The Return of Student Debt: A Looming Credit Crisis for Americans

The Return of Student Debt: A Looming Credit Crisis for Americans

As the calendar turns to October 2024, millions of Americans are facing a harsh financial reality. The long-awaited resumption of student loan payments has arrived, and with it comes a potential credit crisis that could impact borrowers for years to come.

The End of the Pandemic Pause

For over three years, federal student loan borrowers enjoyed a reprieve from their monthly payments, thanks to the pandemic-era pause. This break allowed many to redirect funds towards essential needs and even build up savings. However, as of October 1st, that grace period has come to an end.

A Shocking Return to Reality

The numbers are staggering. Approximately 28 million borrowers are now required to resume payments on their federal student loans. For many, this sudden financial obligation is proving to be overwhelming.

The Delinquency Dilemma

Perhaps most concerning is the rapid rise in delinquencies. Within just the first month of repayment, a significant portion of borrowers have already fallen behind. This surge in missed payments is not only straining personal finances but also threatening the credit scores of millions.

Credit Scores Under Siege

The impact on credit scores cannot be overstated. As delinquencies mount, many Americans are seeing their hard-earned credit ratings take a hit. This decline in creditworthiness could have far-reaching consequences, affecting everything from future loan approvals to employment opportunities.

A Call for Solutions

While the situation appears dire, it's crucial for borrowers to explore their options. Income-driven repayment plans, deferment, and forbearance may offer some relief. Additionally, communication with loan servicers is key to navigating this challenging landscape.As we move forward, it's clear that the student debt crisis requires ongoing attention and innovative solutions. The coming months will be critical in determining how millions of Americans weather this financial storm and what long-term impact it will have on the nation's economic health.

What Does Your Credit Score Mean?

If you know your credit score but don't know what the number means, there are several resources available to help you understand your credit score and how it impacts your financial health. Here are some steps you can take:

1. Understand what a credit score is: A credit score is a three-digit number that represents your creditworthiness, or the likelihood that you will pay your bills on time. It is calculated based on the information in your credit report.

2. Learn about credit score ranges: Credit scores typically range from 300 to 850, with higher scores indicating better creditworthiness. Different lenders may have different criteria for what they consider a "good" credit score, but generally, a score above 700 is considered good.

3. Understand how your credit score is calculated: Credit scores are calculated based on several factors, including payment history, amounts owed, length of credit history, new credit, and credit mix.Understanding these factors can help you identify areas where you can improve your credit score.

4. Check your credit report: Your credit report contains the information that is used to calculate your credit score. You can request a free copy of your credit report from https://www.annualcreditreport.com Reviewing your credit report can help you identify errors or inaccuracies that may be impacting your credit score.

5. Take steps to improve your credit score: If your credit score is lower than you would like, there are several steps you can take to improve it. These include paying your bills on time, paying down debt, and avoiding opening too many new credit accounts at once.

Credit Score Range

Credit scores typically range from 300 to 850, and different credit score ranges can indicate different levels of creditworthiness. Here are the most common credit score ranges and what they mean:

1. Poor: A credit score below 580 is generally considered poor and may make it difficult to qualify for credit or loans.

2. Fair: A credit score between 580 and 669 is considered fair and may qualify you for some credit or loans, but at higher interest rates.

3. Good: A credit score between 670 and 739 is considered good and may qualify you for credit or loans at competitive interest rates.

4. Very Good: A credit score between 740 and 799 is considered very good and may qualify you for credit or loans at even more competitive interest rates.

5. Exceptional: A credit score above 800 is considered exceptional and may qualify you for the best interest rates and terms on credit or loans.

It's important to note that different lenders may have different criteria for what they consider a "good" credit score, and credit score ranges can vary based on the scoring model used to evaluate them. However, understanding these credit score ranges can help you gauge your credit health and take steps to improve your credit score over time.

How Often Do Credit Scores Update?

Credit scores typically update at least once a month, but the frequency could vary depending on your lenders and unique financial situation. Lenders usually report updated information every 30-45 days, so it's possible you might receive an updated credit score each month.

