On Wednesday July 21, 2010 President Obama signed a massive financial overhaul which included putting The FACS Act into law. The FACS Act is the Fair Access To Credit Scores and is a major win for consumers. The FACS Act guarantees that consumers who are denied anything based on their credit scores, including getting a better interest rate, will get a copy of the actual score that was used to make the credit decision.
While the implementation date of the free score disclosure rule is still to be determined, it will not come a moment too soon. FICO™ scores have plummeted more over the past 3 years than they have over the previous 17 years due to the mortgage meltdown and a 10% unemployment rate. This means a higher percentage of credit applications will be denied because not only have scores decreased, but underwriting standards have increased further separating applicants from credit approvals.
FICO™ scores have been around since 1989 and their distribution has remained relatively unchanged since their inception. The two primary reasons for this are the size of the credit bureau databases which is currently 200 million credit files, and the fact that we have not seen the confluence of so many significantly influential economic events.
Until the beginning of the recession, roughly 15% of the population that had a score, had one or more below 600. As of April 2010, 25.5% of consumers have scores below 600. This is an increase from 30 million to 51 million. More importantly is the percentage of consumers who score below 650 has gone from 27% to 35%. This means at least 70 million consumers have FICO™ scores below 650 and are now considered either sub-prime borrowers or at the very least a highly elevated credit risk.
The question now becomes what will these people do now that their scores are so low? Some believe that the dramatic plunge of FICO™ scores is because of excessive credit card debt which could not be further from the truth. Credit card debt does not cause your FICO™ scores to plummet into the sub 600 region. Further, this kind of credit degradation is caused by negative credit events hitting a consumers credit file. Bankruptcy, collections, late payments, charge offs, foreclosures, short sales, settlements, etc. are the types of events that cause such score damage. It is these types of events that continue to escalate at warp speed causing the overall consumer credit score averages to plummet below the 600 mark.
Unfortunately, these negative events will remain on credit files for the allowed statute of limitations, which is 7 to 10 years depending on the event. This means the new lower score distribution will remain as such for the foreseeable future. It also means higher interest rates, lower credit limits, more expensive insurance and difficulty in getting employment as long as your prospective employer relies to some extent on credit screening.
With unemployment at 10% and under-employment at or above 16%, fewer consumers will be able to pay their way out of poor credit. This will require an alternative strategy that depends largely on avoiding credit while you put time between yourself and the negative credit events that are causing the lower scores. Normally, this is not a wise strategy because FICO™ scores like to see new and healthy credit reporting monthly to help offset the damage being caused by older negative items. The problem is that the price of using credit with scores so low is simply too expensive.
This could also mean that bankruptcy could become the best choice as it will protect you from your creditors and get you largely out of debt, assuming you qualify for a chapter 7 rather than a chapter 13. Bankruptcy will remain on your credit reports for 10 years from the filing date however, it will wipe away the debt owed to collection agencies and your current creditors. This will also prevent additional negative information from hitting your credit files while you are trying to dig your way out of the FICO™ basement.
The news is not all good for those of you who have maintained or achieved elite FICO™ scores above 800 at the same time so many have seen their scores drop to all time lows. Lenders are not only looking for better credit risk borrowers, but they are also looking for customers who will generate revenue. Unfortunately, more and more lenders are recognizing the fact that consumers with extraordinary FICO™ scores are also less likely to depend on credit and do things like maintain revolving balances from one month to the next.
This has resulted in lenders actually declining applicants if their scores are too high. This will give the impression that lenders do not know what they are doing and that consumers are being treated unfairly. In a bit of ironic humor, consumers who are declined because of FICO™ scores being too high will also get to see their scores because of the denial. Can you imagine getting an adverse action letter from a lender stating that you were denied because of your FICO™ score just to find out that your FICO™ score is 825? The world of credit is not without humor.
Thank you for reading this months edition of the RE Credit Repair, LLC newsletter.
Monday, October 4, 2010
Wednesday, September 1, 2010
September 2010 Newsletter
Are The Laws Now on Your Side?
Sweeping legislation and the prospect for even more, will impact the way consumers function within the world of consumer credit. In this acronym filled world of laws, there are hidden benefits and consequences that we should be aware of. The following is an overview of the changes that took place in the past six months coupled with the changes that are likely to take place in the very near future.
The FACS Act - This is the Fair Access to Credit Scores Act. We profiled this act in our last blog post which you can revisit here. There was some concern about whether or not this provision of the financial overhaul would survive the conference process or if it would end up on the cutting room floor. Some even had quiet concerns that it would be horse traded out of the bill in exchange for other considerations. Thankfully, none of this happened and this bill made it in the final draft which is soon to be signed by President Obama.
Essentially this requires lenders, insurance companies, retailers, landlords, and/or any other company who uses a credit report and score to make a decision to proactively give you a copy of that score if you were denied or adversely approved for lessor terms than those that you applied for. You will not have to ask for the score as the bill mandates that it automatically be provided to you.
The CARD Act - This is the Credit Card Accountability Responsibility and Disclosure Act that largely went into effect in February 2010. Some provisions, specifically regarding overdraft fees, were held until July 1st and August 15th of 2010. If you have an existing checking account you will now have to contact your bank or credit union to "opt in" to maintain or enroll in overdraft protection for ATM or debit card transactions on both new and existing checking accounts.
This law is designed to protect consumers from the overdraft fees being charged when you attempt to use your ATM card or debit card in such a way that it would take the balance of your checking account below $0. This fee can range from $20 to $40 and is applied each time your account is taken below the $0 point because of an ATM or debit card transaction. If you have existing overdraft protection on your checking account then the protection continues for paper checks, ACH withdrawals and automatic bill payment from your checking account respectively.
The MDRA Act -This is the Medical Debt Relief Act. This act has been proposed however, it is not in the final financial overhaul bill. Many believe it will resurface again in the near future and eventually become law. This bill specifically addresses the credit reporting of 3rd party medical collections.
If this becomes law as written, the reporting of medical collections to the credit reporting agencies will continue until they have been paid or settled at which time they must be completely deleted from the credit report. As it is now, paying or settling a collection does not result in a deletion from the credit reporting agencies. The accounts are simply updated to show paid or settled with a $0 balance due.
The argument for the removal of the medical collection is that it was not a true credit obligation and was likely caused by the inefficiencies that are common in the insurance claims process, i.e. the insurance company doesn't pay the doctor's bill in a timely manner yet the doctor wants to get paid for his services. The counter argument is that there is no way to differentiate between a collection caused by an insurance mix up and one caused by an unpaid deductible or the non-payment of uncovered services.
The DSCPA Act - This is the Debt Settlement Consumer Protection Act. This almost made it into the financial overhaul bill but did not. As with the Medical Debt Relief Act, many believe it's just a matter of time before it is revisited.
One of the most common consumer complaints is the treatment they receive from debt settlement companies. These are the companies that promise to settle your credit card debt for much less than what you actually owe. These services have become aggressively marketed over the past two years and have somewhat misled consumers into believing that in a short amount of time they will be debt free.
The reason these services get so many complaints is that the companies that facilitate these services do a very poor job disclosing their fees and the downsides to attempting using a 3rd party settlement company. In some cases the consumer has no idea what kind of fees they are actually paying and end up paying them even if the debt never gets settled. Worst of all, is that some consumers who are attempting to settle a debt could wind up in court when the creditor decides to sue for non-payment.
The DSCPA Act would limit the up front "setup" costs to between $50 and $100 and would limit the fees to 5% of the amount the consumer saved. Additionally, the fees could not be charged until after the credit card issuer has accepted a settlement. Many believe this fee restriction will put many debt settlement companies out of business. In fact, the DSCPA Act is similar to the Credit Repair Organizations Act, which prohibits outrageous set up fees and prohibits the charging of service fees until after the services have been rendered.
Regardless of your opinion about any of the aforementioned legislation, what we do know is credit card issuers will find new and creative ways to subsidize the costs of compliance with these new rules. The restriction on the non-reporting of paid medical collections could be considered a slippery slope however, for the consumer it is not a bad thing. For many, this will help boost credit scores substantially, provided the consumer has the wherewithal to pay the debt.
Thank you for reading this months issue of the RE Credit Repair, LLC newsletter.
Sweeping legislation and the prospect for even more, will impact the way consumers function within the world of consumer credit. In this acronym filled world of laws, there are hidden benefits and consequences that we should be aware of. The following is an overview of the changes that took place in the past six months coupled with the changes that are likely to take place in the very near future.
The FACS Act - This is the Fair Access to Credit Scores Act. We profiled this act in our last blog post which you can revisit here. There was some concern about whether or not this provision of the financial overhaul would survive the conference process or if it would end up on the cutting room floor. Some even had quiet concerns that it would be horse traded out of the bill in exchange for other considerations. Thankfully, none of this happened and this bill made it in the final draft which is soon to be signed by President Obama.
Essentially this requires lenders, insurance companies, retailers, landlords, and/or any other company who uses a credit report and score to make a decision to proactively give you a copy of that score if you were denied or adversely approved for lessor terms than those that you applied for. You will not have to ask for the score as the bill mandates that it automatically be provided to you.
The CARD Act - This is the Credit Card Accountability Responsibility and Disclosure Act that largely went into effect in February 2010. Some provisions, specifically regarding overdraft fees, were held until July 1st and August 15th of 2010. If you have an existing checking account you will now have to contact your bank or credit union to "opt in" to maintain or enroll in overdraft protection for ATM or debit card transactions on both new and existing checking accounts.
This law is designed to protect consumers from the overdraft fees being charged when you attempt to use your ATM card or debit card in such a way that it would take the balance of your checking account below $0. This fee can range from $20 to $40 and is applied each time your account is taken below the $0 point because of an ATM or debit card transaction. If you have existing overdraft protection on your checking account then the protection continues for paper checks, ACH withdrawals and automatic bill payment from your checking account respectively.
The MDRA Act -This is the Medical Debt Relief Act. This act has been proposed however, it is not in the final financial overhaul bill. Many believe it will resurface again in the near future and eventually become law. This bill specifically addresses the credit reporting of 3rd party medical collections.
If this becomes law as written, the reporting of medical collections to the credit reporting agencies will continue until they have been paid or settled at which time they must be completely deleted from the credit report. As it is now, paying or settling a collection does not result in a deletion from the credit reporting agencies. The accounts are simply updated to show paid or settled with a $0 balance due.
The argument for the removal of the medical collection is that it was not a true credit obligation and was likely caused by the inefficiencies that are common in the insurance claims process, i.e. the insurance company doesn't pay the doctor's bill in a timely manner yet the doctor wants to get paid for his services. The counter argument is that there is no way to differentiate between a collection caused by an insurance mix up and one caused by an unpaid deductible or the non-payment of uncovered services.
