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This Blog Has Moved

2010-07-28T10:14:00.000-07:00

This blog has moved to http://www.creditcrm.com/blog

We will now be posting four or more times every week at the new blog!

Free Credit Scores?

2010-05-27T11:39:00.001-07:00

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!!

Managing Credit in the Post Credit Crunch Era

2010-05-01T09:22:00.000-07:00

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.

LifeLock Smackdown Part 2

2010-04-23T09:20:00.000-07:00

LifeLock –

Last month I wrote about credit and identity theft related services and how some of them either don’t really deliver what they promise. Apparently the Federal Trade Commission and the attorney generals from 35 different states agreed with me because on March 10th 2010 (or some time soon before) LifeLock agreed to a $12 million settlement. This is a very significant settlement especially for a deceptive advertising case. LifeLock probably didn’t want to spend the time or money to defend the lawsuit so a settlement was their way of protecting against downside financial risk.

Many consumers, however, find LifeLock’s advertising perfectly clear and think the value they receive for their $10 per month charge is well worth it. According to Aaron Freeman, a LifeLock subscriber since 2005, “As recently as 2010, a man in Brooklyn tried to withdraw money from my bank account using a driver's license with my information and his picture. LifeLock has been there for me for each incident. LifeLock agents are proactive and take immediate action while I'm busy at work. I consider the $10 monthly fee to be credit insurance and I'm grateful for their services.” The comments above read suspiciously like they were professionally written as a press release so take them with a grain of sale. I’ve never heard anyone speak so highly of any subscription service regardless of how much they enjoyed it.

Gift Card Protections Coming Soon –

When was the last time you tried to use an old gift card and found out, at the register, that the card had expired or the value was much less than when you originally received it? It’s really no different than trying to use a credit card that is either maxed out or has been declined by the issuer. In either case the end result is the same; you’re unable to make your purchase and you’re embarrassed. But with the case of the gift card, there is no happy ending because you can’t get back the value.

This will be changing thanks to the CARD Act. On August 22, 2010 a provision of the CARD Act takes affect that will provide more aggressive consumer protection rules regarding the issuance of gift cards. Starting in August gift cards will have a 5-year life before they will fully expire. This is good news and bad news. Good news in that if you are given a gift card after August 22nd and then forget about it for months or even years you’ll still be able to use it as long as it hasn’t been a full 5 years. The bad news is that now you really don’t have any sense of urgency to use the card, which means it’s much more likely that you’ll toss it aside and not use it any time soon.

This CARD Act provision does allow for fees to be charged for inactivity or prolonged non-use of a gift card. And, the issuer must notify or otherwise disclose that they intend to charge a fee for inactivity. Now, clearly they aren’t going to send you a bill in the mail for not using your gift card. First off, most gift cards are given to other people so he who bought it is unlikely to actually have it. Second, the gift card issuer will simply reduce the value of the card an equivalent amount to whatever fee they want to charge.

The definition of inactivity in this particular discussion is 12 months. So, if you toss your gift card in a drawer and forget about it then you’ll get charged the fee on some day during the 13th month after you received it. Frankly, you should use the card immediately anyway rather than let it sit and collect dust.

There are exceptions to the gift card provisions of the CARD Act. If the card is being used as a promotional award or isn’t the type of card that is marketed to the masses or is available for sale to anyone then there is no protection from expiration or accelerated reduction in value. For example, some cell service providers will offer a rebate, say $100, in exchange for you buying a certain type of cell phone. In some cases these rebates are in the form of a gift card rather than a check. Those are awards used in a rebate promotion so there is no protection provided in the CARD Act.

The award card previously described is also not for sale or marketed to the general public. So, again, there is no protection afforded in the CARD Act. The bottom line in this case is to use the card as quickly as possible so you don’t have to worry about fees or expiration dates.

There are some people who really don’t care for this provision of the CARD Act for a variety of reasons. First, according to the White House the CARD Act was meant to protect consumers from abusive card issuers. Have any of you honestly felt abused by the company whom you purchased your gift card from? It’s not like they can close an account, jack up an interest rate or tack on a $120 annual fee. They also can’t report your activity to the credit bureaus.

Additionally, this makes it more difficult for public companies to claim the revenue from sales of gift cards. They can sell you the card but they can’t claim the revenue publicly until the card has been used or has expired. If it were up to them they’d really like to be able to claim the revenue immediately but the boys from Enron ruined that for everyone.

And lastly, do any of your remember what cash for clunkers did for car sales in 2009? The auto manufactures killed it the second half of 2009 because of the financial incentive for us to go out and trade in our old cars for new cars. This meant more inventory moving off lots, more sales people actually earning an income, more money being thrown back into the local economy, more cars rolling off the lines in Detroit and elsewhere and more loans being placed with local and national auto lenders.

The CARD Act could have been a “cash for clunkers” equivalent if they would have taken the exact opposite approach. If they would have made it illegal for any gift card to not expire after 6 months then practically all gift cards would be used almost immediately because it was like cash that had been set on fire…use it or lose it!! Nice job boys.

What You Need to Know about Credit and Identify Theft Related Services

2010-03-19T10:32:00.001-07:00

You can’t turn on the television, watch a sporting event, or surf the Internet without being hit up with advertisements trying to convince you to buy some sort of credit or identity theft protection related product. Freecreditreport.com, Lifelock, FreeScore.com, and Privacy Matters (aka FreeTripleScore.com) dominate the airwaves, web and overall marketing of these services. The problem with all of these services is that you can do much of what’s being advertised for free or the marketing is misleading.

Take for example FreeScore.com. This is the service being plugged by Ben Stein from Ferris Bueller’s Day Off fame. The problem is the advertising of their service pushes the bounds when it comes to truth in marketing. According to Stein if you ““wanna get a new job, you’re at the mercy of your credit score.” Of course this is not true as employers don’t have access to your credit scores as part of their employment screening processes. They do have access to your credit reports though.

Additionally Stein states that the service “gives me unlimited access to the 3 major credit reports and scores.” Now, I’m pretty sure anyone in the credit industry would recognize the FICO® score as being the “major” credit score used by the lending world. In fact, according to the FICO website 90% of the largest banks use your FICO score to make credit decisions. The score being sold by FreeScore.com (yes, you are signing up for a subscription service when you get your score so I don’t call it free) is likely your TransRisk Score or VantageScore. Neither of those scores are can be called your “major credit score.”

Next is LifeLock. This is the service hocked by Todd Davis, the company’s CEO, as he supposedly drives around the streets with his Social Security Number printed on the side of a truck. I wasn’t there and I didn’t see the truck so I’m calling bologna on that gimmick. LifeLock isn’t a credit monitoring service but they do market themselves as the “#1 Identity Theft Protection” service.

A description of how their service works is on their website. So, here’s a breakdown of some of what you get for $10 per month, and how you can get it for free.

- Monitoring of unregulated Internet and file sharing networks for your identity information. A free alternative would be setting up Google alerts with your name and address. You can do this here for free… http://www.google.com/alerts

- Sex offender records for your zip code. A free alternative can be found via a variety of websites. Google the term “sex offender registry” and be sure to add your city or state name at the end. For example, here’s Illinois’ list. http://www.isp.state.il.us/sor/sor.cfm

- Free annual credit reports. You can do this for free here… https://www.annualcreditreport.com/cra/index.jsp. In all fairness to LifeLock, they do say you can do this on your own for free.

- Reduction in preapproved credit offers. On one of their television commercials they state, “You’ll see a huge reduction in junk mail and preapproved offers.” You can do this for free here… https://www.optoutprescreen.com/?rf=t

- $1 million dollar service guarantee. On one of their television commercials they state, “If anything happens while you’re a client of LifeLock we will cover all losses and all expenses up to one million dollars.” But on their website they state they will NOT cover “lost wages or business profits, loss of business or lost opportunities and direct out-of-pocket expenses like postage stamps, gas or mileage to go to local authorities, or any notary public fees, etc. And they will not cover “any direct losses as a result of the theft.” That hardly sounds like ALL losses and ALL expenses. And the “etc” in the list of things they don’t cover leaves the door open for the list to be much larger.

Next is FreeCreditReport.com, which is owned by Experian. And, twice the Federal Trade Commission has sued them because of their marketing. The credit report being given away isn’t really free; it’s free only if you sign up for a trial period to a credit monitoring service. And if you don’t cancel the service during the trial period then you are billed on a monthly basis for the credit monitoring subscription.

In fact, on April 1, 2010 a new law goes into affect that will clean up how they market their conditionally free credit report. They, and any other service that uses a free credit report as a loss leader, must state the following…

THIS NOTICE IS REQUIRED BY LAW. Read more at FTC.GOV.
You have the right to a free credit report from AnnualCreditReport.com
or 877-322-8228, the ONLY authorized source under federal law.

And finally we end with FreeTripleScore.com also known as Privacy Matters 1-2-3. As with FreeScore.com the data being provided is coming from TransUnion, which means the scores being “given” away are either your TransRisk or VantageScore scores. And, despite their efforts to not disclose their ownership, it appears that the same company is behind FreeTripleScore and FreeScore. Nice try guys.

The new law requiring the more overt disclosure about free credit reports will help to clean up what many believe is a marketplace filled with out of control and deceptive marketing practices. And remember, before you choose to spend the money on any of the credit related products and services listed you should at the very least research free options.

Everything You Need To Know About Collection Accounts - And More!

2010-02-09T10:20:00.000-08:00

By: Shonnie Fischer - CreditCRM Affilaite

Of all of the questions I get regarding consumer credit reporting and credit scoring, collection account inquiries seems to be at the top of the list on a daily basis. This months newsletter is dedicated to the subject of collection accounts and what affect they have on a consumers credit report. Additionally, the most prevalent “credit myths” associated with collection accounts will also be addressed in this article. Far too often myth vs. fact gets passed onto the consumer which in most cases causes further undue damage to the consumers credit report and scores respectively.

Most consumers have a general understanding of what a collection account is. By definition, a collection account occurs if you stop paying on any type of debt where a balance is owed and remains unpaid per the terms of the original agreement contractually entered into by the consumer and financial entity. The lender then takes action to collect on the unpaid and/or deficiency balance by transferring the status of the account from a routine account to a collection account. The lender may have an internal collection department that will then take over the account to collect on, or the lender may sell or assign your account to a outside third party collection agency. Either way the bottom line and single objective is to collect on the remaining debt owed.

Pretty basic so far.....

Collection agencies specialize in collecting money from people who refuse to pay their debt. A collection agency’s main leverage over a consumer, which is also the single most important motivational tactic they use to get a consumer to pay, is by reporting the collection account to the credit bureaus. Any collection activity that reports to the credit bureaus will hurt your FICO® scores. Even if it is a single collection account that reports, you can expect a significant drop in your credit scores once it hits the credit bureaus. As you can imagine, having multiple collection accounts will cause your credit score to plummet even further as you are adding multiple layers of major derogatory information a.k.a “risk” to your credit file.

