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.
Tuesday, August 4, 2009
Tuesday, July 7, 2009
The Next Great Credit Career, the Credit Expert Witness
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.
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.
Wednesday, May 27, 2009
CARD Act Signed Into Law, What Happens and When?
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.
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.
Monday, May 4, 2009
Credit Card Issuers Behaving Badly
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.
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.
Wednesday, April 22, 2009
New FICO Scores Abound, Three New Credit Scores Hit the Market this Month
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.
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.
Monday, March 2, 2009
FICO 08, The Ins and Outs
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.
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.
Friday, February 6, 2009
Banks Behaving Badly and Your Credit Scores
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.
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.
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