FICO 8 of 760 and Beyond: Becoming a Major Leaguer
FICO 8 of 760 and Beyond: Becoming a Major Leaguer
FICO 8 of 760 and Beyond: Becoming a Major Leaguer
For the purposes of this article I am going to assume that you have absorbed the lessons contained in my book available at onhomebuyingandcreditrepair.com and have a more than passing acquaintance with my postings on this site. FICO 9 was introduced in late 2014 but has not been widely implemented yet. FICO 9 is a little more lenient. More on that in a companion post.
I’m Assuming that…
You have obtained and reviewed your free credit reports at annualcreditreports.com, filed your objections to errors and cleaned up the low hanging fruit. You have taken to heart the 3 Commandments for good credit offered on FICO’s site:
- Pay your bills on time.
- Keep your balances low
- Take out new credit only when you need it.
You either have or are well on your way to having a good or very good credit score, but what you really want now is that elusive FICO 8 of 760 and beyond. Because you have been paying attention you know that FICO 8 of 760 is the promised land. Here you will receive the best rates available. Before the recession it was 720. A FICO 8 of 760 could currently be expected to get you the lowest rate on a 30 year fixed mortgage. FICO’s formulas show that there is almost no difference in the probability of default after the FICO 8 of 760 level. Anything over that is just for showing off, which is fine if you find the credit scoring process as interesting as I do. A higher score does provide a cushion in case of a financial hiccup down the road. As they say: FICO 8 of 760 is the new black.
Let’s Review Some Fine Points Leading to a FICO 8 of 760
Now you are ready for some of the fine points:
- When you receive a notice from a collection agency, always ask for validation within 30 days. The debtor cannot report it for the time it takes them to validate it. If you don’t make it within the 30 day period, you can still ask for the validation, but the negative record will be on the credit report in the time it takes to sort it out. Failure to dispute does not legally constitute an admission.
- The law is somewhat vague as to just what constitutes legal proof of a debt that has been disputed. Basically the standard is what a reasonable person would consider proof. A printout or account summary from Excel or word perfect is not enough! If this is what you get, send them a firmer demand stating that the FTC standard as enumerated in the Wollman opinion demands more detail. Insist they either send you this detail or delete immediately. Otherwise you will take legal action.
- Paying off older accounts can actually lower your score. This is because older problems tend to have a diminished effect on scores. Paying it now makes it new activity. If your prospective lender (Bank or Mortgage Broker) insists that you pay the claim you have no choice. After it is paid, file an objection using any excuse, no matter how flimsy. You can claim it is too old or you never had an account with that collection agency (you didn’t have an account with them.) They are much less likely to answer your objection if they already have your money anyway.
- It is of the utmost importance to always hold out for “pay for deletion” before paying off collection accounts that appear on your report. Collection agencies buy these accounts for pennies on the dollar. Not only will they usually settle for less than face value, they almost always will delete it completely from the record. They put it on and they can take it off. This is so much better for you than simply marking it as paid because that indicates you did once have a problem. Even a paid incident is still an incident. The record must be expunged like it never existed and you must get this in writing before paying. In the rare case where they are stubborn, claiming that the credit reporting agencies don’t permit this practice, don’t argue with them. Offer to object on the basis of the age of the account or simply object on the basis that a paid account is not yours if they will promise in writing not to answer your objection. Your settlement agreement should read ” This payment is made to settle a disputed debt and is not an admission of liability. Creditor and its agents agree not to respond to the dispute I will file with the credit reporting agencies.” If they’ve been paid, they’re not going to bother with a response anyway. You can state that “I have never opened an account with xyz credit collection agency.” This is true because you haven’t opened an account with them. You opened it with the creditor they represent. They can then just ignore the objection causing the negative entry to be deleted on that basis. Don’t pay first! Don’t make a partial payment because you will restart the 7 year clock.
