Debt settlement a 'nuclear option' that most people shouldn't even consider.
An excellent article by: Alysse Dalessandro
Complaints about debt settlement companies are on the rise - prompting warnings that dealing with those types of businesses might not the simple solution they might seem for consumers overwhelmed by debt.
Only an estimated one in 10 consumers who use these companies successfully emerge from the process, according to a recent government report.
The Better Business Bureau said it received more than 3,500 complaints from consumers on debt settlement companies since late 2007.
"The whole industry is getting a lot of attention right now because so many people are in so much financial trouble and unfortunately if they get tangled up in the wrong debt settlement company, they end up worse than they began," said Alison Southwick, BBB spokeswoman in an interview with Consumer Ally.
The Government Accountability Office recently released an investigation into debt settlement company practices and found that 17 out of 20 companies sampled impose fees on consumers before settling any of their debts - a practice that the Federal Trade Commission has proposed banning.
According to Southwick, how the process works:
1. consumers are told to stop paying their debt and instead pay into an account set up by the company.
2. The consumer pays into the account for years and then after saving a substantial amount, the debt settlement company will try to negotiate with the credit card company to accept the saved amount instead of the full debt owed.
The issue is that the credit card companies or other original creditors DO NOT have to comply with the negotiation and that is only one of the many potential problems Southwick warns.
"The problem is you haven't been paying your credit card for years, your debt is mounting, and your credit report is taking a hit and in the meantime, your credit card company can file a lawsuit with you and start garnishing your wages," Southwick said.
The BBB, a membership-based business ethics group, takes specific issue with companies making claims of debt settlement as a "simple" solution "guaranteed to work," according to Southwick.
GAO found the debt settlement companies provided information to consumers that was "fraudulent, deceptive, or questionable" including advertising success rates of the program as high as 100%, according to the investigation report.
"Debt settlement is not an easy fix and if you are going to do it, you really should only consider it before declaring bankruptcy," she said. "Its really one of those nuclear options that you do not want to enter into lightly."
Once entered into the lengthy debt settlement process, it may not be so easy to leave. Southwick cites a consumer who had paid $15,000 into a debt settlement account. When she dropped out of the process, the company refused to return the money.
According to the GAO, FTC and state investigations have shown that fewer than 10% of those entering into the process complete it.
U.S. Sen. Charles E. Schumer (D- NY) introduced the Debt Settlement Consumer Protection Act, which would require increased disclosure, limit fees charged by debt settlement firms and grant greater enforcement power to state and federal officials to go after companies that are taking advantage of consumers.
The FTC warns consumers should avoid companies that:
* promotes this as a "new government program".
* guarantee their success of making your debt vanish.
* advise you to stop all communication with your creditors.
* say that they can stop debt related collection calls or lawsuits against you.
* require you to pay a full upfront fee.
"You should always contact your credit card company and try to work something out first with them," Southwick suggested.
"For some people, who have a little bit of credit card debt, debt settlement is really not for them."
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Wednesday, May 5, 2010
Wednesday, April 7, 2010
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.”
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
Credit Repair Va:
CRA Resources:
Credit Repair:
About CRA:
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.”
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
Credit Repair Va:
CRA Resources:
Credit Repair:
About CRA:
Why the Credit Bureaus Can't Get It Right - Part 1
A fantastic article submitted by SmartMoney.com
A mistake on your credit report can cost you literally thousands of dollars, especially in this economy. So what can you expect from a big credit bureau if you ask them to investigate and correct the error?
The answer, for many consumers: About 50 cents worth of effort, conducted by offshore workers at third-party firms. That’s just one of the findings from SmartMoney’s investigation into why credit-report errors continue to pop up so frequently—and why consumers often have so much trouble getting them fixed.
To follow what one consumer advocate calls an “electronic hot potato,” SmartMoney pieced together a depiction of the dispute process through information from trial depositions, internal company memos and the bureaus’ own employee manuals—much of which the bureaus and their trade group subsequently confirmed. The process may be efficient, but it remains a mystery to most consumers, and a source of bitterness for some.
The Wrong Kind of Thrills
For Brandon and Amanda Mendelson, it had all the elements of a paperback thriller:
The innocent newlyweds, the mysterious account held by an obscure bank in Boca Raton, the faceless corporation controlling everything behind the scenes.
But when the Mendelsons discovered the strange overdue loan mistakenly listed on Amanda’s credit report, they weren’t exactly thrilled.
The Glens Falls, N.Y., couple had never done business with that bank, and the error spoiled Amanda’s credit history. Making matters worse, their call to a national credit bureau yielded nothing more than a form letter stating that the accuracy of the entry had been “investigated” and “verified.”
Now they can’t help but wonder: investigated how? Verified by whom? Brandon studied organizational leadership in school, but even he can’t imagine how the bureau failed to fix such an obvious mistake. “Maybe it fell through the cracks,” he says.
Or maybe the process worked pretty much as it was designed to.
Although they generally decline to discuss specific cases, the three major credit bureaus—Experian, Equifax and TransUnion—each attest to their commitment to accuracy and accountability in their record keeping.
But while consumers might assume that each bureau employs an army of dedicated sleuths who carefully investigate and correct errors, all the bureaus actually process most disputes using a system that’s almost entirely automated—and where human beings are involved, they’re often working at a harried pace.
The bureaus say the system, dubbed with the Muppety acronym e-OSCAR, is the most efficient way to handle the more than 20,000 disputes a day they receive.
