I mentioned some of the new rules that were put into place with the CARD act, so you may be wondering, “Will these new rules affect my credit score?”
In a word, no. Of course, it’s not entirely that simple, but the rules were not intended to improve your credit score. They were intended to improve the credit atmosphere and curb lender abuses. Some of those may help your credit score, but that’s mostly incidental to the true purpose.
New Statements May Impact Your Balances
If the new statement designs encourage you to pay off your balances faster and reduce your debt to credit ratio, then your score will improve. So in a way, you could say it’s because of the CARD act, but it‘s also due to you getting your act together.
New Fee Limits Won’t Impact Your Score
Late fees themselves aren’t factored into your credit score. Payments made more than 30 days late are, but that has nothing to do with late fees or overlimit fees. The new rules don’t limit acreditor’s ability to report late payments.
New Interest Rate Rules Won’t Directly Impact Your Score
The new interest rate and payment rules won’t directly impact your credit score, but a lower rate and new rules that payments over the minimum must be applied to the highest rate balances may reduce your debt faster. Lower debt equals a higher credit score.
Tighter Lending Standards Might Impact Your Score
There are two ways that the tighter lending standards imposed because of the new rules could impact your credit score:
Your credit limit is reduced because you’re deemed too high a risk. If your limit is greatly reduced and you still carry a balance or use more than 30% of your available rotating credit, yes, your score will go down.
You make more credit applications and are denied. If you have to keep applying for credit because you don’t qualify under the tighter standards, your score will also suffer. If you’re rejected, you’d be better off fixing your credit and budget issues than you would be applying for credit with another company.
New Ads for Free Credit Scores
Aside from the CARD act, the FTC also imposed new standards on the free credit report companies. They now have to be clear that they’re offering credit monitoring for a monthly fee and the credit reports are included in that. Instead, most sites now offer a free credit score with a free trial of credit monitoring.
The new credit card rules weren’t targeted at credit scores, but if they help you better manage your credit and pay down balances, then your credit score may see a boost. Just don’t expect it overnight!
You’ve probably heard that hard pulls on your credit report can ding your credit score and keep it low for a few months. Since I’m now applying for my third mortgage in eight months (one purchase, two free re-fis), I’ve actually gotten free peaks at our credit scores and watched how quickly they recover.
Hard Pulls Last About a Year
We first started having our credit pulled in February of 2009 as we started shopping for homes. We got a preapproval to see how much we could really afford. We didn’t end up getting a mortgage until July of 2009, so we had at least five or six hard pulls in the span of four months. The result was a 30-point dip in our credit scores. Fortunately, that wasn’t enough to keep us from getting a great re-fi rate, because our scores were around 800 when we started.
With our December re-fi, we had all of those hard pulls on our credit still. Now we’re in June, 2010 and our credit scores have fully recovered to the place they were when we first started mortgage shopping. The hard pulls from February, March, April, and May are off our credit reports already and the June/July 2009 pulls don’t count because we received a mortgage within 30 days of them.
Closed Cards or Reduced Limits Don’t Make a Big Dent
Chase recently notified me that they were cancelling my card. That didn’t appear on my report as yet, but I don’t expect it will make a dent in our scores. We have other closed accounts (store cards), and there has been no effect from all those closures. Bank of America cut our credit limit from insane to merely ridiculous, and that also had no effect on our scores.
Big Loans Don’t Outweigh Clean Credit Histories
Despite hefty student loans on my husband’s report, and a mortgage on both our reports, we still have very high scores. I attribute that to our on-time history. Although he had late payments in the past, most of those were more than seven years ago, so they’re no longer on his report. Even if they were, we closed most of his cards when we got married because mine had higher limits and longer histories. We also make on-time payments through automated debit for all our student loans, so that improves our credit histories.
Credit Utilization Is Key
When it comes to our rotating credit, I think our low utilization ratios are very important. Even with the cancelled account, the highest we got is 17% of our available credit. Most months we use about 4% of our available credit.