With respect to the FICO® credit scoring system, collection accounts are considered a major derogatory “event”. When a collection account is reported, the FICO® credit scoring software considers two things and two things only when factoring in a collection account into the credit scoring system. The first factor is that collection account activity exists and is a part of your credit file, which as previously stated is considered a major derogatory account. The second factor is the age of the account relative to the date of original delinquency with the original creditor that lead to the collection account having to be established in the first place. Specifically, this particular credit scoring component as explained is the perfect segue into our first two (and most prevalent) credit myths.

Myth #1- Paying Off A Collection Account Will Increase A Consumers Credit Score.

This is absolutely false!! If you pay off a collection account, typically the effect on the credit score will be neutral. If your scores do increase it will not be by much - guaranteed! Whether or not a collection is reported as paid or unpaid is NOT a credit scoring component. What the FICO® credit scoring system factors in is the fact that you went to collection in the first place. As stated above collection accounts are scored as “events” with the only other credit scoring factor being the age of the account. Collection accounts regardless of the paid vs. unpaid status are indicative of your previous payment history and therefore used as a predictive measure of future credit risk as assessed in the credit scoring software.

The Fair Isaac Corporation, the creators of the FICO® credit scoring software have this information posted on their website myfico.com under the following link: http://www.myfico.com/CreditEducation/Questions/Collections.aspx.

Myth #2- Paying Off Collection Accounts Will Remove It From Your Credit File.

Again, totally false. Unfortunately this where most consumers make an incorrect assumption only to find the account still remains on their report the next time their credit gets pulled. Paying off a collection account will not cause or force automatic removal from your credit report. What will happen once the account is paid, is the balance is updated to reflect the account has been paid in full and the account will continue to report accordingly. Collection accounts whether paid or unpaid along with derogatory information outside of public records, can report for up to 7 years based upon the date of original delinquency with the original creditor. Prevalent with lending and/or industry professionals, the next myth we will address is not so much a consumer credit myth as it is one that is more common with lending specific and/or industry professionals who work with analyzing consumer credit.

Myth #3- Paying Off Collection Accounts Does Not Lower A Consumers Credit Score.

In all fairness, this is a current myth that is based on a past truth. So those of you reading this article who knew this to be the case in days past, let me confirm you are not losing your mind. In previous credit scoring models (still commercially available as late as 2008) when a collection account was paid off it would update the date of last activity which in turn would report into the credit scoring software as if it were a brand new collection account. The date of last activity used to be a credit scoring component in the FICO® credit scoring software, however in 2007 the Fair Isaac Corporation agreed with debt collectors
that a consumer should not be penalized for paying off old debt accounts. While it is true that any current activity causes the date of last activity to reset, FICO® has revised their scoring software to only consider the date of original delinquency for scoring purposes.

To further validate that this is in fact a current truth vs. future feature to come, in September 2009 John Ulzheimer, credit scoring and credit reporting expert and author who is also the President of Consumer Education for Credit.com, went straight to the source and interviewed Ethan Dornhelm, Principal Scientist at FICO® who is also a FICO® score developer to get further clarity on this subject. Mr. Dornhelm confirmed that “The FICO® score is focused on the presence of the collection and how recently the collection occurred. This is true at all credit bureaus and across all generations of the FICO® scoring models still
commercially available today.”

So now that we have covered what a collection account is, what impact it has on a consumers credit score, as well as the most prevalent credit myths associated with collection accounts, what is the best way to handle collection accounts or recover from the adverse affect they have on a consumers credit report?

1- The most obvious answer is to avoid them all together. Pay your bills on time and if ever you find yourself in a financially distressed situation, try to work out a payment plan with the creditor prior to them having to take further collection
action. Be proactive and be honest about your situation with creditors. This is not always going to be an across the board resolve, but at least it lets the creditor know that your are not intentionally disregarding your obligation to pay them. They may or may not do a work out plan with you, however it is worth the effort to contact them first vs. having them assume the worst case which will without question be to start immediate collection action against you to collect on the money owed to them.

2- If number one can not be avoided and an account has already gone into collection, work with the collection agency and try to negotiate deletion of the account in exchange for payment. Not every collection agency will negotiate these types of terms, however I can tell you from my own personal experience that four out of five will. Collection agencies work on commission and/or a consignment fee basis, so at the end of the day they are truly only interested in collecting on the debt and typically will negotiate for deletion when payment in full is received. For consumers this is well worth doing the leg work to try and negotiate this type of agreement with them as this is THE ONLY way to get a valid collection account completely removed from your credit report.

3- If you have a collection account that you do not agree with, or do not believe belongs to you, you do have rights under the Fair Debt Collections Practices Act to dispute the debt. Ignoring the debt or otherwise refusing to pay the collection agency to punish them for what you perceive to be their error is not the way to get this resolved. This type of action will only continue to hurt you as collection agencies are famous for selling debt multiple times over if uncollectible. Each time that happens it adds additional new collection activity to your credit report causing a layer effect. You do have rights under the Fair Debt Collections
Practices Act that allow you to properly and legally dispute the validity of a collection account reporting on your credit report. A summary of your rights is available on the RE Credit Repair website under the Credit Resources section link: http://www.recreditfix.com/credit_resources.php I hope you have enjoyed this publication and it has provided you some clarification and/or helped you to better understand collection accounts in general. Trust me - speaking from personal experience this is one of the most complex areas outside of credit scoring itself to master. If you have any further questions or need personal assistance regarding collection accounts or any other credit related matter please contact me direct via email or my office line anytime.

All my best to you and thank you for reading this months publication.

Calculating Utilization, Let Me Count The Ways

2010-02-04T10:22:00.000-08:00

I think I’ve written about utilization, the relationship between the balances and credit limits on credit cards expressed as a percentage, for as long as I’ve owned a computer. But this topic has legs as everlasting as the Gobstopper which shares the adjective. So, for the first time in 2010 and what has to be the 100th time overall, here’s how utilization is calculated.

First off, utilization 101…Mark has a credit card with a $1,000 credit limit. That is, his credit reports show a $1,000 credit limit. His current balance as reported on his credit reports is $500. The utilization of that card is 50% because the balance ($500) divided by the credit limit ($1,000) equals .50 or 50%. Now we can get started.

It’s important to note that the figures I use for my next few examples HAVE to be reported on your credit reports to make these math problems accurate. That’s the bottom line. If it’s not on our credit report then all bets are off.

Line Item Utilization – This is the same calculation as described above for Mark but done for every single open credit card or credit card with a balance. So if you have 10 open credit cards, and open in this examples means it’s not closed, then you’ll have 10 different line item measurements. This is important because the number of highly utilized credit cards on your credit report is a consideration in most credit and insurance risk models.

Aggregate Utilization – This is the same calculation as described above for Mark with one huge difference. For this calculation we are going to combine all of the open credit cards on a credit report to do the math. For example, if I have two credit cards and each has a $5,000 balance and a $10,000 credit limit then I have $10,000 in aggregate balances and $20,000 in aggregate credit limits. Divide $10,000 by $20,000 and you again get .50 or 50%. This measurement is important because the higher utilization the percentage the more risky you are to lenders and insurance companies and the less attractive their terms will be.

High Balance in Lieu of Credit Limits – In some cases your credit cards will not have a credit limit reported. (Note: I’m not talking about charge cards. I’m talking about revolving credit cards that are not reporting a credit limit). In those cases most credit scoring models will look for the historical highest balance, which is typically reported by the credit bureaus, and use that figure in lieu of the missing credit limit. So, if I have a credit card with a $10,000 credit limit but it’s not being reported then the credit score will look for my highest balance figure. If it finds, for example, that your highest historical balance was $7,500 then that’s the figure it will use in lieu of the missing $10,000. So, with my same $5,000 balance and a $7,500 “pseudo limit” I appear to be 67% utilized on that card instead of the true 50%. This is a line item measurement and an aggregate measurement, meaning it is the same regardless of which is being calculated. This practice of withholding credit limits got the credit bureaus sued in a class action case several years ago because Capital One was not reporting credit limits. The case was dismissed because, in my opinion, the court simply couldn’t grasp the details of the problem and the breadth of its impact. Shortly after the lawsuit was filed Capital One began reporting credit limits for the first time in their existence. So, some good did come out of the case.

Missing High Balance and Missing Credit Limit - Now this is a tricky one. In some examples a credit card account will be missing the credit limit and the highest balance. Most credit scoring systems will simply ignore the account for the above referenced utilization calculations because, well, you have no limit to include in the math. This can help the consumer’s scores and it can also hurt the consumer’s scores. For example, if you have a very high balance on that particular credit card but no limit or high credit then that balance can’t increase your aggregate utilization because it’s ignored for that math. It can hurt your score in the example where you have a very low balance relative to the credit limit, which isn’t reported because you don’t get any value of the large difference between the balance and the limit, which is called open-to-buy.

Shadow Limits – A shadow limit isn’t a credit card that’s been left under a leafy tree. Instead it’s the unpublished maximum preset spending limit that all credit cards have, even charge cards that are marketed as not having a preset spending limit. That would suggest that you could use your charge card to buy a $100,000 Mercedes, if the dealership took plastic for such a purchase. And while some very wealthy individuals might be given that amount of shopping power, it’s atypical. The shadow limit is not reported to the credit bureaus so the high balance is the next best figure to use when calculating utilization. And if it’s a charge card the newer FICO scores will not count it in utilization at all. There are, however, revolving credit cards that are also marketed as not having a preset spending limit and, thus, a shadow limit.

The moral of this story is simple; you’d like to do business with credit card issuers who do report the credit limit to all three credit bureaus. It give you the ability to strategically use that card so that you never exceed some self applied utilization percentage. For example, if you know your credit card has a credit limit of $10,000 (and it’s being reported to the credit bureaus) and you never want to exceed 10% utilization on that card then you know you can never allow more than $1,000 to be reported to the credit bureaus as a balance.

What Did We Experience in 2009 and What Should We Do in 2010?

2010-01-06T05:28:00.000-08:00

2009 was a historical year in the world of consumer credit. We saw property values decline, lenders stop lending, credit card issuers crank up their abusive behavior, a new Federal law passed and a historically high number of credit related lawsuits. The following is a brief synopsis of 2009 and what consumer should do to put themselves in the best possible position for 2010.

Many of us received a letter (or letters) from our credit card issuers with similar messages;

· Your credit line has been lowered to reflect your spending

· Your account has been closed because we believe your card is being used in a manner inconsistent with your Cardmember agreement

· Given the size of your credit line and the way you have historically used your account, we have adjusted your credit line

· We are increasing the Annual Percentage Rates (APR) on your account to 25.49%

· A new service charge of $10 per month will be applied to your account

2009 was surely the year of the credit card issuer’s reign of terror against their cardholders. According to various surveys at least 35% of the population acknowledged experiencing some sort of adverse change to the terms of their credit card account. And, according to two FICO studies the median score for consumer who saw their credit limits involuntarily reduced was 770, which means that credit line decrease really didn’t have anything to do with elevated credit risk.

