5 Things Credit Scores Won’t Tell You

March 27, 2015 by · Leave a Comment 

The truth behind the numbers that help determine your financial fate.

1. “You may never know your real score.”
Roughly 200 million consumers have a FICO score, which ranges from 300 to 850 and is used by most lenders to determine whether to approve them for financing and at what terms. This score is based solely on the information in consumers’ credit reports. While consumers can check their generic FICO score, which weighs how well they have been managing their credit, it’s unlikely they’ll ever know the exact score a lender sees when they apply for credit.

More than 45 FICO scores are available to lenders, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit monitoring site, and a former manager at FICO. There are FICO scores that assign more weight to certain characteristics, such as borrowers’ credit card activity, or history with car loans, mortgages or installment loans (that include furniture and jewelry payment plans). Car loan lenders, for instance, often pull a FICO auto score which weighs more heavily a borrower’s past car loan activity. Even if they have a stellar generic score, their auto score can be lower if they missed a car loan payment or never had a car loan, which could leave them with a higher interest rate than expected, says Barry Paperno, a credit expert at Credit.com, which tracks consumer credit issues, and a former manager at FICO.
For its part, FICO says its generic score is the most prevalent, and that all its scores use that model as their foundation. The company created the industry scores at the request of the lenders, says Anthony Sprauve, a spokesman for myFICO.com, the consumer division of FICO.

Consumers, for their part, are often left in the dark as to what score lenders have used to come to their decision — unless they’re rejected for a loan or given a rate that’s higher than what the lender advertises. One year ago, a rule that stems from the Dodd-Frank financial overhaul kicked in requiring lenders to automatically present the score they pulled on these borrowers.

2. “Lenders aren’t placing full faith in us.”
Large lenders are increasingly going beyond FICO scores to determine a potential borrower’s creditworthiness. Indeed, credit bureau Experian (which has created scores that compete with FICO) reports that roughly 80% of large banks and lenders use their own custom scores; they incorporate applicants’ credit reports from the three major bureaus — Equifax, Experian and TransUnion (just like the FICO score). But they also take into account other factors, such as applicants’ income, assets, chances of filing for bankruptcy, and the likelihood they’ll generate loan revenue for the bank, says Ulzheimer.

While large lenders have used this strategy for years, experts say the practice is becoming more widespread. The concern is that by itself FICO cannot display the full potential risk of a borrower, says Frank Donnelly, president of the Mortgage Bankers Association of Washington, D.C. But by confirming that borrowers’ have enough cash reserves or assets to weather a sudden job loss, for example, lenders lower the chances that they won’t repay their debts. “They’re saying let’s not put full trust in this — let’s back it up with other evidence,” says Martha Doran, professor emeritus of accounting at San Diego State University, who studies credit scores.
FICO says it agrees with lenders’ strategy. “Any lender naturally would want other information to address ability to pay and other factors in making their lending decision,” says Sprauve.

Consumers could feel the impact. A high FICO score might not guarantee that they get approved for the loan, or get it at the terms they prefer, if the lender discovers an otherwise unfavorable trait that’s not listed on a traditional credit report. On the flip side, consumers with mediocre FICO scores could end up in better terms with a lender than they expected if positive information is discovered through the lender’s independent credit research.

3. “We’re multiplying.”
Consumers can now order their credit scores from more than 20 web sites, up from around five just a few years ago, at a cost of $7 to $20. But while consumers tend to think of one, uniform credit score, there are several types of scores, each of which relies on its own mix of payment history, credit applications, debt and other factors. Beyond FICO, there’s the VantageScore, which was created by the three largest credit bureaus — Equifax, Experian and TransUnion; each of those has at least one score of its own as well. But while lenders have access to different scores, FICO remains the industry standard. It’s used in 90% of lending decisions, according to CEB TowerGroup, a financial services research firm.