The DSCPA Act - This is the Debt Settlement Consumer Protection Act. This almost made it into the financial overhaul bill but did not. As with the Medical Debt Relief Act, many believe it's just a matter of time before it is revisited.
One of the most common consumer complaints is the treatment they receive from debt settlement companies. These are the companies that promise to settle your credit card debt for much less than what you actually owe. These services have become aggressively marketed over the past two years and have somewhat misled consumers into believing that in a short amount of time they will be debt free.
The reason these services get so many complaints is that the companies that facilitate these services do a very poor job disclosing their fees and the downsides to attempting using a 3rd party settlement company. In some cases the consumer has no idea what kind of fees they are actually paying and end up paying them even if the debt never gets settled. Worst of all, is that some consumers who are attempting to settle a debt could wind up in court when the creditor decides to sue for non-payment.
The DSCPA Act would limit the up front "setup" costs to between $50 and $100 and would limit the fees to 5% of the amount the consumer saved. Additionally, the fees could not be charged until after the credit card issuer has accepted a settlement. Many believe this fee restriction will put many debt settlement companies out of business. In fact, the DSCPA Act is similar to the Credit Repair Organizations Act, which prohibits outrageous set up fees and prohibits the charging of service fees until after the services have been rendered.
Regardless of your opinion about any of the aforementioned legislation, what we do know is credit card issuers will find new and creative ways to subsidize the costs of compliance with these new rules. The restriction on the non-reporting of paid medical collections could be considered a slippery slope however, for the consumer it is not a bad thing. For many, this will help boost credit scores substantially, provided the consumer has the wherewithal to pay the debt.
Thank you for reading this months issue of the RE Credit Repair, LLC newsletter.
Thursday, June 17, 2010
June 2010 Newsletter
Colorado Senator Takes One For The Team And Pushes For Free Credit Score Disclosure To Be Made Available To All Consumers.
By: Shonnie Fischer
In 2003 FACTA (The Fair and Accurate Credit Transactions Act) amended the Fair Credit Reporting Act mandating that each consumer be entitled to receive one free copy of their credit report from all three of the consumer reporting agencies on an annual basis. However, the free credit report mandate does not require the credit bureaus to provide (nor does it entitle) a consumer to receive their credit scores for free in conjunction with receiving their free credit report. Traditionally, credit scores have been something that consumers have to pay a fee for in order to obtain them whether going through a financial institution or obtaining their credit report online.
Additionally, FACTA also mandated in section 609, that mortgage lenders had to provide a copy of the consumer's score as part of the homeowner’s disclosure notice. Most lenders were complying and providing this notice as part of the closing documentation the homebuyer received at the time of closing. Therefore, homebuyers have been afforded access to their FICO™ scores since 2003. Now, thanks to a Senator from Colorado, more consumers may soon have free access to their scores outside of purchasing or refinancing a real estate transaction.
Mark Udall (D-Colorado) has proposed the Fair Access to Credit Scores Act, A.K.A. FACS Act. The FACS Act would amend section 615 of the Fair Credit Reporting Act to require the disclosure of credit scores by the lender as part of their adverse action requirements. This means that if you are declined financing by a lender, insurance company or any other company that relies on credit worthiness and/or credit scores as part of their underwriting protocol, you will receive a copy of the scores used to make their decision. Even better, if you are approved but at a disadvantaged interest rate or insurance premium, you will still be entitled to receive a copy of the scores used to make that determination by the lending and/or other institution.
This would certainly serve to accomplish a number of things that we as consumers have been missing and longing for for quite some time.
FICO™ Scores Based On Experian Data - On February 14th, 2009, Experian and FICO™ officially parted ways and no longer have a myFICO.com partnership. That little Valentine's Day present officially prevented FICO™ from selling credit reports and FICO™ scores based on Experian’s data to consumers. Consumers still have access to their FICO™ scores based on TransUnion and Equifax data from myFICO.com. Since Senator Udall's amendment does not leave it up to the credit bureaus to present you with an irrelevant VantageScore or PLUS score (which are alternate proprietary scoring systems), it seems as if we will again soon have access to our Experian FICO™ scores as long as there is an adverse action taken by a lender or insurance company who used an Experian credit report in the decision making process.
FICO™ Industry Option Scores - FICO™ builds a variety of semi-customized credit bureau risk scores called industry option score cards. These are specialized scoring model systems for specific types of lending such as bank card, installment, personal finance, auto and mortgage financing. Prior to this amendment, these scores have never been available for sale to consumers, none the less FOR FREE!
Senator Udall's amendment will require the lender or other provider who utilizes the credit report and scores to give you the actual score they used if any type of adverse action relating to applying for credit or insurance is issued. Therefore, if the lender or other agency specifically used any of the FICO™ scores to make their decision, then for the first time ever you will get what nobody has ever gotten before which is disclosure of the actual FICO™ scores used.
No More Generational Score Confusion - FICO scores, like Windows™ software, are rebuilt periodically to take advantage of advancements in technology, newer data samples and changes in the predictive value of credit file characteristics. If all of this sounds like empirical black magic don't worry, this is actually much more simple than how it actually sounds. Because of these periodic redevelopments there are actually many different versions of the FICO™ scoring models still in use by lenders today. Since some of lenders are large customers of the credit bureaus it is unlikely that the bureaus will strong arm them into converting to newer versions until they voluntarily choose to do so. What this has caused is confusion over what scores are actually being sold to consumers. For example, my FICO™ score based on Equifax’s data might be 780 under one version, 797 on another model or version and 772 on another depending on the generation and/or version of the FICO™ system being used by the creditor. The one the lender purchases might not be the same one that a consumer can buy. Senator Udall's amendment eliminates this issue because whatever score version the lender is buying is the one the consumer is going to receive.
No Bait And Switch Scores - Currently, there are four credit scoring systems prevalent in the direct-to-consumer market today. They are the FICO™ score, the VantageScore™, the PLUS Score™ and the TransRisk Score™. Those of you who have purchased your scores online or got them for free in exchange for your credit card information, may not be aware of which scoring system you are actually given. Most people want the actual score that the majority of lenders use, which is the FICO™ score. The problem is that Experian and TransUnion would rather you purchase their scores , whether it be the Vantage, Plus or TransRisk scores, rather than the FICO™ scores. Additionally, another consumer tidbit for your information, is that PLUS Scores™ are not even sold to lenders. Futher, VantageScores™ and TransRisk Scores™ do not have enough combined market share to fill a row boat. Yet, you're actually more likely to end up with those scores when you go hunting online than you are to receive your actual FICO™ scores. It is the FICO™ scores consumers are in most need of obtaining when seeking to measure credit worthiness from a credit scoring standpoint.
The Udall amendment does not involve the credit bureaus who are not a party to the score disclosure requirements. Senator Udall either got lucky or did his homework and figured that the bureaus (one in particular) were licking their chops and getting ready to take advantage of the free credit score requirements like they (one in particular - again not naming names) have taken advantage of the free credit report requirements in the past. I mean, why has Experian completely changed their marketing efforts to push free credit scores from free credit reports? It doesn't take a credit genius to figure that one out.
No Real Complaining By The Bureaus Or FICO INC.™ - Behind closed doors the bureaus probably don't like this new law however, since the scores being given away have already been purchased by a lender they can not really complain too loudly. FICO™ on the other hand should be very happy with this law for a couple of reasons. First, the scores have been purchased so they will get their piece of the action via financial gain. Second, the majority of scores that will be given away will be in fact the true FICO™ scores which is a great branding opportunity for them. It really eliminates any chance that competing scoring models will be able to forge ahead and take advantage of this new rule, therefore being able to steal market share from FICO Inc.™ will be nearly impossible.
The Udall amendment passed the Senate on May 17, 2010. Now it has to be passed in the House and survive the conference process. Keep your fingers crossed that the amendment is not modified or taken out as this truly is one for the consumer. Stay tuned!!
Thank you for reading this months issue of the RE Credit Repair, LLC newsletter. We hope you have enjoyed the information and certainly welcome any questions, comments and/or assistance with any additional credit repair, management or education needs you may have.
By: Shonnie Fischer
In 2003 FACTA (The Fair and Accurate Credit Transactions Act) amended the Fair Credit Reporting Act mandating that each consumer be entitled to receive one free copy of their credit report from all three of the consumer reporting agencies on an annual basis. However, the free credit report mandate does not require the credit bureaus to provide (nor does it entitle) a consumer to receive their credit scores for free in conjunction with receiving their free credit report. Traditionally, credit scores have been something that consumers have to pay a fee for in order to obtain them whether going through a financial institution or obtaining their credit report online.
Additionally, FACTA also mandated in section 609, that mortgage lenders had to provide a copy of the consumer's score as part of the homeowner’s disclosure notice. Most lenders were complying and providing this notice as part of the closing documentation the homebuyer received at the time of closing. Therefore, homebuyers have been afforded access to their FICO™ scores since 2003. Now, thanks to a Senator from Colorado, more consumers may soon have free access to their scores outside of purchasing or refinancing a real estate transaction.
Mark Udall (D-Colorado) has proposed the Fair Access to Credit Scores Act, A.K.A. FACS Act. The FACS Act would amend section 615 of the Fair Credit Reporting Act to require the disclosure of credit scores by the lender as part of their adverse action requirements. This means that if you are declined financing by a lender, insurance company or any other company that relies on credit worthiness and/or credit scores as part of their underwriting protocol, you will receive a copy of the scores used to make their decision. Even better, if you are approved but at a disadvantaged interest rate or insurance premium, you will still be entitled to receive a copy of the scores used to make that determination by the lending and/or other institution.
This would certainly serve to accomplish a number of things that we as consumers have been missing and longing for for quite some time.
FICO™ Scores Based On Experian Data - On February 14th, 2009, Experian and FICO™ officially parted ways and no longer have a myFICO.com partnership. That little Valentine's Day present officially prevented FICO™ from selling credit reports and FICO™ scores based on Experian’s data to consumers. Consumers still have access to their FICO™ scores based on TransUnion and Equifax data from myFICO.com. Since Senator Udall's amendment does not leave it up to the credit bureaus to present you with an irrelevant VantageScore or PLUS score (which are alternate proprietary scoring systems), it seems as if we will again soon have access to our Experian FICO™ scores as long as there is an adverse action taken by a lender or insurance company who used an Experian credit report in the decision making process.
FICO™ Industry Option Scores - FICO™ builds a variety of semi-customized credit bureau risk scores called industry option score cards. These are specialized scoring model systems for specific types of lending such as bank card, installment, personal finance, auto and mortgage financing. Prior to this amendment, these scores have never been available for sale to consumers, none the less FOR FREE!
