This blog has moved to http://www.creditcrm.com/blog
We will now be posting four or more times every week at the new blog!
Wednesday, July 28, 2010
Thursday, May 27, 2010
Free Credit Scores?
In 2003 FACTA (The Fair and Accurate Credit Transactions Act) amended the FCRA (Fair Credit Reporting Act) to mandate free credit reports to every person in the country from all of the consumer reporting agencies. FACTA also mandated, in section 609, that mortgage lenders had to now provide a copy of the consumer’s score as part of the homeowner notice. Most lenders were providing this notice as part of the closing paperwork. So, homebuyers have enjoyed access to their FICO scores since 2003. Now, thanks to a Senator from Colorado, more consumers might soon have free access to their scores.
Mark Udall (D-Colorado) has proposed the Fair Access to Credit Scores Act (FACS Act). The FACS Act would amend section 615 of the Fair Credit Reporting Act to require the disclosure of credit scores, by the user, as part of their adverse action requirements. This means if you are declined by a lender, insurance company or any other company that depends on a credit report and score, you will get a copy of it. And, even better, if you are approved but at a disadvantaged interest rate or insurance premium you will still get a copy of the score used to make that decision.
This would certainly serve to accomplish a number of things that we consumers have been missing for quite some time.
1. FICO scores based on Experian data – On February 14th of 2009 Experian and FICO officially parted ways and no longer had a myFICO.com partnership. That little Valentine’s Day present officially prevented FICO from selling Experian credit reports and FICO scores based on Experian data to consumers. Consumers still had (and have) access to their FICO scores based on TransUnion and Equifax data from myFICO. Since Sen. Udall’s amendment doesn’t leave it up to the credit bureaus to stick you with an irrelevant VantageScore or PLUS score it seems it seems as if we’ll soon have access to our Experian FICO scores as long as we’ve gone through an adverse action and the lender or insurance company used an Experian credit report.
2. FICO Industry Option scores – FICO builds a variety of semi-customized credit bureau risk scores called Industry Options. These are specially tuned scores for specific types of lending such as bankcard, installment, personal finance, auto and, more recently, for mortgages. These scores have never been available for sale or for free to consumers, ever. But Sen. Udall’s amendment will require the user of the credit report to give you the actual score they used to treat you adversely. So, if they used any of these special FICO scores then you’ll get what nobody has ever gotten…a peak at it.
3. No more generational score confusion – FICO scores, like Windows software, are rebuilt periodically to take advantage of advancements in technology, newer data samples and changes in the predictive value of credit file characteristics. And if all of this sounds like empirical black magic don’t worry, this is actually much more simple than that. Because of these periodic redevelopments there are actually many different versions of the FICO score still in use by lenders today. And since some of these lenders are large customers of the credit bureaus it’s unlikely that the bureaus will strong arm them into converting to newer versions until they chose to do so voluntarily. What this has caused is confusion over scores sold to consumers. For example, my FICO score on Equifax data might be 780 under one version but 797 on another and 772 on another. The one the lender buys might not be the same one that I can buy. Udall’s amendment eliminates this issue because whatever score version the lender is buying is the one I’m going to get.
4. No bait and switch scores – There are four credit scores that are prevalent in the direct-to-consumer market today. They are the FICO score, the VantageScore, the PLUS score and the TransRisk score. Those of you who have purchased your scores online or got them for free in exchange for your credit card information, do you know which one you were given? Most people want the actual score that lenders use, which is the FICO score. The problem is that Experian and TransUnion would rather you purchased their scores rather than FICO’s scores. The problem is that PLUS isn’t even sold to lenders and VantageScore and TransRisk don’t have enough combined market share to fill a row boat. Yet, you’re actually more likely to end up with those scores when you go hunting online than your actual FICO score.
The Udall amendment doesn’t even involve the credit bureaus. They aren’t a party to the score disclosure requirements. Udall either got lucky or did his homework and figured that the bureaus (one in particular) were licking their chops and getting ready to take advantage of the free score requirements like they’ve (one in particular) taken advantage of the free credit report requirements. I mean, why has Experian completely changed their marketing efforts to push free credit scores from free credit reports? It doesn’t take a credit genius to figure that one out.
5. No real complaining by the bureaus or FICO – Behind closed doors the bureaus probably don’t like this new law but since the score being given away have already been purchased by a lender they can’t really complain too loudly. FICO on the other hand should be very happy with this law for a couple of reasons. First, again the scores have been purchased so they’ll get their piece of the action. Second, the majority of scores that will be given away will be FICO scores, which is great branding for them. It really eliminates any chance that competing scores will be able to take advantage of this new rule and steal market share.
The Udall amendment passed the Senate on May 17th. Now it has to be passed in the House and survive the conference process where it could end up taken out or modified. Stay tuned!!
Mark Udall (D-Colorado) has proposed the Fair Access to Credit Scores Act (FACS Act). The FACS Act would amend section 615 of the Fair Credit Reporting Act to require the disclosure of credit scores, by the user, as part of their adverse action requirements. This means if you are declined by a lender, insurance company or any other company that depends on a credit report and score, you will get a copy of it. And, even better, if you are approved but at a disadvantaged interest rate or insurance premium you will still get a copy of the score used to make that decision.
This would certainly serve to accomplish a number of things that we consumers have been missing for quite some time.
1. FICO scores based on Experian data – On February 14th of 2009 Experian and FICO officially parted ways and no longer had a myFICO.com partnership. That little Valentine’s Day present officially prevented FICO from selling Experian credit reports and FICO scores based on Experian data to consumers. Consumers still had (and have) access to their FICO scores based on TransUnion and Equifax data from myFICO. Since Sen. Udall’s amendment doesn’t leave it up to the credit bureaus to stick you with an irrelevant VantageScore or PLUS score it seems it seems as if we’ll soon have access to our Experian FICO scores as long as we’ve gone through an adverse action and the lender or insurance company used an Experian credit report.
2. FICO Industry Option scores – FICO builds a variety of semi-customized credit bureau risk scores called Industry Options. These are specially tuned scores for specific types of lending such as bankcard, installment, personal finance, auto and, more recently, for mortgages. These scores have never been available for sale or for free to consumers, ever. But Sen. Udall’s amendment will require the user of the credit report to give you the actual score they used to treat you adversely. So, if they used any of these special FICO scores then you’ll get what nobody has ever gotten…a peak at it.
3. No more generational score confusion – FICO scores, like Windows software, are rebuilt periodically to take advantage of advancements in technology, newer data samples and changes in the predictive value of credit file characteristics. And if all of this sounds like empirical black magic don’t worry, this is actually much more simple than that. Because of these periodic redevelopments there are actually many different versions of the FICO score still in use by lenders today. And since some of these lenders are large customers of the credit bureaus it’s unlikely that the bureaus will strong arm them into converting to newer versions until they chose to do so voluntarily. What this has caused is confusion over scores sold to consumers. For example, my FICO score on Equifax data might be 780 under one version but 797 on another and 772 on another. The one the lender buys might not be the same one that I can buy. Udall’s amendment eliminates this issue because whatever score version the lender is buying is the one I’m going to get.
