credit score – Law Office of Rick Morin, PC

Credit reports are changing! A better credit score may be right around the corner. Starting this week, some people will enjoy a credit score increase of up to 20 points. This is because the three major credit bureaus will enforce stricter reporting regulations.

What does this mean? Civil judgments and tax liens will vanish from most credit reports. This is because civil judgments and tax liens don’t carry enough identifying information to meet new credit reporting standards. You can expect that tax liens and civil judgments will no longer be recorded as part of your credit.

According to a report by Fair Isaac (home of the FICO score), about seven percent of Americans can expect an increase in their score due to the removal of judgments and liens from their file.

Why the Change?

The Consumer Financial Protection Bureau (“CFPB”) recently recently recommended changes to the major credit reporting companies. The CFBP based their recommendations on frequent consumer complaints. In fact, the CFP reported that the number one consumer complaint was that credit scores often include inaccurate information.

Previous credit report standards left a lot of room for error. Credit reports often included civil judgments for other people. Surprisingly, civil judgments contain very limited identifying information.

People with inaccurate judgments on their credit reports will benefit the most from this change. However, consumers needs be aware that accurate court judgmenets might not show up on their credit reports in the future.

Other Changes Afoot

This isn’t the only major credit reporting change on the agenda.

Starting next month, credit bureaus will have to keep a closer eye on the public records they are reporting. Credit reporting agencies will update their information at least once every 90 days.

Starting in September, credit reports will no longer include medical debt less than six months old.

There is currently no plan to eliminate bankruptcies or foreclosures from credit reports.

Credit scores are important. Your credit score impacts your ability to pay for large purchases over time. Lenders will use poor credit scores to deny loan and credit card applications.

Bad credit will cost you money too. Lenders generally charge higher interest rates depending on credit score. Some service providers may even require you to pay a security deposit based on your credit score.

What hurts a credit score?

According to the Fair Isaac Corporation (FICO), there are five major categories that determine your credit score. The most important factor is your payment history, accounting for 35% of the calculation. Amount owed is the second biggest contributor with 30%. Length of credit history is 15% of the calculation, while credit inquiries and types of credit account for 10% each.

1. Payment History

Late payments on credit cards and loans can result in more than just late fees. If you are habitually late on payments, you could face a penalty increase in interest rate. After just 30 days, the late payment will be added to your credit report where it will remain for seven years.

If you decline to make payments altogether, creditors will charge off your account. Once charged off, you will no longer be able to use the credit card. You will also still owe the balance due. This is one of the worst hits your credit score can suffer. Similarly, if you fail to make payments on a loan, the account will default. This will be reflected on your credit score as well.

2. Amount Owed

The level of debt you have is measured by your credit utilization, or the ratio of your credit card balances to their respective credit limits. Having high credit card balances can demonstrate irresponsibility with credit, and cost you points in your credit score.

Ideally, all of your credit card balances will remain at or below 30% of their maximum limit. If you frequently max out your credit cards, this could adversely affect your score—even if you pay the balance off when the statement comes!

3. Credit History Length

The longer your credit history, the better your credit score. Once you cancel a card, the years of use are erased from your credit history. Canceling an old card will therefore make your credit history seem shorter than it actually is. You should hold on to old credit cards once they are in good standing.

Also, closing cards will raise your credit utilization—your overall balance remains, but you will have decreased your total maximum limit.

4. Credit Inquiries

Each time you submit an application for a credit card or a loan, you are authorizing the lender or business to access your credit report. The number of requests made is recorded and factored into your score. Be cautious about the number of loans and credit cards you apply for. Excess inquiries will reduce your credit score.

5. Credit Types

A diverse credit history signals responsible management of credit. Therefore, having only loans or only credit cards has the potential to hurt your score. When building credit, it is important to have an array of different accounts.

Like it or not, credit scores are a big part of life. Bankruptcy can help you get a fresh start with your finances. Call (916) 333-2222 to discuss if bankruptcy is a good option for you.

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Credit Reports Won’t Show Judgments or Liens