Bankruptcy & Foreclosures

I know, I know, we hear it all the time: Pay your bills on time and you will be rewarded with a high credit score, slip up and your score drops. One of the most common questions around here is “how exactly is my score computed?” or better yet “how long does a mistake remain on my report?”

I have some good news and, well, some more good news. Fair Isaac & Company (FICO), the group responsible for the current credit score model, is just about set to release a new formula of computation! Better yet, the new formula plans to further benefit those who pay their bills on time.

Since 2006, FICO has been assembling their new credit rating system and may still take a few months before consumers see changes in their credit score (as the bureaus themselves (Experian and TransUnion) adapt to the new rating formula. Interestingly, the new model began development long before the current recession flared up.

So what’s the point of the model makeover you ask? Surprisingly, the core of the new design was intended to alleviate the exact economic situation we’re currently going through! The idea behind it is to provide a better differential between good risk borrowers and bad risk ones by giving creditors a more accurate prediction of the potential for default. What’s this mean to you? If you happen to be a consumer in fair standing with a pretty solid track record for making your payments, your score could very easily jump by as much as 25 points under the new formula.

Let’s take a look at some of the individual areas the new formula plans to improve:

The system treats a single large slip up (even as much as 90 days) as an “isolated delinquency” to individuals with a 10-year credit history. Routine late payments of less than 90 days will still damage your report but at least now a legitimate mistake won’t haunt you so severely.

Also under the new system, multiple credit inquiries in a short period of time won’t be so damaging to your credit score, as now they will be weighted less heavily in calculating the overall number.

Finally, the new system actually rewards borrowers who demonstrate the ability to stay on top of both revolving debt (credit cards, lines of credit) and installment loans (auto loans, mortgages). Believe it or not even if you show a hodgepodge of loans but a solid history of paying them on time, expect your score to jump up as well.

With all of the preparing, decorating, shopping, baking, and wrapping occupying the months leading up to this week, Christmas has come and gone in a flash leaving many individuals to focus on the upcoming new year. In my last post we discussed some of the shaky economical situations that 2007 will likely be remembered by but on the immediate horizon, there will certainly be affects of the sub-prime industry rearing their ugly head as we cross over in 2008.

It is likely that the lending industry as a whole will tighten its collective belt in repercussion to the events of 2007. Prepare for increased difficulty when attempting to borrow money from your bank and this means more than just morgages. Car loans, home-equity lines, personal loans, and even some student lending will likely be affected. For obvious reasons, lending institutions are likely going to increase their stipulations before approving loans. To make matters worse, interest rates will likely suffer as well.

However, I don’t mean to spread doom and gloom in this topsy turvey time, but rather just to remind potential borrowers to keep their credit report squeaky clean at least until things level out again. What better to resolve for the new year than to iron out any rough spots that may be tainting our credit reports.

Here’s the scenario: After years of paying your bills on time, you overlook a bill that ends up going into collection. By the time you realize the error, a negative entry has been logged onto your credit report. It happens even to the most organized of us.

The question I often encounter after these situations is: “How long will this blemish stay on my credit report?”

Here’s the bad news: A 30-day late payment will likely stain your credit for seven long years. As will defaulted student loan payments, foreclosures, or law suit filings.

Bankruptcy stays on for ten years and unpaid taxation leans stick with you for fifteen years!

What’s worse is that if these negative entries aren’t erroneous, there is very little a consumer can do to get them to go away. The best advice I can offer if this happens to you is to pay everything else on time so that the negative entry stands out as a single-mistake rather than a pattern of your payment practices.