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FICO’s new credit score won’t ding you for student loans or mortgages

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Your FICO credit score may soon be changing, but if you see a dip in the next year, it’s probably not because of an existing mortgage or a high student loan balance. It’s more likely based on your payment habits.

Fair Isaac Corp., the company behind the popular FICO credit score said Thursday that its newest scoring models rolling out this summer will consider consumers’ payment history and the level of debt they’re taking on.

But those with high mortgages and student loan balances shouldn’t freak out. FICO’s new scoring model is more focused on checking to see if your debt level, especially credit card balances, has been significantly on the rise and whether you’ve been making regular and timely payments on any debt you have accumulated.

“We do look at overall balances, but we look at it in the context of everything else that’s going on that account,” Dave Shellenberger, FICO vice president of product management, tells CNBC Make It. And that includes what your credit card balances look like and how aggressively you’re seeking new credit.

Because of the changes, FICO estimates that about 110 million consumers will see small changes of less than 20 points to their scores under the new credit score model.

Here’s a look at the factors that will really impact where you may rank in the new scoring model.

What is included in credit scores?

Credit scores, including FICO’s, are based on consumer data collected by the three major credit bureaus: Equifax, Experian and TransUnion. Scores range from about 300 to 850, with a good credit falling between 670 and 739 range, and anything below 580 being described as “bad credit.”

The score takes into account payment history, number of accounts open, the length of your credit history and the amount you currently owe. Your age, race, salary, employment history and where you live is not factored in.

The credit bureaus stopped adding many of the so-called “negative credit indicators,” such as tax liens and judgments from credit reports in recent years. And because of a 2015 settlement with state attorneys general, Equifax, Experian and TransUnion have to wait 180 days before adding any kind of medical debt to your report.

Source: myFICO

How does existing debt play out with this new scoring model?

About 30% of your FICO credit score is based on the total amount you currently owe — and that’s not changing under the new model, Shellenberger says.

But let’s break down what that means. To calculate your score, companies like FICO look at both installment credit — which includes student loans, mortgages, auto loans — and revolving credit, the most common types being credit cards and home equity lines of credit (HELOCs).

Don’t panic if you have a lot of student loans and/or a mortgage. Installment debt is “almost benign” to your credit scores, John Ulzheimer, an expert on credit scores and credit scoring, tells CNBC Make It. “You can have hundreds of thousands of dollars of installment debt and still have elite credit scores,” he says. “It’s the revolving debt that’s problematic.”

It’s a point Shellenberger reiterates: “Having outstanding student loan debt, in and of itself, is not going to significantly damage or negatively affect your score,” he says.

Having outstanding student loan debt, in and of itself, is not going to significantly damage or negatively affect your score.

Dave Shellenberger

FICO vice president of product management

If you have large loans, such as student debt, it’s crucial that you “continue to pay,” Shellenberger says. “Repayment performance is one of the key drivers of the FICO score.” Payment history makes up about 35% of FICO scores and will continue to do so going forward, he says.

In fact, consumers who have been good at managing their credit, regularly paying bills on time, and keeping their balances in check are likely going to be “rewarded” by seeing a gain in their score under the new model, Shellenberger says.

What types of financial behavior can be detrimental?

As part of the new credit scoring update, FICO is releasing the 10T score, which will use “trended data.” This is an industry term that basically means the new score will look at your credit behavior over the past two years, as opposed to just a snapshot.

This can be really helpful for those who are practicing good credit habits, but it can also penalize more harshly those who are racking up debt and struggling to pay it off. Someone may see their score dip, for example, if they take out a personal loan to consolidate their credit card debt, but then continue to build up those credit card balances again.

“The data shows that [kind of behavior] correlates very highly with future delinquency and default,” Shellenberger says. “And then that is reflected by the credit score at the end of the day.”

Credit utilization is also something that the new FICO credit score will continue to closely monitor. This refers to the ratio of money you have on your credit cards to the total amount of credit you have available. If you have a credit card with a $20,000 limit and you’re carrying a $10,000 balance month-to-month, your utilization rate is about 50% — which is not great. Experts typically recommend that you keep the utilization as low as possible, with the data showing that consumers who have a credit score of 795 or above typically use an average 7% of their credit limit.

At the end of the day, that’s not a “consumer unfriendly.” Ulzheimer says. “Consumers who are of elevated credit risk should not have better scores than consumers who have less risk. That’s credit scoring 101,” he says, adding that you may have to work to earn a better score.

But that doesn’t mean it’s impossible. In fact, FICO actually estimates that about 40 million will see their scores increase by 20 points or more. And that’s because maintaining those good credit habits “are rewarded quite strongly with FICO score 10 and 10T,” Shellenberger says.

All the more reason to pay off your credit cards whenever possible and make on-time payments. And if you haven’t been as diligent, you do have some time. Shellenberger expects most lenders adopt the new model next year.

