It can often seem like there are a bewildering number of things to do in order to stay financially fit. Don’t borrow too much money. Create a budget and stick to it. Save for retirement. Squirrel away money for your children’s education.
Now add this to the list of to do’s required in order to be financially fit: Be clear on what your credit status is. It may seem like something that can be easily relegated to the bottom of your pressing financial concerns, but that notion is misleading. Having good credit, after all, is a prerequisite for qualifying for a mortgage or a car loan or even a credit card. Furthermore, lenders look at your credit – usually your credit score – to determine how risky it is for them to hand money over to you. If you’re deemed a big risk, you either won’t qualify at all or you’ll have to pay a sky-high interest rate.
Sadly, a new survey conducted by the financial services company Capital One found that when it comes to credit, Americans are not nearly as financially fit as they need to be. Indeed, the survey discovered that a great deal of education needs to take place for many of us to improve our financial IQ, at least as it relates to credit. Among Capital One’s findings were:
About one-third of Americans surveyed believe that a credit score only matters when they need to buy a house. This misconception is particularly pervasive among young Americans. Almost half of those under 35 who were polled believed this to be true.
The survey also pointed towards widespread confusion about the factors that go into determining a credit score. For example, over a quarter of respondents mistakenly believe that having one late payment on a bill will not damage their credit. Another 24 percent of those polled wrongly believe that age is a factor in a credit score, while 19 percent asserted that where they live is considered.
Although it’s free and a very smart thing to do only 30 percent of respondents had requested a copy of their credit report in that past year. Doing so allows consumers to check for and correct any errors that may be harming their credit. By contrast, 66 percent of respondents had their car’s oil changed and over half had been to the dentist.
Despite all of this, the survey also found that 81 percent of parents believed that their kids would have better credit than they do by the time they reach their age.
The new FICO Score 9 is coming out this fall, and it looks very positive for many U.S. consumers. Once implemented and used by lenders, it should help many with poor credit or limited credit histories. Ultimately, this could mean better rates for consumers on loans and credit products such as credit cards.
Score Highlights
There are three main areas that will impact credit borrowers with poor and limited credit. Overall, this is good news for today’s consumer and is a more accurate reflection of the actual credit risk for lenders. The new FICO credit score is more nuanced than the earlier FICO Score 8, which was released in 2008.
Minimizing Medical Collections Impact
A sad figure to be sure, but, according to Experian, a credit reporting bureau, 64.3 million U.S. customers have credit reports currently impacted by medical collections. Of the 317 million Americans, this means that one in five has medical collections showing on their credit reports. Many people do not realize that past due medical bills can negatively impact their credit score, but they can, even the ones charged off to collections.
With advanced analytical systems and software at their disposal, Fair-Isaac, the company who generates the FICO score, will minimize the impact of medical collections on the score in the new system. Although the medical collection accounts will still impact the score negatively, but in FICO Score 9, the impact is minimized. This could mean a bump of around 25 points for many consumers.
So, good news fellow Americans! It’s about time we have some good news regarding medical bills. I will not get on a soapbox about the cost of medical care; we all know it is expensive – about twice as much as other similar countries, but at least in the new system, those large medical bills should be less damaging on credit scores.
Accounts in Collection: New Rules
Many people are not aware of how accounts in collections are treated and scored from their credit reports. Let’s just say that under the current scoring, if you pay off something in collections today, it will have a minimal positive impact to your FICO credit score. It seems like that debt just washes away, as it does for the consumer, but in credit scoring, not so much. It hangs around for six years, showing up on your credit report as a collection item, even if it is paid off.
Again, this is good news! In the new scoring system, paid off accounts in collection will no longer be viewed as in collection. At the very least, that will minimize a negative impact on your credit score, and in my eyes, that is a win for the consumer. This will be good on the collection side as well as it may very well result in additional money collected over time. But, don’t go paying off all those old accounts in collection right now, especially if you would decrease your payments on current accounts. Although the new score will be available, look below to find out more about when lenders will actually start giving credit based on these new scores.
Limited Credit History
In lender’s jargon, around the coffee pot, they describe someone with limited credit history as having a “thin credit file”. That makes sense, there is not much paperwork, so the file is thin. I get it. So, like with any decision, you always want the most information you can collect before pulling the trigger and making the call. A loan decision is no different. With limited information, it becomes harder to make the decision, and that is where this new system comes in nicely.
Right now, the current system measures in absolutes: a Yes or No answer. Was the bill paid on time? The answer is a simple Yes or No. They count how many times an account was paid late. In the new version, they will look deeper into the credit history where they will penalize 30 day delinquencies less than 60 or 90 day delinquencies. For those with minor blips on their young credit history, this will help their score. For lenders, they will have a better way to measure early trends in repayment with limited information. I love it; this means a win-win for everyone.
Consumer Benefits
Of course, it is better to have a higher score, but what will this mean in terms of loans and credit? Credit experts predict that the increase in credit score will show more in terms of better rates for credit rather than qualifying for more loans or credit. So, although it may not mean more “yes’s” for credit, it can lead to you paying less for borrowed money.
The Final Buzzer: Not a Slam Dunk
All this sounds great for the consumer on the way they are reviewing credit scores for the new FICO Score 9. That is excellent news and should help a lot of people. The good news is that positive changes are on the way.
Here is the not-so-good news. Although this new system is released this fall, the lenders still have to implement it. Lenders, banks, credit unions and all institutions providing loans, credit lines and cards have to update their systems to accommodate FICO 9, which is a cost to the lender. FICO 8 was introduced in 2008, and there are still a number of lenders using an earlier version with their systems. BestPrepaidDebitCards.com founder, Curtis Arnold says, “If the past is any indication, it may not take months, but years before it is implemented by a majority of lenders.” Ouch. That is not what I wanted to hear.
