CREDIT SCORES

By Casey Bond

A lot of people are chasing New Year’s resolutions this month, but unfortunately, almost just as many will ultimately fail at accomplishing them. You too may be loosing steam toward reaching your new year goals by now.

By Jennifer Calonia

Whether you’re applying for a new credit card or have your fingers crossed for a mortgage loan toward your first home, understanding credit scores is an essential part of the process.

However, with so many credit score models in existence, it can be difficult to diffuse the fog and truly determine

You are not your credit score. It’s true that banks and other businesses place a lot of emphasis on your three-digit score when they’re deciding whether or not to take you on as a customer, but that’s not all they consider.

Your credit score doesn’t tell the whole story–it only predicts the likelihood that you will pay your bills based on how you’ve paid in the past. And as evidenced by the mortgage meltdown, placing more emphasis on credit scores than ability to repay is bad for everyone involved.

New rules from the Federal Reserve Board (FRB) and Federal Trade Commission (FTC) will soon require that consumers who are denied credit receive free credit scores. The new rules will also apply to consumers whose existing loan terms become less favorable as a result of their credit scores.

New Rules Effective July 21

You know that your credit is important. However, many people focus on their credit scores without realizing the impact that their credit reports are having. Indeed, in some cases, it can be difficult to separate your credit score from your credit report. However, these are two information sources for lenders and others to use when determining your creditworthiness. Understanding the relationship between the two can help you make better credit decisions that will benefit you in the long run.

Your Credit Score is Based on Information in Your Credit Report

A new study has released its findings that less than 1-percent of consumer credit reports contain errors that lead to significant changes in scores. The report, which was commissioned by the three largest credit-reporting companies, said that after surveying 2,338 people the vast majority of credit reports are accurate.

Significant Reporting Errors Don’t Occur Often

When a lender looks at your credit score, he assesses your credit habits, your creditworthiness, your tendency to pay back debts, how responsible you are with credit and most importantly, what kind of risk you pose to his business.

Based on that assessment, he will decide whether or not to approve your loan, credit card or other line of credit. In return, he hopes to make money off of you without risking much of his own money.

Back in 2009, FICO introduced an update of its credit scoring model called it FICO 8. However, it has taken more than a year for banks and other financial services providers to really adopt the FICO 8 updates. Here’s what you should know about the FICO Score changes:

What is FICO 8?

For the first time since the financial crisis, people with a credit score below 680 are able to get their hands on new car loans again. Some are even obtaining loans for larger amounts than in previous years. While it’s great that individuals in need have access to reliable vehicles again, some concern has been expressed over the possibility of more loan defaults as a result of the increased leniency in borrowing standards.

Is it possible that loosening up too much result in more people taking on debt they can’t handle? Could giving people with lower credit scores access to a subprime loan cause more problems than it fixes?

Worrying about how finances need to be managed is a common beginning-of-the-year concern. Many people create their New Year’s resolutions with personal finance somewhere in the picture, which is actually a great idea. The only problem is if money was their enemy in the past, the idea of making new financial decisions can feel overwhelming.

A great way to overcome this feeling is by creating a love affair with finances. By thinking about the great benefits that money provides and how paying bills can make life easier–not more difficult–along with what it is doing for you instead of to you, you could very well fall in love with your finances.