With Janna Herron, Personal Finance Editor at Yahoo Finance
Steve spoke with Janna Herron, Personal Finance Editor at Yahoo Finance, who recently wrote an article about how FICO changes may affect your credit score. Some people will see their credit score go down, while others will get a nice boost. It all depends on how you handle your finances.
New Personal Finance Website
Steve first asked Janna to tell listeners about the new personal finance website that Yahoo’s parent company, Verizon Media, is launching. Janna said, ”We’re really excited about it. It’s going to be a hub of personal finance resources, education, tools, and pretty much an encyclopedia of everything you need to know about personal finance. We’re starting with over 400 pieces of content articles, guides to help you, and real-life examples of people dealing with their personal finances.”
The New FICO Credit Scoring System
Steve then moved on to asking Janna to talk about the new FICO credit score system. She explained, ”FICO 10 is the name of it. The primary change is that it incorporates trended data. What that means is that it looks at how you’ve managed your debt over the past 24 months, instead of just taking a snapshot view of your finances right now.” Steve responded that he was surprised it took them this long to think about taking that approach.
Janna further explained the reason for the change, saying, “It’s just a better indicator of your riskiness. By looking over time at how you’re managing your finances, you can see if things are deteriorating or improving.”
According to Janna, about 110 million people will see their credit score affected, with a breakdown as follows:
- About 40 million people’s score will go up 20 points or more
- About 40 million will have their score drop 20 points or more
- About 30 million will see smaller changes to their score
Specific Changes In Credit Scoring
Steve next asked Janna to detail some of the specific changes to credit scoring with the new system. One important change is in the way medical debt will be viewed—basically, more leniently. For openers, you’ll have six months before medical debt appears on your credit report. Janna explained the reason for the change: “There are so many factors that go into medical debt. Who’s paying it? Is your insurance paying it? There are claims that are outstanding, and it takes a while to resolve all that.”
Another change is that, by taking a long view of your finances, your credit score won’t be negatively impacted by just a temporary spike in your credit card usage that might occur, say, around Christmas or vacation time.
The Three Pillars Of Maintaining Good Credit
Steve concluded their conversation by asking for Janna’s comments on what he considers the three pillars of maintaining good credit and a high credit score. Number one: pay your bills on time, all the time. Janna replied that, yes, that’s still one of the biggest factors in determining your credit score. Number two: keep your balances on credit cards well below their limits. Janna’s advice on that point was, “The rule of thumb is 30%.” In other words, don’t use more than 30% of your available credit at any one time. Number three: don’t apply for too much credit, too often. Janna agreed with that point as well, telling listeners to just use common sense and avoid, for example, responding to every credit card offer you get. Instead, only apply for as much credit as you actually need.
Steve added a fourth point, the importance of paying the full balance on your credit cards every month, as much as you possibly can. He pointed out to listeners that it just doesn’t make sense to pay for something with a credit card because it’s 15% off if you’re going to end up paying 21% interest on the purchase because you only make the minimum monthly payment on your credit card bill. That math just doesn’t work out in your favor.
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Steve Pomeranz: I like to keep tabs on all the changes, subtle or otherwise, which affect our financial health. Fortunately, or maybe, unfortunately, perhaps, one of those things is the number which affects our ability to borrow money, buy a car, rent a home and get insurance. Of course, I’m speaking about your FICO score because there are some important changes now that have just happened in the scoring, which could lower or boost your credit score. So it’s important to know what’s going on here. Watching this for us is Janna Herron, the Personal Finance Editor at Yahoo finance. Hey, Janna, welcome to the program.
Janna Herron: Hi. Thanks for having me.
Steve Pomeranz: Before I begin, you guys have an announcement and that is on February 5th, Verizon Media, which is your parent company, is starting a new website similar to Yahoo Finance, but it’s a personal finance site. Can you tell us a little bit about it?
Janna Herron: Yes. We’re really excited. The new site is called Cache and it’s going to be a hub of personal finance resources, education, tools, and pretty much an encyclopedia of what you need to know about personal finance. So anything from how to make a budget to what are mutual funds. So we’re really excited to do that and have that out there. We are starting with over 400 pieces of content articles, guides to help you. And we also have some great original reporting on student loans with data analysis and real-life examples of people dealing with their personal finances.
