California Credit Law Blog

Yesterday, the Wall Street Journal reported that 25% of Americans now have credit scores less than 600. This compares to 15% before the rescission.

This means one in four consumers cannot get a mortgage loans unless they qualify for some special program. 650 is the cutoff score for Fannie Mae or Freddie Mac to accept mortgage loans. Persons with such scores will have a tough time getting a car loan at a reasonable rate. Landlords may not rent to them. Employers may not hire them.

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NY Time' columinist Joe Nocera's report on the tyranny of credit scores is right on the money. He points out that Fannie, Freddie and the banks that write mortgages depending on one thing--the applicant's credit score. Nocera gives examples of perfectly credit-worthy consumes whose credit scores are low for odd and irrelevant reasons. For example, a consumer's "credit utilization may be high on only one credit card. Using FICO's formula, this adversely affects the credit score,

But Nocera notes that it is not FICO that comes up with a borrower’s score — it just sells the algorithms. The three national credit bureaus, TransUnion, Equifax and Experian, gather input about the prospective borrower’s lending history from various lenders like credit card companies and auto dealers, plug them into a formula and derive a credit score.

Nocera writes that you would think, given the critical importance of an accurate score, that there would be rules about the information that is submitted to them. But there are no rules. "Lenders can submit information about your credit history to one of the bureaus, all of them or none of them. Some of them turn over information right away; some take months; some don’t do it at all. Some are sticklers for accuracy; others are sloppy. The point is that the credit score is derived after an information-gathering process that is anything but rigorous.

He adds that FICO scores are not even the best predictor whether someone will default. The amount of equity a person has in his home, his debt-to-income ratio, his job stability and his cash reserves are all better predictors than credit scores according to the chief executive of Primary Residential Mortgage, a leading mortgage lender.

Moreover, lenders don’t take into account the many, mistakes that are found in credit reports. He mentions a number of errors on his own credit reports. TransUnion is reporting that Nocera works for Rite Aid!

Ed Mierzwinski, who is with PIRG in Washington, D.C., tracks Fair Credit issues. His equally interesting report on credit scores and some pending legislation is below the fold.

Continue reading "Joe Nocera's Terrific Report on the Tyranny of Credit Scores" »

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Today, the San Francisco Chronicle reports on the problem of homeowners who get a loan modification and who end up with a ding on their credit reports. The problem is that the banks holding the mortgages report the homeowners are late on their payments or that they are paying less than is owed. Either way, the consumers' credit scores suffer. This in turn often causes banks to increase credit card interest rates and to reduce credit limits. That in turn may impact consumers' ability to get credit. There should be a legislative fix for this problem.

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The Senate passed an amendment that will allow consumers free access to their credit score if their score negatively affects them in a financial transaction or a hiring decision. The amendment was offered by Senator Mark Udall, Democrat of Colorado.

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Posted In: Credit Scores , Legislation

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A Wisconsin woman has filed a class action alleging that Experian's FreeCreditReport.com ads led her to believe she could go to that site for a free credit report. Once she signed up for her "free" credit report she inadvertently ended up with a a $14.95 monthly bill for a credit monitoring service. The complaint alleges no one goes to the site for anything other than a free credit report.

According to Evan Hendricks, author of Credit Scores and Credit Report, a frequent critic of the credit reporting agencies, consumers have paid the agencies for 160 million credit reports over recent years. Congress mandated that the agencies make available one free credit report for each consumer in a given year. The truly free reports are available at www.annualcreditreport.com. Consumers have downloaded 52 million reports from that site.

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Borrowers taking part in the Obama administration's mortgage modification program are being hit with "partial payment" notifications in their credit reports. This damages the borrower's credit even though the borrower may never have been late in payments. For more information, see the NY Times "bucks" blog dated January 5, 2010.

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Banks and other creditors commonly extend credit based on your credit score. Your score is based on such factors as late payments, missed payments, number of open accounts, length of one’s overall credit history, actual amount of available credit used and negative occurrences such as charge-offs and bankruptcy.

FICO, a company that created credit scoring, has long kept its exact formula secret. Until Thursday, FICO revealed only broad categories of factors influencing the score, but not the number of points at stake for consumers who fail to pay as agreed. The "damage points" information will be made available through its myFICO.com Web site starting this weekend.

FICO's information shows that bankruptcy does the most serious damage to a credit score (up to 240 points), followed by foreclosure (up to 160 points) while maxing out a credit card has the least numerical impact (as few as 10 points).

Those with good or excellent credit -- so-called prime borrowers -- put more points at risk with each mistake. For example, someone with an average credit score of 680 who pays a bill 30 days late will see a drop of 60 to 80 points. But for someone with an excellent credit score -- 780 -- that same delinquency can send a FICO score tumbling by 90 to 100 points.

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Consumers are being bombarded with "free" offers for credit reports and credit scores, but there is usually a catch. The consumer may find the free report means being subscribed to requires monthly charges unless he or she remembers to opt out. Or in order to get a free report, there is a fee for the credit score. More ways Experian, TU and Equifax make money.

However, www.creditkarma.com really does offer a free credit score. The only catch, and it is not much of one, is a lot of advertising. The advertising seems easy to ignore. There is a fair amount of information on credit reporting and Credit Karma promises never to share your information.

