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Medical Collections
With the new changes, FICO has reduced the impact of medical collections on FICO scores by differentiating medical collection from non-medical collections, and even bypassing paid non-medical collection agency accounts. That means it will stop including in their calculations any record that shows a paid or settled collection account. FICO states that this change is expected to increase the median FICO score for consumers whose only derogatory references are unpaid medical collections 25%. This is a huge win for consumers.

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Benefits For Those With Limited Credit
The latest model will also measure a consumer’s payment history in degrees of risk rather than in absolutes, such as simply paid or not paid. Another improvement reflects a better analysis of reports with limited credit history, or thin files, as it is often called.

From FICO.com: “FICO Score 9 uses a more refined treatment of consumers with a limited credit history and those with accounts at collection agencies, so that lenders can grow their credit and loan portfolios more confidently,” said Jim Wehmann, executive vice president for Scores at FICO. “By applying innovative predictive modeling techniques on recent data to capture consumer credit behavior, FICO Score 9 will extend FICO’s leadership in providing the credit score that most accurately and fairly defines U.S. consumer credit risk.”

FICO has said their new FICO 9 Score will be available this fall and “will be the most consistent FICO Score across all three credit bureaus.” It is used by 90 precent of all U.S. consumer lending decisions, with 25 of the largest credit card issuers and 25 of the largest auto lenders. The only caveat is that it does take a while for a broad spectrum of lenders to adopt FICO’s updates. When they do, though, it is indeed going to improve the lending/borrowing world in the U.S.

References:
FICO.com website
Wall Street Journal article
Chicago Tribune Article

Additionally, credit advice for general purchases or buying a car can differ from home-financing tips, not to mention, your FICO score can vary, depending on who pulls it. A consumer-pulled score will likely differ from when a car dealer looks…which will probably be different than when a mortgage consultant pulls your credit score. It also matters which financial institution that’s looking at the credit history and the score. A store offering zero-down credit with their store card, for example, may not look as far back as a mortgage banker, or they may not look at medical collections the same way, either.

A lot is riding on your FICO score when you’re looking to buy a house. So, it benefits you to have a few tips to keep in mind if you’re considering a purchase in the future, near or far?

“Highlight” these 6 credit tips when you’re getting on the road to mortgage-ready credit.  Tweet This…

1 – Pay your payments on time, all the time. Whether you’re 6 months away from buying a house or 6 years, paying your bills on time is a big one. Late payments can negatively affect your credit score for years. Sometimes “things come up,” and a late payment just happens. Fortunately, some bills have grace periods. Make sure that if you’re going to be late on a payment, it’s one with a grace period. The ones without, should be paid first. Then make sure you pay the late ones as soon as possible. Again, late payments can have a major impact on your credit score. Payment history actually makes up about 35% of your FICO score.

2 – Don’t close credit accounts, yet. Paying down balances to zero is generally a great idea. However, don’t close that account just yet. Wait until you talk to a mortgage consultant about your FICO score in particular. A varied, seasoned credit history helps your score. That credit card you opened up your freshman year at college shows that you’re a long-term consumer. That helps. Don’t max it out, but keep it at about 30% of the limit or less. Keep it at zero, just make sure you use it occasionally. A long history with various lines of credit – credit card, car payment, insurance, cell phone bill – shows that you’re a “good borrower.”

3 – Keep an eye on your credit history. Checking your credit often is a great way to make sure no one is stealing your identity. You have the right to check your score with each of the major credit bureaus once a year. This means you can do it all at once, or each quarter check with a different bureau. Keep on top of fraudulent charges or other issues so you’re not surprised when a creditor pulls your FICO score. Preparation is vital.

4 – Don’t open line after line of credit. When you’re getting close to buying a home and you’re ready to get your mortgage pre-approval, it’s not a good idea to go buy a new car, motorcycle or a bunch of furniture on credit. Remember: your mortgage pre-approval is based on your current financial situation. If you change that drastically, your pre-approval could turn into a denial.

5 – Avoid major purchases. Even if it’s not on credit, a major purchase during your mortgage pre-approval time frame can sap your cash reserves. A vacation or new appliances might have to wait until after you close and move into the new house.

6 – Finally, try to avoid job changes. Whether it’s leaving your job, or a big change to your hours worked, changes in employment can sometimes have adverse effects on your home buying journey. If you worked a ton of overtime in the months leading up to your mortgage pre-approval, cutting way back on your hours before you close on the mortgage could affect your full, official approval. Keep things as even-keeled as you can.