For consumers, the sale of other scores can lead to confusion. While many of the scores currently for sale rely on similar sets of data, there can be significant differences. VantageScore ranges from 501 to 990, while FICO scores range from 300 to 850. Others add extra information. For example, in 2010, Experian started factoring in data about on-time rental payments in some renters’ credit reports, data that would impact a VantageScore from that bureau, although a VantageScore from another bureau would not take that into account. Jeff Richardson, a spokesman for VantageScore, says that more competition has led to “more accurate scoring methodologies and more attention to consumer education.”

The credit bureaus say that most lenders don’t rely on just one credit score. “It’s a competitive marketplace and different lenders choose which credit score they prefer to use for various reasons,” says Daryl Toor, a spokesman for Equifax. Separately, they say some of their scores can provide educational value to borrowers. Michael Troncale, a spokesman for Experian, says the bureau’s PLUS score, which ranges from 330 to 830, “helps consumers understand their credit worthiness.”

4. “Our power is greater than you may think.”
When Dan Belanger tried to lease a condominium in Grand Rapids, Mich., a year ago, he provided past tax returns and bank statements to prove he could afford the place. To his surprise, his realtor told him he was rejected — because of his poor credit score. Belanger, who owns an automated data collection firm, says he offered to pay 12 months of rent before moving in to no avail. “It didn’t matter–I was pegged a risk because of my credit history,” he says.

A poor credit score can threaten much more than a consumer’s shot at new credit. Low scores prevent consumers from getting a mortgage and from renting in many cases. Home and car insurers often consult “credit-based insurance scores,” which include the applicant or policyholder’s credit score as well as other factors like their past claims and location. These scores help determine whether to approve a client and what premiums to charge. J.B. Hancock, of Chicago, says her car insurer raised her premiums 33% after her credit score dropped roughly six points to 811, and that the company didn’t allow for any negotiation on the price hike.

Loretta Worters, a vice president with the Insurance Information Institute, says insurers rely on a variety of information to determine coverage and premiums. She says insurers consider only those items from credit reports that are relevant to insurance loss potential.

5. “We can wreck your career.”
Credit reports, which determine borrowers’ credit scores, are also the new resume, used by many employers to help determine whether to hire an applicant. Some 47% of employers report doing credit checks for some or all job candidates, according to the Society for Human Resource Management.

The assumption, experts say, is that a bad credit report might help flag poor work habits and decision-making, and even general untrustworthiness. Some research seems to back employers’ fears: Nearly one third of employees with self-reported credit problems engaged in “counterproductive work behavior,” such as theft or accepting bribes, compared to about 18% of employees without financial problems, according to a 2008 academic study.

Consumer advocates argue that the credit check serves as one more setback for the unemployed. To earn extra income while in retirement, Penny Fox, 68, applied for an insurance sales position at a large health insurer one month ago. Fox, who’s based in Phoenix, Ariz., has more than 30 years experience in the field, but was rejected for the position after the employer discovered her poor credit. Fox recently lost a home to foreclosure and fell behind on credit card payments. “It’s like a house of cards — I’m caught in it,” she says.

The tide could be shifting. At least seven states prohibit companies from doing credit checks on many applicants, and similar bills are pending in another 20 states and Washington D.C. Separately, the latest SHRM report released this month shows that fewer employers are conducting credit checks than two years ago and 80% of employers who did said they hired a job candidate with negative information on their credit report.

5 more items to cover from original article will be posted next…

By ANNAMARIA ANDRIOTIS

http://www.smartmoney.com/borrow/credit-cards/10-things-credit-scores-wont-say-1343613009781/

How a Jr. or Sr. Can Ruin a Credit Report

March 26, 2015 by · 1 Comment 

Imagine getting denied a credit card because someone else is on your credit report. I’m not talking about identity theft. I’m talking about a case of blended credit reports.

The Columbia Dispatch found that 1 in 17 consumer complaints (of 21,500) in 2009 to the Federal Trade Commission and 1 in 12 complaints (of 1,842) in 2009 and 2010 to state attorneys general involved the consumer’s credit report being mixed with another person’s.

The news report illustrated the mix-up by offering three tales of financial identity confusion.

One Ohio woman’s credit report contained the bad credit of a woman living in Utah. Another found her daughter’s poor credit history on her own report. And one lady named Brenda Campbell almost had her wages garnished because two other Brenda Campbells were on her credit report.

