Q:

I am in the process of cleaning up my credit so I can get a mortgage. My credit score was 569 on 9/11/10 and I have since had a judgment removed that was dismissed. Now my as of 7/23 my score has DROPPED 15 points! Nothing else has changed, if anything it has improved. Why the sudden 15 point drop because I had a judgment removed?

Melissa

Gainsville, Florida

A:

“No one item on a credit report is worth a fixed amount of points in your score.  The impression many people have is that when a negative item is removed that the score will improve.  That’s not consistent with how credit scoring systems work.  The removal of that one item means other negative items will change in their impact to your score, and in your case the result seems to be a lower score.”

CreditScoreQuick.com

It’s the million-dollar question, how do credit card issuers use and interpret all of those credit scores they buy from the credit reporting agencies?  Why am I approved with a good score and why am I declined with a poor score?  And finally, why do they use credit scores at all?

The good news is that there’s actually answer to all of those questions.  The bad news is you’re not going to get it from the credit card industry, which is why I’m here.  Credit card issuers have used credit scoring to help them make lending decisions, for good credit and bad credit lending, for a shade over 20 years now.  They’re used credit scores for almost twice as long as the mortgage industry, and their sophistication shows.

The answer to “why do they use credit scores” is the easiest to answer, so I’ll start there.  They use credit scoring because it allows them to consistently approve, deny and/or assign terms based on a number rather than by a subjective review of a consumer’s credit report.  Imagine the number of decisions a lender like American Express, Discover, or Capital One make on a daily basis.  Can you imagine how inefficient their business would be if they all printed out the credit reports of their applicants, read them, passed them around the office, and then made a decision?  So long instant credit!

Their decisions would also be inconsistent, which is dangerous for a lender.  The last thing you want is to make an adverse lending decision for a consumer and then approve another consumer, who have identical credit reports.  Using credit scoring eliminates that possibility because it’s all based on a score.  If you score above X you’re approved.  If you score below X you’re denied.  Simple as pie.

You’re approved with a good credit score because a good indicates that you’re less likely to miss payments or default.  That’s also why you typically get better interest rates with good credit scores.  The reason you’re declined because of a poor credit score is because you’re more likely to default.  And finally, the reason you pay higher interest rates with poor credit scores is because the lender has to be compensated for taking on a higher risk borrower.

So how are all of those pesky credit scores actually interpreted?  What does FICO 750 mean, other than the fact that we know a 750 is better than a 700?  The answer is quite simple, odds.  That’s right, each of those scores has what’s referred to as an “odds to score” relationship.  In English this means that each score level indicates the odds of you getting into credit trouble.

For example, and this is just an example, someone who has a score of 700 might get into credit trouble only 1 time out of 50, or 2% of the time.  But someone who has a score of 600 might get into credit trouble 1 time out of 10, or 10% of the time.  Sophisticated lenders understand the odds of your getting into credit trouble at any score level.

What lenders don’t know, and what nobody knows, is which 1 out of 10 (or 50) is going to be the one that defaults.  That’s why everyone scoring poorly has to pay higher interest rates.  The entire group pays the price of possibly being the one who is going to default.  So the next time you find yourself getting angry at a lender who charges 29% interest on a credit card account remember that they’re not doing it to gouge the cardholder.  They’re doing it so they CAN do business with that cardholder.

John Ulzheimer is the President of Consumer Education for Credit.com and owner of  2StepCredit.com.  He is an expert on credit reporting, credit scoring, credit score ratings, and identity theft. Formerly of FICO and Equifax, John is the only recognized credit expert who actually comes from the credit industry.  He is a weekly guest on FOX’s The Willis Report and is the credit blogger for the New York Times and Mint.com.  He has served as a credit expert witness in more than 65 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.

Many prepaid debit card companies claim that their cards can be used to “build credit” and suggest that usage of these cards can help your credit score. The truth is that while prepaid debit cards can help build up a credit file, the credit file that is built is not necessarily one that will help you boost your personal credit score.
The personal credit score that is generally accepted as the one that matters is the score that is reported by the three major credit bureaus…Experian, TransUnion and Equifax, and is built from payment activity reported to those three bureaus. This is the score that matters to lenders or other credit providers of all types. It’s the score that is used by credit card companies, mobile phone companies, car loan companies, insurers, etc. When they pull your credit score, they are attempting to find out what your credit history is for one or all three of the major bureaus. It is also common that the score of all three is not identical.
For the most part, using a prepaid debit card does nothing to cause this personal credit score to be affected.

