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Average credit score is at all-time high — for consumers who can save

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The average consumer credit score has gone up during the pandemic, an unexpected positive side effect on personal finance from relief efforts and changes to everyday life.

On Monday, the Fair Isaac Corp., which markets the proprietary algorithm used by the three major credit bureaus to determine the most commonly used credit score, known as FICO, reported that the average credit score now stands at 711, a full five points higher than a year ago.

The FICO score ranges from 300 to 850 and is widely used by banks and lenders to determine a consumer’s credit risk. A lower score may mean a borrower has to pay a higher interest rate or put more money up front — or even be shut out of a loan, credit card or financial product entirely.

Several factors go into determining a credit score, with one of the most important being a borrower’s credit utilization ratio. And that’s where the coronavirus comes in.

For families that weren’t among the worst off, the pandemic brought credit relief in three major ways that allowed them to pay off their debts faster: They were able to use part of their stimulus checks. They saved money by not going out for dining, traveling or recreation. And rock-bottom interest rates let them refinance their homes and lower their monthly payments.

All three of those things benefited Evelyn Cox, 40, of Utah, mother of two.

At the beginning of the year she was staring down a household debt of over $20,000. Then both she and her teenage daughter had car accidents. They weren’t hurt but the cars were totaled and when she went to replace them the loans were more expensive then she expected.

“I felt like we’re hanging on by a thread year after year, and I can’t deal with the stress,” Cox told NBC News.

That’s when she decided to take action and get the family’s finances in order. Her husband works in customer service and she does medical transcription and odd jobs to pick up extra income, like selling items on eBay, and working for DoorDash. Between the two of them they gross $45,000 a year. On that income and with two teenagers, one of whom has special needs, tackling their debt wouldn’t be easy. But she got to work.

She printed out a poster-board chart of her credit score and debt and put it up in her bedroom. She put the whole family on a budget and started paying down debt. Then the pandemic happened.

“Initially we were all overwhelmed and all at each other’s throats,” Cox said. But there were some unexpected upsides.

The family was able to use most of its stimulus payment to pay down their debt, she said. They made most of their meals at home, saving more money. With school going remote, she no longer drove her son to a far-off school that met his needs, saving on gas. Vacation money also went toward paying off debt. Then she and her husband refinanced their mortgage, reducing the term of their loan and their monthly payments. Everywhere they saved, Cox plowed most of the money into paying down their debt.

And month by month the lines on the chart in her room got better and better, with the debt going down and their credit score going up. It was “a huge motivating factor,” Cox said.

Now she’s debt free, her credit score is an excellent 800, and she’s working on both building an emergency fund and learning how to invest.

With the household finances in a more comfortable spot, she is now able to reach out more to help others, including giving more frequently and more generously to those in need.

“It feels incredible,” Cox said. “The peace of mind is worth so much more than the financial gain. I wish we’d done it years ago.”

She’s not alone.

“Borrowers are prioritizing their credit health with the hopes of qualifying for the super low interest rates on homes, cars,” Farnoosh Torabi, a financial expert and host of the “So Money” podcast, said in a message. “There is a cohort of consumers that very intentionally worked on credit repair and credit health to help increase their chances for low rates.”

Financial pros say there has also been specific relief offered in the coronavirus relief legislation that has helped consumers stay current with their creditors, improving their scores.

“Even if cash-strapped consumers aren’t currently paying their credit accounts, as long as they have an agreement in place with their creditors — like auto finance firms, student loan companies or credit card issuers — then those businesses are likely still reporting nonpaying customers as having accounts ‘paid as agreed,’” Lynnette Khalfani-Cox, a personal finance expert, said in an email.

“This is consistent with the relief provided in the CARES Act, and just having credit tradelines or accounts reported as ‘current’ or ‘paid as agreed’ maintains or improves a person’s credit scores,” Khalfani-Cox said.

While improving a credit score may pale in significance to the global issues the world is facing, it does give consumers more options, said Ted Rossman, a credit industry analyst for CreditCards.com.

