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FICO Scores Are Changing. Will Your Credit Score Go Down?

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New updates to the way FICO credit scores are calculated could make it more difficult for some Americans to get loans. With the changes, you could see your credit score go down — or up.

FICO scores are the most commonly used type of credit score in the U.S. and are used by lenders to determine whether to extend credit to someone applying for a loan. Once the revision is implemented, you’ll want to get a free check of your credit score to see if you’ve been affected.

What’s changing?

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The new version will take into account credit card usage over a two-year period.

Fair Isaac Corp., the company responsible for FICO scores, has announced a change that will penalize consumers if they allow their debt levels to rise, or if they fall behind on their loan payments, as first reported by The Wall Street Journal.

The update will factor in how a consumer uses credit cards over a 24-month period — and if you tend to carry high balances, your score will take a hit. The new FICO scores also give more weight to unsecured personal loans, which could hurt some borrowers.

Under the new scoring criteria, consumers with good credit scores — 680 or higher — will likely see an increase in their scores if they stay on top of their loan payments.

However, those with fair or poor credit scores — 600 or lower — who miss payments or accumulate debt will see bigger declines in their scores than under previous FICO versions.

What’s the impact?

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FICO says a minority of consumers will see major changes in their scores.

FICO officials say the majority of consumers, roughly 110 million, will see changes in their credit scores of less than 20 points, either up or down.

Another 80 million will see bigger swings — in either direction.

The changes will widen the gap between consumers who are already considered to be good or bad credit risks, and will likely lead to a shift in the average FICO score, which hit a record high of 703 in 2019, according to an annual report from the credit bureau Experian.

In a news release, FICO says it expects its new system will result in an up to 10% reduction in credit card defaults and as much as a 17% decline in defaults by new mortgage borrowers.

The new scoring model marks a stark reversal from FICO changes in previous years, which aimed to help build scores for people with little or no credit history, and remove certain pieces of negative information — like civil judgments and tax liens — from many credit reports.

It’s unclear when lenders will begin using FICO’s new model. But if you’re not sure about the current status of your credit rating, you’ll want to take a free peek at your credit score to know where you stand.

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Bad Credit

What Is Considered an Excellent Credit Score?

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Do you have an excellent credit score? A lot of people can achieve good credit scores by practicing responsible financial habits, such as making on-time payments, but it takes a little extra knowledge — and some credit card savvy — to take your credit score from good to excellent.

Is having excellent credit worth it? Absolutely. Credit scores make up a huge part of our financial lives, so it’s to your advantage to learn how to get your credit score as high as possible—and getting an excellent credit score is just about as high as you can go.

How do you know if you have excellent credit? What is an excellent credit score and is there an easy way to get it? Let’s take a closer look at what is considered an excellent credit score, as well as what you can do to boost your credit score into the excellent range.

What is an excellent credit score?

According to the FICO credit scoring model, an excellent credit score falls between 800 and 850 points. FICO, or the Fair Isaac Corporation, operates one of the most popular credit scoring systems in the industry, and myFICO.com reports that over 90 percent of top lenders use FICO credit scores to help them make lending decisions.

If your credit score falls within the excellent credit score range, your credit is as good as it gets. Yes, you could try to achieve a perfect credit score, but you don’t need to actively work on building your credit the way you might if you had fair credit or bad credit. Instead, you can focus on maintaining your excellent credit score by practicing the responsible credit habits that helped you earn your score in the first place, like paying your bills on time and keeping your balances low.

What are the credit score ranges?

What is an excellent credit score range? How does it compare to the other credit score ranges? Here’s a breakdown of the five FICO credit score ranges, including the points that fall within each range:

FICO Credit Score Ranges

Excellent/Exceptional 800-850
Very Good 740-799
Good 670-739
Fair 580-669
Poor 350-579

The FICO scoring system occasionally refers to the top credit score range as “Exceptional” — but don’t worry, that means the same thing as “Excellent.” If you have excellent credit, you don’t need to do anything else to get exceptional credit. You’re already there!