Don’t miss: 110 million consumers could see their credit scores change under new FICO scoring

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‘There is no new normal’: Worcester small business owner pivoted during COVID-19 and expects only more change after pandemic

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It took about eight minutes for the bank to reject Natalie Rodriguez’s application for a loan through the Small Business Administration.

Rodriguez opened Nuestra, a Puerto Rican inspired restaurant in Worcester, in January of 2020. When COVID-19 arrived months later she discovered Nuestra wasn’t eligible for the federal or state funding that thousands of other establishments received.

To qualify, restaurants were required to show payroll and salary for years before 2020. Those figures didn’t exist for a restaurant that weren’t open in 2019.

“[I was] determined and knew that ‘no’ is not an OK answer,” Rodriguez said. “A door may close but you may need to kick down another door.”

Rodriguez then applied for conventional loans only to be led to more closed doors. Less than 10 minutes after applying for an Economic Injury Disaster Loan, she received notice that her poor credit score resulted in her application being denied.

Rodriguez used the dead end with the SBA to create a new path for herself and Nuestra.

She not only learned how to improve her credit but wanted to ensure others didn’t have to follow her journey as an entrepreneur.

Rodriguez extended the “Nuestra” brand to include financial advising. She started Nuestra Financial in April of 2020.

“Now I’m helping others. I’ve been able to restore my credit,” Rodriguez said. “I’ve been able to help others restore their credit and be able to help them make a business themselves if they so choose. I’ve been able to survive.”

Without grants and other funding, Rodriguez managed to keep her restaurant open through funds generated from Nuestra Financial.

“I was very quiet about it in the beginning. I didn’t want people to be like, ‘Oh look at this girl, she just opened a restaurant in the middle of a pandemic,’ and talk smack,” Rodriguez said. “About a month or two later, a light bulb hit and I was like, nobody pays my bills but me. I needed to mind my own business and not worry about what other people thought.”

In creating Nuestra Financial, Rodriguez said she’s helped Worcester residents restore their credit and purchase new vehicles and homes.

Rodriguez said financial literacy is rarely taught to children in school and wasn’t something she learned. When a situation arises like a rejection notice for an economic disaster loan, many don’t know how to respond or where to find answers.

Rodriguez said she’s helped young and old people, along with those who have bad credit or no credit.

“We lack the confidence, including myself, because we weren’t taught,” Rodriguez said. “So if you don’t know something, you weren’t taught, you’re not going to be confident about it.”

Coming out of the pandemic, Rodriguez remains confident about both her businesses. Nuestra, the restaurant, while closed for daily service continues to provide catering services. Rodriguez is still preparing what the future holds for the restaurant but plans to announce an update soon.

As masks start to become less a part of daily routines, Rodriguez, as a small business owner, doesn’t envision many differences from this year to last.

So many aspects of life remain uncertain from rising food costs to a potential third booster for vaccines and whether the country will ever reach herd immunity for COVID-19.

The pandemic arrived with Rodriguez immediately pivoting. As it approaches its potential end, Rodriguez will continue to do what helped her to navigate it.

“I feel like there is no new normal just yet,” Rodriguez said. “I think we’re all just trying to adjust and pivot at the same time and getting creative. I think it’s where we all are.”

Related Content:

Owner of Worcester’s Nuestra restaurant, closing due to COVID impact, has something she’d like to say to Gov. Baker

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Columbus Mattress Wholesale moves to newer, larger Gahanna store

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More than four years back, Cathryn Clark’s boyfriend, Christopher Robbins, was on the hunt for a new mattress. He just couldn’t find one at an affordable  price. 

Clark, 29, and Robbins, 34, who are now engaged, were living in Franklinton, where they still live today.

They had no experience owning or operating a small business; Robbins worked as a retail assistant for SAS Retail Services while Clark worked as the communications director for two Methodist churches. 

But in 2017, Robbins, with Clark at his side, took the leap and opened Columbus Mattress Wholesale on the West Side, with the goal of  helping low-income consumers secure mattresses and other bedtime products.  

“We really wanted to bring a store to people that, you know, they weren’t paying an arm and leg, but they still could get a good night’s sleep,” Clark said.

Customers at Columbus Mattress Wholesale can pay cash or credit, for example, but the business also works with financing companies that serve people without credit scores, with bad credit or who are lower income. 

Last month, the business made a big move. It expanded from its original location on Harrisburg Pike to a store double the size at 435 Agler Road in Gahanna.

Clark said she and Robbins saw a need in the broader area, with many of their customers coming from outside the Hilltop, such as Linden.

Nestled between Dollar Tree and the Ohio BMV in Gahanna, the new storefront opened Memorial Day weekend and sells mattresses, bed bases, bed frames and pillows. Mattress prices range from under $100 to more than $1,000, depending on the size and brand, which includes some well-known names such as Serta, Beautyrest and Casper.

Clark said while she and Robbins originally sold solely Ohio-based brands, they’ve branched out to national brands as business has grown.

Columbus Mattress Wholesale also offers free same-day delivery on most orders from customers living in Columbus. 

