TIME Spending & Saving

Finally, Some Good News About Your Credit Score

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FICO announced on last week a new version of its credit scoring model will debut this fall. This new version, FICO Score 9, throws a lifeline to borrowers indebted by medical bills or those saddled with old collections actions.

FICO characterizes the change as “a more nuanced way to assess consumer collection information.” It says people with unpaid medical debt but no other “major derogatory references” could see a median score increase of 25 points.

Medical debt is no joke — it’s responsible for almost two-thirds of bankruptcies, according to a study by the American Journal of Medicine — so a credit scoring model that doesn’t punish people for having the bad luck to be get sick or injured while uninsured (or beyond the limits of their health coverage) is a change for the positive.

“It’s almost like there’s a credit scoring arms race taking place, and consumers are benefiting,” says John Ulzheimer, president of consumer education at CreditSesame.com.

FICO’s main competition is VantageScore, a scoring model created by the three big credit bureaus. Last year, a version of VantageScore that minimized the impact of old collections on a person’s score was rolled out, a step FICO’s new scoring model also takes.

“I do like the consistency between VantageScore and FICO,” Ulzheimer says. “Both credit scoring giants seems to agree that collections that have a zero balance have lost importance to risk assessment and can now be ignored.”

This is important because a new study from the Urban Institute finds that more than a third of Americans have a debt collection action in their credit file. Although some of these debts are likely to be too old to collect or have been paid off, just having that black mark there can tarnish your credit.

FICO says its new scoring model will also do a better job determining the creditworthiness of people who have little credit history, promising a “more refined treatment” of people who have so-called “thin files.”

VantageScore took a stab at people who flew under the radar of older scoring models in its version released last year, too. “The VantageScore 3.0 model provides scores to 27-30 million adults who are invisible to traditional scoring models,” it said at the time.

One drawback to FICO’s announcement, Ulzheimer warns, is that it could take a while for these benefits to trickle down to borrowers. “The new model will take years before it is the standard FICO score used by lenders as it takes time for lenders to convert from older versions,” he says. The other rub: “Until Fannie Mae and Freddie Mac endorse the newer version, it will not be used for mortgage lending,” he says.

TIME Spending & Saving

Why You Have to Start Paying Down Your Credit Cards Right Now

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Federal Reserve meetings aren’t high on most people’s list of interesting things, but if you have a credit card and carry a balance, you should probably start paying attention to what America’s top money policymakers are talking about, because it’s going to affect your monthly bill.

During last week’s Federal Open Markets Committee meeting, analysts were listening closely to tease out a sense of when the central bank will raise interest rates — always an endeavor that’s one part math, one part reading tea leaves.

A rate hike might not come right away: CNN points out that Fed chair Janet Yellen wants to see higher wages along with lower unemployment. Although unemployment is ticking down, wages are stuck in a rut.

“There are no such signs evident yet, but we expect that to be the big story in the second half of this year,” Capital Economics chief U.S. economist Paul Ashworth tells CNN.

But a hike might come sooner than expected, CNBC argues, if either the labor market gets better faster or if Fed members get spooked about inflation. “I think pressure is really growing to do something in January,” Peter Boockvar, chief market analyst at the Lindsey Group, tells CNBC. .

Bottom line: It’ll probably happen sometime next year. This means you have, at maximum, maybe a year and a half before your credit card bills jump.

The reason why is because most of us these days have variable credit card interest rates, with our APRs tied to the prime rate. The prime rate is the Federal Funds rate plus 3%, and today, prime is a mere 3.25%. Then the card issuers tack on a percentage they determine, and we swipe away.

Banks dropped fixed interest rates en masse in advance of the CARD Act kicking in a few years ago because the law prohibits them from hiking fixed rates on existing balances except with a few exceptions. Banks wanted to be able to raise what they charge us when interest rates rise, so they switched over to variable rates.

After the Fed makes its move, rate increases will happen quickly. “Within a few months after the prime rate eventually starts going up, card holders will also likely see their APRs going up,” says John Ulzheimer, president of consumer education at CreditSesame.com.

Ulzheimer says it’s most likely issuers will adopt a straight pass-through of any hike in the prime rate; in other words, if the rate goes up by 0.5%, your APR will, too. And credit card companies aren’t required by law to give you a 45-day heads-up that a jump in your interest rate is coming.

Obviously, the bigger your balance, the more this will affect your monthly payment, so it’s a good idea to start chipping away at that debt now.

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