What Does the New FICO Scoring System Mean?

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by Paul Mulligan, SVP, Retail Lending

When you apply for a loan, lenders have access to a variety of information they use to decide whether to give you a loan and at what terms.  The most popular of those resources is your FICO score, a three-digit rating based on information in your credit reports, which helps lenders decide how likely to repay a loan, how much you can borrow, the length of you loan repayment period, and your interest rate.

While FICO scores give lenders a quick and consistent way to determine borrower worthiness, they also make sure you, the borrower, get a fair credit assessment and access to the funds you need.  FICO has become the de facto industry standard for lenders.

This month, FICO has updated its scoring system for the first time since 2014, which could impact your scores.  The new scoring places more emphasis on trend data in your credit report, looking at your credit utilization and payments over the past two years, as opposed to only current balances.  For instance, new data might include whether you tend to pay off balances quickly, carry extended debt, or consolidate loans, as well as your credit management predictability.

The other major change reflects changes in credit reports.  Tax liens, insurance-paid medical collections, and judgments are no longer part of credit reports, and healthcare defaults won’t appear on credit reports for at least six months.

At the end of the day, though, the real question is, how will the new scoring impact you?

The new scores will be less forgiving of risky credit behavior.  That means, if you regularly run up your credit, don’t pay off balances consistently, carry too many credit cards, or consolidate debt into personal loans in order to free up your credit cards, you may see your score go down.

On the other hand, some spending habits that may have previously been viewed negatively may no longer hurt you.  For instance, if you run up seasonal balances – such as during the holidays or summer vacations – and then pay them off, your score may not be negatively impacted because those are predictable one-time spikes, not regular habits.

Ultimately, what you need to keep in mind is the basics of good credit haven’t changed.  Payment history (35%) and credit usage (30%) are still the two biggest components of your FICO score.  If you follow good credit practices – pay your bills on time, keep balances below your credit limits, and don’t apply for too many new lines of credit (or too often) – you should have nothing to worry about.  In fact, if you manage your credit well, the new scoring could actually improve your score.

If you’re concerned about your credit rating and want to work to improve your score, the sooner you start following good financial habits and budgeting, the faster you can see positive change.  Of course, it’s not always easy, so if you need help or want advice on how to become more responsible with your spending, talk to our specialists.  They can provide information on financial best practices, budgeting and saving tips, and improving your credit.  On the other hand, if you have managed your credit responsibly, you probably don’t have anything to worry about.  Just continue to follow smart banking habits.

Don’t Let Emergencies Sink You into Debt

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By Celeste Lohrenz

Emergencies are, by definition, unexpected and unpredictable.  They can also have significant financial ramifications – either due to high costs or loss of revenue or both.  By nature, emergencies aren’t easy to deal with and most can’t be avoided, but there are ways to make them more manageable, starting with making sure you have an emergency fund.  The question you should ask yourself is, “If I lose my job, if my roof starts leaking, or if my car needs a new transmission, am I financially prepared am I to deal with it?”

Why start an emergency fund?

An emergency savings fund or account could be the difference between being able to manage unexpected expenses and falling into deep debt.  If a significant expense comes up, knowing you have the funds to support at least some of it can keep you from having to worry about your monthly fixed expenses without taking out loans or maxing out credit cards.

How much do you need?

How much to save is really a question of several variables, including income, monthly fixed costs, lifestyle and other variable expenses, size of family, and certainly how much can you actually afford to save each month.  A common goal is to have 3-6 months’ worth of expenses in an emergency fund, but even as little as $500 can cover many unexpected expenses, like a leaky bathroom pipe or bad brakes on your car.

Start by setting an attainable goal and, once you’ve reached that target, you may find you want to increase the size of your emergency fund, so you can set a second target.  When your emergency fund has reached a point with which you’re comfortable, you may have found it easy to live with the reduction in spending.  In that case, you can use the same philosophy to start a new account to start saving for a larger planned expense, such as a vacation, wedding, mortgage down payment, college  tuition, etc.

How to grow the fund?

There are many ways to find money to add to your savings, from cutting expenses to finding supplemental income sources.  One place to start is the change you get when paying with cash.  The coins, $1 and even $5 bills can add up quickly if you put it into a jar at home every day, then deposit it each week or month.  But, you have to have the willpower to avoid dipping into it for an iced latte or other items.

One of the most effective ways to save, though, is using automatic deposits.  We can help you set up automatic monthly transfers into your emergency fund, so you don’t even have to think about it.  Saving apps are another very useful tool that help automate your emergency fund growth.  The Milford Bank has partnered with Plinqit to help customers not only save, but earn money in the process as they reach their goals.

Where to put the money

The key is to make sure you have access to your emergency fund should you need it, but you don’t want it to be so convenient that it becomes a daily temptation.  Interest-earning savings accounts are a good option, because they can be accessed at any time without penalty, but you should keep your emergency fund in a separate account from your regular savings to avoid using it.  Your bank’s specialists can help you determine exactly what kind of account is most suitable for your individual needs.

When should you access this account?

The point of an emergency fund is to have it available if unexpected expenses come up that you can’t handle with your monthly budget.  if you’re faced with an expense you weren’t expecting, consider whether it’s actually an emergency – something you absolutely can’t avoid doing – and whether you may be able to cover the costs with your monthly budget, even if you have to adjust it slightly.  By using automated tools to fund the account, you will be less likely to spend it until an emergency arises – out of sight, out of mind, as they say.  But remember, emergencies can happen at any time, so if you do need to dip into your fund to cover an expense, you should start saving again right away to build it up again.  You never know when the next emergency is going to happen.