Does Paying the Minimum Hurt Your Credit Score

Credit card bills can be confusing. If everything was straightforward and clear, credit card debt wouldn’t be such a big issue. But it’s not clear, and debt is a massive issue for millions of consumers. 

One of the most confusing aspects is the minimum payment, with few consumers understanding how this works, how much damage (if any) it does to their credit score, and why it’s important to pay more than the minimum.

We’ll address all of those things and more in this guide, looking at how minimum credit card payments can impact your FICO score and your credit report.

What is a Credit Card Minimum Payment?

The minimum payment is the lowest amount you need to pay during any given month. It’s often fixed as a fraction of your total balance and includes fees and interest.  

If you fail to make this minimum payment, you may be hit with late fees and if you still haven’t paid after 30 days, your creditor will report your activity to the major credit bureaus and your credit score will take a hit.

When this happens, you could lose up to 100 points and gain a derogatory mark that remains on your credit report for up to 7 years. Making minimum payments will not result in a derogatory mark, but it can indirectly affect your credit score and we’ll discuss that a little later.

Firstly, it’s important to understand why you’re being asked to pay a minimum amount and how you can avoid it.

How Much is a Minimum Credit Card Payment?

Prior to 2004, monthly payments could be as low as 2% of the balance. This caused all kinds of problems as most of your monthly payment is interest and will, therefore, inflate every month so that every time you reduce the balance it grows back. 

Regulators forced a change when they realized that some users were being locked into a cycle of credit card debt, one that could see them repaying thousands more than the balance and taking many years to repay in full.

These days, a minimum payment must be at least 1% of the balance plus all interest and fees that have accumulated during that month, ensuring the balance decreases by at least 1% if only the minimum payment is met.

Do I Need to Make the Minimum Payment?

If you have a rolling balance, you need to make the minimum monthly payment to avoid derogatory marks. If you fail to do so and keep missing those payments, your account will eventually default and cause all kinds of issues.

However, you can avoid the minimum payment by clearing your balance in full.

Let’s assume that you have a brand-new credit card and you spend $2,000 in the first billing cycle. In the next cycle, you will be required to pay this balance in full. However, you will also be offered a minimum payment, which will likely be anywhere from $30 to $100. If this is all that you pay, the issuer will start charging you interest on your balance and your problems will begin.

If you spend $2,000 in the next billing cycle, you have just doubled your debt (minus whatever principal the minimum payment cleared) and your problems.

This is a cycle that many consumers get locked into. They do what they can to pay off their balance in full, but then they have a difficult month and that minimum payment begins to look very tempting. They convince themselves that one month won’t hurt and they’ll repay the balance in full next month, but by that point they’ve spent more, it has grown more, and they just don’t have the funds.

To avoid falling into this trap, try the following tips:

  • Only Spend What You Have: A credit card should be used to spend money you have now or will have in the future. Don’t spend in the hope you’ll somehow come into some money before the billing period ends and the credit card balance rolls over.
  • Get an Introductory Interest Rate: Many credit card issuers offer a 0% intro APR for a fixed period of time, allowing you to accumulate debt without interest. This can help if you need to make some essential purchases, but it’s important not to abuse this as you’ll still need to clear the full balance before the intro period ends.
  • Use a Balance Transfer: If you’re in too deep and the intro rate is coming to an end, consider a balance transfer credit card. These cards allow you to move your full balance from one card (or cards) to another, taking advantage of yet another 0% APR and essentially extending the one you have.
  • Pay the Minimum: If you can’t pay the balance in full, make sure you at least pay the minimum. A missed payment or late payment can incur fees and may hurt your credit score. 

Why Pay More Than the Minimum?

You may have heard experts recommending that you pay more than the minimum every month, but why? If you’re locked into a cycle of credit card debt, it can seem counterproductive. After all, if you have a debt of $10,000 that’s costing you $400 a month, what’s the point of taking an extra $100 out of your budget?

Your interest and fees are covered by your minimum payment and account for a sizeable percentage of that minimum payment. By adding just 50% more, you could be doubling and even tripling the amount of the principal that you repay every month.

