How will FICO Score 9 impact credit scoring? Not as much as you may think!

FICO’s recent release of its FICO SCORE 9 model caused a buzz of conversation among financial circles and even news media.  There are plenty of questions and concerns by consumers and headlines in the traditional news media.  But most people still don’t understand FICO 9 or what kind of impact it will have on credit scoring. 

The following is a combination of data from several sources, but especially ficoforums.myfico.com.

Different banks and lenders use FICO in different ways.  Many of them still use FICO 04 Classic, an older but more widespread scoring model, while others have integrated FICO 08 Classic, the latest version before FICO 9 was released.  This chart shows the 49 different FICO scores along with their corresponding Credit Reporting Agency (CRA) and the version of FICO they most prominently use.  Additionally, it lists the approximate range of credit scores per that specific FICO. 

In summary, it seems that the FICO scores that really matter are still FICO 04 and FICO 08.  FICO Score 9 is expected to shake up the status quo but mostly in the way that collections are differentiated, particularly medical collections.  However, FICO Score 9 will take time to integrate – some expect even a couple years – and Fannie Mae and Freddie Mac aren’t using it to date.  To consumers, realtors, lenders, and mortgage professionals, this means that not much has changed at all.

Please contact us if you have any questions about FICO Score 9 or how to keep a great credit score or make it even better.

Does the average person really understand credit?

I came across this info graphic today and wanted to share it with you.  It illustrates the need for education and a better understanding of credit and credit scoring.  Blue Water Credit is happy to help!

In a random survey of 1,000 Americans:

20% of respondents admitted their knowledge of credit score was poor.

71% failed to answer a question about how companies and service providers use credit score.

Only 59% of Americans consider themselves to be highly knowledgeable about personal finance.

The majority of those polled agree there should be a ban on an employer’s right to use a potentially employee’s credit report in the hiring process.

Only 50% have checked their credit score in the last year.

The majority of those polled were confused about how credit score is determined – thinking that employment history, interest rates on current debts, and personal savings were factors.

Almost 40% thought that their age was a factor, and 1 in 4 thought the state they lived in was a determining factor!

20 Surefire ways to muck up your credit score.

1. Pay late.

Even missing a bill’s due date by a few days may trigger a 30-day later reporting, which will damage your score and take a lonnnnnng time to come off your credit report.

2. Not pay at all.

Of course if missing one payment is bad, not making it at all magnifies the damage to your credit.  A 90-day late is where things get really serious and your score may sink like a stone.

3. Max out cards.

One of the determining factors of your score is the ratio of available credit to your balances.  So if you max out your cards, even if they are in paid on time, your score could be affected.

4. Have an account charged off.

Generally after a 90-day late, the next step is that the credit card company/bank, etc. charges off the debt, sending it to a third party for collections.  This further damages your score.

5. Be a cosigner for someone who doesn’t pay.

If you cosign for someone else’s loan, whether it’s a car or an apartment lease or an installment loan, you are jut as responsible for paying the debt as they are!  That means you better make sure they are paying on time because if they slip up, your credit will be affected – and you may not even realize it.

6. File bankruptcy.

Filing a Chapter 7 or 13 Bankruptcy is one of the most damaging events to someone’s credit score.

7. Foreclose on your home.

The other is foreclosure, which hurts your score for a prolonged period and in some ways is more damaging that Bankruptcy.

8. Get a judgment against you.

If you don’t pay your debt obligations, your lender or third-part collection agencies may take you to court, trying to secure a judgment for the amount you owe (plus late fees, penalties, and court costs.)  

9. Apply for new credit like wildfire.

If you start filling out credit card and loan applications frequently in a short period, it signals financial desperation and risk to the credit scoring algorithms, and your score will go down accordingly.

10. Have no mix between credit and installment.

Remember that your credit score is calculation based on a mix of different types of credit – mortgage, installment, revolving, credit cards, etc. so make sure to overload on just one type.

11. Close old credit cards in good standing.

By cancelling a well-seasoned credit card or credit line that was in good standing, you’ve just effectively erased a positive track record of paying on time, so your score will go down as that’s taken out of the equation.

12. Rent a car with a debit card.

When you rent a card with your bank card, not credit card, they run a hard credit check to make sure you’re a good risk, which could lower your score.

13. Take payday loans, cash advances, or finance through rent-a-centers.

All credit is not created equal, and when you take out loans that are deemed risky or on the lower strata of the economic spectrum, it could hurt your score.

14. Finance a major purchase.

Additionally, when you finance furniture, boat, timeshare, or other big purchases outside of the big three – house, car, credit cards – it signals some risk to the credit bureaus.

15. Try to get slick with balance transfers.

Too many people try to outthink the credit card companies, taking out 0% interest or cash-back offers and moving balances around to stay one step ahead.  That works…until it doesn’t work, and at some point it always doesn’t work, leaving you with a big mess.