What are the factors that impact your credit score?

The FICO credit scoring model uses five factors to determine your credit score: payment history, credit utilization, credit history, credit mix and recent credit applications. Let’s take a closer look at how each of those factors impacts your credit score:

Payment history (35 percent)

This is your history of on-time payments. If you have excellent credit, you’re probably very good at making on-time payments — but if you ever accidentally miss a credit card payment, act quickly to keep it from affecting your credit score. Making on-time payments consistently is one of the best ways to maintain a stellar credit.

Credit utilization (30 percent)

Your credit utilization ratio is the amount of credit you’re currently using compared to the amount of credit available to you. If you have excellent credit, you probably have a lot of available credit because you keep your balances low or pay them off in full every month. That’s great for your credit score. Keeping a low credit utilization — below 30 percent at least, but ideally within single digits — is another surefire way to keep a strong credit standing.

Credit history (15 percent)

This is the age of your open credit accounts. If you’ve been successfully maintaining credit accounts for a long time, your credit score is likely to get a boost. This is one of the reasons why it’s a good idea to keep old credit cards open even when you are no longer using them regularly.

Credit mix (10 percent)

Your credit mix is based on the different types of credit accounts under your name. If you have both revolving credit (like credit cards) and installment loans (like a car loan), your credit score could go up.

Credit applications (10 percent)

Your credit score is also impacted by your recent credit applications. If you apply for a lot of credit all at once, lenders might wonder if you are planning on going into a lot of debt — and whether you’ll be able to pay off that debt in the future. This is why hard credit inquiries, which occur every time you apply for a new credit card or loan, can prompt a temporary drop in your credit score.

Steps to improve your credit score

If you want to learn how to get an excellent credit score — or if you already have excellent credit and want to work toward that perfect 850 — here are some steps you can take to improve your credit score.

Start by making on-time payments every month, if you aren’t doing so already. Since 35 percent of your credit score is based on your payment history, making on-time payments is one of the best things you can do to boost your credit score.

Next, start paying down your balances. The lower you can get those balances, the more available credit you’ll have — which is good for your credit utilization ratio and even better for your credit score. As the Washington Post reports, people with perfect credit scores have an average credit utilization rate of 4.1 percent. That doesn’t mean they never use more than that much of their available credit; it just means that they pay those balances off every month, and keep any revolving balances very low.

You can also increase your available credit by requesting a credit limit increase or applying for a new credit card. If your credit already falls in the Very Good range (740-799), going online and requesting a credit limit increase on one of your existing credit cards might give you the point boost you need to take you over 800.

Lastly, you’ll want to track your credit score on a regular basis — here is our advice on how to get a free credit score — and review your credit reports to ensure that all of the information is accurate and up-to-date. Understanding how your credit score fluctuates based on your outstanding balances, new credit applications and overall credit history can help you make adjustments that will benefit your credit score both now and in the long run.

Benefits of having excellent credit

There are numerous financial benefits of having excellent credit. When you have excellent credit, you can access the best credit cards on the market — including the top travel credit cards, the best cash-back credit cards, the best credit cards for dining out and more. Your excellent credit score will make you an ideal candidate for luxury credit cards like the Chase Sapphire Reserve® card or The Platinum Card® from American Express.

Excellent credit score credit cards generally offer lower interest rates, thanks to your strong credit history. When lenders trust you to pay back your debt promptly and responsibly, they have less of an incentive to charge high interest rates — which means you can expect to receive lower interest rates not only on your credit cards, but also on auto loans, personal loans and mortgages.

Plus, your excellent credit will never stand in the way of your ability to rent an apartment, open utility accounts or — if your employer checks credit before hiring — get a job.

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Used Vehicles and Bad Credit Borrowers: Smart Car Shopping

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When you’ve got less than perfect credit, going for a used car is a smarter decision than seeking that brand-new vehicle. Not to mention, used cars are becoming the preferred choice for borrowers across the credit score spectrum.

