Strategies & Tips

Surprise: Your Credit Score is Changing

credit-cardMany investors know their Social Security number by heart, having written it on so many forms over the years. Yet most don’t know another number that may be even more important. Your credit or “FICO” score helps determine everything from your mortgage interest rate to your car insurance premiums.

FICO compiles data from the three top credit bureaus (Experian, Equifax and TransUnion) to calculate a quick, standardized measure of your creditworthiness. Their formula is changing this fall, so now is a good time to review where you stand.

You might assume that paying all your bills on time will automatically give you a good FICO score. That’s not always true. Errors can creep into your file and stay there for years. Individuals can get one free copy of their report from the three agencies each year. It’s a good idea to review them and ask the agencies to correct any inaccuracies.

Keep in mind that your credit score and your credit report are two different things. Lenders use your score as an initial filter when they give mortgage pre-qualification, for instance. They then look at the broader credit report before giving final approval. You want both your score and your report to be accurate.

A revised methodology called “FICO Score 9” takes effect this fall. Among the changes:

Outstanding or defaulted medical debt will have less impact on your FICO score.

This is a long-overdue change, in my opinion. Medical debt usually isn’t voluntary, so it doesn’t say as much about an individual’s likelihood of taking too much risk.

Non-traditional credit like rental or lease payments will be part of the FICO score.

With younger Americans shunning debt and often unable to buy houses, millions of prospective borrowers have little or no credit history. This is a problem for lenders. Considering additional data points will help develop credit history and give lenders a better basis for loan approval.

FICO will now ignore paid-off and settled collections.

Under the previous methodology, debts that went into collection could affect your FICO score for as long as seven years, even if you had settled them. The new score will ignore collection activity if the current balance is zero.

Debt that goes into collection won’t disappear completely, however. It will stay on your credit report and lenders can consider it when deciding whether to grant credit.

The FICO score, while important, isn’t the last word on your creditworthiness. Lenders don’t have to rely on it. Some place great importance on your FICO score, while others may ignore it completely.

One thing is for sure: You want your credit reports and your FICO score to be correct. Errors can hurt you in ways you may never see.

You can order a free copy of your credit reports from all three agencies at AnnualCreditReport.com. This site is the only official provider. Others offer the service free and then pester you to buy additional products. AnnualCreditReport.com only charges an additional fee if you want to see your FICO score. Otherwise, you should not have to pay anything.

If you see incorrect information on the reports, you can ask the agencies to correct it. I suggest getting in the habit of reviewing your reports each year on your birthday, the Fourth of July, or some other memorable occasion. Errors can creep in anytime – and fixing them could save enough cash to buy yourself a nice present.

 

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