16. Get a new cell phone.

Of course we need a new phone from time to time, but be aware that many of the cell phone companies run a hard credit check when you apply, which could hurt your score.

17. Open an account at a credit union

Likewise, credit unions run hard credit checks when you open a new account.  We love credit unions for their service and great rates, but inquire if they’ll be running a hard credit check before you get started.

18. Not using your credit at all.

If you don’t use it, there is no established good payment history for the credit bureaus to judge you by!

19. Close cards with available credit. 

When you do this, you mess up your ratio of debt owed versus available credit, which could negatively affect your score.

20. Dispute credit cards.

This may come as a surprise, but even disputing an account on your credit report may lower your score, at least temporarily.  That’s because when it’s in dispute, the bureaus will remove it from consideration in their algorithms, which may erase a positive history, throw your debt-to-available credit out of whack, etc.

New legislation hopes to shake up the credit reporting industry and help consumers.

U.S. consumers may be getting a valuable ally when it comes to correctly reporting their credit scores if newly introduced legislation gets passed.  A bill sponsored by U.S. Senators Sherrod Brown (D-OH) and Brian Schatz (D-HI,) among others, would call for accuracy and accountability from the credit bureaus when it comes to reporting consumers’ credit.  The Stop Errors in Credit Use and Reporting (SECURE) Act of 2014 would give the public an avenue for transparency in reporting, a way to access free credit reports, and a way to dispute and correct inaccuracies under protection of the law.  

Errors aren’t harmless since lenders, banks, and employers base their rates, premiums, and hiring decisions, on consumers' credit score.  The Federal Trade Commission (FTC) recently released a study that said up to 40 million Americans have error(s) on their credit reports.  At least 10 million of these errors would result in higher interest rates on loans or put them at other financial detriment.  Errors can take the form of duplicates, misreporting, identity errors and mix-ups, and outdated items. 

Under the current system, Credit Reporting Agencies (CRA’s) put very little man-hours or resources into fixing inaccuracies and errors, and there’s no minimum standard for to accurately match and report data.  However under the new act, there would be new procedures that CRA’s were legally mandated to follow, protecting consumers.

S. 2224 dovetails on a proposal by Senator Bernie Sanders (I-VT) which calls for free, verifiable credit reports and scores to all consumers one a year.  That differs from the current system where CRA’s provide a free report that is almost valueless.  They sell “educational” scores and reports to consumers that are rarely used by lenders.  Too often, consumers start by requesting a free copy of their credit score and end up duped into paid credit monitoring services.

The Act would:

“Ensure that agencies send consumers’ disputes and supporting documents to the creditor when there is an error on a report, so that they can thoroughly review the consumer’s claim.

Make it easier for consumers to spot errors in their credit reports by requiring that consumers receive a free copy of their credit report if anyone makes an unfavorable decision based on the report.

Give consumers the ability to request a free credit score along with their annual free credit report to see what credit they might be eligible for.

Give courts the ability to stop a credit reporting agency from reporting inaccurate information and provide the Federal Trade Commission with new authority to stop sloppy practices.”  

For instance, if a consumer filed a legitimate complaint for an error on their report, the CRA would only have 14 days to provide evidence of the reporting.  This would include debt collection agencies affiliated with the CRA’s. 

The SECURE Act is cosponsored by Senator Sanders as well as Elizabeth Warren (D-MA) and Richard Blumenthal (D-CT).  It’s also endorsed by the Consumers Union, the National Consumer Law Center, the National Association of Consumer Advocates, Consumer Action, and U.S. PIRG. 

The bill has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.  You can read the complete Act here.

How much will a 30-day late payment drop my credit score?

We all try to keep on top of our bills, but every once and a while there’s a bump in the road and we might miss a payment.  Unfortunately, a 30-day late payment will report on your credit report and lower your score.  How much will your FICO drop?  There are a lot of factors that go into it, which we’ll go over here.

First off, if you realize you’re late on a payment call your bank or lender immediately.  It may not be too late to salvage the situation and keep the late reporting off of your credit report.  Different lenders report on different days of the month, so if you are proactive they might work something out to get you paid up.  Some of the bigger credit card companies, for instance, have their own internal systems of late reporting that will keep the issues out of the credit bureau’s site for longer than you may expect.

However, if the 30-day late does hit your credit score, what damage will it do?  There are five major factors to determine how much your score will drop:

1. How long ago did the late payment occur?
Since credit reporting is set up on a chronological metric, recency of late payments are perhaps the biggest factor in score changes.  Simply put, the more recent the late payment occurred, the lower your score will drop.  As time goes on (and you make your payments responsibly) the negative impact will diminish.  All items report for 7 years, but the more recent the late payment, the bigger the hit.

2. How severe were any late payments (30, 60, 90-day late or charge off?)
Of course a 60 or even 90-day late payment is exponentially worse for your credit score than one 30-day late.  Why? Credit reporting is all about gauging risk, and a 60 or 90 shows that instead of an accident or isolated incident, there is some serious financial trouble and your score will drop accordingly.  Avoid a 90-day late payment at all costs.