4. No bait and switch scores – There are four credit scores that are prevalent in the direct-to-consumer market today. They are the FICO score, the VantageScore, the PLUS score and the TransRisk score. Those of you who have purchased your scores online or got them for free in exchange for your credit card information, do you know which one you were given? Most people want the actual score that lenders use, which is the FICO score. The problem is that Experian and TransUnion would rather you purchased their scores rather than FICO’s scores. The problem is that PLUS isn’t even sold to lenders and VantageScore and TransRisk don’t have enough combined market share to fill a row boat. Yet, you’re actually more likely to end up with those scores when you go hunting online than your actual FICO score.
The Udall amendment doesn’t even involve the credit bureaus. They aren’t a party to the score disclosure requirements. Udall either got lucky or did his homework and figured that the bureaus (one in particular) were licking their chops and getting ready to take advantage of the free score requirements like they’ve (one in particular) taken advantage of the free credit report requirements. I mean, why has Experian completely changed their marketing efforts to push free credit scores from free credit reports? It doesn’t take a credit genius to figure that one out.
5. No real complaining by the bureaus or FICO – Behind closed doors the bureaus probably don’t like this new law but since the score being given away have already been purchased by a lender they can’t really complain too loudly. FICO on the other hand should be very happy with this law for a couple of reasons. First, again the scores have been purchased so they’ll get their piece of the action. Second, the majority of scores that will be given away will be FICO scores, which is great branding for them. It really eliminates any chance that competing scores will be able to take advantage of this new rule and steal market share.
The Udall amendment passed the Senate on May 17th. Now it has to be passed in the House and survive the conference process where it could end up taken out or modified. Stay tuned!!
Saturday, May 1, 2010
Managing Credit in the Post Credit Crunch Era
2010 marks a turning point in the world of consumer credit. We’ve just survived the worst credit environment since, well, ever. The CARD Act went into affect (most of it anyway) on in February 2010. And, lenders are actually starting to increase the amount of pre-approved mail they send to prospective cardholders. How can consumers benefit from this new environment? Where are the potholes? And lastly, what should we be doing with our credit scores?
Pothole #1 – Having Average FICO Scores is Good Enough. If you think this then you’re making a big mistake. Those of you who have FICO scores in the mid 600’s were considered golden 36 months ago. Today, you’re considered too risky and the credit market has largely passed you by. Conversely, if you have FICO scores above 720 AND are on the buyer’s side of the credit equation then you are in the catbird seat. Auto loans are at or near 0%. Mortgages are at or below 5%. Credit cards issued by credit unions are at or below 9.9%. It’s a great time to be a borrower but only if you have strong FICO scores. Shoot for 750 because that puts you in the best position.
Pothole #2 – Thinking the CARD Act Solved the Free Credit Report Scams. On Fair Isaac’s consumer website, myFICO.com, they take a jab at their newest “Biggest” nemesis, Experian. “U.S Gov’t brings common sense to “free credit report” false advertising” is front and center on their website. What they’re referring to is the new rule that requires companies that offer free credit reports to clearly state that it’s not the free credit report as required by Federal law. So, how did Experian get around this one? They will now charge you $1 for your “free” credit report. It still remains to be seen exactly how the Federal Trade Commission is going to address the continuous actions of Experian (who has already settled two financially meaningless lawsuits with the FTC). “Free” and “$1” are clearly not the same thing so the false advertising seems to continue. Regardless, consumers will still be enrolled for a monthly subscription to a credit monitoring service if you claim your $1, err, free credit report from freecreditreport.com so buyer beware.
Opportunity #1 – Better Credit Means More Leverage. You’ve heard to term “it’s a buyer’s market.” You’ve also heard the term “It’s a seller’s market.” Well, for the first time in almost three years it is now a buyer’s market in the consumer credit environment. But, it’s a buyer’s market only if you have good enough credit to deserve the very attractive rates offered by almost all lenders. If you’ve been putting off paying down credit card debt now may be the time as paying down credit card debt is the fastest way to significantly improve your credit scores.
Opportunity #2 – Short Selling Has Been Anointed as The Best Way to Dispose of a Bad Mortgage Loan. A short sale is when the lender takes less than the principal amount and considers the loan as being paid in full. A short sale is not clean from a credit perspective because it is reported as either a charge off or a settlement, both of which are considered very negative by the FICO scoring system. But, Fannie Mae will allow you to get a mortgage within two years if you’ve chosen a short sale over a foreclosure.
Pothole #3 – Beware of Loan Modifications. Loan modifications are a relatively new phenomenon thanks to the mortgage meltdown. Homeowners who have some sort of hardship might be able to convince their lender to lower the interest rate so much that the payment becomes affordable and allows them to avoid foreclosure. The problem with loan modifications is you are not guaranteed the modification. And, it takes many months for large mortgage lenders to decide whether or not you will qualify. During this time they are asking that you pay a lower amount. This is called the “trial period.” This is reported as a rolling late payment to the credit bureaus, which obviously can damage your credit scores. And, after all is said and done, you might find yourself without a modified loan but with many months of late payments, which are not removed.
Pothole #4 – The Authorized User Strategy Might Backfire. For many years consumers have used the authorized user strategy to build, rebuild and/or improve their credit. The theory, which was accurate, was if you could add an account with a stellar payment history and a large credit limit to your credit file simply by being added as an authorized user on an account belonging to another person, perhaps a parent. Since the authorized user doesn’t have contractual liability the cardholder isn’t responsible for the payments. If the primary cardholder became delinquent then you would simply have your name removed from the account and it would be removed from your credit reports. The problem with the strategy today is that at least one of the credit bureaus, Equifax, won’t remove the account from your credit reports. In fact they are responding to dispute letters with the following, “As an authorized user, you may be liable for any/all activities on this account.” The issue is the word “may.” It’s my belief that a credit bureau can’t maintain information on your file that it simply believes “may” be your responsibility. This one will likely play itself out in court when the class action set gets wind of this.
It’s important to keep in mind that the world of consumer credit is dynamic, constantly changing. Credit scores will likely change, lenders will change their standards, and credit bureaus will change their policies. These observations are as of early 2010 and will eventually become outdated, perhaps even by the end of the year. Stay tuned.
Pothole #1 – Having Average FICO Scores is Good Enough. If you think this then you’re making a big mistake. Those of you who have FICO scores in the mid 600’s were considered golden 36 months ago. Today, you’re considered too risky and the credit market has largely passed you by. Conversely, if you have FICO scores above 720 AND are on the buyer’s side of the credit equation then you are in the catbird seat. Auto loans are at or near 0%. Mortgages are at or below 5%. Credit cards issued by credit unions are at or below 9.9%. It’s a great time to be a borrower but only if you have strong FICO scores. Shoot for 750 because that puts you in the best position.
Pothole #2 – Thinking the CARD Act Solved the Free Credit Report Scams. On Fair Isaac’s consumer website, myFICO.com, they take a jab at their newest “Biggest” nemesis, Experian. “U.S Gov’t brings common sense to “free credit report” false advertising” is front and center on their website. What they’re referring to is the new rule that requires companies that offer free credit reports to clearly state that it’s not the free credit report as required by Federal law. So, how did Experian get around this one? They will now charge you $1 for your “free” credit report. It still remains to be seen exactly how the Federal Trade Commission is going to address the continuous actions of Experian (who has already settled two financially meaningless lawsuits with the FTC). “Free” and “$1” are clearly not the same thing so the false advertising seems to continue. Regardless, consumers will still be enrolled for a monthly subscription to a credit monitoring service if you claim your $1, err, free credit report from freecreditreport.com so buyer beware.
