What Do New FICO Changes Mean for Me?

Have you ever applied for a credit card, car loan or mortgage? If so, then one of the first things the lender looked at was your FICO score. It has a major impact not only on getting approved in the first place, but also on the interest rate you will receive after approval.

On August 7, FICO announced some pretty major changes in how they will be calculating that ever-important number. Before you can understand how the changes will or won’t impact you, you need to have a firm grasp of the basics.

What is my FICO score?

Your FICO score, or credit score, is a number ranging from 300-850 that shows lenders how reliable you will be in repaying your debts. A bad score is anything below 560, not very good is 560-659, good is 660-724, very good is 725-759, and anything above 760 is classified as great. While it is best to be in the great range, you can sometimes qualify for the best available interest rates with 720 or above.

In order to calculate your credit score, FICO pulls information from your credit reports from the three major reporting agencies: Experian, TransUnion, and Equifax. When banks and other lending institutions consider your application, they look at several factors. The first is usually your FICO score, which will either get you in the door or get it slammed in your face, but after that they consider other aspects of your finances, such as income and the detailed history on the credit report itself.

What are the changes, and how will they affect me?

There will be four notable changes to how FICO evaluates your credit score once the announced new model is released. Some of them will be very good for some people, some of them will be bad for others, and some of them may prove to show negligible changes.

The first, and biggest, is that medical debts will no longer be considered when calculating your score. This is a huge relief. Many otherwise fiscally responsible people go into massive debt when a medical emergency happens. Others don’t even know they owe money on medical bills in the first place, as they thought their insurance was going to cover their costs. When they realize they owe money, the responsible consumers pay it back, but it still leaves a scar on their credit report and, therefore, their FICO score.

With this new change, your FICO score will not be impacted. In fact, if you have no other negatives on your credit report (which would mean you most likely have a halfway decent score), you can expect to see your FICO score increase by up to 25 points.

Changes will also be made in considering debts that you have paid off. Currently, after you’ve paid off a debt, it stays on your credit report for seven years. That will continue to be the case after FICO’s updates go into effect, but FICO will no longer look at those debts, even though they show up on your credit report. If you have consumer debts that you have paid off, and they’re the only thing holding you back, you may see your score improve, as well.

There will also be an update to consider the creditworthiness of people who do not have an extensive report, taking into consideration things beyond just paying your month-to-month bills on time. (A lot of times, the people you are paying those bills to don’t even report that anyways.) Depending on how this is done, it could be a boon for those who are unable to get credit not because they are irresponsible, but simply because they have never chosen to borrow money before.

The final update is not good news for those who hold consumer debt. If you owe money and it isn’t paid in full, you can expect to see your credit score take a hit.

Hold your horses – and your enthusiasm.

While FICO has announced that it will make these changes, the new model has not gone into effect. It will not be ready to release to lenders until late 2014 or early 2015. Even then, banks have to choose to adopt it. Thismodel will be FICO 9. FICO 8 was introduced in 2009, and some lending institutions still have not updated since FICO 7. Just because they are releasing a new model doesn’t mean that your lending institution will apply it to their evaluation process.

Another thing to remember is that while your FICO score gets you in the door, banks will look at your credit report. All of those things FICO ignores will still show up. If your medical debts are deemed too oppressive for you to possibly be able to pay for a mortgage on top of them, you may still be denied. And while FICO will ignore debt that has been paid off and closed, it will still stay on that pesky credit report for seven years for all of your potential lenders to see.

While these changes could be a great way to get your foot in the door with lenders, they’re not a holy grail to your credit problems. The same tried and true wisdom will still apply: Spend responsibly, make sure the information on your credit report is accurate and pay off any debts as quickly as possible.

Femme Frugality is a personal finance blogger and freelance writer. You can find more of her writing on her blog, where she shares both factual articles and esoteric ruminations on money.

The post What Do New FICO Changes Mean for Me? appeared first on MintLife Blog.