However, every lender has its own reporting schedule and policies, so there is no set date each month when you can expect your credit scores to be updated. The information in your credit reports must update first before your credit scores can update.

The frequency of credit score updates depends on how many active credit accounts you have and when each of those lenders reports new information

It's important to note that each credit monitoring service may update at different times, and not all lenders report to all three credit reporting agencies, which is one reason why you may see some variations in your credit scores.

Several factors can affect credit scores, including:

1. Payment history: Payment history is the most significant factor that affects credit scores, accounting for 35% of the total score. It considers whether you have paid your bills on time for each account on your credit report, including credit cards, loans, and other debts.

2. Amounts owed: The total amount you owe on your credit accounts and the percentage of your available credit that you are using also affect your credit score. This factor makes up 30% of your credit score.

3. Length of credit history: The length of time you have had credit accounts is another factor that affects your credit score, accounting for 15% of the total score. The longer your credit history, the better your score.

4. New credit: Opening new credit accounts can also affect your credit score, making up 10% of the total score.

5. Applying for multiple credit accounts in a short period can negatively impact your score.

6. Credit mix: The types of credit accounts you have, such as credit cards, loans, and mortgages, also affect your credit score. This factor makes up 10% of the total score. Having a mix of credit accounts can positively impact your score.

It's important to note that different credit-scoring models may weigh these factors differently, and lenders may also consider other factors when evaluating your creditworthiness. However, understanding these factors can help you manage your credit accounts and improve your credit score over time.

Ultimately, it's a good idea to check your credit reports regularly for accuracy and monitor your credit score to ensure that you are aware of any changes.

You can check your credit report for free once a week at: https://www.annualcreditreport.com

This site provides your full report from Experian, Equifax, and TransUnion.

Missed Payments on Credit Reports

The most important detail in the calculation of your credit score is your payment history. This factor alone accounts for 35% of your FICO credit scores. When you miss or make a late payment it can cause significant damage to your credit score, especially if the late payment is recent or severe.

A late payment may remain on your credit report for up to seven years as allowed by the Fair Credit Reporting Act (FCRA). Getting the late payment removed depends on its accuracy.

The FCRA is a federal law that gives you the right to dispute inaccurate information that appears on your credit report. If you check your credit reports and you find that a late or missed payment shouldn’t be there, you can make a dispute to the three credit bureaus: Experian, Equifax, and TransUnion. The best form of contact is by certified mail and you should provide a form of proof that the missed or late payment is inaccurate. When the credit bureaus receive your dispute they have 30 (sometimes 45) days to perform an investigation and they will either delete, update, or verify that your disputed late payment is accurate and inform you of the results of their investigation.

Another situation to look out for is fraud or identity theft. When a late payment appears on your credit reports, it can damage your credit score even if the late payment is attached to an account that isn’t yours.

If you find that there is a fraudulent account (with or without late payment activity) on your credit report, you should visit IdentityTheft.gov to file an identity theft report. When submitting the dispute to the credit bureaus, you will need to include a copy of your ID theft report. Some consumers and even credit repair companies will file fake fraud disputes claiming that the consumer is a victim of identity theft to avoid their liabilities. Filing a false police report or false identity theft affidavit with the FTC is illegal and can cause you serious trouble.

Legitimate late payments are not likely to be removed. Your best shot to have it removed is at the mercy of your creditor to determine whether it will ask the credit bureau to remove the derogatory information. You can take the chance and call or write your creditor to request a goodwill removal. The best chance of getting a removal is if your account has been in good standing. For example, if you’ve had a loan with a lender for several years, you’re current on your loan, and the late payment in question was your first and only delinquency.

Ways to Improve your Credit Reports and Scores

• Pay down credit card debt and keep your payments consistent. When you reduce your credit card balances, your credit utilization rate may decrease as well. Keeping your payments consistent shows that you are consistent with payments. Making large or below minimum payments puts you at risk.

