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A Whole New Credit Score Is Coming—Are You Prepared?

February 22, 2019

Chances are good you know all about  your credit score. Also called a FICO score, this magical number is a major factor in many financial transactions, including qualifying for a mortgage and renting apartments.

Yet here’s some info that may have slipped past your news feed: In October 2018, the Fair Isaac Corp. (the creators of FICO) announced a whole new scoring method called the UltraFICO. Currently in beta testing with a small, undisclosed group of lenders, this new scoring method is expected to be more widely released in April 2019.

So, what is this exciting new scoring model? Will it help? Will it hurt? Here’s what you need to know.

FICO vs. UltraFICO: What’s the difference?

Your traditional FICO score looks only at the money you borrow from lenders (e.g., through credit cards, and car and college loans). FICO scores generally do not factor in any traditional bank accounts, be it checking or savings.

The UltraFICO, in contrast, does look at your banking behavior, adding it to the mix along with more traditional metrics like your credit card payments. UltraFICO examines your checking, savings, and/or money market accounts (which are similar to savings accounts but offer a higher interest rate in exchange for maintaining a higher balance), and reports on details such as the following:

  • Your account history: How long have you had these accounts? The longer the better.
  • Your account balance: According to the UltraFICO website, it’s looking for “a healthy average balance.” It doesn’t spell out exactly what that means, but it suggests that consumers with a balance of at least $400 over a three-month period should fare well with this new scoring system.
  • Your account activity: Do you regularly pay your bills through your bank account? If you don’t, you may want to start, since that will be considered, too, particularly how often you pay your recurring bills (e.g., cellphone and utility bills), according to Nathan Danus, director of housing at DebtHelper.com in West Palm Beach, FL.

If you show “responsible financial behavior” in these accounts, this could improve your credit score. If you have imperfect credit or no credit but you have a positive banking history, your score may see a nice boost.

“If you have even a few hundred dollars in your account, and if you haven’t bounced checks or gone under the minimum balances, that will now count in your favor,” says Howard Dvorkin, a certified public accountant in Fort Lauderdale, FL.

Will UltraFICO replace FICO?

No. “Most banks and lenders are going to use it initially as a backup scoring model,” says Danus.

The way it will likely work, according to Danus, is that when you apply for a loan or mortgage, if your regular FICO score isn’t high enough to qualify you, the lender may ask for your UltraFICO.

The UltraFICO is also voluntary. You don’t have to volunteer your banking information with a prospective lender for review unless you want to. This is a major difference from your FICO score, which is calculated whether you like it or not.

Who will benefit from UltraFICO scores

Building a credit history takes time. If you have little or no credit history but do have a banking history, you may be able to generate an UltraFICO score even if you don’t have enough of a credit history to generate a FICO score.

As such, the UltraFICO has a lot of potential, especially for consumers with borderline credit (meaning you’re at the cutoff between having poor and fair credit or between having fair and good credit) or who have a limited credit history. FICO estimates that over 15 million consumers who don’t have a FICO score could receive an UltraFICO score.

If you already have a good FICO score, then you probably don’t need to worry about the UltraFICO. Whether the UltraFICO will help you depends on your banking history.

“If the consumer finds themselves among the 60% of Americans who have very little to no savings funds, the UltraFICO will likely not help build their credit rating,” says Todd Christensen, education manager at Money Fit by DRS in Boise, ID.

Consumers who don’t have a recent pattern of positive savings may not want to opt in to the UltraFICO, according to Christensen.

How to prepare

The UltraFICO is currently in beta testing. Ultimately whether the program is expanded depends on how well it does for consumers as well as lenders, according to Danus.

If everything goes well, consumers may soon see this option available with lenders in April. And there’s a way to prepare: Start building up your savings now, so that if you have the chance to opt in, you’ll have a positive banking history for lenders to review.

Ultimately, though, don’t let the UltraFICO distract you from taking steps to improve your FICO credit score. It’s still important to make on-time payments to lenders, to pay down your credit balances, and to make payments arrangements if you have any delinquent accounts.

The post A Whole New Credit Score Is Coming—Are You Prepared? appeared first on Real Estate News & Insights | realtor.com®.

How Long Does It Take to Improve Your Credit Score Enough to Buy a Home?

November 29, 2018

How long does it take to improve your credit score? If you’re hoping to buy a home, having a good credit score is key, since it helps you qualify for a mortgage. So if your credit score is low, knowing how long it takes to raise it to home-buying range can help you plan.

While raising a credit score can’t happen overnight, it is possible to raise your credit score within one to two months. However, it could take longer, depending on what’s dragging down your score—and how you handle it. Here’s what you need to know.

How long does it take to raise a credit score?