Source: mint.intuit.com

Can I Get a Car Loan If I Have No Credit?

buy a car with no credit

Yes, lenders have auto loans for people with no credit, but getting one is not guaranteed. It will depend on the lender’s flexibility, the down payment you can afford, and the kind of car you want to buy. It may even depend on how you ask.

Phil Reed, senior consumer advice editor for the consumer auto site Edmunds has some good advice on how to get a car loan with no credit. He says a surprising number of people simply walk into a dealership and say, “Hi, I have no credit, and I want to buy a car.” He doesn’t recommend this approach. Instead, he offers these five tips for people who need a no-credit car loan.

1. Get Pre-Approved

If you have no credit or a thin credit profile, you should try to get preapproved for a loan before heading to the dealership. This will let you compare rates with any loan the dealer may offer. It may also give you a bargaining chip when negotiating the final deal.

If you have a relationship with a bank or credit union, you should start looking for financing there. Reed recommends making an appointment to meet with your bank’s loan officer in person.

“Make a case for yourself,” he says. That means bringing your pay stubs and bank account records with you. You should also check your credit reports, if they exist, and credit scores. You want to know as much about your credit profile as a lender would. If you don’t know your credit score, don’t worry—you can check your credit score for free every month on Credit.com.

If you can’t get a loan from your financial institution, you may be able to find a no-credit auto loan online. Just make sure it’s from a reputable lender. Credit.com can also help you find auto loan offers from trustworthy lending institutions.

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2. Negotiate a Good Price

A dealership could beat the offer you get from your bank or credit union. However, if you know you’re already approved for a loan, you can focus on comparing rates and prices instead of worrying about financing.

Reed says that it’s important to be wary. You don’t want to feel so indebted to the dealer for “giving” you a loan that you fail to negotiate the price of the car. And if the dealer’s financing isn’t better than the bank’s, at least you still have an approval in your pocket.

Having a good down payment or trade-in can also help your case. A trade-in would reduce the amount you’ll need to borrow, and a larger down payment would show the lender some commitment on your part. Edmunds recommends putting at least 10% down on a used car, so start saving now.

3. Choose the Right Car

Be sure the car you’re buying is affordable for you, even if it’s not the car you’d choose if you had more money and better credit. “If you have no credit, it’s not the time to get your dream car,” Reed says. “You have to choose the right car and the right amount [to borrow].”

You want reliable transportation you can afford. Making regular, on-time payments won’t just pay down your load, it will also build your credit, so don’t get a loan that requires higher payments than you can comfortably make.

Sites like Kelley Blue Book, Cars.com, and Edmunds can help you find information on the cars that match your budget. When you’re at the car dealership, remember your budget and don’t spring for optional add-ons you don’t really need.

4. Don’t Let Interest Rates Scare You Off

Reed cautions that when you get a loan with no credit, the interest rates you’re offered may seem appallingly high, but that’s part of the cost of having no credit history.

When you don’t have a credit score, lenders can’t assess how big of a risk they’re taking by giving you a loan. To protect the money they’re lending, they will likely treat you as a high-risk borrower, which means the loan will have a higher interest rate.

As you make payments, you’ll establish a pattern of reliably paying back money. Over time, you can improve your interest rate by refinancing. Reed says that, according to a dealership employee, a customer once lowered his interest rate from 13% to 2% in two years’ time by improving his credit and refinancing.

5. Give Yourself Some Credit, Not a Cosigner

Reed advises against cosigning—a process that involves checking someone else’s credit and using that score to qualify for a loan. It might get you a lower rate and help you get approved, but Reed says that if you bite the bullet and pay a higher interest rate rather than get a cosigner, you’ll have the opportunity to build credit.

In addition, having a cosigner will tie that person’s credit to yours, and the way you repay your car loan will influence their credit. Reed says if you’re going to do it, do it only as a last resort, and make sure the cosigner is a relative.

Bottom line, though, as Reed explains, “It’s asking a lot.” It’s better to finance the car yourself, pay on time, and build your credit. That way, the next time you need a loan, you won’t have to worry about whether you’ll qualify.