Opportunity #1 – Better Credit Means More Leverage. You’ve heard to term “it’s a buyer’s market.” You’ve also heard the term “It’s a seller’s market.” Well, for the first time in almost three years it is now a buyer’s market in the consumer credit environment. But, it’s a buyer’s market only if you have good enough credit to deserve the very attractive rates offered by almost all lenders. If you’ve been putting off paying down credit card debt now may be the time as paying down credit card debt is the fastest way to significantly improve your credit scores.
Opportunity #2 – Short Selling Has Been Anointed as The Best Way to Dispose of a Bad Mortgage Loan. A short sale is when the lender takes less than the principal amount and considers the loan as being paid in full. A short sale is not clean from a credit perspective because it is reported as either a charge off or a settlement, both of which are considered very negative by the FICO scoring system. But, Fannie Mae will allow you to get a mortgage within two years if you’ve chosen a short sale over a foreclosure.
Pothole #3 – Beware of Loan Modifications. Loan modifications are a relatively new phenomenon thanks to the mortgage meltdown. Homeowners who have some sort of hardship might be able to convince their lender to lower the interest rate so much that the payment becomes affordable and allows them to avoid foreclosure. The problem with loan modifications is you are not guaranteed the modification. And, it takes many months for large mortgage lenders to decide whether or not you will qualify. During this time they are asking that you pay a lower amount. This is called the “trial period.” This is reported as a rolling late payment to the credit bureaus, which obviously can damage your credit scores. And, after all is said and done, you might find yourself without a modified loan but with many months of late payments, which are not removed.
Pothole #4 – The Authorized User Strategy Might Backfire. For many years consumers have used the authorized user strategy to build, rebuild and/or improve their credit. The theory, which was accurate, was if you could add an account with a stellar payment history and a large credit limit to your credit file simply by being added as an authorized user on an account belonging to another person, perhaps a parent. Since the authorized user doesn’t have contractual liability the cardholder isn’t responsible for the payments. If the primary cardholder became delinquent then you would simply have your name removed from the account and it would be removed from your credit reports. The problem with the strategy today is that at least one of the credit bureaus, Equifax, won’t remove the account from your credit reports. In fact they are responding to dispute letters with the following, “As an authorized user, you may be liable for any/all activities on this account.” The issue is the word “may.” It’s my belief that a credit bureau can’t maintain information on your file that it simply believes “may” be your responsibility. This one will likely play itself out in court when the class action set gets wind of this.
It’s important to keep in mind that the world of consumer credit is dynamic, constantly changing. Credit scores will likely change, lenders will change their standards, and credit bureaus will change their policies. These observations are as of early 2010 and will eventually become outdated, perhaps even by the end of the year. Stay tuned.
Friday, April 23, 2010
LifeLock Smackdown Part 2
LifeLock –
Last month I wrote about credit and identity theft related services and how some of them either don’t really deliver what they promise. Apparently the Federal Trade Commission and the attorney generals from 35 different states agreed with me because on March 10th 2010 (or some time soon before) LifeLock agreed to a $12 million settlement. This is a very significant settlement especially for a deceptive advertising case. LifeLock probably didn’t want to spend the time or money to defend the lawsuit so a settlement was their way of protecting against downside financial risk.
Many consumers, however, find LifeLock’s advertising perfectly clear and think the value they receive for their $10 per month charge is well worth it. According to Aaron Freeman, a LifeLock subscriber since 2005, “As recently as 2010, a man in Brooklyn tried to withdraw money from my bank account using a driver's license with my information and his picture. LifeLock has been there for me for each incident. LifeLock agents are proactive and take immediate action while I'm busy at work. I consider the $10 monthly fee to be credit insurance and I'm grateful for their services.” The comments above read suspiciously like they were professionally written as a press release so take them with a grain of sale. I’ve never heard anyone speak so highly of any subscription service regardless of how much they enjoyed it.
Gift Card Protections Coming Soon –
When was the last time you tried to use an old gift card and found out, at the register, that the card had expired or the value was much less than when you originally received it? It’s really no different than trying to use a credit card that is either maxed out or has been declined by the issuer. In either case the end result is the same; you’re unable to make your purchase and you’re embarrassed. But with the case of the gift card, there is no happy ending because you can’t get back the value.
This will be changing thanks to the CARD Act. On August 22, 2010 a provision of the CARD Act takes affect that will provide more aggressive consumer protection rules regarding the issuance of gift cards. Starting in August gift cards will have a 5-year life before they will fully expire. This is good news and bad news. Good news in that if you are given a gift card after August 22nd and then forget about it for months or even years you’ll still be able to use it as long as it hasn’t been a full 5 years. The bad news is that now you really don’t have any sense of urgency to use the card, which means it’s much more likely that you’ll toss it aside and not use it any time soon.
This CARD Act provision does allow for fees to be charged for inactivity or prolonged non-use of a gift card. And, the issuer must notify or otherwise disclose that they intend to charge a fee for inactivity. Now, clearly they aren’t going to send you a bill in the mail for not using your gift card. First off, most gift cards are given to other people so he who bought it is unlikely to actually have it. Second, the gift card issuer will simply reduce the value of the card an equivalent amount to whatever fee they want to charge.
The definition of inactivity in this particular discussion is 12 months. So, if you toss your gift card in a drawer and forget about it then you’ll get charged the fee on some day during the 13th month after you received it. Frankly, you should use the card immediately anyway rather than let it sit and collect dust.
There are exceptions to the gift card provisions of the CARD Act. If the card is being used as a promotional award or isn’t the type of card that is marketed to the masses or is available for sale to anyone then there is no protection from expiration or accelerated reduction in value. For example, some cell service providers will offer a rebate, say $100, in exchange for you buying a certain type of cell phone. In some cases these rebates are in the form of a gift card rather than a check. Those are awards used in a rebate promotion so there is no protection provided in the CARD Act.
The award card previously described is also not for sale or marketed to the general public. So, again, there is no protection afforded in the CARD Act. The bottom line in this case is to use the card as quickly as possible so you don’t have to worry about fees or expiration dates.
There are some people who really don’t care for this provision of the CARD Act for a variety of reasons. First, according to the White House the CARD Act was meant to protect consumers from abusive card issuers. Have any of you honestly felt abused by the company whom you purchased your gift card from? It’s not like they can close an account, jack up an interest rate or tack on a $120 annual fee. They also can’t report your activity to the credit bureaus.
Additionally, this makes it more difficult for public companies to claim the revenue from sales of gift cards. They can sell you the card but they can’t claim the revenue publicly until the card has been used or has expired. If it were up to them they’d really like to be able to claim the revenue immediately but the boys from Enron ruined that for everyone.