3. How many accounts have had late payments?
If you only have one account with a late payment or payments, it will hurt your score less than if you have missed payments scattered over multiple accounts.

4. What kind of account is it?
A 30-day late payment on a mortgage loan might hurt you more than on a store retail card with a $200 credit limit.

5. Length of history.
Accounts that are well seasoned – that have been open and in good standing or a long time – will take less of a hit than newer accounts.  Remember that payment history comprises up to 35% of your scoring model so these factors are all important.

With all of that said, here is the direct answer:

If you have a 30-day late on your credit report, your score may drop around 80 points if you’re in the 680 range, or up to 90-110 points if you’re 780 or higher.  Counter to common sense, the better your credit score is, the bigger hit it will take if you miss a payment.

Will inquiries and credit pulls hurt your credit score?

Are you shopping for a home loan?  Sending a child to college so you’re applying for student loans?  Or did you just come from your favorite store where they offered a discount if you take out one of their store credit cards.  Every time you apply for new credit it shows up as an inquiry on your credit report – and done wrong, that could even lower your score.  However, some people become so afraid of having their credit pulled that they don’t adequately shop for the best loans, losing a lot of money in the end.  What you don’t know can hurt you, so today we’re going to explain the process of credit inquiries and the impact they have on your score.

Every time a vendor, bank, or merchant requests to see your credit report, it registers as an inquiry, an event visible on that report.  But will these inquiries actually lower your FICO score?  

 The short answer is: it could, but not too much.  But it’s based on two factors: what kind of credit trade line you’re applying for, and the timing of those inquiries.  Remember that the whole basis of credit reporting and credit reports is to give lenders an accurate metric to measure the risk of granting you a loan.  So when a consumer registers multiple inquiries (and the wrong kind) it sets off a red flag to risk for lenders.  Why?  They’re worried about the consumer applying for credit or loans out of financial desperation or overextending themselves with debt.  So the larger the number of credit applications and inquiries the greater the risk, and therefore their score could drop.  In fact, people with six inquiries or more on their credit reports are statistically 800% more likely to file for bankruptcy!

Now here is the fine print – not all credit inquiries are treated equally.  Some are a logical function of consumers shopping for the best rates or terms, especially with big-ticket items like auto loans, mortgages, and student loans.  The credit bureaus expect consumers to submit several applications (and have their credit report pulled) in order to get quotes from multiple sources when it comes to those loans, so those inquiries are less likely to adversely affect a credit score, if at all. 

However other types of loans are seen as clear indicators of risky consumer behavior, so the more credit inquiries, the bigger the hit to their credit score will be.  These include credit card applications, store credit cards, payroll advances and other inquiries that mark irresponsible financial behaviors.  Typically, your FICO score can go down about 5 points per inquiry if you have your score pulled too much by the wrong vendors.  The drop could be greater if you have few accounts or a short credit history without seasoned, positive factors to compensate.

The second component of this equation is timing.  The more “bad” inquiries that appear on your credit report within a short time, the harder the hit to your score.  For instance, if you apply for 5 new credit cards within a two-week period, it definitely is seen as risky to the credit bureaus, and your score will drop accordingly.  But just like there are compensating factors for big-ticket types of loans like mortgages, the timing of those is also factored in.  Shopping for the best rate on one loan (not simultaneously applying for multiple loans) means getting your credit score pulled several times within a short period, and that will not hurt your credit score.  The bureaus usually just count this group or batch of inquiries as one if they’re within a 30-day period.  So the lesson here is that you absolutely shop around for the best rates on big, important loans without worrying about multiple inquiries on your credit report, but try to contain them to within a 30-day period, but avoid multiple credit pulls on other kinds of debt that signal risk.

The different types of credit inquiries are broken down in two general groups; hard inquires and soft inquiries.  Hard inquiries occur when a bank, financial institution, lender or credit card accesses your credit report for the purpose of making a lending decision.  Hard inquiries may lower your score nominally, only by a few points, and stay on your report for two years.  Of course the negative impact diminishes and disappears over time.

Soft inquiries, on the other hand, are when a person or company checks your credit report.  Usually these come from when an employer checks your credit, preapproved credit card offers, and when you pull your own report.  Soft inquiries can happen without you giving permission, so they typically don’t affect your score at all. 

Hard inquiries:

• Applying for auto loan, student loan, business loan, or personal loan
• Applying for a credit card
• Applying for a mortgage

Soft inquiries:

• Checking your own credit score
• Pre-approved credit and loan offers
• Background checks employers

Sometimes hard sometimes soft:

• Applying to rent an apartment
• Verification of identity by a financial institution like credit union or stock brokerage
• Renting a car
• Getting cable TV or internet account
• Opening a checking, savings, or money market account