Good credit doesn’t just help you get reliable transportation: good credit can make a huge difference in improving your financial security and the peace of mind that comes with it. Start tracking your credit for free today at Credit.com. Your new car will get you moving around town, but your new credit score will get you moving up in the world.

Image: iStock

The post Can I Get a Car Loan If I Have No Credit? appeared first on Credit.com.

Source: credit.com

6 Damaging Side Effects of Having a Bad Credit Score

Side effects of a bad credit score

As you make another large purchase against your credit card, inching closer towards maxing out, you might not realize the negative ramifications this activity will have on your credit score. The same goes for making the odd late payment on your hydro bill or car loan payment. Mounting debt that is not paid off in time or in full can have a major impact on your credit score.

A bad credit score can have more negative consequences than you may think

So what’s the big deal about having a low credit score? These days many institutions – from loan officers, to businesses, to insurance companies – look to your credit history before making a move. You could find your low credit score putting you in a position where you can’t get approved for a loan, get a job, or even find a place to live. Here are 6 damaging side effects of having bad credit.

1. Your Loan Applications Might Not Be Approved

Lenders and creditors see borrowers with poor credit as high risk, which means they’ll be less inclined to lend you the money you need. Whether you’re looking for a mortgage to buy a home, or a loan to finance a new car, you might find your loan applications being denied.

2. You’ll Be Subject to High Interest Rates

If you do get approved for a loan, you’ll most likely end up being stuck with a really high interest rate. Since lenders see people with a poor credit score as risky business, they’ll make you pay for it by attaching your loan with a sky-high interest rate. The higher your interest rate on your loan, the more you’ll be paying towards interest rather than the principle over the long run of your loan period.

3. You’ll Be Subject to Higher Insurance Premiums

Even insurance companies check background credit scores. Their claim is that poorer credit scores are associated with an increased number of claims filed. This theory prompts insurance providers to check a person’s credit background. If they find that you’ve got a credit score that’s less-than-par, you’ll most likely be charged a higher premium, no matter how many claims you’ve actually filed.

Do you know the ramifications of having a bad credit report?

Fixing a bad credit score

4. You Might Have a Tougher Time Landing a Job

Many jobs – especially ones in upper management or in the financial industry – have specific criteria that potential employees need to meet, including having a strong credit score. You might find it a lot more challenging to land the job you want because of your bad credit history, particularly if you’ve got exorbitant debts amounts outstanding, or even a history of bankruptcy.

5. Starting Your Own Business Might Be a Challenge

Not only will finding a job be more difficult with a low credit score, but even starting your own business might be a challenge. Many new businesses need the assistance of a bank loan to get started. With a low credit score, banks will be less likely to approve your loan application, even if your business idea is a great one.

6. You’ll Have a Harder Time Getting Approved for an Apartment

Even landlords check the credit history of potential tenants. If you’ve got bad credit, the landlord might be less inclined to approve a lease, and will sign it over to a tenant with good credit instead. Landlords, much like insurance companies and banks, make the assumption that those with poorer credit are more likely to be delinquent on monthly payments, which puts them at a greater financial risk.

The consequences of having poor credit may be a lot more extensive than you may have thought. Your best bet is to do everything you can to get your credit back into shape, which can be done a lot more easily with effective tools like those at Mint.com.

You can quickly and easily put your finances in order, with Mint doing all the organizing and categorizing of your spending on your behalf. By being able to see where all of your spending is going, you’ll be better able to make better spending decisions, which will only have a positive impact on your credit.

Click here for a free trial.

The post 6 Damaging Side Effects of Having a Bad Credit Score appeared first on MintLife Blog.

Source: mint.intuit.com

What Happens When You Pay Off Your Car Loan?

A man wearing sunglasses drives his car.

According to the Consumer Financial Protection Bureau, around 2.3 million car loans originate every year. Car loans can take years to pay off. So when you finally pay it off, you might be wondering—now what?

