Credit Scores

Millions of Americans are seeking employment in 2010, and everyone wants their job search to turn out successful. But some are focused on raising their FICO score before they submit job applications, despite the fact that employers could care less about your FICO score. Why then do so many people have this misconception? It’s because while an employer may request a copy of your credit report and review it, they don’t actually pay any attention to your FICO number – a statistic that most employers have no legal access to even if they did want to take a peek at it.

Any employer wants to hire the best and most responsible people possible, and they will do whatever they can to screen out the better applicants from those who are sub-par. It costs many times more to hire and train a new person than it does to make a smart hire and employee someone who will stay with the company for years and continue to provide excellent performance, so businesses take their hiring seriously. They will often review a job applicant’s credit report to get an overall picture of how responsible that person happens to be, and whether or not they are good at handling money and financial affairs.

But the FICO score is a different kind of tool and measurement. That number represents risk – or the lack of risk if the FICO score is high – in terms of whether or not the person will repay a loan. Unless your next boss is planning to lend you some money, knowing your FICO score will not really do him or her much good. The FICO score is going to be used instead by someone like a banker or mortgage officer who not only wants to know what is contained in your credit report but also wants to see your track record for debt repayment.

So if you are worried about your credit score while applying for a job, stop fretting over it. A high FICO score is nice, but won’t really help you land that dream job. You should instead concentrate on the credit report itself, and take steps to clear up any problems or errors in it before you go for that big job interview. It’s not strictly a numbers game, in other words, but your employer may want to see a credit report with no financial red flags.

Everyone who wants to have a better credit score focuses on those aspects of their history that will give their FICO score a boost. But most consumers fail to realize that the majority of the calculations that are used to determine their all-important credit score have nothing to do with whether or not they pay their bills on time. The fact is that only about 35 percent of your FICO score is based on payment history or making payments in a timely and responsible fashion. The majority of FICO calculations are based on such things as the ratio of your income to your overall debt, the percentage of your credit card balances that are used and carried forward from month to month, and the frequency of your credit card applications.

If you are in the habit of maxing out credit cards, for example, that can torpedo your FICO score. You can also get credit score demerits if you apply for many credit cards, because each time your credit report gets requested by a lender you’ve submitted an application to it dings your score. Apply for a slew of department store credit cards at the mall during a shopping spree, for instance, and you’ll get some great discounts on purchases but might wreck your FICO number. Another way to drag down a FICO score is to have credit for too short of a time. The folks at FICO want to see a long track record of credit. So even if you do pay bills on time, you need to take all these other factors into consideration in order to really raise your score.

A good place to start is to order a copy of your credit report and review it. By studying it you will start to see the kinds of data that credit companies collect, and that will give you an indication of where your own credit history strengths and weaknesses lie. You can also consult a credit counseling professional or talk to your own banker. They can explain smart ways to raise a credit score in the shortest possible amount of time and then keep it high through smart credit and borrowing practices.

Like it or not: How much you pay for credit, and whether you’re granted credit at all, depends to an ever-increasing degree on your credit score.

Perhaps the most widely used credit score is the FICO score, named after the company that created it, the Fair Isaac Company (which was not named for a fair-minded guy named Isaac). Using a very complex algorithm formula, based in large part on your credit history, your FICO score supposedly tells would-be creditors how risky it would be if they granted you credit. As your score increases, the risk decreases (although people with high FICO scores may be just as likely to lose their jobs—and their ability to pay their bills—as those with low scores).

According to a 2008 book called American Credit Repair, here (summarized) are the five main factors that make up your FICO score:

1. Payment history: 35%. Late payments cause the worst damage to your credit report. Timely payments within the past 12 months can help improve your score.

2. Balances: 30%. According to FICO, if you don’t pay your balances in full each month, you have a poor ability to manage money. (If you do maintain a balance, it’s best to keep it no higher than 30% of your credit limit.)

3. Length of credit history: 15%. The longer you’ve been with each creditor, the better it looks.

4. New credit: 10%. New accounts will have a negative impact on your score for about six months.

5. Types of credit: 10%. It’s better to have a mortgage than a bunch of credit cards, some say. (Probably because there’s real property involved.)

Ever wonder if you lived in a state whose constituents have good or bad credit?

Experian offers a dedicated website named National Score Index,  which provides a summary of geographic credit information based  on debt levels (debt to income), credit usage (number of accounts), minimum monthly payments (amount due each month), open credit card accounts (active versus closed), late payments (history of payment timeliness) and number of credit inquiries (applications for credit). All of these variables factor into a “score index” that is similar in rating to that of a consumer credit score. Overall, Experian rates the US National average credit score to be 693. While it differs by big three credit bureau, Experian uses a credit worthiness scale of 330 (Highest Credit Risk) to 830 (Lowest Credit Risk).