At this point, I’d normally say, pull your credit report and make sure everything on it is correct. (You’re entitled to a free credit report from each of the three credit reporting agencies every 12 months at AnnualCreditReport.com.)

But…

The report you pull will be based off your name, date of birth, Social Security number and current address. However, lenders often use only one or two of those identifying features to pull a credit report.

That means if a creditor pulls your credit report using your name and date of birth, there’s a possibility someone else shares those features and their report will be combined with yours. In other cases, Social Security numbers or names just have to be similar for the mistake to occur.

This kind of botch typically happens to people who share the same or similar names and often are in the same family, says John Ulzheimer, president of consumer education at SmartCredit.com.

To help the credit bureaus keep records straight, make sure to fill in your credit application with complete information, he says. Don’t forget the Jr. or Sr. and/or an apartment number, for example.

If the blunder does happen, Ulzheimer recommends disputing the process manually. Talk to someone at each credit bureaus — TransUnion, Equifax and Experian — and have them contact the lender of the disputed item. (Each bureau has a dedicated department for mixed files, which is separate from departments that handle run-of-the-mill credit report errors.)

(Of course, this is easier said than done as the Columbia Dispatch article showed the difficulties the three ladies had correcting their reports. If you run into a brick wall, consider a consumer-law attorney.)

“The good news is once something is identified as not belonging to a consumer, there is a way to red flag it, so it won’t happen again,” Ulzheimer says. “It’s a permanent fix.”

What’s your worst/most unusual credit report problem? How did you resolve it?

 

By Janna Herron · Bankrate.com

 

12 Steps Towards Financial Success

March 6, 2015 by · Leave a Comment 

TWELVE STEPS TO FINANCIAL SUCCESS
A new year typically brings with it a renewed commitment to become more financially stable. Toward that end, the NFCC offers the following 12-step formula to financial success:

  • Review your credit report – Much of your financial future depends on the contents of your credit report. Therefore, your first step should be to obtain your report, review it for accuracy, and dispute any errors. Since you can obtain your credit report free of charge there is no reason to neglect this important piece of your financial life. Consumers are allowed one free report from each of the three major bureaus once every 12 months. You can get all three at once which is a good idea if a major purchase is on the horizon, or stagger your requests to check for identity theft. Access your report from www.annualcreditreport.com.
  • Obtain your credit score – The three digits that comprise your credit score are a major dictator of whether or not the lender will extend credit, and at what interest rate. It is likely that you’ll have to pay to purchase your score, but it will be money well-spent. Be sure to understand the range within which your score falls, as each score has its own model. Further, take the necessary steps to improve your score. Remember, a high score equals a low interest rate, saving you significant money over time.
  • Reduce debt – If you’ve dug a deep financial hole, stop digging. Piling new debt on top of old is a red flag that you are living beyond your means. Lock up the credit cards until they’re paid in full, and meanwhile, reach out for help from a legitimate nonprofit credit counseling agency sooner rather than later. Delaying only makes the problem worse.
  • Commit to save – Many Americans are great spenders, but lousy savers. Without a well-funded savings account you are on a very slippery slope, one that becomes treacherous with the next unplanned expense. Put 10% of each take-home check into a savings account. Find extra money to dedicate to saving by putting all raises, bonuses, birthday checks, and any other windfall monies into savings. This will create a cushion that should see you through most short-term emergencies.
  • Get financially organized – Create your own personal financial center where you can instantly put your hands on your family’s financial records. Your center doesn’t have to be a fancy home office. It could be an accordion folder. The point is that you know where everything is. Place original documents such as a will or your mortgage in a safe deposit box, and keep a copy at home.
  • Avoid incurring late fees – Pay your bills the day you receive them. This way you’ll never risk the creditor receiving your payment after the due date. Delaying could result in you being charged a late fee, a ding to your credit report, and a lower credit score. The risk of delay is simply too great. If you travel for work or are a procrastinator, consider setting up online bill pay with payments large enough to cover at least the minimum due.
  • Avoid paying overdraft fees – A receipt stuffed into your car visor isn’t simply being unorganized. It can cost you. Many an account has been overdrawn due to neglecting to notate an ATM withdrawal or debit purchase. Get into the habit of recording each transaction into your check register on the spot. Also take the time to balance your checkbook and reconcile your bank statement each month.
  • Track your spending for 30 days – Have everyone in the household who spends money participate in this exercise. Write down every cent that is spent, as it’s the small, miscellaneous expenses that often wreck the best of plans. At the end of the month come together to review the spending. This is the only way you can truly know where your hard-earned money is going.
  • Create a spending plan you can live with – Once you’ve tracked your spending, you can then make conscious decisions as to how you want to allocate the money. Continue tracking with the new plan in place. Keep doing so until you find a plan that is right for your family. Make it too strict, and no one will stay on board. Make it too lenient, and you won’t be accomplishing anything.
  • Take advantage of free money – Contribute the maximum amount to your retirement plan at work, or at the very least, meet the matched amount or you’re throwing away free money. Also inquire about the availability of Flexible Spending Accounts or Health Savings Accounts. All of the above can lower your taxable income.
  • Have an annual insurance check-up – No one wants to be over-insured. Nor do you want to be under-insured resulting in an unpleasant surprise when making a claim. Make an appointment with your provider, and confirm that your coverage is exactly what you thought you were paying for. Inquire about ways to lower your premiums, and ask about any discounts for loyalty, good driving, bundling multiple polices, etc.
  • Investigate refinancing your mortgage – With historically low rates you can save significant money over the life of your loan. Do not extend the term of your loan, however, in order to get a lower monthly payment unless this is absolutely necessary to stay afloat.
A new year can mean a new you, at least a new financial you. Put one of the above steps in place each month, and at this time next year you’ll see that new financial you. Even better, put one tip in place each week, and you’ll be on your way to financial stability at the end of the next quarter this year!

