Is your credit score about to change?
Last week the Wall Street Journal published an article outlining upcoming changes in the calculation methodology of FICO scores. FICO scores are created by Fair Isaac Corp. (hence the acronym) and are the most widely used credit scores in the U.S.
The article, published on the front page of the Journal, prompted a client to reach out to me. She’s smart, informed, and recognized that although understanding credit matters can be complex and headache-inducing, it’s important. Here’s how we broke it down:
Why does all this credit stuff matter?
A strong credit score demonstrates reliability to a potential lender, which directly correlates to favorable loan terms. Credit reports may affect your mortgage rates, credit card approvals, apartment requests, insurance policies, cell phone plans and job applications.
What’s in your credit score anyway?
Your credit score will be a number between 300 and 850 and is based on 5 main criteria:
What’s going on with the FICO Score makeover?
Consumer debt is at a record high. As personal debt levels in the U.S. climb, the changes to the FICO score calculation will start to judge missed payments more harshly (especially if you have an “already-low” score under 600). If your FICO score is high today (680 or above) and you continue to show responsible credit behavior your score may potentially increase. Carrying growing balances over several months will also be judged more harshly in the new calculation. If you’re considering paying off credit card debt with a personal loan, this will also now factor into your score in a bigger way. With these changes, it’s likely that the gap between individuals seen as good credit risks and bad credit risks will widen. The new methodology is scheduled to go into effect in mid-2020.
Is my credit report different than my credit score?
Yes. There are 3 primary credit bureaus that compile your credit history and provide your credit report. The data collected by these firms is used to determine your FICO score. The big 3 credit reporting agencies are:
1. Equifax
2. TransUnion
3. Experian
These credit bureaus publish a detailed history of any loans/debt you’ve have had in the last 7-10 years.
So, what can you do to keep your credit score up?
1. Know what your score is
Ask your lender if they give customers free access to their scores. (i.e. say you have a credit card with Bank of America, they may provide you with your FICO score as part of their service)
2. Review your credit report
www.annualcreditreport.com is the official site to get access to a free copy of your credit report from each of the 3 credit bureaus once per year. Know that federal law entitles you to a free copy of your credit report from each bureau every 12 months – so do not pay!
Note about credit reports: Routinely reviewing credit reports can help you catch errors and spot signs of identity theft. Unfortunately errors seem all too common on credit reports… For example, several years ago my credit report was littered with information for Sheila Qalsh. Who??? If you glance at your keyboard, you’ll see the letter Q next to W. A simple typo on a loan or credit card application….that took a long time to fix. If you find an error, report it to the credit bureau.
3. Pay bills on time, every time
Since on-time payments comprise over 1/3 of your total score, this cannot be underestimated. Coupled with the fact that missed payments and most negative information will stay on your credit report for 7 years, one mistake will linger a longggggg time.
Consider auto pay options so you don’t forget to pay bills
If possible, pay your credit card bill in full each month. If that’s not feasible for you today, I think we just identified a #2020goal :)
Credit scores and credit reports matter to all kinds of things we might not think of everyday….but we certainly do when we’re ready to buy property or a new car! With the upcoming changes to FICO Scores this year, maintaining mindful money habits has taken on a new level of importance.