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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Bankruptcy: 4 Tales from the Trenches

One of the scariest aspects of bankruptcy is the fear of the unknown. These real-life stories can help you know what to expect -- before, during and after.

By Sally Herigstad
MSN Money

Bankruptcy can happen fast -- when a person is successfully sued or when unexpected medical expenses run up. Or it can happen in slow motion, when a business fails or long-term unemployment makes it impossible to keep up with bills. No matter how a person gets to the point of considering bankruptcy, the worst thing about it is the unknown.

The biggest bankruptcies ever

What really happens to you when you file for bankruptcy? What do you have to do? How do you survive afterward?

Four real people, Michael, Robert, Robin and Andrew, shared their experiences going through bankruptcy. (Only Robert allowed us to use his real name.)

Robert Nickell, a pharmacist and chairman of the Nickell Group, filed for bankruptcy in 1999, when he was 39. He lost his business, a pharmacy in Manhattan Beach, Calif., after accumulating more than $600,000 in debt then going through a protracted divorce.

Robin, 31, thought she was covered by health insurance when she spent a week in the hospital after a car accident. She was mistaken. She was already in debt from starting a freelance copy-editing business; with the hospital bill, her debts topped $65,000. Then she lost her job. That was the last straw.

Michael practiced medicine in Oregon for 45 years. He filed for bankruptcy at age 72, when he could no longer work and had no savings to fall back on. He was going through a divorce at the time as well. He owed about $50,000 in back taxes, medical bills and business debts.

Andrew, 36, and his wife, Ashley, 35, owned a retail company in Colorado that sold wireless products, telephones and satellites. They had a great run with it, but between a merger and employee theft, they ran up about $300,000 in debt. They filed for joint bankruptcy two years ago.

Some aspects of bankruptcy weren't as bad as they thought they would be. Other aspects were worse. Here's how it went:

The buildup: How did I get here?

Robert, Robin, Michael and Andrew all found themselves sliding into the circumstances that led them to choose bankruptcy.

Michael had barely broken even in his medical practice for years. He had planned to work until he died, but health problems forced him to retire. His phone rang constantly as creditors sought him out. Eventually, he quit answering it. Bills were stacked all over the office; he stopped opening them. He had given up long before he actually filed for bankruptcy.

Robin had been earning $50,000 a year at a dot-com company. One day, she came to work and was handed a box and a paycheck and told, "This is your last day." Robin moved back to her hometown and quickly found a job. She thought she was getting back on top of things, chipping away at her debt.

Then she was hospitalized, which ended her new job. She could put only a little toward the hospital bills. Living on $1,000 per month in unemployment "gave me a whole new way to look at possessions," Robin says. But cutting back wasn't enough to cut it. Within a few months, her debt was turned over to collection agencies.

Robin hated the phone calls the most. Her father advised her to not answer the phone, but even checking messages stressed her out. Most callers were friendly, but a few were ugly. "One in particular really berated me and said, 'Did you think you could spend this money and not pay it off?' It really upset me because I already did feel guilty."

Robert says, "Pre-bankruptcy is one of these very scary things where you can't believe that you got into this mess.

READ THE REST OF THE ARTICLE HERE: http://articles.moneycentral.msn.com






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Bar to Lawyer - You Have Too Many Student Loans To Practice Law

by: Zac Bissonnette



The New York Times reports on the sad tale of Robert Bowman, a law school graduate whose application for admission to the New York bar was rejected -- because he had too much student loan debt and had a history of missed payments.

He was recommended for approval by the applications review committee but that decision was reversed by a panel of five state appellate judges: "Applicant has not made any substantial payments on the loans," the judges wrote. "Applicant has not presently established the character and general fitness requisite for an attorney and counselor-at-law."

With more than $400,000 in student loans and accumulated interest, the judges apparently felt he had not demonstrated the judgment worthy of practicing law in New York.

While there is a good amount of not entirely unfair righteous indignation over the outcome of this case so far, Mr. Bowman's bizarre borrowing record does raise an eyebrow and, to be honest, you do have to question his judgment. Mr. Bowman had not made a single payment on his student loans in the 26 years since he began taking them out.

The irony of course is that without the ability to practice law, Bowman will have virtually no prayer of getting his financial life in order.