“Even if you’re not in the market for a credit card, mortgage or car loan right now, you very well could be in the next several years. Aside from loans, many apartment rentals, cellphone plans, utility subscriptions and even some job offers involve credit checks.”

Every silver lining has a cloud too, though, and U.S. consumers can still be in for some dark days.

“There is a bit of a lag between when a major macroeconomic event occurs and when the FICO score reflects that,” wrote FICO VP Ethan Dornhelm.

For the millions of Americans who are out of work, falling behind on their bills and maxing out their credit cards, their FICO scores will eventually drop. During the Great Recession of 2007-09, credit scores didn’t hit their lowest point until months after the crisis officially ended.

For some consumers battling Covid-19-induced hardship, government relief and assistance programs are ultimately delaying the inevitable blow to their credit rating.

“In the case of the Covid-19 pandemic, the lag between the onset of the pandemic and when credit files begin to show the financial strain that millions of Americans are feeling is further affected by the significant steps taken by both the government (stimulus spending) and private sector (lender payment accommodations) to help consumers ‘bridge the gap,’” Dornhelm wrote.

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If you need a co-signer, you’re not ready | Business

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My fiancée and I want to make an offer on a house. She has a lot of late payments and a bad credit record, though, but she is working hard to manage her money better and get out of debt. I don’t make enough money to get a home loan by myself, and I have some debt to pay off, too. In order to help us out, my aunt and uncle said they are willing to co-sign a mortgage loan for us. What do you think of that idea?

Here’s a simple, solid piece of advice for anyone looking to make a purchase of any kind. If you need a co-signer, you’re not ready to make that purchase—period. I’m not trying to beat you up or anything, but it’s way too soon for you two to be thinking about buying a home. I mean, for starters you’re just engaged right now.

When a lender requires a co-signer, it basically means they don’t believe you’ll pay back the money. And besides, you two don’t need a house now or right after you get married. The two of you should get married, and live in a decent, inexpensive apartment for a while. During that time, you both need to work hard on paying off all your debt. After that, save up an emergency fund of three to six months of expenses. Then, start setting aside cash for a down payment on a modest home.

When it comes time to buy a home, I recommend a 15-year, fixed rate loan with a down payment of at least 10%. Twenty% is better, because it will help you avoid having to pay PMI (private mortgage insurance). Make sure the monthly payments on the loan are no more than 25% of your combined take home pay. Keeping the payments at 25% or below will make it easier to address other important financial issues, like saving and investing.

Your aunt and uncle are obviously generous people, Evan, but they’re a little misguided in their offer. At this point, helping you two buy a house — something you obviously can’t afford —would be a huge burden instead of a blessing.

Dave Ramsey is America’s trusted voice on money and business, and CEO of Ramsey Solutions. He has authored seven best-selling books. The Dave Ramsey Show is heard by more than 11 million listeners each week on more than 550 radio stations and digital outlets. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

Dave Ramsey is America’s trusted voice on money and business, and CEO of Ramsey Solutions. He has authored seven best-selling books. The Dave Ramsey Show is heard by more than 11 million listeners each week on more than 550 radio stations and digital outlets. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

 

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Dave says: If you need a cosigner, you're not ready – Northeast Mississippi Daily Journal

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Dave says: If you need a cosigner, you’re not ready  Northeast Mississippi Daily Journal

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How to improve your credit score in 2021: Easy and effective tips

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If you’ve ever wondered “What is my credit score?” it’s probably time to find out. Having a good credit score can make life a lot more affordable. If you’re about to buy a house or car, for example, the higher your credit score is, the lower your interest rate (and therefore, monthly cost) will probably be.

Your number may also be the deciding factor for whether or not you can get a loan and ultimately determine if you are even able to buy something you want or need.

So, yes, the goal is to have the highest possible credit score you can, but increasing the number doesn’t just happen overnight. There are important steps to take if you want to increase your score, and the sooner you start working on it, the better.

“If you’re trying to increase (your credit score) substantially to accomplish a goal, you’re really going to have to have as much lead time as possible,” said Thomas Nitzsche, director of media and brand at Money Management International, a nonprofit financial counseling and education provider that advises people on how to legally and ethically improve their credit score on their own.

