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Consumers with a lean or undeveloped credit history will soon be able to improve their credit scores by integrating their bank accounts and payment records into the score calculation mode.
According to the current method, your credit score is primarily determined by the level of repayment of your debts, including credit card payments and mortgages. By adding more criteria to how the credit score is calculated, young people with a poor credit history and those with a low credit score – around 100 million people – could see a slight improvement.
Experian, one of three major rating agencies, will soon be offering what it calls Experian Boost, which will look at utility payments to determine your credit score. FICO, another rating company, known as Fair Isaac Corp, will unveil UltraFICO, which will review your bank history. Both services, which are expected to be commercialized later this year, will be optional and free for consumers.
Two other major rating agencies, Equifax and TransUnion, do not participate in this effort.
Even a small increase in your credit score could mean the difference between getting a credit card or a mortgage or being denied. Currently, anyone with a score below the "good" credit range of 670 to 850 may find it difficult to get credit, rent an apartment, and even get a job.
Consumer advocates support the new efforts of credit reporting companies, but they worry about the risks. Consumers should not lose sight of the fact that they disclose potentially sensitive information to financial services companies, says Chi Chi Wu, a lawyer at the National Consumer Law Center.
Nearly 150 million consumers have already stolen their personal information as a result of Equifax hacking in 2017.
There is also the risk that those whose credit ratings are less than stellar are tempted to borrow too much if their ratings improve and if they have better access to credit.
"I urge people to make sure they can repay their loans in all circumstances, not just the best," says Ted Rossman, an industry analyst at CreditCards.com.
Nevertheless, it is useful to consider these options if you want to improve your credit history or if you do not have enough to qualify for a loan or a credit card. For some people, the additional data could push you into a higher credit category. Here is what you need to know.
How services work
You will be able to register for one or both of these services. However, given the differences in the rates they rate, first check whether your savings or payment history will help your credit score.
When you sign up for Boost, you authorize Experian read-only to view your bank account details. The credit bureau will then focus on your utility payments, internet / cable connections and telecommunications.
You can determine the number of eligible public, internet / cable or telecommunications payments you wish to add to your Experian credit report, and you can disable the service as you see fit.
Experian research shows that nearly 70% of consumers who add this payment information will see an improvement, said Greg Wright, product manager at Experian Consumer Information Services.
The real impact of a high score is likely to be modest, especially if you are already in good financial health. Nevertheless, 5 to 15 percent of borrowers will move to a better scoring category, predicts Experian, which could be important if you go from subprime to premium. When Wright, who has an excellent credit rating, tested the service on himself by adding five bill payment histories, his score increased by 11 points.
Experian Boost is expected to be rolled out nationally in the first half of this year, says Wright. Consumers can sign up for early access on this site.
Although this service also examines your bank account to create a score, UltraFICO focuses on how you manage your money, for example by maintaining a certain amount of savings and avoiding bad checks. Those who do rebound checks might be at risk for lower scores.
The goal is to reach younger consumers or immigrants, who may no longer be traditional bank customers, says David Shellenberger, vice president of product management scores at FICO. The company estimates that UltraFICO will have between 10 and 15 million consumers, or between 20% and 30% of the 53 million consumers previously considered impossible to register due to a lack of credit history.
To get a positive evaluation of UltraFICO, you may need a savings cushion of about $ 400 and a positive balance in the previous three months, although these thresholds are not hard and fast. says Shellenberger. According to the company, approximately 70% of consumers who maintain these financial goals will receive a higher credit score.
Consumers who want to receive an alert when UltraFICO will be deployed later this year can sign up here.
Why do you want to think twice?
Credit experts believe that efforts to provide more consumers with credit is a positive development. But some fear that marginal borrowers will borrow too much. So before asking for more credit or a loan, make sure your cash flow can easily withstand these repayments.
Consumer advocates favor the optional nature of services, which is a change from the usual practice of credit agencies to collect data without consumer authorization. But they are worried about the consequences of disclosing more personal information.
"Data can be used unexpectedly, such as lenders from credit card companies tracking purchase behavior, such as casino visits, through debit card transactions to determine solvency, "Wu said.
Consider other options
Do not neglect the tried and true methods of creating credit, starting with the basics: pay off your debts, pay your bills on time and reduce the balance of your cards. You can also try secure credit cards and credit generating loans, which allow consumers to show lenders that they can handle their debts responsibly.
Secured credit cards require a deposit that generally matches the credit limit of the card, giving lenders the assurance that they will recover their funds if you stop paying. They usually have a credit limit of a few hundred dollars, which can be limited if a consumer has to buy an expensive item such as a plane ticket. Check with your own bank to see if we can create one.
Credit-builder loans are offered by credit unions. You will have to prove that you have enough income to make their payments. A typical arrangement would require you to place the money you borrow into a savings account of the credit unions. On time payments are reported to credit bureaus, rebuilding your credit history. At the end of the loan, the consumer receives the proceeds of the loan. (Be sure to ask the lender where he says the account, which is necessary to establish a credit history.)
Whichever way a consumer chooses, it can take months before the damaged credit score changes significantly.
"Pay your bills on time, keep your debt modest and your score will go up," says John Ulzheimer of Ulzheimer Group, a credit expert who previously worked at Equifax and FICO. "Then you will not have to worry about these alternative methods."
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