In practice, most complaints are electronically zapped straight to the lender, and according to consumer advocates, many lenders respond by simply rereporting the erroneous data.
Credit-report accuracy is profoundly important now, because an error can wreak more havoc than ever on your financial life.
Before the nation heard the words credit crisis, just about anyone with a pulse could get a loan. Now many banks are refusing credit to anyone who looks remotely risky. And as legions of anxious job hunters know, a growing number of employers routinely check credit reports before they make a hire. It’s no wonder, then, that the National Foundation for Credit Counseling says call volume is up 31 percent in the past 12 months.
“Credit is on consumers’ minds more than ever before,” says Curtis Arnold, CEO of CardRatings.com.
But according to a 2007 survey by pollster Zogby, 37 percent of consumers who obtain their credit reports find errors, and half of those said they could not easily correct the mistakes.
An earlier study by the U.S. Public Interest Research Group, a nonprofit consumer advocacy organization, found that one in four reports contained “serious errors.” For its part, the Consumer Data Industry Association, the industry’s trade group, says only 11 percent of consumers who get their credit report file a dispute and just 5 percent of those challenge the results.
“That’s an excellent satisfaction rate,” says the group’s president, Stuart Pratt. Still, even some industry insiders say there’s a problem. Testifying before Congress, one CEO of an independent Arizona credit bureau likened the dispute process to “having an IRS audit, brain surgery, getting a tooth pulled or going to your own funeral.”
And when the dispute process fails, consumers say they are left feeling powerless. Martha Soto, a 63-year-old Antioch, Calif., shipping manager, says she couldn’t get the mortgage she needed last fall because Experian listed her as the defendant in an unpaid court judgment.
She says she’s faxed records proving that she’s actually the plaintiff; Experian says they’re the wrong records, and the dispute is still unresolved, leaving Soto increasingly frustrated. “They’re defaming you, and you can’t do anything about it,” says Soto. “It’s scary to think an agency like that can control your life.”
Big Business, Little Service
Until the late 1980s, consumer credit records were scattered among thousands of low-profile local bureaus.
The industry gradually underwent a consolidation frenzy that left three companies controlling the data of 210 million Americans. The smallest, Chicago-based TransUnion, is owned by the Pritzker family of the Hyatt hotel fortune and boasts credit-reporting operations in 25 countries, including Nicaragua and Botswana.
Publicly traded Equifax, founded in 1898 by a Tennessee grocer who sold his customers’ payment records to fellow shopkeepers, calls itself a “global leader in information solutions” with businesses as diverse as risk detection and database management. (According to its income statements, its consumer data unit remains its most profitable, boasting a 40 percent pretax profit margin.)
Experian, the largest of the three and based in Ireland, is a $4 billion company that uses consumer data to help businesses send more than 20 billion pieces of junk mail every year.
Together, the three credit bureaus have amassed a spotty record on consumer care.
In 2000 they jointly paid a $2.5 million Federal Trade Commission fine for blocking millions of phone calls from consumers. Three years later Equifax paid a second fine because it still hadn’t hired enough people to answer the phone. In 2005, after new federal laws forced the bureaus to give away credit reports, Experian was hit with a $950,000 FTC fine for marketing those reports through a Web site that automatically charged consumers for an $80 credit-monitoring service. Last year TransUnion agreed to pay $75 million to settle a class-action lawsuit over sales of consumer data for marketing purposes.
The bureaus, which never admitted wrongdoing in these cases, say they realize the importance of providing reliable information to lenders and consumers alike. “If we don’t, we cannot survive, either as a company or as an economy,” says Equifax spokesperson Tim Klein.
But they also admit that credit-report errors can stem from glitches in their own systems. Some mistakes occur thanks to the algorithms used to match loans to individual credit reports. If the name or Social Security number on another person’s account partially matches the data on your file, the computer might attach it to your record.
The credit bureaus also employ contractors who gather tax lien and bankruptcy data from courthouses and government offices.
If these workers transpose a digit or misread a document, their error winds up on your report. But even if they never made mistakes of their own, the bureaus say they can’t possibly patrol the accuracy of the 3.5 billion pieces of account information they receive every month from lenders. “We’re the library,” says Maxine Sweet, Experian’s director of public education. “We don’t write the book.”
Continue to Part 2:
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
Credit Repair Va:
CRA Resources:
Credit Repair:
About CRA:
A mistake on your credit report can cost you literally thousands of dollars, especially in this economy. So what can you expect from a big credit bureau if you ask them to investigate and correct the error?
The answer, for many consumers: About 50 cents worth of effort, conducted by offshore workers at third-party firms. That’s just one of the findings from SmartMoney’s investigation into why credit-report errors continue to pop up so frequently—and why consumers often have so much trouble getting them fixed.
To follow what one consumer advocate calls an “electronic hot potato,” SmartMoney pieced together a depiction of the dispute process through information from trial depositions, internal company memos and the bureaus’ own employee manuals—much of which the bureaus and their trade group subsequently confirmed. The process may be efficient, but it remains a mystery to most consumers, and a source of bitterness for some.
The Wrong Kind of Thrills
For Brandon and Amanda Mendelson, it had all the elements of a paperback thriller:
The innocent newlyweds, the mysterious account held by an obscure bank in Boca Raton, the faceless corporation controlling everything behind the scenes.