But here's the good news for Sallie Mae: Student loans can't be discharged in bankruptcy, and Social Security benefits can be garnished to make payments on loans that are in default. And the more penalties he racks up, the more money, ultimately, they'll collect.

Mr. Bowman's life may be ruined in every meaningful way, but the party has just begun for the lenders.

CRA - this is such a shame, but an unfortunate reality in the world that we live in. Mr Bowman might need to call Lexington Law Firm
to repair his credit - if not apply for a job.





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How long does credit repair take?

by Lita Epstein

We've been getting a lot of desperate comments from people who are seeing their credit destroyed as their personal financial lives take a nose dive. Many are losing jobs and others are facing severe medical problems. Some made big bets with investment property in real estate and now face numerous foreclosures. All are probably facing major drops in their credit scores and not able to get new credit in the tight market today.

Without using a professional credit repair company, how long does it take to fix your score, if your score is down dramatically after a credit disaster? The good news is that your most recent history is what impacts your score the greatest, so as these bad debt reports age you will find your score gradually getting better as long as you pay on time starting from today.

I have seen people with bankruptcies get back up to the high 600s within three years. What does that mean in today's credit market? They would probably be able to get credit, but they will likely not get the best credit offers. In order to get the best interest rates you need a score of 760. The next best rates go to people with scores of 700 to 759. People between 650 and 699 can still get credit but they will pay significantly more for it in higher interest rates. Under 650 you probably will find it very difficult, if not impossible, to get credit.

How long will it take to get a clean credit record? Most of the negatives on your credit report will drop off after seven years, but you don't have to wait that long to see an improvement in your score. If you have a clean record of payments on time for three years and you don't apply for more than one or two new cards at that time your score should go above 650. If you want to get that score above 700, you'll need to get your debt levels closer to 10 to 20 percent. Even if you're good, you probably won't reach 700 for at least four years.

Contact CRA if you would like some advice or help with your situation.

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How to Make (or Break) Your Credit Score

Wise or Foolish?
By Janene Mascarella



If life is simply the sum of your choices, you could say the same about your credit score: everything you do (and more specifically, buy) drives that three-digit number. It's probably obvious to you that smart decisions can send your score soaring and save you money, while bad decisions can drag your score down and leave you digging deep into an empty wallet. So why is it so easy for people to get trapped?

Your credit score is your financial snapshot -- your portrait as a borrower -- but your score isn't set in stone. That's both good and bad, because the choices you make today can shift the number in either direction for the years ahead.


My Not-So-Smooth Move: Closing Two Credit-Card Accounts

Credit Score Direction: Slightly down

When Ralph Garcia, owner of a vacuum-and-sewing store in Redwood City, California, started falling behind on bills and getting slapped with late payments, he was determined to take control. He thought it would be smart to cancel two cards with balances and pay them off over time. But the results weren't positive. "That move lowered my score, because my available credit line went down, and the percentage of debt went up," says Garcia, who has been self-employed for 31 years.

Last year, Garcia's credit score was about 750 ("outstanding"); now it now sits at 691 ("good"). "What I did wasn't a rocket-scientist move, for sure," he says. "I just figured, if I didn't have the cards, I wouldn't use them. I'm just trying to make the payments and get the bills down."


A Credit Lesson Learned

Closed and unused accounts can hurt your score if you're paying off debt, says Ethan Ewing, president of money-management site Bills.com. Ewing suggests rotating the use of one credit card at a time (and paying it off monthly), or setting cards aside, so you're not tempted to use them, but keeping the accounts open. "And if a creditor closes your account, they must notify you 30 days in advance," says Ewing. "Call to ask that they reverse the decision."

To keep cards active, charge a monthly bill, such as your telephone, to a card, and set up an automatic payment or a personal reminder so you don't miss a payment. And never cancel a credit card with a long history, Ewing advises. "The longer you hold a card, the more valuable it is in your credit-score determination."


My Smooth Move: Getting Serious About Timely Payments

Credit Score Direction: Up -- and staying up

Danny Kofke says he and his wife, Tracy, have not done anything drastic to raise their credit scores: they just pay all of their bills on time. As simple as that strategy seems, it came from a conscious decision to secure their financial future. "My credit score is 795 and Tracy's is 813" out of 850, says Kofke, a 33-year-old special-education teacher from Hoschton, Georgia. "Making the conscious decision to pay all of our bills on time has definitely helped us."

