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FICO 08 – National Home Loan Advocates LLC – FICO 08 and Your Credit Score

Fair Isaac recently announced plans to change its credit scoring formula to ensure the continued reliability and predictive powers of FICO scores. The new model, named “FICO 08″ has been making its way into the credit scoring process since late 2008. The model replaces the existing FICO model, which has remained relatively unchanged since the 1980s.

Essentially, FICO 08 will be more forgiving to periodic late payments as long as other credit remains strong, and will have a bigger negative impact on your score if you have multiple late payment accounts.

Calculating FICO Scores

A quick summary on the FICO scoring model calculates creditworthiness based on information in five dimensions:

* Payment History (35% of score) – account payment information for credit cards, lenders, and retailers. Used to measure your ability to pay your bills on time.
* Amounts Owed (30% of score) – the total amount of credit you have outstanding relative to the maximum amount creditors are willing to extend to you.
* Length of Credit History (15% of score) – a measure of the length of time your accounts have been open with creditors and lenders.
* New Credit (10% of score) – the number of times you’ve applied for credit in the recent past.
* Types of Credit (10% of score) – this is the diversity of credit you have in your portfolio.

Changes Planned in FICO 08

The primary reason for the switch to FICO 08 had do with the forecasting powers of the new model. Fair Isaac believes that FICO 08 will do a better job at predicting the likelihood of default on a loan by making two changes to its existing model:

* Authorized Users – An authorized user is a person that is permitted by another account holder to use their account. Normally, this situation applies to a family member who is trying to manage credit for the first time, such as a college student. The new scoring model eliminates “piggybacking” which allowed individuals with bad credit to leverage the payment histories of “stronger” credit card holders by becoming an authorized user on their accounts.
* Delinquencies – The second change in the scoring model has to do with payment patterns – especially those that are greater than 90 days late in making a payment. The FICO 08 model will be more forgiving to consumers that are in arrears in one area, but have a number of other accounts that are in good standing.

Fair Isaac predicts the above two changes will reduce the default rates on consumer debt by 5 to 15% for those companies switching to the new model.
Impact of FICO 08 on Credit Scores

Many consumers have been asking:

How will FICO 08 affect my credit score?

Keep in mind that credit scores are used by many lenders to determine the amount of credit to extend a borrower. These creditworthiness thresholds are usually based on predetermined bands of credit scores. To make it easier for lenders to adopt FICO 08, the new scoring model will retain the same numerical range (300 – 850), minimum scoring criteria, and parameters as the prior model.

Credit Score Examples

The following examples help illustrate the rules-of-thumb that apply to FICO 08, and how this model might change individual credit scores:

* If you have at least one major account in delinquency, but you also have a number of accounts in good standing with creditors, then your credit score would likely increase / improve with the new model.
* If you have at least one major account in delinquency, and you demonstrate a poor payment pattern with several other accounts with creditors, then your credit score would likely decrease / deteriorate with the FICO 08 model.

Examples provided by Fair Isaac indicate that consumers might experience a 20 to 25 point adjustment to their credit scores where the above situations apply. As emphasized in other publications, the most effective way to improve your credit score is by ensuring the information used to generate the score is accurate. This includes obtaining a copy of your credit report and looking for errors.

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I must get asked this question about 100 times per month about credit restoration companies and if their validity and ethics are a sound proven way to fix their credit issues. While I always advise my clients that yes when erroneous data appears on their credit they have the ability to dispute the process themselves.

Now when I get the answers of I don’t have the time or resources then yes I would advise them to use a nationally recognized company that can provide a proven method for removing erroneous data. Credit repair can take an average of 4 to 6 months or even longer in some cases.

If you don’t take the time to correct the issues on your report and review the credit bureaus reporting process at least once per year then you are leaving your self open for a whole bunch of problems. Data that has been on your credit report for some length of time can be more difficult to resolve than newer data that was just added.

Also you have the added problem of possible identity theft which is the fastest growing white collar crime in America. Your Social Security Number is your gateway to the financial world, driving world, medical world, credit access and many other areas of life that most people take for granted.

Your credit rating effects your insurance rates, job availability, interest rates and education in many instances. Your financial A.K.A. Your credit report shows your ability to repay debt and handle financial obligations. Your credit report shows the entire credit reviewing public your financial responsibility.

So when looking at a credit repair company you need to make sure that they have the ability to remove erroneous data, challenge bankruptcy, judgments, foreclosures, have the ability to remove mortgage late payments and credit inquiries, renegotiating student loans, refinancing and many other areas of credit.

You want to see testimonials and ensure that you are always dealing with a quality credit repair company who is compliant with all credit restoration laws in every state across the nation. This can seem like a daunting task but if you approach it from the prospective that this is enhancing your financial future.

Credit restoration is a totally legal process, just remember that no one can “guarantee” your score or guarantee the item(s) to be removed. If they do RUN! This is the sign of a scam or scheme. Credit restoration is a way to remove derogatory and misinformation from your credit report. If you took on the debt it belongs to you, and no one else, which means that you need to repay it.

Illegal or immoral practices have given these companies a bad wrap in the past yet with the advent of technology, new laws in place and a better fraud detection system you can rest assured that your safety and protection are the credit repair companies number one goal for you as their client.

Having a credit specialist on your side is like having someone there monitoring your identity 24/7. Combined with the power of having the fair credit reporting act laws leveraged in your favor. Credit is one of your keys to financial empowerment and freedom

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