FICO Fool’s Gold

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

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

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

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

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?

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

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.