Credit

EVERYBODY GETS A THREE-DIGIT NUMBER

 

A three-digit number called a credit score is critical to financial health. If you play the credit game well, you can get the best deal in town, but if you don't, your opportunities diminish and you pay more to borrow in the future.  The trouble is the credit game is not always easy to play, especially if you don't know the rules. A bad credit score can cost you money. If your score is low, lenders will compete with each other to get your business. You will have to fight for a loan that doesn't come with a high interest rate, and you will have little or no negotiating power with lenders. 

 

It's difficult to cover all the credit card bills due to lack of money, and stress creates its own sort of havoc. You start eating junk food and stop exercising, and your doctor says you have a case of hypertension and the beginnings of a nasty ulcer. Credit scoring is used for many noncredit situations today, such as landlords checking your credit along with your references, and insurers using credit scoring to determine how much of a premium you will have to pay. The way the system is now if you let your credit score slip, your insurer could raise your rates overnight, not to mention your level of stress.

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LET'S BEGIN BY LOOKING AT 10 ESSENTIAL FACTS ABOUT CREDIT SCORING:

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Your credit score is in a constant state of change, so if you have a low score now, you can improve it over time. However, people with good or even great scores must consistently monitor their credit. Your score is used to detect fraud in credit applications, predict risk as it applies to bankruptcy, forecast whether a consumer will default on certain types of accounts, and estimate the amount a consumer will pay toward a delinquent account.

 

A score cannot be determined if there is nothing on your credit report. Fair Isaac developed the FICO Expansion Score to evaluate consumers with little or no credit history. Credit scoring was created for lenders, not consumers. Credit-scoring companies do not want you to know how the scoring process works because they fear that competitors will copy their formulas. Consumers know more today about their credit scores than ever before, but the fine details remain a shrouded mystery.

 

Your current credit behavior has a greater effect on your score than past behavior, so handle your credit wisely now. Many lenders have several cut-off points where each segment qualifies for a different set of rates and terms. Consumers with scores below 620 often end up borrowing from what are known as "subprime" lenders.

 

Your payment history accounts for 35 percent of your credit score. It includes the most recent delinquency, collection, or public record item. About 30 percent of your credit score is based on how much you owe on all accounts, including credit card, auto loans, and mortgage accounts. Generally speaking, you should not go near your credit limit. If you apply for lots of credit in a short amount of time, lenders may think you're desperate for money. Credit inquiries are counted here. Hard inquiries have a negative impact on your credit. Hard Inquiries are recorded when a consumer shops for credit cards or loans. They may cost 5 points or less on your credit score, but they lose their impact over time. Lenders want to see a healthy mix of credit, so you should have both revolving accounts and installment accounts. Bankcards are better for your credit score than department store cards.

 

Fair Isaac uses scorecards to segment the population based on the information found in their credit reports. Each scorecard gives different weight to the same information, so the same behavior in different borrowers can mean different things.

 

HOW WE GOT HERE

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Credit scoring came about several decades ago as a way for lenders to determine the creditworthiness of prospective borrowers. Bill Fair and Earl Isaac started a company called Fair Isaac, and their formula helped lenders become faster and more efficient. 

 

At first, each company had its own formula for determining consumer credit scores. However, it was extremely expensive for the lender to develop and implement custom formulas, so they started relying on information gathered at the three major credit bureaus. Credit scoring provided a definite benefit for lenders. They could make loan decisions easier and faster, and charge more interest to those with lower scores. 

 

Credit scoring enabled the big credit explosion of the 1990s. Consumer loans more than doubled to $1.7 trillion from 1990 to 2000. 

People began to understand the importance of FICO scores after Fannie Mae and Freddie Mac recommended that lenders use FICO scoring. Fair Isaac wanted to keep scoring secret, but consumers started altering their behavior to increase their scores. In early 2000, a Web-based lender defied Fair Isaac and allowed consumers to see their credit scores online. Fair Isaac then gave up its secret and posted the 22 factors affecting a credit score on its website.

