You are probably asking what the heck is going on. HUD says they will insure FHA loans down to a 540 credit score with 20% down. Most banks were underwriting loans down to a 620 credit score.  Now banks are changing their requirements. Most are going to a 640 middle credit score requirement to even look at your loan.

The government is asking banks to make loans, but the banks are tightening up. Most of this is with good reason. All mortgage loans are nothing but risk that are bought and sold on the secondary market. Certain types of loans are put into what is called pools to be bought by investors. Currently the big players in the investment community are Wells Fargo and Chase.

These banks will buy mortgage loans based on risk and manage the defaults. When defaults are higher with a particular risk pool, the investors will stop buying those types of loans and raise the bar.

This is the current case with borrowers with scores below a 640. Evidently loan pools with a score below 640 are not performing well. So the secondary market is heading towards a minimum 640 credit score.

Some financial institutions like Bank of America still provide financing down to a 580, but eventually everyone follows suit.

This is another reason to start planning for better credit management. With the current course banks are taking, your credit score requirements just got tougher.

We saw this change coming at the first of the year. There were banks already requiring this type of score. So naturally the other banks have started this new requirement within that last couple of weeks.

Author: Mike Clover

CreditScoreQuick.com

When should you attempt to get an account removed from your credit reports?  Believe it or not this question has nothing to do with “credit repair.”  In fact, it’s actually asked more often from people who don’t understand how the credit reporting and credit scoring systems work, yet have pretty decent credit.

To some people a credit report is only supposed to reflect current obligations, rather than current and past obligations.  This leads many consumers to think that they have to argue with the credit bureaus and attempt to get old, paid, or otherwise satisfied credit obligations removed from their credit reports.  This is unwise, and dangerous.

There are several reasons why you should never attempt to get old and good credit items removed from your credit reports.  First and foremost, the older your credit reports the better your scores will be.  And, how do credit scoring systems set the age of your credit reports?  They do this two ways; by looking at the opening date of your oldest account and, second, by averaging the age of all of your accounts.  If you are successful in getting old accounts removed from your credit reports you will almost certainly cause them to look “younger” to credit scoring systems.  Incidentally, credit-scoring systems do not look at your date of birth so they can’t use that in lieu of account age.

Another reason this is an unwise move is because of a little known yet important measurement within credit scoring systems called “account diversity.”  You earn more credit score points by having a well-rounded credit report than you do by having limited experience across account types.  This means consumers are going to do better with a history of credit card, auto loan, and mortgage usage.

If you are successful at getting old accounts removed from your credit reports then your actions are permanent, meaning you will not be able to convince the credit reporting agencies to replace the deleted account down the road when you realize your mistake.  And, efforts may very well leave you with lower credit scores and no fast way to return them to their former glory.  To avoid this credit score disaster, here are a few “credit” suggestions to live by;

1.  Don’t concern yourself with getting old negative items removed.  Federal law defines how long they can remain on your credit reports.  Normally most negative items can remain for between 7 and 10 years although there are some exceptions.  Point being, it’s a waste of your time because Federal law has already taken care of this.

2.  Credit reports are meant to be credit histories and were designed to house and maintain a record of old, satisfied account relationships.  Old credit accounts are like a fantastic GPA in high school or college.  You never ever want a record of that to disappear.  Here’s why…

3.  Credit scoring systems will reward you for a long history of responsible credit management practices across multiple account types.  In the FICO® scoring system account “age” is worth 15% of your credit score points and account diversity is worth 10% of your credit score points.  This means a full one-fourth of your credit score points could be negatively impacted if you were successful in getting old accounts removed.

Don’t do it!!

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.

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

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