Credit Score

The company that cooks up credit scores for millions of Americans is changing its recipe -- and that could affect how easily you get credit.

Fair Isaac Corp., creator of the popular FICO credit score used by most lenders, says its new scoring model will do a better job predicting the likelihood of a borrower defaulting on a loan.

For one thing, the new model, dubbed FICO 08, will be more forgiving of occasional slips by consumers, but will take a harder line on repeat offenders.

Fair Isaac predicts the its new system will help lenders reduce default rates on their consumer credit by 5 percent to 15 percent.

The rollout comes at a time when lenders say they are eager for more accurate measures of credit risk, in part because of rising loan defaults as subprime mortgages go bad and housing prices fall. And there are signs that delinquencies are creeping into other types of consumer debt, including auto loans, further prompting lenders to tighten up on credit.

The FICO score, which Fair Isaac says is used by 90 percent of the 100 largest banks, and similar scores hold sway over the lives of millions of people. Financial institutions use them to determine the granting and pricing of credit, insurance, cell phone use and, in some cases, employment and utility services.

Wikipedia says: "A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person, which is the likelihood that the person will pay his or her debts in a timely manner. A credit score is primarily based on credit report information, typically sourced from credit bureaus / credit reference agencies. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system."

From the NYT: "Credit Score Mistakes: People trying to repair their credit often operate from ignorance of how credit scores are determined. For them, the Simple Dollar (thesimpledollar.com) offers the “10 Common Tactical Mistakes When Dealing With The Credit Score Blues.” For instance, canceling old credit cards is not always a good idea, because the length of a person’s credit history is a big factor on a credit score. Also, the site advises, “if you have balances on other cards, canceling an old credit card can also worsen your debt ratio, which makes up 30 percent of your score.”"

From the My Money Blog:

I talk a lot about "hard" and "soft" credit pulls. I don't think I've ever actually seen these terms used by FICO officials, so it may be kind of confusing. Money geek slang, who knew? A credit check, also known as credit pull or credit inquiry, is (logically) when a third party wants to examine at your credit history.

A "soft" pull is one that does not affect your credit score. You can get 1,000 of these and it won't matter as they are not visible to other people checking your credit. These are often done without your knowledge as long as they have a "permissible purpose by law", and may include:

A new credit card issuer or mortgage company wanting to send you a "pre-approved" loan offer.

An existing card issuer (like Citibank) checking up on you periodically to make sure you haven't been going nuts and opening 37 other accounts.

An employer doing a background check before a job offer is extended.

You checking your own credit history and/or score.

A bank just verifying your identity when opening an account.

Conversely, a "hard" pull is one that does affect your credit. It is supposed to only happen when you give express permission to do so, usually when you are seeking some form of credit or insurance. It will lower your FICO score by about ~5 points temporarily for ~6 months (after which it will bounce back up), and will also be visible to future people checking your credit.

Whenever you apply for a credit card or a credit line, expect to have a hard credit inquiry. However, it has become more and more common for non-credit institutions, like banks and credit unions to perform a hard pull as well. Some will only do it if you ask for overdraft protection, which makes sense as it is basically a ~$500 line of credit combined with your checking account. Others will do it for any account opening at all. I was surprised and disappointed to see that Bank of America did a hard pull when I opened an new account with them.

Because each hard pull hurts your credit history temporarily a bit (with some exceptions), I am always very protective of my credit checks. I personally try to keep them down to about 4-5 within the last rolling six months. Probably due to this, credit card companies often feel they have to give people with above-average credit an incentive to apply for a new card. Notice how sub-prime credit cards never offer good deals?

The result? My new rule is to try to never settle for less than $100 for each hard pull, either through

Direct instant bonuses like $100 worth of gift cards, or

Cashback over time like with Citi's 6% percent cash back on gas, groceries, and drugstores (up to $1,000 a year), or

Interest earned from reinvesting free money from 0% balance transfer offers (more work, but can hundreds if not over a thousand dollars per card).

From Ron Lieber:

It's an exciting month for Bill Me Later, a new service that lets you shop online but pay for it (later, as the name suggests) with a check for any purchases that you make.

First came the Wall Street Journal story last week, touting the discounts and extended payment terms the company is offering through big retail partners this holiday shopping season. Apparently, the folks at Amazon are fans, because word got out this week that the retailer is taking a minority ownership stake in Bill Me Later.

Here's what's not so exciting for consumers who use Bill Me Later though: Doing so can damage their credit score.