One of the best things you can do as you consider launching your ship on a home-buying journey, is to talk to your local lender about mortgage pre-approval. Make sure you’re on the right track with your finances before you go house hunting. Tweet This…

Revolving Debt Ratio

Revolving debt ratio as applied to credit cards is simply the ratio of the amount which has been used (charged) on a particular credit card at the time of calculation to that card’s maximum available credit. For example: If you have a card with a $5000 credit limit and you have used $1000 on purchases, then your utilization ratio for that card at that current time is 20% ( $1000/$5000 = .20 , or 20%). This would apply to business lines of credit and home equity lines of credit the same way. Tweet This Example

Why is this important, you might ask? FICO has said on their website that revolving debt ratio is one of the factors it considers in calculating your score, and can account for up to 30% of your FICO score calculation. The the lower the ratio, the better one’s score is, and the opposite is true, of course, the higher the ratio, the lower one’s score. The common phrase “maxed out” comes to mind. When credit cards are maxed out, that means all available credit has been used and a 100% utilization ratio has been reached. FICO “penalizes” consumers for maxing out because it shows they possibly rely on borrowing too much (or are in too much debt), and/or may not be the best credit and debt managers.

FICO does consider other aspects of credit utilization ratio on your credit profile to some degree, like how many accounts have balances, and even installment loan utilization ratio, but revolving debt ratio is by far the most important and easiest to influence when trying to optimize your credit score.

Clear as mud? Please feel free to ask us any questions you may have on this subject.

Has this been helpful? Please feel free to comment or share on social media. We like helping people.

Tweetable Takeaways Include:

STOP, BEFORE YOU DO THAT!

Here are some actions to avoid if your goal is to improve your credit.

1. Keeping a Running Balance

It’s a common misconception that carrying a balance on your revolving credit like credit cards will help your credit scores. (Tweet This) Many well meaning people tout that FICO likes to see a running balance on your credit card account and will “give” you more points toward your score if they see a balance at the time of score calculations. It’s a myth. Proponents of this thinking go like this: The purpose of credit cards is to buy things on credit (meaning borrowed money). It’s the convenience of buying something now, and paying later. Credit card issuers make their money on the interest they charge for you to use their money, so to speak, and they don’t start charging interests unless a balance is carried over from one reporting period to the next. Makes sense for the bank to hope you carry a balance. If a cardholder pays their balance off each month, the bank does not make any money. Likewise, say these myth propagators, FICO does too, and rewards you for carrying a balance. Read my lips: IT’S WRONG.

For scoring purposes, it’s different. FICO is not concerned if there is a balance, per se, but rather, they ARE concerned with your utilization ratio – how much you use compared with your credit limit. The less it shows you have used of your available credit when they take a snapshot of your credit activity, the less the ratio is and the better it looks to their score algorithm, thus, a higher score. Understanding revolving debt ratio is important to understand because it contributes to as much as 30% of your FICO score.

Tweet Tweet!   It’s Important to understand that as much as 30% of your FICO score comes from revolving debt ratio.

Running a balance in order to raise your score has the added risk that you will use more and more of your available credit, and coupled with interest charges, just puts you more in debt.

2. Buying Unnecessary, Often Large, Items on Installment

We all know that you have to have credit to get credit, and, therefore, must use credit, but one of the biggest mistakes we make when using credit and especially for the purpose of building good credit is to succumb to the “buy now, pay later” temptation and buy things we don’t really need now, on a type of credit called installment loans. Installment loans as a loan type are the least important type of credit for building your credit score. It only contributes toward 10% of your score, and even then, not directly but only as a part of what FICO calls one’s mix of credit. Additionally, it increases your indebtedness for the entire length of the loan term. Don’t go out and buy that large screen T.V., or car, or new living room furniture on installment if you can wait, and especially if you are in a credit building phase.

3. Closing Old Accounts

There are finance “gurus” preaching that the best thing to do is just pay cash for everything and forget about credit saying, “if you can’t afford to pay cash you don’t need it”, and then commence to advise their listeners to cut up their credit cards. This advise sounds good on the surface and in theory would be nice, but it is short-sighted, and forgets that even if the only thing you ever do on credit is get a mortgage to buy a home, you have to have credit to get credit – not to mention mortgage lenders like to see 2-5 open trade lines for mortgage approval. Since FICO considers the length of credit history as one of the determining factors in calculating your score, don’t indiscriminately go on a card-closing-frenzy.

