Tuesday, April 19, 2011

Remodel Your Credit Before You Begin Renovating Your Home

Improved resale value, more space or better use of the space you have, and a brand-new room to enjoy... It may be hard to imagine a downside to renovating a kitchen or bathroom. But you could discover a dark side to remodeling - deciding to finance the project by borrowing the money before checking your credit.

With the real estate market still limping along in many areas of the country, you may decide that it makes more sense to improve the home you have, rather than move into a new one. And you wouldn't be alone in thinking that way. Harvard's Joint Center for Housing Studies predicts Americans will spend nearly $141 billion on remodeling in the first half of 2011.

The economy may be driving the renovation trend another way, as well. Interest rates are low - for those who can qualify for them, with good credit.

So it makes sense to know what's on your credit report and what your credit score is before you make plans to renovate your kitchen, bath or any other room in the house.

If you plan to use credit to finance a renovation project (and few of us can afford to pay cash these days), be proactive and understand your credit with these simple steps:

1. Find out where you stand.

Although it's fairly easy to obtain a free credit report and score online, many Americans aren't confident about where they stand in terms of credit. Your first step toward making your renovation dreams a reality is to find out how potential lenders will perceive your credit worthiness.

Reviewing your credit score through Websites like Transunion's TrueCredit can help you get a clear picture of how potential creditors might perceive your use of credit. Membership in the site's credit monitoring membership can also help you keep on top of your credit by sending you e-mail alerts when something changes on your credit report.

* Take action - and keep at it.

If you find errors on your credit report, contact the major bureaus and dispute the errors. It's also a good idea to monitor your report regularly, throughout the year, as identity theft or instances of fraud could show up on it, alerting you quickly to a situation you otherwise might not have discovered for months.

Your credit score is a fluid number, and it can change throughout the year as you improve your payment records, miss or delay a payment, and open or close lines of credit. Many factors go into calculating your credit score, but generally bureaus take into account how reliably you pay bills on time, the total amount you owe in secured and unsecured debt, and how much unused credit you have available.

* Get an idea of the impact.

Knowing your credit score not only better empowers you to bargain for the optimum loan terms, it can also help you understand how that new renovation loan will affect your score and report.

Whether you're remodeling just one room in a house or the entire house, funding the project can affect your finances, including your credit score. If you make sure you understand - and have a handle on - your credit before undertaking a project, you'll be more likely to reap the rewards, and avoid the downside, of home renovation.

Reprinted by permission from the Richmond Times Dispatch - published print edition Sat April 16, 2011.

Get A Free Transunion Credit Score through TrueCredit HERE

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Next Post: 8 Secret Credit Scores (you might not have even heard about).


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Thursday, April 14, 2011

8 Secret Scores That Lenders Keep Part 1

By Liz Pulliam Weston from MSN Money

Lenders track every last detail of your spending habits, and then use the data to estimate not just how big a risk you are but how profitable a customer you might be.

Recently my husband and I received nearly identical balance-transfer offers from our respective Bank of America cards. The offers were identical, that is, except for the rates we'd be given. He was enticed with a 0% rate. Mine was 2.99%.

We live at the same address and share the same income. We both have high credit scores (although his are, annoyingly, a few points higher than mine).

So are these different offers evidence of rampant sexism on BofA's part? Hardly. The pitches were the result of complex and largely secret scoring systems that most financial institutions use to boost profits while limiting losses.

You've heard by now of credit scores, the three-digit numbers lenders use to gauge your creditworthiness. Credit scores predict how likely you are to default on a credit account or loan; they're used to help set interest rates and terms.

What you may not know is that credit scores are just the start of the way financial institutions evaluate you, and they're not even the most commonly used scores -- far from it.

While a credit card issuer might check your credit scores once a month as part of its regular account review process, the same company probably checks other kinds of scores every time you pull out your plastic.

"Every single transaction has some sort of score being generated," said credit scoring expert John Ulzheimer, president of Credit.com's education services and author of the book "You're Nothing But a Number." "Generally they're checking whether the transaction is likely to be fraudulent, but there are other reasons as well."

You're being judged by the type of transactions you make, how you pay your bills, how much profit you generate for your lenders and a host of other factors. The scoring formulas might be created by the credit bureaus, third parties or the lenders themselves. Banks and other financial institutions are tight-lipped about many of the details of these other scoring systems, but they're used to determine:

* The kind of credit card offers you get.

* Whether your credit limits are raised or suddenly lowered.

* Whether your over-limit credit or debit transactions are approved.

* Whether your card issuer calls you about a suspicious transaction, blocks it or shuts down your account.

* How cooperative your issuer is about waiving fees or lowering your interest rate.

* How quickly your issuer calls you if your payment is late.

* Whether a collection agency contacts you about an old debt and how hard it pushes.

Your credit scores are just the start.

Here are some of the ways you might be scored, roughly following the life cycle of a credit account. You're very familiar with credit-risk scores, but the other eight rarely see the light of day.

Credit-risk scores: These are the credit scores most of us know. The leading credit score, the FICO, was created by Fair Isaac and ranges from 300 to 850, with scores over 700 generally considered to be low risk.

Response score:
This score predicts the likelihood a consumer will respond to an offer of credit, such as a new card or a balance transfer offer. Credit card issuers use response scores to decide whom to target and how to customize offers to appeal to particular consumers, said Chisoo Lyons, vice president for analytic research at Fair Isaac, which created the leading FICO credit score as well as many other scoring formulas.

