A Credit Score Boost

credit score

In the past, the only way to create a credit score for yourself was to borrow money.  This makes borrowing a little tricky for those who have little or no credit history.  How can banks or credit card companies comfortably lend people money if they have no history for determining if they are a good risk?

Payment history – how you have paid your bills in the past — is one of the most important factors in a credit score. Lenders check an individual’s credit score when deciding whether to lend money to him or her.

FICO, the developer of the most widely used credit score, will begin piloting a new score next year (2019) called the UltraFICO score. This new scoring model considers how you manage your checking, savings and money market accounts in addition to how you pay back your credit cards and loans; it could be good news for those who have a strong banking record but have little or no credit history or have negative information on their credit reports. If you manage your checking, savings and/or money market accounts wisely, avoiding overdrafts and usually keep a modest “cushion” of  at least $400 in your checking account, your credit score could receive a much needed boost that can make a difference when applying for a loan.

Use of the UltraFICO score is not automatic. Consumers must opt in before lenders can access their banking records and calculate the alternate score.  Consumers who already qualify for credit on good terms will never need to authorize the UltraFICO score; those whose “regular” FICO scores aren’t quite good enough to qualify are the ones who may benefit from use of the UltraFICO.

FICO has announced the new scoring model as a “pilot” and has not specified how widely it will be in use, so there is no guarantee it will be available through your lenders. Nevertheless, it is worthwhile to be aware of the possibility, for two reasons:

  1. If you are turned down for a loan or credit account, you may wish to ask the lender if they can check an alternate scoring model such as the UltraFICO score.
  2. It is a reminder that responsible management of your banking accounts can pay off; if you have a tendency to occasionally get sloppy and incur an overdraft, the existence of UltraFICO may motivate you to manage your accounts more carefully.

FICO is marketing the new score at its website, which includes a link to a short video describing the basics of UltraFICO.

As always, the best way to improve or protect your credit score is to consistently pay your bills on time, reduce the amount of debt you owe as much as possible and apply for credit only when needed.

Brenda Schmitt

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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Your Smiley Face to Impress

smileIs it your smiling face and eagerness to take out a loan that impresses the lender?  While that helps, it is probably not the key factor.

Your credit score is the lender’s first impression. Almost all lenders use a credit score to form their first impression of an applicant’s financial situation.  You actually have three credit scores –one each from Equifax, Experian and Trans Union.  Lenders may also have additional factors they consider in making a credit decisions, such as details of a person’s credit history, prior relationship with the company, or others.

The credit score is calculated to be a predictor of whether or not you will repay. Each credit reporting company has their own unique scoring model.  Some credit card companies like Chase and Discover offer your credit score monthly with their statement.  There are websites – Credit Karma.com, Quizzle.com and Credit.com that can show you a three-digit number representing your creditworthiness but it may only represent one of the credit reporting agencies – not all three. So be conservative when looking at those numbers.

Once a lender approves you for credit, lenders may pull your credit score or history regularly to determine whether you continue to be eligible for credit or qualify for special offers.

If you know you will soon need to replace a car or plan to buy a house – check your credit history about 4-6 months before your purchase.  If you find errors, you have time to correct them.  Start with www.AnnualCreditReport.com, the official free site to check your credit history.

 

Susan Taylor

Susan Taylor

Resources are important whether you are looking to rent your first apartment, pay your bills, buy your first home or send your child to college. There are many ways to save money to reach your goals, and hopefully ISU Money Tip$ will be one of them. I enjoy traveling, needlework and am a novice gardener.

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Build Your Credit Score Without Building Debt

Credit Score Gauge
Credit Score Gauge

Does it seem contradictory to say I’m in favor of using credit to build a credit score but I’m not in favor of building debt?  It’s possible that was your reaction after reading the Credit Score Myth post.

It’s true: As a financial educator, I’m definitely in favor of using credit, including credit cards.  At the same time, I’m definitely not in favor of building credit card debt.  NOTE: I followed this belief as a mom, too: when my oldest turned 18, she was very reluctant to get and use a credit card. I pushed her to do both, because I knew how important it was for her to build a credit record.  She’s now in her mid-20’s, and her good credit score is helping her in many ways!

It’s actually not difficult to use credit cards without building debt.  Simply use the card throughout the month and pay the full balance before the due date on the bill.  If you do this, you…

  • won’t be charged any interest,*
  • won’t fall into a debt spiral, and yet you
  • will provide continuing evidence that you can be trusted to pay your bills (thus building or maintaining a good credit score).