Tweet Tweet!   FICO considers the length of credit history when calculating your score. Don’t go on a credit-card-cutting frenzy.

Wells Fargo, then and now is a leader in the mortgage lending world, and is again leading the way, testing the waters of subprime mortgages, except this time with caution and armed with lessons learned from the past. Below is an excerpt from an article going into more depth.

Excerpt from an article at Credit.com

“Wells Fargo is once again setting sail on subprime mortgage waters, despite how choppy they were several years ago. The bank will consider mortgage applicants with credit scores as low as 600, announced Franklin Codel, a Wells Fargo mortgage executive. Previously, the minimum was 640, and this change applies to purchase mortgages to be guaranteed by the Federal Housing Administration.”

Read full article here…

This could be a good thing for the lagging real estate industry which has been trying to “recover” from the fall out of the mortgage and credit crisis of 2006 -2008. What do you think, is it a good move to lower credit score requirements for buying a home? Is it too soon? Will it stimulate home buying, or is the economy still too fragile?

If you currently have low credit scores, you may be wondering if you should pay money to improve your credit score. Well, I’ll let you in on a little secret: if you ever get any kind of loan, you will make your money back many times over!

The reason is simple. Creditors of all kinds will charge you more – sometimes much more – to borrow money if you have a low or even a fair credit score.

Having a 720 credit score instead of a 640 score could save you thousands or even tens of thousands of dollars. Yes, it may seem unfair, but that’s the reality of the lending world.

As someone who has 12 years of experience in the lending world as a loan officer and manager, and now the editor of MyMortgageInsider.com, I could tell you countless stories of how people have saved tons of money by having great credit.

Let’s look at an example, taken straight from today’s rate sheets: Someone with a 720 score could get a $200,000 loan with a principal and interest payment of $1013 per month and a rate of 4.5% (4.652% APR)*.

The same person with a 640 score would pay $1073 per month and have a 5.0% interest rate (5.155% APR)*. The borrower with a 640 score would pay an extra $60 per month and an additional $21,700 in interest over the life of the loan!

How does that fee for credit repair services look now? Pretty low?

The bottom line is this: lenders want to see that you are a low-risk borrower. And it all comes down to the three little numbers on your credit report. The higher those numbers, the less you will pay for credit.

And a home mortgage is just scratching the surface when it comes to the money you’ll save by having a good credit score. Some other things you’ll save money on are:

Car insurance
Homeowner’s insurance
Renter’s insurance
Auto loans
Credit cards

Heck, many employers look at your credit reports when you’re applying for a job these days, and some may even look at your credit scores! What if your bad credit cost you a great job? Reference NYTimes article on this subject.

When you add up all the money you could save and make over your lifetime by having a great credit score, the dollar amount could easily be six figures or more. This is no exaggeration.

Yes, it may seem like a lot of work to build, improve, and maintain your credit score. It takes a lot of discipline. But it’s that discipline that lenders are looking for. It proves you are a worthy candidate and will pay back the loan according to the terms you agreed to.

So if you can get help from an expert to improve your credit score, take that opportunity despite the time, cost and effort. You will get huge returns on your investment – more than you probably ever expected.

*Payment does not include taxes, insurance, or HOA dues. Rates are as of 9/10/13. Purchase price $250,000, loan amount $200,000, property in WA. Scenarios are 30 year fixed conventional loans.

• Having a 720 credit score instead of a 640 score could save you thousands or even tens of thousands of dollars. (Click to tweet)
• Lenders want to see that you are a low-risk borrower. And it all comes down to the three little numbers on your credit report. (Click to tweet)
• Most employers look at your credit reports when you’re applying for a job these days! (Click to tweet)

Free credit Reports! Hhhmmm… really?


The above quote is what someone who called in from our website said almost word-for-word. Unfortunately, she is right. There is no free lunch, as they say. The sites she mentioned, and many more, are not really free, even if the word “free” is displayed somewhere. Furthermore, it is not always clear what you are getting. Creditkarma.com, for example, gives the impression you are getting your credit scores and reports, but in reality they have their own “credit management” platform that does not include your real credit report, only partial information pulled from it. In my opinion, it is this small word free coupled with credit reports or credit scores that throws people off because they have heard that you can get your credit reports somewhere for free. There is only one place where your credit report is 100% free, with no bait and switch, or “small print”, or a catch. More on this in a moment.