And lastly, do any of your remember what cash for clunkers did for car sales in 2009? The auto manufactures killed it the second half of 2009 because of the financial incentive for us to go out and trade in our old cars for new cars. This meant more inventory moving off lots, more sales people actually earning an income, more money being thrown back into the local economy, more cars rolling off the lines in Detroit and elsewhere and more loans being placed with local and national auto lenders.
The CARD Act could have been a “cash for clunkers” equivalent if they would have taken the exact opposite approach. If they would have made it illegal for any gift card to not expire after 6 months then practically all gift cards would be used almost immediately because it was like cash that had been set on fire…use it or lose it!! Nice job boys.
Last month I wrote about credit and identity theft related services and how some of them either don’t really deliver what they promise. Apparently the Federal Trade Commission and the attorney generals from 35 different states agreed with me because on March 10th 2010 (or some time soon before) LifeLock agreed to a $12 million settlement. This is a very significant settlement especially for a deceptive advertising case. LifeLock probably didn’t want to spend the time or money to defend the lawsuit so a settlement was their way of protecting against downside financial risk.
Many consumers, however, find LifeLock’s advertising perfectly clear and think the value they receive for their $10 per month charge is well worth it. According to Aaron Freeman, a LifeLock subscriber since 2005, “As recently as 2010, a man in Brooklyn tried to withdraw money from my bank account using a driver's license with my information and his picture. LifeLock has been there for me for each incident. LifeLock agents are proactive and take immediate action while I'm busy at work. I consider the $10 monthly fee to be credit insurance and I'm grateful for their services.” The comments above read suspiciously like they were professionally written as a press release so take them with a grain of sale. I’ve never heard anyone speak so highly of any subscription service regardless of how much they enjoyed it.
Gift Card Protections Coming Soon –
When was the last time you tried to use an old gift card and found out, at the register, that the card had expired or the value was much less than when you originally received it? It’s really no different than trying to use a credit card that is either maxed out or has been declined by the issuer. In either case the end result is the same; you’re unable to make your purchase and you’re embarrassed. But with the case of the gift card, there is no happy ending because you can’t get back the value.
This will be changing thanks to the CARD Act. On August 22, 2010 a provision of the CARD Act takes affect that will provide more aggressive consumer protection rules regarding the issuance of gift cards. Starting in August gift cards will have a 5-year life before they will fully expire. This is good news and bad news. Good news in that if you are given a gift card after August 22nd and then forget about it for months or even years you’ll still be able to use it as long as it hasn’t been a full 5 years. The bad news is that now you really don’t have any sense of urgency to use the card, which means it’s much more likely that you’ll toss it aside and not use it any time soon.
This CARD Act provision does allow for fees to be charged for inactivity or prolonged non-use of a gift card. And, the issuer must notify or otherwise disclose that they intend to charge a fee for inactivity. Now, clearly they aren’t going to send you a bill in the mail for not using your gift card. First off, most gift cards are given to other people so he who bought it is unlikely to actually have it. Second, the gift card issuer will simply reduce the value of the card an equivalent amount to whatever fee they want to charge.
The definition of inactivity in this particular discussion is 12 months. So, if you toss your gift card in a drawer and forget about it then you’ll get charged the fee on some day during the 13th month after you received it. Frankly, you should use the card immediately anyway rather than let it sit and collect dust.
There are exceptions to the gift card provisions of the CARD Act. If the card is being used as a promotional award or isn’t the type of card that is marketed to the masses or is available for sale to anyone then there is no protection from expiration or accelerated reduction in value. For example, some cell service providers will offer a rebate, say $100, in exchange for you buying a certain type of cell phone. In some cases these rebates are in the form of a gift card rather than a check. Those are awards used in a rebate promotion so there is no protection provided in the CARD Act.
The award card previously described is also not for sale or marketed to the general public. So, again, there is no protection afforded in the CARD Act. The bottom line in this case is to use the card as quickly as possible so you don’t have to worry about fees or expiration dates.
There are some people who really don’t care for this provision of the CARD Act for a variety of reasons. First, according to the White House the CARD Act was meant to protect consumers from abusive card issuers. Have any of you honestly felt abused by the company whom you purchased your gift card from? It’s not like they can close an account, jack up an interest rate or tack on a $120 annual fee. They also can’t report your activity to the credit bureaus.
Additionally, this makes it more difficult for public companies to claim the revenue from sales of gift cards. They can sell you the card but they can’t claim the revenue publicly until the card has been used or has expired. If it were up to them they’d really like to be able to claim the revenue immediately but the boys from Enron ruined that for everyone.
And lastly, do any of your remember what cash for clunkers did for car sales in 2009? The auto manufactures killed it the second half of 2009 because of the financial incentive for us to go out and trade in our old cars for new cars. This meant more inventory moving off lots, more sales people actually earning an income, more money being thrown back into the local economy, more cars rolling off the lines in Detroit and elsewhere and more loans being placed with local and national auto lenders.
The CARD Act could have been a “cash for clunkers” equivalent if they would have taken the exact opposite approach. If they would have made it illegal for any gift card to not expire after 6 months then practically all gift cards would be used almost immediately because it was like cash that had been set on fire…use it or lose it!! Nice job boys.
Friday, March 19, 2010
What You Need to Know about Credit and Identify Theft Related Services
You can’t turn on the television, watch a sporting event, or surf the Internet without being hit up with advertisements trying to convince you to buy some sort of credit or identity theft protection related product. Freecreditreport.com, Lifelock, FreeScore.com, and Privacy Matters (aka FreeTripleScore.com) dominate the airwaves, web and overall marketing of these services. The problem with all of these services is that you can do much of what’s being advertised for free or the marketing is misleading.
Take for example FreeScore.com. This is the service being plugged by Ben Stein from Ferris Bueller’s Day Off fame. The problem is the advertising of their service pushes the bounds when it comes to truth in marketing. According to Stein if you ““wanna get a new job, you’re at the mercy of your credit score.” Of course this is not true as employers don’t have access to your credit scores as part of their employment screening processes. They do have access to your credit reports though.
Additionally Stein states that the service “gives me unlimited access to the 3 major credit reports and scores.” Now, I’m pretty sure anyone in the credit industry would recognize the FICO® score as being the “major” credit score used by the lending world. In fact, according to the FICO website 90% of the largest banks use your FICO score to make credit decisions. The score being sold by FreeScore.com (yes, you are signing up for a subscription service when you get your score so I don’t call it free) is likely your TransRisk Score or VantageScore. Neither of those scores are can be called your “major credit score.”
Next is LifeLock. This is the service hocked by Todd Davis, the company’s CEO, as he supposedly drives around the streets with his Social Security Number printed on the side of a truck. I wasn’t there and I didn’t see the truck so I’m calling bologna on that gimmick. LifeLock isn’t a credit monitoring service but they do market themselves as the “#1 Identity Theft Protection” service.
A description of how their service works is on their website. So, here’s a breakdown of some of what you get for $10 per month, and how you can get it for free.
- Monitoring of unregulated Internet and file sharing networks for your identity information. A free alternative would be setting up Google alerts with your name and address. You can do this here for free… http://www.google.com/alerts
- Sex offender records for your zip code. A free alternative can be found via a variety of websites. Google the term “sex offender registry” and be sure to add your city or state name at the end. For example, here’s Illinois’ list. http://www.isp.state.il.us/sor/sor.cfm
- Free annual credit reports. You can do this for free here… https://www.annualcreditreport.com/cra/index.jsp. In all fairness to LifeLock, they do say you can do this on your own for free.
