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Are American Consumers Taking on Too Much Debt?

This is a very cool infographic from Equifax. Wow!

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How Closing a Credit Card Affects Your Credit Report and Score

By credit expert: John Ulzheimer:
http://www.johnulzheimer.com

If you follow credit scoring to any extent, you're probably familiar with the concept that closing credit card accounts can potentially lower your credit scores.

The idea that closing a credit card will always have a negative impact upon a person’s credit scores is untrue. There are some scenarios under which closing a credit card is completely benign. Let’s explore the issue in depth.

The Never Ending Myth:

The idea that closing a credit card automatically lowers a consumer’s credit scores due to the fact that the age of the account will no longer be counted is false. FICO^® and VantageScore^® credit scores still consider the age of closed credit card accounts when determining a consumer’s credit scores. In fact, closed credit card accounts even continue to age as time passes. Keep in mind, however, that closed accounts will eventually be removed from your credit reports 10 years after the closing date and at that time you will lose the value of the age of the card.

Why Closing a card can actually hurt scores:

Credit scoring models are very concerned with a consumer’s revolving utilization (or debt-to-limit) ratio. Revolving utilization is a fancy way to describe the relationship between the balances on all of a consumer’s credit card accounts with the credit limits on his open credit card accounts. Closing a credit card can cause your utilization ratio to go up and, therefore, your scores to go down.

If Joe Smith has 3 credit cards, each with a limit of $2,000 ($6,000 total available credit) and a balance of $1,000 per card ($3,000 total debt) then his aggregate utilization ratio is 50% ($3,000/$6,000 = .50). If he were to close one of the cards his total available credit would be reduced to $4,000 while his total debt remains at $3,000.

Closing that one card just shot Joe Smith’s utilization ratio up from 50% to 75% ($3,000/$4,000 = .75) within the space of a single phone call. This is the one reason your scores would go down because of you closing a credit card account.


Closing Cards Strategically:

Smart consumers know that carrying credit card debt from month to month is a bad idea. Revolving a balance on credit cards is not only bad for a consumer’s credit scores, it is a poor financial decision as well because of expensive interest. The best way to use credit cards is to spend only as much as you can afford to pay off, in full, by the due date. But, if you are resolved in your decision that credit cards are no longer for you, there are a few smart ways you can do this.

Scenario #1

If a consumer has no credit card debt, ever, then he can close a credit card without any impact to his credit scores. Closing a credit card with a high annual fee, for example, might actually be a wise decision. Remember, if the consumer has a $0 balance on his credit card across all of his accounts then his utilization ratio is 0%.

Scenario #2

If a consumer has several credit cards with high limits and wants to close a credit card with a much lower limit, then doing so will probably have little-to-no impact on the consumer’s credit scores, depending on how much debt he’s carrying on other cards. However, unless the card with the low limit has a high annual fee or perhaps a high interest rate, it’s probably a better idea to keep the account open.

Scenario #3

Consider not closing any of your credit cards, ever. Unless your card has an annual fee, it costs you nothing to keep it open. If it has a high interest rate, just don’t use it or use it for minimal purchases, like a tank of gas, so that it can be paid in full easily by the due date. This way you won’t ever have to worry about the potential damage of closing credit cards.  Furthermore, having several different cards can actually come in handy; learn more about the value of carrying multiple credit cards.


Learn more from credit expert John Ulzheimer at: http://www.johnulzheimer.com

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Reducing Debt in 2012

Trimming the fat may be the most popular New Year’s resolution out there, but trimming your debt is not far behind for a lot of people.

“Getting out of debt is more strategic than simply writing a check to your creditors,” said John Ulzheimer , President of Consumer Education with SmartCredit.com and contributor at the National Foundation for Credit Counseling.
 
“You can save hundreds or thousands of dollars by prioritizing your debts,” he added. “You can also get the benefit of a higher credit score by being smart about what you pay first.”
Ulzheimer recommends these ground rules for those who are serious about reducing their debt in 2012:

REMEMBER THE BASICS
Make sure you make your minimum payments to ALL of your creditors… on time… each month.  If you can pay more, you should.  But skipping a payment or paying late is a big no-no.