Of course this abusive behavior lead to the passage of the Credit Card Responsibility, Accountability and Disclosure Act of 2009, or CARD Act for short. This act provides the following rights to cardholders, among others…

· A guaranteed 21 day grace period on payments

· 45 days advance notice of any interest rate increases

· Tough rules around issuing credit cards to consumers who are under 21 years old

· Restrictions on when card issuers can increase your interest rates, and a method whereby consumers can earn back their lower rates by making their payments on time

· Clearer disclosure of account terms before an account is opened

· Restrictions on over limit fees. If a consumer has not “opted in” to allow a credit card issuer to approve a transaction that puts you in an over limit positions, they have to either decline the transaction or not charge you the over limit fee

· No additional fees because of the method of payment

· No more double cycle billing, the method of using the prior month’s balance to determine interest charges for the current month

· Application of payments above the minimum now have to be applied to the balance with the highest interest rate

· Gift cards won’t be able to expire for at least five years. And inactivity fees on gift cards will be banned

Unfortunately 2009 continued to produce decreased property values, which means no equity or worse, negative equity. And while consumers are comfortable with negative equity in their auto loans, they are not used to negative equity in their homes. Your home is your largest investment and it has historically increased in value. This leads to wealth building, a sizable tax deduction, and access to capital in order to send children to college, pay down credit card debt or fund home improvements.

The loss of home equity also lead to a significant number of home equity lines (HELOCs) being cancelled by lenders. A HELOC had always been a secured loan, secured by the perceived value in your home. But, with the home values dropping many HELOCS became huge unsecured lines of credit and many lenders simply weren’t comfortable with the lines any longer. The problem with the cancellations is that most consumers were never notified that their equity lines had been cancelled and didn’t find out until they wrote a check from the line, a large check in many cases, which bounced.

2009 was also a banner year for attorneys involved in credit related litigation, specifically Fair Debt Collection Practices Act and Fair Credit Reporting Act lawsuits. The total number of these lawsuits filed in 2009 was over 8,000, which is more than any other previous year. Most experts predict similar numbers in 2010 because collectors are continuing aggressive collection tactics and more and more consumers are using the law to get legitimate errors removed from their credit reports.

In most years past filing a lawsuit to get something erroneous removed from your credit reports was an expensive and lesser-pursued strategy. But, with lenders increasing their minimum credit score requirements spending the money in order to have credit score-damaging errors corrected or removed actually is a newly smart investment.

So what should I do in 2010 in order to position myself in the best place? You can find yourself almost completely exempt from the credit crunch by doing two things; getting out of credit card debt and increasing your credit scores. By getting yourself out of credit card debt it allows you to escape the abusive treatment by lenders. Remember, things like interest rate and minimum payment increases only matter if you carry a balance. Getting out of and staying out of credit card debt puts you in a very enviable position. This is old advice that has taken on a new level of importance.

A second byproduct of getting out of credit card debt is the significant benefit to your credit scores. “Debt” makes up a whopping 30% of the points in your FICO® scores, which places it a close second behind whether or not you have negative information on your credit reports. And as many people have learned the hard way, the minimum score requirements to not only qualify but also qualify at the best interest rates have become more difficult to satisfy.

This means higher FICO scores equals approvals where in the past a higher FICO score meant an approval with the best rates.

FICO Fool’s Gold

2009-12-04T14:14:00.000-08:00

By Edward Jamison, Esq.

Oh man, those engineers at FICO must be having themselves one rip roaring laugh right about now. They pulled the fast one of the year on November 29th when they supposedly disclosed FICO score point values to Liz Weston from MSN. Ms. Weston, who is one of smarter consumer credit journalists, took the bait hook line and sinker and published this article soon thereafter.

http://articles.moneycentral.msn.com/Banking/YourCreditRating/weston-5-ways-to-kill-your-credit-scores.aspx?page=1

Essentially what happened was FICO simulated the impact of a variety of credit behaviors on FICO scores of both 680 and 780. The score “damage” was summarized into the below chart. Weston’s article was titled “5 Ways to Kill Your Credit Score”, which to me means that the article was simply meant to illustrate that doing one of the following actions can hurt you…and that your should avoid them at all costs. The problem is the info is already being misinterpreted and abused.

Here’s where the fun really begins, what FICO did not disclose and what Ms. Weston might now know is that four of the five actions listed above will cause your credit file to be scored in a new scorecard. What this means…well, what this means is complicated. FICO scores measure your credit file’s potential risk by scoring it using a unique algorithm specifically designed for your file type, called a scorecard. That means if you have a bankruptcy then you’re scored in a bankruptcy scorecard. If your credit file only has one or two accounts then it’s scored in what’s referred to as a thin file scorecard, and so forth and so on.

Point being, all of our credit files are not scored the same way and not using the same FICO formula. Four of the five actions above are negative. And, when a clean file suddenly is hit with something negative it will go from essentially a “clean credit file” scorecard to a “derogatory file” scorecard. The result is a completely different measurement for EVERYTHING on your file. So adding a foreclosure or a settlement or a 30-day late payment or a bankruptcy to your credit file doesn’t “cost” it the points you see above. It causes everything on your file to have a new value so the score change can’t be attributed just to the negative item. The score change has to be attributed to the change in scorecards.

Next, not all 680s and 780s are created equally. Meaning, your 680 might have been caused by a completely different set of credit circumstances as my 680. Same goes for the 780. Case in point, John Ulzheimer, a credit expert who has forgotten more about credit scores than most people know, ran similar simulations on his own personal credit reports using the myFICO website tools. It just so happens that Mr. Ulzheimer’s FICO score for the simulations was also 780. This is perfect because I’m about to illustrate just how different FICO’s hypothetical 780 is from a real credit report with the same score of 780.

The score damage on the original 780 in FICO’s simulation of filing a bankruptcy was a negative hit of between 220 and 240 points. On Ulzheimer’s real credit file with a real FICO score of 780 the hit was between 195 and 255 points. Missing a payment on an account that was current, also known as the dreaded “30-day” late, caused FICO’s FICO score to drop between 90 and 110 points. On Ulzheimer’s 780 FICO score the same 30-day late payment caused his score to drop 40 to 75 points.

As you can see the point differences for the exact same action on the exact same FICO score (780) was anything but exactly the same. Ulzheimer even trumped Weston by re-interviewing FICO’s Public Affairs Director, Craig Watts. He was able to confirm from Watts that the examples in the FICO chart were “hypothetical” and “could vary significantly” from consumer to consumer. You can Ulzheimer’s his full article here.

http://www.credit.com/news/experts/2009-11-29/real-fico-score-damage-point-amounts-clarified.html

As interesting as the MSN article is and as hard as it is for me to say this, I believe writing this article was quasi-irresponsible. Not so much because of the content was wrong, because it wasn’t. As I said, Weston is right at the top of list of credit journalists who cover the industry. The problem as I see it is you could have disclaimed the charts and results with “this is just a hypothetical example” a dozen times and people are still going to focus on the point differences and believe them and think that they now know how many points things are worth, which will be an incorrect assumption in almost every case. This will lead to more consumer confusion on a topic that’s already confusing as hell.

My point is already being proven. Within two days of the publishing of Ms. Weston’s article two separate writers picked up and misrepresented the data. Instead of interpreting the information as a general approximation of what COULD happen to your score if you made various mistakes, the data is purposely being positioned as a new breakthrough into FICO’s black box. The titles of those two article are “FICO Reveals How Common Credit Mistakes Affect Scores” and “FICO Reveals the Impact of Their Credit Scores on Consumers”, the second title making absolutely no sense and neither being truly accurate.

Look, I recognize that these are simple “search engine content” pirates and they’re just jacking and using someone else’s content to benefit their own affiliate programs. Point being, they’re never going to get it right and they don’t care because they just want the keywords for their websites to attract search engine traffic for certain key credit terms. The problem is this stuff gets picked up and spread all over the world wide web and inevitably finds it’s way into credit related chat rooms, blogs, forums and even legitimate media and thus takes on an air of legitimacy.

It would have been great if Weston had thought about this before she published her story.

Solid Strategies to Avoid Credit Card Smackdown

2009-11-13T10:40:00.000-08:00

By Edward Jamison, Esq.

We’re officially four months away from the Credit Card Holder’s Bill of Rights going into effect. And, if certain Democrats have their way, we’re only thirty days away. But, for the sake of argument let’s assume that the CARD Act provisions will wait until February 2010 to become enforceable law.

During these last few days of the credit card world’s version of the Wild Wild West we should continue to see credit card issuers behaving badly, very badly in fact. The mega-credit card issuers have a shrinking window of opportunity to finish remolding their cardholder base to look more like what they will finally deem as being to their liking. This means consumers will continue to suffer the at the hands of their credit card companies, that is of course unless they employ one or more of the following strategies.

1. Don’t Not Use Your Card – Ok, the poor grammar was intentional and corny but I think I’ve made my point. Credit card issuers are in busy to make money and make a profit. They can’t do either unless you are using your credit card. And, the best news is that you do not have to carry a balance from one month to the next in order to drop a few dimes in your credit card issuers pockets. Each time you use your credit card the merchant (aka the place you used the card) has to pay the bank a fee. This fee is called interchange. It technically comes out of your pocket because many retailers will build the assumed fee into the price of the merchandise but it sure doesn’t feel that way when we buy stuff with our credit cards. So, knock the dust off your cards and use them for modest purchases. Don’t revolve a balance and don’t get into a position where your balances spiral out of control and you’ll be fine.

2. Shut Up! – In the past a viable strategy to get fees waived and interest rates lowered was to call your credit card issuer and complain or otherwise plead your case. That’s still a decent strategy but beware. Your credit card issuer might turn the tables and start asking YOU questions in order to determine whether or not they still want to do business with you. If you call them and THEY start asking questions about your job status and salary then end the convo and hang up or you might just end up with a closed credit card.

3. Open Another Card, NOW – One of the worst strategies I see people employing today is the 1-card strategy. This is a consumer who has swallowed the Dave Ramsey gospel hook, line and sinker. The problem is that it’s unrealistic and appealing only to the lowest common credit denominator. You should have MORE cards, not fewer cards. Clearly this is a credit score play as well since having more available and unused credit limits are always good for your credit scores. So, if you have one or two credit cards right now, think about opening at least one more. This gives you options in case one of your credit card issuers starts behaving badly towards you. Nothing is more empowering than saying “I’ll take my business elsewhere” and then actually doing it.

4. Don’t Hide Behind Great FICO Scores – FICO published a study earlier this year and the findings showed that the median FICO score for a consumer who has seem his or her credit limit reduced was 770. A 770 FICO score is fantastic in any lender’s book and especially in this credit environment where lenders are gravitating to stronger borrowers. What this means is that just because you have great FICOs it doesn’t fully shield you from adverse treatment from lenders.