Kofke wrote the book on good credit -- literally. The author of a 2007 book called How to Survive (and Perhaps Thrive) On a Teacher's Salary, Kofke says his elevated score is more than an ego boost. "We just refinanced our mortgage, and we qualified for a low interest rate because of our credit scores," he says. Their choices even give them the security to let Tracy be a stay-at-home mom.


Reaping the Rewards of Prompt Payments

"Generally, I think timely payments are the most controllable factor for families today," says Dan Danford, C.E.O. of the Family Investment Center, a commission-free investment-management firm in St. Joseph, Missouri. "There's nothing wrong with borrowing. But your score will get dinged if you borrow too much or foul up the agreed payment schedule."

It's never too late to make a smart move like Kofke did, even if your score isn't sitting pretty. Paying bills on time for as little as one month can raise even a modest credit score by 20 points, Bills.com's Ewing says.


My Not-So-Smooth Move: Ignoring My Debt

Credit Score Direction: Down ... way down

Russ Marshalek makes no bones about it: he killed his credit score by filing for bankruptcy, a desperate move often deemed "credit doomsday." Already in credit-score trouble from financing college plus living expenses, the 26-year-old book publicist from Queens, New York, found himself struggling to keep up with the bills piling up.

For a while, Marshalek ignored the consequences of his debt -- late payment penalties, and intimidating collection phone calls -- and hoped it would all just go away. It didn't, and his delinquencies took a massive toll on his credit score. "When I filed for bankruptcy, my credit score was in the mid-300s -- which is basically about as low as it can go," he jokes, "before creditors begin taking parts of your body and various organs as payment."


Wiping the Slate Clean?

Marshalek knew he was in serious trouble. He faced two wage garnishments at his old job, defaulted on his student-loan payment, and got bullied by a collection agent into a payment he couldn't afford. "I didn't really know how to extricate myself from this tidal wave," he says. A consumer credit-counseling service advised him that bankruptcy was his only option.

A bankruptcy stains your credit report for seven years, says Kelli Grant, a consumer reporter at SmartMoney. But that's not a death sentence. Marshalek's credit score has already hit bottom, Grant says; it can only go up from here. "If you can prove you've been doing good things since filing," Grant says, "creditors are apt to look at your recent positive history."

Marshalek calls his experience harrowing and painful but worthwhile. After filing for bankruptcy last year, he's now paying his bills on time. "Though I'm aware it will take time, now actually achieving and maintaining a high credit score is possible for me."


My Smooth Move: Diversifying My Credit

Credit Score Direction: Up, then a dip

Six months ago, Dawn Allcot's free credit-score monitoring service offered tips on raising her score. She learned that she lacked "diverse" credit, like store cards and personal loans. Her credit score was good (over 620), but she wanted it higher.

"Kohl's is one of my favorite stores, so I opened a card," says Allcot, 35, a freelance writer from West Islip, New York. "I use it to take advantage of sales that require a charge card and pay it off immediately -- sometimes right in the store."

The move raised her score about 50 points. "The perks offered with the cards save me money," she says. "So far -- it's been six months -- I haven't had a problem. I never charge more than I can pay off."


Minor Ups and Downs

To raise your credit score, it's important to have a healthy mix of loans and credit cards, says SmartMoney's Grant. The one move to be cautious about is opening a lot of accounts in a short period of time: issuers tend to see a move like that as a bigger risk. In fact, that very strategy made Allcot's credit score dip. But she should see her score bounce up again quickly, Grant says, once she's established a good credit history with these new accounts.

Generally, if you use money wisely and pay off debts according to an agreed-upon schedule, as Allcot does, then your rating will be good. "It's tough for most families to make a go on cash alone, and lenders understand that. They just want some assurance that you've borrowed and paid back in the past," says Danford. "A few blemishes aren't the end of the world."

Excellent advice!

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Keeping ID Thieves at Bay

Identity theft can be both frustrating and costly for the victims. Reporter Stacey Vanek-Smith visits one couple who is still trying to put their credit back together after eight years of identity theft.


Susan and David Litchfield in their home in Norwell, Mass.

by Tess Vigeland

One thing I'm confident no one imagined in the buildup to a culture of borrowers is that one day a stranger would be able to convince debt issuers that they are you, with a simple computer keystroke.

The wide availability of credit has made it easy for thieves to perfect the criminal art of identity theft.

