Have you been thinking about writing a will? Perhaps putting it of until “later” because you think it is too complicated or not necessary…yet? Well, don’t put it off any longer. Here is a great introduction to Wills and Living trusts and the differences between them. Don’t procrastinate – get started now!
The FICO score was created by Fair Isaacs Corporation and, according to their website launched the first publicly available credit scoring system called, obviously, FICO. Shortly thereafter, Fair Isaacs developed a similar score for Equifax and Equifax named it their Beacon score. Fair Isaacs remains in the credit scoring industry today and have become a public company trading under the symbol FICO.
The first thing to note is that the three major credit bureaus don’t use the FICO score. They each have their own proprietary scoring system – which is similar to the FICO score – but each one uses their own algorithm and range. Experian has many scoring systems but the one they currently sell to consumers through resellers is the ScoreX Plus system. TransUnion also has many scoring systems and their consumer scoring system is called TransRisk. Equifax is similar and their consumer oriented scoring system is now called the Equifax Credit Score although their Beacon score is still commonly used by auto dealers.
And to make things more confusing
Each of these scoring systems have gone through many changes and versions over the years. For example, the same data run through last year’s TransRisk score may not give the same result as this year’s TransRisk score. So, your score could change (slightly) just because the algorithm got updated, but your data remained the same.
And even more confusing
As a result of FACTA the three credit bureaus got together and created the Vantage Score, which is also similar to the FICO score but was developed independently from Fair Isaacs, the creator of the FICO score. Equifax, does, however, have an agreement with Fair Isaacs to sell the FICO score but they make it clear on their website that the two are not the same.
And then there are many third-party scores such as CreditExpert’s score and CE Analytic’s CE score.
Fair Isaacs also develops proprietary scores for other companies such as lending institutions and they update their consumer score on a periodic basis. In fact, there are many versions of the FICO score used by various organizations that are tailored for their purposes.
The scoring systems created and sold by the credit bureaus and third parties have been unfairly dubbed “FAKO scores” implying that the only real score is the FICO score. That is far from the truth. These other scores are every bit as good as the FICO score when used for the same purpose, that is, consumer credit scores. You can’t really compare the special scoring systems built for specific purposes or clients by Fair Isaacs or the credit bureaus.
Consumers are often confused by all this and ask, “Why is the score I pulled different from the score my lender pulled?” Consumers need to understand that the actual number derived from each system isn’t as important as where it falls within the range of the system being used. That is, an excellent FICO score will (usually) also be in the excellent range for the VantageScore as well as the TransRisk score – even though the numbers generated are different. Said another way, consumers should compare the range they fall in when comparing scores and not the actual number.
Mostly fiction. Your credit score represents how “willing” you were (in the past) to meet your financial obligations. It does NOT represent how capable you will be of paying your financial obligations in the future. Although your credit score is certainly taken into consideration, potential lenders also look at additional information such as the amount of debt you can reasonably handle given your income (your debt to income ratio), as well as your employment history, and public records. Lenders will based their decision on all this information – your demonstrated willingness to pay as well as your capability to pay – along with their specific underwriting policies. It is possible that a lender will extend credit to you even though you have a low score or decline your application even though your score is high.
A poor score will haunt me forever
Fiction. Your credit score is based on your credit history at a certain point in time. One month later, it could change and there is no historical tracking of your score (unless you choose to do so yourself through a credit monitoring service). It changes as new information is added to your credit bureau files. Credit scores tend to change slowly as you increase your credit history, make your payments on time, add new credit or cancel existing credit lines. If you have had problems paying your bills in the past and have one or more “delinquencies” on your credit report, they will have less and less affect on your score the older they get (assuming that you don’t cause new delinquencies to be reported). Lenders request a current score when you submit a credit application and never request a “historical” score. So, by continuing to pay your bills on time and being responsible with your credit, over time, you can qualify for more favorable interest rates.
Checking my own credit lowers my score
Fiction. There are, basically, two types of credit checks or “inquiries”. One that is used for the purpose of determining if you qualify for a loan you have applied for and the other that is used to simply check on your credit history. The former is called a “hard-pull” and the latter a “soft-pull”, Hard pulls must be done with your consent (for instance, you are applying for a loan) and these, especially if there are three or more in a short amount of time will have a temporary lowering affect on your score. An exception to this is if you are applying to several different banks for the same automobile loan, then all are treated as one pull. On the other hand, if you request your own report or a lender pulls your file to determine if you they want to make an offer to you, then these soft-pulls will have no affect on your score at all. Advice: if you are about to apply for an important loan such as a mortgage or are waiting on approval of such a loan, it best not to apply for other lines of credit until after you have been approved.
Applying for new credit will negatively affect my score
Fact. Yes, it is likely to lower score – but only temporarily. You might get dinged for the credit inquiry and you are likely to get dinged for adding a new line of credit with no history. I emphasized “with no history” because that is what credit scoring is all about – how much history you have of paying your loans on time. Having ten credit cards for one year is not the same (to scoring systems) as one credit card for ten years. So, if you do need to open a new line of credit, don’t fret. You will soon be developing more credit history the longer you make timely payments.
