Thursday, May 27, 2010

Free Credit Scores?

In 2003 FACTA (The Fair and Accurate Credit Transactions Act) amended the FCRA (Fair Credit Reporting Act) to mandate free credit reports to every person in the country from all of the consumer reporting agencies. FACTA also mandated, in section 609, that mortgage lenders had to now provide a copy of the consumer’s score as part of the homeowner notice. Most lenders were providing this notice as part of the closing paperwork. So, homebuyers have enjoyed access to their FICO scores since 2003. Now, thanks to a Senator from Colorado, more consumers might soon have free access to their scores.

Mark Udall (D-Colorado) has proposed the Fair Access to Credit Scores Act (FACS Act). The FACS Act would amend section 615 of the Fair Credit Reporting Act to require the disclosure of credit scores, by the user, as part of their adverse action requirements. This means if you are declined by a lender, insurance company or any other company that depends on a credit report and score, you will get a copy of it. And, even better, if you are approved but at a disadvantaged interest rate or insurance premium you will still get a copy of the score used to make that decision.

This would certainly serve to accomplish a number of things that we consumers have been missing for quite some time.

1. FICO scores based on Experian data – On February 14th of 2009 Experian and FICO officially parted ways and no longer had a myFICO.com partnership. That little Valentine’s Day present officially prevented FICO from selling Experian credit reports and FICO scores based on Experian data to consumers. Consumers still had (and have) access to their FICO scores based on TransUnion and Equifax data from myFICO. Since Sen. Udall’s amendment doesn’t leave it up to the credit bureaus to stick you with an irrelevant VantageScore or PLUS score it seems it seems as if we’ll soon have access to our Experian FICO scores as long as we’ve gone through an adverse action and the lender or insurance company used an Experian credit report.

2. FICO Industry Option scores – FICO builds a variety of semi-customized credit bureau risk scores called Industry Options. These are specially tuned scores for specific types of lending such as bankcard, installment, personal finance, auto and, more recently, for mortgages. These scores have never been available for sale or for free to consumers, ever. But Sen. Udall’s amendment will require the user of the credit report to give you the actual score they used to treat you adversely. So, if they used any of these special FICO scores then you’ll get what nobody has ever gotten…a peak at it.

3. No more generational score confusion – FICO scores, like Windows software, are rebuilt periodically to take advantage of advancements in technology, newer data samples and changes in the predictive value of credit file characteristics. And if all of this sounds like empirical black magic don’t worry, this is actually much more simple than that. Because of these periodic redevelopments there are actually many different versions of the FICO score still in use by lenders today. And since some of these lenders are large customers of the credit bureaus it’s unlikely that the bureaus will strong arm them into converting to newer versions until they chose to do so voluntarily. What this has caused is confusion over scores sold to consumers. For example, my FICO score on Equifax data might be 780 under one version but 797 on another and 772 on another. The one the lender buys might not be the same one that I can buy. Udall’s amendment eliminates this issue because whatever score version the lender is buying is the one I’m going to get.

4. No bait and switch scores – There are four credit scores that are prevalent in the direct-to-consumer market today. They are the FICO score, the VantageScore, the PLUS score and the TransRisk score. Those of you who have purchased your scores online or got them for free in exchange for your credit card information, do you know which one you were given? Most people want the actual score that lenders use, which is the FICO score. The problem is that Experian and TransUnion would rather you purchased their scores rather than FICO’s scores. The problem is that PLUS isn’t even sold to lenders and VantageScore and TransRisk don’t have enough combined market share to fill a row boat. Yet, you’re actually more likely to end up with those scores when you go hunting online than your actual FICO score.

The Udall amendment doesn’t even involve the credit bureaus. They aren’t a party to the score disclosure requirements. Udall either got lucky or did his homework and figured that the bureaus (one in particular) were licking their chops and getting ready to take advantage of the free score requirements like they’ve (one in particular) taken advantage of the free credit report requirements. I mean, why has Experian completely changed their marketing efforts to push free credit scores from free credit reports? It doesn’t take a credit genius to figure that one out.

5. No real complaining by the bureaus or FICO – Behind closed doors the bureaus probably don’t like this new law but since the score being given away have already been purchased by a lender they can’t really complain too loudly. FICO on the other hand should be very happy with this law for a couple of reasons. First, again the scores have been purchased so they’ll get their piece of the action. Second, the majority of scores that will be given away will be FICO scores, which is great branding for them. It really eliminates any chance that competing scores will be able to take advantage of this new rule and steal market share.

The Udall amendment passed the Senate on May 17th. Now it has to be passed in the House and survive the conference process where it could end up taken out or modified. Stay tuned!!

