By now many of us have heard how wise it is to request a free copy of our credit report once a year. It’s good advice. Keeping abreast of the information credit bureaus receive about how promptly and diligently you pay your bills can ensure there are no errors that might harm your credit score. Holders of CitiBank-branded consumer credit cards, however, can do much better than a once-a-year peek at the factors that influence their credit score.
First announced in 2014, Citi officially began making actual FICO Scores available online to holders of many of the bank’s credit cards. In doing so, Citi becomes one of the first major financial institutions in America to make the information that is used by lenders to determine whether or not they will offer a loan to a consumer readily available.
The information Citi provides to its cardholders won’t be stale. The FICO scores will be updated each month based on data from Equifax, one of the three major credit bureaus. Citi cardholders will also receive information about the two key factors that influence someone’s score. For instance, if the score is hurt by a late payment or by holding too high of a balance on one or more credit cards, that information will be provided.
The new Citi credit score feature also includes a graphic that will show a range of credit scores and what those numbers mean to potential lenders. For example, those who have a score of 579 or less will know that “lenders view you as a very risky borrower,” while anyone with a score of 800 and higher will understand that “lenders view you as an exceptional borrower.”
Making an up-to-date credit score available to its cardholders and providing context about the meaning of that score has won Citi praise from consumer advocates. “We are always pleased to see companies taking steps to empower consumers with information that helps them manage their credit wisely. Providing Citi credit customers with free access to the same FICO score often used to make lending decisions and insights into factors that impact their score gives consumers valuable tools to build a stronger financial future,” says Ken McEldowney, executive director of Consumer Action. “Consumer Action hopes it will soon be available to all credit card customers across the U.S.”
If you’re like millions of other Americans, you began 2015 with at least one resolution to better yourself. Nearly half of us routinely begin January with some sort of commitment to self-improvement, usually to lose weight or perhaps establish a new credit score. Making the resolution is the easy part. Research out of the University of Scranton in Pennsylvania, however, shows just how difficult it can be to maintain those good intentions.[pullquote_right] Fully a quarter of Americans don’t last one week with their new habits, and after six months just 46 percent of people maintain committed to their resolutions.[/pullquote_right] Overall, less than 10 percent are able to pull off a permanent change.
Still, just because you haven’t been able to transition from eating burgers to tofu doesn’t mean you can’t take other steps to make 2015 better than 2014. As a start, don’t give up on that resolution to establish a new credit score. Doing so will improve your overall financial health significantly by convincing mortgage and auto loan companies to offer you their best interest rates. Here are a few tips to make 2015 the year of your new and improved credit score.
Don’t run up that balance If you went on a spending spree over the holidays, now is the time to take a sober look at your credit card accounts and get to work paying them down. Thirty percent of the popular and widely-used FICO credit scores are determined by an analysis of how much you owe on those accounts. Ideal is a so-called credit utilization of just ten percent, which means that your balance is ten percent or less of the total credit available to you.
Always be on time Even more important than maintaining a modest credit utilization is simply paying your bills on time. Fully 35 percent of a FICO score is determined by your history of making timely payments on your bills.
Get out the magnifying glass Nobody is perfect, including the companies that compile the credit reports that are used to calculate credit scores. Take advantage of your right to view a free copy of your credit report and take the many hours required to sift through it to find
mistakes that might be harming your score. If you do find mistakes – like accounts that aren’t yours or charges you never made – dispute those errors with the credit reporting companies.
Minimize applying for new standard/prime credit cards Another red flag for credit reporting companies is when people apply for more credit. If you already have pretty good credit and credit cards that you can use, avoid generating any unnessecary credit score dings by holding off applying for any new credit cards.
Now, if your score is currently very low, or if you are trying to build a fresh new score, the tips are a bit different.
Tips for Building Low / New Credit Scores
Apply for store and department store credit cards These are typically easier to get than standard credit cards and do not require as high a credit score for approval. They can offer perks and discounts at your favorite stores and they will report to the credit bureaus.