What’s more, your interest accumulates every single day and this interest compounds. Imagine, for instance, that you have a balance of $10,000 today and with interest, this grows to $10,040. The next day, the interest will be calculated based on that $10,040 figure, which means it could grow to $10,081, which will then become the new balance for the next day. 

This continues every single day, and the larger your balance is, the more interest will compound and the greater the amount will be due over the term. By paying more than your minimum payment when you can, you’re reducing the balance and slowing things down.

Does Paying the Minimum Hurt My Credit Score?

Paying the minimum amount every month ensures you are doing the bare minimum to avoid hurting your credit history or accumulating fees. However, it can indirectly reduce your score via your credit utilization ratio.

Your credit utilization ratio is a score that compares the credit limit of all available credit cards to the total debt on those cards. It accounts for 30% of your credit score and is, therefore, a very important aspect of the credit scoring process.

The more credit card debt you accumulate, the lower your credit utilization rate will be and the more your score will be impacted. If you only pay the minimum, this rate will become stagnant and may take years to improve. By increasing the payment amount, however, you can bring that ratio down and improve your credit score.

You can calculate your credit utilization score by adding together the total amount of credit limits and debts and then comparing the latter to the former. A combined credit limit of $10,000 and a balance of $5,000, for instance, would equate to a 50% ratio, which is on the high side.

Can Credit Card Fees Hurt My Credit Score?

As with interest charges, credit card fees will not directly reduce your score but may have an indirect effect. Cash advance fees, for instance, can be substantial, with many credit card companies (including Capital One) charging 3% with a $10 minimum charge. This means that every time you withdraw cash, you’re paying at least $10, even if you’re only withdrawing $10.

What many consumers don’t realize is that these fees are also charged every time you buy casino chips or pay for some other form of gambling, and every time you purchase money orders and other cash products. 

Along with foreign transaction fees and penalty fees, these can increase your balance and your minimum payment, making it harder to make on time payments and thus increasing the risk of a late payment.

Does Paying the Minimum Hurt Your Credit Score is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

9 Financial Strategies for Padding Your Bank Account in Case 2021 Goes Sideways

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So, you thought 2020 was bad? Just wait!

OK, we’re kidding. Obviously, 2021 should turn out way better than 2020 did, right?

There’s no way it could be worse, right?

Right?

Welllllllll… we hate to sound like pessimists, but if there’s one thing life has taught us, it’s that things can always get worse.

Maybe COVID’s sequel shows up. Maybe the economy crashes again. Maybe our weird politics get even weirder. Maybe aliens land in Times Square.

Just in case, we’ve got some proactive moves you should make to protect your bank account in case things go south. Before the next crisis gets going, let’s get started with the protective measures:

1. Save Up An Emergency Fund

This past year has taught us the hard way that everyone should have an emergency fund. You need a place where you can safely stash your savings away — but still earn money on it.

Under your mattress or in a safe will get you nothing. And a typical savings account won’t do you much better. (Ahem, 0.06% is nothing these days.)

But a debit card called Aspiration lets you earn up to 5% cash back and up to 16 times the average interest on the money in your account.

Not too shabby!

Enter your email address here to get a free Aspiration Spend and Save account. After you confirm your email, securely link your bank account so they can start helping you get extra cash. Your money is FDIC insured and they use a military-grade encryption which is nerd talk for “this is totally safe.”

2. Stop Overpaying for Stuff

Your bank account will be in better shape in 2021 if you stop overpaying for things. For instance, wouldn’t it be nice if you got an alert any time you’re shopping on Walmart and are about to get ripped off?

That’s exactly what a free service called Capital One Shopping does. (No need to be a Capital One customer to use it!)

Capital One Shopping’s free alerts can be added to your browser. Before you check out, it’ll check other websites, including Amazon, Target, eBay and others to see if your item is available for cheaper. It will also show you coupon codes, set up price-drop alerts and even let you see the item’s price history.

Let’s say you’re shopping for a new TV. You’re ready to check out, and you assume you’re getting the best price. Here’s when Capital One Shopping will pop up and let you know if you’re about to overpay. It will even automatically apply any known coupon codes to your order.

