas where changes in FICO 08 could send your score plummeting:
Credit limits. FICO 08 is sensitive to how much of your available credit you are using at any given time. If you are maxed out on a credit card, you're using 100 percent of your available credit. That is bad. You should never use more than 30 percent, even if you pay your balance in full each month.
Closing accounts. Now, more than ever, you should not close credit card accounts. To do so could seriously damage your credit score because you will reduce the total amount of your available credit.
Keep them active. While it pains me to suggest such a thing, if you want an excellent credit score these days, then the accounts you have need to be active. That means using each one for a tiny purchase every month or so, followed by an immediate payment that brings it right back to $0.
Credit scores are not free. You can purchase your TransUnion FICO score or the Equifax FICO Score at MyFICO.com for $15.95 each. You also can do an Internet search for "Credit Score Estimator." You'll find several websites that will give you a close idea of what your score would be if you purchased it.
To learn more about your credit score, how it impacts your life and how you can improve it, go to MyFICO.com and click on "Credit Education." You can also visit my blog, Money Rules, Debt Stinks! for the latest information on changes in the credit-scoring industry.
Copyright © 2009 Mary Hunt. All rights reserved. Permission to reprint required.
Check out Mary's recently released revised and expanded edition of The Financially Confident Woman (DPL Press, 2008).
Debt-Proof Living was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "Debt-Proof Living" is read by close to 100,000 cheapskates. Click here to subscribe. Also, you can receive Mary's free daily e-mail "Everyday Cheapskate" by signing up at EverydayCheapskate.com.