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:
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.
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.
You 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.
Credit scores are designed to predict how reliably you will pay your debts in the future. Lenders rely on them to 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 when it exceeds 30-50% of your available credit, your credit score suffers. An essential key to increasing your credit score is to pay your bills on time.
There is no quick fix for credit card debt. You may hear or see ads for services promising an immediate repair of credit. Your credit problem must be determined to be repairable for the companies to accept you as a client. Repayment may result in added expenses for a service that will duplicate steps you can take yourself. Changing a due date, requesting lower interest rates, closing the account and agreeing to a repayment plan.
Why does your credit score matter? It affects SO many things:
Whether you can borrow money in the future and what interest rate you’ll pay
Your insurability and your insurance premiums
Whether you will get hired for certain jobs
Whether a landlord will rent to you
It is not free to check your credit score at www.annualcreditreport.com , but some credit card companies include it with their monthly billing statements and commercial credit score sites will give you a ballpark estimate. Scoring methods vary from site to site. You can check your credit score for a small fee at the same time you check your free annual credit report. If you are planning to borrow funds for an auto or home purchase, knowing you have a higher than normal score can be a bargaining tool to obtain the lowest interest rate and best loan terms.
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.