5. Go Small and Go Local – I was interviewing John Ulzheimer, founder of http://www.creditexpertwitness.com/ and a nationally recognized credit expert and he made an interesting point. He said that we, as consumers and watchdogs, tend to focus on the largest 5-10 banks and tend to forget about the thousands of lenders who are NOT treating their customers poorly. Credit unions are a great example of these lenders. If you are sick of how you’re being treated by your Manhattan bank then perhaps you need a local credit union or local bank on your side.

6. Don’t Exit The System – The blogs are on fire with angry consumers who are claiming to have sworn off credit for the foreseeable future because of how they are being treated by their lenders. “From now on if I can’t pay cash for it I won’t buy it.” Eh, that plays well on the big screen but it’s not realistic. Carrying around cash to pay for things is a bad idea. And good luck using debit cards for things like business travel and European vacations. Stay in the system, please.

7. If All Else Fails, Litigate – If you’re finding yourself saddled with a garbage credit report because of errors and you can’t the credit bureaus or lenders to correct your files then think about filing a lawsuit. You certainly wouldn’t be alone. There will be over 8,500 credit related lawsuits filed this year. Collections agencies are the targets in most of them but certainly the credit bureaus and lenders are in the cross hairs a fair amount too. Just be sure to hire a lawyer who knows what he’s doing.

So there you have it, seven solid strategies to hopefully minimize your chances of being treated poorly by your creditors. And while there are certainly no guarantees that you’ll exit this credit environment without a few scars, you can certainly make yourself as immune as possible by doing a few easy and inexpensive things. Good luck!!

How Consumers Can Win the Credit Game

2009-09-28T15:37:00.000-07:00

By Edward Jamison, Esq.

It’s late 2009 and the consumer credit world is still in turmoil. You have a new credit law, The Credit Card Accountability Responsibility and Disclosure Act of 2009, which partially became law in August 2009 and will completely become law in either February of 2010 or December 1, 2009 if Democrats have their way. You have a new FICO® score, FICO 08, which is now live and commercially available at all three of the credit reporting agencies. This new FICO score promises to do a better job of predicting future credit risk. You have millions of credit card holders who have seen their credit limits reduced, accounts closed, interest rates increased and/or their minimum payment requirements increased.

In addition you have billions in lost home equity, which means no more safety net for those consumers who have excessive credit card debt. You have debt settlement companies aggressively marketing their services like vultures circling a dying carcass without fully disclosing the downside of possible lawsuits and severe credit damage to their customers who use their services. And finally, you have media and the undereducated that are spreading fallacies about the credit world, and are causing panic. All in all, it’s a tough environment to survive and thrive in. Here are what I believe are the most important things that we consumers should be focused on over the next 24 months;

Continue to Improve Your Credit Scores

Continue to make your payments on time regardless of what you read or hear –
Debt settlement companies would have you believe that the best way to serve you is to suggest that you stop making your payment to your credit card issuers. The theory is that a lender who isn’t getting paid might be more flexible for a consumer who isn’t making their payments. I guess it’s the “I’m lucky to get something” hypothesis. The problem is that many credit card issuers will gladly work with their debtors and work out settlements or payment plans directly, without the intervention of debt settlement companies.
This helps them to collect more than what they’d get from a 3rd party settlement company and it will also mean that you are paying them more of what you owe them, which is a good thing. It will also protect you from litigation should the credit card issuer grow tired of you avoiding them at a debt settlement company’s request.

Pay down your debt to no more than 10% -
The new FICO score, FICO 08, is more sensitive about your revolving utilization percentage, which is the relationship between your balances and limits on credit card accounts. This means those of you who are highly utilized will suffer more as lenders continue to convert to this newer credit score, and many have already made the switch.

If you can’t get your balances to less than 10% of your credit limits then get them as low as possible and your score will benefit. Why is this important? It’s simple. Lenders are being more critical about credit scores than in the past 36 months. A good score, say 700, two years ago would have gotten you approved at their best deal a lender had going. Today it will get you approved but not with the best terms. Shoot for 750 to ensure you of the best terms. And, be aware that mortgage lenders not only want 750 but they also want a larger down payment in many cases.

More Cards Are Better, Shoot for Five –

This is counter intuitive but we’re living in a bizarre credit world. Those of you who have less than five credit cards are in a bad position. A bad position because of a couple of reasons, which are;

You have fewer options if one of your credit card issuers changes your terms – Tens of millions of consumer have seen the terms of their credit card accounts changed adversely over the past 18 to 24 months. This means lower credit limits, higher rates, higher minimum payments and closed accounts in some cases. If you have only one or two cards then you leave yourself without options should one or more of your credit card issuers start misbehaving. And for those of you who think you’re immune from this because you have good FICO scores, think again. FICO released a study several months ago that showed that, at a 2 to 1 ratio, cardholders who saw their credit limits decreased had median FICO score of 770. Nobody is immune.

With more cards you give yourself the option to move your business elsewhere and not lose the access to the capital that a credit card provides.

Think About Litigation If You Know You’re Right –
Fair Debt Collection Practice Act (FDCPA) lawsuits are going to eclipse 8,500 this year, which will easily be a record. According to John Ulzheimer, founder of www.creditexpertwitness.com, and a professional expert witness, “many consumer are finding that they can’t get legitimate errors corrected on their credit reports. The choice they have is to live with it for seven years or take someone to court and force them to listen.”

Many collection agencies are finding it hard to avoid lawsuits despite a huge growth in outstanding delinquent receivables. Some are calling for a revamping if the FDCPA but any politician that chooses to reduce consumer protections at this time in history is asking to be voted out of office.

Busy Couple of Weeks for FICO

2009-08-04T11:40:00.000-07:00

By Edward Jamison, Esq.

Over the past few weeks the news surrounding FICO has been coming fast and furious. The Federal lawsuit filed by FICO against Experian, TransUnion and VantageScore Solutions was partially dismissed but left several counts that will now proceed to trial later this year. Additionally, the credit scoring company announced that FICO 08, their newest credit score, would be available at all three of the national credit reporting agencies starting in August 2009. This means that Experian has finally agreed to install and make available the credit score several months after TransUnion and Equifax had done so.

Regarding the FICO lawsuit:

On July 24th the Honorable Ann Montgomery ruled on a request to dismiss a lawsuit filed in Federal court by FICO (more formally referred to as Fair Isaac) against VantageScore Solutions, TransUnion and Experian. Judge Montgomery dismissed some of the counts and left others in place therefore leading the parties toward trial later this year.

The lawsuit, among other things, claims breach of contract and trademark infringement. The Order sheds a public light on a number of very interesting things that were not previously known, including email communication between executives of the credit reporting agencies. Some of the more interesting nuggets of gold, with emphasis added, from the Order are;

1. The proposed joint venture between the three credit reporting agencies was referred to as either “Operation Triad” or “Project Trident” and eventually lead to the creation of VantageScore Solutions and subsequently the VantageScore scoring model. VantageScore is a credit risk score but uses a different credit scoring range (501-990) as the FICO score (300-850). VantageScore also converts their numeric score to an alpha display using the academic A-F range, which seems comical considering VantageScore is not a lender and doesn’t underwrite loans. The assertion that they know how to grade a consumer’s as being an “A” versus a “B” is a responsibility solely for a lender, not a credit score developer.

It’s also important to note that while Equifax was originally named as a defendant they reached a settlement with FICO on or around June of 2008 and is no longer a party to the lawsuit. The fact that the bureaus named the project after a military weapon sheds light on their mindset at the time.

2. In February of 2005 Experian enlisted the assistance of a consulting firm, which at the time was called Mercer Oliver Wyman. Today this firm is referred to as Oliver Wyman and is a division of Marsh & McLennan. According to the Order this firm created a document for Experian that suggested “through the joint venture (VantageScore), the credit bureaus could build their own scoring model and transfer Fair Isaac’s revenue ENTIRELY to themselves.” The difficulty of replacing entrenched credit scoring systems seems to have been grossly underestimated. I wonder if Experian asked for a refund considering the consultant’s misread of the market.

3. The original VantageScore scoring model “relied on the algorithms in Experian’s own in-house, tri-bureau scoring model, which Experian made available to the team.” The bureaus announced VantageScore to the market in March of 2006. FICO files their lawsuit on October 11th of the same year. This seems to contradict VantageScore’s marketing literature, “The nation’s three consumer credit reporting companies – Equifax, Experian and TransUnion – worked together to develop a tri-bureau generic credit scoring system.”

4. Each of the credit bureaus pays $300,000 annually to secure royalty-free and global licenses for the use of the VantageScore model.

5. Prior to the introduction of VantageScore TransUnion’s royalty payments to FICO was $40,000,000. After the introduction of VantageScore the royalty payments were $44,000,000. No time frames were given so these figures could represent an annual amount or cover some other period of time but assuming the comparison is apples to apples it seems to suggest that FICO has not lost any market share to VantageScore. This means consumers applying for credit will likely have their loans underwritten by a lender using a FICO score.

6. With respect to the confusion in the consumer market of other scores with similar score ranges to that of the FICO score (300-850), “The evidence identified by Fair Isaac lends support to the inference that Defendants intentionally copied Fair Isaac’s 300-850 mark and that consumers confused Defendants credit scores with FICO credit scores as a result.” In English what this means is the credit bureaus intentionally chose score ranges that were similar to FICO’s 300-850 in order to confuse consumers who were shopping online for the credit scores. This has been a consistent criticism of both Experian and TransUnion for years. Equifax does not sell any credit score to consumers other than the legitimate FICO score so they’re not a target of the criticism. The simple question “why did you choose a score range similar to FICO’s” is one that they finally had to answer in court, although smart consumers already knew what they were up to.

7. The published FICO score ranges of 300 to 850 seems to not be the actual FICO score range. From the Order “Fair Isaac argues in response that the term 300-850 is not the "actual scoring range for any of [Fair Isaac's] classic FICO credit scores. The actual scoring range for the first FICO score developed for Trans Union is 397-871, for Experian is 368-839, and for Equifax is 407-829. Every version of these scores has a different range-none of which is 300-850."

Regarding FICO 08:

According to a press release issued by FICO on July 22nd “FICO 08 Credit Score Available at All Three National Credit Reporting Agencies” by the end of July. Experian had refused to adopt the model because of their ongoing litigation with Fair Isaac. And already “five of the seven largest U.S. banks and four of the five largest credit card issuers” have begun testing or using the new score.

What this means is consumers who have a large amount of credit card debt or are highly utilized will likely see lower FICO 08 scores. This is because of the added importance of credit card debt built within the model. It also means adding yourself onto the credit card of another person in an attempt to “piggyback” your way to a better score will be impossible sooner rather than later.