So far, Capital One Shopping has saved users more than $70 million.

You can get started with Capital One Shopping in just a few minutes to see if you’re overpaying online.

3. Get Paid Every Time You Buy Toilet Paper

Grocery shopping was never exactly pleasant. But these days, it’s a downright struggle. Fighting crowds; keeping six feet of space — just buying toilet paper is a feat. Shouldn’t you have something to show for it?

A free app called Fetch Rewards will reward you with gift cards just for buying toilet paper and more than 250 other items at the grocery store.

Here’s how it works: After you’ve downloaded the app, just take a picture of your receipt showing you purchased an item from one of the brands listed in Fetch. For your efforts, you’ll earn gift cards to places like Amazon or Walmart.

You can download the free Fetch Rewards app here to start getting free gift cards. Over a million people already have, so they must be onto something…

4. Knock $540/Year From Your Car Insurance in Minutes

Car insurance is another thing you shouldn’t overpay for in 2021. When’s the last time you checked car insurance prices?

You should shop your options every six months or so — it could save you some serious money. Let’s be real, though. It’s probably not the first thing you think about when you wake up. But it doesn’t have to be.

A website called Insure.com makes it super easy to compare car insurance prices. All you have to do is enter your ZIP code and your age, and it’ll show you your options.

Using Insure.com, people have saved an average of $540 a year.

Yup. That could be $500 back in your pocket just for taking a few minutes to look at your options.

5. Stop Paying Your Credit Card Company

If things go south financially, the last thing you want to be saddled with is credit card debt. And the truth is, your credit card company doesn’t really care. It’s just getting rich by ripping you off with high interest rates. But a website called AmOne wants to help.

If you owe your credit card companies $50,000 or less, AmOne will match you with a low-interest loan you can use to pay off every single one of your balances.

The benefit? You’ll be left with one bill to pay each month. And because personal loans have lower interest rates (AmOne rates start at 3.49% APR), you’ll get out of debt that much faster. Plus: No credit card payment this month.

AmOne keeps your information confidential and secure, which is probably why after 20 years in business, it still has an A+ rating with the Better Business Bureau.

It takes two minutes to see if you qualify for up to $50,000 online. You do need to give AmOne a real phone number in order to qualify, but don’t worry — they won’t spam you with phone calls.

6. Cut Your Food Budget by Planning Ahead

Even if you’re gainfully employed and not in imminent danger of being evicted, you’re probably struggling with bills like most of us are. Groceries are a huge part of everyone’s budget these days, so they’re a big target for savings.

Try preparing for the week ahead with some meal planning. This goes beyond just making a shopping list. Real meal planning helps you save money because it helps you use what you buy, preventing food and money waste. It also prevents you from spending extra cash on emergency lunches or late-night takeout.

First, figure out how many meals you’re responsible for making every week. If it’s just you, your answer might be 21: seven breakfasts, lunches and dinners. If you have a family, count meals per person — a dinner for three people counts as three dinners, even if you all eat the same thing.

Now figure out how much food you’ll need to buy to make it until your next grocery trip. If you buy the same items repeatedly, you know which ones to stock up on when they go on sale. Stocking up on sale items also helps you freeze meals for the future. If there’s a way to buy in bulk and prep the foods you eat the most often, do it!

7. Add $225 to Your Wallet Just for Watching the News

It’s been a historic time for news, and we’re all constantly refreshing for the latest updates. You probably know more than one news-junkie who fancies themselves an expert in respiratory illness or a political mastermind.

And research companies want to pay you to keep watching. You could add up to $225 a month to your pocket by signing up for a free account with InboxDollars. They’ll present you with short news clips to choose from every day, then ask you a few questions about them.

You just have to answer honestly, and InboxDollars will continue to pay you every month. This might sound too good to be true, but it’s already paid its users more than $56 million.

It takes about one minute to sign up, and start getting paid to watch the news.

Mike Brassfield (mike@thepennyhoarder.com) is a senior writer at The Penny Hoarder. He’s got his game face on and is ready for 2021, come hell or high water.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

Source: thepennyhoarder.com

Credit 101: What Is Revolving Utilization?