Credit Inquiries – What’s The Big Deal?

March 5, 2015 by · Leave a Comment 

How Credit Inquiries Impact Your FICO Score

It’s no secret that FICO scores and other credit risk scores consider credit inquiries when calculating your credit scores. A credit inquiry, if you are not familiar with it, is a record of who pulled your credit report and on what date.

If you want to bone up on inquiries you can do so here. I wrote that article for Mint a couple of years ago and the content is still accurate today.

When it comes to credit applications, many consumers are worried that by applying for credit they might lower their scores. That is certainly a possibility. Credit inquiries can lower your FICO scores. Notice I used the word “can” and not the word “will.”

The True Impact of an Inquiry

Before you choose to not apply for whatever it is you’re applying for, consider the fact that inquiries have a marginal, at best, impact on your credit scores.

Further, just because an inquiry causes your score to go down it may not cause it to go down enough to change any lender’s mind.  Going from FICO 790 to FICO 786 because of new inquiries is likely going to be an irrelevant change when it comes to your credit application.

You’ll also want to keep in mind that the majority of credit applications result in one new inquiry on one of your three credit reports.

Applying for a new credit card doesn’t mean all three of your credit reports are being accessed. Only one is going to be pulled so the new inquiry will only appear on that particular credit report. That means your FICO scores at the other two credit bureaus are not impacted at all.

The only exception to this rule is a mortgage application where the lender or broker will likely pull all three of your credit reports.

The Grand Scheme

Something else to keep in mind…credit inquiries really aren’t terribly important in the grand scheme of things. Inquiries account for up to 10% of the points in your FICO scores. When it comes to pieces of the FICO score pie, it’s the smallest piece. The age of your credit report is more important than your inquiries.

FICO just released some data quantifying the true impact of inquiries to their scores. 57% of consumers are getting the maximum number of points from the inquiry category, which means inquiries are not lowering their scores at all. Inquiries are one of the top four reasons your FICO scores aren’t higher only 11% of the time.

And finally, only 4% of consumers lose more than 20 points in their FICO score because of inquiries. According to Frederic Huynh, one of FICO’s credit score scientists, “The bottom line is that I would not characterize inquiries as being a very important score factor relative to other predictors.”

