Thursday, March 04, 2010

The CARD Act and Your Credit Score

Your FICO credit score and is used to determine if a customer will pay their bills on time. A FICO score is made up of 5 factors: payment history (35%), total amount owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%). Ninety-percent of the largest banks use the FICO score. Based on the CARD Act effective February 22, 2010 many changes in the act will now affect your credit score in a different way. Here is a comparison of how the CARD act changes affect your credit score:

1. Previously your credit utilization could be 50% or more and it was not seen as a red flag. Since the CARD act, your credit utilization credit usage/credit limit should be 20% or less.

2. Previously if you had bad credit your credit score was greatly reduced by late payments. Now, The higher your score the more points you lose from a late payments or bad credit. The balance on your previous statement is reported to the credit bureaus. If you have bad credit, one 30 day late payment can lower your credit score by approximately 60-80 points and 90-110 points for those with good credit.

3. If you decide to settle do so quickly to increase your credit score. Your payment history is not affected much if you settle a debt, however, if you pay down a debt over a period of time say over 3-6 months this increases your credit score. If you try to settle a debt with the original creditor ask that the account be removed from your credit report. If the account is still open ask that the account be re-aged. Overall settling a debt or debt consolidation can lower your credit score approximately 45-65 points for those with bad credit and by 105-125 points for those with good credit.

4. Previously you could get another home 6 months to one year after a foreclosure if you had bad credit. Now, a foreclosure can lower your credit score by approximately 85-105 points and by 140 to 160 points for those with good credit. If you lose your home to foreclosure, do a short sell or deed-in-lieu of foreclosure and make sure the mortgage company does not report it on your credit report as a settlement usually reported as "settled", "settled for less than the full amount", or "foreclosure", or something similar.

5. Previously you could file bankruptcy and reestablish credit a few months after filing. Now, if you have bad credit and file for bankruptcy your credit score will be lowered by approximately 130-150 points. For those with good credit it can be lowered by approximately 220 to 240 points.

6. Previously you could close a new account and not worry about the impact on your credit score if you had good credit. Now, it's best not to close an account if you have balances on any open accounts because it will lower your credit score. If you have zero balances on all of your credit cards and close an older account your credit score will be lowered but not by much.

7. Previously when paying off debt, paying off the smallest or largest amounts helped increase your credit score. Now, if you are not making any purchases that require viewing your credit score within the next year pay off debt with the highest interest rate first, then tackle debt with the smaller interest rates.

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