 

CHECKING YOUR CREDIT REPORT AND FIXING ERRORS MAY VERY WELL HELP RAISE YOUR SCORE

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Pay your bills on time to avoid damaging your credit rating. A single late payment can result in a score drop of 80 or more points.

Typically, a payment has to be at least 30 days late for the creditor to report it to the bureaus. However, some creditors use due times instead of due dates and charge high late fees for even one day-late payment. Pay your bills on the same day you receive them in the mail. No more lost statements.

 

The second most important factor in factoring your credit score is how much available credit you currently have. The lower your account balances compared to your credit limits, the better. If you want to improve your credit score, pay down the accounts with balances closest to their limits. Do not close credit card accounts, as this will reduce your credit limit and shorten your credit history. If you already have three or four credit cards, resist signing up for the newest deal in town because it might have you paying more for your next auto loan.

 

Fair Isaac's website advises consumers to contact a legitimate credit counselor for help with financial difficulties. Consumers can request their credit report instantly online, and dispute errors more streamline if they dispute online. Still, consumers need to be persistent with credit bureaus and creditors.

 

DISPUTING ERRORS

 

A 2004 study discovered that over 75 percent of consumer credit reports contain some kind of error, and 1 in 4 reports contain an error serious enough to damage the credit rating. There are specific errors to look out for in each of the information categories. These include: names that are not yours, incorrect Social Security numbers, an incorrect date of birth, unfamiliar addresses, unfamiliar trade lines, unfamiliar accounts, delinquencies that do not belong to you, and closed accounts reported as open.

 

When you order a copy of your credit report, you can request that the bureau correct any errors. The bureau will investigate the error and delete it from your report if the lender cannot prove the information is accurate. If the credit bureaus do not respond to your dispute within a reasonable period of time, send a follow-up letter. The credit bureaus are required to respond within "a reasonable time" under the Fair Credit Reporting Act. If the information cannot be verified, delete it from your credit report. If the credit bureaus do not respond to your letter, file a complaint with the Federal Trade Commission.

 

The Credit Bureaus are required under the Fair Credit Reporting Act to investigate any disputed information. You can also contact the creditors directly to dispute errors, and inform them that you will take legal action if the matter is not resolved quickly. The three main credit-reporting agencies provide links on their websites to dispute errors and to check the status of the dispute. Correcting errors online can save time and aggravation.

 

MEDICAL BILLING, CIVIL JUDGMENTS AND TAX LIENS

 

In 2018, the three major credit bureaus deleted 5.5 million records of tax lien data from consumer reports. This led to modest improvements in credit scores for some consumers. Medical debts will be removed from credit reports once they are paid, and any debt less than $500 will not be reported. The removal of tax liens and civil judgments from credit reports increased credit scores for some consumers. However, lenders may still review this information when considering a lending decision.

 

Experian announced in 2018 that it would start factoring in phone and other utility payment history into some consumers' credit reports. This program is called Experian Boost and allows consumers to start and improve a credit score in a low-risk way. 

 

UltraFICO monitors checking and savings accounts and supplements data already in a credit report. It can even be used with less traditional online accounts like PayPal. UltraFICO is available only with Experian and is still in its pilot phase. It may not be much of an option for borrowers with lower scores.

 

VantageScore® 3.0 and 4.0 were created in 2006 by Equifax, Experian, and TransUnion. They have six factors that make up your credit score. VantageScore 4.0 introduces "Trended Data" in the report, which reveals more information about a borrower's credit use. For example, two consumers may have the same score but exhibit different spending and payment behaviors. Vantage 4.0 and FICO 1OT will give lenders more predictive power to make less risky lending decisions.

 

FICO Scores 5 and 2 were used by lenders who wrote mortgages that Fannie Mae or Freddie Mac may purchase. FICO Scores 8 and 9 are widely used in car lending. There are five FICO scores: FICO Score 2, FICO Score 5, FICO Score 4, FICO Score 8 and FICO Auto Score 9. FICO 1OT and VantageScore 4.0 look at a consumer's credit management over the last 24 months. The Federal Housing Finance Authority approved using FICO Score 1OT and VantageScore 4.0 as credit score models to be used by Freddie Mac and Fannie Mae on October 24, 2022.

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