Credit Tip Packet
The Five laws to Accurate Reporting
Effects of Bankruptcy, Foreclosure & Short Sales
Credit Scoring Breakdown
FICO ’08 Changes
New Tips for 2010
Produced by Clear Credit Exchange, Inc.
The Five Consumer Laws
(Our right to accurate and verifiable information)
-Fair Credit Reporting Act (FCRA)-Regulates Credit Reporting Agencies
Established in 1971, and revised in 1997, it enables consumers to learn what information Credit Reporting Agencies have on file about them. It means that if something is not verified and accurate on your credit report you have the right to demand that it be verified. This accuracy and verification should have been completed PRIOR to it reporting. It also establishes specific permissible purposes for which credit reports may be requested, and places time limits on how long adverse information may be reported.
-Fair Debt Collection Practices Act (FDCPA)-Regulates collection companies
States that in order to collect or report a debt, you have to be able to validate it with a detailed billing history, a signed contract of assignment and your original application.
-Fair and Accurate Credit Transaction Act (FACTA)-Addendum to the FCRA to protect against ID theft & unauthorized access
Pertains to ID theft revisions of the Sunset Laws from the Fair Credit Reporting Act. Your privacy is protected and it’s your right to view and obtain information on your credit report. You should also be allowed to know WHO and WHY someone is looking at your credit.
-Fair Credit Billing Act (FCBA)-Regulates creditors and how they process your payments and handle disputes
Provides regulations for credit companies reporting debts, payment history, regulates billing cycles and information included in bills. Your right to accurate billing is covered here. This means you can dispute items purchased and your creditor cannot charge you interest for that item purchased until problems are resolved.
-Health Insurance Portability and Accountability Act (HIPAA)-Regulates medical providers on how they collect debts and disseminate your personal information.
States that doctors or hospitals cannot sell or divulge any personal health information in order to collect a debt. This means collectors should NOT be looking at your bill that lists the type of treatment received without your permission.
The Effects of Foreclosure,
Bankruptcy & Short Sales on your Credit Score
One of the questions that we unfortunately get asked a lot these days is what happens to someone that has a foreclosure, bankruptcy, or short sale.
Credit scoring formulas are not disclosed so there is not an exact answer and the impact also depends on the person’s previous credit history. Credit scores take into account the previous 7 years of credit history with more weight given to recent activity. A person with a 7 year rock solid credit history will take less of a hit and their score will also recover quicker.
Foreclosures seem to drop scores 200-250 points and a foreclosure will also act as the heaviest “anchor” to the credit score as you move forward. A foreclosure automatically disqualifies a borrower from getting a mortgage for 3 years (there are rumors that Fannie/Freddie wants to change it to 5 or even 7 years)
Bankruptcy seems to drop scores 100-200 points and automatically disqualifies a borrower from getting a mortgage for 2 years. Although more programs are being created today to allow for people to purchase homes sooner. Bankruptcies can protect you but it’s important to re-establish as soon as possible.
Short Sales have a far less damaging affect on a seller’s credit report. Credit scores typically lose between 80-100 points. What happens to your credit down the road? It takes around 3 years after a foreclosure before a lender will offer a sensible interest rate, whereas for a person who went through a short sale typically waits around 18 months to buy another home at a good interest rate.
The effect of a short sale can vary greatly. The credit bureaus have not created a special designation for a short sale. Many borrowers have to go 30, 60, 90 days late in order for a lender to consider accepting a short sale which will obviously have a huge impact on the credit score. Short sales seem to usually show up as “Creditor Settled for Less Than Amount Due” similar to how settling a credit card balance would show up on a credit report. In some rare cases, they may even report the account as paid in full. There is not an automatic disqualification time period for short sales (yet) but many lenders are adopting their own policy that treats it as if it were a foreclosure.
Another item of note is that once a borrower goes 120 days late or once a Notice of Default is issued the Fannie/Freddie approval engine views this the same as it does a foreclosure.
The most important thing to do after having something bad happen is to re-establish a positive credit history immediately.
CREDIT SCORING
HOW IS YOUR SCORE CALCULATED?