But when the Mendelsons discovered the strange overdue loan mistakenly listed on Amanda’s credit report, they weren’t exactly thrilled.
The Glens Falls, N.Y., couple had never done business with that bank, and the error spoiled Amanda’s credit history. Making matters worse, their call to a national credit bureau yielded nothing more than a form letter stating that the accuracy of the entry had been “investigated” and “verified.”
Now they can’t help but wonder: investigated how? Verified by whom? Brandon studied organizational leadership in school, but even he can’t imagine how the bureau failed to fix such an obvious mistake. “Maybe it fell through the cracks,” he says.
Or maybe the process worked pretty much as it was designed to.
Although they generally decline to discuss specific cases, the three major credit bureaus—Experian, Equifax and TransUnion—each attest to their commitment to accuracy and accountability in their record keeping.
But while consumers might assume that each bureau employs an army of dedicated sleuths who carefully investigate and correct errors, all the bureaus actually process most disputes using a system that’s almost entirely automated—and where human beings are involved, they’re often working at a harried pace.
The bureaus say the system, dubbed with the Muppety acronym e-OSCAR, is the most efficient way to handle the more than 20,000 disputes a day they receive.
In practice, most complaints are electronically zapped straight to the lender, and according to consumer advocates, many lenders respond by simply rereporting the erroneous data.
Credit-report accuracy is profoundly important now, because an error can wreak more havoc than ever on your financial life.
Before the nation heard the words credit crisis, just about anyone with a pulse could get a loan. Now many banks are refusing credit to anyone who looks remotely risky. And as legions of anxious job hunters know, a growing number of employers routinely check credit reports before they make a hire. It’s no wonder, then, that the National Foundation for Credit Counseling says call volume is up 31 percent in the past 12 months.
“Credit is on consumers’ minds more than ever before,” says Curtis Arnold, CEO of CardRatings.com.
But according to a 2007 survey by pollster Zogby, 37 percent of consumers who obtain their credit reports find errors, and half of those said they could not easily correct the mistakes.
An earlier study by the U.S. Public Interest Research Group, a nonprofit consumer advocacy organization, found that one in four reports contained “serious errors.” For its part, the Consumer Data Industry Association, the industry’s trade group, says only 11 percent of consumers who get their credit report file a dispute and just 5 percent of those challenge the results.
“That’s an excellent satisfaction rate,” says the group’s president, Stuart Pratt. Still, even some industry insiders say there’s a problem. Testifying before Congress, one CEO of an independent Arizona credit bureau likened the dispute process to “having an IRS audit, brain surgery, getting a tooth pulled or going to your own funeral.”
And when the dispute process fails, consumers say they are left feeling powerless. Martha Soto, a 63-year-old Antioch, Calif., shipping manager, says she couldn’t get the mortgage she needed last fall because Experian listed her as the defendant in an unpaid court judgment.
She says she’s faxed records proving that she’s actually the plaintiff; Experian says they’re the wrong records, and the dispute is still unresolved, leaving Soto increasingly frustrated. “They’re defaming you, and you can’t do anything about it,” says Soto. “It’s scary to think an agency like that can control your life.”
Big Business, Little Service
Until the late 1980s, consumer credit records were scattered among thousands of low-profile local bureaus.
The industry gradually underwent a consolidation frenzy that left three companies controlling the data of 210 million Americans. The smallest, Chicago-based TransUnion, is owned by the Pritzker family of the Hyatt hotel fortune and boasts credit-reporting operations in 25 countries, including Nicaragua and Botswana.
Publicly traded Equifax, founded in 1898 by a Tennessee grocer who sold his customers’ payment records to fellow shopkeepers, calls itself a “global leader in information solutions” with businesses as diverse as risk detection and database management. (According to its income statements, its consumer data unit remains its most profitable, boasting a 40 percent pretax profit margin.)
Experian, the largest of the three and based in Ireland, is a $4 billion company that uses consumer data to help businesses send more than 20 billion pieces of junk mail every year.
Together, the three credit bureaus have amassed a spotty record on consumer care.
In 2000 they jointly paid a $2.5 million Federal Trade Commission fine for blocking millions of phone calls from consumers. Three years later Equifax paid a second fine because it still hadn’t hired enough people to answer the phone. In 2005, after new federal laws forced the bureaus to give away credit reports, Experian was hit with a $950,000 FTC fine for marketing those reports through a Web site that automatically charged consumers for an $80 credit-monitoring service. Last year TransUnion agreed to pay $75 million to settle a class-action lawsuit over sales of consumer data for marketing purposes.
The bureaus, which never admitted wrongdoing in these cases, say they realize the importance of providing reliable information to lenders and consumers alike. “If we don’t, we cannot survive, either as a company or as an economy,” says Equifax spokesperson Tim Klein.
But they also admit that credit-report errors can stem from glitches in their own systems. Some mistakes occur thanks to the algorithms used to match loans to individual credit reports. If the name or Social Security number on another person’s account partially matches the data on your file, the computer might attach it to your record.
The credit bureaus also employ contractors who gather tax lien and bankruptcy data from courthouses and government offices.
If these workers transpose a digit or misread a document, their error winds up on your report. But even if they never made mistakes of their own, the bureaus say they can’t possibly patrol the accuracy of the 3.5 billion pieces of account information they receive every month from lenders. “We’re the library,” says Maxine Sweet, Experian’s director of public education. “We don’t write the book.”