If you have fair credit and you’re trying to improve the number for a house purchase, for instance, you’ll want to start working on it at least a year in advance, he explained to TMRW.

But even though that sounds like a long time away, you can (and should!) start doing things right now to bump that number up. Below, see seven things you should do — and not do — to help improve your credit score:

1. Review your credit report

Review your credit report and look for errors that might be hurting your score. Morsa Images / Getty Images

The first thing you’ll want to do is pull up a copy of your current report so you know where you stand. You can get free reports from all three agencies — TransUnion, Experian, and Equifax — at annualcreditreport.com. Nitzsche said it’s important to take a moment and understand the financial snapshot of where you are today and where you want to be.

You’ll also want to take some time and look for any errors on your report, which could negatively impact your score. “If your name is misspelled, that’s not going to hurt your score,” he explained. “But if you see a late payment or missed payment (that’s in error), or maybe you have an account that should be reporting but isn’t, then that’s a problem and that will impact your score.”

If there is an error, you should dispute it and try to provide as much proof as you can.

One other thing: You can also ask a creditor to remove an issue if it’s been corrected (i.e., if you paid off a collection debt). Nitzsche said it doesn’t hurt to ask and the worst thing they could say is no.

2. Have good financial habits

“The biggest part of your credit score is payment history, so the most critical thing is never missing a due date,” Nitzsche said. Set up a monthly autopay or add all due dates to your calendar so you never miss a bill.

You can also achieve a higher score when you mix different types of accounts on your credit report. It may seem counterintuitive to get extra points for having debt in the form of student loans, mortgages and auto loans, but as long as you’re paying them off responsibly, it shows that you’re reliable.

3. Aim to use 30% or less of your credit at any given time

Know your credit limit and aim to only use 30% or less of it for a better credit score.Tim Robberts / Getty Images

Know your credit card limit, and try not to use any more than 30% of that number each month, otherwise your score could lose points for too much credit utilization.

Another thing you can do is ask your bank to increase your limit. “That will give you more flexibility to spend more,” Nitzsche said. You could also pay it off twice a month to keep the balance low. But he does warn that you never know when the balance is going to be reported to the bureau. It can happen at any point during the month, so it might be the day after you make the payment or the day before. “You don’t necessarily want to use the card and pay it the next day because that doesn’t give the bureau the chance to know that you’re using it,” he said.

4. Avoid requests for new credit

If you’re looking to increase your score around the time you want to buy a house or car, you won’t want to open up a new line of credit, like a retail card, credit card or loan. That’s because “hard” credit inquiries like those can lower your score, and sometimes it comes down to a few points over whether you’re approved or what your rate will be, Nitzsche said.

“Soft” credit inquiries, like when an employer checks your credit or when you pull your own report, won’t affect your score.

5. Keep all accounts open, even ones you don’t use anymore

Even if you don’t use that credit card from college, it’s a good idea to just keep it open because closing it could hurt your score. Nitzsche explained that you’ll be dinged some points for each account that is closed. If you want or need to mentally break up with a card, just cut it up instead.

6. Build your credit if needed

If you haven’t established credit yet, you might not even exist … in the credit report space, that is! “If someone has never fallen in delinquency on any subscriptions or utilities or never had collections on anything and they have not utilized credit cards or loans in the past seven to 10 years, they may not have a credit profile at all,” Nitzsche said. “That presents a challenge when you want to buy a home.”

If this sounds familiar, you may have to get a secured credit card where you put down a deposit, he advised. “You still have to make payments and use it responsibly. Not all banks offer them but you can usually check with your local bank or credit union.”

7. Reach out for help

If you want personal guidance on boosting your credit score, make an appointment with a credit counselor.kate_sept2004 / Getty Images

There are many apps and credit-monitoring services that can help you stay on top of your credit score. You could also reach out to a professional credit counselor who can help you navigate your specific situation. (Here’s a good resource about finding a reputable service.)

One last thing: Nitzsche warned that everyone should beware of credit repair scams that claim to be able to increase credit scores for an advance fee to get accurate negative information removed (even temporarily) from credit reports.

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