Plus: Surprise! Not all lenders rely on a FICO score to determine credit worthiness
Media Contact: Barbara Fornasiero; EAFocus Communications; firstname.lastname@example.org; 248.260.8466
Wyandotte, Mich. — March 8, 2021 — Just before the pandemic began, it was announced that new FICO score calculations would be introduced in the summer of 2020, alarming many consumers that the changes would negatively impact their credit score. The new FICO® 10 puts a greater emphasis on the debt trends of individuals, enhancing the predictive capacity of earlier FICO releases to determine the likelihood of borrowers defaulting on their loans. Yet, while the changes were introduced as planned, not all lenders have adopted them. According to Carma Peters, President and CEO of Michigan Legacy Credit Union (MLCU).
“FICO scores are only used by our credit union to determine interest rates on a loan, based on the predictive indicators of FICO. We never adopted the FICO® 10 version due to subscription costs; we still use an older version of FICO, which is a common practice in smaller financial institutions,” Peters said. “What is more important to us in deciding when to extend credit – and how much – is what we call a relationship score, which also includes the 5 c’s of credit: character, capacity, collateral, capital, and conditions. With local decision-making authority, we are not forced to rely on auto-generated, formulaic determinations of credit worthiness, as is common among traditional banks.”
Viewing credit union members as owners, Michigan Legacy Credit Union’s relationship score considers the following:
- How long has a credit applicant been a member?
- Do they have a savings account with us?
- Do they have a checking account with us?
- Is their paycheck direct deposited to us?
- Have they paid off a previous loan with us?
- What is their pattern of loan repayments with us? A late payment over 30 days occurring more than twice will absolutely have a negative impact on a relationship score.
The pandemic has thrust many working-class individuals in particular into financial stress, with permanent or intermittent job losses that may not be fully offset by government stimulus dollars or other state or federal relief. And even with multiple COVID-19 vaccinations bringing optimism to a return to normalcy, it could take months or years for some to rebuild a solid credit report that plummeted during the pandemic. Peters recommends the following tips to get consumers on the road to credit score recovery:
- Pay your bills on time and on a regular basis. Late payments are the second largest contributing factor for declining scores. If you tend to run a little late, use an online bill pay option to automate your payments.
- Never charge more than half of your balance. Decreased credit capacity is the NUMBER ONE reason a credit score goes down. Also, focus on paying down any outstanding credit balances—ideally, you want them below 30% of your overall credit limits (e.g. if your credit card limit is $3,000, try to keep your balance below $1,000).
- Pull your credit report regularly from each of the three credit bureaus—Experian, Equifax and Transunion—to verify that your information is correct. Due to the pandemic, federal law now allows consumers to request one free copy of their credit report weekly (instead of every 12 months) from each of the national bureaus—effective until April 20, 2022. https://www.annualcreditreport.com/index.action
- Make arrangements with your lender for any collection items, judgements, charge-offs, or anything else owed that you can’t pay off in a timely manner. When you avoid the negative issues and don’t contact your lender, your options decrease. Always stay in touch with your financial institution or lender; communication is key to receiving solution-oriented help. Never agree to arrangements that you will not be able to keep.
- Freeze your report in the event of identity theft—If you are a victim of identity theft or suspect something is off, freeze your credit report immediately through all three credit bureaus: Experian, Equifax, and Transunion. Next, contact your financial institution so they can monitor credit activity.
- Don’t apply for a large amount of credit in a short amount of time—Opening up multiple credit cards over the span of a month, for example, can ding your credit score. While the ding is not significant, it could make a difference in the interest rate you receive. An exception to the rule of not applying for a large amount of credit at once would be the purchase or lease of a vehicle. If you shop for a vehicle within a week or 10 days and apply for credit at multiple places during your car shopping experience, the bureaus will not look at each individual inquiry as far as your score is concerned.
- Provide a consumer statement on discrepancies—If there is a dispute that can’t be resolved, place a consumer statement on your credit report to let any lender or finance company know—and do so without asking. It shows you are paying attention to your credit and gives you a chance to tell your side of the story. Ask each credit reporting bureau how long the consumer statement will stay on your report and whether you can update it.
- Note that accurate information can’t be changed—Anyone reporting accurate information—including late payments—cannot change it, as long as it is correct. If you have negative information that is accurate, it will move off your report after seven years.
About Michigan Legacy Credit Union
Michigan Legacy Credit Union (MLCU) is a member-owned, not-for-profit financial cooperative serving members who live, work, worship, attend school, or own a business in the state of Michigan. Michigan Legacy Credit Union is committed to providing quality financial services at a competitive price, delivered professionally and efficiently while keeping member/owners and their needs first. For additional information on MLCU, visit: www.michiganlegacycu.org.