If you want to keep your credit score high, pay on time and don’t use all your credit. Those seem to be the two biggest factors keeping our scores in good condition.
Finally, the US consumer is close to winning one. The US Senate has just passed an amendment that would give consumers free access to their credit scores under certain circumstances, such as denial of a loan or a job due to your credit score. (This is currently the law for credit reports.) If passed by the House, it would go into law as part of the Wall Street reform package. As happy as I am about this progress, it doesn’t go far enough.
Why Should We Pay for Credit Scores?
Frankly, I don’t believe consumers should pay for access to credit reports or credit scores. Lenders already pay for the data, which they use to make business decisions. Meanwhile, consumers are also required to pay for credit scores and additional credit reports, even though they’re based on OUR DATA, and influence our financial lives. In some cases, they also affect our job prospects.
Free Credit Reports All the Time
I realize that this would put those “free credit report” sites out of business, but as far as I’m concerned, consumers should have free access to their credit reports all the time, not just once a year as the government requires. Can you imagine a bank only allowing access to your account statement once a year? Credit reports aren’t that different, given the frequency with which they can change.
Free Credit Scores All the Time
Credit scores are almost more important than credit reports this time. When we were applying for mortgages, the lenders pulled our credit reports and scores. Yes, they looked at the reports, but the most important factor in preapproval was our credit scores. The rest of the report didn’t come into play until we entered escrow and the full mortgage application process.
Credit Scores Should Be Included with Annual Credit Reports
When I log into annualcreditreport.com to download my report for a specific bureau, the FICO score for that report should also be displayed. Not the Vantage Score or whatever other fake scores the credit bureaus are trying to profit off of. The FICO score is the only score that matters, and that’s the one I want.
The free scores for denials of credit or employment are a good start. That’s where the free credit report system started. But it doesn’t go far enough. If you agree, write your Senators and your Representative and ask them to take it to the next step. They know what I’m saying is true, but until voter anger outweighs credit bureau lobbying money, it’s not going to happen. And that, folks, makes me a little bit stabby.
Hopefully you rebalanced your investment portfolio at the end of 2009 to capture tax losses, but you can do it now if you haven’t already and have those losses for 2010. However, you should look at more than just your portfolio. It’s time to look at all the places you keep money to make you’re not being hit with new fees.
Review Your Checking Account
If you have direct deposit, then you may not worry whether your checking account carries fees. However, some employers don’t offer direct deposit. If your employer is one of them, it’s time to check your account for fees. You should be able to find a fee list online. If not, call customer service and ask. If they charge fees for calls, teller services, monthly account maintenance, low balance, etc., it’s time to move your money. Your first try should be a local credit union, which is probably fee-free. If you can’t find one of those, some major banks offer fee-free accounts. You could even ask your bank if they have one and inform that you’re prepared to find a new bank if they can’t switch you into it.
Review Your Savings Account
I’m not saying you should move your savings account each time a different bank shows a slightly improved rate. You should, however, check this account for fees, too. For example, last year I had to remove my money from Everbank after they more than tripled the minimum balance and doubled the associated low-balance fee. We weren’t in danger of triggering the fee, but we wanted the flexibility and they didn’t offer it.
Review Your Brokerage Account
This is a tricky one, because your investments may be tied up for a short while if you have to move them to a new brokerage. However, you should still check your brokerage account for new “account maintenance fees.” Those fees were one of the reasons I left E-Trade several years ago. They didn’t tell me they’d introduced the fee until they sent me a statement four months after they levied it and then said they couldn’t reverse it because it had been more than 90 days. Even when I said I wanted to close the account if they didn’t reverse the fee, they didn’t budge. So I closed the account and I’m never going back.
Review Your Credit Cards
Credit card companies are cutting limits and hiking fees and interest rates all over the place. If you don’t carry a balance, interest rate hikes are moot, but you need to know if they’ve cut your limit. They should send you a letter when they change your account, but check your account online monthly just to make sure.