Senator Udall's amendment will require the lender or other provider who utilizes the credit report and scores to give you the actual score they used if any type of adverse action relating to applying for credit or insurance is issued. Therefore, if the lender or other agency specifically used any of the FICO™ scores to make their decision, then for the first time ever you will get what nobody has ever gotten before which is disclosure of the actual FICO™ scores used.
No More Generational Score Confusion - FICO scores, like Windows™ software, are rebuilt periodically to take advantage of advancements in technology, newer data samples and changes in the predictive value of credit file characteristics. If all of this sounds like empirical black magic don't worry, this is actually much more simple than how it actually sounds. Because of these periodic redevelopments there are actually many different versions of the FICO™ scoring models still in use by lenders today. Since some of lenders are large customers of the credit bureaus it is unlikely that the bureaus will strong arm them into converting to newer versions until they voluntarily choose to do so. What this has caused is confusion over what scores are actually being sold to consumers. For example, my FICO™ score based on Equifax’s data might be 780 under one version, 797 on another model or version and 772 on another depending on the generation and/or version of the FICO™ system being used by the creditor. The one the lender purchases might not be the same one that a consumer can buy. Senator Udall's amendment eliminates this issue because whatever score version the lender is buying is the one the consumer is going to receive.
No Bait And Switch Scores - Currently, there are four credit scoring systems prevalent in the direct-to-consumer market today. They are the FICO™ score, the VantageScore™, the PLUS Score™ and the TransRisk Score™. Those of you who have purchased your scores online or got them for free in exchange for your credit card information, may not be aware of which scoring system you are actually given. Most people want the actual score that the majority of lenders use, which is the FICO™ score. The problem is that Experian and TransUnion would rather you purchase their scores , whether it be the Vantage, Plus or TransRisk scores, rather than the FICO™ scores. Additionally, another consumer tidbit for your information, is that PLUS Scores™ are not even sold to lenders. Futher, VantageScores™ and TransRisk Scores™ do not have enough combined market share to fill a row boat. Yet, you're actually more likely to end up with those scores when you go hunting online than you are to receive your actual FICO™ scores. It is the FICO™ scores consumers are in most need of obtaining when seeking to measure credit worthiness from a credit scoring standpoint.
The Udall amendment does not involve the credit bureaus who are not a party to the score disclosure requirements. Senator Udall either got lucky or did his homework and figured that the bureaus (one in particular) were licking their chops and getting ready to take advantage of the free credit score requirements like they (one in particular - again not naming names) have taken advantage of the free credit report requirements in the past. I mean, why has Experian completely changed their marketing efforts to push free credit scores from free credit reports? It doesn't take a credit genius to figure that one out.
No Real Complaining By The Bureaus Or FICO INC.™ - Behind closed doors the bureaus probably don't like this new law however, since the scores being given away have already been purchased by a lender they can not really complain too loudly. FICO™ on the other hand should be very happy with this law for a couple of reasons. First, the scores have been purchased so they will get their piece of the action via financial gain. Second, the majority of scores that will be given away will be in fact the true FICO™ scores which is a great branding opportunity for them. It really eliminates any chance that competing scoring models will be able to forge ahead and take advantage of this new rule, therefore being able to steal market share from FICO Inc.™ will be nearly impossible.
The Udall amendment passed the Senate on May 17, 2010. Now it has to be passed in the House and survive the conference process. Keep your fingers crossed that the amendment is not modified or taken out as this truly is one for the consumer. Stay tuned!!
Thank you for reading this months issue of the RE Credit Repair, LLC newsletter. We hope you have enjoyed the information and certainly welcome any questions, comments and/or assistance with any additional credit repair, management or education needs you may have.
Friday, May 7, 2010
May 2010 Newsletter
Managing Credit In The Post Credit Crunch Era
By: Shonnie Fischer
2010 marks a turning point in the world of consumer credit. We have almost survived what is being referred to as the worst credit environment in history. The CARD Act that went into effect February 2010 has given lenders some breathing room which is a good thing. We are finally starting to see an increase in the amount of credit being granted to consumers as well as an increase in the amount of pre-approval offers they are sending out in the mail. So the question becomes how can consumers benefit from this new environment? Where are the potholes and what should we be doing to continue to improve upon our credit scores? Here are a few highlights for managing credit in today’s marketplace.
Pothole #1 - Having Average FICO® Scores is Good Enough.
If this theory is what you think or believe you could not be more mistaken. Those of you who have FICO® scores in the low to mid 600's were considered golden 36 months ago. Today that same 620 - 660 credit score is considered high risk and the credit market will by in large pass you by. Conversely, if you have FICO® scores at or above 720 AND are on the buyer's side of the credit equation, then you are considered to be sitting in the catbird seat. Auto loans are at or near 0%, mortgages are around 5%, and credit cards are being issued at or below 9.9%. It is a great time to be a borrower, however only if you have strong FICO® scores. To be in the best credit position in today’s marketplace shoot for a 720-750 credit score.
Pothole #2 - Thinking The CARD Act Solved The Free Credit Report Scams.
On Fair Isaac's consumer website myFICO.com, they take a jab at Experian, who is currently their biggest nemesis. "U.S Gov't brings common sense to "free credit report" false advertising" is front and center on their website. What they are referring to is the new law that requires companies that offer free credit reports to clearly disclose that it is not the free credit report you are entitled to per Federal law. So how did Experian get around this one? They will now charge you $1 for your "free" credit report. It still remains to be seen exactly how the Federal Trade Commission is going to address the continuous actions of Experian who have already settled on two lawsuits with the FTC. "Free" and "$1" are clearly not the same thing so the false advertising unfortunately seems to continue. Regardless, consumers will still be enrolled for a monthly subscription to a credit monitoring service if you claim your $1 “free” credit report from freecreditreport.com. Bottom line... buyer beware.
Opportunity #1- Better Credit Means More Leverage With Credit Card Companies.
You have heard the terms "buyer's market" and “seller's market." The good news for the economy is that for the first time in almost three years it is now a buyer's market in the consumer credit card world. However, that only applies if you have good enough credit to deserve the very attractive rates currently being offered by the credit card lenders. If you've been putting off paying down credit card debt now may be the time to do so. Paying down credit card debt is one of the fastest ways to significantly improve your credit scores as it accounts for one-third of your overall credit rating.
Opportunity #2 - Short Selling Wins Over Foreclosure As The Best Way To Dispose Of A Mortgage Loan.
A short sale is when the lender takes less than the principal amount and considers the loan as being paid in full. The caveat to that is short sales report as either a charge off or settlement on your credit report which does have an adverse affect and will cause your credit scores to drop. The FICO® scoring system does consider charged off accounts and settlements to be a major derogatory event and grossly negative in nature. However, Fannie Mae will allow you to get a mortgage within two years if you've chosen a short sale over a foreclosure which could take you up to five years to get a home if you go the foreclosure route.
Pothole #3 - Beware of Loan Modifications.
Loan modifications are a two year phenomenon thanks to the mortgage meltdown. Homeowners who have some sort of hardship can apply with their lender to lower the interest rate so much that the payment becomes affordable and allows them to avoid foreclosure. The problem with loan modifications is you are not guaranteed or entitled to any type of modification or reduction in payment regardless of your situation. Further, it takes months and months for large mortgage lenders to process the request and decide whether or not you qualify. During this time a.k.a “The Trial Period” they are asking that you pay a lower monthly amount which is typically put into a separate escrow account. More times than not this is reported as a rolling late payment to the credit bureaus which obviously damages your credit scores.
After all is said and done, you might find yourself without a modified loan and worse many months of late payments reporting on your credit. The best advise I can give you here is to read your agreement or talk with your lender about all of the details before entering into a loan modification agreement. Ask them how and what they report to the bureaus and what impact it will have on your credit scores before making a decision. There is a legal argument that if the lender instructs you to make a specific payment which is a lessor amount than what was contractually agreed to, they are entering into the agreement willingly and technically are altering the contract by doing so which should not have an adverse affect to a borrower. However, as of recent, this is becoming more and more of a hard pressed argument to make to get the lenders to reverse the negative reporting and the bureaus are refusing to make changes strong arming with the argument that the original signed mortgage contract stands for purposes of credit reporting.
Pothole #4 - The Authorized User Strategy Has Changed.
For many years consumers have used the authorized user strategy to build, rebuild and/or improve their credit scores. The theory (which was accurate) was that if you could have someone add a credit card account with a stellar payment history and a low balance to available credit ratio, your credit scores would improve almost overnight. Since the authorized user does not have contractual liability for repayment, if the primary cardholder became delinquent then you would simply have your name removed from the account and it would be removed from your credit reports. The problem now with the authorized user strategy is Equifax will no longer remove the account from your credit report. In fact they are responding to dispute letters with the following, "As an authorized user, you may be liable for any and all activities on this account." The issue is the word "may". It is my belief as well as the legal eagles, that a credit bureau can not maintain information on your file that it simply believes "may" be your responsibility. This one will likely play itself out in court when the class action motion now churning gets started.
The other problem with the authorized user methodology is FICO ’08, as it was branded, is fully released and projected to go live with lenders sometime in the very near future. FICO ’08 has a specific built in feature to bypass authorized user accounts for scoring purposes unless it can clearly determine that it is a husband and wife (or other type of legitimate credit sharing type relationship) warranting the credit be accounted for in the consumer’s score. Therefore, friends who added friends, neighbors, co-workers, sellers of authorized user accounts, distant relatives, etc. scoring on these types of accounts will come to a screeching halt once FICO ’08 is implemented by all credit reporting resellers and mandated for usage by Fannie Mae and Freddie Mac. I highly recommend to those of you who have these types of accounts to start applying for credit on your own now. Whether you apply for secured or unsecured credit cards take advantage of the opportunity while you still have the credit rating the authorized user account is affording you before it is too late.
Keep in mind that the consumer credit world is dynamic and like everything else constantly changing. Credit scores and scoring criteria will continue to change, lenders will change their standards, and credit bureaus will change their policies. These observations are being made as of where we are at now in mid 2010 and are sure to become outdated sooner than later. As always keep yourself safeguarded, stay aware of changes being made in the credit markets and keep yourself well informed of your credit standing as it dictates all things financial whether it be past, present or future.
Thank you for reading this months issue of the RE Credit Repair, LLC newsletter.
By: Shonnie Fischer
2010 marks a turning point in the world of consumer credit. We have almost survived what is being referred to as the worst credit environment in history. The CARD Act that went into effect February 2010 has given lenders some breathing room which is a good thing. We are finally starting to see an increase in the amount of credit being granted to consumers as well as an increase in the amount of pre-approval offers they are sending out in the mail. So the question becomes how can consumers benefit from this new environment? Where are the potholes and what should we be doing to continue to improve upon our credit scores? Here are a few highlights for managing credit in today’s marketplace.