- Reduction in preapproved credit offers. On one of their television commercials they state, “You’ll see a huge reduction in junk mail and preapproved offers.” You can do this for free here… https://www.optoutprescreen.com/?rf=t
- $1 million dollar service guarantee. On one of their television commercials they state, “If anything happens while you’re a client of LifeLock we will cover all losses and all expenses up to one million dollars.” But on their website they state they will NOT cover “lost wages or business profits, loss of business or lost opportunities and direct out-of-pocket expenses like postage stamps, gas or mileage to go to local authorities, or any notary public fees, etc. And they will not cover “any direct losses as a result of the theft.” That hardly sounds like ALL losses and ALL expenses. And the “etc” in the list of things they don’t cover leaves the door open for the list to be much larger.
Next is FreeCreditReport.com, which is owned by Experian. And, twice the Federal Trade Commission has sued them because of their marketing. The credit report being given away isn’t really free; it’s free only if you sign up for a trial period to a credit monitoring service. And if you don’t cancel the service during the trial period then you are billed on a monthly basis for the credit monitoring subscription.
In fact, on April 1, 2010 a new law goes into affect that will clean up how they market their conditionally free credit report. They, and any other service that uses a free credit report as a loss leader, must state the following…
THIS NOTICE IS REQUIRED BY LAW. Read more at FTC.GOV.
You have the right to a free credit report from AnnualCreditReport.com
or 877-322-8228, the ONLY authorized source under federal law.
And finally we end with FreeTripleScore.com also known as Privacy Matters 1-2-3. As with FreeScore.com the data being provided is coming from TransUnion, which means the scores being “given” away are either your TransRisk or VantageScore scores. And, despite their efforts to not disclose their ownership, it appears that the same company is behind FreeTripleScore and FreeScore. Nice try guys.
The new law requiring the more overt disclosure about free credit reports will help to clean up what many believe is a marketplace filled with out of control and deceptive marketing practices. And remember, before you choose to spend the money on any of the credit related products and services listed you should at the very least research free options.
Take for example FreeScore.com. This is the service being plugged by Ben Stein from Ferris Bueller’s Day Off fame. The problem is the advertising of their service pushes the bounds when it comes to truth in marketing. According to Stein if you ““wanna get a new job, you’re at the mercy of your credit score.” Of course this is not true as employers don’t have access to your credit scores as part of their employment screening processes. They do have access to your credit reports though.
Additionally Stein states that the service “gives me unlimited access to the 3 major credit reports and scores.” Now, I’m pretty sure anyone in the credit industry would recognize the FICO® score as being the “major” credit score used by the lending world. In fact, according to the FICO website 90% of the largest banks use your FICO score to make credit decisions. The score being sold by FreeScore.com (yes, you are signing up for a subscription service when you get your score so I don’t call it free) is likely your TransRisk Score or VantageScore. Neither of those scores are can be called your “major credit score.”
Next is LifeLock. This is the service hocked by Todd Davis, the company’s CEO, as he supposedly drives around the streets with his Social Security Number printed on the side of a truck. I wasn’t there and I didn’t see the truck so I’m calling bologna on that gimmick. LifeLock isn’t a credit monitoring service but they do market themselves as the “#1 Identity Theft Protection” service.
A description of how their service works is on their website. So, here’s a breakdown of some of what you get for $10 per month, and how you can get it for free.
- Monitoring of unregulated Internet and file sharing networks for your identity information. A free alternative would be setting up Google alerts with your name and address. You can do this here for free… http://www.google.com/alerts
- Sex offender records for your zip code. A free alternative can be found via a variety of websites. Google the term “sex offender registry” and be sure to add your city or state name at the end. For example, here’s Illinois’ list. http://www.isp.state.il.us/sor/sor.cfm
- Free annual credit reports. You can do this for free here… https://www.annualcreditreport.com/cra/index.jsp. In all fairness to LifeLock, they do say you can do this on your own for free.
- Reduction in preapproved credit offers. On one of their television commercials they state, “You’ll see a huge reduction in junk mail and preapproved offers.” You can do this for free here… https://www.optoutprescreen.com/?rf=t
- $1 million dollar service guarantee. On one of their television commercials they state, “If anything happens while you’re a client of LifeLock we will cover all losses and all expenses up to one million dollars.” But on their website they state they will NOT cover “lost wages or business profits, loss of business or lost opportunities and direct out-of-pocket expenses like postage stamps, gas or mileage to go to local authorities, or any notary public fees, etc. And they will not cover “any direct losses as a result of the theft.” That hardly sounds like ALL losses and ALL expenses. And the “etc” in the list of things they don’t cover leaves the door open for the list to be much larger.
Next is FreeCreditReport.com, which is owned by Experian. And, twice the Federal Trade Commission has sued them because of their marketing. The credit report being given away isn’t really free; it’s free only if you sign up for a trial period to a credit monitoring service. And if you don’t cancel the service during the trial period then you are billed on a monthly basis for the credit monitoring subscription.
In fact, on April 1, 2010 a new law goes into affect that will clean up how they market their conditionally free credit report. They, and any other service that uses a free credit report as a loss leader, must state the following…
THIS NOTICE IS REQUIRED BY LAW. Read more at FTC.GOV.
You have the right to a free credit report from AnnualCreditReport.com
or 877-322-8228, the ONLY authorized source under federal law.
And finally we end with FreeTripleScore.com also known as Privacy Matters 1-2-3. As with FreeScore.com the data being provided is coming from TransUnion, which means the scores being “given” away are either your TransRisk or VantageScore scores. And, despite their efforts to not disclose their ownership, it appears that the same company is behind FreeTripleScore and FreeScore. Nice try guys.
The new law requiring the more overt disclosure about free credit reports will help to clean up what many believe is a marketplace filled with out of control and deceptive marketing practices. And remember, before you choose to spend the money on any of the credit related products and services listed you should at the very least research free options.
Tuesday, February 9, 2010
Everything You Need To Know About Collection Accounts - And More!
By: Shonnie Fischer - CreditCRM Affilaite
Of all of the questions I get regarding consumer credit reporting and credit scoring, collection account inquiries seems to be at the top of the list on a daily basis. This months newsletter is dedicated to the subject of collection accounts and what affect they have on a consumers credit report. Additionally, the most prevalent “credit myths” associated with collection accounts will also be addressed in this article. Far too often myth vs. fact gets passed onto the consumer which in most cases causes further undue damage to the consumers credit report and scores respectively.
Most consumers have a general understanding of what a collection account is. By definition, a collection account occurs if you stop paying on any type of debt where a balance is owed and remains unpaid per the terms of the original agreement contractually entered into by the consumer and financial entity. The lender then takes action to collect on the unpaid and/or deficiency balance by transferring the status of the account from a routine account to a collection account. The lender may have an internal collection department that will then take over the account to collect on, or the lender may sell or assign your account to a outside third party collection agency. Either way the bottom line and single objective is to collect on the remaining debt owed.
Pretty basic so far.....