RETAILER CARDS FIRST
Choose your retailer credit cards (i.e. Macy’s, Gap, Nordstrom, etc.) as the ones you pay off first.  Be aggressive.  On average, the interest rate on these cards is about 10-12-percentage points higher than general use credit cards like Visa, MasterCard, and Discover.
“You should be able to knock them out faster because the balances on these cards are generally lower than general use cards,” said Ulzheimer.
“And by paying off retail cards, you’ll also improve your credit score because you’ve lowered the number of cards with a balance and the infamous “debt utilization” percentage – both of which are very important in your FICO scores.”

SOCK LESS AWAY…FOR NOW
Ulzheimer said you may also want to stop contributing to your 401K and IRA until you’ve paid off your credit card debt.  The amount you are earning in “gain” is probably not as much as you are paying in interest.
“That means you’re losing money each month you have credit card debt.” Said Ulzheimer.

INSTALLMENT DEBT VS. CREDIT CARD DEBT
Don’t put installment debt in front of credit card debt.  Rates on cars, houses, student loans are much lower than those on plastic.  And you are probably getting tax advantages on your mortgage and student loans.

KNOW WHEN TO SETTLE
If your debt is in default or being handled by a collection agency, then you need to offer what’s referred to as a “settlement.”

“I never advise this unless you’re dealing with collection agencies,” said Ulzheimer.
“They normally acquire the debt for pennies on the dollar so your former $1,000 debt isn’t really what you owe the collector, but that’s what they’re going to try to collect,” he explained.  “Start your offer at 10% of what they say you owe and work with them until a satisfactory settlement has been reached.

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A Credit Score That Tracks You More Closely Than You Think ...

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Six Ways to Beat Late Fees

By Naomi Mannino

Did you know late fees are assessed on just about all your monthly bills? These include bills related to your mortgage, cellphone, cable, utilities, insurances, credit cards, library books, traffic tickets and even kids' activities. And, of course, Uncle Sam assesses severe late fees and penalties if you're past due with your tax payment.

"Issuers claim they are a way to account for risk, but our research in the credit card industry shows that is not the case. They are trying to maximize revenue with late fees," says Josh Frank, senior researcher for the Center for Responsible Lending.


Financial experts agree that credit card late fees have been reined in somewhat by the Credit Card Act of 2009, which limited late fees to $25 for the first violation and $35 for subsequent violations. But these rules have substantial loopholes and do not apply to small-business credit cards or any other type of late fees, which can ring up at $39 each and more for past due payments -- on your mortgage, for example.


Late Fees Have Big Consequences

"While late fees (for many debts) are not reported to the credit bureaus, the late payments certainly are. That loads your credit report with delinquencies and can trigger a rate increase on your other cards for all future purchases," says John Ulzheimer, president of Consumer Education at SmartCredit.com. - Say you have one of those zero percent interest credit cards. Many of those have a clause that says one late payment will have the account default to an interest rate as high as 35%.

Another caveat:

"Credit card issuers can revoke your air miles, rebates and rewards for late payments. You may be able to reinstate them, but you'll be charged a reinstatement fee," says Frank.

Dave Ramsey, personal finance expert and radio talk show host, says, "When you pay your bills late and incur that extra charge, you're simply paying more and more every month. You're putting yourself deeper into debt and making it harder to pay in full on time next month."


Late Fees Are Not in Your Budget

The 2011 Financial Literacy Survey from the National Foundation for Credit Counseling found that more than half of adults don't keep a budget or track their expenses. In order to break the cycle of debt and late fees, Ramsey suggests you first figure out exactly where your money is going. "Make a written budget that gives each dollar a name -- including late fees," he says. You will be able to see just how much money you've been paying in late fees every month and what you can cut if you can pay each bill on time.

Says Ulzheimer: "You have to pay on time and be smart about taking on liability. If not, you are going to have a serious compounding problem unless you bring in more income or spend less."


Don't Make the Same Mistake Twice

Chronic procrastinators pay a higher price in the long run.

"The Fed approved a cap for late fees on credit cards, but the rule lets issuers charge a higher late fee of up to $35 if customers make more than one late payment," says Frank. "Credit card issuers can also change your annual percentage rate, or APR, to whatever they want on new charges and balances in the future. If you go 60 days late, they can change your APR on your total balance and you'll simply have to accept the consequences."

In addition, multiple late payments may prompt electric companies and cooperatives to demand additional substantial deposits and fees, without which they can disconnect your service.


