California Credit Law Blog

How do consumers get the best deal on credit? Most people know that furnishers--the lenders that supply credit--look at consumers' FICO scores. The higher the score, the better deal the consumer will get. That means a lower mortgage rate or a more favorable interest rate on a new car.

But how can consumers increase their credit score? A recent article debunks some of the more common myths about how consumers' credit scores can be affected.

1) Closing Accounts Do Not Help Your Credit Score! Credit scoring formulas look at the difference between consumers' available credit and what they are using. So, for example, if a consumer has four credit cards with $10,000 limits and has maxed out all four, that means the consumer has no available credit and $40,00 in credit they are using. That person's credit score will be much lower than someone who has the same cards but only a $1,000 balance--leaving $39,000 in available credit. Closing credit accounts will shrink the available credit, thereby lowering the score.

2) Checking Your FICO Score Will Not Hurt Your Credit! What exactly is a FICO score, anyway? All three of the credit bureaus, Equifax, Experian and Trans Union, offer FICO credit scores using the formula developed by Fair, Isaac. But each bureau labels the scores differently, adding to the confusion. Equifax calls the FICO the Beacon credit score. TransUnion calls it Empirica. Experian names it "Experian/Fair, Isaac Risk Model."

Whatever it's called, checking your own credit report will not affect your score. And multiple inquiries from potential lenders for the same thing--for example, if you're shopping for a car loan or a mortgage--won't hurt you, either. Just make sure to do your shopping efficiently, since the FICO score treats multiple inquiries in a 45-day period as just one inquiry.

3) Credit Counseling Will Not Hurt Your Score As Much As A Bankruptcy! Many consumers are afraid to try credit counseling to handle outstanding credit that they find impossible to manage. Credit counselors will often work out arrangements with credit furnishers in which consumers pay lower balances over time. These arrangements will adversely affect your credit, because you are essentially making your payments late. If you're current with your debts, it's probably a good idea to avoid credit counseling. But sometimes a good credit counseling agency is the best solution to get credit-troubled consumers back on track.

4) You Need to Check More Than Just Your FICO Score! Consumers should be sure to check their scores from all three credit bureaus before applying for at big loan like a mortgage. Many mortgage lenders take the middle score from the three bureaus when evaluating your credit, so consumers should fix any problems in all three reports before shopping for a loan. Consumers can order all three scores here.

The bottom line is pretty simple. Don't use or apply for more credit than you need; pay your bills on time; and correct any errors in your credit report.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Credit Scores

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Identity thieves can deplete your available credit in no time. Dateline recently tried an experiment and documented it on video to test just how quickly sophisticated identity thieves could operate. It teamed up with a major credit card company which issued a couple of genuine credit cards under fake names. Then Dateline, with an identity theft expert posing as a thief, posted the bogus credit cards in underground chat rooms on the Internet. A fraud investigator for the credit card company monitored how much time it took for a thief to use the fake cards and max out the cards' $1,000 credit limit.

For the first credit card, the initial "hit" took only 12 seconds. The thief first began to make fraudulent charges in small amounts--like an $11 contribution to the American Red Cross--apparently to see if the card really worked. Once the thief figured the card was genuine, charges began to pile up in increments of hundreds of dollars. In less than 13 minutes, the credit card was declined for reaching its $1,000 limit.

The second credit card was maxed out in less than two minutes. This time the thief charged more than $700 in dog food alone. Illustrating the prevalence of identity theft wordwide, while the bogus card was issued for a fake person in Washington, D.C., someone in Chile charged the dog food.

