Category: Credit Score

How Income Based Repayment and Student Loans Affect Credit Score of Seniors

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Today’s seniors are the Baby Boomers of yesterday – those born between 1945 and 1964 who were part of the post-World War II baby boom. In 2017, this group of people are between 53 to 72 years old and are either in the midst of their golden years or just approaching them. A staggering statistic affecting this group is soaring student loan debt. According to a report from the Government Accountability Office (GAO), over the last 10 years student loan debt in this age group has gone from $43 billion to $183 billion.

The Baby Boomers were a group who seemed to take out their student loans while in their 30s and 40s to go back to school during their mid-career years – to get a Master’s Degree or to switch careers and get a different degree, for instance. These student loans are now decades old and with the borrower juggling a family, house payment, and car payments, a lot of these student loans are going into default.

So not only is this group defaulting on their student loans, they could be falling behind on other loans which can negatively affect their FICO Score. FICO Score takes two different loan types into consideration when calculating your score – installment and revolving. According to myFICO, student loans are categorized as “installment loans” and credit cards are examples of “revolving loans.” Even though FICO Score weighs installment loan debt less heavily than revolving loan debt, making on-time student loan payments is still very important.

That’s because payment history is the biggest part of your FICO Score – 35 percent to be exact. What does that mean to seniors with student loan debt? Not making on-time payments may cause your credit score to decline and quite possibly force this loan into default. Almost 4 of 10 borrowers over the age of 65 are in default on their student loans – the largest of any age group.

The government’s response in trying to collect student loan debt is to garnish the borrowers Social Security benefits. As cited in the GAO report, 114,000 Americans have had their Social Security benefits reduced via garnishment for failure to pay off their student loan debt. This number is expected to rise as more baby boomers enter retirement with student loan debt. That means these people have less money each month to cover their bills – putting them at risk of late payments or missed payments on current debt. It is a domino effect when talking about how all of this will negatively affect one’s credit score and credit reports.

To address this grievous epidemic, Senator Elizabeth Warren (D-MA) and Senator Claire McCaskill (D-MO) have co-sponsored a bill to end Social Security garnishment for student loans. But until that happens, there is something you can do if you are approaching retirement and you still have outstanding student loans and you don’t want to hurt your 3 bureau credit reports.

Apply for a Federal Income Based Repayment Plan (IBR)

To help seniors get their credit back on track, there are government sponsored repayment plans they can apply for to help them rebuild their payment history and lower their student loan debt.

The Income Based Repayment Plan (IBR) is just one of four types of Income-Driven repayment plans offered by the U.S. Department of Education. To see all the plans, go to this document on the Studentaid.ed.gov website. Income Based Repayment is a plan based on your income and caps your required monthly payment at an amount found to be affordable based on your income and family size. Generally, for seniors, the family size is either one or two people. Here are a few more details.

  • Your income must be low compared to your federal student loan debt
  • Your monthly payment cannot exceed 10 percent of your discretionary income
  • If you file a joint tax return, payment is based on combined income and loan debt
  • Outstanding balance is forgiven after 20 years of repayment
  • Go here to use the Repayment Estimator to estimate your monthly payment

After you have determined this plan may be the one for you, here are some steps to follow to apply for the Income Based Repayment plan.

  • Fill out the information on the repayment estimator to verify you qualify and how much your payment is likely to be.
  • Contact your lender or loan servicer and tell them you are on Social Security and you want to apply for an Income-Driven repayment plan.
  • If your Social Security payment is currently being garnished, you will need to tell them.
  • Obtain an application for the Income Based Repayment plan from your loan servicer – fill it out and send it in.
  • Review this Q & A document which addresses all the Income-Driven Repayment Plans.

If your Social Security is currently being garnished, it may take 30 to 60 days for the loan servicer to stop them. That is why is it best to file your application for Income Based Repayment before your Social Security is garnished.

In Summary

Staggering student loan debt is not just affecting younger Americans, it is also affecting our senior citizens. And, student loan debt can play a factor in determining your FICO Score. Late payments and loan default can cause the biggest credit score drop. Add to that a Social Security garnishment of up to 15 percent of a senior’s monthly check, and now you have less income to cover your monthly expenses. These garnishments will force those hovering just above the poverty line to fall below it, severely affecting their lifestyle and their credit.