Continue to Part 2:
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
Credit Repair Va:
CRA Resources:
Credit Repair:
About CRA:
Saturday, February 13, 2010
New Credit Card Regulations Help Homebuyers Easier to Pay Down Debt and Qualify for Better Mortgage Rates
by Christina Crouch
When Brandon Hill, a 28-year-old marketing specialist based in Salt Lake City, went to buy a house, he got an unfortunate surprise. "I was under the requirement for an FHA loan at the time by about 15 or 20 points," Hill says. "We tried to get the mortgage under my wife's name, but the lender backed out. We needed to get my credit score fixed to buy a house."
Laden with $10,000 in credit card debt between Hill and his wife, Brandon doubled his credit card payments, but still had to enroll with a credit repair service in order to raise his score the 20 points necessary to land a loan. "It was a really long and rough process," says Hill. "[Before credit repair], we felt like our payments weren't going anywhere."
Future homebuyers may not have to go through the Hill's hassle. As of February 22, new provisions from the Credit Card Accountability, Responsibility, and Disclosure Act will go into effect, helping indebted consumers looking to land a mortgage pay off their debt and raise their credit score faster. Here's now the new laws will affect homebuyers.
Those looking to unload some debt before applying for a mortgage are about to get a much-needed helping hand, says Catherine Williams, vice president of financial literacy for Money Management International financial counseling firm in Houston.
"Credit cards that offer an introductory promotional rate have to make that rate last at least six months," explains Williams. "If someone is applying for a mortgage and needs to pay down debt, they'll be able to get a low- or no-interest card and spend the next six months paying off their balance. That could be substantial."
In addition to offering lengthier teaser rates on new cards, Williams adds that the Credit Card Act will also optimize payments for consumers with old balances. When consumers hold cards with multiple interest rates - for example, a five percent rate on the first $3,000 of debt, and 20 percent on anything higher - their monthly payments currently pay off the cheapest debt first, leaving the pricier debt to accrue. Under the new law, payments will eliminate the more expensive debt first, leaving consumers with lower balances, higher credit scores, and a better likelihood of landing sweet mortgage rates.
"It's just going to help everybody get rid of their debt faster," says Williams. "That's going to make their credit score go up."
"The major thing this act will do for mortgagees is help them be more aware of what their debt utilization ratio is and better understand how to lower it," says Curtis Arnold, CEO of the credit card information web site, Cardratings.com. "Now credit card companies are going to have to warn you about what happens if you keep making that minimum payment, and how long it's going to take you to pay off that card."
Arnold adds that to raise their credit score and qualify for the best mortgage rates, consumers need keep their debt to 10 percent or less of their credit limit.
While the new credit laws won't actually pay down your debt for you, they will help consumers keep track of how much they owe by forcing card companies to print the total amount of debt, how long it will take to pay the debt making only minimum payments and how high the payments will be if the consumers wants to pay off the debt with interest within three years on every credit card statement and to give card holders a full three weeks (21) to make their payments.
"As of late February, the only way they can increase your rates is if you're 60 days late on your payment," says Arnold. "That's going to help mortgage seekers financially plan a lot better."
While the card act may help those carrying credit balances destroy debt faster, it's going to block other consumers from getting credit at all, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies in Fairfax, Virginia. For those planning to purchase a home in the future, this could have severe ramifications.
"People younger than 21 are going to have a lot of trouble establishing credit early on in their careers because they won't be able to get a credit card without a cosigner," Jones explains. "Because card companies won't be able to tack on new fees or target risky consumers, they might offset those costs by lowering credit limits or raising interest rates. That's going to create a tough situation for consumers who may be trying to get a mortgage."
The good news, Jones adds, is that those looking to clean up their credit before applying for a mortgage will be able to plan their finances much better. According to the new law, if a credit issuer does change your interest rate or card terms, cardholders will be given the right to opt out. Those who do opt out of a rate increase will lose the ability to use that card in the future, but will be given 45 days to find a new card, pay off their balance, and cancel their account. Changes in rates and fees will also only affect new balances, so future homeowners needn't worry about their old debts doubling or tripling days before submitting their mortgage application.
"The ability to say 'no' to new charges is going to give consumers who are looking for the best mortgage rates more control over their debt and their credit score," says Arnold. "It's going to help level the playing field. That 'Wild West' mentality that's been out in the credit card world until now is going away. There's a new sheriff in town."
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
Credit Repair Va:
CRA Resources:
Credit Repair:
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When Brandon Hill, a 28-year-old marketing specialist based in Salt Lake City, went to buy a house, he got an unfortunate surprise. "I was under the requirement for an FHA loan at the time by about 15 or 20 points," Hill says. "We tried to get the mortgage under my wife's name, but the lender backed out. We needed to get my credit score fixed to buy a house."
Laden with $10,000 in credit card debt between Hill and his wife, Brandon doubled his credit card payments, but still had to enroll with a credit repair service in order to raise his score the 20 points necessary to land a loan. "It was a really long and rough process," says Hill. "[Before credit repair], we felt like our payments weren't going anywhere."
Future homebuyers may not have to go through the Hill's hassle. As of February 22, new provisions from the Credit Card Accountability, Responsibility, and Disclosure Act will go into effect, helping indebted consumers looking to land a mortgage pay off their debt and raise their credit score faster. Here's now the new laws will affect homebuyers.
