We are all aware of how the credit crisis and recession has caused damage to some important nation economic indicators including home prices, stock market indexes and retail sales. They have also affected a lot of people’s credit score as well. This is due to layoffs, reduced credit lights and much tighter credit standards. All of this has caused consumers to take advantage of loan-modification programs and lenders to be more willing to negotiate problematic debt. In the mean time, FICO has also introduced a new scoring method which is known as FICO 08. This new scoring method can raise or lower your credit score by as much as 50 points.
Here is what you need to know about how today’s credit events can either help or harm your credit score. Some of these things may even surprise you, which is why it is important to know how to protect your credit rating in today’s economy.
Your Credit Limit Is Reduced By Your Card Issuer
This will not affect your credit as much as you might fear. In fact, studies have shown that there was little to no impact on credit scores for this. These same studies have actually shown that the median score for these people actually rose a few points. So, while you don’t have to worry about this too much, you will want to pay attention to it next time.
Rate Hikes Cause You to Close Your Credit Card
This can hurt you somewhat if you have a large credit line and a low balance because the scoring model no longer includes the vast, unused credit that you had from this account. However, if you still have a sizable balance on this account, the negative effect will be smaller. For this reason you should keep your account open and only use it sparingly, especially if this is your oldest account. The reason behind this is the fact that the scoring model only knows your earliest credit experience. So, since these closed accounts will eventually be dropped from your report, the length of your credit history isn’t going to be apparent and you could be hurt by this.
Paying Down or Paying Off Credit Balances
This is one of the most effective ways in which to improve your credit rating because it will help your score by reducing your total credit use. It is important to make sure that you don’t do away with all of your credit though because it is still important to show some activity. If you are trying to improve your credit score, then make sure to pay off your balance as soon as possible. You also need to remember that there can be a lag between the time when a lender cashes your check and when they report your payment to the credit bureau.
Getting a Mortgage Modification or Short-Selling Your Home
This will probably negatively affect your credit score but it depends upon how the lender reports the transaction. If you have a modified loan agreement, then your lender will agree to accept a lower amount of money than what you had originally agreed to repay. More than likely this will not damage your credit report if you already have other bad marks on your credit report. If this is your only issue and you get it marked as “paid as agreed,” then the scoring model will never even know about it. However, if a loan modification or short sale is reported as “partial payment,” “deferred payment” or “not paid as agreed,” then your credit score may suffer a lot of damage even if this is the only thing wrong. For this reason, you should always know for sure how this will be reported before entering into the special payment plan. Of course, if you really need the help, you should take the deal even if it will hurt your credit score because the impact this has will eventually fade.
Being Rejected For a Loan Several Times
This is only a small negative since the scoring model doesn’t know if you have been denied credit. All it will see is the prospective lender’s inquiries. However, if there are too many inquiries, this will be seen as risky credit-seeking behavior unless you are loan shopping and all inquiries are made within 14 to 30 days as these will be considered as just one inquiry. Nevertheless it is still a good idea to apply for credit so that you will know what the loan officer’s credit standards are as well as what your prospects for approval are. If it is questionable whether you will qualify, then you should find a more lenient lender to apply with instead.
Having a Sub Prime or Adjustable-Rate Mortgage on Your Credit Report
This won’t affect your score in any way because the underwriting terms of the loan, or anything that may expose you as a big risk, will not be given to the credit bureaus. They also won’t be figured into your FICO score. Nevertheless, you will want to continue making your mortgage payments. If at all possible, it would be a good idea to refinance to an adjustable rate mortgage and take advantage of the lower rates that are currently available on fixed loans.
Get Debt Relief from a Credit Counselor
Entering into a “partial payment agreement” with a debt relief firm will negatively affect your credit score since it will be reported to the credit bureaus. So, if you are struggling with your finances, try to get them back on track just as soon as possible. While your credit will take a hit at first here, it will gradually improve as you demonstrate that you are a responsible borrower. This is something that a credit counselor will be able to help you with. They can set up a five year repayment plan, with favorable terms, for you. Whenever you choose to go this route, make sure that you stick with a reputable, nonprofit agency that employs counselors who are both trained and certified. Make sure that the counselors are also members of either the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. You will also want to check on the agency’s standing with the Better Business Bureau.
Get a “Goodwill Correction” From a Lender
This is a positive thing since FICO doesn’t track any changes on your credit file. Therefore, if a creditor removes a negative item today, the scoring model will never know that it ever existed. So, it will never hurt to ask a lender to remove something that is negative from your credit report. You should definitely try it if it is the only black mark on your otherwise great credit report and you have a longstanding relationship with that creditor. Studies actually show that 50% of those who ask for a goodwill correction will actually get it. Since this is something that you can do for yourself, it can be done for free.
Paying Your Loans While Falling Behind On Other Bills
This will hurt your credit score because the FICO model doesn’t weigh the different types of delinquency any differently from one another. Here it is important to understand that even those bills that aren’t generally reported to the credit bureau may eventually show up on your credit report if it is sent to a collection agency. For this reason, you should never blow off any creditors. Instead, once you find that you are unable to manage all of your bills, make sure that you call the creditor before you are late so that you can make payment arrangements with them.
Adding an Explanation to Your Credit Report as to Why You’ve Defaulted
This will not have any impact whatsoever on your credit score since lenders don’t even bother looking at the special comments field on a person’s credit report. Since this information can’t be coded, the FICO 08 won’t look at this either. Even if your file gets flagged, the FICO model won’t adjust your score. However, if you happen to become a victim of identity theft, make sure that you immediately place a security freeze on your credit report with all three credit bureaus. You will also need to file a police report and then begin the process of removing any fraudulent information from your credit report.
Becoming an “Authorized User” On another Person’s Credit Card
If this is a scam, then there is no benefit. However if you are legitimately authorized to use your spouse’s account, there is some benefit. This is important to understand because the old FICO scoring model couldn’t tell the difference here. Thus you would get points for a good credit history regardless as to whether or not it was actually a scam. FICO 08 can discern this though so you don’t want to misrepresent your credit profile.
Singing Up For A Loan That Will Make Your Payments While Unemployed
This isn’t negative. In fact, it may actually be positive because loans that are covered by credit insurance aren’t reported to the credit bureaus. For this reason, the FICO scoring model isn’t going to penalize you as long as the safeguard kicks in and your bill gets paid on time. It will actually only see “paid on time,” which is a plus. So, if credit insurance makes you feel better, go for it as long as you don’t have to pay any extra for it. Just make sure that you read the fine print in order to be sure that the loopholes won’t give you a false sense of security.
Not Returning a Public Library Book Several Years Ago
This isn’t an issue because FICO 08 doesn’t even look at any collection items that are under $100. It is also more forgiving of any isolated, minor delinquencies that you may have. Nevertheless, you should still do your best to always return your library books on time.