What’s New With Credit Scores?

  • Test Your Student’s Credit Score IQ.  Here is a short 13 question quiz (credit.com)
  • For young adults, one way to build your credit history may be to sign up as an authorized user on a parent’s account.  Find out more about the ins and outs of this practice (Credit Sesame):

The “authorized user” strategy is one of the most commonly used methods by people who want to build their credit from scratch and by people who are trying to rebuild their credit after some sort of credit disaster. The strategy is equally effective for both scenarios, and here’s how it works.

  • What’s the difference between achieving a top credit score and a mediocre one?  Credit Karma analyzes their data to show what attributes show up in a top score:

The main factors that go into credit scores are well-publicized. Payment history, derogatory marks, age of credit history – if you’re interested in credit health, you’re probably familiar with these concepts. For all the literature out there, though, sometimes the practical differences between a top credit score and a middle-of-the-road one are less than completely obvious.

One of Credit Karma’s most popular features is the Credit Report Card, which assigns each member a letter grade based on six major areas of their credit health. The grades are based on where a member’s specific stats fall in comparison to our community as a whole, so the feature gives members a good idea of where they stand. For those who haven’t seen their credit information put into context before, the results can be surprising.

Under the current models used by most mortgage banks, medical debt collections can be very damaging to consumer credit scores. Medical collections are common causes of credit score drops. A recent study by TransUnion  revealed that 54% of insured individuals are confused about medical bills. Credit scores can drop hundreds of points from one collection, and most people do not understand how easily they can be put in this vulnerable position. Even small credit score drops could mean a difference of hundreds or thousands of dollars over the life of a 30-year mortgage or a complete rejection for a loan. There are various thresholds of credit score that offer applicants different interest rates and cost. Even a score off by one point could mean a change in pricing.  However, the new FICO score  will place less emphasis on this medical debt.

  • More companies are offering free credit scores (free credit reports are already available at annualcreditreports.com).  Read this before going through the online process to pull your score (US News and World Report):

Now, though, legitimate companies are increasingly offering consumers access to their credit scores for free – no strings attached. Consumer advocates say getting your score can be a useful exercise and offer the motivation to shore up your score if necessary, especially before taking out a big loan. After all, lenders can access your score to judge whether you’re fit to receive a loan, so shouldn’t you know what it is, too?

  • We often ask “What is your credit score?”  In reality, consumers may have multiple scores.  Here’s why (Credit Karma post on Huff Post):

Each consumer has far more than just one credit score. It’s true, and it’s an unhappy reality for many. People make their minds up to boost their credit health, work hard to get that special number up to their target level and then see a whole new number when they get a decision back from a lender. What can you do with that?

Well, the bad news is that you can’t take all the uncertainty out of the application process. For starters, lenders often consider a whole range of factors beyond your score. As it stands now, also, there is a large variety in the credit score space, and that’s unlikely to change in the immediate future. You can, however, get a better grasp on the system as a whole, while using just one credit score to evaluate your financial health over time.

  • 54 million people in the US have no credit standing today.  Here is how market-based solutions are addressing this (NY Times Fixes Blog):

A quarter of unemployed Americans undergo a credit check when applying for a job, and many landlords refuse to rent an apartment or a house to a person who has no or low credit. The influence of your credit rating on the availability or price of financing for a car or home can be drastic: For a $100,000, 30-year mortgage, a buyer with a FICO score of 760 will pay almost $70,000 less in interest compared with a buyer with a score of 620, which is close to the average score for people in their 20s today. (See this report from the Credit Builders Alliance.)

The bigger problem is that some 54 million people in the United States (and 4.5 billion people globally) have no credit standing at all. They have been dubbed “credit invisibles” (video). This doesn’t mean that they are unreliable or inactive.

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Check out Next Gen Personal Finance’s (NGPF) Credit Scores Basic Lesson as well as a quick activity on Reading a Credit Report.