Those looking to unload some debt before applying for a mortgage are about to get a much-needed helping hand, says Catherine Williams, vice president of financial literacy for Money Management International financial counseling firm in Houston.
"Credit cards that offer an introductory promotional rate have to make that rate last at least six months," explains Williams. "If someone is applying for a mortgage and needs to pay down debt, they'll be able to get a low- or no-interest card and spend the next six months paying off their balance. That could be substantial."
In addition to offering lengthier teaser rates on new cards, Williams adds that the Credit Card Act will also optimize payments for consumers with old balances. When consumers hold cards with multiple interest rates - for example, a five percent rate on the first $3,000 of debt, and 20 percent on anything higher - their monthly payments currently pay off the cheapest debt first, leaving the pricier debt to accrue. Under the new law, payments will eliminate the more expensive debt first, leaving consumers with lower balances, higher credit scores, and a better likelihood of landing sweet mortgage rates.
"It's just going to help everybody get rid of their debt faster," says Williams. "That's going to make their credit score go up."
"The major thing this act will do for mortgagees is help them be more aware of what their debt utilization ratio is and better understand how to lower it," says Curtis Arnold, CEO of the credit card information web site, Cardratings.com. "Now credit card companies are going to have to warn you about what happens if you keep making that minimum payment, and how long it's going to take you to pay off that card."
Arnold adds that to raise their credit score and qualify for the best mortgage rates, consumers need keep their debt to 10 percent or less of their credit limit.
While the new credit laws won't actually pay down your debt for you, they will help consumers keep track of how much they owe by forcing card companies to print the total amount of debt, how long it will take to pay the debt making only minimum payments and how high the payments will be if the consumers wants to pay off the debt with interest within three years on every credit card statement and to give card holders a full three weeks (21) to make their payments.
"As of late February, the only way they can increase your rates is if you're 60 days late on your payment," says Arnold. "That's going to help mortgage seekers financially plan a lot better."
While the card act may help those carrying credit balances destroy debt faster, it's going to block other consumers from getting credit at all, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies in Fairfax, Virginia. For those planning to purchase a home in the future, this could have severe ramifications.
"People younger than 21 are going to have a lot of trouble establishing credit early on in their careers because they won't be able to get a credit card without a cosigner," Jones explains. "Because card companies won't be able to tack on new fees or target risky consumers, they might offset those costs by lowering credit limits or raising interest rates. That's going to create a tough situation for consumers who may be trying to get a mortgage."
The good news, Jones adds, is that those looking to clean up their credit before applying for a mortgage will be able to plan their finances much better. According to the new law, if a credit issuer does change your interest rate or card terms, cardholders will be given the right to opt out. Those who do opt out of a rate increase will lose the ability to use that card in the future, but will be given 45 days to find a new card, pay off their balance, and cancel their account. Changes in rates and fees will also only affect new balances, so future homeowners needn't worry about their old debts doubling or tripling days before submitting their mortgage application.
"The ability to say 'no' to new charges is going to give consumers who are looking for the best mortgage rates more control over their debt and their credit score," says Arnold. "It's going to help level the playing field. That 'Wild West' mentality that's been out in the credit card world until now is going away. There's a new sheriff in town."
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
Credit Repair Va:
CRA Resources:
Credit Repair:
About CRA:
Tuesday, February 9, 2010
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.
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
Credit Repair Va:
CRA Resources:
Credit Repair:
About CRA:
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.
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
Credit Repair Va:
CRA Resources:
Credit Repair:
About CRA:
Thursday, December 3, 2009
Collapse In Consumer Credit May Slow Recovery
Millions seek to repair damaged scores — here’s how to get started:
By: John W. Schoen
Among the many legacies of the housing bust is a widespread collapse of consumer credit. In the space of a few years, bankers have gone from lending to anyone with a pulse to demanding a pristine payment history.
The result is a collapse in consumer credit that shows no signs of easing. In September, the latest figures available, revolving consumer credit fell at an annualized rate of 13.3 percent.
The situation is worsening. In the first half of the year consumer credit was dropping at a rate of just under 10 percent.
No one is suggesting we go back to the reckless days of setting up tables at college orientations to hand out credit lines to freshmen. The credit card industry learned the hard way that when their models break, the results can be painful for all concerned.
But the lending spree has destroyed the credit histories of millions of Americans.
The rules of the consumer credit game suggest it will be years before those failed borrowers are able to dig themselves out of the hole. Until those households get access to credit again, our consumer-driven economy will continue to slog along in low gear.
In the meantime, there are steps consumers can take to get back in the good graces of the financial services industry that helped put them in a hole they find themselves in.
"I am trying to build credit for myself and husband. I have a low credit score, and he has none. We bought a truck and it's under both names, so we are hoping after we pay it off it will help with our credit. He has a repo under his belt and I have a couple of phone bills that I let get too high and couldn't pay them off. So my question is, what can we both do to build and increase our credit scores? We want to buy a house in the future and would like to build our credit so it won't be so hard on us. Any information or ideas that could help?
— Crystal, Amarillo, Texas
There are lots of reasons for financial setbacks, some of which you can’t control. With the “real” unemployment rate pushing 20 percent, job loss is a big one. Health setbacks are another; nearly two out of three personal bankruptcies were the result of out-of-control medical bills.
Letting the phone bill “get too high,” on the other hand, isn’t on the list of uncontrollable setbacks. You can fix that right away.