The results of Dateline's experiment are illuminating. Identity thieves are operating wordwide through the Internet, and they are lightning quick and brutally efficient.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Identity Theft

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Your credit score basically predicts the possibility that you won't pay your bills. Creditors figure that the higher your credit score, the less likely you are to miss payments. Most credit scores on based on the Fair, Isaac & Co. model, known as FICO scores. But why is your credit score important? A recent article by Kiplinger's Personal Finance Magazine explains who relies on that score:

1) Lenders. Most people would expect lenders to look at their credit scores, and indeed they do. Your credit score affects the rate you pay on your mortgage, your car loan and your credit cards.
2) Insurers. You may wonder why insurers would charge a higher rate for insurance just because you may not be so reliable in paying your bills. Yet most car insurance companies and many home insurance companies view your credit score before deciding your insurance rate. The difference in a good score or a bad score can make a huge difference in how much you pay for insurance.
3) Landlords. A low credit score may not result in a higher monthly rent, but it may require you to have a co-signer on your apartment lease or to make a bigger security deposit.
4) Employers. You must give your permission for a potential employer to pull your credit score, but 35% of them will do so if you give your okay. Why? Bad credit can be a sign of irresponsibility.
5) Cell phone companies. Again, they want to be sure you're responsible before they finalize your contract.

How do you improve your credit score? According to the article, the two most important factors--counting for about 2/3 of your credit score--are paying your bills on time and having available credit. Paying your bills on time seems obvious, but many people don't realize how severely a few late payments can hurt their credit score. Having available credit means you should never max out your credit cards. You shouldn't use more than 30% of the available credit on any card to get the maximum benefit.

Even people with poor credit or no credit--like college students--can improve. If you're a college student, limit yourself to one credit card and pay it off in full each month. If you're having credit problems and want to re-establish your credit, consider a "secured" credit card, that will require a deposit of $300 to $5,000. You can improve you credit significantly by making timely payments on a secured card, just the same as a regular credit card.

Posted by Carol McLean Brewer | Permalink | Email This Post

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Will and Gracie Tan suffered through identity theft, fake credit cards in their name, had their bank accounts raided and then learned that their tax refund was going to someone else, as Ken Garcia recently reported in the San Francisco Examiner. The Tans' horrible experience illustrates how much damage sophisticated identity thieves can inflict upon consumers' credit--and their bank accounts--with a few key items of identification.

The Tans' problems seems to have started last year, when they refinanced their mortgage. Garcia's column doesn't say who actually stole their identifying information, only that a ring of thieves in El Paso, Texas ended up with it. Those thieves knew what they were doing--they promptly opened new fraudulent credit card accounts and stole $5,000 from the Tans' checking account. Apparently because the Tans were diligent in monitoring their bank accounts, they were able to get a refund from the Bank of America. They also had a lucky break in discovering that Macy's said they owed $1,500 that they hadn't charged, which led to their discovery that other fraudulent accounts had been opened in their name. But then they learned from the IRS that a tax refund was on the way, and they hadn't filed yet.

According to Garcia, The Examiner reported recently that the number of fraudulent tax filings is on a steady rise, with tax cheaters using computers to create fake W-2 forms that IRS officials admit are nearly identical to the real thing. IRS officials and tax preparers say 2007 may be a banner year for tax fraud. Worse, once a fake tax return has been filed, consumers are unable to file their legitimate tax return electronically. This creates a bureaucratic nightmare for consumers, especially when they are expecting refunds which they discover are being sent to someone else.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Identity Theft

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Many thousands of California consumers have bought houses--or refinanced them--using "subprime" loans. Subprime loans are offered at higher than market rates to people with impaired credit. Often these loans are structured with little or no money down. Often the mortgage rate is adjustable, beginning with an attractively low interest rate that increases as the loan ages. Both the consumer and the lender essentially make a bet that house prices will continue to climb.

If they win the bet, then the consumer builds equity in the house just because the house's value increases, not because the consumer pays down the loan. The consumer might be able to discontinue private mortgage insurance. It's a win-win situation.

The problem is that house prices have been slumping in most places. According to an article in USA Today, a whopping 14.4% of adjustable-rate subprime loans are currently delinquent. Consumers trying to deal with those delinquencies and keep their houses out of foreclosure are facing real difficulties because most U.S. mortgages are now put into trusts, repackaged as bonds and sold to market investors. That means the consumer can no longer deal with Home Town Savings and Loan, but must negotiate with a lender that could have multiple security instruments with different terms that all impact the consumer's loan.