Know the Rules, Grace Periods and Due Dates

Due dates for all your monthly expenses are clearly printed on your bills and statements, but they can change. Under the Credit Card Act, a credit card company must send you a notice 45 days before they can change fees, rates or other terms, but other bill issuers and monthly expenses are not bound by those rules. While the Credit Card Act extended the grace period to 21 full days (from 14 days), the grace periods for other companies and service providers vary. Knowing this information for each of your creditors can save you late fees.

"The consumer who is going to win against late fees is one who notes due dates on a calendar and works toward setting a shadow date to pay recurring bills a month early in advance," says Ulzheimer.

If you're desperate, making a phone payment, paying in person or paying online (note any lead times for posting) by the end of the grace period can help because the consequences of convenience fees (typically up to $15) are much less than the consequences of the late payment and late fees (typically $25-$39 and up).


Don't Be Afraid to Ask

If something unusual happens to you one month, it's a good idea to approach your creditor.

"If you happen to get in a bind and make one late payment for a good reason, ask your lender to give you a goodwill adjustment of your late fee. Obviously that doesn't work if you are habitually late," says Ulzheimer.

You can also avoid late fees by calling up before the due date to request an extension for many regular expenses such as the phone, electric and insurance payments.

If you find payment timing to be the problem, call to request a different monthly due date that better matches the timing of your paycheck to avoid late fees, says Frank.


Take Proactive Rather Than Reactive Steps

According to the 2011 Financial Literacy Survey from the NFCC, one in four adults admit to not paying all of their bills on time. "If you're paying late fees regularly but not defaulting, you are able to pay but are choosing not to pay on time and incur the late fee. The larger problem is fiscal irresponsibility," says Ulzheimer.

"If you're living paycheck to paycheck and paying late fees, you're a ticking time bomb. If an emergency happens or you get laid off, you will be tempted by pawn shops, car title and payday loans that are an extremely expensive start on your way to total default on all of your obligations."

If you find yourself juggling too many payments or too much debt, consider credit counseling or getting into a nonprofit debt management program.

"Go through the government-regulated National Foundation for Credit Counseling and stick to the program of paying back your debts and your monthly expenses on time with lower interest rates and no late fees," says Ulzheimer. "It takes hard work, commitment and typically three to five years to complete, but you'll get out with excellent credit and no debt."


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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.


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What the Credit CARD Act (Credit Card Accountability, Responsibility and Disclosure Act of 2009) Means For You

Restrictions on rates and fees:

This new legislation will put restrictions on credit card companies from increasing rates and fees on existing balances.

If your credit card company raises your interest rates, the newly raised rate will not apply to your preexisting balance, just on new charges.

Avoid getting charged fees by always paying your credit card bills on time, even if you’re only paying the minimum monthly payment or balance.

Keeping the balance below your total credit limit will also help lenders view you more favorably (try to stay under 33% of your total limit).


No immediate changes:

The new law won’t go into effect for nine months.

Meanwhile, banks may still raise interest rates on your existing balances. A smart move now would be to start or continue monitoring your credit so you’re aware of balances and debt as well as fees, rates and interest charges.


Curbing of caps and fees:

The new legislation doesn’t completely cap credit card fees and interest rates.

For example, the regulation doesn’t set limits on the charges that may come with your monthly statement. It does, however, ban late fees if the issuers had delayed crediting the payment.

It also requires banks to give consumers at least 21 days notice when sending bills.

You’ll have more time between a bill’s receipt and its due date, but make sure you stay on top of your bills to avoid late charges.


No more rate raise surprises:

Credit card companies must now alert customers 45 days before interest rate increases.

They’re also required to give notice of significant changes to a card’s terms, so that companies can’t completely alter rewards programs without warning on customers who have been participating for years in a certain rewards program.

Be sure you understand a credit card’s terms before you agree to anything — read all the fine print.


Harder to get credit for some:

Credit card companies will be required, under the legislation, to consider a consumer's ability to pay when issuing credit cards, which could make it harder for some to get credit (but could also protect them from getting in over their heads). It also limits how issuers can offer credit to those under 21 without verification of their ability to pay or parents' permission.

It makes great financial sense to keep aware of how lenders view you as a borrower, so start or continue staying on top of your credit report!

Good stuff!


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Four Myths About Your Credit History

From Equifax's own: Robin Holland


If you don’t learn how to understand your credit, it will be a lifelong problem.

You most likeley know that you should be checking your credit report at least once a year.

