The Greek philosopher Diogenes once said, “There is nothing permanent except change” and this is true in the world of lending as it is in the rest of our lives. Lending is constantly changing, which means that the way we are scored needs to be updated periodically and in line with this here comes the latest – FICO Score 9.
Does the term “credit score” frighten you?
Even though you may be afraid of the term “credit score” it’s important that you know yours and how it affects your personal finances. Lenders generally look at credit scores as follows:
Between 700 and 850 – Very good or excellent credit score
Between 680 and 699 – Good credit score
Between 620 and 679 – Average or OK score
Between 580 and 619 – Low credit score
Between 500 and 579 – Poor credit score
Between 300 and 499 – Bad credit score
When you apply for any kind of credit, the first thing the lender will do is look at your credit score. As you can see from the ranges shown above, if you have a credit score of less than 580, the odds are that you will be turned down or, best case, charged a very high interest rate. If you don’t know your credit score it’s critical that you get it before you next apply for credit – or you could be in for a very unpleasant surprise.
What a credit score means
Credit scores are a three-digit representation of how creditworthy you are. Landlords, creditors and other creditors use it to decide if you should be given a credit card or a loan and how likely it is that you will repay the money. To put this another way, your credit score is a way for lenders to predict how risky you would be as a creditor.
Now comes FICO Score 9
While there are literally dozens of different credit scoring models, the first and most popular is the FICO score. It was developed by a company then called Fair Isaac Corporation as a way to simplify the whole credit granting process. Prior to FICO lenders were required to sit down and carefully analyze your credit report line by line. Plus, they had to review your reports from the three credit reporting bureaus because they could be and often were different. As you can imagine this was both tedious and time-consuming.
The updated model
The models for scoring created by FICO are considered to be the gold standard in terms of deciding consumer risk. Virtually all the credit granting businesses use them. For example, in 2013 alone lenders bought from FICO an amazing 10 billion scores to decide who would be granted loans or credit cards. However, things change over the years and FICO generally keeps creating new models to tackle these changes and do a better job of predicting how creditworthy a person would be. The newest in this long line of credit scoring models from FICO is FICO Score 9 and is to be released this summer.
Much the same as Score 8
FICO Score 9 will be much the same as FICO Score 8. However, FICO said in a recent press release that it will have better “predictive power” and will consist of a better representation of a person’s creditworthiness. Andrew Jennings, who is FICO’s chief analytic officer was quoted as saying, “Our innovative, multi-faceted modeling approach incorporates a more exhaustive characteristic selection process to build a score that is even more effective across a wide variety of situations.” To put this in simpler terms, FICO Score 9 is to do a better job than FICO Score 8 of predicting how risky you are.
As noted above, there are three credit bureaus that provide scores to both lenders and individuals. They are Experian, Equifax and TransUnion. One thing that has made it tough for lenders to get the maximum value out of the credit scores they purchase is that there is sometimes a wide variation between the three bureaus regarding an a person’s score. In fact, when a lender orders a credit report it is not uncommon that each bureau provides a somewhat different score. These inconsistencies can sometimes be quite large, which makes it confusing for both creditors and individuals. So, according to FICO one of the biggest improvements that will come with FICO Score 9 is that these differences will be less apparent, which will make it faster and easier for lenders to decide whether or not they want to issue credit to an individual.
Many new scoring models
This change coming from FICO is just one of the many new scoring models that are on their way. The new ones are expected to focus on individual industries. As an example of this, there will be different scoring systems between credit cards, auto loans and mortgages. This is due to the fact that lenders are searching for ways to grant credit to new customers while still adhering to a number of historically important guidelines.
Watch for more news
FICO will have more details about Score 9 as it comes closer to releasing it. You should pay close attention to this so you’ll know how you might or might not be affected by these changes and your ability to get new credit.
While it’s important for you to know your credit score it’s equally important for you to see your credit reports. The law entitles you to a free copy of each of your three reports once a year. You can choose to get them from each of the credit bureaus or altogether on the site www.annualcreditreport.com. People who are credit wise generally get one of their free credit reports every four months. This represents a way to kind of monitor your credit without having to pay a company to do it. Reviewing credit reports isn’t much fun but it’s important that you look over each one carefully. A study released last year by the FTC (Federal Trait Commission) showed that nearly 20% of us have credit reports that contain errors and that 5% of us have errors so serious they are affecting our credit scores.
What to look for
When you go over your credit report the negative items to look for include late payments, skipped payments, defaults, bankruptcies, charge offs, tax liens and collections. If you find any of these in one of your credit reports it’s important to make sure they are legitimate and not errors. If you do find errors you can dispute them with the appropriate credit bureau by writing a letter and enclosing whatever documentation you have to prove your claim. The credit bureau will then check with the institution that provided the negative item and ask that it be verified. In the event that the institution cannot verify or fails to respond within 30 days, the credit bureau must remove it from your credit report, which could lead to a nice boost in your credit score.
If you do need to dispute something in one of your credit reports, here’s a video on the right way to construct a dispute letter.
Your credit life is ruled by that little three-digit number called your credit score. It’s critical that you know your credit score especially before you apply for a big loan such as an auto loan or mortgage. You need to get and review your credit reports so that you can dispute any errors that could be affecting your credit score. And finally, be sure to watch for more information about FICO Score 9 so you will know how it might affect your credit score and your financial life.