But it will take more than a few months of prompt payments to get back on track. The formula created for scoring credit doesn’t care why your payment history faltered. Maybe you're one of those people who just can't stick to a budget. Or maybe you happened to have hit a period of bad luck.
The credit algorithm can’t handle that distinction. That’s a pretty big flaw in the “science” of calculating credit ratings.
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
Credit Repair Va:
CRA Resources:
Credit Repair:
About CRA:
By: John W. Schoen
Among the many legacies of the housing bust is a widespread collapse of consumer credit. In the space of a few years, bankers have gone from lending to anyone with a pulse to demanding a pristine payment history.
The result is a collapse in consumer credit that shows no signs of easing. In September, the latest figures available, revolving consumer credit fell at an annualized rate of 13.3 percent.
The situation is worsening. In the first half of the year consumer credit was dropping at a rate of just under 10 percent.
No one is suggesting we go back to the reckless days of setting up tables at college orientations to hand out credit lines to freshmen. The credit card industry learned the hard way that when their models break, the results can be painful for all concerned.
But the lending spree has destroyed the credit histories of millions of Americans.
The rules of the consumer credit game suggest it will be years before those failed borrowers are able to dig themselves out of the hole. Until those households get access to credit again, our consumer-driven economy will continue to slog along in low gear.
In the meantime, there are steps consumers can take to get back in the good graces of the financial services industry that helped put them in a hole they find themselves in.
"I am trying to build credit for myself and husband. I have a low credit score, and he has none. We bought a truck and it's under both names, so we are hoping after we pay it off it will help with our credit. He has a repo under his belt and I have a couple of phone bills that I let get too high and couldn't pay them off. So my question is, what can we both do to build and increase our credit scores? We want to buy a house in the future and would like to build our credit so it won't be so hard on us. Any information or ideas that could help?
— Crystal, Amarillo, Texas
There are lots of reasons for financial setbacks, some of which you can’t control. With the “real” unemployment rate pushing 20 percent, job loss is a big one. Health setbacks are another; nearly two out of three personal bankruptcies were the result of out-of-control medical bills.
Letting the phone bill “get too high,” on the other hand, isn’t on the list of uncontrollable setbacks. You can fix that right away.
But it will take more than a few months of prompt payments to get back on track. The formula created for scoring credit doesn’t care why your payment history faltered. Maybe you're one of those people who just can't stick to a budget. Or maybe you happened to have hit a period of bad luck.
The credit algorithm can’t handle that distinction. That’s a pretty big flaw in the “science” of calculating credit ratings.
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
Credit Repair Va:
CRA Resources:
Credit Repair:
About CRA:
Tuesday, November 24, 2009
5 Ways To Kill Your Credit Scores
By Liz Pulliam Weston
One of the questions I'm asked most often about credit scores is exactly how much certain actions affect people's scores.
What good is a good credit score?
Until now, the best I could do was say, "It depends." That's because the company that created the leading credit score, the FICO, has been wary about releasing specifics.
Fortunately, that just changed. At my request and for the first time, the company (also known as FICO) has released details about how specific actions, from maxing out a credit card to filing for bankruptcy, can affect people with different credit scores.
I asked the company to compute the results of those actions for two examples: a person with a 780 score, which is an excellent score on the 300-to-850 FICO scale, and someone with a 680 score. The results:
Effect on a 680 score Effect on a 780 score
Maxed-out card
-10 to -30
-25 to -45
30-day late payment
-60 to -80
-90 to -110
Debt settlement
-45 to -65
-105 to -125
Foreclosure
-85 to -105
-140 to -160
Bankruptcy
-130 to -150
-220 to -240
Source: FICO
The results are given in a range because FICO is still a little nervous about revealing too much about its proprietary scoring. But the range is fairly tight, and we can clearly see the disparate impacts of the different actions.
A Guide, Not a Guarantee.
Before we go further, I have to make this clear: Your mileage may vary.
People with the same credit score can have very different credit profiles: more or fewer accounts, a different mix of accounts, a longer or shorter credit history, use of more or less of their available credit, etc.
Because of those differences, the same action -- maxing out a card, say -- can have different effects on people with the same score, depending on the details of their individual credit profiles.
For the sake of this exercise, FICO assumed both people had several active major credit cards as well as a mortgage, a car loan and student loans.
The person with the 780 score:
Has at least 10 credit accounts in total and a 15-year credit history.
Uses 15% to 25% of her credit card limits.
Has no late payments on her credit reports.
Has no collection accounts or other major negatives.
The person with the 680 score:
Has six credit accounts and an eight-year credit history.
Uses 40% to 50% of her credit card limits.
Was 90 days late on an account two years ago.
Was 30 days late on another account one year ago.
Here's what you need to know about each action and the effect it had:
1. Maxing out a credit card
Using 100% of your limit on any credit card puts you at risk of over-limit fees. It also takes a bite out of your credit score.
Our person with the 680 score might lose 10 to 30 points from this one action, while the 780 scorer could shed 25 to 45 points.
The difference points up an important fact: The higher your score, the more points you tend to lose from "bad" actions. That's because the scoring formula is sensitive to any sign you're getting in over your head. Maxing out a credit card is considered one of those signs.
You also should know that it typically doesn't matter to the formula if you carry a balance or pay off that maxed-out card as soon as you get your statement. What's usually reported to the credit bureaus is the balance on your last statement. Even if you pay the debt in full before the due date, the maxed-out card will hurt your score.