While fixing this problem will require lawmakers to adjust Social Security’s garnishment provisions, that may take some time. In the interim, people who find themselves approaching retirement age, or those already retired, who have outstanding student loan debt, should see if an Income-Based Repayment Plan can help them arrange payments before garnishment begins. This will not only improve their credit score but it will help the person with a fixed income be able to adjust their monthly spending so they don’t fall behind on any other payments that could hurt their credit score.

If you are not where you’d like to be credit-wise, it may be time to consult with a professional and learn how to start repairing your credit here.   You can also ask us questions on our social media platforms like Facebook or leave us a tweet on Twitter.

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Will My Credit Score Follow Me Abroad?

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Planning a move abroad, whether for employment, retirement, or a lifestyle change, raises a number of questions. Where will I live? What is the cost of living? Can I handle the culture shock?

While financial considerations play an important role in a decision to move abroad, many future expatriates wait until it’s too late to ask one vital question: Will my credit score follow me abroad? It’s an important query whether you have good or bad credit. But, the answer isn’t quite as simple as yes or no.

Put simply, your credit score won’t follow you abroad, but your payment history and debts will. Let’s take a closer look.

Credit Scores Vary from Country to Country

Your credit scores apply to your credit history in the United States and indicate your creditworthiness as a U.S. citizen. If you choose to move abroad, your current credit score will have little to no influence on your ability to borrow money in your new home country. That’s true whether you move to Toronto or Timbuktu.

That doesn’t mean other countries don’t use credit scores. Many do. Some countries’ credit scoring systems feel more familiar than others. Canada’s system, for example, shares many traits with the U.S.’s. Here’s a snapshot:

  • Canada’s two major credit bureaus are TransUnion Canada and Equifax Canada
  • Credit scores in Canada range from 300 to 900 (FICO and Vantage scores range 300 to 850 in the U.S.)

In the United Kingdom, simply registering to vote can help improve your credit score. Lenders use the Electoral Roll to confirm identifying information like your name and address. If you’re not on the Electoral Roll, your application could be delayed or even denied.

Your History Still Matters

Even though you won’t take your credit score with you, your credit past might as well be an extra piece of luggage — it’s coming too. Unless you plan on living exclusively from cash, you’ll need to secure a loan or credit at some point during your time abroad.

When applying for a new credit card or for a new loan outside of the U.S., your credit history will be examined by potential lenders. They might not look at your score, but they’ll still see the credit history that’s resulted in the score.

Maintaining Your U.S. Credit Rating

If you plan to return to the United States, or even visit frequently, be sure to maintain (or improve) your credit. Continue paying down those credit card accounts and any other loans you have. If you plan to keep or rent out your American home, ensure you’re still making timely mortgage payments.

With an eye toward returning, also make sure to keep your existing accounts active. Make purchases on Amazon or pay any recurring bills (Netflix, Prime, or other digital subscriptions) with your U.S. credit cards.

If you’re planning to move abroad, or have recently moved, and want to repair your credit, a lawyer can help. Lawyers understand consumer protection laws and can help leverage your legal rights so that your credit reports remain fair and accurate.

The lawyers and paralegals at Lexington Law can help you repair your credit. Contact us for a free credit repair consultation, including a complete review of your credit report summary and score.

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What VantageScore 4.0 Means to You and Your Credit Report

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In early April, VantageScore Solutions, developer of VantageScore credit scores, announced that its new VantageScore 4.0 tri-bureau credit scoring model will be available to lenders in fall 2017. But this announcement doesn’t only impact lenders.

You can think of VantageScore as a competitor to the widely used FICO score used by the majority of lenders. Although FICO, created by Fair Isaac Corp., is the credit industry standard, the VantageScore model, which was created in 2006 by Equifax, Experian, and TransUnion, has grown significantly in the past several years. The number of VantageScores used increased 40 percent between July 2015 and June 2016, with more than 2,400 lenders and other credit industry participants using it — including 20 of the top 25 financial institutions.

So, what does VantageScore 4.0 mean to you?

VantageScore 4.0 is an update to version 3.0, and includes three important changes:

  1. Perhaps most notably, VantageScore 4.0 is the first tri-bureau credit scoring model designed to accommodate the National Consumer Assistance Plan initiative. The NCAP takes effect July 1 and, among other provisions, it will mark the end of the three reporting agencies collecting and reporting a significant amount of information pertaining to tax liens and civil judgments.