Bigger Fish to Fry

If you’re concerned about your FICO scores then there are certainly bigger fish to fry than inquires. Negative information and paying your bills on time makes up a 35% piece of the pie. The various debt related measurements account for 30%. How long you’ve had credit is worth 15%. And, the diversity of account types accounts for 10% of the score points.

Keep in mind that when you pull your own credit report through sites like www.annualcreditreport.com, the inquiry has no impact on your scores. And, if you subscribe to a credit monitoring service or choose to purchase your credit reports through any of the retail websites, those inquiries also do not impact your scores.

By John Ulzheimer for Mint.Com

 

mint.com/blog/credit/how-credit-inquiries-impact-your-fico-score-052012

How to Read a Credit Report

March 4, 2015 by · Leave a Comment 

Read a Report

Once you’ve obtained a copy of your credit report, you’ll be able to see what your creditors are saying about you. There’s just one problem — credit reports can be a little confusing. Never fear! Elite Financial, LLC is here to help. In the following paragraphs you’ll find a step-by-step explanation of how to read and interpret each section of your credit report.

I.D. Section

Here you’ll find identifying information like your:

  • name
  • current address
  • social security number
  • date of birth
  • spouse’s name (if applicable)

Easy, right? But don’t just skim over this section. Read all the entries to make sure everything is correct. One bad piece of information and the credit history listed on your report could be wrong.

Credit History Section

This is the meat of the report. It contains a list of your open and paid credit accounts and indicates any late payments reported by your creditors. Although it may seem a little tedious, it’s essential that you read through this section very thoroughly. If you find any information that is incorrect or accounts that don’t belong to you, you’ll need to submit a dispute letter to the credit-reporting agency.

The basic format for the credit history section is as follows:

  • Company Name – identifies the company that is reporting the information.
  • Account Number – lists your account number with the company.
  • Whose Account- Indicates who is responsible for the account and the type of participation you have with the account. Abbreviations may vary depending on the reporting agency but here are some of the most common:
    • I – Individual
    • U – Undesignated
    • J – Joint
    • A – Authorized User
    • M – Maker
    • T – Terminated
    • C – Co-maker/Co-signer
    • S – Shared

 

  • Date Opened – This is the month and year you opened the account with the credit grantor.
  • Months Reviewed – Lists the number of months the account history has been reported.
  • Last Activity – Indicates the date of the last activity on the account. This may be the date of your last payment or last charge.
  • High Credit – Represents the highest amount charged or the credit limit. If the account is an installment loan, the original loan amount will be listed.
  • Terms – For installment loans, the number of installments may be listed or the amount of the monthly payments. For revolving accounts, this column is often left blank.
  • Balance – Indicates the amount owed on the account at the time it was reported.
  • Past Due – This column lists any amount past due at the time the information was reported.
  • Status- A combination of letters and numbers are used to indicate the type of account of the timeliness of payment.Abbreviations for the type of account are as follows:
    • O – Open
    • R – Revolving
    • I – Installment
    • Abbreviations for Timeliness of Payment varies among agencies. Numbers are used to represent how current you are in your payments. Current or paid as agreed is usually represented by 0 or 1. Larger numbers (up to 9) indicate that an account is past due.
  • Date Reported – Indicates the last time information on this account was updated by your creditor.

Collection Accounts Section

If you’ve had any accounts referred to collection agencies in the last seven years, this is where they will be reported. The name of the collection agency will be listed along with the amount you owe and, in some cases, their contact information. If a collection is listed on your report that doesn’t look familiar to you, contact the credit bureau and submit a dispute letter.

For your own piece of mind, you may also want to contact the collection agency (Or have Elite do it for you) to determine the nature of the account. Here’s why.