Pothole #1 - Having Average FICO® Scores is Good Enough.
If this theory is what you think or believe you could not be more mistaken. Those of you who have FICO® scores in the low to mid 600's were considered golden 36 months ago. Today that same 620 - 660 credit score is considered high risk and the credit market will by in large pass you by. Conversely, if you have FICO® scores at or above 720 AND are on the buyer's side of the credit equation, then you are considered to be sitting in the catbird seat. Auto loans are at or near 0%, mortgages are around 5%, and credit cards are being issued at or below 9.9%. It is a great time to be a borrower, however only if you have strong FICO® scores. To be in the best credit position in today’s marketplace shoot for a 720-750 credit score.
Pothole #2 - Thinking The CARD Act Solved The Free Credit Report Scams.
On Fair Isaac's consumer website myFICO.com, they take a jab at Experian, who is currently their biggest nemesis. "U.S Gov't brings common sense to "free credit report" false advertising" is front and center on their website. What they are referring to is the new law that requires companies that offer free credit reports to clearly disclose that it is not the free credit report you are entitled to per Federal law. So how did Experian get around this one? They will now charge you $1 for your "free" credit report. It still remains to be seen exactly how the Federal Trade Commission is going to address the continuous actions of Experian who have already settled on two lawsuits with the FTC. "Free" and "$1" are clearly not the same thing so the false advertising unfortunately seems to continue. Regardless, consumers will still be enrolled for a monthly subscription to a credit monitoring service if you claim your $1 “free” credit report from freecreditreport.com. Bottom line... buyer beware.
Opportunity #1- Better Credit Means More Leverage With Credit Card Companies.
You have heard the terms "buyer's market" and “seller's market." The good news for the economy is that for the first time in almost three years it is now a buyer's market in the consumer credit card world. However, that only applies if you have good enough credit to deserve the very attractive rates currently being offered by the credit card lenders. If you've been putting off paying down credit card debt now may be the time to do so. Paying down credit card debt is one of the fastest ways to significantly improve your credit scores as it accounts for one-third of your overall credit rating.
Opportunity #2 - Short Selling Wins Over Foreclosure As The Best Way To Dispose Of A Mortgage Loan.
A short sale is when the lender takes less than the principal amount and considers the loan as being paid in full. The caveat to that is short sales report as either a charge off or settlement on your credit report which does have an adverse affect and will cause your credit scores to drop. The FICO® scoring system does consider charged off accounts and settlements to be a major derogatory event and grossly negative in nature. However, Fannie Mae will allow you to get a mortgage within two years if you've chosen a short sale over a foreclosure which could take you up to five years to get a home if you go the foreclosure route.
Pothole #3 - Beware of Loan Modifications.
Loan modifications are a two year phenomenon thanks to the mortgage meltdown. Homeowners who have some sort of hardship can apply with their lender to lower the interest rate so much that the payment becomes affordable and allows them to avoid foreclosure. The problem with loan modifications is you are not guaranteed or entitled to any type of modification or reduction in payment regardless of your situation. Further, it takes months and months for large mortgage lenders to process the request and decide whether or not you qualify. During this time a.k.a “The Trial Period” they are asking that you pay a lower monthly amount which is typically put into a separate escrow account. More times than not this is reported as a rolling late payment to the credit bureaus which obviously damages your credit scores.
After all is said and done, you might find yourself without a modified loan and worse many months of late payments reporting on your credit. The best advise I can give you here is to read your agreement or talk with your lender about all of the details before entering into a loan modification agreement. Ask them how and what they report to the bureaus and what impact it will have on your credit scores before making a decision. There is a legal argument that if the lender instructs you to make a specific payment which is a lessor amount than what was contractually agreed to, they are entering into the agreement willingly and technically are altering the contract by doing so which should not have an adverse affect to a borrower. However, as of recent, this is becoming more and more of a hard pressed argument to make to get the lenders to reverse the negative reporting and the bureaus are refusing to make changes strong arming with the argument that the original signed mortgage contract stands for purposes of credit reporting.
Pothole #4 - The Authorized User Strategy Has Changed.
For many years consumers have used the authorized user strategy to build, rebuild and/or improve their credit scores. The theory (which was accurate) was that if you could have someone add a credit card account with a stellar payment history and a low balance to available credit ratio, your credit scores would improve almost overnight. Since the authorized user does not have contractual liability for repayment, if the primary cardholder became delinquent then you would simply have your name removed from the account and it would be removed from your credit reports. The problem now with the authorized user strategy is Equifax will no longer remove the account from your credit report. In fact they are responding to dispute letters with the following, "As an authorized user, you may be liable for any and all activities on this account." The issue is the word "may". It is my belief as well as the legal eagles, that a credit bureau can not maintain information on your file that it simply believes "may" be your responsibility. This one will likely play itself out in court when the class action motion now churning gets started.
The other problem with the authorized user methodology is FICO ’08, as it was branded, is fully released and projected to go live with lenders sometime in the very near future. FICO ’08 has a specific built in feature to bypass authorized user accounts for scoring purposes unless it can clearly determine that it is a husband and wife (or other type of legitimate credit sharing type relationship) warranting the credit be accounted for in the consumer’s score. Therefore, friends who added friends, neighbors, co-workers, sellers of authorized user accounts, distant relatives, etc. scoring on these types of accounts will come to a screeching halt once FICO ’08 is implemented by all credit reporting resellers and mandated for usage by Fannie Mae and Freddie Mac. I highly recommend to those of you who have these types of accounts to start applying for credit on your own now. Whether you apply for secured or unsecured credit cards take advantage of the opportunity while you still have the credit rating the authorized user account is affording you before it is too late.
Keep in mind that the consumer credit world is dynamic and like everything else constantly changing. Credit scores and scoring criteria will continue to change, lenders will change their standards, and credit bureaus will change their policies. These observations are being made as of where we are at now in mid 2010 and are sure to become outdated sooner than later. As always keep yourself safeguarded, stay aware of changes being made in the credit markets and keep yourself well informed of your credit standing as it dictates all things financial whether it be past, present or future.
Thank you for reading this months issue of the RE Credit Repair, LLC newsletter.
Monday, March 8, 2010
March Newsletter
CREDIT CARDS CAN EITHER MAKE OR BREAK YOUR CREDIT SCORES. THE TOP TEN THINGS YOU NEED TO KNOW ABOUT CREDIT CARDS AND HOW TO SUCCESSFULLY MANAGE YOUR CREDIT CARD PORTFOLIO TO HELP YOU MAXIMIZE YOUR CREDIT SCORES.
By: Shonnie Fischer
1- NEVER CLOSE YOUR CREDIT CARD ACCOUNTS
Thirty percent of your credit score is based upon your credit card portfolio. The technical term for this particular credit scoring component is known as the “Credit Card Utilization Ratio”. How the credit scoring model calculates your credit card usage into your score (like anything else related to credit scoring) is complicated, diverse and multi-faceted. Believe it or not, closing credit cards trumps missing payments and/or becoming delinquent when it comes to the potential of a negative effect on your credit score. Closing credit cards should never be used as a strategy to increase ones credit score. This happens to be a very common myth among consumers, and all too often wrongfully advised by industry professionals. There are two huge reasons why closing credit cards is never a good idea.
Reason #1: Your credit file as a whole is based upon the entire history and/or depth of the file. Therefore, let’s assume that you have had a Sears credit card that was opened back in 1990. Although you may not have used the card recently, the scoring model is scoring you based upon having a 20 year credit history. If you were to close that account, the length of your credit file “history” would revert to the next oldest tradeline in your file. Should that account happen to be a newer or less tenured account, you will lose points due to the decrease in the average age of your credit file.
The solution to this credit scoring predicament is simple. Keep your credit cards open and never ever close them. Even if they have low available credit limits and/or high interest rates, continue to use them periodically. Personally, I recommend using them at least once every three to six months. Simply stated, all you need to do is make a small purchase on your credit card such as a pack of gum, tank of gas, pair of socks, pizza delivery, etc. Then pay the balance off once you receive the statement. Just because you have a credit card does not mean you have to nor should you carry a balance on the account when possible.
Reason #2: Closing credit cards decreases your overall credit card utilization ratio. By definition, the revolving debt/credit card utilization ratio is the amount of your available credit limit on your credit cards vs. the amount that you owe on them. For example, if you have a Bank Of America credit card that has a $10,000 credit limit, and your current balance on the account is $5,000, you are at a 50% utilization ratio. The scoring models take into account individual credit card usage as well as an aggregate (total of all of your credit cards) calculation. Therefore, all of the available credit limits on your cards vs. what you owe on them is factored in to this particular piece of the credit scoring system.
By closing a credit card, you remove the amount of the available credit limit from the utilization category entirely. Let’s use the Bank Of America example above and tie in a Chase credit card that has a $20,000 limit and no balance. After combining the two cards, the available credit limit would be $30,000 with a $5,000 aggregate balance owed. Therefore, the combined total aggregate utilization ratio is 17%. If you were to close the Chase account, the $20,000 limit would be immediately removed from the total/overall available credit limit increasing you to a 50% utilization ratio. This would automatically cause a decrease to your credit score, which in this case, could be a pretty drastic drop.
In order to maximize your credit scores you always want to keep your balances on your credit cards as close to zero as possible. If you must carry a balance on any of your credit cards the most that you should carry without adverse affect to your credit scores is around 20%. Some experts say that 30% is the magic number but my personal experience leans more towards that 20% figure. Again, keep in mind the true magic number is $0 owed and 0% carry over. Just because you have a credit card does not mean that you have to carry a balance and/or use it on a daily or even monthly basis. You need to keep your cards active by using them, however use them sparingly and use common sense when making purchases with them.
2- MISSING AND/OR MAKING DELINQUENT PAYMENTS
This is an obvious event that is going to cause an adverse affect and decrease to your credit scores. The credit scoring software takes into account your payment history to see how you have managed your current and past credit obligations in order to calculate future risk.
The severity of your late payment(s) also plays a big part in your credit scores. Consumers who have missed payments by only a few weeks are far less of a risk than those who go 90 or more days delinquent. Scoring models are designed to predict if a consumer is likely to go 90 days or more delinquent in the next 24 months. Therefore, by its own calculations and measurements, the scoring system takes into account and places the heaviest concentration on a consumers past 24 month payment history. Late payments within a 24 month period will have a greater adverse scoring hit than a late payment made during years three through seven, with year seven being the max allowable timeframe a late payment can report on your credit and/or affect your credit scores respectively.