Apply for a secured credit card These cards are also easier to get, although there are typically fees associated with secured credit cards. But, they can help to establish or build up a low credit score. And when you start using these cards, always pay on time. We offer a list of some of the top secured cards on this site. If you are in the market for one, check them out.
Whether you are in the market for the best mortgage rate you can find or trying to rebuild your credit, knowing your credit score and what is on your credit report is a very healthy exercise that will help improve your overall financial fitness.
This is an interesting item on the topic of nature vs nurture and how they may affect your spending habits. Although the study came out in 2013, it does not appear the information has changed. For those who are curious, read on.
Which affects your spending and borrowing habits more, nature or nurture? Does it matter? Well Dr. Hersh Shefrin, Chair in the Department of Finance at Santa Clara University’s Leavey School of Business seems to think so. In a recent paper for Chase Blueprint’sResource Center for Mindful Spending, Dr. Shefrin, takes a deeper look into the psychology of why we spend and borrow the way we do.[pullquote_right]…financial education has largely been ineffective in increasing our degree of financial literacy …[/pullquote_right]]
Some would argue it is due to a genetic predisposition, while others would say it is a matter of financial literacy. Well, you would be surprised to find it is actually a little of both. While nature and instincts play a part, a strategic, well-educated thought process (nurture), can override habits and knee-jerk reactions for instant gratification.
According to Dr. Shefrin, Traditional financial education has largely been ineffective in increasing our degree of financial literacy because traditional methods fail to take into consideration the importance of psychology and the knowledge of how our brains make decisions. A recent study showed those with financial literacy training fared no better on tests than those who did not take the class.
Dr. Shefrin suggests the key to better financial literacy would be a two-fold approach. First, identify what motivates us, then design programs aimed at helping develop and maintain strong spending and borrowing patterns. Some ways to do this would be by designing smart, nurturing programs that help people carry out the basics of managing spending and borrowing. Another way would be with the use of modern technology, such as personal financial management tools aimed at providing consumers with their spending data in a straight forward way. Finally, turning finances into fun with the use of games would go a long way to help instill better spending and borrowing habits in children, particularly during the K-12 years.
“There is a high cost to making bad financial decisions,” says Dr. Shefrin. To make real progress, we should harness innovations that can make it possible for people to overcome poor spending and borrowing habits.”
If you’re like millions of other Americans, you likely began 2015 with a handful of resolutions to improve your physical or financial health. Unfortunately, there are all too many predatory companies and scam artists who want to turn your commitment to better yourself into a quick profit for themselves. And just as you should steer clear of anyone shilling for a diet that has you eating only foods of a particular color, so too should you know how to avoid credit repair scams.
That is one of the New Year messages from Better Business Bureau (BBB) chapters from Illinois to Louisiana. As the BBB notes, the credit repair scams promise a quick-fix for the sort of credit woes that prevent people from either obtaining a mortgage or a car loan or instead compel them to pay a high interest rate for those loans. In exchange, these local and national companies vowing to provide a clean bill of credit health charge upfront fees as high as $250 – and sometimes follow those up with additional monthly charges as well.
How to avoid credit repair scams
As the BBB makes clear, these credit repair scams do nothing more than make already financially vulnerable people’s situations even worse. “No one can make bad credit scores simply disappear,” says a BBB statement. “After consumers pay these companies hundreds or even thousands of dollars in upfront fees, frequently these companies do nothing to improve your credit report and many simply vanish with your money.”
In fact, the Federal Trade Commission (FTC) lists the many signs of a credit repair scam that consumers should watch out for. At the top of the list is a request by so-called credit repair companies that you pay them before they will do any work on your behalf. This is illegal. Other signs of a credit repair scam include being told not to directly contact the credit reporting companies – including Experian, TransUnion and Equifax – that maintain credit reports and calculate credit scores. The FTC also advises avoiding any company that urges you to dispute information included in your credit report that you know is correct or tells you to provide false information on a credit application.
