Credit Scores

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
  

In the last 6 months, there have been dramatic changes in the mortgage industry. One of the most visible is what's been referred to as a "flight to quality". Not only are we seeing the disappearance of loan products to serve those with blemished credit, Fannie Mae is now penalizing virtually all borrowers with less than excellent scores. Borrowers with a 719 FICO score with less than 40% equity (or putting 40% down), are automatically hit with a .5% penalty. On a $350,000 loan, that's $1,750! The penalty gets higher as the credit score goes lower. The penalty increases to $4,375 for the same loan if the credit score falls to 679. 
 
A credit score over 680 used to be considered an good score - one that gave a borrower access to the best rates. Now, unless you have a score over 720 or are putting more than 40% down, you are going to feel this "flight to quality" in your pocketbook.
 
Now, more than ever, it's imperative for you to take control of the information in your credit report and take the steps necessary to improve your credit score or maintain the score you have.  If you have any questions about credit repair or credit score improvement, please do not hesitate to send an email to chris@caacredit.com or visit http://www.caacredit.com.

Other Resources:

• Your Money: Good Credit Score Helps Mortgage Rate
• Low Credit Score Can Increase Cost of Private Mortgage Insurance
• How Your Credit Score is Calculated
  

 

 

If you are like most Americans, at some point in your adult life, you've found out there was a collection on your credit report. Most people understand that collections are certainly not helpful to a credit score. They can remain on a credit report for up to 7 years. The older they are, the less damage they do to your score.
 
If the collection is legitimate, you may be inclined to pay it off. It would stand to reason that by doing so, you'd see an improvement in your credit score, no?
 
Unfortunately, in many cases, once the collection is paid off, the date of last activity is updated making it appear to be a recent collection from a credit scoring standpoint. For example, if you had an old medical collection from May of 2003, and paid it off this month (April 2008), in May of 2008, the collection will appear to be very recent and very damaging to your score. Prior to paying it off, it may have only been having a minor impact on your score since it was about 5 years old.
 
So, what's the best thing to do?
 
You have several options. First, you can take your chances, pay off the collection, call it a day, and let time heal your score as the "new" collection begins to age. Another option is to negotiate with the creditor/collection agency to delete the collection in exchange for payment (make sure to get everything in writing). If the collection is deleted, your score will benefit. Finally, if the collection is close to the 7 year mark, you can simply wait for it to fall of your report.
 
Other Resources:

• Deciphering A Credit Report
• To Protect Their Rights, Consumers Should Understand the Rules of Debt Collection
• Does Paying Off Collection Accounts Help Your Credit Score

 

Adults in the U.S. are becoming increasingly vigilant in protecting their identity. Credit monitoring services have become big business for that very reason. There's even a good chance that you've been to annualcreditreport.com to obtain free copies of your credit report from TransUnion, Equifax, and Experian. While you were there, did you happen to obtain copies of your child's credit report? If you are like most parents, the thought didn't even cross your mind.

 
Identity Thieves are beginning to target children under the age of 18 because the theft will often go undetected until that child reaches the age of consent and attempts to obtain credit for the first time. By that time, years may have gone by with a series of fraudulent accounts having gone delinquent or into collections.
 
Unfortunately, it seems as though many cases of child ID theft occur by someone who has contact with the child, (family members, teachers, coaches, etc). Parents are advised to keep their children's social security information as safe as possible and be cautious in providing it to others unless absolutely necessary. Parents should also request a free copy of their child's credit report every time they request their own at annualcreditreport.com.
 
Another option would be placing a freeze on your child's report so that no new credit can be established. There are currently 39-states that allow freezes to be placed, however, some require a minimal fee. (see: http://www.consumersunion.org/campaigns/learn_more/003484indiv.html)

Other Resources:

• Parents Steal Children's Identities
• Identity Theft and Children
• Identity Theft Through a Lifetime

 

 

It is widely known that the amount a consumer owes versus their available credit limit represents 30% of their FICO score. Experts in the industry often counsel consumers to keep their credit card balances as low as possible, and if possible, pay them in full every month. The idea, of course, is that if you pay down your balance to zero, it will appear that you owe nothing even though you have a lot of available credit. This, naturally, will help raise your credit score.
 
A Key ingredient to this strategy, however, is often neglected. First, you must find out what day of the month your credit card company reports your balance to the credit bureaus. Often times this can be a few days before your account's due date. Armed with this information, you will want to ensure your balance is paid down to zero just prior to them reporting the balance. Otherwise, even though you have good intentions, they may report the balance on the account just before it's paid off. This can then have a negative impact on your credit score since it will appear that you are carrying a balance.
 
You must also take into account what the current balance is at the time of payment and not at the end of the billing period. Typically, there can be days or weeks that pass between when you receive your credit card statement and when the payment is due. If you are like most consumers, you usually continue to use your credit card during that time. As a result, by the time you make your payment, if you only pay what's due on the statement, a balance will remain from the new charges. To combat this, you can call your credit card company or check your account online prior to making your payment to accommodate any new or pending charges that arise after receiving your statement.
 
While paying your credit card balance in full every month may feel like the responsible thing to do, if you're not paying before your credit card company's reporting date or paying more than the amount due to accommodate any new charges, you may wind up hurting yourself financially.

Other Resources:

• Ask Kim Your Credit-Score Questions
• Climbing Out of Debt, Step by Step
• Credit Health Check