3- SETTLING ON PAST DUE ACCOUNT BALANCES WITH YOUR CREDIT CARD LENDERS
Anytime you do not or can not meet the terms of a financial agreement that you have entered into with a creditor, your account will go into some type of default status. If there is a deficiency balance owed to the lender, they can “charge off” the amount of money owed to them. Sometimes the creditor will attempt to collect on the debt internally, however in most cases they will sell and/or assign the deficiency balance to an outside collection agency.
It is very common once collection efforts begin, whether it is by the creditor directly or a third party collection agency, for them to offer the client a settlement for an amount less than contractually owed to them. Financially, this is a good idea. From a credit scoring perspective, this is a huge mistake. Anytime a debt is settled for less than the amount originally owed, a narrative stating just that is reported on your credit report. This particular narrative is as severe in nature as any other major derogatory posting that can report on your credit report. It will undoubtedly cause your credit score to plummet as it is considered a major derogatory event.
4- A DIVORCE DECREE WILL ABSOLVE YOU OF YOUR CREDIT RESPONSIBILITIES
Totally false!! Divorce proceedings typically require the parties to equitably and/or financially divide up debts incurred during the marriage. The judge will then review and order or decree that one or the other spouse will be responsible for making payments on car loans, mortgages, credit cards and other credit obligations. The judge’s order is a disposition made in a court of law. HOWEVER, the judge’s decree doesn’t override the contract that you signed with your creditors. Therefore, if you and your spouse both signed for financial liability and it stops being paid by the responsible party assigned by the judge, decree or no decree both of you will suffer. The lender will almost certainly report the late payments on both of your credit reports and if the account goes seriously delinquent, or even into the dreaded collection status, then your scores will suffer for years despite how the judge’s order reads. Additionally, if collection efforts begin they can and most likely will come after both parties. Again anyone who signed on the bottom line is eternally financially responsible until the debt is paid in full.
5- OVER UTILIZATION ON YOUR AVAILABLE CREDIT CARD LIMITS
We briefly touched on this topic in section one of this article. Maintaining high balances on your credit cards is a score killer. The mistake being made is called “over utilization”, which is the practice of maintaining balances close to your available credit limit. Anytime a consumer has a balance over 70% of their available credit limit, they are in big trouble score wise.
Another major issue in this category is going over and/or exceeding your available credit limit. By going over your credit limit you are adding an additional derogatory indicator to your score which could not be more detrimental to this credit scoring component. Best practices for credit cards is to use your cards sparingly, keep your balances as close to zero as possible, and do not use credit cards as a method to purchase large ticket items that you otherwise could not afford.
6- MAKE SURE YOUR CREDIT CARD COMPANIES ARE REPORTING YOUR AVAILABLE CREDIT LIMITS
As discussed in a couple of areas of this article, the credit card utilization ratio is a significant credit scoring factor accounting for 30% of your total credit score. One of the problems that consumers run into in this category is when the credit card companies do not report credit limits. Why is this so detrimental? The answer is that if there is no limit reporting on the credit report, the credit scoring model is set up to recognize any balance on that card to be one and the same as the credit limit, therefore putting you at a 100% utilization ratio. This will of course adversely affect and drop your credit scores, and in most cases significantly. For example, you could have an available credit limit of $100k on your Visa with a $10 balance, however if Visa does not report that you have the $100k limit the $10 is recognized as the card being fully maxed out and utilized.
Unfortunately there is not a lot a consumer can do in this category as credit card companies are not required to report credit limits on the credit report. If you do have a credit card that does not report the credit limit, really the only thing that you can do to avoid credit scoring problems is by paying the card off monthly. You can always try calling the credit card company to request that they report the information. But if they do not report it is not being done in error, it is because it is their policy not to report that information.
The other solution to this problem is to go credit card shopping. This is a last resort and only applies if you need to carry a balance from month to month, and you are not in the middle of a home purchase. Additional inquiries can and most likely will hurt your scores even further. This option needs to be carefully considered as it is not advisable in most circumstances.
7 - MYTH: CHECK CARDS WILL HELP YOUR CREDIT SCORES
This is a common credit myth that has no bearing or weight on your credit score. Check cards and/or Debit Cards are nothing more than plastic access to your checking account. Since checking accounts are not recognized as an extension of credit they do get reported to the credit agencies nor do they affect your credit scores.
8 - NOT HAVING ANY CREDIT CARDS AT ALL HURTS YOUR CREDIT SCORES
Contrary to popular belief, not having credit cards dramatically hurts your credit scores. Again, the credit card scoring component accounts for 30% of your overall credit score. Therefore, if you do not have credit cards or if you are a consumer who does not believe in credit cards, you are losing out on one-third of the points possible in the credit scoring system.
If you are a non-believer in credit cards, or if you are a consumer who has had credit cards in the past that got you in financial trouble, you may want to rethink your position. If you want to maximize your credit score you will have to have credit card accounts open and reporting on your credit report. It is recommended for a consumer to have three to five open credit card accounts to maximize their credit scoring potential. Remember, just because you have a credit card does not mean that you have to use it on a consistent basis or carry a balance.
9 - CONDUCT A SEMI-ANNUAL REVIEW WITH YOUR CREDIT CARD COMPANIES
I recommend that every six months you contact each one of your credit card companies and conduct an account review with them. You will want to ask them if you are receiving the lowest rate they are currently offering. You will want to inquire about getting a credit limit increase - remember, you are not spending the money!! Getting a credit limit increase is going to leverage and increase your available credit limits, thus lowering your utilization ratios. Finally, make sure you are benefiting fully from any additional perks or point systems they may be offering. You could very well be throwing money away by not taking advantage of reward programs credit card companies offer and/or lower interest rates that unless you ask will not be automatically assigned to your account.
10 - TAKE EXTREME CAUTION WHEN CO-SIGNING FOR CREDIT CARD DEBT
This is an across the board credit warning for all types of credit, not just credit cards. However, as of February 22, 2010 the CARD Act went into effect requiring people between the ages of 18-21 to have a parent co-sign for a credit card unless they can demonstrate an ability to repay the loan via a steady and consistent income stream. Translation- 9 times out of 10, we as parents are going to have to put our name on the bottom line in order for our 18-21 year olds to get a credit card. A couple of caveats need to be noted here when co-signing for your child or anyone else for that matter:
1- Make sure that you are monitoring the credit card statements monthly to ensure the payment is being made on time. There is no distinction between signer and co-signer when it comes to reporting late payments. Therefore, their late payments are your late payments and will drop your score accordingly.
2- Their credit utilization ratio becomes and/or ties into your credit utilization ratio. Thus, if they max out their card it will in turn increase your ratios possibly causing your scores to drop.
It is not a bad idea to co-sign for your child, nor is this section intended to scare you away from doing so. This is simply a new law that went into effect, so as a precaution we as parents will need to ensure that our credit ratings are not being adversely affected. This is again new to us all and we simply need to incorporate monitoring practices to avert any future problems that could damage our credit ratings.
Thank you for reading this month’s publication and as always if you have any questions on this or any other credit related matter, please don’t hesitate to contact me directly anytime.
By: Shonnie Fischer
1- NEVER CLOSE YOUR CREDIT CARD ACCOUNTS
Thirty percent of your credit score is based upon your credit card portfolio. The technical term for this particular credit scoring component is known as the “Credit Card Utilization Ratio”. How the credit scoring model calculates your credit card usage into your score (like anything else related to credit scoring) is complicated, diverse and multi-faceted. Believe it or not, closing credit cards trumps missing payments and/or becoming delinquent when it comes to the potential of a negative effect on your credit score. Closing credit cards should never be used as a strategy to increase ones credit score. This happens to be a very common myth among consumers, and all too often wrongfully advised by industry professionals. There are two huge reasons why closing credit cards is never a good idea.
Reason #1: Your credit file as a whole is based upon the entire history and/or depth of the file. Therefore, let’s assume that you have had a Sears credit card that was opened back in 1990. Although you may not have used the card recently, the scoring model is scoring you based upon having a 20 year credit history. If you were to close that account, the length of your credit file “history” would revert to the next oldest tradeline in your file. Should that account happen to be a newer or less tenured account, you will lose points due to the decrease in the average age of your credit file.
The solution to this credit scoring predicament is simple. Keep your credit cards open and never ever close them. Even if they have low available credit limits and/or high interest rates, continue to use them periodically. Personally, I recommend using them at least once every three to six months. Simply stated, all you need to do is make a small purchase on your credit card such as a pack of gum, tank of gas, pair of socks, pizza delivery, etc. Then pay the balance off once you receive the statement. Just because you have a credit card does not mean you have to nor should you carry a balance on the account when possible.
Reason #2: Closing credit cards decreases your overall credit card utilization ratio. By definition, the revolving debt/credit card utilization ratio is the amount of your available credit limit on your credit cards vs. the amount that you owe on them. For example, if you have a Bank Of America credit card that has a $10,000 credit limit, and your current balance on the account is $5,000, you are at a 50% utilization ratio. The scoring models take into account individual credit card usage as well as an aggregate (total of all of your credit cards) calculation. Therefore, all of the available credit limits on your cards vs. what you owe on them is factored in to this particular piece of the credit scoring system.
By closing a credit card, you remove the amount of the available credit limit from the utilization category entirely. Let’s use the Bank Of America example above and tie in a Chase credit card that has a $20,000 limit and no balance. After combining the two cards, the available credit limit would be $30,000 with a $5,000 aggregate balance owed. Therefore, the combined total aggregate utilization ratio is 17%. If you were to close the Chase account, the $20,000 limit would be immediately removed from the total/overall available credit limit increasing you to a 50% utilization ratio. This would automatically cause a decrease to your credit score, which in this case, could be a pretty drastic drop.
In order to maximize your credit scores you always want to keep your balances on your credit cards as close to zero as possible. If you must carry a balance on any of your credit cards the most that you should carry without adverse affect to your credit scores is around 20%. Some experts say that 30% is the magic number but my personal experience leans more towards that 20% figure. Again, keep in mind the true magic number is $0 owed and 0% carry over. Just because you have a credit card does not mean that you have to carry a balance and/or use it on a daily or even monthly basis. You need to keep your cards active by using them, however use them sparingly and use common sense when making purchases with them.
2- MISSING AND/OR MAKING DELINQUENT PAYMENTS
This is an obvious event that is going to cause an adverse affect and decrease to your credit scores. The credit scoring software takes into account your payment history to see how you have managed your current and past credit obligations in order to calculate future risk.
The severity of your late payment(s) also plays a big part in your credit scores. Consumers who have missed payments by only a few weeks are far less of a risk than those who go 90 or more days delinquent. Scoring models are designed to predict if a consumer is likely to go 90 days or more delinquent in the next 24 months. Therefore, by its own calculations and measurements, the scoring system takes into account and places the heaviest concentration on a consumers past 24 month payment history. Late payments within a 24 month period will have a greater adverse scoring hit than a late payment made during years three through seven, with year seven being the max allowable timeframe a late payment can report on your credit and/or affect your credit scores respectively.
