The New Credit Score - Help or Hurt

Many consumers have been plagued with the never ending changing rules for calculating credit scores, it seems as soon as consumers understand the system it changes. Once again the FICO company is changing the credit score rules.

Due to the recession or one small transaction many consumers are on the line between good and bad credit, one small slip up could plunge their score in the bad credit zone, one debt payoff could boost their score to good credit and save them in interest and fees.

The new FICO8 credit score can potentially help consumers obtain higher credit scores or lower scores for others, some consumers score will not be affected at all. The FICO score ranges from 300-850, 850 being the highest score. FICO updates its scoring model every 2-3 years.

FICO claims the new scoring model is more precise because it considers more types of consumers. FICO8 rates people who have missed payments on small debts under $100 easier which could help millions of consumers improve their credit scores. These types of accounts will not have the same impact as a missed mortgage or credit card payment. The FICO 8 considers people with high credit utilization rates (credit card balances) to be higher risks than under the previous FICO model.

Major lenders have been slow to switch to the new scoring model. Three years after the actual release, most major lenders still have yet to adopt it and is absent in the mortgage industry.

In June 2011, Citibank implemented the new FICO8 credit scoring model. Bank of America is in the process of implementing the FICO8 scoring model. Fannie Mae and Freddie Mac continue to use the older FICO credit scoring model.

Almost half of consumers have FICO8 scores that are close to their scores from the previous version of the FICO score. The main ways to maintain a good credit score under the FICO8 model are: pay your bills on time, keep credit card balances low, and open a new credit account only when you need it.

The FICO8 will look at high credit card balances differently and maxed out credit cards will lower credit scores more. Isolated late payments will weigh less heavily on your credit score. Multiple late payments will weigh more and decrease your credit score. Authorized credit card accounts will be included when calculating your credit score. The FICO8 score will ignore collection accounts with balances less than $100. The five major actions that can greatly lower your credit score are: maxed out credit cards, foreclosure, bankruptcy, 30 day or more late payments, debt settlement or loan modification.

FICO says the new score will help consumers. We will just have to wait and see.

Everyday Fixes for Credit Scores

Credit. Credit. Credit. Do you ever get tired of people talking about credit or asking for your credit score? Companies used to have IOUs and you would pay them back when you could. Credit has become an ugly monster in the world of finance. It has destroyed lives, caused suicide, caused health issues such as high blood pressure, depression, fear, anxiety and hopelessness. Is this the effect that credit card companies had in mind when they created credit in the 1950s? I don’t think so but greed has caused them to operate as a mafia.

Some owners, customer service representatives and collection agencies have no remorse, no feelings, and refuse to provide good customer service to help clients who are willing to pay back debt owed. Sometimes you feel as though you committed a crime based on how potential employers, current employers or companies treat you when they look at your credit score or when you owe a company money.

Credit is one of the most important aspects of your financial life. It is easy to create a credit history but can be hard to maintain. One you have bad credit it can take years to recover and establish good credit again. Here are 13 everyday tips on how to raise your credit score.

1. Pay bills on time
2. Get current on late payments
3. Pay more than the minimum monthly payment – pay multiple times per month
4. Pay late accounts in 3 installments
5. Re-age accounts
6. Get paid delinquent (negative) accounts removed from your credit report
7. Ask for a settlement or setup payment bills for late accounts
8. Ask a company not to report a late payment on your credit report if it is less than 90 days late
9. Open a secured credit card or a department store credit card to establish credit history or increase your credit score
10. Avoid cash advances, payday loans and home equity loans to pay down debt
11. Don’t open new accounts often
12. Don’t close old accounts that are 2 or more years old, this will lower your credit score
13. Keep credit card balances at 20% or less of the credit limit

Consumers Can Now Get Free Credit Score

Effective July 21, 2011, the Federal Trade Commission consumers can now receive free credit scores if they apply for a loan or credit and are denied as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Previously consumers could receive a free copy of their credit report but in some cases it is hard for consumers to determine if they had good or bad credit.

Loan providers and companies that offer credit must provide details of the credit score and why the consumer was denied. Bad credit and low credit scores mean consumers will get higher interest rates, possibly pay upfront fees and have less than favorable credit or loan terms. The credit score will include the factors that impacted the consumers’ credit score such as late payments or maxed out credit cards.

Under this new law, banks can no longer keep their in-house credit scoring models secret and must share these with consumers who are denied credit. The new law does not apply to telecommunication and insurance companies.

Allowing consumers to receive credit score will give them the ability to quickly see if they have good or bad credit and create a plan to increase their credit score.

Not all consumers can receive a free credit score. If you were approved for loan with less than favorable terms or if your loan or credit application is rejected you can get a copy of your credit score. If you have good credit you may not get a copy of your credit score. Here are 7 tips to increase your credit score:

1. Get current. Pay delinquent accounts such as judgments, tax liens, foreclosures, repossessions and collection accounts first. Then pay all other late accounts such as medical bills.
2. Pay down debt. Keep balances at 10-20% or less of the credit limit. Having credit cards with balances of 30% or more of the limit decreases your credit score.
3. Pay on time. Pay bills at least 7-10 days before the due date to avoid late fees and penalties.
4. New accounts. Opening more than one new account per year will lower your credit score.
5. Avoid closing accounts. Closing accounts that have been open for 2 years or more can decrease your credit score.
6. Negotiate. Setup payment plans to pay down debt if you cannot pay the full amount owed. Stick to the agreement until the account is paid in full.
7. Avoid risky solutions. Avoid filing for bankruptcy. Use bankruptcy, debt consolidation, credit repair counseling or debt settlement as a last resort. These are reported on your credit report and lower your credit score.

Another Reason to Use Cash

A trend that has been occurring in some parts of the country for the past two years is continuing but has had a sharp increase in the past few months. Some gas stations and merchants are charging customers more when paying with credit or debit cards. Some states have passed laws to prohibit charging customers fees: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

Previously processing fees for credit card and debit card transactions were paid by the merchants now the charge is being passed to customers. This is due to increased charges that merchants have to pay when processing credit and debit card transactions. However, fees for debit card purchases are lower than credit card transactions.

In order to legally charge customers for credit card and debit card processing fees gas stations and merchants have to create two separate pricing offers. This is done by offering a discount when paying with cash but a sign must be displayed that states that a higher price will be charged when paying with credit card or debit card. The increase in this practice is due to the changes implemented in the CARD Act of 2009 that stated credit card issuers can charge a discount to customers who pay with cash.

Visa and MasterCard allow merchants to offer a discount when paying with cash that is lower than the price paid for other forms of payment. Discover allows merchants to charge a fee to customers when using a credit card or debit card. American Express states that merchants cannot accept a credit card or debit card for fees over the normal price of an item.

I noticed this week that the local gas station near my office is now charging more when paying with a credit card or debit card. I visited the gas station yesterday and decided to pay with cash but usually pay with my debit card. I am glad I did because I saved $.10 per gallon saving a total of $.80 yesterday for unleaded (regular) gas. For those who buy mid-grade or premium the cost is even more and can easily cost you anywhere from $1.00 - $5.00 more when paying with credit card or debit card.

Be aware of the rules and regulations that govern businesses as well as the rules and regulations that protect consumers to ensure you are not being taken advantage of. For detailed information on the CARD Act of 2009 visit www.govtrack.us/congress/billtext.xpd?bill=h111-627.