Ask The Money Coach

Posts Tagged ‘Credit rating’

Credit Report Reality Check: Here’s How Big Brother Is Watching You

If you think that the credit-reporting system is too invasive, unfair, or not necessarily accurate in assessing how risky a person truly is, then you’re about to have a lot more to complain about.

It turns out that Fair Isaac – the company that developed the FICO credit score ‑‑ is teaming up with a company called CoreLogic to create new credit scores for the mortgage industry.

CoreLogic supplies financial, consumer and real estate information to lenders and other businesses.

Now these two powerful companies, both of which have made an art out of the science of decision analytics, are going to start tracking and scoring a whole lot of things that millions of consumers take for granted and don’t realize may impact their credit rating.

For example, have you looked into or actually received a payday loan lately? You may not have stepped foot into any seedy payday lender store, but have you applied for cash from any online lender recently? Well, both types of activities are about to be tracked.

Have you missed any child support payments?

Have you filled out an apartment rental application or been evicted by a landlord lately?

Or have you gotten other loans that you thought were ‘under the radar’ because they’re not being reported to Equifax, Experian and TransUnion?

All that information is about to be fair game too, and it will be tracked, analyzed and judged as either risky (or not) in this new credit score that CoreLogic and FICO are creating for mortgage lenders.

CoreLogic, which is going to be presenting at the FICO World 2011 conference in New York in November, is going so far as to market its own new CoreScore credit report by stating: “Everything will change November 30, 2011.”

According to the company, the range of new information it will aggregate and report includes:

Properties owned—with and without debt obligations
Mortgage obligations with companies that may not report to traditional credit reporting agencies
Property legal filings, such as notices of default
Property tax amounts and payment status
Estimated market values on all U.S. properties owned
Rental applications and evictions
Inquiries and charge-offs from pay-day and online lenders
Consumer-specific bankruptcies, liens, judgments and child support obligations
Other (unspecified) data

Mortgage Lending Already Tight

Obviously, it’s already very tough for the average American to get a “Yes” from a bank when it comes to securing a mortgage. I shudder to think at how much more difficult it will become to get a loan when every single aspect of your financial life, every seemingly benign decision you’ve made, and virtually every transaction that you’ve entered into, suddenly starts getting systematically tracked, finely sliced and diced, and codified in some way; all to suggest to lenders whether you’re a good risk or a bad credit risk.

And of course, the implications of a good or bad credit rating go far beyond your ability to get loans. Your credit rating impacts your car and life insurance rates, your ability to rent an apartment, and even your ability to get hired and promoted.

This is the new credit reality that Americans are dealing with – and to a greater extent than ever before. I talked about this phenomenon in my book, “Perfect Credit: Seven Steps to a Credit Rating,” where I described one of the unwritten rules about credit. One such unwritten rule is simply this: Every Transaction Counts.

And I mean every transaction. Anything you sign your name to, any contract you enter into, any agreement with a financial services company, retailer or other entity, is subject to being monitored, dissected, analyzed, judged, and ultimately scored by the credit‑scoring industry.

Beware: Everything is Tracked and Every Transaction Counts

That means you must be careful of everything you do and how it could potentially help or hurt your credit record. If you sign‑up for a newspaper subscription and you don’t pay the bill – maybe because your Sunday paper is routinely absent from your doorstep – your failure to pay (justified or not) could nevertheless come back to haunt you in the form of a ding on your credit report.

If you have medical bills that are in dispute, or that you contest for one reason or another, again think carefully about the implications of non-payment. Those medical bills could get turned over to a collection agency and then – poof! – your credit is damaged.

Certainly, if you’re juggling any traditional forms of credit – like credit cards, a mortgage, car loans or student loans – you should naturally you expect those to be tracked and reported to the credit bureaus.

But what about the library book that you checked out and failed to return? Or the DVD that your kid didn’t even tell you he borrowed from the library and never took back? What about that parking ticket that you got when you were visiting another town that you felt was given to you unjustly. You chucked it, thinking you could just forget it about. Unfortunately, the credit scoring system won’t forget about it.