Some prepaid Visa cards allow bill payments to be reported to an “alternative” reporting agency or bureau. These alternative bureaus readily accept cash payment activity, and build a file of your payment history, based on whomever they receive the payment history from. Their business model is that they sell these reports to credit grantors who request them as a secondary source of information, rather than charge the companies that report them.
Unfortunately, when a credit grantor pulls a credit report, this “alternative” information is not typically contained in any credit report from the three major bureaus. As a result, any file or history that may have been reported to the alternative bureau does not impact the score that matters (the one reported by the three major credit bureaus).
But there is still one way that a prepaid card can be used to improve your personal credit score. Several prepaid credit card companies have added a short term loan feature to their cards. Timely repayment of these short term loans can impact your personal credit score. Plus, a prepaid card with a short term loan feature is a perfect bank account alternative, and in many ways is better than a credit card (giving you the benefits of a prepaid account with access to a small line of credit).

Author: Kurt

GetDebit.com

With the release of the new Wall Street film, and its treatment of the financial crisis in the fall of 2008, the issue of whether “greed is good” is back on the table.  Director Oliver Stone, like many others, will almost certainly use that film to show that greed was the primary cause of the bubble that led to the recession under which we now suffer.  But he, like those others, would be wrong:  the fundamental cause is misguided government regulation that channeled greed in ways that were destructive.

Greed is like gravity:  it’s omnipresent.  People are always self-interested.  The question is how political and economic institutions work to harmonize that self-interest with providing benefits to others.  Just as we wouldn’t blame gravity if several planes crashed on the same day, we can’t blame greed for the crisis and recession.

Instead, we need to look at how government policy skewed the incentives facing people, leading them to make so many bad decisions.  The first of those policies was the Federal Reserve System keeping interest rates far too low after 9/11, actually producing negative real interest rates for a couple of years.  When people are, effectively, being paid to borrow, you can bet they will do so.  Flush with funds, banks and other institutions began to lend quite freely.  This wasn’t some abnormal degree of greed, but simply a self-interested response to the cheap credit made available by the government’s central bank.

The cheap credit found its way into the housing market also thanks to a variety of government policies.  Fannie Mae and Freddie Mac were key players here, as these government-sponsored enterprises were given privileged access to credit as well as an implicit guarantee of taxpayer support should they run into trouble.  Their mission was to be prepared to buy up new mortgages and package them together like a bond to sell to investors.

Without a clear profit or loss bottom line, there was little incentive for Fannie and Freddie to be overly concered with the quality of the mortgages they bought.  As the flow of cheap credit continued to fuel housing sales, rising home prices made these mortgage-backed securities to seem like a terrific investment.  Here too, it was not some ratcheting up of greed that caused the problems, but instead the ways in which government policy in the form of Fannie and Freddie distorted market incentives to make bad investments look more attractive to self-interested investors.

The best way to avoid booms and bubbles that eventually lead to crises and recessions is to keep government, whether in the form of a central bank or bad policy, out of the market as much as possible so that it cannot distort incentives facing market actors.  There’s no way to make humans less self-interested, but what we can to is make sure that we don’t adopt institutions and policies channel that self-interest into socially harmful activities.

Author: Steven Horwitz

Charles A. Dana Professor of Economics

St. Lawrence University

Bio:

You probably know that the Credit CARD Act of 2009 changed the rules for college students and others who are under the age of 21.

Prior to that law, credit card issuers were doing all in their power to lure in college students. They even set up tables on college campuses, offering free gifts to any and all who would make application. Back in the late 60’s they were even mailing pre-approved credit cards to students at their college dormitories.

As of February 22, 2010, card issuers are no longer allowed to target college students. In fact, they’re not allowed to issue credit cards to consumers under 21 unless they meet some strict guidelines.

The most obvious, and easiest route for many is to show proof of income. Those who have left school and who are working full time will be qualified based on their income and credit history, just like older consumers.

And, those college students who hold part time jobs during the school year and/or full-time jobs during the summer break will also qualify.

However, the amount they’ll qualify for will be limited by the amount of verifiable income. Thus, their credit cards may have limits as low as $200 or $300. That can be a problem for students who need to pay over time for high-priced items such as textbooks.

The second way students can carry a credit card is to be added as an additional user on a card owned by a parent, grandparent or sibling. The family member can set up the account and keep it for the student’s exclusive use. This, of course, means that the family member is solely responsible for payment, and if the college student gets behind it’s their family member’s credit that gets the damage.

Finally, a student can get a family member to co-sign for a card in their own name. Again, this is a risk for the family member, because he or she will be jointly responsible for payment. A late or missed payment will show on both credit reports.

If you’re a student and need to obtain a card with a co-signer, read the card issuers rules before making application. Extra inquiries bring your credit scores down, so make sure your application won’t be denied outright before you apply.

Some credit card issuers, such as American Express, Citi, and Capital One don’t want to be bothered with joint accounts, so will deny the application no matter how strong your co-signer may be.

CreditScoreQuick.com

Yes, the numbers lied.

According to new data from the Federal Reserve, Americans owed 9% less in credit card debt during the second quarter of 2010 than they did during the same period in 2009. The outstanding debt fell from $887.1 billion to $806.9 billion

But like so many statistics, the numbers don’t tell the true story.