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What you need to know about credit scores is covered in the Wall Street Journal published 9/9/09. The article points out that there are really many credit scores besides the best known--FICO--and your credit score may not accurately reflect your financial condition. 30% of FICO scores are based on credit utilization, 35% on paying bills on time, 10% on your type of debt, 10% relates to the number of new accounts, and 10% the length of time you have had credit. Positive accounts stay on your credit reports indefinitely and closed accounts stay on 7 years, which is the same as derogatory accounts. Once you achieve a score in the mid-700s, you are likely to get as good an interest rate as someone in the 800s.

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The three major credit bureaus charge fees for revealing consumers' credit scores. However, two new sites, www.creditkarma.com and www.quizzle.com, offer free credit scores based on Trans Union and Experian data. The sites allow you to compare your score to a sample of other consumers. You have to register to get the scores, but the sites promise they won't share your data with yours.

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In its January 4, 2009, edition, the Wall Street Journal reports that it now takes a 760 FICO score to get the best rate on a 30 year mortgage, 740 for the best rate on 15 year mortgages, and 720 for the best 3 year auto loan rate. Formerly, 720 would get the consumer the best rates on these loans. The inflation in required credit scores is a result of the current credit crunch.

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Your credit score, also often referred to as a FICO score, is a three-digit number that is designed to gauge your creditworthiness. Lenders use it to assign interest rates on things such as auto loans, mortgages and credit cards, among other borrowings.

The score, called FICO, ranges from 300-850 and is calculated by Fair Isaac Corp. using information from the three major credit reporting agencies: Equifax Inc., Experian, and TransUnion.

On 12/31/08, the Wall Street Journal reported that Fair Isaac states that a credit score is made up of five components:

* 35% reflects payment history: whether or not you pay your bills on time to a lender that reports to one of the three credit-reporting agencies.
* 30% reflects amounts owed: how your credit limits compare with the balance you carry; the more you carry from billing cycle to billing cycle, the lower your score.
* 15% reflects length of credit history: the longer your credit history, the better ability lenders have to see your track record.
* 10% reflects new credit: how many accounts you've opened recently.
* 10% reflects types of credit used: the mix of accounts -- student loans, credit cards, mortgages, etc.

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Evan Hendricks is a leading expert on credit scores and credit reports. His book, aptly named Credit Scores & Credit Reports, How the System Really Works, What You Can Do, 3d Edition, is now available in paperwback on Amazon. Anyone interested in how the credit bureaus operate should read this book.

Hendricks covers credit scoring, obtaining your credit report, disputing errors, identity theft, mixed files, reinvestigations, so-called credit repair, debt collection, and other topics.

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Posted In: Consumer Credit 101 , Credit Reports , Credit Scores

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When a consumer seeks credit, the lender will report an inquiry on the consumer's credit reports. When a bank sends out a pre-approved loan application or makes an account review, the bank reports that event as an inquiry. The former inquiries are known as hard inquiries and the latter as soft inquiries.

Consumers reading their reports worry the inquiries are reducing their credit scores. However, the soft inquiries do not affect credit scores at all and the hard inquiries lower credit scores but not very much.

For most people, one additional hard inquiry will takes less than five points off the FICO score. Inquiries can have a greater impact if bunched together. A large number of inquiries might mean someone is in trouble financially. However, Fair Isaac, the company that created FICO scoring, now counts multiple auto or mortgage inquiries in any 45-day period as just one inquiry. In addition, the score ignores all inquiries made in the 30 days prior to the scoring according to Evan Hendricks, author of the book, Credit Scores & Credit Reports. Hard inquiries more than 6 months old are not counted at all.

Continue reading "Inquiries & their Effect on Your Credit Score" »

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Credit scores are determined using formulas designed to predict how likely a consumer will pay his or her bills. Fair Isaac is the leader having created the FICO credit-scoring formula. Fair Isaac has announced its formula will be revised this year. The new formula will deemphasize the effect of one late payment on your credit score on an otherwise unblemished record.

Fair Isaac states the company's analysts pulled reports of 5 million consumers to see how their credit profiles fared over time. More information may be found in a recent issue of SmartMoney magazine.

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Consumers Union has released a report on the "free" credit reports available on the Internet that are not really free. The study looked at 24 sites were consumers are enticed to obtain free credit reports but only if they agree to pay for their credit scores and other services at the same time. Some sites offer free credit reports and free credit scores, but only if the consumer signs up for a credit monitoring service.

Almost all the sites discouraged consumers from going to annualcreditreport.com, which is the one site where consumers may, once a year, get a free credit report from all three of the major credit bureas.

According to Consumer Reports, very few people need credit monitoring services. Consumers can check with their own credit for free or at low cost by periodically going to the credit bureaus own sites and paying a small fee ($5.95 for Experian and $7.95 for TU and Equifax).

Once a consumer signs up for credit monitoring, it can quite difficult to cancel. In 16 of 18 cases, the consumer has to call someone to cancel after going through an initial sign in process on the site. All to discourage consumers who want to quit.

Turns out Experian and TransUnion between the two of them own 15 of the sites. For example, Experian owns FreeCreditReport.com and TransUnion owns free-creditreports.com

Bottom line--don't go to any site other than annualcreditreport.com and the credit bureaus individual sites (Equifax.com, Experian.com and TransUnion.com).

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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

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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.

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