What's New With......Credit Reports and Scores?
More data, more control
Far and away the biggest development in the area of credit reporting and credit scores so far in 2019 has been the introduction of a new program from Experian, and the announcement of another one from Fair Isaac Corporation. Both programs incorporate a broader array of metrics to give a clearer picture of a person’s default risk. Interestingly, the two companies are using the same “financial data access and insights “company, Finicity, to drive the new measures.
Experian’s new product is called “Boost.” It was launched nation-wide in March. For the Boost score, Experian couples payment history data from Finicity with its traditional scoring to come up with a new score, which is usually higher. This new data (utility and cable bill payment history as well as some banking information) is expected to help 100 million people become credit worthy, while also helping people with little to no credit history. According to Consumer Reports, early tests of the new system yielded the following results:
- Two-thirds of consumers saw an instant improvement to their FICO Score.
- Depending on credit tier, 10 -15 percent of consumers moved into a better score category.
- The average FICO Score increase was more than 10 points.
According to MarketWatch, Experian Boost will help with all commonly used credit scored (Fico 8, and 9 and VantageScore 3 and 4) but will only be reflected if the lender uses the Experian credit report (not TransUnion or Equifax). If you have frozen your Experian credit report, unfreeze it before applying for new credit if you want to take advantage of Boost.
Experian also partnered with both Fair Isaac Corporation (FICO) and Finicity to create the UltraFico score. UltraFico is being piloted now and should be launched sometime this summer. For this score, the consumers will voluntarily input information into their record about their banking history and activity. An average balance of $400 and no negative balances for three months will raise a person’s score by about 20 points. Some consumer advocates fear the UltraFico may hurt some people who currently have a good credit history/score but do not manage their bank accounts well, or conversely, that some who manage their bank accounts but aren’t able to handle debt might qualify for debt they can’t pay back.
There are several articles that discuss these measures. A Washington Post article also discusses a third new tool for the real estate/mortgage sector called Wayfinder from CreditXpert. A potential homeowner, working with their mortgage lender, would use the Wayfinder software to come up with a concrete, step-by-step plan to move their credit score from where it is to a target score within a certain time period in order to qualify for a better interest rate on their mortgage.
Why is Wayfinder important for those looking to boost their scores before buying a house? Because at this point, the two largest providers of home mortgages—Fannie Mae and Freddie Mac—will not be accepting either the Experian Boost or the UltraFico scores. This is why the real estate market was looking for its own “solution” to help potential homebuyers.
Among the numerous articles on these developments, a few stand out. FastCompany discusses the potential pros and cons of these new measures for the very vulnerable communities they are intended to help. Forbes gets into more detail with examples of which new score will be more helpful in a variety of circumstances. And USA Today gives some helpful examples.
For credit card newbies:
Getting a credit card with no credit history? US News and World Report gives some advice. Bottom line is that you have the best chance of success with student credit cards, secured credit cards, or Fin Tech alternative credit cards that rely on you having a bank account in good standing. Another article from US News goes further to explain how students can build credit. In addition to similar advice on getting a credit card, they also mention becoming an authorized user on someone else’s card (a parent/guardian), and using a rental payment service that will track and report their rent payments to the credit reporting agencies (RentTrack and PayYourRent.com).
For credit card users at all experience levels, this NPR podcast on Credit Card strategies might be worth a listen.
When is your credit score high enough? You really don’t need a credit score of 850. USA Today published a Nerd Wallet piece that discusses how people are actively working to increase their credit scores since they are able to see their scores for free provided by banks, credit card companies and some financial apps The national average FICO score is 700. (The average for the Vantage Score is 680.) Experts say that a score of 720 should earn you a good rate on a car loan, but for a mortgage, you will need a score of 760. What should you aim for? They suggest you can relax a bit once you hit 780.
Another Nerd Wallet article explains that people need to understand a bit more about these scores they are seeing for free. They should know if it is a FICO score or the Vantage Score (this is a competitor to FICO and growing.) They should also know which credit bureau supplied the report behind the score they are seeing.
A final Nerd Wallet article was timed well as I see many personal finance “experts” suggesting people go on “spending diets” or “spending fasts.” This article gives you reasons why, if you do decide to stop spending, you may want to cut up your credit cards, but you shouldn’t close your accounts. Cancelling a credit card reduces the denominator in your “credit utilization ratio,” which may therefore increase the ratio if you have carry balances on your other cards, and tank your credit score.
Credit scores and life events:
Student Loan Hero has a great piece explaining how student loans impact your credit score. Student loans are installment loans (starting balance with fixed payments over time). They work just like auto loans and mortgages, and are treated the same way. (The other type of debt is revolving credit—credit cards and such—where the balance varies over time.) Student debt balances don’t necessarily hurt your credit score as long as you are making your payments on time. Where they may have an impact is in the “debt utilization” ratio that is considered when you look to take out a mortgage.
Thirty five percent of Millennials would be comfortable talking about credit scores , salary and debt on their first date than older adults (18%), according to a survey by Bankrate.com. Check this story out if you are interested in finding out more results from the survey. (BTW, low credit scores are often the reason for saying no to a second date.) (WCCO Minneapolis)
MarketWatch had an interesting piece that outlined the relationship red flags associated with a low credit score (that were not about money.) Apparently there is a high correlation between having similar credit scores and successful relationships. Read the article to find out more and pull out some of the survey statistics. This could be a great conversation starter with your students.
You can follow up the discussion with this next article on financial infidelity and/or this one on how divorce ruins your credit score (Citizens Voice) to drive the point home that you need to find out while dating if you are financially compatible before taking the relationship further.
Finally, Yahoo Finance details why you still need to have a good credit score in retirement.
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