Credit Scores—What Do They Mean and How are They Changing?

Credit scores, every U.S. adult has one. But what do they mean, and how does your credit score affect you?

Credit scores may seem complicated, but they’re really just a summary of your financial history. Keep reading to learn why curating and maintaining a good credit score is best for you.

What Is a Credit Score?

The Fair Isaac Corporation, also known as FICO, launched the first credit score model with Equifax in 1989. A credit score is a number rating between 300 and 850 used to determine a consumer’s creditworthiness. Other credit-scoring systems exist. However, financial institutions most widely use the FICO score.

What Determines Your Credit Score?

The higher your credit score, the better a consumer looks to potential lenders. FICO bases its credit score model on:

  • Payment history – accounts for 35% of a credit score; shows if an individual pays their bills on time
  • The total amount owed – accounts for 30% of a credit score; considers the percentage of credit available to an individual that the individual is currently using
  • Length of credit history – accounts for 15% of a credit score; the longer the credit history, the more information there is to determine payment history
  • Types of credit – accounts for 10% of a credit score; shows if an individual has a mix of installment credit and revolving credit
  • New credit – accounts for 10% of a credit score; factors how many accounts an individual has, how many accounts they have recently applied for, and when they opened the most recent accounts

How Does Your Credit Score Affect You?

Credit reporting companies separate credit into five categories:

  1. Excellent (800 to 850)
  2. Very Good (740 to 799)
  3. Good (670 to 739)
  4. Fair (580 to 669)
  5. Poor (300 to 579)

An excellent credit score will help you get lower-rate loans, better car insurance rates, and easier approval to rent a property. A person’s credit score may also determine how much of a deposit one may need to put down for a smartphone, cable service, or utilities.

How Are Credit Scores Changing?

Four significant changes are coming this year.

  • Removing Most Medical Debt from Credit Reports

Starting July 1, 2022, medical collection debt that you paid (bills that were given to a collection agency but eventually paid) will no longer appear on credit reports. Also, starting July 1, consumers will have one year to fix insurance or billing issues before the unpaid medical debt is reported on their credit files. Currently, this period is only six months.

Also, in the first half of 2023, credit bureaus are to start omitting all medical collection debt under $1,500 from credit reports. This is estimated to remove about 70% of medical collection debt from credit reports.

  • BNPL Accounts to Be Added to Credit Reports

BNPL, or buy now, pay later, allows consumers to purchase items through installments that span several weeks or months, usually with no interest. However, the credit bureaus may classify BNPL accounts as short-term loans, which can lower your score. This is terrible news for the nearly 100 million U.S. adults that used BNPL over the past year.

  • Free Credit Reports Through 2022

During the beginning months of the pandemic, credit bureaus began to offer free weekly credit reports. Before the pandemic, you could only receive one free report from each bureau per year.

While this offer was supposed to expire as of April 20, 2022, credit bureaus have extended it to last through December 31, 2022.

It’s beneficial to check your report at least once a year. However, if you are a victim of identity theft or know that you have debt that needs to be paid, it’s best to check your score periodically to ensure it hasn’t gone down for a reason you’re not aware of.

  • Transitioning to FICO 10

In January of 2020, FICO updated its model from FICO 8 and FICO 9 to FICO 10. “The new FICO score is reported to give more weight to rising debt levels, higher debt utilization (the ratio of the amount you borrow relative to the amount of credit available to you), and late payments. Unsecured personal loans are also being reconsidered,” according to Schwab.

It’s expected that this new FICO model will cause points to fluctuate about 20 points in either direction. If you already have excellent or very good credit and take steps to build it, you have nothing to worry about. These changes are expected to widen the gap between those with good credit (670-739) and those with bad credit (below 580).

Why Do You Need a Good Credit Score?

Good credit makes it easier for you to get approved for better credit cards and loans for purchasing things like cars and homes. Without a good credit score, you risk higher interest rates, smaller loans, or not even getting approved for a loan at all.

To improve your credit, you should:

  • Pay your bills on time
  • Up your credit line
  • Keep credit card accounts open (even if you don’t use them)
  • Only open new lines of credit periodically (not all at once)
  • Work with a credible credit repair company

Prepare For Your New Home Today!

Excellent credit is vital in obtaining a loan for your dream home. Check your credit score periodically and follow the steps listed above, and you should be golden when it comes time to make a big purchase.

At The Massey Team at Berkshire Hathaway HomeServices Select Properties, we can help you take that giant leap into the unknown waters of home buying and owning. We know it can seem intimidating at first but trust our expertise, and we’ll help you every step of the way.

To view our current listings, visit our website today! If you would like to contact a team member, call us at (618) 791-5024 & (618) 791-9298.

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