• Ask for a Credit Limit Increase. A higher credit limit reduces your credit utilization rate/ratio and improves your score.

• Become an authorized User. If you have a friend or family member add you to a well-managed credit card as an authorized user, this can help you build positive credit. You should consider asking someone close to you who has a credit card with no missed payments and a low credit utilization ratio.

Avoid future missed payments. Keeping up with your payments helps improve your credit score over time.

Negative Credit Information

Your credit score is likely to be hurt when negative information shows up on your credit report. There is a varying degree of impact from late payments, collection accounts, charge-offs and bankruptcies.

Negative information on your credit report tends to stick around for awhile, and could make it harder to qualify for new financing (such as loans and credit cards). The good news is: they don’t stay on your report forever.

It can be difficult to understand how credit scores work. One puzzling factor is that specific items on your credit report (credit score factors) are not worth a preset number of points.

For example, you won’t automatically lose 20 points, or any set number of points for a 30-day late payment that is newly showing up on your report. You could just be earning fewer points, which would result in a lower score the next time your credit score is calculated.

The credit scoring models like FICO and VantageScore consider all of your credit report information at once. Someone with a clean credit report who receives a new collection account might have a larger decrease in their score than someone who already has blemishes on their credit. However, the person with the cleaner credit report would still have a higher score overall.

Two other factors have a role in how negative information impacts your credit score: age and severity. As for age, a more recent late payment is likely going to damage your score more than a late payment that is several years old.  As for severity, a 90-day late payment tends to be more damaging than one that is 30 days late.

Negative information does the most damage to your credit score when it first appears on your credit report. The derogatory information will hurt your score as long as it is reporting, but becomes less pronounced over time, especially if you have avoided adding more derogatory items.

Any item that is reporting on your credit report is likely to affect your credit score for good or bad. The Fair Credit Reporting Act (FCRA) is a federal law that regulates the three major credit bureaus, as well as others. The maximum shelf life of derogatory information is seven to ten years. There are some exceptions to this rule.

Examples:

7 Years

• Late Payments

• Collection Accounts

• Medical Collections

• Charge- Offs

• Chapter 13 Bankruptcy

10 Years

• Chapter 7 Bankruptcy

• Accounts closed in good standing

2 Years

• Credit inquiries

Indefinite

• Defaulted federal student loans

Incorrect & Outdated Information

There isn’t much you can do about an accurate but negative item on your credit report. You can however, talk to the creditor about a goodwill removal (which is not always granted). Most negative items will keep showing on your credit report as long as the law allows.

If you have an item on your credit report that is inaccurate or it has been reporting for longer than the FCRA permits, there are a few actions you can take.

• Dispute: You have the right to dispute any incorrect or outdated information on your credit report. You can send disputes online or by mail, but the Federal Trade Commission (FTC) recommends using certified mail for dispute letters. This method allows you to verify that your letter was received and that a real person is reviewing your dispute. Online disputes are computerized.

• Complain: Along with disputing the incorrect information on your credit report, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).

• Legal Action: If disputes and complaints aren’t fixing your issues, you might consider talking to an attorney specialized in the FCRA. An attorney can help you discover if your rights have been violated. They will advise you on steps you may not have taken and will initiate legal action when necessary.

Negative information on your credit report has the potential to damage your credit score and make it harder to qualify for financing and applying for any type of credit. It is best to avoid issues like late payments charge-offs, and collection accounts. If you do happen to make a mistake or have an error in your credit report, all hope isn’t lost. You can still bounce back and improve your credit for the future.

What Caused Your Credit Score to Drop?

When you notice that your credit score had dropped, you start to question many things. We try to pay our bills on time, at the right amount, and keep our credit usage at a minimum but sometimes we fail. We aren’t perfect, but one small mistake can reflect on your overall credit score. 

If you notice a drop, it is most likely due to something specific. Here is a list of the most common reason this happens: 

1. You Were Late or Missed a Payment

Your payment history is one of the most influential factors to your overall credit score. Missing just one payment can negatively impact your credit. It is important to stay up to date on things such as due dates and minimum payment amounts. 