First off, what’s considered a good score versus a poor one? Here are some general parameters:

  • Perfect credit score: 850
  • Excellent score: 760-849
  • Good credit score: 700 to 759
  • Fair score: 650 to 699
  • Low score: 650 and below

 

While it varies by area and type of loan, generally lenders will look for a score of 660 or higher to grant a mortgage (here’s more on the minimum credit score you need for a home loan).

If you’re looking to boost your credit score fast, here are some actions you can take.

Correct errors on your credit report

Correcting errors on your credit report is a relatively quick way to improve your credit score. If it’s a simple identity error—like a credit card that’s not yours showing up—you can get that corrected within one to two months.

If it’s an error on one of your accounts, though, it could take longer, because you need to involve your creditor as well as the credit bureau. The entire process typically takes 30 to 90 days. If there’s a lot of back-and-forth between you, the credit bureau, and your creditor, it could take longer.

The first step to correcting errors is to get a copy of your credit reports from TransUnion, Equifax, and Experian (the three major credit bureaus), which you can do at no cost once a year at annualcreditreport.com. Next, review them for errors. If it’s an error on one of your accounts, you must refute that error with the bureau by providing documentation arguing otherwise. For example, if you paid a credit card on time and the card issuer is reporting a late payment, find a bank statement showing that you paid on time.

Credit bureaus typically have 30 days to investigate the error. If they agree that it’s an error, they will remove the item. The credit bureau may also ask for additional information or ask you to discuss the information with the creditor involved. If that’s the case, stay on top of communications with your creditor so you can get things resolved as quickly as possible.

Deal with delinquent accounts

Bringing delinquent accounts current and settling accounts that are in collections can also boost your score fairly quickly. Once the creditor or collection agency reports your account update, you should see a positive bump in your score. Keep in mind, though, that your late payment history will remain on your credit report for seven years.

If you have bad accounts that have been on your report for six years or more, you may not want to worry about settling them or bringing them up to date. This can re-age the account, and if you fall behind again, it will stay on your credit report for another seven years.

“Make sure you don’t re-age these accounts, because they’re going to drop off soon,” says Nathan Danus, CDMP and Director of Housing and Community Development at DebtHelper in West Palm Beach, FL. Negative information typically “falls off” your credit report after seven years, so if you’re close, it’s best to just wait it out.

Lower your credit utilization

Credit utilization refers to how much you owe compared with the amount of credit you have available. For example, if you have a $10,000 credit limit across all your credit cards and you have balances totaling $9,000, you’ve utilized 90% of your credit. This drags down your credit score.

“What these consumers often need to do is pay down the balances on their existing credit accounts, which can be a challenge if they’ve allowed the balances to creep up over time,” says Martin H. Lynch, compliance manager and director of education at Cambridge Credit Counseling of Agawam, MA. “The ratio of what’s owed to the amount of credit available represents 30% of the consumer’s score, so rapid improvement is possible if there’s a large amount of money available to pay down balances.”

Linda L. Jacob, a financial counselor at Consumer Credit of Des Moines, IA, recommends paying down balances to below one-third of your credit line. Any payments you make will be reflected on your credit report as soon as your creditors report your payment to the credit bureaus. Credit scores are updated on an ongoing basis, and creditors typically report once per month, so if you make a payment that lowers your credit utilization, that should be reflected on your credit score within two months.

If you’re regularly using your credit card but you want to keep your utilization low so you can apply for a mortgage, you may want to pay down your credit-card balance on a weekly or biweekly basis. This ensures that your balance is as low as possible whenever your creditor reports your payment history to the credit bureaus.

You can also decrease your card utilization by getting more credit, but this approach can backfire. Consumers sometimes assume that by getting more credit, their credit score will improve. If you have a $3,000 balance on a card with a $4,000 credit limit and you’re approved for a new credit card with a $1,000 limit, you now have $5,000 in total credit lines. Instead of using 75% of your available credit, you’re now using 60%. That’s better, right?

Not necessarily. “Just applying for credit lowers your credit score, and that effect lasts for months,” warns Mike Sullivan, personal finance consultant at Take Charge America in Phoenix, AZ. “For the first few months after you apply for credit, your credit score may actually go down.”

You can try getting around this by asking a credit limit increase on a card you already have. Be sure to ask whether they do a “soft” credit pull rather than a “hard” credit pull, though, since hard credit inquiries are the ones that impact your credit. A creditor may be willing to give you a credit line increase with a “soft” pull, which will not hurt your credit score.

Soft inquiries are for background purposes only. For example, a credit card company may do a soft pull to see if you’re eligible for certain credit card offers, or an employer may do a soft pull before offering you a job. Soft pulls can be done without your permission and do not impact your credit score. Hard pulls require your permission, and are done when lenders or credit card companies are assessing whether to grant you a loan or line of credit.