Do you understand what’s included in your credit report and how to read it?

Do you know what your credit score means?

When I work with consumers or lead workshops on financial literacy and credit, I’m always amazed at the misconceptions about credit histories, credit scores, and credit-reporting agencies.

Here are four myths about your credit history that I hear people proclaim frequently as truth:


Myth #1: The credit-reporting agency is responsible for my debt (or credit) rejection.

The credit report is an important part of the decision to grant you credit or not, but it’s not the only one.

Each lender or creditor has a set of criteria it uses to determine whether or not you qualify for that credit.

Think about it: It’s much easier to get a gas card than a credit card or a mortgage.

That’s because the requirements to qualify for a gas card are not as stringent as those for a mortgage.

It’s up to you to establish an on-time payment history and a good mix of credit.

Then when the creditor pulls your credit report, the creditor can look at your history, along with the other information you have provided, to make a decision about whether or not to give you credit.

A lot of the details you may provide, such as your gender, income, and employment history, aren’t on your credit report. But you can take responsibility for your financial identity and make sure the information reported about your credit history will present a positive picture of you to creditors.


Myth #2: The credit-reporting agency put the negative information on my credit file.

A lot of people don’t understand how credit reporting works.

Credit reporting agencies put information in your file when creditors send us details about your payment history.

Credit reporting agencies are not out to get you, and no one pays us to report negative information so they can avoid granting you credit.

We compile the data sent to us about your financial history and present it as a snapshot of your finances.

*** There may be inaccurate information on your credit report (and you should frequently check your file at all three nationwide credit reporting agencies for inaccuracies), and if you find any inaccuracies contact the credit reporting agencies to dispute them.


Myth #3: My credit score is a part of my credit report.

Your credit score is not included with your credit report.

You can access your credit report and credit score from Equifax or one of the other nationwide credit reporting agencies.

Your credit report is a history of how you pay your bills.

It includes your credit accounts—mortgages, student loans, credit cards, and auto loans—and shows if you’ve been late or on time with your payments, the balances on these accounts, and who else has been looking at your credit report.

Your credit score is calculated from a formula based on the components of your credit report.

While the score is a good reflection of you and your financial capabilities, there’s still room for interpretation.

A lender or creditor will look at your score as another element in determining the risk in lending to you or giving you credit.

So you can get your credit score from a credit-reporting agency, but it is not automatically included with your credit report unless you purchase a credit report and score product or subscribe to a credit monitoring service that includes it. (Because like all companies, we need to show a profit).


Myth #4: Credit-reporting agencies make the rules on how your credit history is reported and how long information stays on your credit report.

Nope.

The credit reporting agencies compile and report information about your credit history, but we’re not the decision makers.

A government agency, the Federal Trade Commission (FTC), governs the credit reporting agencies.

The Fair Credit Reporting Act (FCRA) outlines the rules on what credit reporting agencies can and cannot report and how long negative factors stay on your file.

It is helpful for people to understand what a credit reporting agency does and how information gets into their credit report. The more knowledge you have about this and your credit history the more control you will have over your finances.


Robert's comments: This is some good information. As much as I criticize the 3 big credit reporting agencies, we would not have the access to credit that our economy is based on without them.


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Secrets ot the Perfect Credit Score

Good Credit Scores Are the Key To Financial Health

Credit scores were developed as tools to help banks and businesses make objective decisions. To generate them, a mathematical formula pulls credit report data and transforms it into a numerical rating. Fico Scores range from a low of 300 to a high of 850, and, according to Fair Isaac, the creator of the scoring system, mortgage lenders consider anything above 760 as ideal.

Despite differences in each ranking system, they have one thing in common: A higher score indicates less risk. And having high credit scores makes you more appealing to lenders, employers and landlords.

Consequently, focusing on your credit scores is only natural. "People are drawn to this subject because it allows them to measure something that they equate to financial health," says Jose Rivas, the national education manager for Consumer Credit Counseling Service of San Francisco.

That focus, however, can turn into anxiety, and conflicting information is often to blame.

"One article states that consumers should close their unused accounts," says Rivas, and "another states that consumers should never close their accounts." For this reason, getting the facts from reliable sources is essential.


Keeping the Right Mix of Credit

"Every time someone runs my credit, they say, 'Wow, I almost never see someone with credit that high,'" says Carrie Rocha of Minneapolis, the founder of the “Pocket Your Dollars” blog. She keeps her credit first-rate to preserve her autonomy.