2. Skipping a payment
Mailing a payment a few days late normally won't hurt your score, although you may incur late fees and trigger higher interest rates. The big hurt comes when you miss a payment cycle entirely.
A 30-day-late report would shave 60 to 80 points from our lower-scoring person and 90 to 110 points from our higher scorer. In other words, one lapse of attention could plunge the 680-scorer into subprime credit territory, and our 780-scorer could find credit much harder to get and more expensive.
This is why it's so important to set up automatic payments to ensure your bills get paid on time, all the time. With credit cards, you can set up automatic payments that take the minimum payment out of your checking account to ward against a late payment. You can always make a second payment that reduces your debt or pays it off entirely. You can sign up for automatic payments on the Web site of your card issuer.
3. Settling a credit card debt
All the advertisements about "settling your debt for pennies on the dollar" make debt settlement sound like a great solution. But failing to pay what you owe a creditor will take a serious toll on your score.
The 680 scorer would lose 45 to 65 points with this maneuver, while the 780 scorer would shed 105 to 125 points.
Our scenario assumed that our borrowers would miss one payment before settling the debt with their credit card companies. In reality, debt settlement negotiations can drag on much longer, with each missed payment taking another chunk out of your score.
Settling a debt with a collection agency would hurt less, probably much less, because the FICO formula is set up to weigh more heavily what the original creditor says about you than what a collection agency reports. But if our borrowers were settling with a collection agency instead, their scores would be lower to begin with, because they would have collection accounts on their records.
Also, you should know that the amount of debt your creditor "forgives" in a debt settlement solution is typically added to your taxable income. So you may save some money by settling a debt, but you'll give some of it back to Uncle Sam in higher taxes.
4. Losing a property to foreclosure
Foreclosure deals a severe blow to your credit score: 85 to 105 points for our person with the 680 score and 140 to 160 points for the one with the 780 score.
Foreclosures have implications for your future ability to get a mortgage as well. Although your score may start to improve as soon as the house is gone, mortgage lenders may not be willing to extend you another home loan until two to four years have elapsed.
In an attempt to protect their credit, many people attempt short sales, selling their houses for less than what's owed, with the lenders' permission. Unfortunately, these transactions, even if successful, are often reported as settlements. And a settlement, as you've seen, is pretty bad for credit scores.
To lenders, a short sale isn’t quite as bad as a foreclosure, though, and it may be easier to get another mortgage once you’ve rebuilt your credit.
5. Filing for bankruptcy
FICO spokesman Craig Watts once called bankruptcy the nuclear bomb of credit actions. Filing for bankruptcy would shave 130 to 150 points from the 680 score and 220 to 240 points from the 780 score.
This is different from the other black marks, where the higher scorer was still left with better numbers than the lower scorer. In this case, both would wind up near the bottom of the credit barrel. Getting new credit, particularly in the current credit-crunch environment, would be extremely tough.
Sometimes, of course, bankruptcy is the best of bad options. (See "Quiz: Should you file for bankruptcy?") But if you can't pay your bills, you should at least explore the other possibilities: forbearance, credit counseling or even debt settlement.
Finally, if you have any of these five black marks on your record, remember two things: The impact on your score may differ from what's shown above, and regardless of how many points you lost, you can rebuild your FICO score over time.
You can buy your Equifax
or TransUnion FICO score from MyFICO.com. (Experian no longer sells FICO scores to consumers, although it continues to sell the scores to lenders.) With paid scores, you'll get specific advice about how to improve your numbers.
myFICO May Sale - Save 20% on FICO scores & credit reports
In general, when you're trying to build a credit score, you should:
1. Pay your bills on time, all the time.
2. Reduce your credit utilization; below 30% is good, below 10% is better.
3. Have a mix of credit on your reports, including installment loans (mortgages, auto loans and personal loans) and revolving accounts (credit cards and lines of credit).
4. Refrain from closing accounts.
5. Apply for new credit sparingly.
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
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CRA Resources:
Credit Repair:
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One of the questions I'm asked most often about credit scores is exactly how much certain actions affect people's scores.
What good is a good credit score?
Until now, the best I could do was say, "It depends." That's because the company that created the leading credit score, the FICO, has been wary about releasing specifics.
Fortunately, that just changed. At my request and for the first time, the company (also known as FICO) has released details about how specific actions, from maxing out a credit card to filing for bankruptcy, can affect people with different credit scores.
I asked the company to compute the results of those actions for two examples: a person with a 780 score, which is an excellent score on the 300-to-850 FICO scale, and someone with a 680 score. The results:
Effect on a 680 score Effect on a 780 score
Maxed-out card
-10 to -30
-25 to -45
30-day late payment
-60 to -80
-90 to -110
Debt settlement
-45 to -65
-105 to -125
Foreclosure
-85 to -105
-140 to -160
Bankruptcy
-130 to -150
-220 to -240
Source: FICO
The results are given in a range because FICO is still a little nervous about revealing too much about its proprietary scoring. But the range is fairly tight, and we can clearly see the disparate impacts of the different actions.
A Guide, Not a Guarantee.
Before we go further, I have to make this clear: Your mileage may vary.
People with the same credit score can have very different credit profiles: more or fewer accounts, a different mix of accounts, a longer or shorter credit history, use of more or less of their available credit, etc.
Because of those differences, the same action -- maxing out a card, say -- can have different effects on people with the same score, depending on the details of their individual credit profiles.