2. You Applied for a Loan or a New Credit Card

Maybe you found a new credit card that appeals to you or you just took our a loan for school, a vehicle, or home renovation. Unfortunately, as exciting as these can be, it can be less exciting for your credit score. Any time you authorize someone, such as a credit card company or lender to check your credit report, you may notice your score took a hit. This is known as an inquiry. It is important be sure the credit you applied for is worth the hit and will be valuable in the long run. It doesn’t have to be a scary process if you are prepared! 

3. Your Credit Utilization Has Gone Up

It is easy to make a charged payment and think that you will pay it off later. It is such an easy and convenient process that we don’t realize how charges can add up quickly. You may end up lowering your credit score depending on the card’s credit limit, maxing out the card, making larges purchases, or continuing to make small payments. You should monitor your charges and keep them below 30% of the credit limit. 

4. You Closed a Credit Card Account

Closing out a credit card, especially if it one of your oldest will reduce the age of your credit history. Your credit history is another factor that impacts your credit score. The longer you have a card or account open shows that you are able to maintain a credit card over time. You should consider keeping the card unless it has a high annual fee. Keeping it open will help maintain your overall credit limit and credit history. 

What is a Credit Score?

Credit scores indicate your level of risk as a borrower. There are different credit scores that use unique formulas but they each will typically include factors such as: payment history and amounts owed. 

What Is a Credit Score?

A credit score is a number that measures how risky you are as a borrower aka your credit worthiness. Financial institutions use this score to measure how much they can trust you. Credit scores are calculated by your past behavior with loans, credit cards, and other financial products. The higher your credit score, the lower risk you pose to lenders. Higher scores usually mean that you can expect better terms and lower rates when you borrow money. 

You might not realize that you have hundreds of of credit scores, not just one. The FICO brand of credit scores used to be the only scoring system3. Established by Fair Isaac Corporation, FICO, remains the main type of credit score used by lenders to evaluate the credit ratings of applicants. When you hear about credit scores, it usually means the FICO Score. However, under the FICO brand there are different types of FICO Scores for different purposes. For example, when applying for a student loan or buying a house, the bank may use a different type of score than if you are applying for a credit card. 

Most recently, the three major credit bureaus (TransUnion, Equifax, and Experian) have banded together to create another scoring system called VantageScore. This score relies on a slightly different set of weighted criteria than FICO Scores. If you receive a free credit score on your credit card statement, you may read the fine print to find out what scoring model and credit bureau data they are using. 

Range of Credit Score

VantageScore 3.0, 4.0, and most FICO Scores range from 300-850. Older versions of VantageScore and some other types of FICO Scores have different numerical values. 

What isn’t In Your Credit Score

Your FICO and VantageScore credit scores only consider your account information on your credit reports. They do not consider things like:

• Your income (credit card companies will ask for this when you apply for new credit, though)

• Your specific place of residence

• Your age, race, gender, religion, marital status, or national origin

• Child support/family support obligations

• Whether or not you’re using credit counseling services

Criteria Used by FICO and VantageScore

FICO and VantageScore determine credit scores by evaluating similar factors that essentially boil down to the following:

• Your payment history

• Amounts owed, particularly versus your overall available credit

• The age of your credit history

• The types of credit accounts opened in your name (loans, credit cards, etc.)

• New/recent applications for credit

It is generally safe to assume that the biggest factor that impacts your credit score is your payment history followed by amounts owed and utilization of credit. 

Exactly how these factors impact a given score can vary, but it’s generally safe to assume that your payment history is the biggest consideration, and that’s nearly always followed by your amounts owed/utilization.