A benefit to consumers is FICO 08’s logic, which ignores very low dollar collections, commonly referred to as nuisance collections. Consumers who are seeing their scores lowered by collections with an original amount less than $100 will see immediate benefit with FICO 08. This is an incentive for lenders to more quickly adopt the new score because savvy consumers who have these small collections will know that a lender who uses FICO 08 will see them in a much better light. Nothing will incent a lender to adopt the newer model faster than prospects going to competing banks just to ensure a better credit score.

This is the 20 year anniversary of the introduction of the FICO score at a credit bureau. Consumers who conduct banking or insurance business at pretty much any bank, mortgage lender, or insurance company are subject to FICO’s evaluation.

The Next Great Credit Career, the Credit Expert Witness

2009-07-07T12:51:00.000-07:00

By Edward Jamison, Esq.

Few people are in more demand but less in supply than the consumer credit expert witness. These individuals possess a truly unique understanding of credit reporting, credit scoring, credit damage, identity theft, and the various credit laws, which govern how lenders and credit bureaus access and use our personal data. This issue of this month’s CreditCRM monthly newsletter will be dedicated to a “who, what, where, when, to what extent, and why” conversation with a seasoned credit expert witness, John Ulzheimer, who founded www.creditexpertwitness.com and in September will begin training a small number of credit industry professionals on how to leverage their knowledge into becoming an expert witness.

The first question that must be answered is who can serve as an expert witness and what qualifications must they possess? “This is a very common question from someone who would like to perform expert witness work but has never done so and assumes that the lack of witness experience somehow disqualifies them”, Ulzheimer says. “This is simply not true. All experts have his or her first case. I had mine roughly five years ago when I served as an expert witness for the Credit Bureau of Baton Rouge in a case where a consumer was suing them.”

The Federal Rules of Evidence (FRE 702) requires that an expert witness be “qualified…by knowledge, skill, experience, training, or education.” The determination of whether a witness is qualified to serve is part of the Court’s “gate keeping” function. Whether or not an expert is qualified is judged with respect to the subject matter of the witness’s testimony. Having said that, Rule 702 is not so rigid as to demand an intimate level of familiarity with every component as a prerequisite to offering expert testimony.

According to Ulzheimer, “what this means is if you have a firm understanding of credit either through your work, your education, or knowledge gained through research then you’ll likely make for an effective credit expert witness. In fact, I’ve served as an expert in cases where the adversarial experts have never worked one day in any part of the credit industry. I’ve also gone up against an expert, several times, whose career in the credit industry ended almost two decades ago.” The point is that if you have a demonstrable understanding of the credit industry it’s going to be hard to argue that you are not qualified to serve as an expert witness. “You don’t have to have a PhD in credit to be a credit expert witness.”

The next question is exactly what does an expert witness do? Again, according to Ulzheimer, “your primary role is to offer your opinion on several issues. Among other topics, for example, were the actions of your client reasonable? Another could be whether or not a low credit score was truly caused by negligence or was it self-inflicted? Yet another example would be to offer an opinion as to whether or not damages sought by a plaintiff are inflated or in line. You also spend a great deal of time acting as a consultant for your client, whether it’s the plaintiff or the defense. I also spend a great amount of time assisting my clients with discovery requests.”

Does the expert have to live in the same state where the lawsuit has been filed? “Absolutely not”, says Ulzheimer who lives in Atlanta. “I’m on my 26th case and only one of them was filed in a Georgia court. I’ve got clients in two dozen states and do 95% of my work from my home office. The only time I need to travel is when I’m being deposed or testifying in court. One of the more common myths about serving as an expert is that you have to live in the same state where the case is filed, which is simply not true.”

When is your work as an expert performed? “From the expert’s perspective each case has a chronology of events that generally occurs sequentially. The complaint is filed by the plaintiff, a response is filed by the defendant, the plaintiff might file an amended complaint, documents are produced by both sides, one side discloses who their expert is, the other side hires and discloses their expert, an expert report is filed giving an opinion, the opposing side will have their expert submit their expert report challenging the other’s sides report, you go through a deposition, and then the case either goes to court or is settled”, according to Ulzheimer. “Obviously there’s more to it than that but as the expert you are involved in only certain aspects of the case, not all of them.”

How involved do you get with your client? “Every client is different and every lawsuit is different. I’ve had some cases where I did only a few hours of consulting work and then my work was done. On the other hand I’ve had some cases where I’ve been their expert for years and have done well over one hundred hours of work” says Ulzheimer. “The attorney will direct your work. He or she has a well thought out strategy and knows where they will plug in your expertise.”

Why is an expert witness needed in a credit related lawsuit? “I used to ask myself that very question until I read my first expert report, which was filed by a man who was a very popular expert witness who always represented consumers over lenders” says Ulzheimer. His report was full of so much false information about credit scores and what influences credit scores. I knew right then and there that I was brought in to offer balance to his assertions. I’ve also been a part of lawsuits where nobody involved understood how information was generally corrected on a credit report and the process involved with doing so. My opinion is that one side hires an expert to ensure that the other side doesn’t embellish or unintentionally fabricate facts about the industry or the tools used in the credit industry.”

Do you always represent one side or the other (a consumer versus or industry player)? Ulzheimer quickly fires back, “absolutely not and anyone who does can’t genuinely call themselves fair and balanced.” When pressed for more about his answer he gives his reasons. “Look, lenders and credit bureaus mess up, everyone knows this. Does that mean they are always wrong when they’re sued? No, it doesn’t. I am a firm believer in only taking on cases where I feel like I’m representing an argument that is fair and accurate, regardless of whom my client is. I sleep very well at night knowing that I haven’t sold out to one side or the other. Trust me, I’ve seen my share of garbage lawsuits where a consumer was dead wrong but was trying to shake down a lender, collection agency or a credit bureau. I also hate to lose, which drives me to do the best job I possibly can for my client regardless of whether it’s a consumer or a company from the credit industry.”

Why are you training people to become expert? Aren’t you hiring your future competition? “I don’t look at it that way. If I was worried about other experts then I wouldn’t have started doing expert work.” Ulzheimer continues, “I can’t keep up with the work and I turn away a lot of potential clients because of conflicts or I don’t want to argue their side because I don’t agree with them. But that doesn’t mean that they don’t deserve a great expert to passionately represent them. There were 5422 consumer credit lawsuits filed between 1/1/06 and 11/29/07. I predicted a sharp increase at the beginning of 2009 and I nailed it. So far in 2009 there have been over 4000 filed already, and over 500 in June alone. There’s simply too much work to be done and not enough good credit experts to do it. I think the credit industry would benefit from there being more qualified experts to serve it.”

Can you talk about the expert training in September? “Sure, we’re inviting a small number of credit industry professionals to go through three days of credit expert witness training. Knowing what I know now about the demand and the financial benefits of being an expert witness I wish there would have been something like this when I was getting started. I could have ramped up my case volume much more quickly. I also could have saved a ton of money by skipping the poor expert placement services.”

What is the normal hourly rate for an expert and how much time do you spend on each case? “Are you trying to politely ask me how much you can make as an expert witness” Ulzheimer asks. “I’ve had some cases where I’ve made as little as a few thousand dollars because they only needed a few hours of work. I’ve also got cases where I’ve made over $100,000 because of how long the case lasted and the amount of work I was asked to perform. Look, if you go into this because you want to become the next John Ulzheimer then you’re looking at this all wrong. You should have the attitude that you’re going to kick my tail, become the next great credit expert witness and fight off clients with a stick.”

Does the fact that you’re on television help you get work? “I can honestly tell you that I haven’t gotten one client because of my television or media work”, according to Ulzheimer. “Remember, I started doing this years before I did my first interview or visit my first television studio. Lawyers don’t hire you because you’ve been on T.V. They hire you to be an expert witness because they think you’ll help them win their case. Lawyers also don’t watch T.V to find their expert witness. They use other methods, which we’ll discuss at the training in September.”

If you’re interested in learning more about how to become a credit expert witness then please contact Garett Overstreet at Garett@creditcrm.com.

CARD Act Signed Into Law, What Happens and When?

2009-05-27T13:00:00.000-07:00

By Edward Jamison, Esq.

On Friday May 22 President Obama signed the landmark Credit Card Accountability Responsibility and Disclosure Act, or better known as the CARD Act. The CARD Act is meant to protect consumer from the abusive acts of credit card issuers. It becomes enforceable law at the end of February 2010, a full five months earlier than similar protections adopted by the Federal Reserve, which would have gone into effect in July 2010.

A highlight of the new law and its provisions is as follows:

Gift Card Longevity – Today gift cards have descending value, meaning that as the gift card remains unused the balance can be reduced a few percentage points each year. This self-reducing balance is important to the card issuer, especially if they are publicly traded because of current accounting rules that prevent a company from claiming the revenue until the card is actually redeemed.

What this means is that if you buy a $500 gift card from an Apple Store and never use it, Apple cannot claim that $500 as revenue despite having the $500 in the bank. This is why many companies reduce the value of unredeemed gift cards over time. Under the new CARD Act a gift card cannot be reduced in value for a full five years.

There are studies that have shown that the longer the “safe harbor” period for gift cards the less likely they are to be redeemed. So, it seems as if the lawmakers may have gone the wrong way with this provision. Think about it from a consumer perspective. If you have a gift card that expires in 7 days aren’t you more likely to use it quickly rather than a card that retains its full value for five years?

Under 21 Marketing Restrictions – Today you just have to be over the age of 18 in order to obligate yourself to a credit card agreement. That will change under the CARD Act. In fact, you will now have to be 21 years old starting next March if you want to apply for a credit card. An exception will be made for those who can prove that they have the capacity to make credit card payments and for those who can convince a parent to co-sign for them.

This is a “good news/bad news” provision in that it prevents consumers from establishing credit at 18. This costs you a full three years of credit history and credit experience, both of which are essential to someone who wants to build up his or her credit scores. Now someone who can’t find a parent willing to co-sign will have to wait until they turn 21 before they can get their credit career started. An obvious question to ask would be “exactly what happens between the ages of 18 and 21 that all of a sudden indicates that a consumer has learned the value of proper credit management?”

The good news is that many students who would have ended their college career with a nice degree and a ton of credit card debt will now end their career with just the degree. According to a study performed by Sallie Mae in 2008 found that 84% of college undergraduates had a credit card. And, the same study found that the average senior carried more than $4,100 after graduation. Both of these numbers will surely decrease with the new law.
Prevents Double Cycle Billing – Most credit card issuers have scrapped this practice voluntarily but the new law makes it official. Double cycle billing is the practice of using your average daily balance for the current and most recent past billing cycle and use that figure to determine finance charges. It’s complicated but safe to say that if you carry a balance from one month to the next then this method costs you more interest.

Longer Guaranteed Grace Period – Today many issuers are reducing grace periods, which is the number of days after your bill is mailed before it is due. This is the “free loan” period. If you pay your balance in full before the grace period ends then you’ve just enjoyed a free short-term loan.

Many issuers were reducing this grace period to 14 days, which caused many consumers to miss payments because their due date would fall between paychecks. The longer grace period guarantees that you will be paid at least once before their bill comes due, assuming you’re employed.

