Why traditional credit scores still matter

Researchers and startups say all kinds of weird data can predict your creditworthiness. What kind of smartphone you have, who your friends are and how you answer survey questions may foretell how likely you are to pay back a loan.

Don’t expect this alternative data to displace the three-digit number most lenders use, however. Credit scores still matter — a lot.

Lenders use credit scores to decide whether you get loans and credit cards, plus the rates you pay. Scores are also used to determine which apartments you can rent, which cell phone plans you can get and, in most states, how much you pay for auto and homeowners insurance.

In my latest for the Associated Press, why traditional, three-digit credit scores still matter.

Thursday’s need-to-know money news

Today’s top story: Intern with a 401(k)? Here’s how to make it pay. Also in the news: 6 big ways credit can affect your life, helping your kid start a business, and a new game show pays off winner’s student loans.

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Tuesday’s need-to-know money news

Today’s top story: How to save money by thinking like a college student. Also in the news: What an average retirement costs, how soon should you worry about your credit, and how to budget for your kids’ summer vacation.

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Summer can get very pricey.

Thursday’s need-to-know money news

Today’s top story: 6 ways to build your credit in less than an hour. Also in the news: Investing in international stocks, why you should invest in the stock market even if it scares you, and where to find the best Memorial Day sales.

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Q&A: Does a credit freeze hurt your credit scores?

Dear Liz: I implemented a credit freeze a few months ago. I’m wondering if that could prevent me from having credit scores. I understand that if you don’t use credit, your credit scores can basically go away. I don’t have any loans or a house payment. I do have a few credit cards, used often and paid in full monthly.

Am I at risk of my credit fading away because of neglect with the freeze in place?

Answer: You’ll continue to have credit scores as long as you keep using credit accounts that are reported to the major credit bureaus. The people who are at risk of having their credit die of neglect are the ones who stop using credit.

About 7 million people are considered “credit retired,” which means they no longer actively use credit enough to generate credit scores, according to credit scoring company FICO. Their histories are free from charge-offs and other negative marks that might indicate their lack of credit is involuntary, says Ethan Dornhelm, FICO’s vice president for scores and predictive analytics.

Being credit retired can be costly. People may be shut out of loans they want in the future, or may have to pay higher interest rates. A lack of scores could lead to higher insurance premiums, cellphone costs and utility deposits.

Keeping your credit scores alive is relatively easy — using a single credit card is enough. There’s no need to carry debt or pay interest. Just continue using the card lightly but regularly, and pay it off in full every month.

Your credit freezes will prevent new lenders from seeing your scores and opening new accounts in your name unless you thaw the freezes. Companies where you already have an account, however, will be able to see your reports and scores.

Don’t let your credit die of neglect

Certified financial planner David Rae says he used to think that “anyone who could draw breath” could get an auto loan. Then one of his millionaire clients tried to buy a car — and failed.

The 42-year-old client was turned down for a loan because he had no credit scores , says Rae, who is based in Los Angeles.

Nineteen million American adults are “unscoreable,” lacking enough recent credit history to generate credit scores, according to the Consumer Financial Protection Bureau. They either have “thin” files, with too few accounts, or “stale” ones that haven’t been updated in a while. In my latest for the Associated Press, find out how having no scores can cost you.

Thursday’s need-to-know money news

Today’s top story: 4 ways to curb your online shopping enthusiasm. Also in the news: 13 last-ditch ways to avoid the poorhouse in retirement, why you should freeze your child’s credit, and 8 inspirational stories of people who overcame debt.

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Tuesday’s need-to-know money news

Today’s top story: How bad credit can increase your car costs. Also in the news: Owning Bitcoin creates a complex tax situation, 13 last-ditch ways to avoid the poorhouse in retirement, and the top 7 tax deductions and credits people forget.

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Q&A: Managing debt with credit counseling

Dear Liz: I contacted a company to help me resolve my debt. They present themselves as a nonprofit organization and seem to offer a possible solution by reducing the interest rate I’m paying on my credit cards. How do I determine the trustworthiness of this and other such organizations?

Answer: If the organization is affiliated with the National Foundation for Credit Counseling, then it’s a legitimate credit counseling agency. These agencies offer debt management plans that typically allow people to pay off their credit card debt over three to five years at reduced interest rates. People enrolled in the plans make monthly payments to the counseling agency, which then distributes the money to the creditors. Fees vary by agency, but the cost to set up a plan is typically less than $50 and the monthly fee around $35.

Debt management plans are not loans or debt consolidation. They’re also not a way to settle your debt for less than you owe. They’re a potential solution for people to pay off what they owe over several years.

Credit counseling got a bad name in the 1990s when a bunch of companies masquerading as nonprofits got into the business of offering debt management plans. Many siphoned off money that was meant for creditors or failed to pay creditors at all. The IRS cracked down and cleared out many of the worst offenders.

You can visit www.nfcc.org to see if the agency is listed and to get its contact information. (It’s best to get the information directly from NFCC, just in case you’re dealing with a copycat.)

Before you sign up with a credit counselor, though, you also should consult with a bankruptcy attorney. Credit counselors may try to steer you away from bankruptcy, and you’ll want an attorney to review your situation to help you understand if bankruptcy may be a better option.

Friday’s need-to-know money news

Today’s top story: Seeking smart, funny – and a credit score above 700. Also in the news: Wellness travel helps you tune up or tune out, what you need to know about investing in IPOs, and a major tax mistake to avoid if you have student loans.

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