What happens when you pay off your car? What should you do with the money you were previously putting towards your monthly payments? We’ve got a few ideas, but keep in mind that everyone’s finances are different. So while our suggestions might work for some people, they probably won’t work for everyone.

What to Do When You Pay Off Your Car

Firstly, paying off your car loan is a huge accomplishment. So congratulations! Paying off any loan isn’t always easy. And now you finally own your car, which is a pretty big deal.

Luckily for you, the hard part is over. But there are still a few steps you should take after you pay off your car.

1. Get Your Car Title

You usually don’t have to take action for this step. In most states, your lender notifies the Department of Motor Vehicles—or BMV or other equivalent entity in your state—of the title change. Once the paperwork clears, the title is mailed to you.

There’s not much for you to do except keep an eye on the mail. If you don’t get your title a few weeks after paying off your loan, call your lender. You’ll need the title if you ever want to sell your car or use it for collateral when applying for credit.

2. Reconsider Your Finances

If you’re paying off a vehicle and not planning to buy another with a new loan, you’ll have a little more extra room in your budget. In 2019, new car buyers committed to an average monthly payment of around $550. So when you pay off your car loan, there’s a good chance you’ll have an extra $300 (or more) per month.

You might be tempted to splurge on fun stuff or to make large purchases you’ve been putting off. But unless your transportation situation is radically changing soon, you’ll always need a car. And that means you’ll eventually need to pay for the next one.

Plus, owning a car is expensive—even if you’ve completely paid it off. You’ll have to your oil changed, new tires and much more. And that’s just regular maintenance. If you get in even a minor accident, you could have a major repair expense on your hands.

That’s why it’s a good idea to put that some of that extra money in savings. If you end up getting a new car eventually, you can pay for all or part of your next vehicle with cash. That reduces how much you have to finance, which can significantly reduce the total cost of your next vehicle. Another option is to use the money to continue to pay down other debt to put yourself in a better financial situation in the future.

It’s also worth putting part of that cash in your short-term savings. You could easily dip into those funds if you need to get any work done on your car. But whatever you plan to do with the money, take the time to look at your personal budget. That gives you a chance to see exactly where this extra money might make the most difference.

3. Notify Your Car Insurance Company

Notify your car insurance company when you’ve paid off your loan so you can remove the lien holder from your policy. You don’t need to wait until you have the title in your hand to make the call.

This step is important because if your financed vehicle were totaled in a wreck, the insurance payment would go to the lender. Once you’ve paid off the car and own it outright, the payment goes to you.

4. Consider Any New Insurance Options

Most states have requirements for what type of coverage you must carry on your car. At minimum in most states, you need bodily injury and property damage liability that will cover the losses of other people if it’s caused in a wreck that is deemed your fault. There are some exceptions to those requirements, though.

But your lender will likely require additional insurance coverage until you pay off the loan. Many lenders require you to also carry comp and collision coverage. This is the part of your insurance policy that pays for damage to yourvehicle if you get into an accident that is deemed your fault.

Lenders require this extra coverage to protect their investment. They want to know that if your car is totaled, they can recover the value that you owe them. Once you pay off the loan, whether or not you carry this level of coverage might be your choice.

Talk to your insurance agent to find out what your options are and if you can save money by changing your insurance coverage. Just remember that if you drop this coverage and get into an accident, you may have to cover the costs of repairs or a new vehicle on your own.

You can also check rates for auto insurance online. In addition to saving money on your monthly vehicle payment, you may be able to save a lot on your insurance coverage.

Does Paying Off Your Car Loan Early Hurt Your Credit?

To get out of debt or change your current car, you might decide to pay off your car loan early. Your credit isn’t penalized by making early payments on debt. However, paying off an entire account can cause a small dip in your credit score temporarily. That’s because open accounts with a positive payment history impact your score more than closed accounts with positive payment histories.

Your wallet might also take a small hit depending on how your loan is structured. Find out if your loan includes any penalties for paying off the principle early before you make a decision to go this route.

The post What Happens When You Pay Off Your Car Loan? appeared first on Credit.com.

Source: credit.com