The truth is that, from a credit-scoring standpoint, it really doesn’t matter why a bill didn’t get paid. The only thing that matters is that something you are allegedly supposed to be responsible for is financially delinquent in some way, or not paid as agreed.

So anytime you owe anybody anything – or even if they claim you do – and anytime you enter into any financial transaction whatsoever, if money is changing hands, or credit of any kind is being extended you should expect the details of those transactions to be monitored and tracked by someone.

Probably feels a bit like Big Brother is watching, right? But this is the new credit reality.

Sure, it’s true that people who religiously pay their bills on time and have “thin” or “no” credit files may ultimately benefit from having non-traditional bills reported to the credit bureaus and scored by credit scoring firms. These individuals may be able to demonstrate credit-worthiness and thereby secure loans or credit in the future.

But frankly, they’re probably in the minority.

I fear more for the vast numbers of Americans who are struggling through this current recession; those without the financial means to stay afloat, and those who lack the ability to throw money at certain problems and make them go away.

These are the people, I’m afraid, who are going to find that their credit scores suffer more than ever in this daunting, new world of credit.

Is The Credit Score Industry Fair to Consumers?

Author: The Money Coach

In my latest book, Perfect Credit, I explained that the credit score industry prefers to work together—without you whenever possible.

I’m not saying that they have no need for you or that they don’t want to have some dealings with you. After all, consumers provide valuable feedback and constitute a revenue source. And companies in the credit industry realize that, if they don’t address the consumer, their competitors will.

All in all, however, many folks in the credit industry would be quite happy if you just went away and not made any fuss about your credit.

Why do I say that the industry sometimes considers you a thorn in its side?

First of all, you have to realize that credit-scoring firms had to be dragged into having any direct interaction with consumers. The credit industry only started giving consumers a peek at their credit scores in 2001, despite the fact that the first commercial credit scores were created by the founders of Fair Isaac more than 50 years ago in 1958.

It wasn’t until the 1970s, however, when credit-card usage grew tremendously, that banks began widespread use of credit scores to reduce card delinquencies.

A couple decades later, in 1989, Fair Isaac released the first general-purpose credit score used to predict a consumer’s overall riskiness to a lender. It was only at that point that any serious consideration was given to educating the consumer about credit scores.

Until then credit-scoring firms like Fair Isaac, as well as the credit bureaus themselves, had mainly focused all their attention on lenders and businesses that needed to obtain credit information in order to manage risk.

They were playing together nicely, thank you very much, until consumers and consumer advocates started demanding to know the exact same information to which lenders were privy.

VantageScore Brings More Competition to the FICO Score

More recently, credit industry players have shown other examples of how they can work together even as they compete with one another. In 2006, the “Big Three” credit bureaus – Equifax, Experian and TransUnion jointly developed their own credit score called the VantageScore.

Doing so raised the ire of Fair Isaac, which sued and alleged anti-trust violations. Fair Isaac, which makes the FICO score, lost that lawsuit and the VantageScore is still being marketed – as it should be.

Frankly, I don’t have a big problem with the credit bureaus getting together. The point of their creating a joint score was to minimize variation in people’s credit scores. You see, credit scores are based on the underlying information contained in each of your credit files. Thus, if Equifax, Experian, and TransUnion have different data about you, naturally your scores based on those three reports will vary. This is often exactly what people find.

In getting together, the Big Three tried to come up with a statistical model to lessen variation among the bureaus. So all in all, I don’t fault their efforts, but I do use it to point out that the bureaus, while competitors, are willing to work together.

The primary point of contact they have with you as an individual comes when you order a credit report, purchase a product, or dispute a mistake in your file.

Disputing Information in Your Credit Report

In the last scenario you have to fill out a dispute-resolution form, online or in the mail. And once you dispute something, what do the credit bureaus do next? Do they come back to you and ask you to prove what you said or to verify it independently? No, they really don’t.

They may allow you to send in supporting documentation to bolster your claims, but essentially the bureaus go to your creditors as the ultimate arbiters of the truth.