Application score: This score scoops up data from your credit application that's not included in your credit scores, said Ulzheimer, who worked for Fair Isaac and for credit bureau Equifax before joining Credit.com. That data include how much you earn, how long you've lived at your current address and how long you've worked for your current employer. Application scores are typically used in combination with other scores, such as credit and bankruptcy scores, to determine whether to open the account, what rate to give and how much credit to extend.

Bankruptcy score: Credit scores typically predict the chance you'll miss a payment in the next two years. Bankruptcy scores predict the likelihood you'll throw in the towel on your debt entirely and file for Chapter 7 liquidation or a Chapter 13 repayment plan, said David Rubinger, spokesman for credit bureau Equifax, which produces the leading Bankruptcy Navigator Index or BNI. BNIs range from 1 to 300, with the higher the score, the lower the predicted risk. Most lenders use both credit scores and bankruptcy scores, Ulzheimer said, to help assess the risk that you won't pay.

Revenue score: Lenders want to maximize the profitability of each account, and one way they do that is to gauge how much money each account is likely to generate.

Continue to 8 Secret Scores That Lenders Keep Part 2


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8 Secret Scores That Lenders Keep Part 2

Attrition-risk score: Attrition risk refers to the likelihood a user will stop using a card, and attrition-risk scores are typically used in combination with other scores to determine what to do next if you look ready to bolt. If your account generates a lot of revenue and is deemed at low risk for default or bankruptcy, for example, the issuer might aggressively try to keep your business by jacking up your credit limit, lowering your rate and pelting you with convenience checks. If your account isn't that profitable or is deemed risky, on the other hand, the issuer might just let you go.

Behavior score:
Credit scores provide a snapshot of how a consumer is handling all of his or her credit accounts. Behavior scores, by contrast, typically focus on a single account (the one you have with that particular creditor) but take in a broad view. Does the user pay off her bills every month, carry a balance occasionally or frequently pay only the minimums on her cards? That information typically isn't available on a credit report, but is contained in the issuer's databases, along with other data that helps the score describe how she handles her account. A behavior score might be used in conjunction with other scores, such as credit or bankruptcy scores, to decide whether an overdue payment is an aberration (maybe he's traveling?) or a sign of impending financial crisis (maybe we should call the consumer today and find out what's going on).

Transaction score: These are the scores run each time you use your plastic to determine whether the transaction should be approved. Issuers are typically looking for signs the transaction might be fraudulent, but transaction data can be used in other ways as well (more on that in a minute).

Collection score: You've failed to pay for long enough that your card has been turned over to a collection agency. These agencies use collection scores to assess the likelihood that you'll be able to pay them and sort their list of debtors accordingly. Collection agencies watch for all kinds of evidence that your financial situation may be improving, Ulzheimer said, from better credit scores to another collector's account suddenly being reset to 0, indicating it's been paid off.

If, on the other hand, your credit is in the dumps or the amount involved is small, the collection agency may make minimal effort.

"Why spend time and effort to track you down if you're not likely to pay?" Ulzheimer said. "Probably the most cost-effective (tactic) is to write you a letter, put it on your credit report and wait for you to call them."

Waiting, watching, hoping...

As several of the previous examples show, lenders and others often combine different types of scores to assess you. Sometimes the evaluations become pretty sophisticated.

One scoring model sold to lenders, the TRIAD Transaction Score created by Fair Isaac, takes into account credit risk, attrition, potential revenue and patterns in the user's charging behavior that might indicate higher or lower risk.

Let's say you typically spent $1,000 a month on your credit card, usually on toys, clothes and eating out at family restaurants. Then one month your spending changes -- you still spend $1,000, but now it's to get cash advances, buy groceries and gamble at the local racetrack.

The scoring formula may decide you've gone from Stable Family Guy to Desperate Unemployed Guy and flag the issuer that you've become a higher-risk customer.

Instead of a single three-digit number, TRIAD generates three numbers. Typically the scores will include a credit-risk score and an attrition score, both somewhere on a scale of 50 to 999 with higher numbers being riskier, plus a dollar figure to indicate the account's potential revenue generation.

If the issuer decides the risk of your default outweighs the profits you generate, it might reduce your credit limit. If you're a profitable customer, on the other hand, the card issuer might wait awhile to see if your situation improves.

Yes, it is rocket science...

How issuers decide what to do with the scores depends on their companies' policies, and even those are often changing targets. Credit card issuers constantly tweak their systems to maximize profits and minimize losses.

"Those guys at NASA have nothing on the Ph.D.s who work for credit card companies," Ulzheimer said. "They're Mensa-level smart, and they are very, very sophisticated in the ways they use credit data."

Which is not to say issuers, or the scoring systems they use, never make mistakes. Case in point: an issuer sending two different offers to the same household, as they did to ours. Most issuers use software to make sure that doesn't happen, Ulzheimer said; they don't want us comparing notes. (Bank of America didn't return my calls about the issue.)

In fact, financial institutions in general aren't eager to reveal how they make the decisions they do -- and that's not likely to change soon. While you have a federal right to see your credit scores, that's not true with other scores, which lenders often consider proprietary information.

Is that a crisis for consumers? I have mixed feelings about that. You clearly need to see your credit scores, since they influence so much of your financial life across the board. But given how many of these other scores are in use, how different they are and how many ways they're applied, I'm not sure I really want to see them all.

Back to 8 Secret Scores That Lenders Keep Part 1


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