It's hard to figure this out by reading the company's FAQ. At the moment, it says the the following:

Bill Me Later will review your credit report prior to opening your account. You must provide us permission to review your credit report when completing your request to become a Bill Me Later customer. Bill Me Later is a credit account that you can use to make purchases. Bill Me Later will review the current status of your account each time you make a purchase but your full credit report is not reviewed for every Bill Me Later purchase.

The average consumer will have little idea what this means. Some reviews hurt your credit score and some don't, and Bill Me Later doesn't explain which is which.

So here's an attempt at a translation, which I hereby suggest that Bill Me Later adopt.

Bill Me Later will review your credit report prior to opening your account. This review is what's known in the credit world as a "hard pull." Hard pulls happen when you apply for a new credit card too. Hard pulls have the potential to damage your credit score. You must give us permission to do this hard pull, or you can't use the service. Because we're billing you later, we're extending you credit. That's why we have to check your credit report ( just like a credit-card company would).

We'll also check your credit each time you make a purchase, but this will be something called a "soft pull," and soft pulls don't damage your credit score.

Is it unfair to pick on Bill Me Later for this, given that credit-card companies don't exactly make the whole credit-impact thing clear either? I don't think so. There's a general awareness among consumers that applying for and using a credit card has an impact on their credit report and credit score.

From the AJC:

Holiday shoppers will inevitably face this question in the coming days: "Would you like to save 10 percent today by opening a charge account with us?" Customers are easily tempted by an offer of a 10 percent discount, or interest-free financing for a year or more, especially when buying a big-ticket item.

But in the long run, credit experts say, that decision could cost more than it saves. Simply opening an account will lower your credit score, the three-digit number that credit bureaus use to rate virtually every consumer.

Credit scores affect a wide range of everyday transactions — from interest rates and the price of insurance to whether you can rent an apartment or get a discount on cellphone service.

Why does an extra charge account matter? "Statistically, you have become a slightly riskier borrower," said Craig Watts of Fair Isaac Corp., the Minneapolis-based company that developed the computer models used to calculate the scores. A consumer who has applied for credit six times or more within the last year is eight times more likely to declare bankruptcy than somebody who applied for no new accounts, Watts said.

From Fool.com:

I didn't fully realize how the crisis may have some meaningful ramifications for me -- and probably you. I gained a new perspective after reading a somewhat scary viewpoint on the recent subprime-lending crisis the other day, from Bill Hardekopf of lowcards.com.

Here are some points to ponder:

It may get harder to borrow money from your bank, whether for a car loan, home-equity loan, mortgage, or any other reason. Banks are likely to be fussier than before. If you just don't cut it with regular banks that charge reasonable rates, you might end up looking at other lenders offering less reasonable rates.

This might actually be a good thing: Hardekopf suspects that even new credit cards will be harder for some people to get. Apparently, in the United Kingdom, "half of all shoppers seeking new credit cards are being turned down. Those who are receiving offers are paying higher rates and fees."

It's going to be more important than ever to keep your credit record clean and your credit score high. Happily ensconced in your home, with no plans to refinance your mortgage in the immediate future, you might think you're out of the woods. But no, these days, our credit scores get looked over by all kinds of lenders, as well as potential employers and landlords, among others. It's an important influence on your financial life. If your score drops, your credit card rates, for example, might get raised. Lower scores mean higher mortgage rates, too. According to a recent issue of Money magazine, a FICO score of 760 would qualify you for a mortgage at an interest rate that's 4% less than someone with a 560 score.

Learn more
Be a smart credit user. Learn much more about credit by visiting our Credit Center, and check out the following articles:

Credit Cards' Travel Troubles

Credit Cards Can Pay You Thousands

The 8 Commandments of Credit

The Worst Credit Card Ever

Here's a report:

The credit bureaus Equifax, Experian, and TransUnion just switched to "VantageScore", a new system for rating credit. Now these agencies will likely give you a higher but not necessarily a better credit score. The FICO score is still the most commonly used credit scoring method. Credit counselor Henry Cameron says the vantage and FICO scores are calculated using the same criteria and can be managed using similar techniques. "The big difference is they came up with a grading score for the advantage 800-900 is an A and it goes all the way down to a A-B-D- and F." Most important is payment history, followed by amount outstanding debt, how many lines of credit a person has open and how many times you apply for credit.

From Kiplinger:

Your credit score reflects only your credit history, so your score will not include your wife's accounts. But her score will go up when she becomes a joint owner because her credit report will include your accounts' history.