Used Cars Becoming More Popular

Used Cars and Bad Credit Borrowers: Smart ShoppingYou don’t have to settle for the clunker in the back of a used vehicle lot – but now may not be the time to finance the most expensive car, either. When you’re struggling with poor credit, reliability and good loan terms should be at the front of your mind.

More specifically, you should choose a reliable vehicle that’s going to last, and one that you can comfortably afford each month without breaking the bank. It seems obvious, everyone wants a reliable car! But one of the main goals you should focus on with your bad credit auto loan is repairing your credit for future purchases.

Not only does having a high credit score improve your chances of getting approved for new credit later, it can also save you money. Having a good credit score means a higher chance of qualifying for the lowest interest rates and the best car loan deals offered.

However, you have to start somewhere. And a reliable used vehicle with a bad credit auto loan could be the ticket.

Recently, even good credit borrowers are increasingly going for used cars. The data shows used vehicle purchases are on the rise across all credit scores. While everyone was locked indoors during statewide shutdowns due to COVID-19, dealers began shifting their focus from new cars to used ones, and they’ve started showcasing their certified pre-owned vehicles.

Worried About Getting a Used Vehicle? Try a CPO Car

If a used car seems risky to you, check out a certified pre-owned (CPO) vehicle. A CPO auto loan can be seen as the middle ground between new and used, and it can be a good option for borrowers who want a newer car without the hefty price tag.

CPO vehicles are inspected by a manufacturer-certified mechanic, cleaned, and come with some type of warranty. Many CPO cars are also just coming off-lease, and usually have lower mileage. Since a CPO’s selling price is generally cheaper than financing a brand-new one, borrowers who are looking for reliability are starting to turn toward the certified option for the most bang for their buck.

If you work with a bad credit auto lender (or subprime lender) and you qualify for financing, you may be able to get into a CPO vehicle. Subprime lenders operate through a dealership’s special finance department, so bad credit borrowers who meet the requirements could qualify.

In general, CPOs tend to be more expensive than regular used cars, since they come with more perks. If you don’t quite meet the requirements of a CPO vehicle, opting for a used car is still a smarter financial choice for borrowers with questionable credit scores.

Subprime Lenders and Improved Approval Chances

When you apply with a bad credit auto lender, they determine what monthly payment you qualify for based on your individual information. This is done by looking at many aspects of your credit and financial life: credit history, income, living situation, expenses, overall stability as a borrower, and more.

Once the subprime lenders determine how much vehicle you can afford, they tell the dealer. You then work together to find a car that fits the monthly payment you qualify for. Getting your monthly payment to a lower amount can be easy if you simply extend the loan term, but you should choose a used vehicle that’s reliable, while keeping your loan term as short as you can.

After you narrow down some car choices, you’re going to need a down payment. This can vary, but subprime lenders typically require borrowers to have at least $1,000 or 10% of the vehicle’s selling price. The more expensive the car, chances are, the more you’re going to have to put down to get into that vehicle. Poor credit borrowers are usually required to put money down to prove to the lender that they’ve got skin in the game, and down payments improve your chances of getting approved.

Meeting the down payment requirement gets easier when you go for a cheaper car – another reason why many bad credit borrowers opt for used vehicles. On top of all this, bad credit borrowers are more likely to get approved for used cars anyway, due to the lower sticker price.

Repairing Your Credit With an Auto Loan

If you work with a subprime lender, the auto loan itself could give you the chance to repair your credit. Subprime car loans are reported to the credit agencies, and with on-time payments, you can rebuild your credit. However, if you go for a long auto loan or one with high payments, you could be putting yourself in the hot seat, and risk damaging your credit.

Since borrowers with lower credit scores don’t normally qualify for the lowest interest rates, you could also end up paying more for that expensive new vehicle than what it’s actually worth.