Top 5  | Credit Score States

1. Minnesota – 722
2. North Dakota – 720
3. South Dakota – 720
4. Vermont – 717
5. Montana - 716

Bottom 5 | Credit Score States

1. Texas – 669
2. Nevada – 671
3. Mississippi – 673
4. Louisiana – 674
5. South Carolina – 675

According to the Experian Score Index, New England (VT, NY, MA, NH, CT and RI) is the region of the country with the highest rating of credit worthiness - 713. The West South Central area of the United States has the lowest rating of credit worthiness – 673.  Below is a list of average credit scores listed by state.

State | Average Score

Alabama - 680
Alaska - 692
Arizona - 682
Arkansas - 684
California - 691
Colorado - 697
Connecticut - 711
Delaware - 696
Florida - 684
Georgia - 678
Hawaii - 710
Idaho - 706
Illinois - 700
Indiana - 697
Iowa - 714
Kansas - 702
Kentucky - 690
Louisiana - 674
Maine - 709
Maryland - 697
Massachusetts - 715
Michigan - 696
Minnesota - 722
Mississippi - 673
Missouri - 695
Montana - 716
Nevada - 671
New Hampshire - 716
New Jersey - 706
New Mexico - 677
New York - 700
North Carolina - 682
North Dakota - 720
Ohio - 697
Oklahoma - 685
Oregon - 705
Pennsylvania - 705
Rhode Island - 706
South Carolina - 675
South Dakota - 720
Tennessee - 689
Texas - 669
Utah - 700
Vermont - 717
Virginia - 701
Washington - 707

Region | Average Score

United States Overall - 693

Pacific - 695
Mountain - 790
West North Central - 709
West South Central - 673
East North Central - 699
East South Central - 684
South Atlantic - 686
Middle Atlantic - 703
New England - 713

760 is the new 700. Prior to the credit market collapse, you could feel pretty safe in assuming that you would get the best of everything that credit had to offer with a score above 700.  You could feel confident that you had an excellent or good credit score that banks would deem attractive to obtain you as a customer. However, with the recent changes to the financial market, this safety blanket no longer exists.

As credit card companies tighten credit standards and group potential applicants into categories of lending risk, you may find yourself lumped together with other card holders who are having a difficult time. This means that if you have a score of 700, and 700 or less is shown as more being more risky based on a bank’s risk analysis – you could be affected. While a credit score of 700 isn’t anything to be discouraged about, its best to just realize that it isn’t as stellar of a score as it once was.

The best thing to do to raise your score: Pay your bill ahead of schedule and reduce your outstanding debt balances to under 25% of the available credit amount.

We recently received an email from a fairly new credit card holder who had been told that carrying a balance on his credit card would actually improve his credit score.  He was writing to ask whether what he had been told was true. That may be one of the most misunderstood practices of credit card usage. 

Two things that creditors consider most are:

(1)  Whether bills are paid on time

(2)  The debt to credit ratio or how much of an available credit line the card holder is using

In other words if you have three cards with a total credit limit of $6,000 and you carry balances totaling $5,000 then your debt to credit ratio is very high. Paying your balances down completely or at least somewhere under 50% of your credit limit (in this case $3,000), will actually result in improving your credit score.  So, the correct answer is that first and foremost you should pay at least the minimum amount due on time, every time.  And, the other part is that your credit history will actually be improved if you keep your debt to credit ratio low. Using the card for purchases on a monthly basis and then paying your entire balance off within the grace period will send a strong message to the credit bureaus that you are responsible with your credit card and, as a result, your credit score will likely improve.

Other Resources:

• Wall Street Journal: Tackle credit cards now
• How to get out of credit card debt
• Asking for a Lower Credit Card Rate

Less than one week ago, Salle Mae's computer system incorrectly reported graduated or extended repayment plans for student loans as arrangements for partial payment. This caused the Credit Bureaus to tag just under 1 Million borrowers as delinquent sending their credit scores plummeting. Some claimed to have drops of over 100 points.
 
The problem was corrected within a few days and all that were effected should see their scores back to more normalized levels. While many of the roughly 1 Million people effected probably didn't even realize that anything had happened, I imagine there were at least a few dozen people that tried to obtain credit, applied for a new job, or signed a rental application during that time -- only to be turned down.