Collection agencies specialize in collecting money from people who refuse to pay their debt. A collection agency’s main leverage over a consumer, which is also the single most important motivational tactic they use to get a consumer to pay, is by reporting the collection account to the credit bureaus. Any collection activity that reports to the credit bureaus will hurt your FICO® scores. Even if it is a single collection account that reports, you can expect a significant drop in your credit scores once it hits the credit bureaus. As you can imagine, having multiple collection accounts will cause your credit score to plummet even further as you are adding multiple layers of major derogatory information a.k.a “risk” to your credit file.
With respect to the FICO® credit scoring system, collection accounts are considered a major derogatory “event”. When a collection account is reported, the FICO® credit scoring software considers two things and two things only when factoring in a collection account into the credit scoring system. The first factor is that collection account activity exists and is a part of your credit file, which as previously stated is considered a major derogatory account. The second factor is the age of the account relative to the date of original delinquency with the original creditor that lead to the collection account having to be established in the first place. Specifically, this particular credit scoring component as explained is the perfect segue into our first two (and most prevalent) credit myths.
Myth #1- Paying Off A Collection Account Will Increase A Consumers Credit Score.
This is absolutely false!! If you pay off a collection account, typically the effect on the credit score will be neutral. If your scores do increase it will not be by much - guaranteed! Whether or not a collection is reported as paid or unpaid is NOT a credit scoring component. What the FICO® credit scoring system factors in is the fact that you went to collection in the first place. As stated above collection accounts are scored as “events” with the only other credit scoring factor being the age of the account. Collection accounts regardless of the paid vs. unpaid status are indicative of your previous payment history and therefore used as a predictive measure of future credit risk as assessed in the credit scoring software.
The Fair Isaac Corporation, the creators of the FICO® credit scoring software have this information posted on their website myfico.com under the following link: http://www.myfico.com/CreditEducation/Questions/Collections.aspx.
Myth #2- Paying Off Collection Accounts Will Remove It From Your Credit File.
Again, totally false. Unfortunately this where most consumers make an incorrect assumption only to find the account still remains on their report the next time their credit gets pulled. Paying off a collection account will not cause or force automatic removal from your credit report. What will happen once the account is paid, is the balance is updated to reflect the account has been paid in full and the account will continue to report accordingly. Collection accounts whether paid or unpaid along with derogatory information outside of public records, can report for up to 7 years based upon the date of original delinquency with the original creditor. Prevalent with lending and/or industry professionals, the next myth we will address is not so much a consumer credit myth as it is one that is more common with lending specific and/or industry professionals who work with analyzing consumer credit.
Myth #3- Paying Off Collection Accounts Does Not Lower A Consumers Credit Score.
In all fairness, this is a current myth that is based on a past truth. So those of you reading this article who knew this to be the case in days past, let me confirm you are not losing your mind. In previous credit scoring models (still commercially available as late as 2008) when a collection account was paid off it would update the date of last activity which in turn would report into the credit scoring software as if it were a brand new collection account. The date of last activity used to be a credit scoring component in the FICO® credit scoring software, however in 2007 the Fair Isaac Corporation agreed with debt collectors
that a consumer should not be penalized for paying off old debt accounts. While it is true that any current activity causes the date of last activity to reset, FICO® has revised their scoring software to only consider the date of original delinquency for scoring purposes.
To further validate that this is in fact a current truth vs. future feature to come, in September 2009 John Ulzheimer, credit scoring and credit reporting expert and author who is also the President of Consumer Education for Credit.com, went straight to the source and interviewed Ethan Dornhelm, Principal Scientist at FICO® who is also a FICO® score developer to get further clarity on this subject. Mr. Dornhelm confirmed that “The FICO® score is focused on the presence of the collection and how recently the collection occurred. This is true at all credit bureaus and across all generations of the FICO® scoring models still
commercially available today.”
So now that we have covered what a collection account is, what impact it has on a consumers credit score, as well as the most prevalent credit myths associated with collection accounts, what is the best way to handle collection accounts or recover from the adverse affect they have on a consumers credit report?
1- The most obvious answer is to avoid them all together. Pay your bills on time and if ever you find yourself in a financially distressed situation, try to work out a payment plan with the creditor prior to them having to take further collection
action. Be proactive and be honest about your situation with creditors. This is not always going to be an across the board resolve, but at least it lets the creditor know that your are not intentionally disregarding your obligation to pay them. They may or may not do a work out plan with you, however it is worth the effort to contact them first vs. having them assume the worst case which will without question be to start immediate collection action against you to collect on the money owed to them.
2- If number one can not be avoided and an account has already gone into collection, work with the collection agency and try to negotiate deletion of the account in exchange for payment. Not every collection agency will negotiate these types of terms, however I can tell you from my own personal experience that four out of five will. Collection agencies work on commission and/or a consignment fee basis, so at the end of the day they are truly only interested in collecting on the debt and typically will negotiate for deletion when payment in full is received. For consumers this is well worth doing the leg work to try and negotiate this type of agreement with them as this is THE ONLY way to get a valid collection account completely removed from your credit report.
3- If you have a collection account that you do not agree with, or do not believe belongs to you, you do have rights under the Fair Debt Collections Practices Act to dispute the debt. Ignoring the debt or otherwise refusing to pay the collection agency to punish them for what you perceive to be their error is not the way to get this resolved. This type of action will only continue to hurt you as collection agencies are famous for selling debt multiple times over if uncollectible. Each time that happens it adds additional new collection activity to your credit report causing a layer effect. You do have rights under the Fair Debt Collections
Practices Act that allow you to properly and legally dispute the validity of a collection account reporting on your credit report. A summary of your rights is available on the RE Credit Repair website under the Credit Resources section link: http://www.recreditfix.com/credit_resources.php I hope you have enjoyed this publication and it has provided you some clarification and/or helped you to better understand collection accounts in general. Trust me - speaking from personal experience this is one of the most complex areas outside of credit scoring itself to master. If you have any further questions or need personal assistance regarding collection accounts or any other credit related matter please contact me direct via email or my office line anytime.
All my best to you and thank you for reading this months publication.
Of all of the questions I get regarding consumer credit reporting and credit scoring, collection account inquiries seems to be at the top of the list on a daily basis. This months newsletter is dedicated to the subject of collection accounts and what affect they have on a consumers credit report. Additionally, the most prevalent “credit myths” associated with collection accounts will also be addressed in this article. Far too often myth vs. fact gets passed onto the consumer which in most cases causes further undue damage to the consumers credit report and scores respectively.
Most consumers have a general understanding of what a collection account is. By definition, a collection account occurs if you stop paying on any type of debt where a balance is owed and remains unpaid per the terms of the original agreement contractually entered into by the consumer and financial entity. The lender then takes action to collect on the unpaid and/or deficiency balance by transferring the status of the account from a routine account to a collection account. The lender may have an internal collection department that will then take over the account to collect on, or the lender may sell or assign your account to a outside third party collection agency. Either way the bottom line and single objective is to collect on the remaining debt owed.
Pretty basic so far.....
