Why You Must Maintain a Healthy Credit-Score Rating

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Image: Why You Must Maintain a Healthy Credit-Score Rating

By Richard Agu
Monday, 16 July 2018 06:05 AM

Following the implementation of the 2018 Credit Score Rules, consumers are a happier lot as the new rules are set to improve the credit score for some by as much as 30 points. But there’s more to it than meets the eye!

What’s really new in the credit score rules? The three main credit bureaus (Equifax, Experian and TransUnion) will not consider tax liens while calculating credit scores. Until now, a tax lien and civil judgment data created a negative impact on a credit score.

Now, tax lien and civil judgment data are going to be excluded from the calculation. As a result, credit scores for people with unpaid taxes and pending payments on account of tax lien and civil judgment will improve.

As predicted by LexisNexis Risk Solutions, the new credit score rules will have an impact on around 11 percent of the U.S. population. The change in the rules was suggested by the Consumer Financial Protection Bureau, which revealed in a study that consumers were wrongly penalized because of faulty data identification that linked tax lien and civil judgment to the wrong consumers.

Wrong linking of data has been the top cause for erroneous reporting by the credit score agencies. The changes in the rules are in fact an attempt to help consumers, but have the consumers been able to actually benefit from it?

The new rules are unlikely to have a positive impact on the interest rates of consumers. Credit scores play a pivotal role in the lives of average Americans as the credit access and the interest rates they would be paying on their borrowings largely depend on their credit score. Lenders see a credit score of 750 and above as a less risky proposition as high scores mean that the borrower has paid all their debt in time and never defaulted on any of the payments.

Such high credit score owners attract lower interest rates and lenders are willing to lend them money. Conversely, a credit score of below 600 is seen as risky by lenders and therefore, such low credit score owners have limited access to credit and need to pay more in interest. With regard to the changes in the new rules, all the tax liens and civil judgment data will be removed while calculating the credit score. The credit score will not reflect if a consumer has unpaid taxes or owes money on a civil lawsuit.

From the lender’s point of view, unpaid taxes or pending payments on civil lawsuits adds to a consumer’s risk potential. When this risk is not reflected in the credit score, the lenders will likely measure every consumer with the same yardstick. They will be unable to differentiate between risky and less risky consumers.

As a result, they will be increasing their rate of interest across the board. Eventually, it would mean that even people with good credit scores and people with no pending payments or tax liens will also have to pay a higher interest rates as such data is excluded from credit score.

The boost in credit scores is hardly good news for consumers or lenders. Such a move to wipe data from credit reports will lead to lack of transparency and will also allow credit access to people who have defaulted in making payments.

So, how do you improve your credit score to access cheap credit? Some of the ways of maintaining a good credit score are:

  • Always make payments on time.
  • Do not default on any payment of any bills or credit cards.
  • Spend wisely.
  • Try to find alternative methods of income.
  • Maintain a healthy debt to income ratio by paying off your debt or by increasing incomes
  • Ideally, maintain a credit card utilization ratio of less than 30%.

It also is essential that you ask adequate questions to get proper information and work with the right lender. A debt consolidation loan can offer you a much lower interest rate, which will allow you to pay off other debts. In case you have no pending payments by way of tax lien and civil judgment, you can give an undertaking to the bank saying that you do not owe any payment towards these authorities.

This will help the bank to judge their risk in lending money to you. If you have no unpaid dues with the authorities and have a good credit score, the banks may offer you a lower interest rate.

Even if you are getting cheap credit, you’ll have to repay the loan. Manage your expenses and needs wisely to avoid falling into a debt trap.

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