New Rules You Must Know About Credit Scores

A YourMoneyCounts® Exclusive by Lynnette Khalfani-Cox, The Money Coach

01 Jun 2011
Lynnette Khalfani-Cox

01 Jun 2011
Lynnette Khalfani-Cox

The world of credit reports and credit scores is constantly changing. And even though it’s tough to stay on top of all the new credit-related rules and regulations, it’s important to do so.

For 2011 and beyond, here are some of the most important things you need to know about protecting and improving your credit rating.

Credit Standards Remain Fairly High

FICO® credit scores, the most popular scores used by banks and other lenders, range from 300 to 850 points.

Before the credit crunch and the Great Recession, having a FICO credit score of 620 was good enough to help you secure a home loan and most other forms of credit. Today, however, many lenders consider a FICO score of 700 and above to be a “good” credit score. So managing your credit wisely will help you if you’re in the market for a credit card, student loan, car loan, and especially a mortgage.

According to the April 2011 Senior Loan Officer Opinion Survey released by the Federal Reserve, when it comes to mortgage lending: “On net, standards on prime closed-end residential real estate loans and home equity lines of credit were about unchanged during the first quarter of 2011,” the Fed said in a press release.

In other words, even though banks stopped tightening their credit standards in 2010, they’re not loosening their requirements either.

So it’s up to you to achieve the highest possible credit rating to secure favorable loan terms. To get a higher credit score, focus on paying all your bills on time, lowering your credit card balances, and limiting the number of inquiries or new applications for credit in your credit files.

Consumers Have Access to More Credit Information

Fortunately, as part of the Dodd-Frank financial reform bill signed into law by President Barack Obama in 2010, you now have greater insight into your credit standing and more awareness of the credit-granting process any time you apply for credit or a loan.

Under the law, effective July 21, 2011, anytime a potential creditor turns down your application, or does not give you the very best loan rates and terms due to your credit rating, you are entitled to detailed information explaining why.

For instance, the creditor must disclose to you:

  • Your credit score that the creditor used to make its decision
  • The date the credit score was created
  • The credit bureau that provided the credit score
  • The credit score range of the scoring model.
  • The key factors that adversely affected your credit score, with a requirement to disclose up to five “key factors” any time inquiries are one of the “key factors” that adversely affected the score.

If you get an “adverse notice” review that notice and your credit reports carefully to make sure the information reported about you is correct. You can get your credit reports free of charge at http://www.annualcreditreport.com (This link will open a dialog box).

If there is erroneous, outdated, or unverifiable information in your credit files, the fastest way to dispute such data is to contact the three main credit reporting agencies (sometimes referred to as credit bureaus) online. Here are the direct websites for the credit reporting agencies to initiate an online dispute:

More of Your Data is Being Tracked

For decades, the credit reporting agencies have tracked traditional forms of credit – such as your mortgage payments, auto loans and credit cards. Starting in January 2011, one of the “Big 3” credit reporting agencies, Experian, also started tracking rent payments.

In 2011, Experian will only report positive rental payment information about consumers. But starting in 2012, Experian will also keep tabs on and report negative information too, such as late rent payments and evictions.

According to the National Multi-Housing Council, there are approximately 96 million renters in America. Since about one-third of the U.S. population rents, a big group of consumers may be able to help establish a positive credit rating simply by paying their monthly rent on time. On the other hand, those who are chronically late with their rental payments will do damage to their credit rating and jeopardize their chances of being granted other forms of credit in the future.

Officials at FICO have indicated that they are currently examining the issue, to determine whether or not rent payments are predictive of credit risk, and should be included in FICO’s credit scoring model.

Either way, one thing is certain: whether you own or rent, you’ll be better off economically – and from a credit standpoint – by meeting your housing payments and all other financial obligations in a timely manner.