It's a huge problem for consumers. The Federal Reserve, as well as state and federal lawmakers, have all been looking for a solution to the default problem because no one wants to see consumers lose their homes. We shouldnd't expect a silver bullet or a uniform remedy, however, because the issue is so complex.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Subprime Loans

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What consumers don't know about credit can really, really hurt them, according to James Scurlock. Scurlock produced the excellent new documentary, Maxed Out, as a result of Scurlock's quest to find out why America can't get itself out of debt.

Scurlock's Newsweek article this week makes five points:

1) A high credit score doesn't necessarily mean you can pay your debts; it just means you have lots of available credit.

2) Banks will lend you more than you can afford to pay back because they make most of their profits on the least responsible consumers.

3) Bankruptcy is not an easy way out of debt; most bankrupt Americans finally resort to bankruptcy only after their banks have demanded upward of three times what they had originally borrowed.

4) The government is not looking out for you. Congress and the courts have repeatedly sided with industry over the consumer.

5) Credit card agreements and mortgage documents are so complex that even experts have difficultly understanding and interpreting them, let alone the average consumer.

Scurlock's observations serve to remind us that the consumer must be her own best advocate. About the most important thing you can do is obtain your credit report once a year and be vigilant about reporting anything that doesn't belong there. Although it seems counter-intuitive, you should complain to the credit reporting agency that reported the bad information (Experian, Equifax or Trans Union), not the credit furnisher (bank or finance company). The credit reporting agency then has a legal obligation to investigate the bad information and correct it. If it refuses to do that, you may have a right to take legal action.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Consumer Credit 101

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Consumers should use their hard-earned credit to buy products that are safe and effective. But sometimes it's difficult--if not impossible--to keep track of hazardous products. In 2006, the U.S. Consumer Product Safety Commission (CPSC) recalled a record 466 products!

The CPSC wants to help, encouraging consumers to "spring clean for safety" by signing up to receive information on hazardous products that have been recalled. Consumers should be particularly diligent about checking products like grills and outdoor furniture; children's products; household products; and electronics.

You can receive notice of recall information as it is released by signing up with the CPSC. Registration is free and it could save your life or the life of a family member.

Posted by Carol McLean Brewer | Permalink | Email This Post

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You can get rid of unwanted credit card offers in the mail. Go to their website, which is the direct mail marketers site. Go to consumer assistance; once you have registered (it costs $1), you are protected for five years. It takes a few months, but the unsolicited mailings should stop. Reducing this type of mail reduces the chances someone will steal the mail and apply for credit in your name.

Posted by Mark F. Anderson | Permalink | Email This Post

Posted In: Credit Cards

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Credit cards scammers have a new tool to defraud consumers. Most people have heard of "phishing," when fraudsters ask consumers to reveal personal credit information in response to a fraudulent e-mail message. This new scam is called "vishing"--phishing by phone.

Fraudsters prompt this new scam either by e-mail message or by a phone call, which can be recorded or live. Typically consumers will be asked to type in an account number or other information over the phone. The thief then uses this information to steal credit or for identity theft.

Thieves often use huge lists of consumers' names to make cold calls, saying they are calling on behalf of well-known banks and familiar companies. They hope the targeted consumer will be a customer and will return the call thinking the creditor is genuine.

Banks say if there is a legitimate problem with a customer account, a real person will call from the bank's fraud control department. Banks would never send automated messages asking consumers to type in sensitive information over the phone.

If you get a call that sounds suspicious, hang up. Use the phone number printed on the back of your credit card to call back and ask the bank about the call you received. If you have been a "vishing" victim, report your experience to the FTC's identity theft website.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Credit Card Scams

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Call centers in India have been defrauding British consumers by selling their personal financial data for as little as eight British pounds, less that ten U.S. dollars. This video illustrates the shockingly wide-ranging practice of call centers' theft of consumers' valuable personal information, which is then quickly offered for sale. Unfortunately, this data theft is spread among a number of banks, not just one or two. One of the British journalists reporting the story questioned whether this wide-spread practice was exacerbated by the banks' decision to move their call centers out of Britain to save money.

The same type of theft could easily happen to American consumers. Protect yourself by always reviewing your credit card statements to make sure your haven't been charged for anything that's not yours. Also, check your credit report at least one a year.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Credit Card Scams

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