Prevents Universal Default – Universal Default is the practice whereby a credit card issuer adversely changes the terms of your credit card account because of your actions with another lender. Today credit card issuers practice universal default and then publicly decry the practice, depending on which way the wind is blowing.

Allows Consumers To Control Over-Limit Spending – This provision allows consumers to avoid over-limit fees. In fact, a consumer would have to contact a credit card issuer and proactively opt in to allow over limit transaction approval. Otherwise the issuer will decline the transaction while you’re standing at the register or waiting for the waiter to return with the bill. Fees represent a multi-billion dollar revenue stream for credit card issuers. This provision will cost them big time.

Allows Consumer to Earn Back Lower Rates – Consumers who have gone 60-days past due can still see their credit card interest rates increased. This act, according to the American Banker’s Association, is meant to punish a consumer for doing something that they didn’t want them to do, which is the pay late. This allows credit card companies to still punish the delinquent consumer but it also allows the consumer to earn back their lower rate if they can make their payments on time for six months. Today all you can do is ask for your rate to be returned to its lower baseline.

This provision also guarantees that your rate will not increase for the first year after you’ve opened a credit card account. And, if also guarantees that promotional rates have to last at least six months. This provision is neutral and doesn’t benefit either side.

So there you have it, the CARD Act. Still the best way to not have to concern yourself with legislative protections is to not have credit card debt. Doing so makes many of these provisions interesting but not applicable.

Credit Card Issuers Behaving Badly

2009-05-04T11:02:00.000-07:00

by Edward Jamison, Esq.

Over the past 12-18 months most of the large credit card issuers have been changing the terms of some of their customer’s accounts. The reason they’ve been doing so is because of a general lack of comfort for credit risk as well as the slumping economy. Changing the terms is usually allowed under almost any circumstance, depending on the cardholder agreement.

Some of the more common actions being taken by credit card issuers, and the reasons why, are as follows;

Credit Limit Reductions – This is being done on a very large scale. In fact, Fair Isaac published the results of a study that measured the breadth of credit limit reductions during a 7-month period in 2008. Their findings show that 16% of cardholders saw their credit limits reduced in 2008, which translates to roughly 32 million consumers. Out of the 32 million, 22 million had a median FICO score of 770. This means that their credit limits were reduced for a reason other than poor credit or elevated credit risk. For these people it was because of inactivity, under-usage, or general lack of profitability. The remaining 11 million did have some sort of credit problem such as late payments, collections or adverse public records hitting their credit files so the reduction in credit limits wasn’t a surprise. What is important to remember is this study took place over a 7-month period from April through October 2008. Credit card issuers have been lowering credit limits since October 2008 and were doing so well before April 2008. What this means is the FICO numbers, while very accurate, are likely to underplay the true amount of consumers who have seen their credit limits reduced.

Increased Interest Rates – There are no numbers to quantify the breadth of rate increases but we know it’s significant. The excuse being given by some banking industry leaders is that a rate increase is meant to be both punitive and motivational. It’s punitive in order to punish cardholders who have done something wrong, like miss a payment due date. And it’s motivational because the logic is if your debt is more expensive then you’ll be more likely to pay it off faster. And while both are certainly true in some circumstances it’s hard to honestly argue that increasing an interest rate always leads to a consumer accelerating their payments. In fact, an alternative and much more damaging result is more likely which is to push an already struggling consumer over the edge into default. This doesn’t do the consumer or the creditor any good because of the damage it does to the consumer’s credit files and credit scores and it could motivate the consumer to seek the services of a debt settlement company or even a bankruptcy attorney. In either of the latter cases the lender gets much less, if any, of the money they are owed.

Increased Minimum Payment Requirements – The amount of money you are required to pay your credit card issuer each month is referred to as the “minimum payment required.” This amount is a percentage of the overall balance. Normally it’s 2% of the outstanding balance. But, in recent months some credit card issuers have increased that minimum requirement to 5% from 2%. This means if you were normally making a $350 minimum payment now you are required to make a $875 minimum payment. Don’t misinterpret this as them gouging you, like when they increase your interest rate. In this case they simply want back more of their money instead of less of their money. But, this also can lead to consumers defaulting on loans because they simply don’t have the capacity to make the larger monthly payment.

Reduction in Grace Period – The grace period is an often misunderstood component of a credit card account. The grace period is the amount of time between when the statement billing period has closed and the date when your payment is due. A simpler way to define the grace period is the period of time before interest begins to accrue on the balance. Some people incorrectly define the grace period as being the amount of time AFTER the due date a payment can be made before the credit card issuer starts to report your account to the credit bureaus as being past due. That’s incorrect. Grace period has nothing to do with credit reporting. The reason a grace period would be reduced is all about cash flow for the bank. If you never revolving a balance from one month to the next then you’re not going to earn the bank any interest income. As such, it would be reasonable for the bank to want their money back faster since it’s not earning for them. This allows them to lend it out to other people who are going to generate more income.

As of today every single one of these practices is perfectly legal, as long as the action doesn’t breach your contract with the creditor. However, many of them will be much more difficult to apply to your account as of July 2010, when a new set of credit card rules goes into effect. As of today the best way to avoid the negative ramifications of these actions is to only charge what you can afford to pay off at the end of the month. And, it would be in your best interest to pay off credit card debt as quickly as you can. This way things like interest rates, grace periods or minimum payments don’t matter to you.

New FICO Scores Abound, Three New Credit Scores Hit the Market this Month

2009-04-22T09:31:00.000-07:00

by Edward Jamison, Esq.

Last month I wrote about the newest version of the FICO score to be installed and available via TransUnion; FICO 08. Since I wrote that article FICO has announced three more new scores to be released some time this month. These new scores and details about those score are;

1. The FICO Mortgage Score – This score is actually a variation of the FICO score currently available at Equifax, which is called BEACON. This new score, which comes at the request of players in the mortgage industry, is meant to give them a better understanding of credit risk posed by mortgage borrowers rather than just general credit risk across all different types of accounts. This new score is what’s referred to in the credit scoring industry as an “Industry Option” score. The Industry Option score uses the standard FICO score as a foundation and then adjusts that score up or down based on the consumer’s credit risk for a specific type of loan, in this case a mortgage loan. So, for example, if my FICO score at Equifax is 750 but I’ve managed my previous mortgage loans very responsibly it is likely that my mortgage score will be slightly higher. This is because I actually pose less risk to mortgage lenders because I’ve exhibited that I can manage mortgage debt based on previous experience, which is displayed on my Equifax credit report. This score will be available some time in April.

2. The FICO Auto Score – The industry option scores do not stop for just mortgage lenders. There is actually an entire suite of these scores available for other lenders as well. They are available for credit card issuers, auto lenders, personal finance lenders and installment lenders. TransUnion will be making the FICO Auto Industry Option score available immediately to lenders who loan money to consumers who are buying a car, new or used, or are refinancing an existing car loan. The new auto score is expected to easily outperform the previous auto score version at TransUnion. According to FICO, “auto lenders may be able to identify as many as 5 percent to 15 percent more potential delinquencies among consumers as they could with the previous FICO auto score.” This increased predictive power will help to accomplish two things sorely needed in the auto-lending environment. First, it will allow lenders to loan more money into a dying auto market. And second, it will allow healthy auto lenders to loan deeper into the credit score pool because of the increased ability to identify the future bad accounts before they even make it to their books.

3. The FICO Bankcard Score – In addition to the auto score available at TransUnion FICO has also made available it’s newest Industry Option score designed specifically for credit card issuers. This new score, called the Bankcard Industry Option, does the same things as the mortgage and auto versions, which is to give credit card issuers a better crystal ball to use when making decisions about whether or not to approved or deny credit card applications and whether or not to modify the terms of an existing credit card customer’s account. It’s my belief that of all of the industry specific scores, this is the most commonly used. According to FICO this newer score will also do a better job of identifying riskier credit card users than the previous version of the same score. According to FICO, “…testing found that the new scores could potentially increase issuers' delinquency prediction rates by 6 percent to 12 percent…” This is a significant improvement especially when you apply the average loss of a credit card account for a major credit card issuer who might have 30 million active credit cards in circulation.

One of the biggest hurdles to implementing one of these new scores is the work to accommodate a new, different scoring model. This is one of the reasons VantageScore, a product of the credit bureau’s joint venture VantageScore Solutions hasn’t done well. It’s a different score with a different score range and likely performs very differently than a FICO score.

In order to make the transition from previous versions of FICO to these newer scores as painless as possible FICO has done a good job of keeping the structure of the newer scores identical to that of the older versions. The score range is still 300 to 850. And the new scores maintain the same set of adverse action codes, also commonly referred to as score factor codes or reason codes. They have also maintained the same minimum scoring criteria, which means if a bank has traditionally seen a 2% “no score” rate, they should continue to see the same.

FICO releases a new generation of scoring models every few years for each of the three national credit reporting agencies; Equifax, Experian and TransUnion. And in most cases it doesn’t make the headlines when it happens. Given the current state of the economy and especially the credit environment any time a newer better score becomes available it seems to draw more attention. This probably won’t change any time soon.

FICO 08, The Ins and Outs

2009-03-02T21:12:00.000-08:00

March 2, 2009
by Edward Jamison, Esq.

On January 29, 2009 TransUnion rolled out and made available the credit-scoring model called FICO 08. This is the newest version of the FICO® credit score, which is simply a redevelopment of their widely used industry standard classic score. The long awaited release of this model is good news for lenders, low risk borrowers, and those with low credit card balances. It’s bad news for piggybackers, companies that sell piggybacking services, consumes with a lot of credit card debt, and the flop of the century, so far, in the credit scoring world known as VantageScore.

FICO 08 will eventually be the industry standard credit score despite not being available yet from Equifax or Experian. We should see FICO 08 at Equifax before the fall and at Experian as soon as they start losing customers to TransUnion or Equifax. Experian has alluded to the fact that their ongoing litigation with Fair Isaac over VantageScore is causing some stress in their relationship and delaying the roll out of FICO 08. The problem is eventually lenders are going to get sick and tired of getting caught in the middle of the “Experian versus FICO” arm wrestling match and move their business elsewhere when they find out that Experian isn’t offering the new gold standard credit scoring model. When that happens you will be able to time the FICO 08 implementation at Experian with the second hand on your favorite watch.

So what is so different about FICO 08 and the other versions of the FICO score? There are three primary differences of note. They are:

1. Negligible Collection and Public Record Exclusion – The newest FICO score will ignore any collections or public records with an original amount less than $100. It’s important to note that for a collection to be bypassed by the score, thanks to the new logic, it has to be reported as a 3rd party collection agency account and not the collection department of a credit card company. If the collection shows up as “trade” then it will still count against your score even if it is less than $100. And, if the original amount was over $100 but it has been paid down to a current balance of less than $100 it will still count in your score. This is exceptional news for consumers who are haunted by low dollar collections caused by misdirected final utility bills and some insurance snafus.

