The Fair Isaac Corporation, or FICO, has announced plans to develop a new scoring model that would benefit consumers whose credit file is thin or virtually nonexistent. Find out what the most important changes are and how you can use these changes to your advantage to continue building an excellent credit profile.
Who the new model is designed to help
Approximately 53 million Americans don’t have a credit score according to Fair Isaac and the proposed changes would specifically target consumers who don’t have access to traditional avenues for building credit. That includes people who don’t have a bank account and young adults who tend to shy away from using credit cards and don’t own a home.
The new model may also benefit people who have had previous experience with credit but are struggling to rebuild it after hitting a bump or two in the road. The goal of the program is to help identify those people who are creditworthy but for one reason or another just haven’t been able to establish a positive credit history.
Did you know? Because of variations in scoring models and how they’re used by lenders, it’s possible to have over 50 different FICO scores.
FICO to calculate on-time utility bill payments
Your FICO score is determined by five specific elements, with your payment history accounting for a 35 percent share of the total number. Up until now, the kinds of payments that affected your score were the ones related to a specific type of debt, such as student loans, credit card bills or a mortgage. When you’re late by 30 days or more on one of these debts, it shows up as a black mark on your credit history.
Since the new FICO model is geared towards people who may not actively be using credit, it takes into account a wider range of bill payments to generate a score. This includes things like cable, electric, water and cellphone bills. If you have any of these kinds of accounts in your name, your credit will reflect these payments with the new FICO version.
The upside to the change is that it’s going to be easier for you to establish and improve on your credit score — as long as you are diligent about paying bills on time. If you pay your utility bills late from time to time, that’s now going to count against you credit-wise, where it didn’t before.
Tip: If you have trouble keeping up with when your bills are due, download an app like Mint or BillMinder. Both apps allow you to set up alerts for when payment dates are coming up so you don’t have to worry about falling behind.
Moving history is now factored in
The other big change with the FICO scoring guidelines is that your moving history is taken into consideration. The logic is that living at the same address for an extended period of time is a mark of stability so if you’re moving around a lot, that could be a sign you’re more of a risk in terms of credit.
The change only looks at how long you lived at a particular address, not whether you’re paying your rent on time each month. Both Experian and TransUnion now include rental payment history on your credit but it’s up to your landlord to report it. If yours isn’t doing this yet, don’t be shy about asking them to. According to Experian, having rent payment information included on your credit could raise your score by 29 points on average.
Credit reporting is also set to improve
In addition to the FICO score updates, changes are also on the way for your credit report. Equifax, Experian and TransUnion have agreed to a settlement that would make it easier for consumers to correct errors on their credit reports and minimize the impact of certain debts. One of the most important stipulations the three agencies agreed to includes a provision that requires each of them to notify the other if a consumer has a mixed a file. This happens when your credit information is incorrectly combined with someone else’s, typically a family member.
Companies who furnish credit data to the three bureaus will no longer be allowed to add information about fines or tickets to your credit report. Going forward, all three bureaus will have to wait 180 days from the time a medical debt is reported to actually add it to your credit history so you have time to take care of any billing issues or arrange a payment plan.
If you’ve got a debt that’s in collection status, the debt collector must be able to provide the original creditor’s name and the details of the debt before it can show up on your credit report. Anyone who successfully disputes an item on their credit report can get a copy of their report for free from all three bureaus, in addition to the ones that are available through AnnualCreditReport.com.
Build credit now with a secured credit card
Secured credit cards require you to put down a cash deposit, which usually doubles as your credit line. These cards typically have limits that are set at a few hundred dollars, which is a good feature for 20-somethings who want to help their credit but don’t want to run up a lot of debt. If you make payments faithfully and keep your balance low, you should be able to convert it to an unsecured card at some point.
The biggest disadvantage to secured cards is that they tend to carry higher interest rates and fees than regular credit cards. If you don’t pay the balance off each month or the card has a high annual fee, you’re effectively paying a premium to establish credit. Comparing offers before handing and reviewing the terms and conditions lets you see what the cost is before you sign up.
Open a second chance checking account if you’re unbanked
If your credit suffered in the past because of a banking mistake, a second chance checking account can get you back on track. These accounts are designed for people who have been denied a regular account because of a negative mark on ChexSystems. That’s the credit reporting system banks use to identify risky customers.
Second chance accounts work the same as regular checking for the most part, although you’ll likely pay more in fees and be subject to stricter minimum balance requirements. The upside is that most banks allow you to switch to a regular account after you’ve been a customer for a set period of time. While having the account itself won’t help your score, establishing a good record with the bank could make it easier to qualify for other products that would, such as a credit card or line of credit.
Love or hate the new changes to the FICO scoring model? Let us know in the comments!