Are there potential pitfalls?  Yes.  You need to be smart about this.  You need to charge only as much as you will be able to pay in full at the end of the month.  How can you make sure?  You may find your own strategy, but here are a couple of ideas:

  1. Keep charges so small that paying the bill will never be a problem.  (If you only use the card a couple times a month for small purchases, then the balance at the end of the month should always be manageable).
  2. Set aside money for each charge you make on your credit card.  If you charge $30 for gas, then set aside $30 in your savings account which you can use to pay the bill when it comes.
  3. Every few days log in on-line to your credit card account and pay the balance.  Even if you haven’t received the bill.  That will ensure that you are paying as you go, rather than building up a balance.

Need reassurance?  Consider this: if you are able to manage a checking account carefully to avoid overdrafts, then you should also be able to use credit cards in moderation so you can build a strong credit history without building debt.

~ Barb

*Most credit cards have a grace period, meaning they do not charge interest if the balance is paid in full each month. Make sure your card falls in this category!

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Myth: Credit Score Doesn’t Matter If You Don’t Borrow

credit score
credit score

Last week – twice in the same day(!) – I was reminded of a myth.  The myth is propagated by people who have a worthy goal, but are just missing some information.

  • The worthy goal?  Encouraging people to avoid debt.  My thoughts on that goal? I agree!  Debt, especially excessive debt or certain types of debt, can lead people into extremely difficult situations.
  • The well-meaning recommendation:  Avoid using any credit, especially credit cards.
  • The myth: If you aren’t ever going to borrow money, then your credit score doesn’t matter.  I talked with someone who quoted a well-known financial guru as saying that it doesn’t matter if your credit score is zero.  In fact, they went on, it’s just as well to have a zero credit score, because then you can’t and won’t borrow.

The problem with this seemingly-logical sequence of thoughts is that your credit score does matter, even if you never plan to borrow money.  A zero score – or any low score – can have devastating impact, because credit scores are also used for other purposes:

  • Renting – Many landlords check your credit score before deciding to rent to you – they want to make sure you can be relied on to pay.
  • Insurance – Statistical analysis has shown a connection between credit score and frequency of insurance claims, so you may be turned down or charged extra for certain insurance policies if you have a low credit score.
  • Employment – a poor credit score can prevent you from getting a job in certain industries.

It’s also possible that even if you never planned to borrow money, you might someday decide to buy a house or start a business; these are both cases where taking a loan can be a very good idea, because it allows you to purchase something that will build value over time.

Even if you expect to never borrow money again, your credit score will affect you.  This means we all need to use credit (wisely) to build the best scores we can achieve.

~Barb

P.S. Stay tuned to next time for a follow-up!

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Free Credit Score

In my personal email yesterday was a message from my credit card company, telling me about the new benefit they offer: free credit score.  I opened the message with interest!

Even though I hoped for a useful opportunity, I was not surprised when it was much less exciting.  Yes there was something free – a chance to monitor my credit score.  But it was a free 30-day trial.  Then it would start costing.

I really dislike free 30-day trials.  I worry that I’ll forget to cancel them. Once I DID forget to cancel.  So I’m not going to take advantage of this “free” offer.  If you get a similar offer, you might decide to take advantage of it.  If it’s a reputable credit card company, as mine is, you would be allowed to cancel after 30 days (or 20 days might be smarter), and the benefit might outweigh the hassle of cancelling.

Just mark your calendar – once something starts, it’s easy for inertia to kick in.  Believe me, I know about inertia!  ~Barb

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Credit Score Basics

credit cardYou hear the term credit score mentioned often, but how much do you really know about it? 

Credit scores were first developed by Fair Isaac Company – FICO – and FICO is still the most commonly-used credit scoring system. FICO scores range from 300-850; the median score is about 720, which means that half of the population has a higher score and half has a lower score.  Nearly forty percent had scores over 750, and 18% have scores above 800, according to FICO 2011 data.  For more information about FICO scores, check www.myFICO.com 

Credit scores are designed to predict how reliably you will pay your debts in the future. Lenders rely on them as they decide whether to loan you money, and how high an interest rate they will charge.   Not surprisingly, the main factor in these predictions is how reliable you have been in the past. 

Implication?  A cash-only lifestyle  may do wonders for your wallet, but it won’t boost your score.  If you rarely or never use credit, your credit score may be very low.

Fortunately, you don’t have to pay credit card interest to achieve a great score.  “Using credit” is not the same as “carrying a balance on your credit cards.”  People who pay off their credit card bills in full every month get the benefit of building a strong credit score, but without the cost of interest. Carrying a balance is expensive and therefore bad for your finances.  