This story hasn't gotten too much press, however, it helps to underscore the unfair stranglehold creditors have on our credit reports and scores.

BusinessWeek was one of the few publications to run details on what happened.

Other Resources:

• Lenders Errors Can Hurt Your Credit Score
• Student Credit Cards
• Sallie Mae Changes Its Student Loan Ways

There is an increasing trend in the collection business --- outsourcing the collection work to call centers in India, Romania, Mexico, and the Philippines. Collection Agencies and Junk Debt Buyers are finding that the call centers in these countries are quite effective in their collection efforts, and at a fraction of the cost of using employees in the United States. These call center reps are trained to be firm but empathetic. They are also using the tax rebates that are currently going out as leverage to collect. Not a bad strategy - it's a lot harder to say you can't pay an old collection because you're broke when you and your husband have $1,200 coming your way.

With collection calls, the first question is often how do you get them to stop?
 
The first thing you should do is familiarize yourself with the

Fair Debt Collection Practices Act (FDCPA). The law is intended to regulate how and when Collection Agencies attempt to collect on a debt. If they are acting outside the bounds of what the FDCPA allows, a properly drafted letter sent certified mail with a returned receipt will often help in reducing the harassment. Another popular strategy is to request the Collection Agency to validate the debt. Essentially, if they are unable to provide you with the following, they are unable to collect on the debt:
 
1) Proof that they own the debt or have been assigned the debt.
2) Complete payment history, going back to the original creditor.
3) Copy of the original signed loan agreement, credit card application, or contract.
 
Since many Collection Agencies and Junk Debt Buyers are now buying old debts in large quantities, they often have nothing more than a spreadsheet with contact information and amount owed. They are unable to validate the debt and must cease collection activities and stop reporting the information to the credit bureaus.
 
If you are planning on taking a Collection Agency on, be wary....Collection Agencies seem to be more aggressive with the threat and filing of lawsuits against consumers these days. While most will back down from a well informed consumer, some will try to bully you with threats of legal action. The best way to know your rights are being protected and enforced is to consult with an attorney familiar with this area of the law.

Other Resources:

• Debt Collection Gets a Polite Indian Touch
• Credit Card Consolidation Loans
• Spanco Respondez partners with MRS Associates

 

If you have a negative listing on your credit report, the three Credit Bureaus (Equifax, Transunion, Experian) will allow you to submit a written explanation of your side of the story that will be provided to prospective creditors when accessing your credit file. For example, let's say you went 60-days late on a mortgage payment 8 months ago because your spouse lost their job and you were unable to meet your monthly obligations until they found a new job 2 months later. The Credit Bureaus will permit you to explain this in your credit file. The assumption is that a creditor will possibly overlook a poor FICO score due to the explanation you provided. Isn't that great?
 
This is a complete waste of time! Most creditors rely on automated risk models that are unable to take into account these written explanations and as a result put all the weight on the actual FICO score -- not your explanation of why your score should be higher. Furthermore, providing a written explanation does nothing but verify with the Bureaus and creditors that you were in fact late on your mortgage payment (in the example above). Don't bother providing a written explanation to be included with your credit file. If you have already, request that it be deleted.

Other Resources:

• How to Protect Your Rights
• Fixing Errors in Credit Report is No Small Task
• More People are Freezing Credit Reports

In recent months, many of the nation's largest lenders have begun to freeze their customers' home equity lines of credit. Defaults on these "second mortgages" are increasing, and since they are in a second lien position, often times lenders are unable to recoup all or some of the amount owed if and when a home is lost to foreclosure. In response to this, some lenders are sending out notices to their customers letting them know they are no longer able to draw against their equity lines of credit or the size of the equity line of credit is being reduced dramatically to help reduce the risk to the lender.
 
Going a step further, some banks are contacting customers who have open equity lines of credit with no balance and encouraging them to close them (to prevent them from drawing against them) while the bank is willing to waive the early termination fee. In their notices, they are often telling customers that they will report to the credit bureaus that the account has been paid as agreed which will lower the outstanding level of indebtedness reported on that individual. The wording is often misleading in that it hints you will see an improvement in your credit score by taking the lender up on their offer.
 
Do not be fooled! The banks are not making this offer to help you - they are doing it to reduce their risk. Home Equity Lines of Credit are treated much in the same way credit cards are by most FICO scoring models, and as a result, closing the account reduces the amount of credit available to you which increases the ratio of debt vs. credit which will ultimately harm your credit score.

Other Resources:

• Home Equity Lines of Credit
• Taking A Home Equity Loan? Be Careful What You Use the Money For
• Ride Out the Storm with Good Credit