2. Credit Card Utilization – Credit card utilization, the ratio of your current balances to your current credit limits on revolving credit card accounts, remains a highly important factor in your FICO credit score. However, in FICO 08 it takes on a whole new level of importance. Consumers who have balances that approach the reported credit limit will find their scores lower with FICO 08 than with previous versions of the scoring software. FICO’s research has apparently discovered that consumers who are highly utilized with their credit cards are more risky than they were in the past, hence the more punitive treatment.

3. No Piggybacking Allowed – This new version of FICO apparently has the ability to determine if an authorized user credit card account is an attempt to game the credit scoring system through piggybacking, which is the process whereby a consumer with poor credit would pay to be added to the credit card of someone with good credit as an authorized user. Fair Isaac will not disclose how they’re able to tell the difference between a legitimate authorized user account belonging to, say, a husband and wife versus one that has been made it to a credit report through other means, such as piggybacking. You will recall that FICO 08 was originally going to completely ignore all authorized user accounts. This new logic seems to split the difference between ignoring all authorized user relationships and doing nothing to discourage the use of piggybacking services.

So why does FICO 08 pose a problem for VantageScore? It’s actually quite simple. As long as FICO keeps improving what they refer to as their “classic” risk scores the less compelling it is for a lender to test, let alone switch, to a new score brand. Implementing a new version of FICO is much easier than implementing a whole new scoring model, like Vantage. In fact, a company called SubscriberWise has already implemented FICO 08 not more than two weeks after it became available.

The best advice for consumers who will begin to be scored with this new FICO score is for them to continue to do what they’re doing now. Continue to make all of your payments on time. Continue to work down your credit card balances as much as possible. Continue to apply for credit only when needed. If you can do all of these things then your FICO 08 score will be solid as a rock and, who knows, maybe your VantageScore will be solid too, although nobody will care.

Banks Behaving Badly and Your Credit Scores

2009-02-06T17:45:00.000-08:00

February 6, 2009
by Edward Jamison, Esq.

“We are writing to advise you about a change being made to your account.” This prologue is a part of letters being sent to millions of U.S consumers and sets an ominous tone for the remainder of the communication. The “change” being referred to is either your credit card account has been closed or the credit limit has been severely slashed. In this particular example, the credit limit was lowered on a Barclay’s Bank credit card by $15,000.

In normal economic times a credit card issuer would only take such adverse action against one of their cardholders if they’ve done something wrong, such as miss a payment. However millions upon millions of cardholders are seeing their terms changed because of seemingly innocuous actions such as “a change in spending patterns” or “inactivity.” I guess we can attribute this to the fact that we’re not in normal economic times, but it’s not fair to consumers to leave it at that. Closing accounts and lowering credit limits can harm your FICO® credit scores. And since these actions are being taken against consumers who, in many cases, have fantastic credit scores the damage can be dramatic. Here’s what you can do…

Knock the dust off that old credit card – An inactive credit card, one that is open but never used, actually costs the credit card issuer money each month. Your account information is taking up space in their databases and they’re still likely buying credit scores on you each month trying to decide how to entice you to actually use the card. If you never use the card you are not generating merchant fees, or interchange fees, for the credit card issuer. And, obviously, if you’re not using the card you won’t have a balance rolling month over month so you’re not generating interest income for them either.

In many cases, now, the issuer is simply choosing to lose you as a customer by closing your account. You want to avoid this so you’ll have to appease them by generating a little bit of revenue. The good news is that it won’t come out of your pocket. Simply move the card to the front of your wallet and the next time you fill up your car or buy a pair of shoes, use that dusty credit card. This will reset the clock of activity and generated a little bit of income for the issuer. Pay off the bill when it shows up so you don’t pay any interest and repeat this strategy at least once per quarter.

Watch your spending patterns – This is a friendly way of your issuer telling you that you don’t have enough debt. For example, if you have a card with a $25,000 credit limit but have never charged more than a few hundred dollars in any month, and you pay it in full, then the issuer is questioning the need for such a high credit limit. They still have the risk of the “open-to-buy” (unused credit limit) so many have made the decision to adjust credit limits so they are more in line with your spending patterns.

Of course to avoid this you’d have to get into much more debt with that issuer, which could hurt your credit scores and cause other credit card issuers to take adverse actions too. If you’ve received a letter lowering your credit limits because of spending patterns there’s simply not much you can do other than be happy that they didn’t close the account, which would have been worse. Continue to use the card sparingly and think about opening a new card to help replace the lost credit limit. Eventually we’ll get back to the time when we can pay our credit cards on time and not have to worry about credit card issuers being scared of their customers, but for now you need to think outside of the box to prevent the bank from putting you outside of the vault!

Edward Jamison is a credit attorney based out of Los Angeles and is the founder of www.CreditCRM.com, a complete business opportunity that makes you the credit expert.

Time to Sue

2009-01-22T11:40:00.000-08:00

Is Litigation for You if You Can’t Get the Errors Corrected on Your Credit Report?

January 22, 2009
by Edward Jamison, Esq.

Imagine this scenario... You discover errors on your credit reports by one or more of your lenders. You challenge them and ask the credit bureaus to correct or remove them. Thirty days later the credit bureaus send you a reply confirming that what they have on file is accurate and it will not be removed or changed. They also direct you to contact your lender if you have any further questions regarding that allegedly incorrect credit reporting. You take the same course of action with the lenders reporting the incorrect information and, again, you are unsuccessful in getting the items corrected.

The scenario just described happens thousands of times every week. And while the Fair Credit Reporting Act is designed to protect consumers from credit bureau and lender negligence, the number of valid challenges to credit report data is not decreasing. Unfortunately, the number of challenges that result in credit reporting data being amended in favor of the consumer pale in comparison to the number that remain the same.

At this point the consumer has two very simple options; they can either live with the erroneous information until the state or Federal credit reporting statute of limitations expires, normally seven years, or they can escalate their efforts to have their credit reports corrected by filing a lawsuit.

Many experts are predicting that 2009 will yield an increase in consumer credit lawsuits due, in part, to consumers feeling the sting of increasingly difficult access to credit because of the credit crunch and a willingness to incur the costs of litigation to restore their good credit standing. "To some people it's an investment, do the math. If it costs you $20,000 in legal costs to force a lender or credit bureau to remove an inaccurate collection and the removal allows you to qualify for a mortgage interest rate that saves you $100,000, you tell me, was that a wise investment?

In fact, it's possible that you'll recover all of your legal costs as part of a settlement if your case is strong. It seems logical that the credit bureaus would not prefer a jury determine punitive damages in a case where they have sold credit reports to a lender that contained inaccurate information, but there is also a risk that the judge will grant only a portion or none of your Attorneys fees and then you're out that part of the money. The trade off for the credit reporting industry is legal fees and a controlled settlement amount, versus the unknown of taking the case to trial where the odds are not certain that at least one of the members of the jury has not had a similar experience with a credit bureau or lender.

The credit bureaus are sued hundreds of times each year with the majority of those lawsuits being filed in Georgia, California and Illinois. "It's not a coincidence that the filings are disproportionate to those states given that's where the three national credit reporting agencies are based", says John Ulzheimer, President of Consumer Education at Credit.com and the Owner of www.CreditExpertWitness.com, a consumer credit expert witness referral service. The credit bureaus also maintain insurance against such lawsuits so the costs can be limited to premiums and deductibles in many cases. Having said that, it's certainly not a comfortable feeling knowing that you're about to go to war with a company large enough to easily absorb the cost of litigation. "It's a rounding error to them and you better be prepared", states Ulzheimer.

So how do you know if you're prepared to sue your lender or one of the credit bureaus? Here's a checklist. If you can't answer yes to each of these then litigation may not be for you.

1. Have you documented all of your calls with the lender and credit bureau? This means every conversation you've had with them since you started your attempts to have the errors corrected. This can be as simple as a handwritten summary of the conversation with dates and names.

2. Have you attempted to have the item corrected using the standard protocols? You can't simply file a lawsuit against the credit bureau without giving them the opportunity to correct their error. Be sure that you've exhausted your rights to challenge credit report items as defined in the Fair Credit Reporting Act.

3. Have you suffered any damages due to the incorrect item? If not, then think twice about filing a lawsuit. Damages can be credit declinations, credit approvals with disadvantaged rates, higher insurance premiums, or the loss of a job due to credit report pre-employment screening. Can you document these things?

4. Can you tie the damages to the incorrect item? Are there other seriously negative items on your credit reports that are completely accurate that can be blamed for your damages?

5. Do you have copies of your credit reports and FICO scores and can you put together a chronology of credit reports and scores? If you can't, then you can subpoena the credit bureaus for archived credit reports and scores, although they will object profusely.

6. Are you absolutely certain that what's being reported is incorrect? Before you file a lawsuit you need to do a reality check. If the items are accurate but simply not to your liking, save your money.

7. Does your case have a chance? An expert witness can assess this for you before you spend a dime on a lawyer and can give you an honest assessment of your chances for success and ways to better prepare for litigation.

FHA Alert!

2008-09-22T16:01:00.000-07:00

FHA Seller Funded Down Payment Assistance May Not Be Dead

Washington, Sept 16, 2008 - H.R. 6694

The House Financial Services Committee adopted H.R. 6694, legislation designed to reauthorize and reform down payment assistance programs that the Bush Administration banned in July.

A last-ditch effort to head off the Oct. 1 ban on the use of seller-funded down-payment assistance with FHA-backed loans is picking up steam as a compromise bill that would mend rather than end the practice of down payment assistance.

HR 6694 would allow qualified borrowers with credit scores of 680 or above to use seller-funded down-payment assistance on FHA-backed loans. Borrowers with scores between 620-680 will be subject to risk-based pricing and higher insurance premium fees.

But the bill still needs to be approved by Congress and the President.

Today's committee vote was a positive step toward preserving down payment assistance, but it's far from over. Now more than ever, members of Congress need to know that Americans are watching their vote on H.R. 6694.

I encourage everybody who wants to see seller assisted down payment assistance preserved to tell their representatives in the House and the U.S. Senate that a vote for H.R. 6694 is a vote for the next generation of homeowners.

What does it take to raise a borrower's credit score so that they can qualify for these loans?

Click here to see how.

5 Steps to a Credit Makeover

2008-08-28T17:00:00.000-07:00

August 28, 2008
by Edward Jamison, Esq.

A lot of homeowners have the mind set that making payments on time automatically equates to good credit and credit scores.

Unfortunately, this couldn't be further from the truth.

While paying your bills on time accounts for a large portion of your credit score, there's still a lot more to it. In fact, paying your bills on time only drives 1/3rd of the points in your credit score, which means that 2/3rds of your score has nothing to do with making on time payments.