The reason that it appears that consumers are carrying less credit card debt this year is that the banks have written it off as bad debt. Once accounts have gone 6 months without payment, the banks remove them from their balance sheets. Therefore, while consumers still owe the debt, it is no longer officially “owed” on their books.

In reality, consumer debt is increasing at a higher rate this year than last year.

It isn’t hard to understand why. With nearly 10% of Americans “officially” unemployed and probably another 10% who are unemployed but no longer receiving benefits, many consumers are going further in debt in an attempt to keep up with day to day expenses.

Unfortunately, many consumers in financial trouble have been taken in by debt-settlement companies. These companies promise debt relief, but often do nothing to help the consumer. In fact, they’ve made matters worse by taking up-front fees for services never performed.

Under a new FTC rule, debt settlement companies are prohibited from charging any fees until after they’ve produced results. But that rule doesn’t go into effect until October 27, so consumers are still at risk. And of course, a new regulation won’t prevent the criminal segment from attempting to prey on those who are most vulnerable.

If you find yourself unable to meet your minimum payments, shun the debt settlement companies and instead meet with a nonprofit credit counselor and a bankruptcy attorney. These professionals can help you see all the options available to you and will help you create a debt settlement plan, if you are able to make minimum payments.

Because banks are losing money on uncollected debt, they’ve become more agreeable to negotiating settlements. But beware. Consult with an attorney before agreeing to an offer, and don’t consider any offer unless it is in writing and clearly states the amount that the bank will accept as payment in full.

Consumers should be aware that when a bank forgives more than $600 in debt, they will issue a 1099 form, which shows the forgiven debt as income. This is reported to the IRS and the consumer will be expected to pay income tax on the amount. However, consulting a tax attorney before the agreement is made can result in having that tax waived.

Author: Mike Clover
CreditScoreQuick.com

Credit Score Index Widget

We recently created a widget that provides a credit score average by state and region. If you are interested in putting this widget on your site go here to add to your site.

Last week, at DEMO Fall2010, a company named Dynamics Inc. unveiled the first “smart” credit card – powered by an internal computer. And, in keeping with software labeling, this is being called Card 2.0.

Don’t get too excited, because it’s not yet available, but developers are predicting that it won’t be long.

This credit card, which is the same size as any other credit card in your wallet, holds 70 electronic components in just 1 tenth of a cubic inch. In order to protect these components, the card is covered in plastic, so it is scratch-proof and waterproof. It’s also flexible – indicating that it will take a lot to damage or destroy this little wallet-sized computer.

This card comes in two versions: MultiAccount and Hidden Account.

The multi account card can be populated with two or more accounts from the same credit card issuer. So if you have a business and a personal account, you can choose which you will use for a given purchase.

Each time you use the card, you push a button to select the account you wish to use, and the computer inside will populate the magnetic strip on the back.

The Hidden Account card, which is being touted as an anti-theft card, requires an access code for use. This card has 5 buttons with which to enter your PIN. The face of the card shows all but one section of your credit card account number all the time – but when you’ve correctly entered your PIN, the remaining numbers show on the screen. This facilitates use of the card for on-line and telephone purchases.

At the same time, the smart card populates the magnetic strip for swiping.

When you’ve finished using the card, it automatically turns off – so your account number is no longer visible and the magnetic strip no longer works. Obviously, this card could frustrate a thief, since he or she wouldn’t know the PIN to turn the card on.

Author: Marte

CreditScoreQuick.com

What ever happened to buying something for what it’s actually worth?  If you have something for sale and you know what its worth, will you let it go for a lot less than market value? For example, your home is worth $300,000. A buyer offers you $250,000 for your home. You say to yourself, you have got to be kidding me! Does this buyer actually think I will sell my house for $50,000 less than market value?

Well this seems to be the case now in today’s housing market. For some reason buyers are going around and offering ridiculous offers on homes. Reverse the roles and it’s a different story. They would more than likely be out raged….

The media and internet advertise that we are in a buyers market. Basically that means there are more homes for sale than there are buyers. This typically drives down the price of homes a bit to sell, but it does not warrant a seller to lower their sales price by $20,000 to $50,000 under market value.

In some cases when a bank accepts and offer for a home under market value this affects values in the area. The value of a home is dictated by homes sales over the last 6 months in a particular area. When that area has a high number of foreclosures, the values typically fall. This takes place due to buyers making low ball offers on foreclosed homes. Banks have the tendency to accept low offers when there is not a bidding war to drive up the offer price. A bank will dump a home to get it off their books.

This type of scenario affects the value of homes. Maybe you got a good deal on the home you bought, but the current homeowners just got their values lowed because of your good deal.

We all want the best deal possible. But sometimes greed will cause issues. I believe low rates and good deals on homes bring out the worst in people.

In the long run this type of market affects all of us in a negative way.

Maybe we all should consider “Practicing the Golden Rule.”

Author: Mike Clover

CreditScoreQuick.com