As many of my readers know, Fair Isaac Corporation or FICO keeps the credit scoring algorithm Top Secret!

Under pressure from both the governmental watchdogs and consumers, FICO has been releasing limited information about how credit scores are impacted by common events in one’s personal finances.

Well today they disclosed for the first time ever the extent of damage done to a credit score with some of the most common credit boo boo’s that happen to most Americans.

Borrowers already knew that late payments hurt their credit scores, but for the first time, they now know the extent of that damage.

Thinking of “maxing out” your credit card? Expect a credit score drop of 10 to 45 points. Declare bankruptcy? Your score will plummet by up to 240 points, and your odds of getting credit will nosedive with it. (at least that what some people think )

The “damage points” data, unveiled recently by FICO, are part of the most revealing glimpse into the firm’s once-secret — and still mysterious — credit scoring model. The new information discloses how many points borrowers’ scores will drop when they make the most-common mistakes.

Here is a sample of that chart from Fair Isaac -

The greater transparency about FICO scores is important because American consumers’ ability to get credit rises and falls with the number. FICO, the company that pioneered credit scoring, assigns consumers a three-digit number from 300 to 850, depending on how well they handle credit.

FICO’s credit score has been around for decades, but only within the past decade have consumers gradually gained access to theirs. Though the raw numbers can be purchased, how they’re figured remains a FICO secret, as closely guarded as the formula for Coca-Cola. Until Thursday, FICO revealed only broad categories of factors influencing the score, but not the number of points at stake for consumers who fail to pay as agreed.

FICO’s information shows that bankruptcy does the most serious damage to a credit score (up to 240 points), followed by foreclosure (up to 160 points) while maxing out a credit card has the least numerical impact (as few as 10 points).

Those with good or excellent credit — so-called prime borrowers — put more points at risk with each mistake. For example, someone with an average credit score of 680 who pays a bill 30 days late will see a drop of 60 to 80 points. But for someone with an excellent credit score — 780 — that same delinquency can send a FICO score tumbling by 90 to 100 points.

The Real Cost Of Bad Credit in Dollars –

In order to show just how badly a drop in your FICO score can hurt your wallet, below are some examples from the home mortgage, auto, and credit card lending institutions.

The examples represent hypothetical scenarios of a consumer who decided to apply for a $200,000, 30-year mortgage; a $20,000, five-year auto loan and a credit card. While all the industry insiders stressed that a FICO score isn’t the only factor in determining who gets credit and at what cost (other factors they cited include the borrower’s debt-to-income ratio and whether they have already established a relationship with the lender), they were able to provide an idea of what a borrower who had the following credit scores could expect.

For a Consumer Who Started With a FICO Score of 780:

• Following a 30-day late payment, the consumer’s car loan rate would jump nearly 3 percent, costing the borrower $26 more each month.
• Following a debt settlement, the consumer would pay as much as $109 more each month on a home mortgage.

For a Consumer Who Started With a FICO Score of 680:

• Following a 30-day late payment, the consumer would pay $41 more each month for a car loan.
• Following a 30-day late payment, the consumer would pay as much as $95 more each month on a home mortgage.
• Following a debt settlement, the consumer would no longer qualify for a credit card.

So as you can see, learning how to improve credit scores puts REAL dollars in your pocket and can save you thousands of dollars over the life of any loan or credit card you may have.

Until next time,

Mark

   With the latest move by the Fed, I have received many questions about what will it mean, and by when for all of us in the real world. The Federal Reserve has cut interest rates by 50 basis points. I will give you my 2 cents on what exactly you can expect and what you need to be doing about it for your finances.

Action: Home Equity Loans

How Soon Will You Be Affected? 1 or 2 Billing Cycles

   The latest rate cut will eventually mean lower borrowing costs for those of you who have a Home Equity Line Of Credit (HELOC). Most of these loans are indexed to the prime lending rate. This rate moves in tandem with the Federal Funds Rate.

    Rates on new home equity loans are a bit trickier to predict where things are headed. These loans don’t follow the Federal Funds Rate. Also, these loans tend to have fixed interest rates.

Action: Mortgages

How Soon Will You Be Affected? Impossible To Know

   The recent rate cut will have an unpredictable effect on mortgage rates. The banks and lending institutions are still “freaking out” and are processing VERY few new loans. At this time it is impossible to tell when – or even if – rates will come down. I suspect they will due to the simple fact that we have to get the flow of credit running again and start to stabilize the housing market.

Action: Car Loans:

How Soon Will You Be Affected? Be Afraid, Be VERY Afraid!

   The rate cut will probably not factor into any kinds of savings for car buyers. As many readers of my Crushing The Credit Bureaus         e-book will remember, my ex-father-in-law used to own a Ford Dealership. He tells me that we are at the beginning of seeing a meltdown in the car business like we have seen in the residential housing market.

   He mentioned that his colleagues are telling him that to get someone approved for a car loan, many of the major auto finance companies are requiring  a FICO Credit Score of 720! That is huge. Less than 15% – 25% of the population have credit scores that high. 

   If the already troubled auto industry can’t sell their vehicles and inventory start to pile up, how long do you think it will be before some of those corporate giants will need a government bailout? YIKES

Action Credit Cards:

How Soon Will You Be Affected? 1-3 Billing Cycles

   This gets a bit tricky…since rates will be lowered that doesn’t mean they will necessarily give you a rate cut. Far from it – many credit card companies are actually raising the interest rate on many of their customers.

   Floor rates could prevent some variable-rate cardholders’ APRs from falling, as could lower credit scores. Certain behaviors can trigger a rate increase or lower credit limit, such as paying late, habitually paying the minimum balance or charging close to the card limit. 

   Regardless of what happens, pay attention to your statements and any notices of a change in terms that arrive in the mail. Make sure your issuer hasn’t made an unfavorable adjustment to your APR or credit limit. 

   The latest reports indicate that there is almost triple the default rate on credit card accounts over one year ago. Think about that for a moment – all of those credit card companies and credit issuers will have losses in the billions!

I can’t stress enough though about making sure that your credit scores are healthy and the highest they can possibly be.

The near term is a bit scary with regards to all of this credit mess. You can find more credit repair tips by visiting www.CrushingTheCreditBureaus.com.

Stay Tuned

Mark

How To Raise Your FICO Credit Scores Fast!

As many of my students and coaching clients know, one of the quickest and cheapest (as in no cost at all) ways to increase your FICO Credit Scores is to change the ratio of credit used vs credit available. This is sometimes called a “Utilization Ratio” and it this part of the scoring algorithm factors heavily on your overall credit scores.

Now, what I am about to teach you can be abused by folks who don’t have self-discipline…I must tell you that when you get an increase on your cards – DO NOT go on a shopping spree!

You are trying to obtain the highest possible FICO scores you can, and increasing your credit card limits is one of the fastest ways I know how to accomplish this. I recommend you do this twice per year – six months apart for the best results. 

For this to work, you must not be late on any payments in the last six months and you must not have gone over your credit limit in the same six month period.

I will let one of my newest friends, Lane McGhee explain it to you in his own words:

There you have it. One simple phone call and Lane has added $26,000 to his credit card limits.

I would venture to say that he had an immediate bump in his FICO credit scores as well.

Now, Lane is an extremely prudent and savvy real estate investor. I know that he will put his newfound increases to a profitable use over and over again.

Folks, that is how the credit game works…find a system or process and as the old saying goes; “Lather, Rinse, and Repeat”…

Stay tuned and a BIG THANKS goes out to Lane McGhee for his credit testimonial…Thanks Lane!

Mark

www.CrushingTheCreditBureaus.com