A troubling series of lawsuits has been filed in several states, improperly accusing lenders and the three national credit reporting companies (CRCs—Equifax, Experian and TransUnion) of mishandling the way they report credit card charge-offevents on consumer credit reports.
More specifically, the suits allege—erroneously—that lenders and the CRCs are improperly treating a single charge-off as an event that recurs month after month after month, lowering the consumer’s credit score each time the event appears on the credit file.
To understand the mistaken assumptions behind these unfounded lawsuits, a bit of background is in order, starting with an explanation of what a charge-off is in the first place. A lender performs a charge-off when a consumer has defaulted on a debt, and the lender determines it will never be able to collect that debt. The lender reports the charge-off to the CRCs, who add it to the consumer’s credit files.
The relevant account in the consumer credit file is then assigned a charged-off status, and that status is applied to each monthly entry for that account, dating back to the month that the account first went delinquent. The date of the original delinquency is known as the anchor date for the charge-off. Charge-offs remain on consumer credit files for seven years from the anchor date.
The process described here represents accurate credit reporting, and complies with standards set forth by the credit reporting industry’s trade association, the Consumer Data Industry Association. One source of confusion surrounding the process may involve the fact that an interval of several months typically passes from the time when an account goes delinquent, to the date when the lender decides to write the account off and report the write-off to the CRCs. If the consumer obtains a credit report during that interval, the account status for the delinquency month, and any intervening months, will be listed as delinquent. Credit reports pulled after the charge-off is final will show the account status for those months as charged-off instead of delinquent.
The lawsuits allege that reporting the account status as charged-off for multiple months somehow indicates that the account was subjected to a brand new charge-off for each of those months, and that each monthly status triggers a new anchor date, which resets the seven-year clock that determines when the charge-off will be removed from the credit file.
That is categorically not the case. A charge-off is a single event which an account can only be subjected to once. Accounts cannot go into and out of charged-off status and the anchor date does not vary once it is set. Credit scoring systems, including VantageScore models, are designed to recognize the industry-standard methods for reporting charge-offs, and the models do not handle a series of charge-off statuses for a single account as multiple events.
A charge-off in a credit file is a significant negative event. It causes significant reductions in credit scores. Like all negative events in a credit file, its impact on a credit score diminishes over time. When calculating a score using a credit file that contains a charge-off, scoring models use the anchor date to properly age the defaulted account.
Link to Original article: https://thescore.vantagescore.com/article/291/did-you-know-accounts-can-only-be-charged-once
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Many kinds of entries on a credit report can lower your credit score, but some are much more harmful than others. The entries that do the most damage and that tend to keep your score down for extended periods of time are what lenders call derogatory events—or just plain bad ones. Lenders view derogatory credit-report entries as evidence of mismanaged debt. That is why credit-scoring models typically treat them as grounds for steep, long lasting score reductions. That is also why you should avoid them at all costs.
This four-part series of articles is designed to help you “steer clear” of derogatory events, examining them in detail so you know what to avoid—and what the consequences could be if you don’t. We are covering the three categories of information that can be considered derogatory:The first partexamined public records; part two looked at credit reportnarratives, this installment and part four will look at the somewhat complicated topic of non-performing trade lines—a fancy term used to describe accounts that aren’t being paid as agreed upon. Trade, as used in the credit industry, refers to an account on your credit report. So, a Bank of America credit card on your credit report, would be referred to, formally, as a trade line. A trade line can contain a variety of negative entries, including current and historical late payments, past-due balances, and indicators of default or other serious delinquency associated with the account. This month we’re going to tackle historical late payments. Just for clarity, a late payment on a credit report isn’t the same as a late payment on an account. I know that doesn’t make any sense, so let me clarify. In order for you to be late on one of your credit accounts, you have to not make a payment on or before the due date. In order for a late payment to show up on your credit reports you have to be a full 30 days past the due date.
So, if a late payment shows up on your credit reports, then you know you went at least 30 days late, not just a few days late. In other words, there’s a more rigorous standard used in credit reporting. For the past several decades the three national credit reporting companies (CRCs—Equifax, Experian and TransUnion) have accepted late-payment reporting by creditors. So, if last year you were late on your credit card account by 30-59 days multiple times, it’s likely a record of those previous late payments will appear on your credit reports, associated with each respective account. And yes, those late payments do have the potential to lower your credit scores.
There are a variety of ways historical late payments are represented visually on credit reports. The most common is for the credit reporting companies to display a payment-history grid for each account, which indicates if you’ve made any late payments, how many days you were late, and when you were late.
By the time you’ve reached your 30s, you’ve probably heard dozens of financial acronyms and terms thrown around—from APRs to IRAs, expense ratios to exchange-traded funds. Yet while the lingo may sound familiar, you might not have a really clear understanding of what the words actually mean or how they apply to your finances. And that can be problematic when you’re trying to make the best decisions with your money.
So we’ve gathered, and answered, 35 questions on a range of financial topics that you’ll want to know by the time you’ve established your career and started building some wealth.
While we’ve started with the basics, we also include more sophisticated terms and topics. Master these, and you can not only sound smart about money, but you’ll be able to make smarter decisions with yours, too.
1. What’s your net worth?
Your true worth is unquantifiable, my friend. But financially speaking, your net worth equals your assets—cash, property (like your home, car and furniture), your checking and savings account balances and any investments—minus your liabilities, which are your debts and other financial obligations.