Furthermore, VantageScore 4.0 also distinguishes medical accounts that have been sent to collections from other types of collection accounts and ignores medical collections that are less than six months old in order to allow adequate time for insurance payment processing, according to VantageScore Solutions.

The new model “relies less on derogatory collections and public-records data to ensure that the model will not lose substantial predictive strength in the likely event that these records fail to meet enhanced data quality standards and are removed from consumer credit files under provisions of the NCAP program,” VantageScore Solutions said.

  1. VantageScore 4.0 will be the first credit scoring model used by Experian, Equifax, and TransUnion to include “trended credit data.” This essentially means the new model takes into consideration a consumer’s credit behavior over time vs. looking only at a current snapshot.
  2. The new version will accommodate consumers with limited credit histories through the use of data mining to create consumer scorecards. Through extensive data, VantageScore 4.0 identified thousands of consumer behavior combinations common to those who pay their bills on time.

Consumers and lenders stand to benefit from this new model, which promises more consistent credit scores from all three national credit reporting agencies.

If you’d like to learn more about how the new VantageScore 4.0 can impact you, or more about credit scoring and credit repair, contact Lexington Law today.

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3 Unorthodox Ways to Improve Your Credit Score

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With the increase in the number of companies and websites offering free credit scores, more consumers are becoming aware of their scores than ever before. Despite the buzz, however, those who focus solely on their scores are being shortsighted.

In actuality, your credit reports are the real foundation of your personal credit. Each consumer active in the credit world has a report with each of the three major consumer credit bureaus, TransUnion, Equifax, and Experian. It is the information in these credit reports on which your credit score is based.

Because of this, improving your credit score is really a matter of improving your overall credit health. For instance, credit repair can remove errors and disputable accounts from your credit report, especially when you use one of the top-rated credit repair companies like Lexington Law.

Of course, the best approach for increasing your credit score is to use a variety of techniques designed to improve each aspect of your report used in your credit score calculation. This includes your payment history, your total debt, the length of your credit history, and your current credit mix.

  1. Set Up Automatic Payments

Regardless of which credit model is used, one of the most important considerations in your creditworthiness is your payment history. In particular, the FICO scoring model counts your payment history as 35% of your FICO credit score.

Under most scoring models, the types of accounts that contribute to your payment history include credit cards, retail accounts (store cards), installment loans, mortgages, and finance accounts. Keeping all of these accounts in good standing is the key to securing a solid payment history.

This means avoiding certain negatives, such as bankruptcies, foreclosures, and certain types of lawsuits, as well as ensuring you don’t default on any of your accounts. It also means building a history of paying on time, perhaps through responsible use of one or two easy-to-get credit cards — keyword, responsible.

For many, the hardest payment history negatives to avoid are delinquencies, which are late or missed payments. Future delinquencies can be easily prevented, however, if you set up automatic payments on your credit accounts. By setting your accounts to automatically pay your balance each month, you never have to worry about forgetting a due date again.

Because late and missed payments lose impact on your score over time (and drop off completely in seven years), the longer you go without a delinquency, the more you’ll see your credit score improve.

  1. Ask for a Raise

The second most important aspect of your credit score, 30% under the FICO scoring model, is your total amount owed. This segment looks at your total debt by summing the balances of all of your credit accounts. While lower is better, your total debt itself isn’t the only factor considered in this segment.

Also, part of your amount owed is your utilization ratio, which is the total amount you owe divided by the total amount of credit you have available. For example, if you have a total credit limit of $10,000 between two credit cards and a loan, and you owe a total of $6,000, your utilization ratio is 60%.

The most effective way to improve how you rank on your amount owed is to decrease your total debt. Unfortunately, this can be difficult when already dealing with a tight budget. When it comes to determining how much of your budget to dedicate to paying down debt, sometimes the answer isn’t to trim your expenses, but, simply, to increase your income.

One straightforward method of scoring an income boost is to obtain a pay raise in your current position. Even a modest raise of $0.50 an hour can equal over $1,000 a year that can be used to decrease your current debt.

If a raise isn’t a possibility, try taking on overtime hours; most hourly positions offer time-and-a-half for overtime worked. You may also want to consider an additional part-time job to really jumpstart your earning potential.

