I was clueless about the process involved in renting an apartment and securing a lease in the 2000s. Or, how having a FICO score fit into the process.
When I got my first apartment, I had to undergo a credit check.
I was completely terrified the process would be over before it started.
In my preparations for getting my first apartment and getting married, I had become grotesquely irresponsible, bordering on criminally stupid, with my credit card use.
Let’s put it this way: those old-fashioned “Afterschool Specials,” half-hour educational and morality tales that taught children and teens important life lessons which were produced in the 1980s, should be updated to include a special based on my former credit card use.
I had amassed so much so much credit card debt from late payments, habitual late payments, and flagrant payment delinquency that I had knew I had a bad credit score.
I just didn’t know at that time, in the mid-2000s, that a bad credit score could stop you from getting an apartment. A mortgage or a car loan, sure, but an apartment?
How much I miss being an ignorant 20-something.
Sometimes.
The real estate agent, who lived across the street from me, took pity on me and allowed me to sign the lease.
My credit score was abysmal. I wonder if the best thing that could have happened to me was getting rejected from signing that lease.
I didn’t become more responsible with my credit card use. It became worse.
I haven’t used a credit card in over a decade. But that’s another story.
What’s interesting is that, as per FICO’s new credit scoring metrics, I would never have been allowed to qualify for that lease.
That is because FICO is now more aggressively calculating debt and debt payment histories of consumers into its scoring metrics.
The New FICO Credit Score Metric
As of January 2020, FICO has officially updated its scoring metrics and how it calculates credit scores.
Most notably, if you have unmanageable debt, miss payments habitually, or are frequently delinquent with payments, your credit score will be significantly lower.
Credit scores could increase or decrease by a factor of 20 points or more depending on how well you maintain your credit.
So, if you’re always paying your credit card bills late while always being mired in debt, get ready to see an up to 20-point drop in your credit score.
Still, if you have good credit and pay your bills on time, then your credit score will rise accordingly.
Over 110 million Americans will see their credit scores seriously affected by FICO’s new scoring metric.
That is because unmanageable debt is a serious problem in 21st century America.
Unmanageable Debt and FICO 10
According to a November 2019 report by the Federal Reserve Bank of New York, Americans collectively owed almost $14 trillion in household debt.
Think about that number.
Almost $14 trillion in household debts.
The reality of unmanageable debt in America precipitated FICO to change their scoring metrics.
Just giving consumers the benefit of the doubt, along with an average credit score as an automatic default score, is no longer an option.
FICO released a statement saying that over 80 million Americans will see their credit score rise or fall by at least 20 points as a result of their new scoring metrics.
The latest scoring metric is officially known as FICO 10. The last time FICO’s credit scoring metric was updated was the FICO 9 metric that was implemented in 2014.
The only bright spot for consumers with bad credit scores is that financial lenders and banks choose their own scoring metrics.
They can also choose with FICO scoring model they want to use.
Still, your best bet is to know the difference between a good and bad credit score.
And, how credit scores are calculated.
Credit Score Scale
So, what constitutes a good credit score from a bad one? A FICO credit score is made of 3 digits and ranges from 300 to 850.
- Bad – 300 to 629
- Fair – 630 to 689
- Good – 690 to 719
- Excellent – 720 to 850
The higher your score, the less you’ll be considered a risk to lenders and credit card companies.
This is good to know when considering how your credit score is calculated.
How FICO Scores are Calculated
There are 5 metrics by which your FICO credit score is ultimately calculated.
About 35% of your credit score is calculated based on your timely, or delinquent, history of payments. Make a habit of paying your debts on time.
Another 30% of your credit score is calculated based on how much debt you have. This metric is being more significantly considered now in your final score in the FICO 10 metric as opposed to FICO 9 metric.
How long have you had a credit history? That will comprise another 15% of your final credit score calculation.
What kinds of credit, or credit mix, do you own? This could include credit cards, a mortgage, a car loan, and so on. This information makes up about 10% of your credit score.
How much new credit do you own and how often do you apply for new credit? If you apply for multiple credit cards within a few weeks or months, then you’ll be flagged as an application risk to lenders.
If you have bad credit and apply for new cards often, lenders perform, “hard inquiries,” to check your credit history. This can lower your credit score by several points, not counting the 20+ point drop the FICO 10 metric can cause.
Long story short – use credit cards responsibly and pay your outstanding balances on time and in full.
The new FICO 10 scoring metric will only reward you in the long run.
Read More
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Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.