"As someone who got out of $50,000 in debt in less than three years, I take a lot of personal pride in my financial freedom" she says.

Though Rocha has no plans to borrow money again, "I have no barriers when it comes to employment, insurance or other areas of life where my credit score is used to assess the kind of risk I am."

Besides "the obvious things like pay my bills," Rocha says she increased her scores by talking to her credit union loan officer, who said an overabundance of idle retail accounts was driving it down.

She had opened the cards randomly during in-store promotions but never really charged on them, so there was no history to protect. After formally closing the accounts, her scores that were previously in the 720 to 740 mark rose to the 800s.


Does the Perfect Credit Score Exist?

Pursuit of excellence is often wise, but does "perfect" exist? Yes, says Craig Watts, the public affairs director for Fair Isaac. "Several thousand consumers do, in fact, have the highest possible FICO score."

Though most people won't reach the credit score apex, you can get close by consistently following three simple guidelines:

• Pay all bills on time.

• Keep credit card balances low.

• Take on new credit only when you really need it.

Don't obsess over small credit score variations. "Lenders decide what score they will accept for their best-interest-rate product," assures Watts.

"They genuinely don't care if your score is 50 or 100 points higher than that."

Clearly, A-plus credit has its advantages, but there is no reason to go overboard. Find a balance between attentiveness and fixation by understanding what those numbers can do for you and knowing how you can improve them.

And remember: Credit scores gauge your borrowing history, not your value as a person.


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Why the Credit Bureaus Can't Get It Right - Part 2

How Problems Go Global

So suppose there’s a whopper of an error on your credit report - Suppose it says you’re dead.

That’s what Ken Clark, a financial planner in Little Rock, Ark., was told when he tried to buy his wife a minivan. The auto dealer called Clark a con man because his report was marked “deceased.”

When Clark called the credit bureaus to report that he was still breathing, he learned that the real authority on the matter was a Utah bank that issued him a credit card and later reported him dead. To fix the error, Clark had to send a notarized letter and a copy of his utility bill to the bank, which in turn assured the bureaus that he was alive.


Clark’s story sheds light on how the dispute process works.

Credit bureaus say they usually need to check with the lender because 30 percent of disputes are filed by shady credit-repair companies that challenge all the negative information on a consumer’s report, regardless of its validity. Bureaus also have to deal with consumers who pull stunts like concocting official-looking statements on phony letterhead; one bureau says it recently got a letter from “Banke [ed.-this “typo” is intentional, replicating the original] of America.”

To sort the good from the bad, the industry sends almost everything through the automated system e-OSCAR (Electronic Online Solution for Complete and Accurate Reporting), which forwards consumer disputes to lenders for verification.


Here’s where the trouble begins.

Rather than call the lender or send it the consumer’s letter and supporting evidence, the bureaus zap the documents to a data processing center run by a third-party contractor. This system yields considerable savings.

Equifax reduced its per-dispute cost from $4.50 to 50 cents by outsourcing the work to Costa Rica and the Philippines, for example. But consumer advocates say these workers are under enormous pressure to process disputes and forward them to lenders as quickly as possible. While the bureaus say quality is the overriding factor, employees deposed in civil suits describe a harried pace.

One TransUnion manager testified that workers were expected to complete up to 22 cases an hour. An Equifax worker estimated she was allotted four minutes per dispute. To process the letters so rapidly, the workers summarize every complaint with a two-digit code selected from a menu of 26 options.

The code “A3,” for example, stands for “belongs to another individual with a similar name.” The worker can also add a single line of commentary. The two-digit code and short comment is the only information the lender receives about the dispute.

Consumer advocates say these summaries omit the background banks need to understand a complaint, and banks agree. “We’ve met with [the credit bureaus] and said, ‘Look, we need more information,’” says Nessa Feddis, vice president and senior counsel for the American Bankers Association.

But the bureaus say their codes provide accountability and accuracy. “People talking to people? That’s the last thing consumers want,” says Experian’s Maxine Sweet.

She suggests that consumers with complex cases resolve their disputes directly with their lenders. But that can put consumers in a catch-22. Currently, banks have no obligation to investigate a dispute unless it’s forwarded by a credit bureau.