  1. Become an Authorized User

Although how much debt you have and how good you are at paying it back will make up more than half of your credit score calculation, an assortment of other factors will also have an impact. These include the length of your credit history, the types of credit you have, and how many new credit accounts you’ve opened.

The length of your credit history counts for 15% of your FICO calculation and is taken into account in two ways. First, creditors will look at the age of your oldest credit account. Second, they’ll look at the average age of all of your accounts. In both situations, older is better.

Furthermore, another 10% of your credit score is dedicated to the number of recent inquiries and new accounts you have. Any hard credit pulls within the last 12 months can be taken into consideration here. In practice, this means that, while it’s all well and good to apply for one or more post credit repair credit cards, new cards will impact both your average account age and recent credit inquiries.

For the most part, time is the primary way you can improve the length of your credit history. That said, you can help your average age by becoming an authorized user on someone else’s established credit card account (providing it is older than your oldest account).

In fact, in addition to increasing your average age of accounts, becoming an authorized user for a credit account in good standing can also help improve your credit utilization rate by increasing your available credit.

The trick here is that being an authorized user on an account only helps your credit if the primary account holder maintains healthy financial habits. If the account on which you are an authorized user has a high utilization rate, it will negatively impact your credit scores, too.

   Battle Bad Credit on All Fronts

Discovering your credit isn’t in the shape you thought it was can be a blow, but it doesn’t have to be the end of the world. You can improve your credit by using a variety of techniques to improve each important credit factor.

A good first step in repairing tarnished credit is to shine it up with credit repair, done by an experienced credit repair company. After that, really make it gleam by addressing each aspect of your credit, from the ones with big impact — your payment history and utilization rate — to the factors with smaller impact, including the length of your credit history and average age of accounts.

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Is Credit Repair a Scam?

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If you automatically think, “Scam!” every time you hear or see a commercial for a credit repair company, you’re not alone. Credit repair has certainly gotten a bad rap among many consumers — and it’s not difficult to understand why.

For many people, credit repair is synonymous with companies taking advantage of consumers who don’t know where to begin to clean up their credit report and improve their credit score. Unfortunately, it’s when consumers are at their most vulnerable that scam artists can swoop in.

But ultimately, whether or not credit repair is a scam comes down to the firm you select to help you.

With so many companies claiming to offer the best credit repair services, it’s important to understand how to determine which are legitimate and how to weed out potential scams.

Let’s take a look at three ways to help you differentiate legitimate credit repair from credit repair scams.

  1. Legitimate credit repair companies will only charge for credit repair services after they’ve been performed. Beware of any company that asks for money upfront.
  2. You should be able to speak to a person when you call your credit repair agency and you should steer clear of any company with a Web-only presence or one that doesn’t provide a phone number where you can reach a real, live person. The bottom line is your credit repair agency should want to talk with you directly so that they can fully understand your needs and situation in order to effectively assist.
  3. You’ll also want to beware of services that offer you nothing more than a credit report. By law you are already entitled to one free credit report each year, without paying anyone a dime. You can also request your scores from each of the three bureaus individually, for a fee. Whether or not you choose to pay for your credit score, it is still a good idea to check your report at least annually so that you can be diligent in disputing credit items that are erroneous or fraudulent.

Consider a Legal Approach to Credit Repair

Despite the negative perceptions, there are reputable, trustworthy credit repair services you can rely on.

When it comes to credit repair, a legal approach is the safest and most effective. Partnering with a consumer advocacy law firm means you’re always working with real, live, legal experts. It also empowers you with tools and education to maintain good credit for life and exposes you to other financial and legal services from which you can potentially benefit.

Many consumers are unaware that credit protection laws exist when it comes to ensuring your credit report is fair and accurate. Laws also exist pertaining to credit problems that have arisen as a result of life circumstances, such as divorce or military deployment. Partnering with a law firm that specializes in credit allows you to understand and leverage these laws.

Don’t Go it Alone

While do-it-yourself credit repair is possible in theory, it requires a significant amount of time and legal knowledge. Effective credit repair is complex, and is better left to a trustworthy firm that understands all of those complexities and legalities. The best advice when it comes to credit repair is to partner with a firm that can help you repair your credit and offer you the knowledge and services to maintain good credit going forward.

Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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