Aerial view of a young woman with brown hair contemplating her revolving utilization. She has a pen in her mouth and an open notebook on her desk.

According to Experian, the average credit score in the United States was just over 700 in 2019. That’s considered a good credit score—and if you want a good credit score, you have to consider your revolving utilization. Revolving utilization measures the amount of revolving credit limits that you are currently using, and it accounts for a large portion of your credit score.

Find out more about what revolving utilization is, how to manage it, and how it impacts your credit score below.

What Is Revolving Credit?

To understand revolving utilization, you first have to understand revolving credit. Revolving credit accounts are those that have a “revolving” balance, such as credit cards.

When you are approved for a credit card, you are given a credit limit. If you have a credit card with a limit of $1,000 and you use it to buy $200 worth of goods, you now have a $200 balance and an $800 remaining credit limit.

Now, if you pay that $200, you again have $1,000 of open credit. If you pay $150, you have $950 of open credit. But your credit revolves between balance owed and how much open credit you have available to use. How much you have to pay each month—known as the minimum payment—depends on how much your balance owed is.

Other forms of revolving credit include lines of credit and home equity lines of credit. They work similar to credit cards.

What Isn’t Revolving Credit?

Unlike revolving credit, installment loans involve taking out a lump sum and paying it back in an agreed-upon fashion over a set term of months or years. Typically, you agree to pay a certain amount per month for a certain number of months to cover the amount you borrowed plus any interest.

With an installment loan, the amount of your monthly payment is determined by your loan agreement, not the balance due. Common types of installment loans include vehicle loans, personal loans, student loans, and mortgages.

What Is Revolving Utilization?

Revolving utilization, also known as “credit utilization” or your “debt-to-limit ratio,” relates only to revolving credit and isn’t a factor with installment loans. Utilization refers to how much of your credit balance you’re using at a given time.

Here’s how to determine your individual and overall credit utilization:

  1. Look at your credit reports and identify all of your revolving accounts. Each of these accounts has a credit limit (the most you can spend on that account) and a balance (how much you have spent).
  2. To calculate individual utilization percentage on an account, divide the balance by the credit limit, and multiply that number by 100.
    1. $500/$1,000 = 0.5
    2. 5*100 = 50%
  3. To calculate overall utilization (all revolving accounts), add up all of the credit limits (total credit limit) and all of the balances (total spent) on your revolving accounts. Divide the total balance by total credit limit, and multiply that number by 100.

If you have a credit card with a $1,000 credit limit and a balance of $500, your utilization rate is 50%, for example. For the same card, if you have a balance of $100, your utilization rate is 10%.

When it comes to your credit score, revolving utilization is typically calculated in total. For example:

  • You have one card with a limit of $1,000 and a balance of $500.
  • You have a second card with a limit of $4,000 and a balance of $400.
  • You have a third card with a limit of $3,000 and a balance of $600.
  • Your total credit limit across all three cards is $8,000.
  • Your total utilization across all three cards is $1,500.
  • Your revolving utilization is around 19%.

How Can You Reduce Revolving Utilization?

You can reduce revolving utilization in two ways. First, you can pay down your balances. The less you owe, the less your utilization will be.

Second, you can increase your credit limit. If you apply for a new credit card but don’t use it, you’ll have more open credit, and that can reduce your utilization. You might also be able to ask your credit card company to review your account for a credit increase if you’re an account holder in good standing.

Find the Right Credit Card for You

What Is Revolving Utilization’s Impact on Your Credit Score?

Your revolving utilization rate does impact your credit. It’s the second-largest factor in the calculation of your credit score. Your utilization rate accounts for around 30% of your score. The only factor more important is whether you make your payments on time.

Why is credit utilization so important to your score? Because to lenders, it can say a lot about you as a borrower.

If you’re currently maxed out on all your existing credit, you may be struggling to pay your debts. Or you might not be managing your debts in the most responsible fashion. Either way, lenders might see you as a riskier investment and be less inclined to approve you for loans or other credit.

How Do You Know If You Have a Revolving Utilization Problem?

Sign up for Credit.com’s free Credit Report Card. It provides a snapshot of your credit report and gives you a grade for each of the five areas that make up your score. That includes payment history, credit utilization, age of credit, credit mix, and inquiries. The credit report card makes it easy for you to see what might be negatively affecting your credit score.

You can also sign up for ExtraCredit, an exciting new product from Credit.com. With an ExtraCredit account, you get a look at 28 of your FICO scores from all three credit bureaus—plus exclusive discounts and cashback offers as well as other features—for less than $25 a month.

Sign Up Now

The post Credit 101: What Is Revolving Utilization? appeared first on Credit.com.

Source: credit.com

What Is The Average Credit Score In America? Find Out Where You Stack Up.

Credit score talk is all over the place these days, from online forums to the office break room. That’s because your credit score affects just about every aspect of your life: your ability to get…

The post What Is the Average Credit Score in America? Find out Where You Stack Up. appeared first on Crediful.

How To Freeze Your Credit After The Equifax Hack

Here’s how you can freeze your credit to avoid fraudulent activity. This is especially important after a hack like the one experienced by Equifax recently.

The post How To Freeze Your Credit After The Equifax Hack appeared first on Bible Money Matters and was written by Peter Anderson. Copyright © Bible Money Matters – please visit biblemoneymatters.com for more great content.

Source: biblemoneymatters.com

How to Get Approved for Credit in a Financial Downturn

In a recession it’s common for many people to rely on credit cards and loans to balance their finances. It’s the ultimate catch-22 since, during a recession, these financial products can be even harder to qualify for.

This holds true, according to historical data from the Federal Reserve Bank of St. Louis. It found that during the 2007 recession, loan growth at traditional banks decreased and remained deflated over the next four years. 

Credit can be a powerful tool to help you make ends meet and keep moving forward financially. Here’s what you can do if you’re struggling to access credit during a weak economy.

Lending becomes riskier in a weak economy. Does this mean you’re completely out of luck if you have bad credit? Not necessarily, but you might need to take the time to understand all of your alternatives.

How Does a Financial Downturn Affect Lending?

Giving someone a loan or approving them for a credit card carries a certain amount of risk for a lender. After all, there’s a chance you could stop making payments and the lender could lose all the funds you borrowed, especially with unsecured loans. 

For lenders, this concept is called, “delinquency”. They’re constantly trying to get their delinquency rate lower; in a booming economy, the delinquency rate at commercial banks is usually under 2%. 

Lending becomes riskier in a weak economy. There are all sorts of reasons a person might stop paying their loan or credit card bills. You might lose your job, or unexpected medical bills might demand more of your budget. Because lenders know the chances of anyone becoming delinquent are much higher in a weak economy, they tend to restrict their lending criteria so they’re only serving the lowest-risk borrowers. That can leave people with poor credit in a tough financial position.

Before approving you for a loan, lenders typically look at criteria such as:

  • Income stability 
  • Debt-to-income ratio
  • Credit score
  • Co-signers, if applicable
  • Down payment size (for loans, like a mortgage)

Does this mean you’re completely out of luck if you have bad credit? Not necessarily, but you might need to take the time to understand all of your alternatives.

5 Ways to Help Get Your Credit Application Approved 

Although every lender has different approval criteria, these strategies speak to typical commonalities across most lenders.

1. Pay Off Debt 

Paying off some of your debt might feel bold, but it can be helpful when it comes to an application for credit. Repaying your debt reduces your debt-to-income ratio, typically an important metric lenders look at for loans such as a mortgage. Also, paying off debt could help improve your credit utilization ratio, which is a measure of how much available credit you’re currently using right now. If you’re using most of the credit that’s available to you, that could indicate you don’t have enough cash on hand. 

Not sure what debt-to-income ratio to aim for? The Consumer Financial Protection Bureau suggests keeping yours no higher than 43%. 

2. Find a Cosigner

For those with poor credit, a trusted cosigner can make the difference between getting approved for credit or starting back at square one. 

When someone cosigns for your loan they’ll need to provide information on their income, employment and credit score — as if they were applying for the loan on their own. Ideally, their credit score and income should be higher than yours. This gives your lender enough confidence to write the loan knowing that, if you can’t make your payments, your cosigner is liable for the bill. 

Since your cosigner is legally responsible for your debt, their credit is negatively impacted if you stop making payments. For this reason, many people are wary of cosigning.

In a recession, it might be difficult to find someone with enough financial stability to cosign for you. If you go this route, have a candid conversation with your prospective cosigner in advance about expectations in the worst-case scenario. 

3. Raise Your Credit Score 

If your credit score just isn’t high enough to qualify for conventional credit you could take some time to focus on improving it. Raising your credit score might sound daunting, but it’s definitely possible. 

Here are some strategies you can pursue:

  • Report your rent payments. Rent payments aren’t typically included as part of the equation when calculating your credit score, but they can be. Some companies, like Rental Kharma, will report your timely rent payments to credit reporting agencies. Showing a history of positive payment can help improve your credit score. 
  • Make sure your credit report is updated. It’s not uncommon for your credit report to have mistakes in it that can artificially deflate your credit score. Request a free copy of your credit report every year, which you can do online through Experian Free Credit Report. If you find inaccuracies, disputing them could help improve your credit score. 
  • Bring all of your payments current. If you’ve fallen behind on any payments, bringing everything current is an important part of improving your credit score. If your lender or credit card company is reporting late payments a long history of this can damage your credit score. When possible speak to your creditor to work out a solution, before you anticipate being late on a payment.
  • Use a credit repair agency. If tackling your credit score is overwhelming you could opt to work with a reputable credit repair agency to help you get back on track. Be sure to compare credit repair agencies before moving forward with one. Companies that offer a free consultation and have a strong track record are ideal to work with.

Raising your credit isn’t an immediate solution — it’s not going to help you get a loan or qualify for a credit card tomorrow. However, making these changes now can start to add up over time. 

4. Find an Online Lender or Credit Union

Although traditional banks can be strict with their lending policies, some smaller lenders or credit unions offer some flexibility. For example, credit unions are authorized to provide Payday Loan Alternatives (PALs). These are small-dollar, short-term loans available to borrowers who’ve been a member of qualifying credit unions for at least a month.

Some online lenders might also have more relaxed criteria for writing loans in a weak economy. However, you should remember that if you have bad credit you’re likely considered a riskier applicant, which means a higher interest rate. Before signing for a line of credit, compare several lenders on the basis of your quoted APR — which includes any fees like an origination fee, your loan’s term, and any additional fees, such as late fees. 

5. Increase Your Down Payment

If you’re trying to apply for a mortgage or auto loan, increasing your down payment could help if you’re having a tough time getting approved. 

When you increase your down payment, you essentially decrease the size of your loan, and lower the lender’s risk. If you don’t have enough cash on hand to increase your down payment, this might mean opting for a less expensive car or home so that the lump sum down payment that you have covers a greater proportion of the purchase cost. 

Loans vs. Credit Cards: Differences in Credit Approval

Not all types of credit are created equal. Personal loans are considered installment credit and are repaid in fixed payments over a set period of time. Credit cards are considered revolving credit, you can keep borrowing to your approved limit as long as you make your minimum payments. 

When it comes to credit approvals, one benefit loans have over credit cards is that you might be able to get a secured loan. A secured loan means the lender has some piece of collateral they can recover from you should you stop making payments. 

The collateral could be your home, car or other valuable asset, like jewelry or equipment. Having that security might give the lender more flexibility in some situations because they know that, in the worst case scenario, they could sell the collateral item to recover their loss. 

The Bottom Line

Borrowing during a financial downturn can be difficult and it might not always be the answer to your situation. Adding to your debt load in a weak economy is a risk. For example, you could unexpectedly lose your job and not be able to pay your bills. Having an added monthly debt payment in your budget can add another challenge to your financial situation.

However, if you can afford to borrow funds during an economic recession, reduced interest rates in these situations can lessen the overall cost of borrowing.

These tips can help tidy your finances so you’re a more attractive borrower to lenders. There’s no guarantee your application will be accepted, but improving your finances now gives you a greater borrowing advantage in the future.

The post How to Get Approved for Credit in a Financial Downturn appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

What Do New FICO Changes Mean for Me?

Have you ever applied for a credit card, car loan or mortgage? If so, then one of the first things the lender looked at was your FICO score. It has a major impact not only on getting approved in the first place, but also on the interest rate you will receive after approval.

On August 7, FICO announced some pretty major changes in how they will be calculating that ever-important number. Before you can understand how the changes will or won’t impact you, you need to have a firm grasp of the basics.

What is my FICO score?

Your FICO score, or credit score, is a number ranging from 300-850 that shows lenders how reliable you will be in repaying your debts. A bad score is anything below 560, not very good is 560-659, good is 660-724, very good is 725-759, and anything above 760 is classified as great. While it is best to be in the great range, you can sometimes qualify for the best available interest rates with 720 or above.

In order to calculate your credit score, FICO pulls information from your credit reports from the three major reporting agencies: Experian, TransUnion, and Equifax. When banks and other lending institutions consider your application, they look at several factors. The first is usually your FICO score, which will either get you in the door or get it slammed in your face, but after that they consider other aspects of your finances, such as income and the detailed history on the credit report itself.

What are the changes, and how will they affect me?

There will be four notable changes to how FICO evaluates your credit score once the announced new model is released. Some of them will be very good for some people, some of them will be bad for others, and some of them may prove to show negligible changes.

The first, and biggest, is that medical debts will no longer be considered when calculating your score. This is a huge relief. Many otherwise fiscally responsible people go into massive debt when a medical emergency happens. Others don’t even know they owe money on medical bills in the first place, as they thought their insurance was going to cover their costs. When they realize they owe money, the responsible consumers pay it back, but it still leaves a scar on their credit report and, therefore, their FICO score.

With this new change, your FICO score will not be impacted. In fact, if you have no other negatives on your credit report (which would mean you most likely have a halfway decent score), you can expect to see your FICO score increase by up to 25 points.

Changes will also be made in considering debts that you have paid off. Currently, after you’ve paid off a debt, it stays on your credit report for seven years. That will continue to be the case after FICO’s updates go into effect, but FICO will no longer look at those debts, even though they show up on your credit report. If you have consumer debts that you have paid off, and they’re the only thing holding you back, you may see your score improve, as well.

There will also be an update to consider the creditworthiness of people who do not have an extensive report, taking into consideration things beyond just paying your month-to-month bills on time. (A lot of times, the people you are paying those bills to don’t even report that anyways.) Depending on how this is done, it could be a boon for those who are unable to get credit not because they are irresponsible, but simply because they have never chosen to borrow money before.

The final update is not good news for those who hold consumer debt. If you owe money and it isn’t paid in full, you can expect to see your credit score take a hit.

Hold your horses – and your enthusiasm.

While FICO has announced that it will make these changes, the new model has not gone into effect. It will not be ready to release to lenders until late 2014 or early 2015. Even then, banks have to choose to adopt it. Thismodel will be FICO 9. FICO 8 was introduced in 2009, and some lending institutions still have not updated since FICO 7. Just because they are releasing a new model doesn’t mean that your lending institution will apply it to their evaluation process.

Another thing to remember is that while your FICO score gets you in the door, banks will look at your credit report. All of those things FICO ignores will still show up. If your medical debts are deemed too oppressive for you to possibly be able to pay for a mortgage on top of them, you may still be denied. And while FICO will ignore debt that has been paid off and closed, it will still stay on that pesky credit report for seven years for all of your potential lenders to see.

While these changes could be a great way to get your foot in the door with lenders, they’re not a holy grail to your credit problems. The same tried and true wisdom will still apply: Spend responsibly, make sure the information on your credit report is accurate and pay off any debts as quickly as possible.

Femme Frugality is a personal finance blogger and freelance writer. You can find more of her writing on her blog, where she shares both factual articles and esoteric ruminations on money.

The post What Do New FICO Changes Mean for Me? appeared first on MintLife Blog.

Source: mint.intuit.com