Employers have increasingly been checking the credit of potential hires. The basic premise is simple: a person that does a poor job of managing their own credit may not do a good job of handling company finances. On the surface, this seems like a good argument but when you start looking at it more closely the practice may actually be discriminatory if not just unfair. Say, for example, everything is going fine until you lose your job. As you look for another one, you start relying more on your credit cards. Then, your insurance runs out and your medical bills start piling up. Maybe things start to get real tight and you miss a payment or two. As a victim of circumstance, your credit score falls and, adding insult to injury, you get turned down by prospective employers just because you have a lower score.
The Equal Employment For All Act
If Senator Elizabeth Warren gets her way this practice could come to a screeching halt. She introduced the Equal Employment For Act today (December 17th, 2013) which would severely limit the use of credit reports and scores in hiring practices. Senator Warren contends that poor credit discriminates against minorities and is often a result of unexpected medical bills, unemployment and economic downturns and does not reflect a person’s character or potential performance on the job. Her bill would prevent employers from requiring potential hires from disclosing their credit data and would prohibit them from rejecting potential hires based on the credit report. There is an exception, however, for national security jobs.
“There’s little or no evidence of any correlation between job performance and a credit [report],” Warren said. “This is a point of basic fairness … people who get hit with hard economic blows end up getting squeezed out of the system. This is another way the game is rigged against hardworking middle-class families.”
Business Groups Oppose the Bill
Many business groups advocate the use of credit checks as a safeguard against hiring people who have trouble managing their finances for positions of trust in handling money. Proponents of the practice feel that many of the risks are mitigated by the Fair Credit Reporting Act. The FCRA states that employers must notify the candidate of an adverse decision and give the candidate an opportunity to correct any misinformation on their credit report. Furthermore, credit checks are typically only used in the final stages of the hiring process – after the candidate has met other qualifications. And anti-discrimination laws also help to protect against unfair hiring practices.
Good idea or bad idea?
Although credit checks may have a place in hiring and managing employees, Senator Warren may have a valid point. Credit reports simply are not reliable enough to accurately reflect a job candidates performance in a particular role and certainly doesn’t – fairly – reflect a person’s character. What do you think?
Bills or loans that are non-recoverable or where there’s no chance of being repaid are usually considered “bad debt”. If you have one or more bad debts, then you’ll probably see a significant, negative impact on your credit score. This may hurt your future prospects of applying for further loans and financial products.
Kinds of debt
All the credit rating agencies put different amount of weight to different kinds of debt. They are actually responsible for tabulating all borrowing profiles of individuals like you. Basically, a credit score is a numerical value related to the kinds of credit for which you’ve been extended and, your punctuality in paying off those back in accordance to the terms and conditions of the creditor or financial institution.
As of now, there is no particular standard or formula to calculate exactly how much a specific bad debt will or can hurt your credit rating. Normally, the higher the outstanding loan amount, the greater will be its negative impact on your credit score.
Effects of debt on your credit score
Say, for instance, you’ve got a bad debt at a dentist’s office in the amount of about $110 and another bad debt at a vehicle leasing company of $22,000. In this case, the higher-valued debt will leave a greater impact on your credit rating as compared to the lower debt amount.
Both creditors and credit reporting agencies don’t consider all bad debts as equal. There are certain bad debts that are regarded as partial debts. For this kind of credit, consumers often make an agreement with their creditors to repay a part of the total borrowed money in return for a forgiveness of the remaining loan balance owed to them.
At times, such a procedure of loan forgiveness is called a “charge-off”. For example, you may consider that you owe a total balance amount of $23,000 on your credit cards. If you’re regularly delinquent in making the monthly repayments or you stop making any payment altogether, then your creditor may offer you with an alternative to pay off less than the actual amount owed in a single lump sum payment.
If you accept your creditor’s offer and settle to pay off $14,000 of the balance owed, then your creditors may agree to charge off the remaining loan balance amount and so, you’ll no longer be held liable to make the additional repayments. The remaining $9,000 loan balance will be considered as bad debt (or unrecoverable debt) on behalf of your creditor. This bad debt will be reported to the credit reporting agencies as such.
Generally, loan repayments of this kind also have a clause that says the debt was settled for less than the actual amount owed. Although this would have a negative impact on your credit score, it is far better than having the entire loan amount be reported as bad debt on your credit report.
Finally, if you want to resurrect your credit rating and are looking for ways to improve your credit score, then you’ll have to work on building a positive credit history. For that to happen, you’ll have to make timely loan repayments, avoid using your credit cards irresponsibly, build up an emergency fund, apply for fewer loans (resulting in hard inquiries) and so on.
There are many online personal finance forums where you can participate and find out more about how to build up your credit score. One such social media platform is OVLG Google+ page , where you can ask financial experts questions related to debt and other credit related issues.