Here is an outline of a few of the more commonly used scoring formulas:

FICO Scoring Criteria

(Scores range from 300 to 850)

• 35% Payment history

• 30% Amounts owed

• 15% Length of credit history

• 10% New credit

• 10% Types of credit

VantageScore 3.0 Scoring Criteria

(Scores range from 300 to 850)

• 40% Payment history

• 20% Credit Utilization

• 11% Balances (total amount owed)

• 21% Depth of credit (length of credit history, types of credit)

• 5% Recent credit

• 3% Available credit

VantageScore 4.0 Scoring Criteria

(Scores range from 300 to 850)

• 41% Payment history

• 20% Credit Utilization

• 20% Age/Mix of Credit

• 11% New Credit

• 6% Balances

• 2% Available credit

Look for our next blog for the break down of these elements included in FICO Scores. 

Twitter Shredded by Credit Karma's Comically Inaccurate Scoring

Last week, Twitter was bombarded with consumers expressing their (hilarious) frustrations concerning their credit scores provided by Credit Karma, the personal finance company owned by Intuit. 

The frustration comes from users realizing that Credit Karma is providing them with lower credit scores than what is found on their credit reports. 

Consumers were tweeting about applying for credit cards, loans, and attempting to purchase vehicles thinking that they had good or excellent credit, only to find out that the credit score that the issuer pulled was lower than what they had found on Credit Karma. The tweet that started the meme trend can be found here.  

Twitter users were quick to share and create memes about how their credit score was inflated on Credit Karma. @RiotGrlErin had even tweeted “checking your credit score on credit karma is like checking your symptoms on WebMd.”

But, users were on to something important when it comes to checking your credit score. There are many reasons why your credit scores differ between what a personal finance website tells you and what lenders or credit card companies find. There are mainly two reasons: For one, a lender may pull your credit from different credit bureaus, either Equifax, Experian, or TransUnion. Your score can differ depending on which bureau your report is pulled from, since they do not all receive the same information about your credit accounts. Secondly, there are different credit score models and versions that exist across the board. 

Credit Karma’s website states that they use the VantageScore® 3.0 model. VantageScore may look at the same facts that the other popular FICO scoring models does, such as your payment history, amounts owed, length of credit history, new credit and your credit mix but each scoring model weighs these factors differently. Because of this, VantageScore and FICO Scores tend to vary from one another. The VantageScore® 3.0 on Credit Karma will likely be different from your FICO Score that lenders use most often. If you are planning on applying for credit, make sure to check your FICO score since there is a good chance that lenders will use this to determine your creditworthiness. FICO Scores are used in over 90% of U.S. lending decisions. It is important to note that there are also industry-specific FICO Scores to look at when you are planning a specific purchase. For example FICO® Auto Scores are ideal if you are wanting to finance a car with an auto loan. If you are planning to buy a house you should look at FICO® Scores 2, 5 and 4. 

The best way to look at your scores is to visit www.annualcreditreport.com where you can access and download your reports from Equifax, Experian, and Trans Union. Due to Covid, your report is free to access once a week until April 2021. 

Feel free to shoot us a message for any questions!

Drastically Dropping Credit Score

Many people are are wondering why their credit scores are dropping at a drastic rate. You may be doing things such as paying off auto loans, credit cards, and even making credit card payments well above the minimum due. So, this drop seems really unfair, doesn’t it?

You first want to retrieve your credit reports from the three main bureaus: Equifax, TransUnion, and Experian. You can obtain and download these reports from: AnnualCreditReport.com  These reports are now available weekly, for free until April 2021! Every month millions of data are retrieved by credit bureaus to be posted. The items in your report should be accurate but sometimes errors can be found. You should check for things such as: a misspelled name, a mixed-up account in the lenders’ records, a suffix such as “junior” that should be “senior” and other items that could be a mix up with someone else’s data on your report. By getting all three reports you will be able to see the discrepancies faster.

The bureaus do not have all the same information. They compete for business both into and out of their files. Some lenders may only be reporting to one of the lenders and you may find that you have very different credit scores from each reporting agency. Make sure to dispute anything that you do not recognize as yours, that is more than seven years old, or if something is missing. The best way to dispute is by sending them a letter through certified mail, so that you know an actual person is reading your dispute and you can verify that they received your letter. Since they are in competition with each other, if that data is incorrect, that is not a good competitive business for you. 