Here’s how they work:
Except for sites like creditkarma.com, here’s how most of them work. First, in various catch phrases and combinations of products offered (read each carefully), they tout in big print that you get credit scores and/or credit reports from all three credit reporting agencies, Transunion, Equifax and Experian , with call to action buttons saying things like “Try it Free”, or “Get Started Now” and “Click Here to Start”. However, usually in small print, they state it is a free trial for 7 or 14 days. At the end of the free trial you are immediately transformed into a monthly credit monitoring customer, which costs between $14.95 and $29.95 per month, depending on the company. The ones that only give a 7 day trial are particularly tricky. Your reports aren’t usually available for 3-4 days due to “processing”, which gives you 3 days to view it. There hope is that you will “accidentally” pass the 7 day mark without cancelling the trial. As a rule, it is my opinion to avoid the 7-day offers. If you don’t cancel within the 7 days, they immediately charge you their monitoring fee. Additionally, needless to say, it is not always easy to cancel.

Tip:  Some offer a printer-friendly version. if you print it out immediately,         and make sure to call to cancel, then, depending on the site’s offer, you         could actually get a free credit report.


Credit Karma is truly free, but you don’t really get all your reports and scores, only ONE score, as mentioned above, and their proprietary credit management platform. Credit Karma is, in my opinion as a credit consultant, useless, and useless translates in my book as a gimmick, of sorts, because customers think they are getting something useful. (Update 6/14/15: Since the writing of this original post, Credit Karma now offers scores and reports for two of the big three credit reporting agencies, Equifax and Transunion. They still don’t offer information from Experian. Keep in mind that the scores they provide are NOT your FICO scores).

The ONLY place you get a free credit report without pitfalls to avoid, and hoops to jump through is AnnualCreditReport.com. The Fair Credit Reporting Act (FCRA) requires the there major credit bureaus to provide one free credit report per year. You can get one at a time each quarter, or all three at once, once each year. Keep in mind, though, that this does not include scores, FICO nor VantageScores. Go here for a comparison of the FICO Score and Vantage Score. Most lenders use FICO, especially mortgage lenders.

Our favorite paid site is Privacyguard.com and instructions for pulling your credit so that we can give you a free credit report evaluation can be found here. You get all three full reports, and all three VantageScore credit scores. Privacyguard.com gives you a 14-day trial for free, and then only costs $19.95 per month for monitoring. Monthly monitoring is not necessary all the time, but we do recommend it if you are in credit repair and re-building phases, or looking to do something requiring credit in the near future. (We are NOT affiliated with privacyguard.com)

Has this been helpful? Please feel free to commment or share on social media. We like helping people.

Tweetable Takeaways Include:

• There is only one place where your credit report is 100% free, with no bait and switch, or small print (Click to tweet)
• The Fair Credit Reporting Act (FCRA) requires the three major credit bureaus to provide one free credit report per year. (Click to tweet)
• Most lenders use FICO (credit scores), especially mortgage lenders. (click to tweet)

There are many reasons, but here are a few:

• Convenience. debit cards fit nicely in my wallet.
• No more “No checks allowed” signs to get in the way. Debit cards are accepted everywhere.
• You get the convenience of a credit card without the debt.
• You get a record of all your expenditures for budgeting and reconciling purposes.
• You can use it for online purchases like a credit card.
• If it gets lost or stolen it is easy to freeze it, or cancel it and get a new one.
• My favorite, many banks offer rewards for using them.

Most, if not all, banks now offer debit cards to use with your current account at that bank. It is, basically, an extension of your account, like checks. However, not all debit cards are created equal, and, like many of my clients in credit repair and debt reduction plans, not everyone can open a standard checking account at their local bank down the street due to low credit scores. (banks do check credit before opening a new account). Problem solved! The debit card I use myself and recommend to everyone is Perk Street Financial Debit Card.

I recommend all my clients in Upgrade My Credit’s credit repair and transformation program to use Perk Street Financial Debit Card, especially if they don’t already use one. There is no credit check, for one thing. And zero fees – not even checking account maintenance fees. Nada! (click here for FAQ on fees).

To see all the wonderful benefits of using their card Click for Perk Street Debit Card >>

By far, the best part of PerkStreet Awards Debit Card is the rewards and perks. They pay you to use it.


Image from their website

Check it out and let me know what you think. Do you already use their debt card? Please share in comments below.


By Blair Warner – Credit Transformation Coach