3- SETTLING ON PAST DUE ACCOUNT BALANCES WITH YOUR CREDIT CARD LENDERS
Anytime you do not or can not meet the terms of a financial agreement that you have entered into with a creditor, your account will go into some type of default status. If there is a deficiency balance owed to the lender, they can “charge off” the amount of money owed to them. Sometimes the creditor will attempt to collect on the debt internally, however in most cases they will sell and/or assign the deficiency balance to an outside collection agency.
It is very common once collection efforts begin, whether it is by the creditor directly or a third party collection agency, for them to offer the client a settlement for an amount less than contractually owed to them. Financially, this is a good idea. From a credit scoring perspective, this is a huge mistake. Anytime a debt is settled for less than the amount originally owed, a narrative stating just that is reported on your credit report. This particular narrative is as severe in nature as any other major derogatory posting that can report on your credit report. It will undoubtedly cause your credit score to plummet as it is considered a major derogatory event.
4- A DIVORCE DECREE WILL ABSOLVE YOU OF YOUR CREDIT RESPONSIBILITIES
Totally false!! Divorce proceedings typically require the parties to equitably and/or financially divide up debts incurred during the marriage. The judge will then review and order or decree that one or the other spouse will be responsible for making payments on car loans, mortgages, credit cards and other credit obligations. The judge’s order is a disposition made in a court of law. HOWEVER, the judge’s decree doesn’t override the contract that you signed with your creditors. Therefore, if you and your spouse both signed for financial liability and it stops being paid by the responsible party assigned by the judge, decree or no decree both of you will suffer. The lender will almost certainly report the late payments on both of your credit reports and if the account goes seriously delinquent, or even into the dreaded collection status, then your scores will suffer for years despite how the judge’s order reads. Additionally, if collection efforts begin they can and most likely will come after both parties. Again anyone who signed on the bottom line is eternally financially responsible until the debt is paid in full.
5- OVER UTILIZATION ON YOUR AVAILABLE CREDIT CARD LIMITS
We briefly touched on this topic in section one of this article. Maintaining high balances on your credit cards is a score killer. The mistake being made is called “over utilization”, which is the practice of maintaining balances close to your available credit limit. Anytime a consumer has a balance over 70% of their available credit limit, they are in big trouble score wise.
Another major issue in this category is going over and/or exceeding your available credit limit. By going over your credit limit you are adding an additional derogatory indicator to your score which could not be more detrimental to this credit scoring component. Best practices for credit cards is to use your cards sparingly, keep your balances as close to zero as possible, and do not use credit cards as a method to purchase large ticket items that you otherwise could not afford.
6- MAKE SURE YOUR CREDIT CARD COMPANIES ARE REPORTING YOUR AVAILABLE CREDIT LIMITS
As discussed in a couple of areas of this article, the credit card utilization ratio is a significant credit scoring factor accounting for 30% of your total credit score. One of the problems that consumers run into in this category is when the credit card companies do not report credit limits. Why is this so detrimental? The answer is that if there is no limit reporting on the credit report, the credit scoring model is set up to recognize any balance on that card to be one and the same as the credit limit, therefore putting you at a 100% utilization ratio. This will of course adversely affect and drop your credit scores, and in most cases significantly. For example, you could have an available credit limit of $100k on your Visa with a $10 balance, however if Visa does not report that you have the $100k limit the $10 is recognized as the card being fully maxed out and utilized.
Unfortunately there is not a lot a consumer can do in this category as credit card companies are not required to report credit limits on the credit report. If you do have a credit card that does not report the credit limit, really the only thing that you can do to avoid credit scoring problems is by paying the card off monthly. You can always try calling the credit card company to request that they report the information. But if they do not report it is not being done in error, it is because it is their policy not to report that information.
The other solution to this problem is to go credit card shopping. This is a last resort and only applies if you need to carry a balance from month to month, and you are not in the middle of a home purchase. Additional inquiries can and most likely will hurt your scores even further. This option needs to be carefully considered as it is not advisable in most circumstances.
7 - MYTH: CHECK CARDS WILL HELP YOUR CREDIT SCORES
This is a common credit myth that has no bearing or weight on your credit score. Check cards and/or Debit Cards are nothing more than plastic access to your checking account. Since checking accounts are not recognized as an extension of credit they do get reported to the credit agencies nor do they affect your credit scores.
8 - NOT HAVING ANY CREDIT CARDS AT ALL HURTS YOUR CREDIT SCORES
Contrary to popular belief, not having credit cards dramatically hurts your credit scores. Again, the credit card scoring component accounts for 30% of your overall credit score. Therefore, if you do not have credit cards or if you are a consumer who does not believe in credit cards, you are losing out on one-third of the points possible in the credit scoring system.
If you are a non-believer in credit cards, or if you are a consumer who has had credit cards in the past that got you in financial trouble, you may want to rethink your position. If you want to maximize your credit score you will have to have credit card accounts open and reporting on your credit report. It is recommended for a consumer to have three to five open credit card accounts to maximize their credit scoring potential. Remember, just because you have a credit card does not mean that you have to use it on a consistent basis or carry a balance.
9 - CONDUCT A SEMI-ANNUAL REVIEW WITH YOUR CREDIT CARD COMPANIES
I recommend that every six months you contact each one of your credit card companies and conduct an account review with them. You will want to ask them if you are receiving the lowest rate they are currently offering. You will want to inquire about getting a credit limit increase - remember, you are not spending the money!! Getting a credit limit increase is going to leverage and increase your available credit limits, thus lowering your utilization ratios. Finally, make sure you are benefiting fully from any additional perks or point systems they may be offering. You could very well be throwing money away by not taking advantage of reward programs credit card companies offer and/or lower interest rates that unless you ask will not be automatically assigned to your account.
10 - TAKE EXTREME CAUTION WHEN CO-SIGNING FOR CREDIT CARD DEBT
This is an across the board credit warning for all types of credit, not just credit cards. However, as of February 22, 2010 the CARD Act went into effect requiring people between the ages of 18-21 to have a parent co-sign for a credit card unless they can demonstrate an ability to repay the loan via a steady and consistent income stream. Translation- 9 times out of 10, we as parents are going to have to put our name on the bottom line in order for our 18-21 year olds to get a credit card. A couple of caveats need to be noted here when co-signing for your child or anyone else for that matter:
1- Make sure that you are monitoring the credit card statements monthly to ensure the payment is being made on time. There is no distinction between signer and co-signer when it comes to reporting late payments. Therefore, their late payments are your late payments and will drop your score accordingly.
2- Their credit utilization ratio becomes and/or ties into your credit utilization ratio. Thus, if they max out their card it will in turn increase your ratios possibly causing your scores to drop.
It is not a bad idea to co-sign for your child, nor is this section intended to scare you away from doing so. This is simply a new law that went into effect, so as a precaution we as parents will need to ensure that our credit ratings are not being adversely affected. This is again new to us all and we simply need to incorporate monitoring practices to avert any future problems that could damage our credit ratings.
Thank you for reading this month’s publication and as always if you have any questions on this or any other credit related matter, please don’t hesitate to contact me directly anytime.
Friday, February 5, 2010
February Newsletter
Everything You Need To Know About Collection Accounts - And More!
By: Shonnie Fischer
Of all of the questions I get regarding consumer credit reporting and credit scoring, collection account inquiries seems to be at the top of the list on a daily basis. This months newsletter is dedicated to the subject of collection accounts and what affect they have on a consumers credit report. Additionally, the most prevalent “credit myths” associated with collection accounts will also be addressed in this article. Far too often myth vs. fact gets passed on to the consumer which in most cases causes further undue damage to the consumer's credit report and scores respectively.
Most consumers have a general understanding of what a collection account is. By definition, a collection account occurs if you stop paying on any type of debt where a balance is owed and remains unpaid per the terms of the original agreement contractually entered into by the consumer and financial entity. The lender then takes action to collect on the unpaid and/or deficiency balance by transferring the status of the account from a routine account to a collection account. The lender may have an internal collection department that will then take over the account to collect on, or the lender may sell or assign your account to a outside third party collection agency. Either way the bottom line and single objective is to collect on the remaining debt owed.
Pretty basic so far.
Collection agencies specialize in collecting money from people who refuse to pay their debt. A collection agency’s main leverage over a consumer, which is also the single most important motivational tactic they use to get a consumer to pay, is by reporting the collection account to the credit bureaus. Any collection activity that reports to the credit bureaus will hurt your FICO® scores. Even if it is a single collection account that reports, you can expect a significant drop in your credit scores once it hits the credit bureaus. As you can imagine, having multiple collection accounts will cause your credit score to plummet even further as you are adding multiple layers of major derogatory information a.k.a “risk” to your credit file.
With respect to the FICO® credit scoring system, collection accounts are considered a major derogatory “event”. When a collection account is reported, the FICO® credit scoring software considers two things and two things only when factoring in a collection account into the credit scoring system. The first factor is that collection account activity exists and is a part of your credit file, which as previously stated is considered a major derogatory account. The second factor is the age of the account relative to the date of original delinquency with the original creditor that lead to the collection account having to be established in the first place. Specifically, this particular credit scoring component as explained is the perfect segue into our first two (and most prevalent) credit myths.
Myth #1- Paying Off A Collection Account Will Increase A Consumers Credit Score.
This is absolutely false!! If you pay off a collection account, typically the effect on the credit score will be neutral. If your scores do increase it will not be by much - guaranteed! Whether or not a collection is reported as paid or unpaid is NOT a credit scoring component. What the FICO® credit scoring system factors in is the fact that you went to collection in the first place. As stated above collection accounts are scored as “events” with the only other credit scoring factor being the age of the account. Collection accounts regardless of the paid vs. unpaid status are indicative of your previous payment history and therefore used as a predictive measure of future credit risk as assessed in the credit scoring software.
The Fair Isaac Corporation, the creators of the FICO® credit scoring software have this information posted on their website, myfico.com under the following link: http://www.myfico.com/CreditEducation/Questions/Collections.aspx.
Myth #2- Paying Off Collection Accounts Will Remove It From Your Credit File.
Again, totally false. Unfortunately this where most consumers make an incorrect assumption only to find the account still remains on their report the next time their credit gets pulled. Paying off a collection account will not cause or force automatic removal from your credit report. What will happen once the account is paid, is the balance is updated to reflect the account has been paid in full and the account will continue to report accordingly.
Collection accounts whether paid or unpaid along with derogatory information outside of public records, can report for up to 7 years based upon the date of original delinquency with the original creditor.