Saturday, May 1, 2010

Managing Credit in the Post Credit Crunch Era

2010 marks a turning point in the world of consumer credit. We’ve just survived the worst credit environment since, well, ever. The CARD Act went into affect (most of it anyway) on in February 2010. And, lenders are actually starting to increase the amount of pre-approved mail they send to prospective cardholders. How can consumers benefit from this new environment? Where are the potholes? And lastly, what should we be doing with our credit scores?

Pothole #1 – Having Average FICO Scores is Good Enough. If you think this then you’re making a big mistake. Those of you who have FICO scores in the mid 600’s were considered golden 36 months ago. Today, you’re considered too risky and the credit market has largely passed you by. Conversely, if you have FICO scores above 720 AND are on the buyer’s side of the credit equation then you are in the catbird seat. Auto loans are at or near 0%. Mortgages are at or below 5%. Credit cards issued by credit unions are at or below 9.9%. It’s a great time to be a borrower but only if you have strong FICO scores. Shoot for 750 because that puts you in the best position.

Pothole #2 – Thinking the CARD Act Solved the Free Credit Report Scams. On Fair Isaac’s consumer website, myFICO.com, they take a jab at their newest “Biggest” nemesis, Experian. “U.S Gov’t brings common sense to “free credit report” false advertising” is front and center on their website. What they’re referring to is the new rule that requires companies that offer free credit reports to clearly state that it’s not the free credit report as required by Federal law. So, how did Experian get around this one? They will now charge you $1 for your “free” credit report. It still remains to be seen exactly how the Federal Trade Commission is going to address the continuous actions of Experian (who has already settled two financially meaningless lawsuits with the FTC). “Free” and “$1” are clearly not the same thing so the false advertising seems to continue. Regardless, consumers will still be enrolled for a monthly subscription to a credit monitoring service if you claim your $1, err, free credit report from freecreditreport.com so buyer beware.

Opportunity #1 – Better Credit Means More Leverage. You’ve heard to term “it’s a buyer’s market.” You’ve also heard the term “It’s a seller’s market.” Well, for the first time in almost three years it is now a buyer’s market in the consumer credit environment. But, it’s a buyer’s market only if you have good enough credit to deserve the very attractive rates offered by almost all lenders. If you’ve been putting off paying down credit card debt now may be the time as paying down credit card debt is the fastest way to significantly improve your credit scores.

Opportunity #2 – Short Selling Has Been Anointed as The Best Way to Dispose of a Bad Mortgage Loan. A short sale is when the lender takes less than the principal amount and considers the loan as being paid in full. A short sale is not clean from a credit perspective because it is reported as either a charge off or a settlement, both of which are considered very negative by the FICO scoring system. But, Fannie Mae will allow you to get a mortgage within two years if you’ve chosen a short sale over a foreclosure.

Pothole #3 – Beware of Loan Modifications. Loan modifications are a relatively new phenomenon thanks to the mortgage meltdown. Homeowners who have some sort of hardship might be able to convince their lender to lower the interest rate so much that the payment becomes affordable and allows them to avoid foreclosure. The problem with loan modifications is you are not guaranteed the modification. And, it takes many months for large mortgage lenders to decide whether or not you will qualify. During this time they are asking that you pay a lower amount. This is called the “trial period.” This is reported as a rolling late payment to the credit bureaus, which obviously can damage your credit scores. And, after all is said and done, you might find yourself without a modified loan but with many months of late payments, which are not removed.

Pothole #4 – The Authorized User Strategy Might Backfire. For many years consumers have used the authorized user strategy to build, rebuild and/or improve their credit. The theory, which was accurate, was if you could add an account with a stellar payment history and a large credit limit to your credit file simply by being added as an authorized user on an account belonging to another person, perhaps a parent. Since the authorized user doesn’t have contractual liability the cardholder isn’t responsible for the payments. If the primary cardholder became delinquent then you would simply have your name removed from the account and it would be removed from your credit reports. The problem with the strategy today is that at least one of the credit bureaus, Equifax, won’t remove the account from your credit reports. In fact they are responding to dispute letters with the following, “As an authorized user, you may be liable for any/all activities on this account.” The issue is the word “may.” It’s my belief that a credit bureau can’t maintain information on your file that it simply believes “may” be your responsibility. This one will likely play itself out in court when the class action set gets wind of this.

It’s important to keep in mind that the world of consumer credit is dynamic, constantly changing. Credit scores will likely change, lenders will change their standards, and credit bureaus will change their policies. These observations are as of early 2010 and will eventually become outdated, perhaps even by the end of the year. Stay tuned.