Are you one of the many Americans carrying a large amount of credit debt? In the past credit scores have played a large part in determining the interest rates or terms of a loan when someone is applying for a loan or credit card. However, with the new FICO 10 score model announced in January 2020, it may have a huge impact on your credit rating.
Since 2008 credit card debt has continued to rise substantially. At the end of last year, according to Make it, “the number landed at about 13.95 trillion average.” John Ulzheimer, a credit expert says, “this is bound to happen. The job of scoring models is to properly assess risk, not simply give people better scores as a default position.”
FICO built the new score model using scoring from the big three credit bureaus agencies (Experian, TransUnion, Equifax). The model will take effect by the end of 2020. In this new plan, certain criteria will affect scores, one being late payments and high debt that runs every month. Experts say it can lower score by as much as 20 points. The current credit suit had been consistent with no changes since 2014 when FICO released model 9. But this is the most meaningful change in many years. Although FICO 10 T is one variant that expands beyond old versions because it has a goal of giving lenders a more precise assessment of credit risk.
In the digital age, having a good credit resume is highly important. Intelligent technology allows for a more precise accounting of user’s activities online and offline. FICO wanted a model for lenders to get a better way of analyzing trending data on a potential borrower’s applications. The information would track history for twenty-four months; in this, it creates a picture of your financial situation over time.
In the FICO 10 scoring model, it focuses on the impact of late payments, causing a profound effect on the scoring results.
The new scoring model could potentially affect 110 million consumers. “Those consumers with recent delinquency or high utilization are likely going to see a downward shift and depending on the severity and recency of the delinquency it could be significant,” Dave Shellenberger, FICO vice president of product management, said in a statement.
Despite, however, the changes will not occur immediately, because credit scoring happens overtime. Plus, the lender or banks have the option of which model they chose to use when deciding on a borrower's status.
In the new models trending data will include your balances, minimum payment amounts, plus the amount paid over the past twenty-four months. The analysis shows who pays their debt each month from the ones who make just the monthly payment. Along with the other results, the data will also determine if the consumer is reducing the debt, maintaining or increasing over time. The factors are better in predicting credit risk. Most consumers will also see added benefits for paying off the debt, besides lower interest rates.
But don’t be fooled, delinquencies hurt more than just credit reports. If by chance someone is more than thirty days late on a payment the lender will generally report these late payments, which will harm your credit score.
One other area that may lower a FICO score is on personal loans. In the new model, a debt consolidation loan maybe even more beneficial than in the past, as certain high-risk consumers will be seen as a better credit risk. The focus is trying to stop consumers who use debt consolidation to pay off high-interest credit cards, then go right back and purchase high ticket items, increasing their newly paid debt.
According to FICO, “By adopting the FICO® Score 10 Suite, a lender could reduce the number of defaults in their portfolio by as much as ten percent among newly originated bankcards and nine percent among newly originated auto loans, compared to using FICO® Score 9. The reduction in defaults is even higher for newly originated mortgage loans, at 17 percent compared to the version of the FICO Score used in that industry. These improvements in predictive power can help lenders safely avoid unexpected credit risk and better control default rates, while making more competitive credit offers to more consumers.”
Credit experts, nonetheless suggest the best way to alleviate credit worry, is to practice good credit habits. “And while credit scores have been rising overall, FICO says almost half of U.S. adults either have low scores or no score whatsoever, so there’s still a lot of room for improvement,” said Ted Rossman, industry analyst at CreditCards.com.
A study done by CreditCards.com notices that young adults have the most challenging time establishing a solid credit resume. Many of them are in their 30s before gaining credit. In fact, 58% of millennials do not expect to be debt-free in their lifetime.
As the current world-wide health crises expands and possible financial hardships take place, paying bills on time might be difficult. If, however, you are not able to make the payments please contact the lender and make arrangements. It is better to ask for help then pay the long-lasting impact on your credit score.
Credit card companies in most cases have multiple options to help in a time of need. It can include, waiving fees, allowing for a delayed, or skipped payment. Below is some information the lender may ask.
· Your situation
· How much you can afford to pay
· When you’re likely to be able to restart regular payments
· In the case of mortgages, be prepared to discuss your income, expenses, and assets
If by chance the trouble belongs to making a car payment, the lender could offer options like changing the due date, requesting a payment plan on the late payment or asking for an extension. Sometimes, you may be able to refinance the loan to save money on interest and skip one to two payments.
On the chance you are late or having trouble with a student loan, your options are much broader. Just remember, the payments may be delayed the debt is not eliminated. Interest rates will continue to grow. You can find more info on federal student loans.
On Monday, March 2020 the FDIC encouraged financial institutions to prepare for Americans experiencing extreme hardships, due to the coronavirus pandemic. In response, to the request, the large banks including Chase, Wells Fargo, Capital One, Citi and US Bank have agreed to allow for emergency funding to support the failing economy; including credit line increase and heightened fraud security.
The uncertainty of the pandemic has forced many Americans to look at how they handle their finances. When a consumer is forced to spend money during a crisis, the best option is to aim for following the same rules and during normal times. It's best to start with a budget, figure out the maximum amount you’ll need to spend and then divide the total monthly budget into the number of months the amount will be increased. For example, if you spend $1,000 in purchases and your 0% interest period lasts for 12 months, you should prepare to pay $83.33 per month to pay it off before interest.
Yes, it may seem like a relief upfront to have more money, but in the long run, the debt will only increase. Ultimately, causing more harm than good at times. The last thing anyone needs in a time of emergency is higher debt. Be cautious and cut costs where possible, if you don’t need something right away, then wait until you can actually afford to pay cash, not credit.