  • You may find out that the collection account is NOT yours. Perhaps it belongs to someone whose name or social security number is very similar to yours. If this is the case, ask the collection agency to acknowledge this fact in writing. They should send a copy of the letter to you AND the credit reporting agency so that the mistaken information can be cleared from your report.
  • You may find out that the collection account IS yours. If so, it is in your best interest to determine the accuracy of the amount of the collection account and make arrangements to satisfy your obligation as quickly as possible. Once the collection account has been paid, you should request a letter from the collection agency to this effect. Again, make sure the credit reporting agency gets a copy of the letter so that they can list the account as paid.

 

Courthouse Records Section

This section may also be referred to as Public Records. Here you’ll find a listing of public record items (obtained from local, state and federal courts) that reflect your history of meeting financial obligations. These include:

  • Bankruptcy records
  • Tax liens
  • Judgments
  • Collection accounts
  • Overdue child support (in some states)

Look closely at all the information listed here. If anything is mistaken, contact the credit bureau and submit a dispute letter.

Additional Information

This section consists primarily of former addresses and past employers as reported by your creditors.

Inquiry Section

Contains a list of the businesses that have received your credit report in the last 24 months. If you find the names of businesses that sound unfamiliar, you should find out who they are and why they’re looking at your credit! The credit-reporting agency may be able to help you with contact information. Remember, only companies that have received your written authorization should be able to check your credit history.

Time information is retained

The length of time that information remains in your file varies.

  • Credit and collection accounts will be reported for 7 years from the date of the last activity with the original creditor.
  • If you’ve filed a Chapter 7 or Chapter 11 bankruptcy, this information will be reported for 10 years from the date filed.
  • All other courthouse records will be reported for 7 years from date filed.

As always, contact our office for more information. 909-570-9048

Medical Collections Deleted Once Paid?

March 3, 2015 by · Leave a Comment 

med coll

Rep. Waters tackles mortgage woes created by medical debts

4/26/13 1:05pm

U.S. Rep. Maxine Waters, D-Calif., proposed legislation Friday that aims to improve Americans credit scores by ensuring any ‘paid medical debts’ are removed from a person’s credit report within 45 days.

While a delinquency tied to a medical bill may seem less serious than a mortgage default, lawmakers are upset with the practice of allowing late payments tied to medical debt to stick to a borrower’s credit report for an infinite period of time.

Waters believes the practice creates downward pressure on credit scores, freezing out access to mortgages and other lines of credit.

Waters’ bill – H.R. 1767 – is the sister legislation to Senate Bill 160 introduced by Sen. Jeff Merkley, D-Ore.

Waters and the bill’s co-sponsors also asked the Government Accountability office to review whether medical financing options provided to consumers are fair and transparent.

Source: Housing Wire

http://www.housingwire.com/fastnews/2013/04/26/rep-waters-tackles-mortgage-woes-created-medical-debts

7 Sins of Credit & How To Repent

March 2, 2015 by · Leave a Comment 

THE 7 SINS OF YOUR CREDIT AND HOW TO REPENT

Why you're stuck with Bad Credit & How to get out!

Why you’re stuck with Bad Credit & How to get out!

In this day and age of living with plastic money, there are many temptations and errors in the way of living a healthy credit lifestyle. Credit can be a huge asset or an even bigger liability. This list will provide you the details you need to know and some advice on how to avoid the burden of bad decisions.
1. LUST (Galatians 5:16 But I say, walk by the Spirit, and you will not gratify the desires of the flesh)
a. Having that insatiable appetite to consume more and more. Applying for more credit cards, generating inquiries.
b. REPENT: Pause, then Pay with cash. Sit on it for 48 hours, and then pay with cash if you still have that urge.
2. SLOTH ( Colossians 3:23 Whatever you do, work heartily, as for the Lord and not for men)
a. What I don’t see won’t hurt me. Ignore your credit report, credit card statements, your checking account balance
b. REPENT: Check your credit report for errors for FREE at annualcreditreport.com
3. WRATH (James 1:20 For the anger of man does not produce the righteousness of God)
a. Emotions can run high when your money is on the line. Closing credit card accounts can lead to a dramatic decrease in credit score.
b. REPENT: Pay down your balance if you have one and just don’t use the card anymore.
4. GLUTTONY (1 Corinthians 10:31 … whatever you do, do all to the glory of God)
a. Maxing out your credit limit
b. REPENT: Keep your credit card balances below 30%
5. PRIDE (Proverbs 11:2 When pride comes, then comes disgrace, but with the humble is wisdom)
a. Loss of income, medical emergency or any other type of hardship can lead to a big burden to carry. It is not easy asking for help
b. REPENT: Reach out for help right away.
6. GREED (Proverbs28:25 The greedy stir up conflict, but those who trust in the LORD will prosper.
a. Cash advances on credit cards, payday loans, maxed out credit cards.
b. REPENT: Live within your means. Easier said than done sometimes but not impossible.
7. ENVY (Proverbs 14:30 A tranquil heart gives life to the flesh, but envy makes the bones rot)
a. Keeping up with the Jones’. Comparisonitis
b. REPENT: Find out if you suffer from comparisonitis and deal with roots of the problem.
Good Luck and God Bless,