Credit scoring is a mystery. It is not taught in school and there are no specific classes that are offered in our public education system that can prepare us for this three-digit number that now controls out lives. Ignorance is bliss but knowledge is power. Read below to find out a bit more about how your credit score is calculated…
Key Factors of your FICO Credit Score
Just what goes into the score? Pretty much everything in your credit report, with different kinds of information carrying different weights, says Fair Isaac consumer affairs manager Craig Watts. The model looks at more than 20 factors in five categories.
Payment History 35%
1. Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.).
2. Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items).
3. Severity of delinquency (how long past due).
4. Amount past due on delinquent accounts or collection items.
5. Time since (recent) past due items (delinquency), adverse public records (if any), or collection items (if any).
6. Number of past due items on file
7. Number of accounts paid as agreed.
How you pay your bills – The most important factor for your FICO score is how you’ve paid your bills in the past, placing the most emphasis on recent activity. Paying all of your bills on time is good. Paying them late on a consistent basis is bad. Having accounts that were sent to collections is worse. Declaring bankruptcy is worst.
Amounts Owed 30%
1. Amount owing on accounts.
2. Amount owing on specific types of accounts.
3. Lack of a specific type of balance, in some cases.
4. Number of accounts with balances.
5. Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts).
6. Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).
Amount of money you owe and the amount of available credit – The second most important area for a FICO score is your outstanding debt – how much money you owe on credit cards, car loans, mortgages, home equity lines, etc. Also considered is the total amount of credit you have available. If you have 10 credit cards that each have $10,000 credit limits, that’s $100,000 of available credit. Statistically, people who have a lot of credit available tend to use it, which makes them a less attractive credit risk. Carrying a lot of debt doesn’t necessarily mean you’ll have a lower score. It doesn’t hurt as much as carrying close to the maximum. People who consistently max out their balances are perceived as riskier. People who never use their credit don’t have a track history. People with the highest FICO scores use credit sparingly and keep their balances low.
Length of Credit History 15%
1. Time since accounts opened.
2. Time since accounts opened, by specific type of account.
3. Time since account activity.
The third factor is the length of your FICO credit score history – The longer you’ve had credit – particularly if it’s with the same credit issuers – the more points you get.
Types of Credit Used 10%
1. Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.).
The best FICO scores will have a mix of both revolving credit and installment credit. Statistically, consumers with a richer variety of experiences are better credit risks. They know how to handle money.
New Credit 10%
1. Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.
2. Number of recent credit inquiries.
3. Time since recent account opening(s), by type of account.
4. Time since credit inquiry(s).
5. Re-establishment of positive credit history following past payment problems.
The final category with your FICO score is your interest in new credit – how many credit applications you’re filling out. The model compensates for people who are rate shopping for the best car or mortgage rates. The only time shopping really hurts your FICO score, is when you have previous credit stumbles, such as late payments or bills sent to collections.
Then, looking for new credit will be seen as an alarm because statistically, before people declare bankruptcy and default on everything, they look for a life preserver. Also, if you have a very young credit file, an inquiry can count for more than if you’ve had credit for a long time.
What Doesn’t Count in a FICO Score?
The FICO scoring model doesn’t look at :
Ø Age
Ø Race
Ø Job or length of employment at your job
Ø Income
Ø Education
Ø Marital status
Ø Whether or not you’ve ever been turned down for credit
Ø Length of time at your current address
Ø Whether you own a home or rent
A lender may consider all those factors above when deciding whether to approve a loan application, but they aren’t part of how a FICO score is calculated.
Please note that:
Ø A FICO score takes into consideration all these categories of information, not just one or two.
Ø No one piece of information or factor alone will determine your score.
Ø The importance of any factor depends on the overall information in your credit report.
For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO score. Thus, it’s impossible to say exactly how important any single factor is in determining your score.
** Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score.
NEW CHANGES IN FICO AS OF 08-
1. Spouses and children can improve their credit score by being an authorized user on a credit card account, but that’s it. No more piggybacking off strangers.
2. Debts less than $100 that go to collections will matter less.
3. They will look at the total picture more. A single repossession, for instance, won’t matter as much if everything else looks good.