Car loans almost always use simple interest, which means the charges stack up daily. The more you owe and the longer you owe, the more you pay in interest charges. Some bad credit borrowers find themselves with double-digit interest rates, which can end up being very expensive on a loan for a new vehicle.

Additionally, due to the higher selling price of new cars, many borrowers find themselves stretching their auto loan terms to the max, taking out 84-month loans, or sometimes higher, just to afford the monthly payment. Again, long loan terms can spell disaster for a bad credit borrower who’s more likely to only qualify for a high interest rate.

Not to mention, who wants to be stuck with a monthly payment for eight or more years for the same vehicle? Shorter loan terms save you more in interest charges, and a cheaper car means a lower monthly payment, too.

Ready to Find Your Next Used Vehicle?

Overall, a bad credit borrower needs to choose a sensible vehicle that’s reasonably priced, and go for auto loan terms that they can afford long term. Car loans are big commitments, often between five to sometimes eight years long. If you go for a new vehicle with a high monthly payment that rides the edge of your budget, you could end up damaging your credit if something happens. Focus on repairing your credit now, so you can save more cash and qualify for better deals later. Credit repair is a long-term game – play wisely!

If you’re ready to get into your next auto loan, start your car shopping journey right now with Auto Credit Express. We’ve got a nationwide network of dealerships with special finance departments that are equipped to work with bad credit borrowers. To get matched to a dealer in your local area at no cost, complete our auto loan request form.



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How to Refinance Your Mortgage With Bad Credit

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Our goal here at Credible is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders, all opinions are our own.

A low credit score doesn’t mean you can’t refinance your mortgage. In fact, there are many refinancing options to consider if you have bad credit.

If you have bad credit and are looking to refinance your mortgage, here’s what you should know:

How to refinance a mortgage with bad credit

If you have poor credit and aren’t sure where to start, follow these steps to get started:

  1. Improve your credit score
  2. Consider a co-borrower
  3. Compare bad credit mortgage refinance programs
  4. Check with your current lender
  5. Compare rates from multiple lenders

1. Improve your credit score

After checking your credit and knowing what your current credit score is, it’s a good idea to see how you can improve it before applying for your refinance.

To improve your credit quickly, here are a few things you can try:

  • Ask for a credit line increase on a current credit card
  • Become an authorized user on someone else’s account or credit card
  • Pay off your debt as much as possible
  • Don’t close old accounts (like credit cards)

Learn More: How to Improve Your Credit Score in 5 Steps

2. Consider a co-borrower

If you have a spouse, partner, or trusted friend with good credit, consider asking them to apply for the loan with you.

With their name on the application, lenders will look at both credit profiles and incomes, giving you a better shot at approval if your co-borrower is more creditworthy.

Just make sure the co-borrower understands their obligations. For example, if you’re unable to make payments on the loan, they’d have to repay it.

3. Compare bad credit mortgage refinance programs

Next, you should research bad credit refinance programs to see which loans you might be eligible for. Having a good idea of what loan product you’ll be using can help you when shopping around for lenders.

4. Check with your current lender

Get a refinancing quote from your current lender. If you’ve paid your loan on time consistently and have a good history with them, they might be willing to refinance your loan without a credit check — or at least look past that score and consider other factors when evaluating your application.

A current and solid relationship with a lender can go a long way, so it never hurts to ask.

Keep Reading: How to Refinance Your Mortgage in 4 Easy Steps

5. Compare rates from multiple lenders

Comparing rates from multiple lenders is one of the best ways to find the best loan and interest rate for you — whether you have good or bad credit.

Credible Operations, Inc. lets you shop for prequalified refinancing rates from all of our partner lenders in the table below by filling out just one form.

