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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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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