Steve Pomeranz: Well, I’m sure that if you guys put as much effort and smarts into this new site as you do in Yahoo finances, it’s going to be great. Let’s take a moment to talk about why you’re here. So, as I said before, the new FICO changes may lower or they may boost your credit score and there’s a new version of this FICO credit score, which was just unveiled. Describe this for us.
Janna Herron: Yeah. So I think it’s FICO 10 is the actual name of it. And what it does is it incorporates, in industry-speak, trended data. But what this does, it allows the score to look at how you’ve managed your debt over the past 24 months to judge your riskiness, as opposed to before, the score only got a snapshot of what your financial behavior looks like today.
Steve Pomeranz: I’m surprised that they’re just getting around to that. But I’m always surprised that they seem far behind to me in this process. This is the thing they do, this is the money that they make, and they reinvest it. Anyway, that’s my personal opinion. So this is important because right now, just to repeat what you said very quickly, they take a snapshot, but under this new FICO 10, they’re going to look at all your activity in the past 24 months. Is there a reason that they decided to kind of dig in deeper and actually go wider with regards to looking at your credit scores? Has credit itself increased dramatically that they’re kind of getting a little concerned about it?
Janna Herron: There are a couple of reasons and first of all, it’s just a better indicator of your riskiness. If you can kind of look over time how you’re managing your finances, you can see if things are deteriorating or if you are improving. So for example, if over the last 24 months your credit card balances become larger and larger, even though you continue making payments, that’s a risk factor right there.
Steve Pomeranz: Yeah, and that’s actually, if you were lending money to somebody, you’d want to know that information, to see whether they’re getting more and more in debt. They’re not using the money you’re giving them to pay off previous debt that’s piling on. Those are kind of bad signs. I guess they’re looking at that. So how many people are expected to be affected by this?
Janna Herron: So overall, 110 million people will see some kind of change to their credit score. And how that breaks down, 40 million will see their score go up by 20 or more points, 40 million will see their score go down by 20 or more points, and the remaining 30 million will see smaller changes either way.
Steve Pomeranz: So give me an example, you did say one thing about if your debt ratios are increasing and so on. What are some of the other factors that are going to be looking at? For example, will they be looking at your medical history and how you’re paying your medical bills?
Janna Herron: Well that’s actually a very important point to bring up that that’s changed in the last couple of years, how medical debt has been reported. And I think that’s one of the factors that have gone into developing a new score to try to be more accurate. So, for example, medical debt is treated less harshly now than it used to be. You have six months before it becomes reported on your credit reports because there’s so many factors that go into medical debt. Who’s paying it? Is your insurance paying it? There’s claims that are outstanding. So it takes a while to resolve that. So that has been a change in the last couple of years that has made the score less dependent on medical debt.
Steve Pomeranz: That’s positive. When you think about it, you get a bill from your provider and it’s usually a really big bill and you don’t pay it. You wait until the insurance company comes through and you see what they’re going to pay. And then you wait and you get a bill back from the provider saying here’s what you owe. That process can take six weeks or more. And so I think this is this addressing the reality of how the tempo of the billing is. But it also is for tax liens I understand from the information you provided, judgments, and things that have been removed from your credit histories altogether. But defaulted medical debt, as you said, doesn’t show up for six months. So that’s all part of the formula now. What are some of the other factors that would lead to an increase or decrease, let’s say, in your FICO score?
Janna Herron: Sure. So one of the ways you might see an increase in your score is say you have really good payment behavior. You’re doing really well. Christmas comes up or summer vacation comes up and you spend a whole lot on your credit card. So you have this huge spike in the balance. You’re not going to get hurt as much because of that spike in the score. I’m sorry, you won’t get hurt as much because of that spike in spending. And that is because FICO can see that this is just a one-time thing and that, otherwise, you’re a pretty good credit risk.
Steve Pomeranz: Yeah. Actually, that’s fantastic because we all spend more during Christmas. We go on vacations, whatever, once or twice a year, and our spending is going to spike. Of course, we’re going to use credit cards because we get points, we get miles, we get protection on our purchases. So you’re not going to go out and you not going to write a check or use cash and obviously, you’re buying things like airline tickets. So you have to use credit cards. So the spike is there and again, I can’t believe I’m in this modern age, it’s taken them so long to realize that people have spiky spending.