To calculate the net worth of your home, for example, you’d take an estimate of its current market value. (You can look at what similar homes in the neighborhood have sold for recently or have a real estate agent make an appraisal.) Next, subtract how much you still owe on your mortgage. If an agent says she could sell your home for about $215,000 and you owe about $110,000 on your mortgage, for example, that’d be about $105,000. The asset value minus your liability (or what you owe on it) equals the net worth.
Why is knowing your total net worth important? It gives you a true financial picture of how you’re doing, and highlights where you could make improvements.
2. What should you include in a budget?
First, add up your essential expenses, such as your mortgage or rent, utility bills, cell phone, food and child care. Then tally your financial obligations, like credit card, auto or student debt payments and savings goals (for emergencies, retirement and anything else you’re working toward).
Then add in “discretionary” expenses, or those that are not absolutely essential but are important to you. Don’t forget to factor in fun—entertainment, weekend trips, whatever you love—because drudging through life with a too-tight spending plan is a recipe for failure.
1. How much should you save in your emergency fund?
Most experts agree that you should have three to six months’ worth of living expenses saved to keep you afloat in the event of, say, a home or car repair or other unexpected expense—or the loss of your job.
2. Where’s the best place to hold short-term savings?
For money you need to be able to access within the next year or two, advisors usually recommend looking for a high-yield savings account. Just be aware that you can only make up to six withdrawals each month.
Unfortunately, you won’t earn much interest on a savings account, as the national average is currently .06 percent. But some banks—like Ally Bank, Synchrony and Barclays—are offering 1 percent or more as of early March, so it’s worth shopping around. “Internet banks often have the [lowest] fees, better interest rates and can be much more convenient,” says Ken Tumin, co-creator of comparison site DepositAccounts.com.
3. What’s the difference between a money market and a savings account?
Both savings and money market accounts are government-insured. But money market accounts are more likely to offer check-writing capabilities and ATM or debit cards (although they are subject to the same six-withdrawals/month limit). MMAs typically have higher interest rates, but also have higher minimum balance requirements. Details vary by account.
4. Where should you put money you’ll need in two to 10 years?
If you need the money in a year or two, “You might start thinking about CDs if you want to maximize your rates,” Tumin says. One-year CDs aren’t offering much more than high-yield savings accounts now. But some two-year CDs are offering 1.5 percent or more.
If you have a longer timeframe, consider investing in stocks and bonds. Just be aware that, while the stock market has historically gone up over time, it can go up or down in the short run. (And, as advisors will caution, past performance doesn’t guarantee future returns.) So while stocks may provide higher growth opportunities than CDs and bonds, you want to allow enough time to ride the downturns out and may consider moving money into more conservative options as your time horizon gets shorter. Investing in a mix of stocks and bonds can also lower your risk.
5. What’s a CD?
CD stands for certificate of deposit, which you can buy from a bank and is guaranteed to pay interest over a designated period of time—usually much more than a savings account would. A five-year CD from Melrose Credit Union is paying 2.4 percent, for example, while its savings accounts offer rates of just 0.5 percent. The catch is that you can’t touch the money in a CD until the designated time period ends.
“CDs can offer higher rates than savings accounts, but the price you pay is to have less liquidity,” says Tumin. “If you take the money out early, it can cost you several months of interest.”
(This page has been updated to clarify the process for calculating the net worth of an asset.)
Two people walk into a deli and both order a pastrami on rye. When the check arrives, one is charged $8. The other is surprised to get a bill for $15.99.
That’s not the start of an old Henny Youngman joke. It’s an analogy that raises some of the issues in the FTC’s proposed $2.95 million settlement with Sprint for allegedly charging customers with lower credit scores a monthly fee without giving them the proper up-front notice required by law.
The FTC’s lawsuit centers on mobile service provider Sprint’s Account Spending Limit Program. Under the program, consumers with lower credit scores were charged a monthly fee of $7.99 on top of what they already had to pay for cell phone and data service. But here’s the thing: Many consumers didn’t know they had been “enrolled” in the program and weren’t given mandatory information that would have made it possible for them to do meaningful comparison-shopping before they were locked in. The FTC says that by tacking that extra $7.99 fee onto consumers' monthly bills without making required disclosures, Sprint violated the Fair Credit Reporting Act and its Risk-Based Pricing Rule.
Because Sprint bills consumers for services after the fact, the company is covered by the Risk-Based Pricing Rule. Under the Rule, if consumers are offered service on less favorable terms based on their credit report or credit score, the company has to inform them of that fact by giving them what the Rule calls a risk-based pricing notice.
But according to the complaint, in many cases Sprint failed to provide customers it placed in its Account Spending Limit Program with all of the required disclosures. The FTC says Sprint’s notices omitted key information necessary for consumers to determine if their lower credit scores were based on errors in their consumer reports. That’s a particularly important consideration, given FTC studies showing that credit reports often contain mistakes that can have a major impact on what people have to pay for things like cell phone service.
Sprint's timing raised concerns, too. The complaint alleges that Sprint often gave consumers the required notices too late for them to shop around for a better deal without having to cough up a hefty early termination fee.
In addition to a $2.95 million civil penalty, the proposed settlement requires Sprint to comply with the Risk-Based Pricing Rule. But that’s not all. From here on in, Sprint will have to give customers the required notice – this time, with complete information – within five days of signing up for Sprint service or by a date that gives them the ability to avoid recurring charges like those in the Account Spending Limit program. Sprint also has to send corrected risk-based pricing notices to consumers who received incomplete notices from the company.
Do your company’s practices put you at risk for a Risk-Based Pricing Rule violation? One important compliance tip: Make sure your notices give consumers all the information required by law. Read Using Consumer Reports for Credit Decisions: What to Know About Adverse Action and Risk-Based Pricing Notices for guidance.