What’s more, consumer attorneys say some lenders do little more than check the disputed information against their own records—even if those records were the source of the error. “It’s a closed loop,” says Michigan lawyer Ian Lyngklip. And some lenders rely on software rather than people to do some of the checking.

Not every dispute sent to a credit bureau gets the e-OSCAR treatment.

Some complaints get extra attention. Experian says it sends disputes to its “special assistance service” department when consumers have “unusual problems” or an elected official requests consideration for a constituent;

Equifax says it handles disputes relating to public figures and court cases with “additional processing procedures.” TransUnion declined to provide details on its VIP service, but its employee manual instructs workers to use “priority processing” if a letter comes from a “judge, senator, congressman, government official, attorney, paralegal, professional athlete, actor, director, member of the media or a celebrity.”

If your case is assigned this status, it may be given to a dedicated rep who will make phone calls on your behalf. But there’s no guarantee of a successful resolution. “I have a lot of cases that go to special services, and they still mess it up,” says Robert Sola, a Portland, Ore., attorney.


Better Times Ahead?

The Consumer Data Industry Association, the trade group, reports that 72 percent of disputes result in an update or correction, suggesting that the e-OSCAR system fixes plenty of errors. However, when the system fails, the consumer has few options.

If he files a second dispute without providing new information, the bureau can dismiss it as “frivolous.” The FTC is supposed to enforce laws requiring the credit bureaus to conduct a “reasonable investigation” into consumer disputes, but it hasn’t taken any action on that front since the start of the decade. (The agency says its recent reviews of consumer complaints yielded no reliable conclusions about report accuracy or the dispute process.)

That leaves the courts. But consumers can’t sue a bureau over an error until they can prove the error is already creating problems. “It’s a system designed to make sure the horse is out of the barn,” says Santa Fe, N.M., attorney Richard Rubin.

And even a successful lawsuit won’t necessarily fix a mistake. Just ask Chino, Calif., marriage counselor Jeff Christensen. In 2003 the cable company Charter apologized to him for reporting a collections account in error and directed the credit bureaus to delete the information.

Experian refused, so Christensen took the bureau to court. In 2005 a judge ruled that Experian was violating the law and fined the company $2,500. Experian paid the fine, but it didn’t correct the error until December 2008—when SmartMoney called—saying it never got the right paperwork.

Turns out, the courts can issue fines, but they can’t demand corrections.

“You have no right to an accurate credit report,” says Lyngklip, the attorney. Consumer advocates estimate that bureaus pay just $25 million a year in court fines—a minor expense for the $7 billion industry.

The credit bureaus say they have no immediate plans to change the dispute process.

They note that turnaround time is at an all-time low, and consumers have embraced a new online dispute-filing feature. “The possibility of errors is at its lowest point ever and continues to decline,” says Equifax’s Klein.

Consumer advocates have their own ideas. They want Congress to amend the Fair Credit Reporting Act so that judges can demand corrections. They’d like the bureaus to establish an appeals process and require proof from lenders who rereport disputed information.

And everyone seems to have their hopes pinned on regulations expected this year that will require lenders to address complaints received directly from consumers. Says Pratt, the trade group president, “That may allow consumers a better route to resolve a stickier dispute.”


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How The New Credit Score Will Affect You

Lenders now have a second formula for judging your past, backed by the three giant credit bureaus.

Your VantageScore could look very different from your FICO score.

By Liz Pulliam Weston


The three credit bureaus are touting their new credit-scoring system as a boon for borrowers, easier to understand and more "consistent" than other scoring methods.

Maybe. But VantageScore, which uses the same underlying data about your debts as the FICO score you already know, also poses some serious risks.

Let's be clear: This isn't about making credit easier for the little guy. This is business.

Big business.


Equifax, Experian and TransUnion are private companies that each track your accounts, balances and payment habits.

A credit "score" simply assigns a weight to those factors to produce an indicator of how much risk you show as a borrower.

Fair Isaac's formula (FICO) for scoring is the one lenders like best.

Fico Scores/Reports

Every time an appliance store or car dealership asks one of the credit bureaus for your credit score, the data the bureau has collected about you is sent through the proprietary FICO model.

The lender pays the credit bureau for the score, and the bureau pays FICO for using its formula.

This is quite a lucrative business for Fair Isaac. Credit scoring accounts for 20% of the company's revenues, according to Merrill Lynch analyst Edward Maguire, but 65% of its operating profits.