Review Your CD Due Dates
If you have any CDs expiring this year, mark the due date on a calendar so you can notify the bank immediately about your intentions. If you wait more than 10 days, the CD will automatically renew and lock your money in for another term unless you pay a high surrender fee.
A once-a-year checkup is a good way to start the year, but always be vigilant about changes to your account because they can happen at any time. The sooner you take action, the less risk of getting hit by a fee.
My husband and I just applied for a mortgage this week. After the broker ran our credit, he informed that the new minimum credit score for mortgage underwriting is an astounding 740.
That’s no problem for us — our scores were around 800 — but that could be a problem for many prospective homebuyers. The average credit score is 723. That’s not to say that you can’t a mortgage if your score is under 740, just that it will be a lot harder and cost you a lot more. If you’re above 740, mortgage issuers are more likely to take the risk on you in this frozen credit market. Perhaps once the market thaws, things will improve.
How Can You Get to 740?
There are a few ways you can get your score to 740.
- Don’t apply for new credit at least six months before applying for a mortgage.
- Clean up newer delinquencies.
- Wait to apply for a mortgage until delinquencies near the 7-year cut-off fall off your report. Ten years if you have serious blackmarks like bankruptcies.
- Pay all bills on time for a year before applying for a mortgage.
- Check your report for fraudulent collections and have them removed.
- Use current credit cards every few months to keep them active.
If You Can’t Get to 740
If there’s nothing really wrong with your credit, but you don’t have enough history or high enough limits to get to 740, then you need to instead focus on saving up a larger down-payment. Banks really prefer to see 20% down these days. If it takes you an extra few months to save more money to reach that target, you’ll have a much easier time qualifying for a mortgage.
If you’re curious, you can learn more about how credit scores work on my previous post. If you want to know your scores, go to MyFico.com to order them all at once. While you’re at it, check your credit reports.
Just like the living debt, sometimes old debts can come back to haunt you. This is called zombie debt. The good news is that you can fight this illegal debt collection without having to pay them a penny. I tell you how in the last of my five-part series on credit.
What is Zombie Debt?
Zombie debt is charged-off or expired debt that collection agencies have purchased for as little as one cent on the dollar. Sometimes they purchase them from creditors, other times they purchase them from other collection agencies. Even though you’re not legally required to pay the debt, they will review the credit scores and histories of potential victims. They then target those who have the most to lose.
Typically, you’ll receive an excessive bill for a debt with one of three characteristics:
- The statute of limitations has expired
- It was a result of identity fraud
- It was discharged via bankruptcy or some other settlement
The collection agency will send you a letter demanding payment and threatening to sue you or add the collection to your credit report if you don’t pay up. Any attempts to deal with them will only encourage them to push harder. They’re banking on your fear of having your credit ruined, and your lack of awareness of your rights.
How to Fight Zombie Debt
First, don’t try to deal with the collection agency directly. Do not speak to them on the phone; do not offer them money to go away. If you pay them, they might decide you can pay more. If you speak to them, you may inadvertently agree that you do owe the debt.
Instead of dealing with them, take the following actions:
Verify the debt. Don’t speak to the collection agency, but do check your own records for some history of the debt. If it was charged off, you should have a record of that. If it’s an old debt, verify the statute of limitations in your state and the state where you created the debt. If both statutes of limitations have expired, you can’t be required to pay anything. The statute of limitations for most debts is six years, but it can be up to fifteen years in some states.
Write to the collection agency. Send them a certified letter demanding that they cease contact with you. Federal law requires that they comply. State that you do not acknowledge the debt in the letter.
Monitor your credit report. Often, they will illegally re-age the debt to make it appear current and restart the seven year clock. If the debt appears, dispute it with the credit bureau. If the collection agency persists, demand that they produce documentation of the original debt. In most cases, they don’t have documentation. Continuing to report a debt they can’t document is a violation of the Fair Debt Collection Practices Act. If they do have documentation, then it will most likely prove that you no longer owe the debt.
Hire an Attorney. If the statute of limitations isn’t expired, hire an attorney to negotiate a settlement with them. Contact the National Association of Consumer Advocates for a referral. If the debt isn’t valid, they can’t document it, and they continue to harass you, hire an attorney to fight for you.
