All posts by Phil Bradford

Featured Stories, Money News, News

How New FICO Credit Scores Work

 

by Phil Bradford

A new FICO credit score launches in 2019 that may make it easier for you to get credit and borrow money. The experimental program, called UltraFICO, will evaluate your credit worthiness based on how you manage your checking, savings and money market accounts.

Why the new UltraFICO system?

The UltraFICO scoring system could benefit over 15 million Americans with shaky credit histories or who haven’t built up a credit record.

The new score is aimed at people with high 500 to low 600 FICO scores. Now lenders often want to see FICO scores over 720 before they’ll do business with you.  The traditional scores calculated by the Fair Isaac Corporation are based on information from your credit report and credit history.  The higher the score, theoretically, the less risk faced by the lender. 

Sally Taylor-Shoff, vice-president for scores at FICO, told The New York Times that the new FICO credit score, “…would most likely be used as a second chance.”

People who want to borrow for the first time or consolidate debts are the most likely to benefit from the UltraFICO scores. Their prior credit history may have made it difficult or impossible to borrow. But with the new credit scoring system they may find that lenders’ doors open for them.

How does  Ultra FICO work?

Starting in 2019, a lender who reviews your credit history and would normally turn thumbs down instead might suggest you use your banking activity to generate an UltraFICO score. 

Experian, one of the three credit reporting bureaus, is participating in the trial run. So the banker would pass your information on to Experian and Finicity, which will tabulate the new score from the data. They will consider how long you’ve had the account and how you manage what you have.

To qualify for UltraFICO you must maintain a savings account with a balance of at least $400. If you had a negative account balance within three months, it’s likely the lender will turn you down. 

Disadvantages of UltraFICO 

Consumer advocates think that the new UltraFICO could encourage people to borrow even when it’s hard to repay the loan.  They also worry that it makes it easier for lenders and credit card companies to woo people who may not be on the steadiest financial ground. 

Overall the caution remains the same for credit and borrowing. This new UltraFICO may open doors, but to build your creditworthiness you need to make sure that you pay your debts on time consistently.

 

Banking News, Consumer News, Featured Stories, Money News, News, Student News

Can Bankruptcy Eliminate Your Student Loan Debt?

 

by Phil Bradford 

Can you declare bankruptcy to eliminate your student loan debt? Maybe yes and maybe no. Here’s how the system works.

Usually, student loan debts are not dischargeable in bankruptcy. But there are exceptions. The U.S. Department of Education describes some of those rare cases. So let’s find out if you might qualify.

Most bankruptcy courts require you to pass the Brunner Test. This three-part test analyses whether repaying your student loan would cause you unnecessary hardship. Check if you meet all three conditions:

Poverty — You have to show that repaying your loan would leave you without enough income to meet the minimum necessities for you and your family.

Persistence — You must also show that your financial hardship will continue for at least the time covering your repayment period.

Good Faith — Finally, you have to show that you have made sincere efforts to repay your student loan debt.

In short, you need to prove that you’re living near, on or below the poverty line.  

There’s another, more elaborate, test that addresses whether or not you’ll face hardship if you have to pay back your student loan debt.  See if you can pass the Johnson Test:

Employment and Income — Your present employment and income as well as your future prospects are compared to the federal poverty line to determine if you fall into this category.

Education — How much income can your education generate now and in the future?

Health — Can you remain healthy and continue to work? This is especially meant for people with chronic or life-threatening diseases.

Dependents — Does meeting the needs of your dependents create an obstacle to repaying your student loan debt?

Good Faith — As in the Brunner Test, the Johnson Test also looks at your previous efforts at repayment.  Have you seriously tried to pay off your student loan?

Other bankruptcy courts may use additional tests to determine if repaying your student loan debt would cause you undue hardship.  One is called the Totality of the Circumstances Test.  But all in all, you have to prove to the bankruptcy court that your critical financial condition makes it impossible to repay the student loan and that bankruptcy is your last option to discharge the debt.

This is a high bar to pass.  Let’s examine how to get started, and what other options you may face.

The first step is filing a formal action known as the Complaint to Determine Dischargeability.  Then the steps outlined above come into play.  If your student loan debt is not discharged in bankruptcy, as happens in most cases, the type of bankruptcy may make a difference.

Chapter 7 — In Chapter 7 bankruptcy, you’ll still owe your debt if you could not prove that repayment of the student loan would cause you undue hardship.

Chapter 13 — In Chapter 13 bankruptcy, even if you could not prove undue hardship you may have other ways to eliminate or reduce student loan debt. For example, you may get a reduction on your loan amount during your Chapter 13 repayment plan.  However, you’re still answerable for the unpaid loan amount.

Alternative Options to Repay Federal Student Loan Debt

You can reduce or cancel your federal student loan debt with the help of the following federal programs:

  • Public Service Loan Forgiveness
  • Teacher Loan Forgiveness
  • Perkins Loan Cancellation
  • Income-driven Repayment
  • Federal Family Education Loan Program (FFELP)

You can also take advantage of the Student Aid Bill of Rights to get on top of your student loan debt.

Discharging Private Student Loan Debts in Bankruptcy

Your private student loan debt can be eliminated in bankruptcy only if it meets the following criteria:

It cannot be included on the U.S. Department of Education’s list of “eligible educational institutions.

It must be provided by large national lenders like well-known banks or financial institutions.

You haven’t taken out loans for vocational training or technical training programs, IT training courses, truck driving schools, coaching classes, cooking or beauty schools, or mechanical schools.

The bottom line: It’s always better if you can repay your student loan debt yourself.  You should make the long, hard process of bankruptcy your last option to pay off your student loan debt. 

 

*Financial web enthusiast Phil Bradford has expert knowledge about personal finance issues. His passion for helping people stuck in financial problems has earned him recognition and honor in the industry. He also loves to travel and cook.