Five main categories go into making up your overall credit score calculation. Let's briefly review each category and how much they count:

1. Payment History - The Most Important Category
This category is pretty self-explanatory. It doesn't take a rocket scientist to figure out that if you pay your bills on time, you'll do well in this category. Likewise, if you have a history of late payments, collections, chargeoffs, public records, etc. - you're not going to do so well in this category.

In addition, the number of negative items on your credit reports is important. The more incidents of credit transgressions, the more your score will suffer. And if you have recent negative information that will punish your scores more than if they are several years old.

2. Debt - A Very Close Second
The most important non-payment category in your credit score is, by far, the amount of debt that you carry. And while your installment debt (auto loans and mortgages) are factored into your scores, it's really your credit card debt that's most important.

This includes anything from Visa, MasterCard, Discover, American Express, gas cards and/or retail credit cards like Macy's or Target. The balances that you carry on your credit cards can affect your scores almost as much as whether or not you make your payments on time.

This category calculates the proportion of balances to credit limits on your revolving credit card accounts — also referred to as "revolving utilization". Simply put, the higher your revolving utilization percentage, the fewer points you will earn in this category.

So what is revolving utilization and how is it calculated?

Click Here to Read On...

How to Go from Bad to Great

2008-08-14T12:19:00.000-07:00

August 14th, 2008
by Edward Jamison, Esq.

Do you have a client with bad credit? Not quite sure just how bad it really is? Frustrated and confused when it comes to deciphering the mess and trying to figure out what to do about it?

Well, you're not alone.

In this article I'm going to help you figure out exactly how bad their credit is and what you need to do to help them raise their scores and retake control of your sale.

The first step to figuring out where they stand is to find out what their lenders are reporting to the credit reporting agencies. To do this you'll need to order their credit reports from all three of the major credit reporting agencies. Although there are numerous websites to order reports and scores from, they don't need to spend a dime.

Thanks to the Fair Credit Reporting Act, everyone in the U.S. is entitled to one free copy of their credit reports once a year from each of the credit reporting agencies. To claim their reports they can go to www.annualcreditreport.com or call 1-877-322-8228. If they'd rather do it the old fashioned way, they can even mail in this request form - https://www.annualcreditreport.com/cra/requestformfinal.pdf - and they'll mail their reports to them.

After you've obtained their credit reports, you'll need to assess the information and determine the following, primarily:

Are there any negative/derogatory items in the report; and
How much debt do they have?

Let's focus on the first question. It's safe to assume that if they have negative information in their credit reports, it's hurting (not helping) their credit rating. It's also safe to assume that if they have a lot of this information; it's likely causing their situation to be even worse.

To interpret the derogatory information in their credit reports, you can follow these general rules:

Click Here to Read On...

Credit Alert

2008-08-11T13:43:00.000-07:00

August 11, 2008
by Edward Jamison, Esq.

Most people have never checked their credit score. They have always used credit wisely and have probably never been denied a loan. Long story short, they have never really had a good reason to worry about their credit score.

They do now.

Why? Because banks are systematically lowering credit limits on credit cards and HELOCS, even for borrowers with spotless credit records.

So when they receive notification from their bank of a drop in their available credit, they usually don't think too much about it at first. They say to themselves that they had no plans to max out their credit cards anyway. And besides, they just got their HELOC as a financial safety net or they only used it to finance a new car at better rates with a nice tax deduction.

But what the banks aren't telling them is the negative impact lowering their credit limits will have on their credit score.

As soon as a borrower's credit limit is lowered, it changes their Credit Utilization Rate, (CUR), which is a major component of their credit score. Credit Utilization Rates are calculated by dividing outstanding loan balances by the amount of credit available.

Click Here to Read On....

Big Brother is Watching

2008-07-31T19:12:00.000-07:00

July 31, 2008
by Edward Jamison, Esq.

If you've been following the financial news over the past couple of weeks, chances are you've heard about the CompuCredit lawsuit and the potential impact on credit scores.

On June 10th, the Federal Trade Commission filed a lawsuit against CompuCredit, for the deceptive marketing of their Aspire Visa card to sub-prime borrowers. According to the lawsuit disclosures, CompuCredit was penalizing their customers for using their Aspire Visa cards with certain merchants.

A few examples that were given were massage parlors, bars, tire companies and even marriage counselors.

They were using a scoring model that helped to predict their customers' risk based on where they shopped. How in the world does buying tires or going to marriage counseling impact credit scores?

You can imagine the frenzy this piece of information is causing. Furious consumers and media outlets were demanding to know why "where" you shopped could negatively impact your FICO scores. Well, therein lies the problem... unfortunately, the media lumped these scores with FICO scores and simply put - these aren't FICO scores, folks.

This caused an awful lot of confusion and in an effort to set the record straight, here's some additional context that should help shed some light on this touchy subject:

Click Here to Read On...

FICO or FAKO?

2008-07-29T18:25:00.000-07:00

July 24, 2008
by Edward Jamison, Esq.

We’ve all seen them – the never-ending television ads and radio commercials with the catchy jingle for free credit reports and scores.

Nowadays a number of similar companies are offering free credit reports and scores. With all of these ads for freebies, it’s no wonder that so many consumers believe that all credit scores are created equally.

First, a little history on credit scores:

A company called the Fair Isaac Corporation created the first credit score. It was made available to lenders in the very late ‘80s and soon thereafter began to pick up momentum and popularity in the lending world. The FICO® score became the gold standard in the mortgage lending world when Fannie Mae and Freddie Mac endorsed its use for evaluating mortgage loan applications in the mid ‘90s.

For years the FICO score was a mystery to consumers and was only known by the lending industry. Credit scores have only recently been made available to the public in the last few years. In 2001, California passed a law that required credit scores to be made available to California residents. This pretty much opened the floodgates for the rest of us.

It also turned into a cash cow for the bureaus. However, for two of the three, instead of selling the actual FICO score, where they had to pay royalties to the Fair Isaac Corporation – they created their own scores to sell to consumers.

That’s where the confusion started.

Now that the bureaus all sell scores targeted at the consumer market, many unknowing consumers assume that these scores are the same scores a lender would see. Unfortunately, this is just not the case and it often causes a lot of confusion for those that are looking to refinance a mortgage or trying to qualify for a new car loan.

So what score is the right score and where can I find it online?

Click Here to Read On...

5 Big Credit Mistakes

2008-07-24T16:22:00.000-07:00

July 24, 2008
by Edward Jamison, Esq.

It’s surprising how many consumers make the same credit scoring mistakes over and over again. In an effort to educate consumers on credit and credit scoring, we’ve compiled 5 common credit scoring mistakes into a list that defines each mistake and explains why they are bad and how to avoid them:

Credit Mistake #1: Closing Credit Cards Accounts
This is probably THE biggest credit mistake that consumers make. What you may find surprising is that closing credit card accounts can hurt your credit score almost as badly as missing a payment. Not only is this the number one on the top five credit scoring mistakes, it’s also number one on the list of credit myths. Ironically, most consumers make this mistake based on poor advice from a mortgage lender as a strategy for improving their credit scores. A word of advice people, when you’re dealing with something as sensitive as your credit and credit scores, make sure you do your homework before trusting some of these so called ‘industry experts’ before following through with their advice. There are two important reasons why you should not close credit card accounts:

1. Eventually, the accounts will fall off of your credit reports. The information in your credit reports are subject to certain rules in regards to how long it can remain in the report. In most cases, credit information will remain in your credit reports for seven years from the account’s DLA or date of last activity. When an account is open, the DLA will continue to update each month and the open account will never reach that seven-year mark. If you close the account, the DLA will stop updating and the clock will start ticking. Eventually the account will be completely removed from your credit reports.

Why would this be a bad thing? It’s simple – you never want to get rid of old, positive information in your credit reports. This information actually helps your credit scores. Credit scores want to see this positive account information. They want to see your long, perfect history of making your payments on time because this information significantly helps your credit scores. This information significantly helps your credit scores so why would you ever want that history to disappear? You wouldn’t! Here’s an analogy for you: let’s say you made straight A’s in high school. What if the record of that perfect scholastic accomplishment were permanently deleted seven years after you graduated? Would you ever want that history deleted? Of course you wouldn’t. The same is true for the credit reporting environment.

So, what should you do with old credit cards that you don’t use any longer?
Click Here to Read On...

Understanding Your Credit Score

2008-07-21T15:12:00.000-07:00

July 21, 2008
by Edward Jamison, Esq.

You’ve just applied for a mortgage or auto loan and your lender comes back with a three-digit number that summarizes your credit worthiness and you have no clue what that number really means. What is the difference between a 540, a 670 and a 780? If you’re not familiar with credit scores then these seemingly random numbers can make it difficult to determine where you stand. And in today’s difficult economic environment, you need every point you can get. In this article we’re going to find out exactly what these numbers mean to lenders – and to you.

*Range above based on the FICO® credit score, which is used by most lenders.

Outstanding: 800+
If your credit score is over 800 then you’re pretty much the best of the best as far as the lending and insurance worlds are concerned. With scores this high, you represent an outstanding credit risk, almost non-existent, and you’ll qualify for the best deals. Consumers that score in the 800+ range typically have a long credit history with multiple credit accounts that have been paid on time for years. There are no derogatory records such as collections, bankruptcies or charge-off accounts and very little credit card debt. These people are almost immune to the credit crisis.

Very Good: 750 - 799
If your credit score is between the 750 – 799 range, lenders will view you as a very low credit risk and you’ll qualify for some of the lowest lending rates available. You manage your credit responsibly by paying your bills on time and keeping your credit balances very low in relation to the credit limits.

Click Here to Read On...

How Medical Collections Hurt Credit Scores

2008-07-18T14:37:00.000-07:00

July 18, 2008
by Edward Jamison, Esq.

We all know that ignoring our credit card bills will most likely lead to collections. We also know that if we break a lease and skip out on the last months rent, this too could lead to collections. What if we don’t pay a utility or phone bill for several months? Not only would we end up with no power or phone service, but you guessed it, we’d probably end up with collections as well. What we don’t expect is inefficient communication between our doctors and our insurance company damaging our credit and credit scores.

Between uninsured Americans and the bureaucratic red tape between large healthcare companies and insurance providers, medical collections have become increasingly common in consumer credit reports. The problem is that a lot of consumers believe that medical collections are overlooked or excluded from their credit and credit scores. Unfortunately, medical collections are no different than other types of collections and can wreak havoc on your credit scores just as easily. The most frustrating thing with medical collections is that in most cases the consumer isn’t the cause, yet they end up paying the price as though it were.

One reason for the large misconception about medical collections is due to how some industries view them. While medical collections hurt your credit scores just as badly as other collections, most industries don’t view medical collections as negatively as other collections. The mortgage industry in particular, will frown on unpaid collections but tend to overlook or turn a blind eye on unpaid medical collections. Even FHA guidelines aren’t overly concerned with medical collections when determining a consumer’s eligibility for a mortgage loan. This begs the question, “why do credit scoring models view medical collections the same way they view non-medical collections?” There are a couple of reasons:

Click Here to Read On...