Fortunately, the FTC is actively pursuing illegal collections, and has shut down some collection agencies engaged in aggressive practices, including pursuing zombie debt. If you’re the victim of an illegal debt collection, follow the above steps and then report them to the FTC.
As I mentioned in the post about credit monitoring, you can get a free credit report every year at AnnualCreditReport.com. The best approach is to access one of the three free reports every four months. That will give you a year-round view of your credit for free. However, there are other occasions where you can get a credit report for free, even if you’ve already received your free annual report through the government site.
You Live in a State that Requires Free Copies of Credit Reports
If you live in Colorado, Maine, Maryland, Massachusetts, New Jersey or Vermont, you’re entitled to another free report. You can’t access it through the federal website, but you can request it by mail by writing to each of the three bureaus or by visiting the websites for Equifax, TransUnion, and Experian. If you live in Georgia, you’re entitled to two reports a year.
You’re Denied Credit, Insurance, or Employment
When you apply for new credit, the creditor will review your credit report. If you’re turned down because of information on your credit report, you’re entitled to a free copy of the report that contained it. The creditor must explain the reason credit was denied. You then have sixty days to request your report in writing if you include the reason credit was denied in your request.
Some insurers use your credit report when determining whether to extend insurance to you. The theory is that people with poor credit are more likely to make insurance claims. If you’re turned down for insurance due to your credit history, you can request a copy of the report they reviewed within sixty days of being notified.
Employers can also use credit reports when making hiring decisions. If you’re denied employment due to your credit report, you can also request a free copy of it.
You Receive Public Assistance
If you receive welfare benefits or other public assistance, you can request free copies of your reports.
You’re Unemployed and Looking for Work
If you’re unemployed and plan to begin looking for work within the next sixty days, you can request free copies of your reports.
You’re a Victim of Fraud
If you know you’re a victim of identity fraud, or suspect fraudulent activity, you can request a free copy of your report when you place a fraud alert on your file.
Obviously, none of these are ideal ways to get a free copy of your credit report, but it’s good to know that you’re entitled to it if one of them occurs. You can also try to game the system by using the free credit report offers at various bureaus and private firms, but most of these deals require you to provide a credit card number and will start charging you a monthly fee if you forget to cancel the service within the first thirty days. I’d much rather play it safe and use the government site.
FICO credit scores determine whether you’ll qualify for a loan or credit card, and if so, what your interest rate will be. A low score can cost you thousands of dollars over the life of a mortgage To help you learn more about this vital piece of information, I cover what goes into your scores and what you can do to fix them.
How Credit Scores Are Determined
As I mentioned on Monday, there are now two breeds of credit scores: the VantageScore and the more familiar FICO score. The FICO score is used by most lenders and creditors. Although the exact formula is proprietary, FICO says that it currently ranks the following elements of your credit history:
- 35% payment history
- 30% outstanding balances
- 10% types of credit you hold (loans, credit cards, etc.)
- 15% credit history length
- 10% recent history
The resulting number is a three digit score between 300 and 850. The average credit score in the U.S. is 723, which is considered good.
The Credit Score Scale
If you’re even moderately aware of the mortgage industry, then you know that scores are grouped into three tiers by mortgage lenders:
Subprime borrowers were previously considered to have scores below 620. Alt-A borrowers had scores between 620 and 720, but also often had high debt-to-income or low loan-to-value ratios, were self-employed, or had other factors that made them higher risk. Prime borrowers had scores above 720, solid employment, low debt, and a good down payment, all of which made them lower-risk.
Rather than tiers, FICO divides the scores into the following range. As you can see, the range helps determine your interest rate. The difference between the first two tiers is $42 a month on a $300,000 loan. It’s $97 a month between the first and third tiers.
Each of the three bureaus generates its own FICO scores. Lenders generally pull all three and then use the middle score. If you have a co-borrower, they will use the middle score of the lower-scoring borrower. For example, if one of you had 720, 730, and 740 and the other had 660, 670, and 680, your rate would be determined based on a score of 670.