Prevalent with lending and/or industry professionals, the next myth we will address is not so much a consumer credit myth as it is one that is more common with lending specific and/or industry professionals who work with analyzing consumer credit.
Myth #3- Paying Off Collection Accounts Does Not Lower A Consumers Credit Score.
In all fairness, this is a current myth that is based on a past truth. So those of you reading this article who knew this to be the case in days past, let me confirm you are not losing your mind. In previous credit scoring models (still commercially available as late as 2008) when a collection account was paid off it would update the date of last activity which in turn would report into the credit scoring software as if it were a brand new collection account. The date of last activity used to be a credit scoring component in the FICO® credit scoring software, however in 2007 the Fair Isaac Corporation agreed with debt collectors that a consumer should not be penalized for paying off old debt accounts. While it is true that any current activity causes the date of last activity to reset, FICO® has revised their scoring software to only consider the date of original delinquency for scoring purposes.
To further validate that this is in fact a current truth vs. future feature to come, in September 2009 John Ulzheimer, credit scoring and credit reporting expert and author who is also the President of Consumer Education for Credit.com, went straight to the source and interviewed Ethan Dornhelm, Principal Scientist at FICO® who is also a FICO® score developer to get further clarity on this subject. Mr. Dornhelm confirmed that “The FICO® score is focused on the presence of the collection and how recently the collection occurred. This is true at all credit bureaus and across all generations of the FICO® scoring models still commercially available today.”
So now that we have covered what a collection account is, what impact it has on a consumers credit score, as well as the most prevalent credit myths associated with collection accounts, what is the best way to handle collection accounts or recover from the adverse affect they have on a consumers credit report?
1- The most obvious answer is to avoid them all together. Pay your bills on time and if ever you find yourself in a financially distressed situation, try to work out a payment plan with the creditor prior to them having to take further collection action. Be proactive and be honest about your situation with creditors. This is not always going to be an across the board resolve, but at least it lets the creditor know that your are not intentionally disregarding your obligation to pay them. They may or may not do a work out plan with you, however it is worth the effort to contact them first vs. having them assume the worst case which will without question be to start immediate collection action against you to collect on the money owed to them.
2- If number one can not be avoided and an account has already gone into collection, work with the collection agency and try to negotiate deletion of the account in exchange for payment. Not every collection agency will negotiate these types of terms, however I can tell you from my own personal experience that four out of five will. Collection agencies work on commission and/or a consignment fee basis, so at the end of the day they are truly only interested in collecting on the debt and typically will negotiate for deletion when payment in full is received. For consumers this is well worth doing the leg work to try and negotiate this type of agreement with them as this is THE ONLY way to get a valid collection account completely removed from your credit report.
3- If you have a collection account that you do not agree with, or do not believe belongs to you, you do have rights under the Fair Debt Collections Practices Act to dispute the debt. Ignoring the debt or otherwise refusing to pay the collection agency to punish them for what you perceive to be their error is not the way to get this resolved. This type of action will only continue to hurt you as collection agencies are famous for selling debt multiple times over if uncollectible. Each time that happens it adds additional new collection activity to your credit report causing a layer effect. You do have rights under the Fair Debt Collections Practices Act that allow you to properly and legally dispute the validity of a collection account reporting on your credit report. A summary of your rights is available on the RE Credit Repair website under the Credit Resources section link: http://www.recreditfix.com/credit_resources.php
I hope you have enjoyed this months publication and it has provided you some clarification and/or helped you to better understand collection accounts in general. Trust me - speaking from personal experience this is one of the most complex areas outside of credit scoring itself to master. If you have any further questions or need personal assistance regarding collection accounts or any other credit related matter, please contact me direct via email or my office line anytime.
By: Shonnie Fischer
Of all of the questions I get regarding consumer credit reporting and credit scoring, collection account inquiries seems to be at the top of the list on a daily basis. This months newsletter is dedicated to the subject of collection accounts and what affect they have on a consumers credit report. Additionally, the most prevalent “credit myths” associated with collection accounts will also be addressed in this article. Far too often myth vs. fact gets passed on to the consumer which in most cases causes further undue damage to the consumer's credit report and scores respectively.
Most consumers have a general understanding of what a collection account is. By definition, a collection account occurs if you stop paying on any type of debt where a balance is owed and remains unpaid per the terms of the original agreement contractually entered into by the consumer and financial entity. The lender then takes action to collect on the unpaid and/or deficiency balance by transferring the status of the account from a routine account to a collection account. The lender may have an internal collection department that will then take over the account to collect on, or the lender may sell or assign your account to a outside third party collection agency. Either way the bottom line and single objective is to collect on the remaining debt owed.
Pretty basic so far.
Collection agencies specialize in collecting money from people who refuse to pay their debt. A collection agency’s main leverage over a consumer, which is also the single most important motivational tactic they use to get a consumer to pay, is by reporting the collection account to the credit bureaus. Any collection activity that reports to the credit bureaus will hurt your FICO® scores. Even if it is a single collection account that reports, you can expect a significant drop in your credit scores once it hits the credit bureaus. As you can imagine, having multiple collection accounts will cause your credit score to plummet even further as you are adding multiple layers of major derogatory information a.k.a “risk” to your credit file.
With respect to the FICO® credit scoring system, collection accounts are considered a major derogatory “event”. When a collection account is reported, the FICO® credit scoring software considers two things and two things only when factoring in a collection account into the credit scoring system. The first factor is that collection account activity exists and is a part of your credit file, which as previously stated is considered a major derogatory account. The second factor is the age of the account relative to the date of original delinquency with the original creditor that lead to the collection account having to be established in the first place. Specifically, this particular credit scoring component as explained is the perfect segue into our first two (and most prevalent) credit myths.
Myth #1- Paying Off A Collection Account Will Increase A Consumers Credit Score.
This is absolutely false!! If you pay off a collection account, typically the effect on the credit score will be neutral. If your scores do increase it will not be by much - guaranteed! Whether or not a collection is reported as paid or unpaid is NOT a credit scoring component. What the FICO® credit scoring system factors in is the fact that you went to collection in the first place. As stated above collection accounts are scored as “events” with the only other credit scoring factor being the age of the account. Collection accounts regardless of the paid vs. unpaid status are indicative of your previous payment history and therefore used as a predictive measure of future credit risk as assessed in the credit scoring software.
The Fair Isaac Corporation, the creators of the FICO® credit scoring software have this information posted on their website, myfico.com under the following link: http://www.myfico.com/CreditEducation/Questions/Collections.aspx.
Myth #2- Paying Off Collection Accounts Will Remove It From Your Credit File.
Again, totally false. Unfortunately this where most consumers make an incorrect assumption only to find the account still remains on their report the next time their credit gets pulled. Paying off a collection account will not cause or force automatic removal from your credit report. What will happen once the account is paid, is the balance is updated to reflect the account has been paid in full and the account will continue to report accordingly.
Collection accounts whether paid or unpaid along with derogatory information outside of public records, can report for up to 7 years based upon the date of original delinquency with the original creditor.
Prevalent with lending and/or industry professionals, the next myth we will address is not so much a consumer credit myth as it is one that is more common with lending specific and/or industry professionals who work with analyzing consumer credit.
Myth #3- Paying Off Collection Accounts Does Not Lower A Consumers Credit Score.
In all fairness, this is a current myth that is based on a past truth. So those of you reading this article who knew this to be the case in days past, let me confirm you are not losing your mind. In previous credit scoring models (still commercially available as late as 2008) when a collection account was paid off it would update the date of last activity which in turn would report into the credit scoring software as if it were a brand new collection account. The date of last activity used to be a credit scoring component in the FICO® credit scoring software, however in 2007 the Fair Isaac Corporation agreed with debt collectors that a consumer should not be penalized for paying off old debt accounts. While it is true that any current activity causes the date of last activity to reset, FICO® has revised their scoring software to only consider the date of original delinquency for scoring purposes.
To further validate that this is in fact a current truth vs. future feature to come, in September 2009 John Ulzheimer, credit scoring and credit reporting expert and author who is also the President of Consumer Education for Credit.com, went straight to the source and interviewed Ethan Dornhelm, Principal Scientist at FICO® who is also a FICO® score developer to get further clarity on this subject. Mr. Dornhelm confirmed that “The FICO® score is focused on the presence of the collection and how recently the collection occurred. This is true at all credit bureaus and across all generations of the FICO® scoring models still commercially available today.”
So now that we have covered what a collection account is, what impact it has on a consumers credit score, as well as the most prevalent credit myths associated with collection accounts, what is the best way to handle collection accounts or recover from the adverse affect they have on a consumers credit report?
1- The most obvious answer is to avoid them all together. Pay your bills on time and if ever you find yourself in a financially distressed situation, try to work out a payment plan with the creditor prior to them having to take further collection action. Be proactive and be honest about your situation with creditors. This is not always going to be an across the board resolve, but at least it lets the creditor know that your are not intentionally disregarding your obligation to pay them. They may or may not do a work out plan with you, however it is worth the effort to contact them first vs. having them assume the worst case which will without question be to start immediate collection action against you to collect on the money owed to them.
2- If number one can not be avoided and an account has already gone into collection, work with the collection agency and try to negotiate deletion of the account in exchange for payment. Not every collection agency will negotiate these types of terms, however I can tell you from my own personal experience that four out of five will. Collection agencies work on commission and/or a consignment fee basis, so at the end of the day they are truly only interested in collecting on the debt and typically will negotiate for deletion when payment in full is received. For consumers this is well worth doing the leg work to try and negotiate this type of agreement with them as this is THE ONLY way to get a valid collection account completely removed from your credit report.
3- If you have a collection account that you do not agree with, or do not believe belongs to you, you do have rights under the Fair Debt Collections Practices Act to dispute the debt. Ignoring the debt or otherwise refusing to pay the collection agency to punish them for what you perceive to be their error is not the way to get this resolved. This type of action will only continue to hurt you as collection agencies are famous for selling debt multiple times over if uncollectible. Each time that happens it adds additional new collection activity to your credit report causing a layer effect. You do have rights under the Fair Debt Collections Practices Act that allow you to properly and legally dispute the validity of a collection account reporting on your credit report. A summary of your rights is available on the RE Credit Repair website under the Credit Resources section link: http://www.recreditfix.com/credit_resources.php
I hope you have enjoyed this months publication and it has provided you some clarification and/or helped you to better understand collection accounts in general. Trust me - speaking from personal experience this is one of the most complex areas outside of credit scoring itself to master. If you have any further questions or need personal assistance regarding collection accounts or any other credit related matter, please contact me direct via email or my office line anytime.