They basically go to the lenders, banks, collection agencies, or whatever entities reported you, and the credit bureaus say, “This individual disputes the information you provided. Do you agree or disagree?” (I’m summarizing, of course, but this is the gist of what happens). And based on what that lender or creditor or bill collector says, their response determines what goes into your credit report.

Either a creditor confirms the information, and it stays on your report, or the creditor can’t verify what was initially reported, and the information is dropped from your file. That’s a lot of power for the creditor to hold. And I have to question whether creditors are right 100% of the time. That doesn’t seem fair, logical or even remotely possible.

Nevertheless, what they say goes. This is standard operating procedure. The dispute-resolution process is legal, and it’s yet another example of how the entire industry works together, maximizing the flow of information among themselves and minimizing interactions with consumers. Perhaps that’s why less than 1% of credit report disputes are changed.

So if you ever feel that you’re not exactly receiving full disclosure about some aspect of your credit report or scores, just remember that the system was designed that way. The credit industry (not all players, but certainly many) wants to maintain control over and access to credit information for risk-management and profit motives.

They don’t want you to have the same insights and information that they do, nor do they want you to quash their creative maneuvering.

As one blogger wryly noted about the credit industry, specifically bank creditors and credit-scoring firms, “You have to admire their resourcefulness. Step 1: Cancel credit card because you don’t use it enough. Step 2: Lower your credit score because you had a credit card cancelled (or limit lowered). Step 3: Send dozens of offers through the mail for new credit cards with higher rates and fees. Repeat as often as needed.”

Again, in fairness to the credit industry, I don’t want to paint all the players with one broad brush. Clearly some exceptions to the rule exist.

Indeed, a select number of companies are bolstering their efforts to provide credit education for consumers, as opposed to just selling the public loan products, credit reports, credit scores, and credit-related services.

Overall, though, I believe that the industry can do a much better job of communicating with consumers, advocating financial literacy, and giving the public more insight into the complex world of credit management and credit scoring.

Will Closing a Credit Card Account Hurt My Credit Score

Author: The Money Coach

Question: “I have good credit and own four credit cards with a combined credit limit of $24, 000. Three cards are at zero balance, and the other one has a balance of $100. I would like to close the newest card because I’ve only used it once. It has a credit limit of $2, 000. So if I close it, will it cause my credit score to drop?”

Answer:

The short answer to that question is yes, it can cause your credit score to drop. So many people mistakenly think that closing a credit account, a credit card in particular, might be beneficial to them in some way, or perhaps might even increase their credit rating.

Unfortunately, the exact opposite is most often the case. It will lower your credit score.

Now, you have to understand that your credit score is based on a host of factors, one of which is your credit utilization rate. Let me explain quickly what that means. Your credit utilization rate simply means the amount of credit you’ve charged versus how much credit you have available.

In your case, you said that you have $24, 000 available and a balance of only $100. That means your credit utilization rate is super low, less than 1%. That’s very outstanding, that’s stellar, which probably speaks to why you have a good credit rating.

But let’s say you charge $12, 000 out of the $24, 000 you had available. Well, that would mean you’d have a credit utilization rate of 50%, because you would have charged up half of your available credit.

Now, this credit card that you’re thinking about closing has a relatively small credit limit, $2, 000. So the fact that that’s only about 10% of your overall credit limit that you have combined, because you said you have $24, 000 available, tells me that the impact on your score might be minimal.

I also say that because you said that this is your newest card, meaning that you haven’t had it opened very long, although you didn’t specify how long you’ve had the four cards open.

But in general I tend to think that closing that one card would probably not do as much damage to you, for example, as it might to do somebody else, based on the most recent card… You know, based on us talking about you thinking about closing your most recent card, and based on the fact that that credit card only has a small limit.

So I hope this has been helpful to you. Sometimes, I know, people want to close cards because, you know, they have an annual fee, or because the interest rate on the card is way too high, and, you know, for that kind of situation, I might advise somebody to think about doing it or to close it after they make sure that they’ve had other cards for a longer period of time.