Requirements to refinance your mortgage with bad credit

Scenarios Is refinancing student loans a good idea?
You have high-interest student loan debt Yes, you should refinance
You want to pay off your debt early Yes, you should refinance
You want to switch interest rate types Yes, you should refinance
You have multiple loans and want to simplify your payments Student loan refinancing probably makes sense
You have reliable income and good credit Student loan refinancing probably makes sense
You’re eligible for student loan forgiveness No, you shouldn’t refinance
You have low or unsteady income No, you shouldn’t refinance
You have poor credit and no access to a creditworthy cosigner No, you shouldn’t refinance
Your loan already has a low interest rate No, you shouldn’t refinance

Find Out: When to Refinance a Mortgage: Is Now The Best Time?

Pros and cons of bad credit mortgage refinance options

FHA rate and term refinance

Rate and term refinancing is intended to help borrowers change their interest rate, loan term, or both. This often results in a lower monthly payment.

Pros:

  • Lower credit score requirements
  • Can be used to refinance non-FHA loans
  • Can refinance up to 97.5% of your home’s value, but a lower cap applies with a lower credit score

Cons:

  • Requires mortgage insurance
  • No cash-out allowed
  • Requires new appraisal

Learn: How to Get the Best Mortgage Rates

FHA cash-out refinance

With a cash-out refinance, you can replace your existing mortgage loan and take out some extra cash from the equity you have in your home.

Just keep in mind, your new loan will have a higher balance, which could mean a higher monthly payment.

Pros:

  • Low credit score requirements
  • Can be used to refinance non-FHA loans

Cons:

  • Requires mortgage insurance
  • Requires new appraisal
  • Can only refinance up to 80% of your home value

FHA streamline refinance

FHA’s streamline program is designed to ease the refinancing process for existing FHA borrowers.

In many cases, it requires no appraisal, no credit check, and no income verification, and documentation requirements are reduced.

Pros:

  • Credit check might not be required
  • Appraisal might not be required

Cons:

  • Requires mortgage insurance
  • Must already have an FHA loan

VA rate and term refinance (IRRRL)

The Department of Veterans Affairs also offers a rate and term refinance program called the Interest Rate Reduction Refinance Loan (IRRRL).

It’s only available to eligible military members, veterans, and their spouses (under limited circumstances).

Pros:

  • No credit or income check
  • No appraisal
  • Can roll your refinancing costs into your loan
  • No mortgage insurance
  • Could refinance up to 100% of your home’s value

Cons:

  • Only available to eligible veterans and military members
  • You must already have a VA loan
  • Requires a funding fee

Check Out: Refinance Closing Costs: How to Lower and Avoid Fees

VA cash-out refinance

You can also do a cash-out refinance of existing VA loans if you’re a military member or veteran. The VA also allows you to finance your closing costs, making the refinance very affordable.

Pros:

  • Can roll your refinancing costs into your loan
  • No mortgage insurance
  • Could refinance up to 100% of your home’s value

Cons:

  • Only available to eligible veterans and military members
  • You must already have a VA loan
  • Requires a funding fee
  • Requires an appraisal
  • Requires a credit check

Alternative or non-prime lending

If you don’t qualify for any of the above programs, seeking out an alternative or non-prime lender could be your best bet.

These lenders don’t use the same standards as FHA, VA, and other government-insured programs, so they typically have less strict requirements when it comes to credit score.

Pros:

  • Might allow lower credit scores than other programs
  • May allow bankruptcies, foreclosures, etc.

Cons:

  • Usually come with higher interest rates and fees
  • Requirements vary greatly from one lender to the next
Find out if refinancing is right for you

  • Actual rates from multiple lenders – In 3 minutes, get actual prequalified rates without impacting your credit score.
  • Smart technology – We streamline the questions you need to answer and automate the document upload process.
  • End-to-end experience – Complete the entire origination process from rate comparison up to closing, all on Credible.

Find My Refi Rate
Checking rates will not affect your credit

About the author

Aly J. Yale

Aly J. Yale

Aly J. Yale is a mortgage and real estate authority and a contributor to Credible. Her work has appeared in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.

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