How to Get Your Credit Score
Unfortunately, your credit score is not available for free at AnnualCreditReport.com. You can either buy them from the credit bureaus, or buy them with your reports at MyFico.com. If you’re currently applying for a loan, you can ask the lender to show them to you. If you have a Washington Mutual Credit Card, you can view one of your scores for free anytime.
As far as I’m concerned, credit reports and scores should be available to consumers for free at any time. The credit bureaus make most of their money selling the information to banks. Their information is our personal information, which is used to make decisions about our financial lives. We shouldn’t have to pay to see something based on our own data.
How to Fix Your Credit Score
If your credit score is low, you can take a few steps to boost it, but you may also inadvertently harm your score. You should never pay someone to repair your credit score. Anything they could do, you can do for free yourself.
Review Your Credit Report. The most important thing you can do is review your credit reports and correct errors to the bureaus. Incorrect negative information can have a major impact on your score, and fixing it is usually simple. Don’t dispute negative items that are accurate, though. Even if the bureaus temporarily remove them, they will return because the information is correct.
Don’t Close Old Credit Accounts. There’s a lot of conflicting information about how cancelling credit cards affects your score. The current advice is to leave them open. This is especially true of your oldest card. If you’ve had one card for fifteen years and the rest for five, cancelling the oldest card will shorten your credit history, which negatively impacts your score. There are exceptions, though.
Become the Co-Owner of a Card with Good History. A year ago, you could be an authorized user and have the benefit of the owner’s account history applied to your score. Due to fraud, FICO stopped doing that. You do still get a score boost if you’re the co-owner of the card (and therefore legally responsible for it.) My husband had an old card with a fee and a low limit. When we got married, we made him the co-owner of two of my oldest cards and then cancelled his younger, high-fee-low-limit cards. Remember, though, that you’re on the hook for any debts incurred on the card if you’re a co-owner, so this is really only a good idea for spouses.
Don’t Open Several Accounts Before Applying for a Loan. New credit accounts detract from your score. The general rule of thumb is to avoid acquiring new credit for one year before applying for a home or car loan.
Don’t Pay Off Really Old Debts. Collections and old debts fall off your report after seven to ten years. Even if they’re still on your report, they have less impact as they age. If you pay them off, you may inadvertently refresh them and lower your score more.
Even though your score affects your borrowing ability, there’s no reason to stress about it until it’s time to apply for a new loan, or if your credit card interest rate shoots up. Then you can take steps to improve it to lower your costs.
I now return to my series on credit history and credit scores. Monday, I covered the VantageScore. Today, I focus on credit monitoring. FICO, the three credit bureaus, banks, credit card companies, and many other independent services try to use scary warnings about identity theft to try to convince you monitoring is a necessity. So what exactly is credit monitoring and is it worth the cost?
What Is Credit Monitoring?
Monitoring services constantly check your records and send you daily reports concerning changes or alerts. Most services provide the following features:
- Unlimited access to all three credit reports
- Unlimited access to all three credit scores
- Daily alerts regarding changes to credit reports, credit scores, public records, and your address
- New account alerts
- New inquiry alerts
- Identity theft insurance (usually up to a maximum of $20,000)
Prices for the monitoring vary, but they usually run $12.95-$14.95 a month. Some offer discounts for prepaying a year in advance.
According to Consumer Reports, some services also check forums, chat rooms, and other websites where stolen credit information is sold. The article also states that credit monitoring won’t protect you if someone uses your social security number with a different name.
Who Needs Monitoring?
For most people, monitoring is a waste of money. You can get a copy of each your credit reports for free every year at AnnualCreditReport.com. If you mark your calendar to check one of the reports every four months, you can stay on top of your credit pretty easily. You won’t access to your credit scores, but that information isn’t necessary unless you’re preparing to take out a new loan or applying for new insurance.