Things to Watch out for:
Free Things You Can Do to Improve Your Credit:
Company asks you to pay up front before any work is done
Being told not to directly contact the credit reporting companies: Experian, TransUnion and Equifax
Urges you to dispute information in your credit report
Tells you to provide false information on a credit application
Create a personal debt repayment plan and stick to it
Take advantage of the legal right to access and check your credit report for free once per year – go to www.annualcreditreport.com or call 1-877-322-8228 – you can get a copy of your report from each of the three reporting companies
Dispute any errors you find on your credit report
Truth is, improving credit doesn’t happen in a hurry. Instead, the BBB suggests devising a personal debt repayment plan and sticking to it and taking advantage of the legal right to access and check your credit report for free once every year. If you come across errors that are harming your credit, take the time to dispute them. “If your credit is less than golden, there are steps you can take to repair it on your own, at no cost,” says the FTC. “Only time and a personal debt repayment plan will improve your credit.”
The new FICO Score 9 is coming out this fall, and it looks very positive for many U.S. consumers. Once implemented and used by lenders, it should help many with poor credit or limited credit histories. Ultimately, this could mean better rates for consumers on loans and credit products such as credit cards.
Score Highlights
There are three main areas that will impact credit borrowers with poor and limited credit. Overall, this is good news for today’s consumer and is a more accurate reflection of the actual credit risk for lenders. The new FICO credit score is more nuanced than the earlier FICO Score 8, which was released in 2008.
Minimizing Medical Collections Impact
A sad figure to be sure, but, according to Experian, a credit reporting bureau, 64.3 million U.S. customers have credit reports currently impacted by medical collections. Of the 317 million Americans, this means that one in five has medical collections showing on their credit reports. Many people do not realize that past due medical bills can negatively impact their credit score, but they can, even the ones charged off to collections.
With advanced analytical systems and software at their disposal, Fair-Isaac, the company who generates the FICO score, will minimize the impact of medical collections on the score in the new system. Although the medical collection accounts will still impact the score negatively, but in FICO Score 9, the impact is minimized. This could mean a bump of around 25 points for many consumers.
So, good news fellow Americans! It’s about time we have some good news regarding medical bills. I will not get on a soapbox about the cost of medical care; we all know it is expensive – about twice as much as other similar countries, but at least in the new system, those large medical bills should be less damaging on credit scores.
Accounts in Collection: New Rules
Many people are not aware of how accounts in collections are treated and scored from their credit reports. Let’s just say that under the current scoring, if you pay off something in collections today, it will have a minimal positive impact to your FICO credit score. It seems like that debt just washes away, as it does for the consumer, but in credit scoring, not so much. It hangs around for six years, showing up on your credit report as a collection item, even if it is paid off.
Again, this is good news! In the new scoring system, paid off accounts in collection will no longer be viewed as in collection. At the very least, that will minimize a negative impact on your credit score, and in my eyes, that is a win for the consumer. This will be good on the collection side as well as it may very well result in additional money collected over time. But, don’t go paying off all those old accounts in collection right now, especially if you would decrease your payments on current accounts. Although the new score will be available, look below to find out more about when lenders will actually start giving credit based on these new scores.
Limited Credit History
In lender’s jargon, around the coffee pot, they describe someone with limited credit history as having a “thin credit file”. That makes sense, there is not much paperwork, so the file is thin. I get it. So, like with any decision, you always want the most information you can collect before pulling the trigger and making the call. A loan decision is no different. With limited information, it becomes harder to make the decision, and that is where this new system comes in nicely.
Right now, the current system measures in absolutes: a Yes or No answer. Was the bill paid on time? The answer is a simple Yes or No. They count how many times an account was paid late. In the new version, they will look deeper into the credit history where they will penalize 30 day delinquencies less than 60 or 90 day delinquencies. For those with minor blips on their young credit history, this will help their score. For lenders, they will have a better way to measure early trends in repayment with limited information. I love it; this means a win-win for everyone.
