The Fair Isaac Corporation, the company responsible for FICO scores, announced that it is going to conduct
a test to determine how a wider scope of financial information will impact credit scores. Starting next year, FICO will team
with Experian and technology company Finicity to test a new type of credit score it is calling FICO Ultra. It will use
information from savings, checking, and money market accounts as factors in credit score calculation during the test.
While it will not immediately impact consumers' credit scores, the management of your personal bank accounts
will be factored into your credit score if Ultra becomes the new standard of credit reporting. Currently, the main ingredient in
credit scores is information from creditors who report to the three Nationwide Credit Reporting Agencies (NCRA) - Equifax,
Experian, and TransUnion. Negative items such as collection accounts, tax liens, bankruptcies, and delinquent child support payments
are also part of the equation. The credit utilization rate, or the amount of credit used compared to the credit limit, is also a factor.
A few years back, TransUnion started reporting rental payments. The rationale behind reporting that information is the
same as that behind the Ultra test: to help raise the scores of people with subprime credit scores. About 79 million people have subprime
scores, which the NCRAs classify as scores that are 680 or lower.
Statistically, younger people have the lowest credit scores. They may be exercising financial discipline and have a positive
payment history, but the demands of raising a family or just starting out usually results in a high credit utilization rate. The fact that
their credit accounts are relatively new also creates a drag on their score. The use of rental payments and bank account activity for credit
score calculation could be a very positive thing for subprimers because it would provide another factor to determine their credit risk level,
but the knife could cut the other way.
What all of us should get from the Ultra test announcement is that our personal financial management is the gage the financial
world uses to determine our fiscal and personal responsibility. Managing your financial affairs to build a credit score of 760 or higher will
improve your financial health and ability to lower the cost of borrowing.
The most important aspect of financial management is creating and following a zero based budget. Without a plan to build your
credit score, you are destined to make mistakes that will negatively impact that score. An essential element of credit score building is the use
of credit cards so they have a positive rather than a negative impact.
Most people use their credit cards improperly. The average consumer's credit card balance is $6,354. At an 18% interest rate,
consumers with that average balance will pay $1143.72 annually in interest payments. Carrying a purchase's cost over as a credit card balance
results increases the cost of that purchase. This often negates any savings gained through a discounted sale price and enriches our creditors.
All too often this is the start of a never ending cycle of debt.
If this is your current situation, you need only invest some time in creating a zero based budget that is focused on debt
elimination and learning how to utilize credit cards so they positively impact your credit score. Building a "very good" credit score, which
is 740 or higher, is not a sprint, it is a marathon. That is because FICO currently make time and history the largest factors in credit score
calculation. You can achieve such a score with knowledge, a plan, and the exercise of discipline. In time, you will become wealthy, which is not
being rich but having the financial freedom to do or obtain the things you desire.
FICO Ultra, if it becomes the norm in credit score calculation, should be of benefit to subprimers and other consumers who are
not over drafting their bank accounts. While Ultra is only n the testing stage, its announcement is clarion bell warning us that the minor details
of how we use money may impact our financial health score card. We hope the announcement compels you to learn more about how to properly build your
credit score and eliminate debt. A "very good" credit score will literally save you tens or hundreds of thousands of dollars in interest payments
over your life time.