To convert your individual accounts to joint accounts, you will have to fill out an application for each account you want to modify. The card issuer will scrutinize your wife's credit report (and perhaps yours), and you may be offered a higher interest rate or a lower credit limit depending on your combined histories.

Previously, adding a spouse or a child as an authorized user to your account was a quick way to raise that person's credit score. Such "piggybacking" on someone else's credit will not be possible when a new version of the FICO score is implemented next year.

Here's a report:

Credit score is the most important aspect for any borrower. There is a lot of misinformation on the Internet regarding what makes your credit score dip and what improves it. There are certain points that you should keep in mind so that your credit score does not pose any problem while taking a loan.

Credit score takes into account various parameters. The length of your credit history is very important. This is the reason that you should never close your accounts and open new ones. It will only make your credit history look younger than it actually is. Having too many accounts can also adversely affect your credit score.

Credit score also considers the amount of credit available to you and the amount that you are actually using. By closing your accounts, your credit availability shrinks resulting in a low credit score.

Some inquiries hurt your credit score while others do not. If you are applying for a new credit, an inquiry from the credit rating agency will hurt your score. However, ordering your own credit report does not in any way affect your credit score. Similarly, when credit car providers try to sell you their products and make mass inquiries, your credit score will not be affected.

StarTribune.com reports:

Canceling a credit card can hurt your credit score in a couple of ways. First, 30 percent of your credit score is attributed to the amount owed compared with the amount of outstanding credit. Therefore, you're better off from a credit standpoint if you owe $2,000 with a $20,000 limit as opposed to $2,000 on a $5,000 limit.

Canceling a credit card will reduce your outstanding credit limit and if the outstanding balance does not also decrease, your credit score can be negatively affected.

An additional 15 percent of your credit score is attributed to the length of your credit history. Maintaining a line of credit for 10 years is better than a credit line that has only been open for a year. Your new Citibank card may be considered the same credit line as the old store card. If this is the case, you might want to keep the Citibank card, depending on how long you've had the old card and your overall credit history.

If the accumulated balance on your current credit cards is greater than 50 percent of the overall limit and you plan to acquire new debt (home, auto, etc.) in the near future, it might make sense to keep the Citibank card. It doesn't make sense to take steps that could temporarily lower your credit score at a time when lenders may be trying to determine your creditworthiness. On the other hand, if you have a relatively small balance on your current cards, have no immediate intention of acquiring new debt and have an established credit history, it probably makes sense to go ahead and cancel the card.

From DallasNews.com:

Mortgage lenders aren't the only ones showing more interest in your credit score these days – the health industry is creating its own score to judge your ability to pay.

The new medFICO score, being designed with the help of credit industry giant Fair Isaac Corp., could debut as early as this summer in some hospitals. Healthcare Analytics, a Waltham, Mass., health technology firm, is developing the score. It is backed by funding from Fair Isaac, of Minneapolis; Dallas-based Tenet Healthcare Corp.; and venture capital firm North Bridge Venture Partners, also based in Waltham. Each kicked in $10 million for the project. The score is already raising questions from consumer advocacy groups that fear it will be checked before patients are treated. People with low medical credit scores could receive lower-quality care than those with a healthy medFICO, they argue.

Hospitals and other caregivers already can tap into regular credit scores – even without the patient's permission – but those are not necessarily a good indication of whether a patient will pay a medical bill, Mr. Farber says. Such credit scores are based on voluntary purchases, such as a car. Health care debt is largely involuntary.

From CBSNews.com:

The general subject here is "universal default." This means that if, say, you're late paying your electric bill, Visa can double the interest rate on your credit card even though your late payment had nothing to do with Visa. Anything that lowers your credit score, whether you know about it or not, can potentially change the interest rate on your credit card balance. But it's even worse than that! Not only can they double your interest rate if they feel like it, but the new interest rate applies retroactively to your existing balance, not just to any new debt. Your minimum payment of $500 can become a minimum payment of $1,000 overnight and there's nothing you can do about it. This is so patently unfair that most people can't believe it's legal the first time they hear about it. Even the subprime mortgage leeches never tried anything like this. But not only is it legal, it's common (read the fine print on your credit card contract someday). In an industry so rotten and corrupt that even Boss Tweed would blush to be part of it, universal default is by far the rottenest and most corrupt practice around.

I recommend these links about the credit score:

Credit Score