The world of consumer credit has been altered dramatically over the past year, and many of the changes affect whether you can obtain credit, and what you pay. "In the previous two decades, your credit scores have become more important over time. Then in the past year, it's suddenly become critical," said Liz Pulliam Weston, author of the newly updated "Your Credit Score: Your Money & What's at Stake" and who has extensively researched credit issues.The credit world is vastly different than a year ago, and not knowing about the changes could cost you money."The rules have definitely changed," said John Ulzheimer, president of consumer education for Credit.com.
Credit polarization."What I've seen is the world dividing up into two worlds--the credit haves and the credit have-nots," Weston said. Those with great FICO credit scores--the brand of three-digit scores that matter most--still have access to lines of credit at good interest rates. They include mortgage refinancing, car loans and rewards credit cards.What's changed most is for those without sterling credit. Fewer will qualify for loans at all, and those who do will face higher interest rates and more onerous terms. "Having great credit is crucial if you want to have the best possible financial life," Weston said. "People don't realize how much more they pay for having mediocre or bad credit."A $300,000 mortgage with a great credit score might cost you $1,500 per month, while the same mortgage with a poor score might cost $1,800 monthly, according to MyFico.com, a division of the firm that created the FICO score.Fair Isaac, the company that began the FICO score and sells it to lenders, does not disclose exactly how it calculates scores.-- New benchmarks.Until the last year, having a FICO credit score of 700 to 720 was good. Today, you'll need about 740 for the best mortgage rates, 750 for the best rewards credit cards and 760 for the most favorable auto loans and home-equity lines of credit, Weston said. A year ago, a score under 620 might have been considered subprime and subject to punitive terms. Today, that has jumped to 660 or even 680, Weston said. "That's a huge turnaround," she said.-- Lower limits/canceled lines.Banks are more often reducing borrowing limits and canceling credit lines. "It used to be that credit card companies would pick on the folks with poor scores or who had missed a payment or had something else obvious they could point to," Weston said. "These days, they're just whacking credit lines right and left."But if you have great credit, with a FICO score of about 750 and greater, you're in demand. So call your lender and ask for that line to be reinstated or tell them you'll take your business elsewhere.If you have a low FICO score, "you're in a world of hurt," Weston said. The only thing you can do is try to improve your score. The best way to do that is to stop borrowing and pay off balances.Ulzheimer predicts creditors within the next one to three years will be lending again to higher-risk consumers. "Lenders have very short memories," he said.-- Canceled credit cards.Some companies are canceling cards because of low use. That's different from the past, when issuers would keep dormant customers on their books for years in hopes they would start using their card. You want to maintain the available credit of "back of the wallet" cards to help your credit score. You're likely to have a higher score if you have high limits compared with the amount of that credit you actually use. The easiest way to do that is to occasionally use the card--a few times a year--and pay off the balance.-- FICO 08.Fair Isaac is rolling out a new scoring model. FICO 08, developed last year, cares even more than the old formula about the ratio of your borrowing to your available limits--your credit utilization, Fair Isaac has said."It's even more sensitive to the balances you carry on your credit card," Weston said. Ideally, you would keep balances below 30 percent of your available limits, regardless of whether you pay it off in full, with less than 10 percent being best.FICO 08 also ignores small overdue bill collections of original debts of less than $100--for, say, overdue library books or small medical bills.It's difficult to determine when and if lenders will start widely using FICO 08. Only one of the three major credit bureaus, TransUnion, is offering a FICO 08 score to lenders, Ulzheimer said.-- Experian FICO score.Consumers can no longer buy their FICO score from Experian, another of the big credit bureaus. On Feb. 14, Experian cut off access because of a dispute with Fair Isaac. But many lenders use the Experian FICO score, so you could be judged based on a score you cannot see ahead of time. That puts consumers at a disadvantage, Weston said. But there's little you can do little about it. In many cases, your Experian FICO score will be similar to scores from the other two bureaus, TransUnion and Equifax, but not always.-- Score simulators.Several credit-related Web sites have developed FICO score simulators, which are useful if you're curious about where you stand. Examples of simulators are at such sites are Bankrate.com, Quizzle.com and Credit.com. But if you're in the market for an important loan, it's worthwhile paying for your FICO scores from MyFico.com. That way, you know where you stand and whether you'll qualify for the best borrowing rates. And you can always pull your credit reports, upon which your score is based, from AnnualCreditReport.com. Then you can quickly and easily dispute errors that might be hurting your score.
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