Consumer Benefits
Of course, it is better to have a higher score, but what will this mean in terms of loans and credit? Credit experts predict that the increase in credit score will show more in terms of better rates for credit rather than qualifying for more loans or credit. So, although it may not mean more “yes’s” for credit, it can lead to you paying less for borrowed money.
The Final Buzzer: Not a Slam Dunk
All this sounds great for the consumer on the way they are reviewing credit scores for the new FICO Score 9. That is excellent news and should help a lot of people. The good news is that positive changes are on the way.
Here is the not-so-good news. Although this new system is released this fall, the lenders still have to implement it. Lenders, banks, credit unions and all institutions providing loans, credit lines and cards have to update their systems to accommodate FICO 9, which is a cost to the lender. FICO 8 was introduced in 2008, and there are still a number of lenders using an earlier version with their systems. BestPrepaidDebitCards.com founder, Curtis Arnold says, “If the past is any indication, it may not take months, but years before it is implemented by a majority of lenders.” Ouch. That is not what I wanted to hear.
But, lenders are usually motivated to make more loans, so those lenders who could see more loans with these score improvements in their systems will be motivated to implement these system changes. If consumers find they are getting better rates from lenders with this new system, those lenders should enjoy a competitive advantage until others catch up. Hopefully, that encourages the overall industry to respond faster. At least, we can hope for that.
Thanks for the improvements, Fair-Isaac. Now, lenders it is up to you.
Readers, we would love to hear your thoughts on this. How do you think this will roll out, and who will start using this first?
Life outside the financial mainstream is getting the Hollywood treatment. On June 4th, the American Express-sponsored documentary, Spent: Looking for Change, which profiles the challenges and frustrations of those Americans who lack traditional bank accounts and credit cards, premiered in Los Angeles and online.
Executive produced by Davis Guggenheim, who won an Academy Award for An Inconvenient Truth, and directed by Derek Doneen, Spent is available for free on a variety of websites, including SpentMovie.com as well as on the American Express YouTube channel. Simultaneous to its online availability, a screening of the film and a question and answer session with Guggenheim and Doneen took place at the Hammer Museum in Los Angeles.
The wide availability and zero cost to access Spent is a sharp contrast to the families and individuals who are profiled in the film. Lacking access to checking accounts and other mainstream financial services, the Americans highlighted in Spent are forced to pay high fees – at check cashing and payday loan outlets, for instance – and wait in long lines to do simple tasks like pay bills and cash paychecks. American Express estimates that about 25 percent of American households are not well-served by the current financial system and that those families spend an average of 10 percent of income on fees – about the amount the typical American family spends on groceries.
The film is narrated by Tyler Perry, who grew up in poverty in New Orleans and spent time living in his car as he worked to launch his career in TV and film. “I know about this issue first-hand and how expensive it is to not be a part of the mainstream financial system,” he says. “Growing up the way I did, there was no education about how important it was to be financially responsible. That’s why I felt compelled to participate in this film – to help educate others and advocate for better options.”
As a sponsor of the film, American Express is eager to highlight what it believes are its own superior options for the millions of people outside the financial mainstream. In particular, American Express is now selling both its ultra low-fee prepaid card, Serve, and itschecking account alternative account, Bluebird, at Walmart and other chain retail stores nationwide. With low (and sometimes no) fees, both products provide those who are unbanked, or simply unhappy with the available options, a new choice.
The film is part of a larger effort by American Express to not only shed light on the problems with the current financial system but to also promote change – including the development of new technologies and products that inexpensively meet the financial needs of everyone. “With the debut of Spent: Looking for Change, we hope to spark a national dialogue about re-imagining financial services as we know it today,” says Dan Schulman, who heads up the American Express Enterprise Growth unit. “Change is possible and we believe financial exclusion is a solvable problem, but it’s going to take lots of people working together, raising awareness, and investing in initiatives that help to create better, more affordable financial solutions for everyone.”
