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.