 

For FREE Download of the full article click here:

THE 7 SINS OF YOUR CREDIT AND HOW TO REPENT

 

What NOT to Do to Your Credit Score

February 27, 2015 by · 1 Comment 

The NY Times posted a very interesting article on what the impacts, some very severe, can be for missing payments on mortgages and such. By taking a look at this article there will be fewer ways that you can get caught up in a mess of a poor credit score. Please follow the link below to the full article and as always, let us know what you think!

Mortgages

Fallout From a Poor Credit Score

The New York Times
By MARYANN HAGGERTY

 

IF you want to see how quickly you can ruin a great credit score, just skip a mortgage payment.

Lenders use credit scores to measure how you handle debt. The number you’ll see most often is your FICO score. It runs from 300 to 850. The major credit reporting bureaus developed a rival, VantageScore, with scores from 501 to 990.

Missed mortgage payments, serious loan delinquencies, loan modifications, short sales, foreclosures and bankruptcies all drag down credit scores. Because a mortgage is such a big slice of anyone’s credit profile, it carries more weight than other loans. Both FICO and VantageScore have studied and quantified those impacts.

They reached similar conclusions: for people with near-perfect records, a single mortgage payment that’s 30 days late reduces a credit score enough to hurt. For anyone, a short sale — selling a home for less than the amount owed — can be almost as destructive as a foreclosure.

In contrast, a loan modification — when the lender approves new loan terms — can have a “very, very minimal” effect, said Sarah Davies, the senior vice president for analytics at VantageScore. In some cases, the borrower’s score might drop 10 or 15 points.

With a loan modification, said Joanne Gaskin, the director of global scoring solutions at FICO, “the consumer does not have to go delinquent to get assistance.”

Modification horror stories abound; some borrowers have been told they can’t be helped unless they’ve already missed payments. That doesn’t have to be the case, said Josh Zinner, the co-director of the Neighborhood Economic Development Advocacy Project, a New York City nonprofit company active in foreclosure prevention.

The government-backed Home Affordable Modification Program, known as HAMP, specifically permits modifications for borrowers who can document hardship like a job loss, Mr. Zinner said. “What we advise people in New York to do” he said, “is reach out to a nonprofit loan counselor or to Legal Services in order to get a modification with a servicer.”

It’s not a perfect solution — HAMP has been criticized for not helping enough borrowers. There are plenty of paperwork hassles, and points in the process where credit scores are in peril.

Still, because of “some really profound consequences” to bad credit, modification is worth pursuing, he said. Employers increasingly check credit. Housing options may be limited. “Virtually all landlords look at credit,” he said, adding that getting a mortgage can be difficult. Car loan and credit card costs jump.

In a study last month, FICO looked at how choices would affect three hypothetical mortgage holders: One with a spotless 780 score; another with a good 720, who may have missed a couple of credit card payments three years ago; a third with a not-great, not-toxic 680, who has sometimes fallen seriously behind on credit cards or a car loan. (Most lenders consider poor credit about 650 and below, Ms. Gaskin said.)