- Don’t close old revolving accounts. By doing this you reduce your amount of available credit. Your debt to available credit ratio is critical to a good score. There is a lot of confusion about whether this lowers the average age of your accounts. Once and for all let it be said that a 10 year old account is still 10 years old whether it is open or closed. Furthermore, closed accounts continue to age. FICO spokesman Craig Watts says:”When assessing length of credit history, the FICO score considers the origination date on all accounts on the credit report, open and closed. So an account that was opened for just one year 10 years ago still counts 10 years toward length of credit history in the eyes of the FICO score, everything else being equal.” It will be deleted 10 years after the date on which it is closed. The closing of the account begins the 10 year clock. Open accounts remain indefinitely. Also inactive accounts are not treated as favorably for scoring purposes as active accounts. Use them a little bit. Don’t close them unless they carry an annual fee you want to get rid of. Buy a pizza or a tank of gas once in a while and pay it on time. Closing a new account doesn’t help you regain on average age.
- 9% or less is the best debt to available credit ratio. The amount of debt that is reported to the credit reporting agencies each month is the amount owed on the date the monthly statement is closed, not on your due date. Pay several days before it closes. On average a debt to available credit ratio of 10-19% costs 10 points. 20-29% costs 25 points. 30-39% costs another 25 points. It gets worse from there.
- Paying off loans early is a mixed bag. Open accounts handled wisely are treated more favorably by the computer. You may consider paying down the balance some to help your debt to credit ratio if your contract allows this. The debt to available credit ratio on installment loans is treated in a more lenient manner that iit s on revolving accounts. Keep paying as agreed.
- Installment loans such as automobile loans help your mix of credit. If you don’t have one, take one out when you can afford it as long as you can handle it wisely. Although the new loan will lower your average age of credit, in this case it is worth it, especially if you have a favorable average age of credit on your revolving credit card accounts. Average age of installment credit is graded differently.
- “Piggybacking” as a tactic will work. Piggybacking refers to the practice of adding a person with a poor credit score as an authorized user to the accounts of someone with good credit. This tactic will better the low score without harming the higher score. FICO refers to this as “tradeline renting.” The new FICO 8 model tried safeguards against this practice. The exact way these safeguards work has not been revealed (I call this FICO’s “secret sauce”). It is a controversial practice for them to try to discriminate this way. A recent Court decision on this practice favors the consumer. FICO justifies keeping a few proprietary secrets under the excuse that they don’t want anyone to be able to”game” the system with 100% confidence. A certain amount of legitimate credit will go to authorized users. This can be very helpful for increasing the age of the file and improving the debt to available credit ratio.
- Opening new secured loans with a paid down balance rarely works very well. One trick is to open a line of credit secured by a CD up to the value of the CD. This is frequently seen as a foolproof way to inflate your score because you can raise your debt to available credit ratio this way. But remember, this tactic simultaneously lowers the average age of your accounts which may very well result in at least a temporary loss to your score rather than a gain. Actual results will vary depending on the whole picture.
- If you absolutely must miss a payment, miss a credit card payment before a mortgage or auto loan payment. Remember that the credit card payment not reported until it is 30 days late plus another 21 days mandated by the CARD Act for a total of 51 days. If you are 20 days late or more there is still time to make it without a late report being filed. Call customer service and pay by debit card or whatever they recommend. Mortgage and Installment loans are considered more substantive debts and are given more weight in the scoring formula. Missing any payment is a last resort. A hit on your mortgage payment history is to be avoided at all costs. There is always the possibility of a “good will” deletion of a late credit card payment after it’s been recorded. The new FICO8 model is more forgiving of an isolated late credit card payment than the old model was. Not all banks have updated their software to use FICO8.
- Find out the date that your balance is reported to the credit bureau. This is determined by the amount owed on the statement closing date. This is too important for guesswork. Resolve to pay prior to the statement closing date. This is right after your due date. This is the balance the credit bureau sees in a given snapshot of you. This snapshot is what is used to determine your debt to available credit ratio until the next reporting date the following month. Pay this down as far as you can if you are about to apply for a loan. It will have a dramatic effect on the score that is furnished to the creditor.
If you get Discouraged
Always remember that you can still have a good score even if your track record has some blemishes. All it takes to improve is consistent good behavior and the passage of time. Negatives recede in importance as they age. Now that you have the knowledge, all it takes is diligence and good habits from where you are to a FICO 8 of 760.