Collection agencies specialize in collecting money from people who refuse to pay their debt. A collection agency’s main leverage over a consumer, which is also the single most important motivational tactic they use to get a consumer to pay, is by reporting the collection account to the credit bureaus. Any collection activity that reports to the credit bureaus will hurt your FICO® scores. Even if it is a single collection account that reports, you can expect a significant drop in your credit scores once it hits the credit bureaus. As you can imagine, having multiple collection accounts will cause your credit score to plummet even further as you are adding multiple layers of major derogatory information a.k.a “risk” to your credit file.
With respect to the FICO® credit scoring system, collection accounts are considered a major derogatory “event”. When a collection account is reported, the FICO® credit scoring software considers two things and two things only when factoring in a collection account into the credit scoring system. The first factor is that collection account activity exists and is a part of your credit file, which as previously stated is considered a major derogatory account. The second factor is the age of the account relative to the date of original delinquency with the original creditor that lead to the collection account having to be established in the first place. Specifically, this particular credit scoring component as explained is the perfect segue into our first two (and most prevalent) credit myths.
Myth #1- Paying Off A Collection Account Will Increase A Consumers Credit Score.
This is absolutely false!! If you pay off a collection account, typically the effect on the credit score will be neutral. If your scores do increase it will not be by much - guaranteed! Whether or not a collection is reported as paid or unpaid is NOT a credit scoring component. What the FICO® credit scoring system factors in is the fact that you went to collection in the first place. As stated above collection accounts are scored as “events” with the only other credit scoring factor being the age of the account. Collection accounts regardless of the paid vs. unpaid status are indicative of your previous payment history and therefore used as a predictive measure of future credit risk as assessed in the credit scoring software.
The Fair Isaac Corporation, the creators of the FICO® credit scoring software have this information posted on their website myfico.com under the following link: http://www.myfico.com/CreditEducation/Questions/Collections.aspx.
Myth #2- Paying Off Collection Accounts Will Remove It From Your Credit File.
Again, totally false. Unfortunately this where most consumers make an incorrect assumption only to find the account still remains on their report the next time their credit gets pulled. Paying off a collection account will not cause or force automatic removal from your credit report. What will happen once the account is paid, is the balance is updated to reflect the account has been paid in full and the account will continue to report accordingly. Collection accounts whether paid or unpaid along with derogatory information outside of public records, can report for up to 7 years based upon the date of original delinquency with the original creditor. Prevalent with lending and/or industry professionals, the next myth we will address is not so much a consumer credit myth as it is one that is more common with lending specific and/or industry professionals who work with analyzing consumer credit.
Myth #3- Paying Off Collection Accounts Does Not Lower A Consumers Credit Score.
In all fairness, this is a current myth that is based on a past truth. So those of you reading this article who knew this to be the case in days past, let me confirm you are not losing your mind. In previous credit scoring models (still commercially available as late as 2008) when a collection account was paid off it would update the date of last activity which in turn would report into the credit scoring software as if it were a brand new collection account. The date of last activity used to be a credit scoring component in the FICO® credit scoring software, however in 2007 the Fair Isaac Corporation agreed with debt collectors
that a consumer should not be penalized for paying off old debt accounts. While it is true that any current activity causes the date of last activity to reset, FICO® has revised their scoring software to only consider the date of original delinquency for scoring purposes.
To further validate that this is in fact a current truth vs. future feature to come, in September 2009 John Ulzheimer, credit scoring and credit reporting expert and author who is also the President of Consumer Education for Credit.com, went straight to the source and interviewed Ethan Dornhelm, Principal Scientist at FICO® who is also a FICO® score developer to get further clarity on this subject. Mr. Dornhelm confirmed that “The FICO® score is focused on the presence of the collection and how recently the collection occurred. This is true at all credit bureaus and across all generations of the FICO® scoring models still
commercially available today.”
So now that we have covered what a collection account is, what impact it has on a consumers credit score, as well as the most prevalent credit myths associated with collection accounts, what is the best way to handle collection accounts or recover from the adverse affect they have on a consumers credit report?
1- The most obvious answer is to avoid them all together. Pay your bills on time and if ever you find yourself in a financially distressed situation, try to work out a payment plan with the creditor prior to them having to take further collection
action. Be proactive and be honest about your situation with creditors. This is not always going to be an across the board resolve, but at least it lets the creditor know that your are not intentionally disregarding your obligation to pay them. They may or may not do a work out plan with you, however it is worth the effort to contact them first vs. having them assume the worst case which will without question be to start immediate collection action against you to collect on the money owed to them.
2- If number one can not be avoided and an account has already gone into collection, work with the collection agency and try to negotiate deletion of the account in exchange for payment. Not every collection agency will negotiate these types of terms, however I can tell you from my own personal experience that four out of five will. Collection agencies work on commission and/or a consignment fee basis, so at the end of the day they are truly only interested in collecting on the debt and typically will negotiate for deletion when payment in full is received. For consumers this is well worth doing the leg work to try and negotiate this type of agreement with them as this is THE ONLY way to get a valid collection account completely removed from your credit report.
3- If you have a collection account that you do not agree with, or do not believe belongs to you, you do have rights under the Fair Debt Collections Practices Act to dispute the debt. Ignoring the debt or otherwise refusing to pay the collection agency to punish them for what you perceive to be their error is not the way to get this resolved. This type of action will only continue to hurt you as collection agencies are famous for selling debt multiple times over if uncollectible. Each time that happens it adds additional new collection activity to your credit report causing a layer effect. You do have rights under the Fair Debt Collections
Practices Act that allow you to properly and legally dispute the validity of a collection account reporting on your credit report. A summary of your rights is available on the RE Credit Repair website under the Credit Resources section link: http://www.recreditfix.com/credit_resources.php I hope you have enjoyed this publication and it has provided you some clarification and/or helped you to better understand collection accounts in general. Trust me - speaking from personal experience this is one of the most complex areas outside of credit scoring itself to master. If you have any further questions or need personal assistance regarding collection accounts or any other credit related matter please contact me direct via email or my office line anytime.
All my best to you and thank you for reading this months publication.
Thursday, February 4, 2010
Calculating Utilization, Let Me Count The Ways
I think I’ve written about utilization, the relationship between the balances and credit limits on credit cards expressed as a percentage, for as long as I’ve owned a computer. But this topic has legs as everlasting as the Gobstopper which shares the adjective. So, for the first time in 2010 and what has to be the 100th time overall, here’s how utilization is calculated.
First off, utilization 101…Mark has a credit card with a $1,000 credit limit. That is, his credit reports show a $1,000 credit limit. His current balance as reported on his credit reports is $500. The utilization of that card is 50% because the balance ($500) divided by the credit limit ($1,000) equals .50 or 50%. Now we can get started.
It’s important to note that the figures I use for my next few examples HAVE to be reported on your credit reports to make these math problems accurate. That’s the bottom line. If it’s not on our credit report then all bets are off.
Line Item Utilization – This is the same calculation as described above for Mark but done for every single open credit card or credit card with a balance. So if you have 10 open credit cards, and open in this examples means it’s not closed, then you’ll have 10 different line item measurements. This is important because the number of highly utilized credit cards on your credit report is a consideration in most credit and insurance risk models.
