CREDIT » Credit Scores & Reports

While the new FICO scoring system comes with some notable improvements, there are some who believe that there may be some disadvantages. To get a better idea of both the disadvantages and advantages that could have an effect on your FICO score, let’s take a closer look at both ends of the spectrum.

The Disadvantages

Some people are happy about the new FICO system but others may be a little displeased. No matter what the reaction is, it seems it will take some adjusting to get used to. Because so many of the changes affect a wide group of individuals, it’s important to understand just what the new system means and how it can affect your FICO score.

The Purpose of the New FICO System

In the past money was tight, tough choices had to be made and bills were often neglected for long stretches of time. Because of your past behavior, you now have a dismal credit score and are having difficulty qualifying for any type of lines of credit. You are considering securing a credit card for those with a history of bad credit, but there are some risks associated with those types of cards you need to be aware of.

The housing market is calling and you want to get ready to answer. You have already worked on building a sizeable down payment, have crunched numbers to know exactly what you can afford and now need to work on improving your credit score in order to get your lowest mortgage rate possible. Improving your credit score takes financial discipline and that will ultimately affect the amount of time it takes to raise your credit rating. You should give yourself several months to thoroughly address the task at hand.

Like Rome, credit ratings were not built in a day. To understand how to improve your credit score and why the process may take several months, you need to grasp the core system that establishes your credit score in the first place:

The Fair Isaac Corporation responsible for developing and implementing FICO scores boldly proclaim “Don’t close unused credit cards as a short-term strategy to raise your score,” as that action may actually damage and lower your credit score. It is important to realize that by closing a credit card account, you do not make your bad credit history vanish. Instead that act of closure can result in a lowered credit score.

Your credit report is often viewed by a number of agencies and companies; some of these views are known as hard pulls and soft pulls. Also known as inquiries, when a company or agency “pulls” information from your report, they are trying to obtain information that can help them make a decision regarding an interest that they have in you.

But hard pulls and soft pulls don’t stop at just providing information to interested parties; they also have a very direct effect on your credit report and score. So to give you a better idea of what these actions entail, let’s look more closely at their meanings.

If you know your credit report contains details that may result in you not being approved for a loan, car or home, it may be time to contact your creditors to make some repairs. It may feel a little scary to contact these agencies, especially if you don’t have the full amount to pay them; however, they are usually prepared to strike a deal with you, so it’s truly worth the effort.

Why You Should Clean Up Your Credit Report

While your credit report may divulge a lot of information that you would not like shared with lenders, there is also information that can’t be reported to credit bureaus. Though the list isn’t extremely long, it may provide you a little be of comfort in knowing that not all of your information can be shared with the lenders.

What Can’t be Reported

Consumers will soon get relief from the current credit crunch in the guise of a $200 billion  consumer credit program being launched by the Federal Reserve. Financial institutions borrowing the money will in turn lend it to consumers to jump start spending in the education, auto and credit cards sectors. 

The unprecedented program, called Term Asset-Backed Securities Loan Facility, or TALF, has the lending potential of $1 trillion. TALFs efforts are specifically aimed at targeting small businesses and consumer households by providing available funds to owners of high-rated asset-backed securities to prompt them to open up lines of credit. The companies and investors who own securities backed by credit-card receivables and loans for consumers, autos, small-businesses and students can use them as collateral to obtain the loan money from the government, thus reducing the credit risk for tax-payers.

If you feel like you’re in over your head financially, don’t jump to claiming bankruptcy yet.

Credit counseling can be a good choice before you take the drastic step of declaring yourself bankrupt and possibly damaging your credit further for years. Credit counseling can help you get back on your feet financially and set you up with good money habits for the rest of your life.

Why Not Bankruptcy?