California Credit Law Blog

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.

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

Posted In: Credit Scores

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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).

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

Posted In: Consumer Credit 101 , Credit Scores

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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

Posted In: Credit Scores

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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

Posted In: Credit Scores

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