Errors on your credit report can cause an unjustifiably low credit score. According to a recent Federal Trade Commission study, about one out of every four credit reports contained errors and about one out of every 20 consumers (in the US) pay more for their loans because of these errors. That’s a lot of unnecessary interest – paid by consumers – going right into bankers’ pockets!
How accurate is this study?
Well, the sample size was only 1001 participants and 2968 credit reports (roughly one report from each of the three credit bureaus per participant) so the margin of error may be significant. And there have been other studies that report different statistics. Once such study reported on 19% of credit reports had errors and only 1% of consumers paid a higher interest rate because of it. However, this study was sponsored by a trade association for the credit bureaus. The important thing is that all studies find that some percentage of reports have errors and that a significant number of consumers are paying more because of the errors.
So, in real dollars, how bad is it?
Not so bad to really bad! Consider that the minimum score threshold to get a mortgage loan approval at all is around 620. Now consider that errors on your report drop your score below 620 and it is pretty assured that you will be denied the loan. And with interest rates and housing prices incredibly low, now would be a great time to buy a home. It would be a shame to get denied because of some inaccurate data on your credit report that is reflected in a low credit score. To add “salt to the wound” you will take another hit to your score because of the inquiry just for applying for the mortgage!
But suppose you did get the mortgage because your score is 690 (but would be 735 if it weren’t for those darn errors). Your interest rate is likely to be higher because of the lower score and this could translate into tens of thousands of dollars over the lifetime of the loan!
Even credit card interest rates may be affected by your low credit score. If you are someone that carries a balance on your credit cards, then a clean and accurate credit report could mean the difference of just a few dollars to hundreds of dollars in savings each month.
Ok, let’s have the good news.
The FTC study found that about 13% of the participants were able to correct these errors and, for every one out of twenty, the new (improved) score placed them in a better risk bracket thus entitling them to a lower interest rate.
Although only about half a percent of the participants saw an increase of 100 points or more after correcting the errors, about 5 percent of participants were able to raise their score 25 points or higher. About 10 percent of participants improved their credit score at least a little after the errors were corrected.
And while 20 percent of participants were able to correct at least one error after disputing it, about 80 percent of participants saw some modification to their reports after disputing the error(s).
A 25 point increase in your credit score could result in a better likelihood of getting the loan you want as well as lower interest rates.
Credit report errors can cause an unnecessarily low credit score and can have a significant impact on your finances as well as your dreams.
Ok, then, what can I do about it?
Correcting the errors on your credit report can be a time consuming task and may take months to correct so you should get off your butt and start now! The first thing you should do is take a look at your current credit report. Then, follow the steps described in Correcting Your Credit Report and you could be on your way to lower interest rates or even that dream house you’ve always wanted.
Absolutely! Although credit scores reflect only your willingness to pay your obligations, they do not say anything about your ability to do so. That is, credit reports do not contain any information about your sources of income. Creditors and lenders, however, look at the whole picture and consider your “borrowing power” or the amount of debt they believe your income can reasonably support.
If they believe you can reasonably handle $20k of debt, and half of that is used up by a mortgage and the balance is used by credit cards then you will likely be denied additional credit – even though you don’t owe anything on your credit cards! Why? Because they see your credit limit as the amount you can obligate yourself to at anytime without further approval. So your credit limits count towards the total amount you are able to borrow and not the amount you currently owe.
So, no, don’t get lots of credit cards. Get just a few good ones and keep your credit limits down to the max you expect to use at any given time – not the highest possible you can achieve.
One big misconception about credit scores is that there is a “standard”. The truth is that there are many scoring systems and each one has its own range and algorithm. A 720 in Experian’s ScoreX Plus is not the same as a 720 in Transunion’s TransRisk Score which is different than Equifax’s Beacon Score.
On top of that, every lender uses their own scoring system that includes many factors not included on your credit report – such as your income.
Sound confusing? Well, it is not as bad as it seems. Although the numbers for any particular individual will be different from one scoring system to the next, a “good” credit score in one will be a “good” credit score in the others. So, when comparing different scores compare the range you fall in and don’t stress that the numbers don’t line up exactly.
For anyone with either Federal Family Education Loans (FFEL) or Direct Loans, the Higher Education Act provides for a loan consolidation program to help borrowers stay in control of their student loan debt. Under these two loan programs, your current loans will be paid off and the balance will be moved to a new, consolidated loan with a fixed interest rate and longer payout. This can simplify your life because it takes multiple loans with different repayment terms and combines them into one loan with one set of terms. Continue reading
Unfortunately, it is not uncommon to discover errors on your credit report—ranging from the spelling of your name to an incorrect recording of a payment. These errors could negatively impact your credit score, or cause problems when background checks are pulled for job or housing/rental applications. Errors can occur for several different reasons—but regardless of the cause, the responsibility is yours to fix them.
If you come across errors on your credit report, you absolutely must fix them. It is only to your benefit to have the appropriate information reflected. Even a misspelling of your name somewhere on your credit report could cause later confusion and trouble. For example, when taking out a loan, the creditor may wonder whether you have credit under those other names or not, creating another step in the loan process where you’ll have to produce additional information and documentation. Continue reading