Aggregate Utilization – This is the same calculation as described above for Mark with one huge difference. For this calculation we are going to combine all of the open credit cards on a credit report to do the math. For example, if I have two credit cards and each has a $5,000 balance and a $10,000 credit limit then I have $10,000 in aggregate balances and $20,000 in aggregate credit limits. Divide $10,000 by $20,000 and you again get .50 or 50%. This measurement is important because the higher utilization the percentage the more risky you are to lenders and insurance companies and the less attractive their terms will be.
High Balance in Lieu of Credit Limits – In some cases your credit cards will not have a credit limit reported. (Note: I’m not talking about charge cards. I’m talking about revolving credit cards that are not reporting a credit limit). In those cases most credit scoring models will look for the historical highest balance, which is typically reported by the credit bureaus, and use that figure in lieu of the missing credit limit. So, if I have a credit card with a $10,000 credit limit but it’s not being reported then the credit score will look for my highest balance figure. If it finds, for example, that your highest historical balance was $7,500 then that’s the figure it will use in lieu of the missing $10,000. So, with my same $5,000 balance and a $7,500 “pseudo limit” I appear to be 67% utilized on that card instead of the true 50%. This is a line item measurement and an aggregate measurement, meaning it is the same regardless of which is being calculated. This practice of withholding credit limits got the credit bureaus sued in a class action case several years ago because Capital One was not reporting credit limits. The case was dismissed because, in my opinion, the court simply couldn’t grasp the details of the problem and the breadth of its impact. Shortly after the lawsuit was filed Capital One began reporting credit limits for the first time in their existence. So, some good did come out of the case.
Missing High Balance and Missing Credit Limit - Now this is a tricky one. In some examples a credit card account will be missing the credit limit and the highest balance. Most credit scoring systems will simply ignore the account for the above referenced utilization calculations because, well, you have no limit to include in the math. This can help the consumer’s scores and it can also hurt the consumer’s scores. For example, if you have a very high balance on that particular credit card but no limit or high credit then that balance can’t increase your aggregate utilization because it’s ignored for that math. It can hurt your score in the example where you have a very low balance relative to the credit limit, which isn’t reported because you don’t get any value of the large difference between the balance and the limit, which is called open-to-buy.
Shadow Limits – A shadow limit isn’t a credit card that’s been left under a leafy tree. Instead it’s the unpublished maximum preset spending limit that all credit cards have, even charge cards that are marketed as not having a preset spending limit. That would suggest that you could use your charge card to buy a $100,000 Mercedes, if the dealership took plastic for such a purchase. And while some very wealthy individuals might be given that amount of shopping power, it’s atypical. The shadow limit is not reported to the credit bureaus so the high balance is the next best figure to use when calculating utilization. And if it’s a charge card the newer FICO scores will not count it in utilization at all. There are, however, revolving credit cards that are also marketed as not having a preset spending limit and, thus, a shadow limit.
The moral of this story is simple; you’d like to do business with credit card issuers who do report the credit limit to all three credit bureaus. It give you the ability to strategically use that card so that you never exceed some self applied utilization percentage. For example, if you know your credit card has a credit limit of $10,000 (and it’s being reported to the credit bureaus) and you never want to exceed 10% utilization on that card then you know you can never allow more than $1,000 to be reported to the credit bureaus as a balance.
First off, utilization 101…Mark has a credit card with a $1,000 credit limit. That is, his credit reports show a $1,000 credit limit. His current balance as reported on his credit reports is $500. The utilization of that card is 50% because the balance ($500) divided by the credit limit ($1,000) equals .50 or 50%. Now we can get started.
It’s important to note that the figures I use for my next few examples HAVE to be reported on your credit reports to make these math problems accurate. That’s the bottom line. If it’s not on our credit report then all bets are off.
Line Item Utilization – This is the same calculation as described above for Mark but done for every single open credit card or credit card with a balance. So if you have 10 open credit cards, and open in this examples means it’s not closed, then you’ll have 10 different line item measurements. This is important because the number of highly utilized credit cards on your credit report is a consideration in most credit and insurance risk models.
Aggregate Utilization – This is the same calculation as described above for Mark with one huge difference. For this calculation we are going to combine all of the open credit cards on a credit report to do the math. For example, if I have two credit cards and each has a $5,000 balance and a $10,000 credit limit then I have $10,000 in aggregate balances and $20,000 in aggregate credit limits. Divide $10,000 by $20,000 and you again get .50 or 50%. This measurement is important because the higher utilization the percentage the more risky you are to lenders and insurance companies and the less attractive their terms will be.
High Balance in Lieu of Credit Limits – In some cases your credit cards will not have a credit limit reported. (Note: I’m not talking about charge cards. I’m talking about revolving credit cards that are not reporting a credit limit). In those cases most credit scoring models will look for the historical highest balance, which is typically reported by the credit bureaus, and use that figure in lieu of the missing credit limit. So, if I have a credit card with a $10,000 credit limit but it’s not being reported then the credit score will look for my highest balance figure. If it finds, for example, that your highest historical balance was $7,500 then that’s the figure it will use in lieu of the missing $10,000. So, with my same $5,000 balance and a $7,500 “pseudo limit” I appear to be 67% utilized on that card instead of the true 50%. This is a line item measurement and an aggregate measurement, meaning it is the same regardless of which is being calculated. This practice of withholding credit limits got the credit bureaus sued in a class action case several years ago because Capital One was not reporting credit limits. The case was dismissed because, in my opinion, the court simply couldn’t grasp the details of the problem and the breadth of its impact. Shortly after the lawsuit was filed Capital One began reporting credit limits for the first time in their existence. So, some good did come out of the case.
Missing High Balance and Missing Credit Limit - Now this is a tricky one. In some examples a credit card account will be missing the credit limit and the highest balance. Most credit scoring systems will simply ignore the account for the above referenced utilization calculations because, well, you have no limit to include in the math. This can help the consumer’s scores and it can also hurt the consumer’s scores. For example, if you have a very high balance on that particular credit card but no limit or high credit then that balance can’t increase your aggregate utilization because it’s ignored for that math. It can hurt your score in the example where you have a very low balance relative to the credit limit, which isn’t reported because you don’t get any value of the large difference between the balance and the limit, which is called open-to-buy.
Shadow Limits – A shadow limit isn’t a credit card that’s been left under a leafy tree. Instead it’s the unpublished maximum preset spending limit that all credit cards have, even charge cards that are marketed as not having a preset spending limit. That would suggest that you could use your charge card to buy a $100,000 Mercedes, if the dealership took plastic for such a purchase. And while some very wealthy individuals might be given that amount of shopping power, it’s atypical. The shadow limit is not reported to the credit bureaus so the high balance is the next best figure to use when calculating utilization. And if it’s a charge card the newer FICO scores will not count it in utilization at all. There are, however, revolving credit cards that are also marketed as not having a preset spending limit and, thus, a shadow limit.
The moral of this story is simple; you’d like to do business with credit card issuers who do report the credit limit to all three credit bureaus. It give you the ability to strategically use that card so that you never exceed some self applied utilization percentage. For example, if you know your credit card has a credit limit of $10,000 (and it’s being reported to the credit bureaus) and you never want to exceed 10% utilization on that card then you know you can never allow more than $1,000 to be reported to the credit bureaus as a balance.
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