As the effects of the mortgage meltdown ripple through the entire lending
community, the result is higher interest rates and stricter guidelines on
who qualifies for credit. In the wake of what could be termed as one of
the most devastating credit meltdowns in the history of the United States,
many empty-handed investors are searching for someone to pin the blame on.
And it seems that they’ve fixed their sights upon the lofty, mysterious
citadel of Fair Isaac Credit Organization.

Mortgage Lenders are crying foul play on Fair Isaac, citing major flaws in
the company’s popular FICO Classic credit scoring model as being the
underlying cause for the economic disaster that has taken the United
States by storm. What do these allegations mean for the credit industry?
Let’s take a look at a relatively new phenomenon in the world of credit
scores: the so called “emerging credit” scoring models.

Emerging Credit scores are largely the result of a shrinking market in
terms of the number of consumers who are considered creditworthy. As the
mortgage crises escalates, people who used to be considered an acceptable
risk to creditors are no longer eligible for even the most basic of credit
cards; but these companies still need to make money somehow, so where do
they turn to market their credit products if the old crowd just isn’t
going to “make the cut” anymore? The answer is found in the large clumps
of consumers referred to as the “unbanked”.

Unbanked consumers are those individuals who have little or no credit
history, either by deliberately avoiding all forms of credit, or simply
because they haven’t yet had the opportunity to establish credit for
themselves. Either way, extending substantial amounts of credit to the
unbanked has long been considered taboo by lending organizations, as the
FICO Classic scoring model relied on so heavily in credit industries
flagged such individuals as being unacceptable risks for investors. Now,
however, companies such as Pay Rent, Build Credit, are bridging the gap
between the unbanked and prime lending candidates.

For a long period of time, banks and other companies had little use for
organizations such as PRBC. Now, however, in an eager, if not altogether
desperate, search for qualified prospects, lenders are turning to
information brokers such as LexisNexis, PRBC, and credit bureau TransUnion
to dig up all the information they can find on an individual’s “unbanked”
payment history, such as cell phone bills, rent deposits, tuition,
magazine subscriptions, and so forth. Some agencies have gone ahead and
begun to utilize this information in new credit scoring models, dubbed as
“emerging credit scores”.

In all likelihood, it looks as if these new emerging credit scoring
systems will become mainstream in a few years. This would have a dramatic
impact on what credit card options are available to the average consumer,
since creditors will have a more complete picture of that person’s
financial behavior.

What does this mean for you and me?

It simply means that more prudence needs to be exercised with
traditionally unreported expenditures, particularly those expenditures
which occur on a regular and continual basis, such as subscriptions or
rent payments. As always, the new systems invariably favor those who are
financially responsible and live well within their means.

Jesse asked me to do up a guest post since I just became consumer debt free on February 26th, and I am happy to oblige! He thinks y’all will be particularly interested in the “big picture” since my journey to eliminating debt (except for the mortgage now … and that will get its day) spanned just three days shy of fourteen months. It felt tough at times, but this was something I knew in my bones had to be done if I was ever going to turn the financial ship around in my life.

I accomplished this debt free feat using the Dave Ramsey “baby steps” and recommend them personally.

Once I made the decision to get out of debt, I had to learn a few productive money habits. The first was getting caught up on my bills, and paying them on time (cringe; yes I was that disorganized). The second was learning how to make a budget that works. Yes, I just used that nasty “B” word. Except it’s no longer a bad word for me. The best quote about budgeting I think I have ever heard was: “A budget is telling your money where to go instead of wondering where it went.” Some folks rename their budget, calling it a “cash flow plan” or maybe even “allocated spending plan” since that sounds fancy, or you can just call it “Fred” if you want. (“Fred” says we can’t buy that right now.)

Doing a realistic working budget was a huge eye-opening experience for me. Before I wrote it down in dry erase and white, I thought we didn’t make enough to make ends meet. After writing it down, I discovered that somehow at least $600 per month was just disappearing! Over a year later, I still can’t say for sure where that money went to … although I suspect it vanished in the local restaurants.

OK, so I was current on my bills and I now had a working realistic budget in hand … time to kill some debt, right? Not so fast, Hoss …. and this is where I am so grateful I was following the Dave Ramsey plan! The next step is to build up a baby emergency fund of approximately $1,000. No problem, I said. I had a non-retirement mutual fund I could cash out, and I did. I squirreled away the $1k and used the rest to finish off the last two months of my car note and start in on the next debt on my list.

Then my furnace broke at the end of January when it was only 21F outside. The repairs ended up being $1140, and it wasn’t the only time I tapped the baby emergency fund! The other time was a few months later in May when I had to replace the brakes on all four wheels on my car. So … I play my radio a little to loud to have heard the brakes squealing BEFORE it became a serious problem. I had about $300 of the $538 it cost to fix that, so I only pulled about $250 to cover it. I distinctly remember my son whispering to me after I paid the bill: “Mom, can we afford this?” I whispered back: “Yes, we have an emergency fund.”

Which brings me to another thing I did: get a weekend job delivering pizzas. It doesn’t have to be pizza delivery, but picking up a part-time job on the weekends is a great way to bring up your income. Just don’t work somewhere you might be tempted to spend!

Oh, and one thing I didn’t do that I wish I did: convince hubby to sell his truck. Somewhere on hubby’s Y-chromosome is the “I Love Trucks” gene, and there was just nothing I could say or do to convince him to sell it, even though its sale price was MORE than one year worth of salary for him. Hubby dug his heels in deep on this one, so it was a matter of knuckling down and simply paying it off. He did promise to drive the wheels off of said truck, so hopefully it will last until at least 2015 (it’s a 2005, but also a Chevy). But if you can sell high-dollar items without causing a major rift in your relationship … DO IT!

And right there are the keys I used: better habits about paying bills, getting on a working realistic budget, and getting a part-time job. Just be sure to put that baby emergency fund in place LOL Add in a natural stubborn streak and the burning desire and determination to get out the chains of debt, and you see me DEBT FREE but the house, BABY!!!! LOL It’s been a week now and I am still celebrating.

Oh, there’s a whole lot of other parts to this story but Jesse asked for a “big picture” post which was in danger of being the size of an ebook before revision. Although Jesse has left the door open to the possibility of further guest posts that deal with y’all’s questions