Monday, January 11, 2010
January Newsletter
Myth: FICO Scores Have Been Decoded
By Shonnie Fischer
Credit scores have made it into virtually every aspect of our life and dictate accordingly. Hitting that magic number whether it be for financing or other reasons is paramount and makes or breaks the deal -or- in some cases can even cost you employment opportunities. Because either a lender or other entity sets the minimum credit scoring requirements, those who do not make the cut try to quickly scramble to gain the points they need. Herein lies the problem, credit scores are created via an algorithm specific to the credit scoring source. We as consumers do not know the magic formula that holds our fate, thus end up desperately scurrying to find any possible solution to get our scores where they need to be when applying for financing or other credit score driven areas.
So what really makes up a credit score? How is it specifically calculated and why the big secret? Credit scoring is similar in comparison to Coca Cola® in that as consumers we have access to the basic ingredients but we do not know the secret recipe or how the end product is truly made. Like Coca Cola®, the formula that makes up a consumers credit score is in an of itself a heavily guarded industry secret known only to very few people. The Fair Isaac Corporation who developed the FICO® credit scoring software, keep a very tight lip and do not disclose what - if any- specific value(s) are applied or used when a consumers credit score is generated. However, most consumers know the basics like how failing to make a payment, collection accounts, bankruptcy, liens, and judgements will all cause a credit score to go down. Here is what else we know about the credit scoring system:
35% of the total score is derived from past payment history.
30% of the total score is derived from credit card utilization ratios.
15% of the total score is derived from the average age of a credit file.
10% of the total score is derived from diversity of account types.
10% of the total score is derived from inquiries into a consumers credit.
What we know about credit scoring is very generic and broad in range, thus does not provide much assistance to the consumer who needs an immediate 20 point boost. There is believed to be (and sometimes wrongfully published) a mythical treasure map of point values for credit scoring. It is here where I see consumers and industry professionals jump in and give advice such as “if you do this -or- pay off that, it will boost your score by X amount of points”. Unfortunately, a credit scoring treasure map does not exist and such statements are incorrect and completely misleading. Case in point, Liz Weston with MSN, recently published a point value chart in an article following an interview where a contact from FICO® disclosed the following canned figures.
Effect on a 680 score vs. Effect on a 780 score
Here is where the confusion begins and why this type of information is so unreliable, misinterpreted, and abused doing a great disservice to the consumers and the industry professionals involved. What FICO® did not disclose is that four of the five actions listed above will cause your credit file to be scored on a totally different scorecard. Yes, I know that I just confused and may have completely lost the vast majority of you reading this article. I will elaborate with fair warning that it just gets more confusing from here.
FICO® scores measure your credit files potential risk by scoring it using a unique algorithm specifically designed for your file type known as a scorecard. That means if you have a bankruptcy then you’re scored in a bankruptcy scorecard. If your credit file only has one or two accounts, then it’s scored as a thin file scorecard and so on and so forth. Point being that all credit files are not scored the same way and not using the same FICO® formula. Four of the five actions above are negative in nature and when a clean credit file suddenly gets hit with something negative, it will transfer from a “clean credit file” scorecard to a “derogatory file” scorecard respectively. The result is a completely different measurement for EVERYTHING on your file. So adding a foreclosure, settlement, 30-day late payment or a bankruptcy to your credit file does not “cost” the points you see above. Worse, is it causes everything on your file to have a new value so the score change can not be attributed just to the negative item. The score change has to be attributed to the change in scorecards.
Next, not all 680 and 780 credit scores are created equally. Your 680 credit score might have been caused by a completely different set of credit circumstances than my 680 and the same goes for the 780 category. Case in point, John Ulzheimer, a highly regarded industry expert ran similar simulations on his own personal credit reports using the myFICO.com website tools. It just so happens that Mr. Ulzheimer’s FICO® score for the simulations was also 780. This is a perfect example of just how different FICO’s® hypothetical 780 is from a real credit report with the same score of 780.
The score damage on the original 780 in FICO’s® simulation of filing a bankruptcy was a negative hit of between 220 and 240 points. On Mr. Ulzheimer’s real credit file with a real FICO® score of 780 the hit was between 195 and 255 points. Missing a payment on an account that was current, caused the FICO® score to drop between 90 and 110 points. On Mr. Ulzheimer’s 780 FICO® score the same 30-day late payment caused his score to drop 40 to 75 points.
As you can see the point differences for the exact same action on the exact same FICO® score of 780 was anything but exactly the same. Mr. Ulzheimer even trumped Ms. Weston by re-interviewing FICO’s Public Affairs Director, Craig Watts. Mr. Watts confirmed that the examples in the FICO® chart were “hypothetical” and “could vary significantly” from consumer to consumer, thus getting back to my original statement that there is no such thing as a treasure map of single point value systems for credit scoring. Unfortunately, we are left with only the basic and generic credit scoring components which do not help much when needing to hit an exact number.
The point of this article has been further proven thanks to some cavalier follow up journalism. Within two days of the publishing of Ms. Weston’s article, two separate writers picked up and misrepresented the data. Instead of interpreting the information as a general approximation of what could happen to your score if you made various mistakes, the data is purposely being positioned as a new breakthrough into FICO’s® black box.
Bottom line is I know we all would like to get our hands on this type of specific information so that credit scoring would make some kind of sense and give consumers the ability to regulate their credit scores and be in full control their own destinies. However, unless those magic numbers and secret formulas are ever formally published and/or made public knowledge, we will have to continue working with averages, assumptions and fingers and toes crossed.
By Shonnie Fischer
Credit scores have made it into virtually every aspect of our life and dictate accordingly. Hitting that magic number whether it be for financing or other reasons is paramount and makes or breaks the deal -or- in some cases can even cost you employment opportunities. Because either a lender or other entity sets the minimum credit scoring requirements, those who do not make the cut try to quickly scramble to gain the points they need. Herein lies the problem, credit scores are created via an algorithm specific to the credit scoring source. We as consumers do not know the magic formula that holds our fate, thus end up desperately scurrying to find any possible solution to get our scores where they need to be when applying for financing or other credit score driven areas.
So what really makes up a credit score? How is it specifically calculated and why the big secret? Credit scoring is similar in comparison to Coca Cola® in that as consumers we have access to the basic ingredients but we do not know the secret recipe or how the end product is truly made. Like Coca Cola®, the formula that makes up a consumers credit score is in an of itself a heavily guarded industry secret known only to very few people. The Fair Isaac Corporation who developed the FICO® credit scoring software, keep a very tight lip and do not disclose what - if any- specific value(s) are applied or used when a consumers credit score is generated. However, most consumers know the basics like how failing to make a payment, collection accounts, bankruptcy, liens, and judgements will all cause a credit score to go down. Here is what else we know about the credit scoring system:
35% of the total score is derived from past payment history.
30% of the total score is derived from credit card utilization ratios.
15% of the total score is derived from the average age of a credit file.
10% of the total score is derived from diversity of account types.
10% of the total score is derived from inquiries into a consumers credit.
What we know about credit scoring is very generic and broad in range, thus does not provide much assistance to the consumer who needs an immediate 20 point boost. There is believed to be (and sometimes wrongfully published) a mythical treasure map of point values for credit scoring. It is here where I see consumers and industry professionals jump in and give advice such as “if you do this -or- pay off that, it will boost your score by X amount of points”. Unfortunately, a credit scoring treasure map does not exist and such statements are incorrect and completely misleading. Case in point, Liz Weston with MSN, recently published a point value chart in an article following an interview where a contact from FICO® disclosed the following canned figures.
Effect on a 680 score vs. Effect on a 780 score
Here is where the confusion begins and why this type of information is so unreliable, misinterpreted, and abused doing a great disservice to the consumers and the industry professionals involved. What FICO® did not disclose is that four of the five actions listed above will cause your credit file to be scored on a totally different scorecard. Yes, I know that I just confused and may have completely lost the vast majority of you reading this article. I will elaborate with fair warning that it just gets more confusing from here.
FICO® scores measure your credit files potential risk by scoring it using a unique algorithm specifically designed for your file type known as a scorecard. That means if you have a bankruptcy then you’re scored in a bankruptcy scorecard. If your credit file only has one or two accounts, then it’s scored as a thin file scorecard and so on and so forth. Point being that all credit files are not scored the same way and not using the same FICO® formula. Four of the five actions above are negative in nature and when a clean credit file suddenly gets hit with something negative, it will transfer from a “clean credit file” scorecard to a “derogatory file” scorecard respectively. The result is a completely different measurement for EVERYTHING on your file. So adding a foreclosure, settlement, 30-day late payment or a bankruptcy to your credit file does not “cost” the points you see above. Worse, is it causes everything on your file to have a new value so the score change can not be attributed just to the negative item. The score change has to be attributed to the change in scorecards.
Next, not all 680 and 780 credit scores are created equally. Your 680 credit score might have been caused by a completely different set of credit circumstances than my 680 and the same goes for the 780 category. Case in point, John Ulzheimer, a highly regarded industry expert ran similar simulations on his own personal credit reports using the myFICO.com website tools. It just so happens that Mr. Ulzheimer’s FICO® score for the simulations was also 780. This is a perfect example of just how different FICO’s® hypothetical 780 is from a real credit report with the same score of 780.
The score damage on the original 780 in FICO’s® simulation of filing a bankruptcy was a negative hit of between 220 and 240 points. On Mr. Ulzheimer’s real credit file with a real FICO® score of 780 the hit was between 195 and 255 points. Missing a payment on an account that was current, caused the FICO® score to drop between 90 and 110 points. On Mr. Ulzheimer’s 780 FICO® score the same 30-day late payment caused his score to drop 40 to 75 points.
As you can see the point differences for the exact same action on the exact same FICO® score of 780 was anything but exactly the same. Mr. Ulzheimer even trumped Ms. Weston by re-interviewing FICO’s Public Affairs Director, Craig Watts. Mr. Watts confirmed that the examples in the FICO® chart were “hypothetical” and “could vary significantly” from consumer to consumer, thus getting back to my original statement that there is no such thing as a treasure map of single point value systems for credit scoring. Unfortunately, we are left with only the basic and generic credit scoring components which do not help much when needing to hit an exact number.
The point of this article has been further proven thanks to some cavalier follow up journalism. Within two days of the publishing of Ms. Weston’s article, two separate writers picked up and misrepresented the data. Instead of interpreting the information as a general approximation of what could happen to your score if you made various mistakes, the data is purposely being positioned as a new breakthrough into FICO’s® black box.
Bottom line is I know we all would like to get our hands on this type of specific information so that credit scoring would make some kind of sense and give consumers the ability to regulate their credit scores and be in full control their own destinies. However, unless those magic numbers and secret formulas are ever formally published and/or made public knowledge, we will have to continue working with averages, assumptions and fingers and toes crossed.
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