Those two issues, high interest rates or a big annual fee, don’t seem to be the issue with you. You indicated you only want to close the card just because you’ve only used it once.

My suggestion in general would be, “Oh, don’t worry about it too much. It’s probably just fine if you keep it open.” If you only use it once and you continue to have very infrequent credit usage, chances are the creditor, the bank issuer who issued you the card might, in fact, close it anyway, because increasingly, amid the current credit crunch, banks are, in fact, closing out credit limits when people haven’t used them.

Either way it goes, if they close the card or if you close the card, that part doesn’t play a role in your credit score. The credit score doesn’t take into account, in other words, who asks or who dictates that the credit card be closed.

What does matter are those factors that I mentioned before, your credit utilization rate and also the length of your credit history.

Remember, 15% of your credit history… I’m sorry, 15% of your credit score is based on the length of your credit history. Generally speaking, the longer a credit history you have established, the higher your FICO score will be.

Here’s how to get your FICO credit score free

How can I remove items from my credit report? (askthemoneycoach.com)
Recommended reading: Perfect Credit: 7 Steps to a Great Credit Rating

How Will a Foreclosure Affect My Credit Score?

Author: The Money Coach

If you’re facing foreclosure, you may be wondering how this will affect your credit score. Missing payments on your mortgage and other bills may have already dropped your credit score by several points, and when you reach foreclosure status, you will notice a significant drop in your credit rating. If you’ve been struggling financially for a while, the foreclosure could have an even more significant impact on your credit standing now, and in the future.

Effects of a Foreclosure on Your Credit Report

Your FICO score is the most commonly-used credit score by most lenders, and credit bureaus have shared how many points you lose when you’re dealing with a delinquent mortgage. Here are the average ranges of points you lose when you’re in foreclosure:

40 to 110 points when payments are 30 days late
70 to 135 points when payments are 90 days late
85 to 160 points when you’re dealing with a foreclosure, short sale or deed-in-lieu

Even if you had been making your mortgage payments on time for several months and years before dealing with financial distress, the banks will report missed payments to the credit bureaus right away.

For many people facing foreclosure, the mortgage isn’t the only bill that’s late. If you are also late on your car payments, have been skipping student loan payments or are late on credit card payments, your credit score will drop within a very short period of time.

Sadly, the combination of a foreclosure and defaulting on other loans often leads borrowers down the road of bankruptcy. Declaring bankruptcy will do extensive damage to your credit rating and, like a foreclosure, will also stay on your credit report for several years.

Erasing a Foreclosure from Your Credit Report

A foreclosure will drop off your credit report automatically within seven to ten years, depending on the state you live in. When you reach the seven-year mark, make sure you get in touch with the credit bureaus to make sure that they are still not reporting the foreclosure. You may need to send them a written notice in order to have the foreclosure removed after it has expired. It’s also important to contact your original lender to have them remove the record from your credit report. Lenders are not always willing to go out of their way to do this, so a written notice and persistence may be needed to clean up your credit report.

If you do decide to apply for a loan when you have a foreclosure on your credit report, the lender may be willing to offer you loan but at a higher-than-average interest rate. In most cases, you will find it difficult to get another mortgage at an attractive interest rate, because of your credit history.

Ask The Money Coach

Posts Tagged ‘Credit rating’

Credit Report Reality Check: Here’s How Big Brother Is Watching You

Related Questions:

Is The Credit Score Industry Fair to Consumers?

Related Questions:

Will Closing a Credit Card Account Hurt My Credit Score

Related Questions:

How Will a Foreclosure Affect My Credit Score?

Related Questions:

Ask The Money Coach

Posts Tagged ‘Credit rating’

Credit Report Reality Check: Here’s How Big Brother Is Watching You

Related Questions:

Is The Credit Score Industry Fair to Consumers?

Related Questions:

Will Closing a Credit Card Account Hurt My Credit Score

Related articles

Related Questions:

How Will a Foreclosure Affect My Credit Score?

Related Questions: