Credit scores often determine a person's ability to make major purchases like a home or car at favorable interest rates or to qualify for credit at all.
After a long delay, a revamped credit scoring system, FICO 08, will be introduced in late January, 2009 by the Transunion Credit Bureau, with Equifax and Experian to follow later in the year. The system offers a few advantages for consumers.
1. Collection accounts under $100 will be ignored in scoring.
2. A big problem like a chargeoff or repossession will have less of a negative impact on a consumer score than in the past so long as other accounts are in good standing.
3. The negative impact of authorized users on accounts will be minimized
Fair Issacs, who developed the system, predicts that it will be more accurate in predicting default than the prior credit scoring system, used in more than 75% of mortgage lending decisions and by 90% of the largest U.S. lenders.
The new system is even more sensitive to the amount of available credit a consumer uses. When banks reduce credit limits on home equity lines of credit and on personal and business credit cards - a recent trend - this will negatively affect scores. Ironically, closing accounts hurts the credit score as well, whether the consumers close them or the lender does so, even for inactivity.
To minimize the percentage of credit used on each card, customers might have to modify how they use the cards. Many customers use their cards for business or may even temporarily use a large amount of their limit on credit cards to earn reward points or airline miles. Credit bureaus don't give customers "atta-boys" for paying bills in full. Customers like this, with good payment records, can ask the bank to reconsider a limit cut or request an increase. If that doesn't work, their best line of defense is to use more than one card and try to keep their spending within 10-30% of the limit on each card.
Customers with less than stellar payment records have little recourse against limit cuts or interest rate increases. If the lender won't reverse his decision, the only recourse is for the customer to work on paying down the balance - while, of course, not adding new charges to the balance in order to reduce the debt to limit ratio.
One tactic that has helped consumers improve scores in the past has been to transfer revolving credit to installment loans with fixed payments that paid down your balance over time. The new scoring system is even more sensitive to the mix of credit the consumer maintains.
Staying on top of your credit score and then getting pre-qualified and pre-approved for a Denver home loan are the best ways to ways to insure that your move to a new home will be smooth. Contact us at the Bandy Home Team for more tips to prepare you for home ownership.
Marianne Bandy
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