The bureaus, naturally, want to cut out the middleman.

"They don't like having to pay Fair Isaac for anything,"

said mortgage broker Ginny Ferguson, who teaches credit scoring to her colleagues in the National Association of Mortgage Brokers. "The (credit bureaus) are intent on finding the next area of revenue generation."

The bureaus have tried to break Fair Isaac's stranglehold before, with no success. The VantageScore may be a different story.

Investors certainly think so; they drove Fair Isaac's stock down 6.6% on the day the new scoring system was announced, even though the bureaus hadn't signed up a single lender.

Analyst Maguire rightly called VantageScore "a shot across the bow" of the bureaus and opined that even if the new system didn't replace FICOs, the bureaus could use it as leverage to get Fair Isaac to lower its prices.

We wouldn't have to care about these elephants' battles, except that consumers may be the grass trampled under their feet.


Here are just some of the concerns:


1. Credit score confusion

FICO and VantageScore use two different ranges. The classic FICO scale runs from 300 to 850, while the VantageScore starts at 501 and runs to 990.

The bureaus say the VantageScore range is more "intuitive," because it breaks down like an elementary-school report card:

901-990 equals "A" credit

801-900 equals "B" credit

701-800 equals "C" credit

601-700 equals "D" credit

501-600 equals "F" credit


There will probably be a lot of puzzled borrowers trying to figure out why a number that would qualify them for the best rates and terms under one system - say, a 780 credit score - makes them credit mediocrities under the other system.


2. Consistency

The information in the credit-bureau databases can be wildly different.

You may have accounts reported at one bureau that don't show up at the other two, or you may have successfully disputed an error at two of the bureaus only to have the third refuse to erase the bogus entry.

One of FICO's big selling points for lenders has been the model's consistency.

Even though the bureaus collect and report credit information differently, the same basic FICO model is used at all three to generate comparable scores.


We shouldn't fall for the idea that the new system is superior without more evidence -- so far, VantageScore hasn't been tested head-to-head with FICO.


3. The good, the bad and the ugly -- but mostly the bad

VantageScore is being marketed to lenders as being a better way to separate "good" from "bad" risks including, to quote its Web site, "the ability to classify more bad accounts into the worst-scoring ranges."

Lenders, you see, are often less worried about losing out on good customers than they are about getting stuck with bad ones.

So if a few potentially good risks get wrongly qualified as bad, lenders aren't that worried as long as they avoid the deadbeats.


*** If you happen to be one of those good eggs who's paying higher interest rates or having trouble getting loans, though, you should worry.


Again, the bureaus are quick to say that they haven't tested VantageScore against FICO, so it's unclear whether the upstart actually does sweep more folks into the worst-scoring range.


But the fact that it's one of the bureaus' goals should help you understand the point: this is not about making consumers happier.


4. "Thin" and "Young" credit profiles

One of lenders' beefs about the classic FICO model is that people whose credit histories are "thin" (they have few accounts) or "young" (their oldest account has been established for only a few months or years) can still get pretty high scores.

The lenders grump that these borrowers may pose a greater risk than the scores predict, and that people should have more robust credit files before they reach the top of the FICO pyramid.

Once again, without comparing VantageScore directly to FICO, the bureaus are touting it as a better way to grade people with limited credit histories.

If that means the young or others without "robust" histories get better access to credit to buy homes and build businesses, this could be a good thing. If it means making credit harder to get for those folks, not so much.


5. High switching costs

To say that FICO scores are entrenched in the financial world would be understating the case.

"FICO scores are used by 80% of the 50 largest banks. They're used in 75% of the mortgage loan origination decisions," said Ron Totaro, Fair Isaac's general manager for global scoring solutions. "We're a force because we've been at this for 50 years."

It's not just the lenders that rely on FICO. Most loans today are bundled up and sold to investors, who use the scores to gauge how much risk they're taking with these investments.

Wall Street is comfortable that FICO-scored loans will behave as forecast, Ferguson said, but could be more nervous about the "predictiveness" of a new scoring system.

If lenders begin adopting VantageScores, they might tighten up their underwriting guidelines -- in other words, make credit harder for consumers to get -- while they see how well the loans actually perform.


*** Consumers can stand to reap some benefits from the new score.


For one thing, competition has a way of bringing prices down and forcing companies to improve their products.

But more importantly, the bureaus promise to provide clear guidance about what goes into the scores and how consumers can better their numbers.