Clark does a little bit of everything for the business, from running communications, to working on the sales floor, to managing the sales team, to ordering what they sell. 

She said a big mission for herself and Robbins, beyond doing business, is aiding the community.

“We’ve seen a lot of people struggle,” Clark said.

Clark said she and Robbins work to mentor other people who are hoping to open or currently own a small business. She added that the store starts employees at $17 per hour.

She and Robbins haven’t decided yet what they will do with the original location — which is currently closed — but said they might shift it into an accessory store.

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A Guide to Getting Mobile Deals with Bad Credit History

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You’re interested in a new mobile deal but there’s only one thing that’s stopping; you’ve got a bad credit history. Does that mean that your hopes of getting a new phone contract are crushed? Well, not exactly. In this article, you will learn how to get a mobile phone with no credit check required and how you can navigate the issue to get a great deal even with bad credit history.

Why is a bad credit history a big deal?

When taking a new phone contract, it means you’re entering into a financial agreement that requires you to make payments in monthly installments. As such, many providers of the service will want to ensure that they’re entering into an agreement with someone who will pay the agreed amount without violating the terms.

The best way for them to have that assurance is by looking into the credit history of the client. But does it necessarily mean that if you’ve got a bad credit history you can’t honor your side of the bargain in a phone contract? Of course not; which is why this article gives you the options you can pursue to end up landing a pretty impressive deal.

Although you might not find a deal that includes the latest devices in the market, you’ll not lack a relatively cheaper but functional option. For instance, if you’re a great fan of the iPhone, you might end up landing the iPhone XR instead of the latest release of iPhone 12. When the deal is cheaper, you stand higher chances of success as opposed to one that just dropped in the market and so it’s in high demand.

Another alternative is to find a contract that comes with a used handset as such tend to be less strict in terms of credit history requirements. That means you’re likely to pass the test of a contract with an already used gadget as opposed to that of a brand new phone.

Another alternative could be to go for SIM only deals especially if you already have an alternative source for a handset. Most of the providers won’t require you to sign any contract and so they’ll not look into your previous credit history. SIM only deals tend to be intensive on minutes, texts and data offers.

Networks that favor people with bad credit

There are networks that are more lenient to people with bad credit history than others. Major networks including Vodafone, O2 and EE usually come with strict requirements that might only frustrate you. The following are the alternatives you could consider looking into:

Smarty:The company offers SIM only plans that don’t require you to sign any contract. If you have an alternative handset, this could be a great alternative to consider as they won’t do a credit check on you. Their services and offers run on a monthly rolling basis which means you can walk away at any time in case you’re dissatisfied with the quality of service you’re getting. Their deals start at 2GB of data and unlimited texts and calls at a cost of £5 to unlimited calls, texts and data for £16.

Giffgaff:You won’t be subjected to a credit test here as well during sign up for one of the packages that the network offers. You’ll be required to sign up for a monthly bundle of your choice that’s inclusive of calls, data and texts. You can proceed with the same plan or switch to a new one after the month is gone. Most of their deals start at £8 a month.

VOXI:The network has numerous offers that operate on a 30-day rolling basis. They also won’t bother performing a credit check on you as it has no use in the first place. A bonus with this network is that they won’t include the social sites you frequent in their data charges.

Mobile phone to go with a SIM only deal

The SIM only deals we’ve highlighted above means that you’ll need to have a separate handset. In case you don’t have one already, you can take a separate mobile phone contract to go with your preferred SIM only deal. The other alternative is to buy one outright. But in case you don’t have money to make the purchase, you can always save up and buy when you’ve accumulated enough.

Some great smartphones that are classic and yet won’t put a huge wall in your pocket. Coveted brands such as iPhone and Samsung have great devices such as the Samsung Galaxy A52 5G that goes for £349 and the iPhone SE valued at £399. As you can see, with some savings, you should be able to get your hands on these gadgets and many others out there. And if you feel that these cost on the higher side, you can opt for refurbished phones. Refurbished phones refer to those handsets that have been used but have undergone intensive testing to ensure they still have got higher functionality.

When do credit checks apply?

Credit history is required by providers that have a mobile phone that requires a payment plan spanning several months or years. In most cases, the major network providers including EE, O2 and Vodafone will do a background check on your credit check before allowing you to sign up for their deals. Some factors that might make you have a poor credit rating is when you’ve missed several months’ payments, made late payments or placed too many credit applications concurrently.

Want to improve your credit rating?

The following are several steps you could consider to help you improve your credit rating. Most of these revolve around efficient management of your money, bills and other forms of payments.

  • Have a proper and functional bank account
  • Pay all your outgoing bills on or before the due dates
  • Ensure you’re registered on the electoral roll
  • Don’t share your account with a person with poor credit rating

That’s how you can work out things to get mobile deals even if your credit history isn’t a good one. But going forward, the best action plan would be to work towards improving your credit rating so that you can take advantage of the opportunities that come up in future.

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