¶30 days late: The gold-plated 780 drops to 670-690, the middling 720 becomes 630-650, and 680 is now 600-620. Effects are most significant for the strongest borrower. “A continued progression is going to have less and less impact on a score,” Ms. Gaskin said.

¶90 days late: This is seriously delinquent, and brings the onetime best borrower down to 650-670, the midlevel one to 610-630, and the weakest to 600-620.

¶Short sale, deed in lieu of foreclosure, or settlement, assuming the balance has been wiped out: The result is just a bit less serious. The 780 score deteriorates to 655-675; 720 to 605-625; 680 to 610-630.

¶Foreclosure, or short sale with a deficiency balance owed: For either, 780 is 620-640; 720 is 570-590; and 680 is 575-595.

At a certain point it might seem as if there was not much difference between bad and worse, but remember that the lower the score, the longer it takes to climb back.

http://www.nytimes.com/2011/04/24/realestate/24mortgages-credit-score.html?_r=1&hp

What is Credit?

February 26, 2015 by · Leave a Comment 


Here is part 1 of 7 in a series of video taped interviews with Adam Villaneda of Wholesale Capital Corp. We discuss Credit 101 in 7 easy steps. Follow us as we break down what you need to do as a consumer to place yourself in the best possible position for using your credit. Step 1 of 7 – What is Credit

Credit and Unemployment

February 25, 2015 by · Leave a Comment 

Credit background checks have become routine among employers, even as soaring unemployment and foreclosures have resulted in black marks on millions of people’s credit histories.

Credit checks are required for federal jobs with security clearances, but six out of 10 private employers check the credit histories of at least some of their job applicants, according to a recent survey by the Society for Human Resource Management.

Companies do so primarily to prevent or reduce crime, such as theft and embezzlement, the survey indicated. The idea is that people who have debt problems are more likely to steal or commit other crimes.

 

Overused and abused

I’ve been reluctant to weigh in against employers using credit checks, assuming companies would use some common sense.

Consider:

Thirteen percent of employers use credit checks for all their employees, including those who don’t handle money, have any fiduciary or financial responsibilities, or even access to sensitive information. There’s no evidence credit checks are effective in preventing crime even in financially sensitive positions, so how can we justify them for anyone else?

Twenty-five percent acknowledged that a bankruptcy on an applicant’s credit report would most likely result in a decision not to make a job offer. Here’s the problem: Using a bankruptcy as a decision not to hire (or to fire or to refuse a promotion) is illegal under federal law.

A majority (65 percent) allow applicants to explain credit-check results before the final hiring decision is made. But 22 percent allow applicants to explain only after a decision is made, and 13 percent don’t allow any explanation. Even if employers are convinced that credit checks prevent crime, why wouldn’t they want to know if an applicant was the victim of identity theft or ran up debt for a life-saving operation for their child?

If companies aren’t willing to use a little common sense on their own, maybe some needs to be imposed on them.

No evidence supports use

There’s no hard evidence that links bad credit and bad morals.

“At this point we don’t have any research to show any statistical correlation between what’s in somebody’s credit report and their job performance or their likelihood to commit fraud,” Eric Rosenberg, the state government liaison for TransUnion credit bureau, conceded in testimony to Oregon legislators.

Rosenberg was actually arguing against a state bill that would limit employers’ ability to use credit checks. TransUnion and other credit bureaus that provide the reports say they’re an important tool for evaluating applicants.

The arguments didn’t sway the Oregon Legislature, which recently passed a law prohibiting credit checks for hiring, firing, promoting or determining compensation for most workers. Exceptions were made for financial institutions, public-safety offices and other employment if credit history is important to a job and a background check is disclosed to the applicant or employee.

Washington state and Hawaii already have curbed widespread use of credit checks in making hiring decisions. Other states are considering similar laws, and U.S. Rep. Steve Cohen, D-Tenn., has sponsored a bill that would ban employment-related credit checks nationwide except when the job:

- Required a national-security or Federal Deposit Insurance Corp. clearance.

- Was with a state or local government agency that otherwise required the use of a consumer report.

- Was in a supervisory, managerial, professional or executive position at a financial institution.