How specific that guidance will be remains to be seen, but Kerry Williams, group president of Experian's Credit Services, said that he wants consumers to know exactly how certain actions can affect their scores.

Currently, Fair Isaac offers a FICO "simulator" through the my FICO.com website that can show you how a handful of actions might affect your score.


At the moment we can't buy our own VantageScores, but Experian promises to make them available to consumers in the next few weeks, and the other bureaus say they'll follow suit by the end of the year.

Then we'll have some more information to gauge whether VantageScores really are a better mousetrap -- or just more of the same.



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The New Math of FICO Credit Scores

Those with small blemishes on their record should benefit from the FICO 08 scoring change, while high-risk borrowers and those who "piggyback" are the likely losers.

Even the most responsible borrowers slip up sometimes.

Maybe a utility bill went unpaid after you moved and the missed payment went into collections. Or perhaps there are unpaid library fines or parking tickets in collections that are hanging onto your credit history and affecting your FICO credit score, which is widely used.

With the newest version of the FICO credit-scoring system, however, minor delinquencies are now overlooked in calculating creditworthiness.

Under the updated scoring model, called FICO 08, small missed payments lingering in collections with original amounts of $100 or less will no longer do damage to your credit score.

Consumers also are less likely to be penalized for any single delinquency if it occurred two or more years ago -- and if their credit history is otherwise unblemished, says FICO (formerly Fair Isaac), which developed the FICO scoring system.

"There's more flexibility with missing a payment," said Careen Foster, the director of global scoring product management for FICO. "If you have a more habitual pattern of paying accounts late . . . you're more likely to get penalized for that."

If a consumer's credit usage is high, that will be more likely to hurt his or her score with FICO 08. But getting close to your credit-card limits -- even if you always pay on time -- is penalized in some way in every FICO score, not only the recent edition, Foster said.

The changes were made to provide lenders with a better risk assessment of borrowers, said John Ulzheimer, the president of consumer education for Credit.com, a consumer education and advocacy site. FICO decided that one small library fine didn't really predict whether a consumer was likely to default, for example.

With the changes, individuals who pose a low credit risk will probably see their scores rise a bit, and those who are high risk could see their scores drop, he adds.

FICO 08 also addresses "piggybacking," a practice used by credit-repair companies to help people improve their scores, Ulzheimer said. In piggybacking, an individual pays to become an authorized user on a stranger's account. The account holder gets paid for allowing the person to be associated with the account, and the new authorized user is able to improve his or her credit score.

"It was a practice to . . . misrepresent what your credit looks like to your bank," Foster said.

FICO 08 aims to single out individuals who are named as authorized sources through deceptive means, Ulzheimer said. Those people won't see their credit scores rise as a result. But the scores of legitimate authorized users will be treated as they always have been.

Credit Restoration Associates recommends that you still need to be proactive about your credit. By being proactive, you can start to work toward a higher score, something that will serve you well every time you apply for a loan.

Some CRA suggestions:

1. Monitor your credit reports and correct errors. Don't just look for negative events on your record; also examine your credit limits to make sure they're accurate. Credit limits that appear lower on the report than they actually are have the potential to hurt your score.

2. Pay bills on time and keep card balances low. Your payment history, and the amount you owe on your accounts as a ratio of the amount of credit you have access to, are important components of your score. FICO 08 is more sensitive to high credit usage, and consumers may see a lower score if their reported balance on one or more cards is near the account's limit.

3. Take on new credit only when you need it. Some credit cards come with great offers, including a percentage off your bill if you sign up at the cash register. If you accept, make sure you're getting a big enough benefit to make it worthwhile -- taking on additional credit could end up dinging your score.


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What is a debt ratio and why should I care about it?

Your debt ratio is the amount of credit you’ve accumulated on a monthly basis compared to your income.

It’s a critical number if you plan to make any major purchases, such as a home or car, since lenders check your debt ratio to ensure you’re capable of repaying the loan.

Mortgage lenders generally won’t approve your loan if your mortgage payment would exceed 28% of your gross income (before taxes are withheld).

Your total payments -- including all other debts -- should not exceed 36% to qualify for a mortgage.

These debts don’t include food, utilities or taxes.

For these calculations, mortgage lenders look at items like credit card bills, student loans and car loans and how your mortgage would affect your overall ability to pay.


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