4. Having less available credit will drag down your score more.
5. Diversity matters more. A mix of healthy auto, personal and student loans would bring up a score.
6. Closing accounts will bring down the score.
NEGATIVE ACCOUNTS vs. POSITIVE ACCOUNTS
The main key to all this information is to look at credit as a scale. Based on your habits and your accounts as evidence – How many is on the negative side of the scale? How many is on the positive side? If your scale weights more on the negative than things must be done to try and balance that scale to tip to the positive = so even if you have 4 late payment accounts, a BK, foreclosure – it doesn’t mean you are doomed. Start a checklist of the positive things you can do to start tipping that scale. Even when there are negative accounts – over time and the right resources you can rebuild again.
CREDIT TIPS 2010
1. Repair credit report errors.
Get a copy of your credit report, and then look it over carefully. There are often mistakes on credit reports, and those mistakes could be hurting your credit score. For instance, if a retailer or lender is still reporting an outstanding debt you paid off, that can ding you. So can an error that shows an older, closed account as still open. We’ve told you before how to go about disputing a mistake. Yes, it can be a bit of a hassle, but consider the time spent as an investment in your financial health.
2. Pay down your balances.
Maybe you’ve heard the rule of thumb that you should never have a balance that’s equal to more than 30% of your credit limit – both per card as well as a total of the balance on all cards. Sadly, that advice harkens back to the days when you could also get a no-money-down, adjustable-rate mortgage with a credit score of 650. In other words, it no longer applies in today’s economy.
The new 30% is now 10%, according to Amber Stubbs, managing editor for CardRatings.com. In other words, if you have a credit card with a $10,000 limit, you want to keep your balance at or below $1,000 at all times. If that sounds austere, definitely don’t talk to Lauren Bowne, staff attorney at Watchdog Group Consumers Union. She advocates a much shorter leash for your credit expenditures; no more than 3% of your credit limit. While this can mean a big change in your spending habits, since credit utilization counts for a full 30% of your credit score, lowering your utilization could make a big, positive difference in your number.
Lauren Fairbanks, a freelance writer from New York, raised her credit score 40 points – from 580 to 620 – by paying off $8,000 in credit card debt and $6,000 in student loan debt over the course of 2 years. Of her new-and-improved score, Fairbanks says, “It’s still going up steadily, and now I’m up to 633.”
3. Pay early.
“What some people don’t realize is the balance that’s reported on your credit report is the balance reported on your last billing statement,” says Barry Paperno, consumer operations manager for FICO. “Even if you pay it off every month, if you charge a lot, it will show high utilization.” In other words, it’s helpful to pay off or pay down a big balance right before you go to a lender who’s going to pull your credit score. And even if you generally pay off your balances in full each month, the credit report formula doesn’t know that; it just sees your current balance. So if you’ve got the money to pay a credit card bill early and you plan to have your score pulled by a lender, do it.
Another benefit to paying early, Fairbanks points out, is avoiding the risk of getting dinged with a late fee if your check gets lost in the mail. While the recently implemented CARD Act now requires credit card companies to give you a 60-day grace period before hiking your interest rate for late payment, they can still hit you with late fees. Wouldn’t you rather be using that money to pay down your debt?
4. Ask for a credit limit increase.
We already told you how important your credit utilization is. Paying down your balances and charging less are two ways to improve that ratio. Another is to request more credit from your issuers. The idea isn’t that you’re going to go out and run up a huge bill; rather, you simply want that credit available for the effect it has on your utilization ratio. Think about it: If you’re a bank officer and 2 people come in looking for a loan, both with $5,000 in debt, who are you going to give it to? The person with $5,000 in available credit or the one with $6,000 available?
5. Close certain unused store cards.
Closing credit cards is a mixed bag. Sometimes, it can ding your score by dragging down your utilization; other times, it can be helpful if you have an overabundance of open accounts. One type of card you want to look at very carefully is retail cards. These are the cards that cashiers at the malls or big-box stores will pitch you when you’re checking out, sometimes trying to entice you with an offer of 10-20% off your purchase if you apply for a credit card that day.
Original Article from Wallet Pop.com entitled “5 Ways to Improve our Credit”