High Balances

If you are making the above minimum payment on a number of cards which you are carrying balances, the interest being charged is making your balance go up which is causing you to lose points.  You should be keeping your credit card balances below 30% of your credit limit. If you have multiple cards, don’t focus on just paying off one. The card with a high balance will still effect your credit score regardless if they other(s) are paid off. 

Accounts not appearing on report

Some lenders don’t report to every bureau every month. It costs the lender money to report to the bureaus that you have paid a bill. Auto lenders are quick to repossess a vehicle if you miss a payment but might find little advantage in reporting the paid-off loan instantly. It may take a three-month period for that good news to get published! It’s unfair! 

Closed Credit Card Accounts 

If you have paid off credit cards and then closed the accounts, the utilization points in your score will have gone down because you have lost the available credit from those cards. This is a reason why it is important to not close accounts if you can prevent from doing so. Your credit limits are tied directly to your credit utilization ratio, which counts for 30% of your overall FICO score. You should try to keep credit cards open, whether you are using them or not, unless you are being charged a large fee for their use. One tip I can suggest: If you have two cards from the same bank issuer, you should ask to have the closed account credit limit added to your remaining opening account. This will keep the utilization factor low while saving you an annual fee. 

Your credit history has gotten shorter

If you have recently closed any other accounts, it could have impacted your credit history. Your credit history is how long you have had credit being reported in your name. In credit reporting, the older the better. This makes it more difficult for young people to build up their scores. It is useful to know that some scoring models only count your open accounts in this calculation. 

What affects your credit score?

Here is a brief FICO score primer:

The five basic components in order of importance:

• Payment history (35 percent)

• Credit utilization (30 percent)

• Length of credit history (15 percent)

• Credit mix (10 percent)

• New credit (10 percent)

Credit mix

While the car payments aren’t a factor in utilization, they have a direct impact on the credit mix portion of your score. Lenders like to see that borrowers can handle both revolving credit (credit cards, etc.) and installment debt (car notes, mortgages, etc.) on a monthly basis. Once your car notes were paid off, you lost those points. You still have your good payment history on those notes and that history will stay on your credit reports for 10 years. But credit cards alone will not do much for you in the credit mix department.

New credit

Having hard inquiries over the past couple of years could negatively impact your credit score but only in short term. If you have applied for credit that you did not receive that will hurt you since you would not have the new available credit credit to balance out the impact of that inquiry. It is important to have a fairly good idea that you will be accepted for credit before you apply. 

If you have questions or concerns about your credit report use our online form to contact us. We can answer your questions and see if you might have a case. 

Covid and Credit Score

Covid-19 has been such a unprecedented event and there is still a lot of work being done to configure how different situations should be treated and reported. 

The Fair Credit Reporting Act (FCRA) is a law enacted in 1970 that gives consumers certain rights when it comes to their credit reports that include the ability for consumers to dispute credit reporting errors. It also requires that furnishers (those that produce credit reports) are reporting accurate and up-to-date information. 

Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. Part of this act ensures that consumers impacted by Covid-19 are still able to receive loan accommodations without having their credit score impacted. This means that when banks and other lenders provide a loan, payment deferrals, and other forms of relief to consumers due to the pandemic, it should not impact their credit score.

Many Americans have been heavily impacted by Covid-19 and have received these types of relief from banks and lenders. While these should not impact credit scores, there are different credit reporting agencies and different credit scoring models. The current challenge is to make sure that loan payment deferrals are being treated consistently. As a consumer, you have the right to view your credit score. Currently, you are able to obtain a free credit report weekly as opposed to yearly. It is important that you check your credit report and score regularly and to make sure to contact the credit reporting agencies if you notice any inaccuracies in your report, especially now if you have received a loan during the pandemic. 

If you feel that your credit report has inaccuracies contact us to take a look and to see if you have a claim. Consultation is free and you may be entitled to a settlement!