For the sake of this exercise, FICO assumed both people had several active major credit cards as well as a mortgage, a car loan and student loans.
The person with the 780 score:
Has at least 10 credit accounts in total and a 15-year credit history.
Uses 15% to 25% of her credit card limits.
Has no late payments on her credit reports.
Has no collection accounts or other major negatives.
The person with the 680 score:
Has six credit accounts and an eight-year credit history.
Uses 40% to 50% of her credit card limits.
Was 90 days late on an account two years ago.
Was 30 days late on another account one year ago.
Here's what you need to know about each action and the effect it had:
1. Maxing out a credit card
Using 100% of your limit on any credit card puts you at risk of over-limit fees. It also takes a bite out of your credit score.
Our person with the 680 score might lose 10 to 30 points from this one action, while the 780 scorer could shed 25 to 45 points.
The difference points up an important fact: The higher your score, the more points you tend to lose from "bad" actions. That's because the scoring formula is sensitive to any sign you're getting in over your head. Maxing out a credit card is considered one of those signs.
You also should know that it typically doesn't matter to the formula if you carry a balance or pay off that maxed-out card as soon as you get your statement. What's usually reported to the credit bureaus is the balance on your last statement. Even if you pay the debt in full before the due date, the maxed-out card will hurt your score.
2. Skipping a payment
Mailing a payment a few days late normally won't hurt your score, although you may incur late fees and trigger higher interest rates. The big hurt comes when you miss a payment cycle entirely.
A 30-day-late report would shave 60 to 80 points from our lower-scoring person and 90 to 110 points from our higher scorer. In other words, one lapse of attention could plunge the 680-scorer into subprime credit territory, and our 780-scorer could find credit much harder to get and more expensive.
This is why it's so important to set up automatic payments to ensure your bills get paid on time, all the time. With credit cards, you can set up automatic payments that take the minimum payment out of your checking account to ward against a late payment. You can always make a second payment that reduces your debt or pays it off entirely. You can sign up for automatic payments on the Web site of your card issuer.
3. Settling a credit card debt
All the advertisements about "settling your debt for pennies on the dollar" make debt settlement sound like a great solution. But failing to pay what you owe a creditor will take a serious toll on your score.
The 680 scorer would lose 45 to 65 points with this maneuver, while the 780 scorer would shed 105 to 125 points.
Our scenario assumed that our borrowers would miss one payment before settling the debt with their credit card companies. In reality, debt settlement negotiations can drag on much longer, with each missed payment taking another chunk out of your score.
Settling a debt with a collection agency would hurt less, probably much less, because the FICO formula is set up to weigh more heavily what the original creditor says about you than what a collection agency reports. But if our borrowers were settling with a collection agency instead, their scores would be lower to begin with, because they would have collection accounts on their records.
Also, you should know that the amount of debt your creditor "forgives" in a debt settlement solution is typically added to your taxable income. So you may save some money by settling a debt, but you'll give some of it back to Uncle Sam in higher taxes.
4. Losing a property to foreclosure
Foreclosure deals a severe blow to your credit score: 85 to 105 points for our person with the 680 score and 140 to 160 points for the one with the 780 score.
Foreclosures have implications for your future ability to get a mortgage as well. Although your score may start to improve as soon as the house is gone, mortgage lenders may not be willing to extend you another home loan until two to four years have elapsed.
In an attempt to protect their credit, many people attempt short sales, selling their houses for less than what's owed, with the lenders' permission. Unfortunately, these transactions, even if successful, are often reported as settlements. And a settlement, as you've seen, is pretty bad for credit scores.
To lenders, a short sale isn’t quite as bad as a foreclosure, though, and it may be easier to get another mortgage once you’ve rebuilt your credit.
5. Filing for bankruptcy
FICO spokesman Craig Watts once called bankruptcy the nuclear bomb of credit actions. Filing for bankruptcy would shave 130 to 150 points from the 680 score and 220 to 240 points from the 780 score.
This is different from the other black marks, where the higher scorer was still left with better numbers than the lower scorer. In this case, both would wind up near the bottom of the credit barrel. Getting new credit, particularly in the current credit-crunch environment, would be extremely tough.
Sometimes, of course, bankruptcy is the best of bad options. (See "Quiz: Should you file for bankruptcy?") But if you can't pay your bills, you should at least explore the other possibilities: forbearance, credit counseling or even debt settlement.
Finally, if you have any of these five black marks on your record, remember two things: The impact on your score may differ from what's shown above, and regardless of how many points you lost, you can rebuild your FICO score over time.
You can buy your Equifax
or TransUnion FICO score from MyFICO.com. (Experian no longer sells FICO scores to consumers, although it continues to sell the scores to lenders.) With paid scores, you'll get specific advice about how to improve your numbers. myFICO May Sale - Save 20% on FICO scores & credit reports
In general, when you're trying to build a credit score, you should:
1. Pay your bills on time, all the time.
2. Reduce your credit utilization; below 30% is good, below 10% is better.
3. Have a mix of credit on your reports, including installment loans (mortgages, auto loans and personal loans) and revolving accounts (credit cards and lines of credit).
4. Refrain from closing accounts.
5. Apply for new credit sparingly.
VISIT THE CREDIT RESTORATION ASSOCIATES WEBSITE:
Back to the CRA blog homepage:
Credit Repair Va:
CRA Resources:
Credit Repair:
About CRA:
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