Janna Herron: Yeah. I think there’s another score out there, Vantage Score, which has been using this trended data a little bit longer. But in some respects, it just took some time for the credit reporting bureaus to be able to put that information into your credit report. So there’s a lot of moving factors, but I think overall if it’s more accurate, that’s better for those who have good credit.
Janna Herron: You wanted another example of how it could hurt you. And I think this is really timely and important because it’s around personal loans. For the last several years, we’ve seen a real spike in people using personal loans. They’re much more popular, they’re easy to get online these days, especially among younger consumers. And so one of the things is taking out a personal loan. I’m not saying that that’s bad, but if you take out a personal loan to consolidate your credit card debt, which is a move that is a lot of personal finance experts say you should do and that’s fine. It would help your credit score. But after you do that, you then start to run up more credit card debt, then you’re going to be seen as a risky borrower.
Steve Pomeranz: Yeah, well, that’s this idea of using credit to pay off credit that, I mean it’s obviously not really a pay down in credit. So now if your habits or your requirements are still that you have to keep charging, we all know that’s a dangerous situation. I mean, put yourself on the other side of the transaction. You’re lending someone money and you really want to know what their ability is to pay it back. And if the ability is low, then you’re going to want to charge more interest to cover some of the losses that you may incur. I mean this is just logical, pragmatic way that the credit system works. However, there are three basic things that you can do or three pillars, so to speak of for maintaining a high credit score. And I want to discuss those with you very quickly here Janna. Number one: pay your bills on time all the time. Any comment on that?
Janna Herron: Yeah, I mean that’s one of the biggest factors that go into your credit score. So if you can keep doing that, that’s really going to boost you and it doesn’t matter which credit score is being used. That is one of the most important things that you can be doing.
Steve Pomeranz: Pay your bills on time all the time. That is incredibly important. Number two is keep your balances on credit cards well below their limits.
Janna Herron: Yes, that’s right. So if you have $5,000 on your credit card in available credit, don’t use $5,000 of that available credit because that’s going to make you look really risky. Rule of thumb is to keep it 30% or lower than your credit limit. I like to go lower than that. I like it to be at 10% or lower. But that’s another big factor that credit scores look at to see if you have any risky behavior.
Steve Pomeranz: Now I realize for a lot of people it’s impossible to pay off their credit card after a month’s use. But if you really think about this idea of paying a minimum balance or paying something against it, that’s fine. But if you’re paying 17%, 21%, 28%, think about this item that maybe you searched all over the net to find a 15% discount and then you’re going to borrow the money and you’re going to pay that 15%, 20%, 28% back. It’s just bad math. You’ve got to try to pay off your monthly cards every single month if you possibly can. It’s got to be a goal because the math is going to work against you. And then finally, the third pillar is don’t apply for too much credit, too often. Take us out on that one.
Janna Herron: So you should really only look to get a loan or a credit card when you actually need it. So if you’re looking to buy a house, yes, you want to take out a mortgage. If you need to buy a car and you don’t have enough to buy it outright, maybe you’d take out an auto loan. But you shouldn’t just be signing up for credit cards left and right. This is something that might happen to you, say during Christmas time, holiday shopping when you go out and you sign up for a lot of retail credit cards. You just don’t want to do that because that tells the credit score that you’re looking for credit and why are you looking for credit and you haven’t yet proven that you can handle that credit. So it’s another sign of possibly risky behavior.
Steve Pomeranz: I’m guilty. Recently, I bought some luggage, got a credit card from the department store, so I could get a lot of money off. I was flying somewhere and they were offering a credit card. I got points. I was flying somewhere else on another airline. They were giving away a million points, so I don’t know. I guess my credit score is going to go down temporarily.
Steve Pomeranz: Anyway, my guest, Janna Herron, Personal Finance Editor for Yahoo Finance. And don’t forget on February 5th, Verizon Media, their parent company, is going to be launching a new personal finance website. Janna, thank you so much for joining me today.
Janna Herron: Thank you. Take care.
Steve Pomeranz: Thank you. You can hear our podcast. Over 600,000 podcasts have been downloaded. To hear this interview, again. If you have a question, we love to get your questions about what we’ve discussed or anything that we discuss here on this show, visit our website, StevePomeranz.com. That’s StevePomeranz.com to join the conversation.