An essential key to increasing your credit score is to pay your bills on time. 

Remember if you are not paying your bills, you can’t fix your credit.  You may hear or see ads saying they can get rid of your debt, and some of those “services” advise you not to pay your debts.  That is poor advice, and will only make your credit score worse.   For more tips on improving your score, check: www.federalreserve.gov/consumerinfo/fivetips_creditscore.htm

Why does your credit score matter?  It affects SO many things:

  1. Whether you can borrow money in the future and what interest rate you’ll pay
  2. Your insurability and your insurance premiums
  3. Whether you will get hired for certain jobs
  4. Whether a landlord will rent to you

As I described a couple of weeks ago, it is now easy and free to check your credit report.  It is not free to check your credit score, and you don’t need to check it frequently.  However, it can be wise to check your credit score occasionally, especially 3-6 months prior to applying for a mortgage or car loan, to make sure it is where you think it should be.  You can check your credit score for a small fee at the same time as you check your free annual credit report. See www.annualcreditreport.com

– Susan

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Your Credit Report

Have you looked at your your credit report in the past year?   Consumers fought for the right to a free credit report each year, so we should all make sure we take advantage of that right!

To get your free credit report from each of the three major credit reporting agencies (Equifax, Experian and TransUnion),  go to www.AnnualCreditReport.com or call 877-322-8228.  This is the ONLY source for the free credit reports that are yours by federal law. 

There are other sources out there – copycats. Over 130 companies claim to offer free credit reports – and some do.  Generally, however, there are strings attached. Some provide a “free” report only if you buy products or services. Others say they’re giving you a “free” report and then bill you for a monthly subscription which you will need to cancel. Remember that www.AnnualCreditReport.com is the real free site.

Getting your credit report isn’t enough.  Read through it carefully to check for inaccurate information. Errors can occur.  And in this age of identity theft, information on a credit report is often a person’s first clue that someone else is using his or her identity. With each credit report you will receive information on how to dispute inaccurate information and correct errors.  Move quickly to dispute any serious errors, such as:

  • accounts that aren’t yours;
  • reports of late payments when you paid on time;
  • bankruptcies older than 10 years (they should be removed after 10 years);
  • accounts that were wiped out in bankruptcy but are listed as still due; and 
  • other negative information that’s older than seven years (the seven-year clock starts 180 days after the account went delinquent).

Remember that the information on your credit report will determine whether you can get credit in the future, and on what terms.  In addition, credit report information is considered by prospective landlords and employers, and by insurers deciding whether to provide coverage and what premiums to charge. So it’s very important to make sure the information is accurate.  Mark your calendar each year, so you remember to check your credit report!

Susan

For more information, go to http://www.extension.org/pages/25271/credit-reports:-what-you-need-to-know

Susan Taylor

Susan Taylor

Resources are important whether you are looking to rent your first apartment, pay your bills, buy your first home or send your child to college. There are many ways to save money to reach your goals, and hopefully ISU Money Tip$ will be one of them. I enjoy traveling, needlework and am a novice gardener.

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More Than One Credit Report?

You have more than one credit report.  Yes, you know about the three credit reports that come from Equifax, Experian, and TransUnion.  By calling 1-877-322-8228, you can annually check your credit report for free.  But there’s more…

There are two specialty reports that are free, too. 

1) Your medical records can be obtained from www.mib.com or 1-866-692-6901. MIB stands for Medical Information Bureau.  This organization provides information to insurance companies making underwriting decisions or checking for fraud.

2) Comprehensive Loss Underwriting Exchange (CLUE) is a credit report used by insurance companies, landlords and employers. Request your report at https://personalreports.lexisnexis.com/ or 1-877-448-5732. In compliance with the FACT Act, you can request one FREE report during each 12 month period. Your CLUE report actually includes three different reports: 

  • Insurance Report — contains information provided via our C.L.U.E. report for auto and property records.
  • Employment History Report — contains information relating to your employment history.
  • Resident History Report — contains information relating to your tenant history.

These reports are different than your credit report   The CLUE report predicts whether you will file a claim on an insurance policy, and can impact your ability to rent an apartment, get a job or purchase insurance.

Susan Taylor

Susan Taylor

Susan Taylor

Resources are important whether you are looking to rent your first apartment, pay your bills, buy your first home or send your child to college. There are many ways to save money to reach your goals, and hopefully ISU Money Tip$ will be one of them. I enjoy traveling, needlework and am a novice gardener.

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