A monitoring service may be a good idea if your identity has already been stolen and you’re in the process of documenting the extent of it and getting your credit cleaned up. If your information was stolen as part of a large data breach, the company holding your data may offer you free monitoring for a year. If so, accept it and use it for that year.
Should You Monitor Your Children’s Credit Reports?
You’ve probably heard recent ads touting monitoring services for children. The ads claim that your children’s identities could be destroyed if you don’t buy protection while they’re too young to apply for credit. It’s a nice theory, but in most cases, children’s identities are stolen by their parents, not by strangers. If you’re very concerned, request a free credit report annually. The credit bureaus won’t be able to provide a report in most cases because a social security number or savings account alone isn’t enough to create one.
In summary, credit monitoring is unnecessary for most people, including children. It’s only worthwhile if your identity has already been stolen and you’re in the process of stopping the breach and cleaning up your information.
This is the first of five posts relating to credit scores and credit history. If you ordered a credit score along with your Experian credit report, you probably got a VantageScore and wondered “what the heck is this?” It’s a new credit score developed by the three credit bureaus (Experian, TransUnion, and Equifax) to compete with the FICO score.
How Does the VantageScore Work?
The VantageScore is derived similarly to the FICO score, but uses a few additional scoring metrics. The score range is wider and higher, and you receive a letter grade in addition to your number.
FICO scores range from 300 to 850, while VantageScores range from 510 to 990. Each 100-point range is also assigned a letter score from A to F. Scores of 900-990 are the equivalent of an “A.”
Although both formulas are proprietary, experts say the scores are based on several factors.
The FICO score is calculated with the following factors:
- 35% payment history
- 30% outstanding balances
- 10% types of credit you hold (loans, credit cards, etc.)
- 15% credit history length
- 10% recent history
The VantageScore adds a few factors and changes the scoring model slightly:
- 32% payment history
- 23% amount of credit you’re currently using
- 15% credit balances
- 13% length and depth of credit history (kinds of credit and age of accounts)
- 10% new credit accounts and inquiries
- 7% total available credit
Who Uses VantageScores?
I couldn’t find much evidence to date that lenders are using the new scores. The score was introduced in 2006, so most lenders are still testing its use versus the FICO score. If you’re planning to apply for a mortgage, take out a car loan, or just want to know what the lenders are seeing, buy your FICO scores. You could ask your potential lenders if they use VantageScores, but I wouldn’t buy them unless they say they do.
Are the Scores the Same for All Bureaus?
Each credit bureau computes an individual VantageScore using the information they have in their files. Some of your accounts may not be reported to all the bureaus, so there could be some variation.
How Does the Score Compare to the FICO?
We discovered the VantageScore when my husband checked his credit report and requested his credit score along with it. We were confused when we saw this strange number and letter grade, so we ordered his FICO score and Experian report from MyFico.com. The FICO score was 20% higher than the VantageScore, a significant difference that could impact his interest rate. If we were applying for a mortgage today, we’d want that top score used!
What Does It Mean for You?
Currently, the score means nothing for you. However, it’s possible that lenders will opt for these scores in the future. They’re cheaper than FICO scores, so smaller institutions might opt for them sooner. On the other hand, bankers don’t like change; they might opt to stick with the score they know for several more years.
It appears that you can no longer buy your FICO score from Experian. The other two bureaus still sell them rather than VantageScores. That does make me wonder how good the scores really are if the other two bureaus don’t sell them to consumers. I suggested that my husband call Experian to demand a refund, but he pointed out that they asked if he wanted to buy his “credit score,” not his “FICO score.” Technically, they didn’t lie, but I think it’s very deceptive marketing. Most people don’t know about VantageScores, and everyone knows about FICO scores. If you see the words “credit score,” you assume “FICO score.”
If you’re very curious, go buy your VantageScore from Experian, but I would wait until there’s some evidence that the score is in use. Unfortunately, that means you can only get two of your three FICO scores for the lower fees charged by the credit bureaus. FICO will only sell them bundled with a credit report for $15.95 each. Want to see your FICO score for free? Get a Washington Mutual credit card.