Archive for Your Credit

MAJOR CHANGES TO HOW YOUR CREDIT SCORE IS CALCULATED by Paul Ferraresi

The math behind your credit score is getting an overhaul, with changes big enough that they might alter the behavior of both cautious spenders as well as riskier borrowers.

Most notably for those with high scores: Abiding by the golden rule of “Don’t close your credit card accounts” may now hurt your standing. On the other side, those with low scores may benefit from the removal of civil judgments, medical debts and tax liens as factors.

Beyond determining whether someone gets approved for a credit card, a credit score can affect what interest rate and what spending limit are offered.

The new method is being implemented later this year by VantageScore, a company created by the credit bureaus Experian, TransUnion and Equifax. It’s not as well-known as Fair Isaac Corp., whose FICO score is used for the vast majority of mortgages. But VantageScore handled 8 billion account applications last year, so if you applied for a credit card, that score was likely used to approve or deny you.

Using what’s known as trended data is the biggest change. The phrase means credit scores will take into account the trajectory of a borrower’s debts on a month-to-month basis. So a person who is paying down debt is now likely to be scored better than a person who is making minimum monthly payments but has been slowly accumulating credit card debt.

“This is a really big deal,” said John Ulzheimer, an expert in credit reports and credit scoring. Ulzheimer said taking trended data into account has long been considered by the credit score industry, but hasn’t been implemented on a meaningful scale. He expects more lenders to adopt it.

People with high credit scores may be affected the most, since the goal of trended data is to see warning signs long before a borrower actually gets into serious trouble.

“When it comes to prime borrowers, you may not have bad behavior on your credit file, but a trajectory provides very powerful information,” said Sarah Davies, a senior vice president for research, analytics and product development at VantageScore.

The change also shakes up the maxim that had people keeping open accounts they’d opened long ago. An important metric in calculating credit scores has been the portion of their available credit people are actually using. A person with $5,000 in credit card debt with a $50,000 limit across several cards could score better than someone with $2,000 in debt on a $10,000 limit because of that ratio.

Here’s what you can do to get the best Interest Rate deals

5 Key Websites

Credit.com
Shop for the credit card that’s best for you based on interest rate, rewards or other features. Also try cardratings.com.

Bankrate.com
The site lists the best and latest rates on mortgages, savings accounts, auto loans and other financial products from lenders nationwide.

HSH.com
Find calculators here that can help you determine the size of the mortgage you can afford and the cost of refinancing.

AARP.com
Check out more than a dozen AARP calculators and tools to help you manage your finances. Search for “Money Tools.”

MyFICO.com
The company that produces the widely used FICO credit score offers tips on how to improve your score to qualify for better credit terms.

Fix Your Credit Cards

Most cards carry a variable interest rate. If you carry a balance you need a low fixed rate. This will save you money especially as we enter an increasing interest rate environment.
Consumers with good to excellent credit (FICO score of 720 or higher) can find cards with a fixed rate of 10 percent or less from credit unions and community banks. If you favor cards with reward points at the higher rates, please review the terms to get the best deal. Many issuers have doubled their point rewards in the past year. Some even offer $100 to $150 to sign up. Look at Card Rating.com for more ideas.

Plastic Payback

Let’s say you use a credit card that give you double miles. You can run up $25,000 in purchases ($50,000 points). Those relate to $500 in airline ticket credits, so, you purchase miles in this case at $25,000 and redeem them at $500. In this case you spend $1 and get a benefit of 2¢. You might be better off asking for a 5% discount and putting that money away for the next trip.
How rewarding is your rewards credit card? Comparing 100 cards, the website “ValuePenguin” concluded the best dollar-for-dollar payback came with hotel-affiliated cards. However, the best choice for the consumer who spends less than $24,000 a year may be a card offering 2 percent cash back on most or all purchases. Airline-affiliated cards have the lowest return value.

A Boost for Low Credit Scores

Millions of consumers with credit tarnished by medical debt could soon see their scores increase. FICO, the nation’s top credit score provider, is changing its scoring formula by the end of the year. Consumers with sterling credit history except for overdue medical expenses – either now or in the past – would likely get a 25-point boost. A recent study by the federal Consumer Financial Protection Bureau found medical debt unfairly hurt too many credit reports. Part of the problem with medical debt is that people find themselves in collections because of miscommunication over who is responsible for it – you or the insurance company.

Homebuyers may not see a benefit right away, however, because it’s not clear when lenders will adopt the new score model. An older couple had to pay a higher mortgage interest rate because a medical bill of less than $100 had slipped through the cracks and hurt their credit score. They weren’t even aware of it. It cost them over $120 a month more.

Why Debt Matters:
About a third of your credit score is decided by the amount of debt you owe.
This is how it is scored:

Accumulated Debt: 30%
Payment History: 35%
Other: 35%