And that means you could be on the hook for bank loans, car loans and credit cards you don't even own.

ID theft costs businesses, banks and consumers more than $50 billion a year.

Once your credit is destroyed, fixing it comes at a high price of its own. Stacey Vanek-Smith reports.


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Stacey Vanek-Smith: David Litchfield is a metal fabricator in Norwell, Mass. David Leighton is a repairman in Florida. They've never met, but they know a whole lot about each other.

Eight years ago a man named David Leighton started using David Litchfield's social security number.

David Litchfield: He got a whole pile of credit cards. He'd use one, maxed it out and then go to another one.

Litchfield and his wife, Susan, didn't discover the problem until months later, when their daughter's student loan was refused.

By then, they were sitting on thousands of dollars in overdue bills and David's credit score was in ruins. It took more than two years to repair David's credit. But it looked like the identity thief had been stopped until...

Susan Litchfield: We went to refinance the house and the bank called me. And I just started crying and I said, don't tell me he's done it again? And he goes, "Oh Sue it's a mess. Wait until you see it."

Susan Litchfield produces a stack of settlement offers, collection notices and credit reports, all linked to David Leighton. He had racked up more than $200,000 in debt, and it was all there, on the Litchfield's credit report.

Susan Litchfield: Credit cards, Capital One, Chase, student loans. He had a $98,000 debt for, what we believe was child support.

ID thieves often strike the same victim more than once says Jay Foley, Executive Director of the ID Theft Resource Center. He says ID theft is hard to prove, the cases almost never got to court and the criminals know this.

Jay Foley: At the same time that we're dealing with issue A and B. The bad guys over here are creating E, F and G for us.

The Litchfield's have put a stop on their credit, but they're worried David Leighton might be sitting on a stockpile credit cards tied to their accounts -- cards he got back when credit was easy.

In the meantime, they're still trying to clean up their credit score.

And that can be an epic undertaking, says Foley, of the ID Theft Resource Center. He says every company where a fraudulent purchase was made has to be contacted via certified mail, each one has to call off its collections agency, ask the credit bureaus to remove the black mark, and open its accounts to police. Companies often push back so they don't have to cover the damages. Foley says victims should prepare for a fight.

Foley: Well they can expect to be grilled repeatedly, and if there's anything that you say during that process that is ambiguous, they are going to jump on that as the excuse for holding you responsible for the account.

Foley says it usually takes between six months and two years to correct problems on a credit report.

Susan Litchfield says the mess is so big this time, she and her husband have basically given up.

Susan Litchfield: They just bounce you around until, after an hour of waiting on the phone, you just hang up. Then I get into bed, my head's spinning, I want to cry, I just get so angry. I got to the point where my blood pressure was sky-high, my doctor was afraid I was going to have a stroke. I just put it all away. I just couldn't deal with it.

The credit bureaus don't make things any easier, says Bob Sullivan, author of "Your Evil Twin: Behind the ID Theft Epidemic." He says the three agencies that determine your credit score have no incentive to move quickly.

Bob Sullivan: The credit bureaus have one customer and one customer only, and it's not us - It's the banks. It's the people who lend money.

And lenders are in no rush to see your credit score improve -- the lower your score, the more they can charge you to borrow.

The Litchfields have seen the interest rates on their credit cards jump and the premium rise for their homeowner's insurance. And now David's credit score is so low, he can't even get a card on his own.

David Litchfield: I have a credit card I share with my daughter. Somehow she got me a credit card. It has my name on it but it, but it's hers and mine.

About ten million Americans have their identities stolen every year. But there are ways to minimize the damage says Lucy Duni. She's with TransUnion, one of the three major credit agencies.

Lucy Duni: Place a fraud alert on your credit report. You could also place a credit freeze, so no new accounts can be opened in your name.

Duni recommends being stingy with your social security number and shredding personal documents. ID theft is getting harder, thanks in part to the credit crisis, which has made banks put stricter lending standards in place, says author Bob Sullivan. He blames the era of easy credit for the ID theft boom. He says banks were more than happy to hand out plastic to almost anyone, with very little verification.

Sullivan: A couple of years ago, you could walk into a Circuit City and walk out with a $3,000 television set five minutes later, even if you had nothing in your pockets. That's the reality of where we were and we created this system that made things very easy for identity thieves.


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