How to raise your credit score for the long haul

Once you’ve corrected errors, settled your delinquent accounts, and brought your credit utilization under control, the only other things that will improve your score are time and developing good payment habits. For example, if you tend to forget to make payments, you can set up automatic payments so you don’t forget.

And here’s some good news for people with bad credit: Generally, people with the lowest scores will see the biggest gains the fastest.

“It’s a lot like dieting,” says Sullivan.

For instance, if your score is 550, “you could probably get it up 30 points in a matter of a couple months, if you’re really dedicated and really careful,” he explains.

On the other hand: “If your credit score is already a 750 and you’re trying to get it to 780, that can take double or more the time.”

Still, it’s worth doing whatever you can to get the best interest rate possible.

The post How Long Does It Take to Improve Your Credit Score Enough to Buy a Home? appeared first on Real Estate News & Insights | realtor.com®.

How Long Does It Take to Build Credit History From Scratch?

November 9, 2018

How long does it take to build credit history? If you ever plan to buy a house, establishing a track record of past payments is essential, because it proves to mortgage lenders that you’ve paid people back (which means they’ll be more apt to loan you money for a home).

Still, if you have no credit history—because you’re young or just never bothered—how long does it take to build it from scratch?

Here’s the straight dope: Done right, it can take as little as six months. Done wrong? It can take several years. So if you’re in a rush to establish credit to buy a home, you’ll want to know the right way to go about it! Heed this advice to learn what to do.

How long does it take to build credit?

At a minimum, you need to open at least one credit card in your name. From there, you just need to make a purchase using the card, and then make a payment. Once you’ve made your payment, your creditor will report your payment to one or more of the major credit bureaus (TransUnion, Equifax, and Experian).

“Typically, it takes at least three to six months of activity before a credit score can be calculated,” says Tracy East, director of communication at Consumer Education Services in Raleigh, NC.

Once you’ve established credit, you still have some work to do. Credit histories are scored based on performance, much like the grades you got in school. Healthy credit behavior—like on-time payments and staying well below your credit limit—lead to a higher credit score.

What’s more, there are two types of scores: VantageScores and FICO scores. Some mortgage lenders may look at a VantageScore, but FHA lenders are required to use FICO scores.

“After opening their first credit account and beginning to make timely payments, it will take at least three months for the person to generate a VantageScore, and six months to have enough information to create a FICO score,” says Martin Lynch, compliance manager and director of education at Cambridge Credit Counseling of Agawam, MA.

And the longer you demonstrate good credit behavior, the higher your score can climb from there. In other words, a couple of on-time payments is nice, but years and years of on-time payments is far more impressive, and reflected in your score accordingly. In fact, the length of your credit history can count for as much as 15% of your credit score.

What credit score do you need to get a mortgage?

Your initial credit score when building credit will typically be in the 660s, which is considered on the low end of “fair” (fair scores range from 650 to 699). It could be just enough to buy a house with some lenders, but not all, because lenders vary regarding the minimum credit score they will accept.

You should also know that while a “fair” score may get you a mortgage, it won’t qualify you for the best mortgage—in terms of interest rates and other deals. To get better mortgage rates, you will need a good score (700 to 759) or an excellent score (760 or higher). Unfortunately, achieving these scores will take (you guessed it) more time.

How to speed up the credit-building process

To establish a payment history, use your card reasonably. Make payments on time (or early, if possible). Setting up automatic payments can help. East recommends keeping your balance below 30% of your credit limit and, ideally, paying it off in full each month. These simple steps will eventually push your score from fair to good to excellent, allowing you to get the best rates for your mortgage.

Here are some other ways to speed up the credit-building process and ensure your credit history and score get off to a good start.

  • Become an authorized user on someone else’s account. This can be a parent, friend, or relative who has had the account for at least a few years and has a good payment history. You don’t need to use the account or even have a card. Once you’re added as an authorized user and that fact is reported to the credit bureaus, it will instantly affect your credit and may generate a score if you don’t already have one or, at least, give it a boost.
  • Get a secured credit card or loan. If you’re having trouble qualifying for a traditional credit card, try for a secured credit card, which is “secured” by a deposit. This means that if you default or stop paying, your deposit will be used to pay off the account. This lowers the risk involved for the lender, which makes it more likely to offer you credit even if you don’t have an established credit history.

 

Also know that when it comes to mortgages, your credit score is just one piece of a larger puzzle. According to Lynch, your lender will also look at your employment history, how long you’ve lived at your current residence, and your credit references.

The post How Long Does It Take to Build Credit History From Scratch? appeared first on Real Estate News & Insights | realtor.com®.