But, lenders are usually motivated to make more loans, so those lenders who could see more loans with these score improvements in their systems will be motivated to implement these system changes. If consumers find they are getting better rates from lenders with this new system, those lenders should enjoy a competitive advantage until others catch up. Hopefully, that encourages the overall industry to respond faster. At least, we can hope for that.
Thanks for the improvements, Fair-Isaac. Now, lenders it is up to you.
Readers, we would love to hear your thoughts on this. How do you think this will roll out, and who will start using this first?
In yet another sign of the mainstreaming of prepaid debit cards, the Consumer Financial Protection Bureau (CFPB) announced this week that it would begin accepting complaints from Americans encountering problems with these increasingly popular financial products. Although the market for prepaid debit cards has been steadily expanding and attracting big name financial players like American Express, consumer advocates have expressed concern about a lack of regulatory oversight.
The CFPB is in the midst of developing proposed regulations targeted at prepaid debit cards, which should be released in the coming months. In the meantime, the CFPB, the federal government’s consumer watchdog for all manner of financial matters, is urging Americans who have run into problems with prepaid cards to get in touch. “By accepting consumer complaints about prepaid products and certain other services we will be giving people a greater voice in these markets and a place to turn to when they encounter problems,” says CFPB director, Richard Cordray.
In its statement announcing the move, the CFPB outlined the specific issues consumers should alert it to, including:
Trouble managing, opening or closing an account
Incorrect or unexpected fees
Overdraft issues
Frauds, scams or unauthorized transactions
Advertising, disclosures and marketing practices
Adding money and savings and rewards features
The CFPB already accepts consumer complaints about a wide range of financial products, including credit cards, mortgages, consumer loans and bank accounts. The CFPB complaint process works like this: After receiving a complaint, the CFPB expects companies to respond within 15 days and outline the steps they plan to take to address the problem. The CFPB also expects some sort of resolution to all complaints within 60 days. Consumers who do submit a complaint receive a tracking number and can follow the process on the CFPB website.
Complaints about prepaid cards can be submitted through the CFPB website. In the same announcement about accepting prepaid debit card complaints, the CFPB also said that it would begin to address problems with debt settlement and credit repair companies as well as pawn and title loans suppliers.
It seemed like a genuine family emergency. When an 81-year-old Cincinnati resident named Roger answered his phone last December he thought he was talking to his grandson, who told the elderly man that he was in big trouble. The caller told Roger that he had been arrested for speeding and drug possession and needed $7,000 so he could post bail. Being a devoted grandfather, Roger quickly put the money on a prepaid debit card and gave the account number to someone he thought was a police officer.
The only problem: Roger reached his real grandson on his cell phone and realized that he had been swindled. Roger’s tale (he insisted on anonymity for fear of being targeted by other criminals) was one of the stories’ victims of so-called “grandparent scams” told to members of the US Senate’s Special Committee on Aging on July 16. By no means is Roger alone. According to the Federal Trade Commission (FTC), Americans were cheated out of $73 million by imposter scams, a number the government believes is far below the actual cost of all of this type of crime.
Although the hearing was designed to highlight the impact these crimes have on the elderly, it also resulted in some genuine action. In its own written testimony before the committee, Green Dot Corporation, one of the leading suppliers of prepaid debit cards, announced that it would eliminate the MoneyPak PIN, which allowed money to be added to an account to take place via phone. Instead, Green Dot, which issues the Walmart MoneyCard, will now only allow cardholders to reload their accounts with cash in person – a method known as “swipe reloading.”
It’s a change Green Dot insists will make it harder for criminals to commit fraud. “Without the MoneyPak PIN, the scammer will have no method of instructing a senior to buy a product and no method of redeeming any associated PIN number,” Green Dot said in its testimony. The company says the MoneyPak PIN has already been removed from all Walmarts and it expects it will be eliminated from all retailers by early 2015.
There are plenty of compelling reasons people should want to have a good credit report. A solid credit report leads to the sort of credit score that makes mortgage and auto lenders eager to give you the best interest rates available. Simply put, it means you can save a lot of money in interest payments over the years, especially with the sort of big-ticket items you typically need a loan to buy.
While most of the work involved with having a good credit report and score is in our hands, your good credit can sometimes require the credit bureaus not making errors. Sadly, they are far from infallible. A Federal Trade Commission (FTC) study conducted last year found that five percent of consumers had errors on their annual credit reports that could cause them to have to pay more interest on their loans. Furthermore, the FTC study also discovered that 25 percent of people found errors on their credit reports.
Which is why it’s so important to catch and correct any errors that show up on your credit report as soon as you possibly can. A recent story in US News & World Report provides tips on how to do that. Here are some of the suggestions, provided by reporter, Jenna Lee:
Review those reports. You can’t fix what you don’t know about. So the very first step to ensuring that a faulty credit report won’t cost you serious money is identifying any errors. That is easy to do now that the law entitles Americans to a free credit report each year. All you have to do is go to AnnualCreditReport.com and request a report from each of the three major bureaus, TransUnion, Equifax and Experian.
Take a very close look. Once you receive your credit reports, take out that magnifying glass and look for errors. In particular, pay close attention to account details that are wrong and, even worse, fraudulent accounts (i.e. ones you didn’t open).
Get proof you’re right and they’re wrong. The credit bureaus aren’t just going to take your word for it that they’ve goofed. You’ll have to assemble documentation that highlights their errors.
Write a letter. Once you have all of the information you need to dispute any errors, you’ll have to alert the credit bureaus of the mistakes. Do that by writing a letter to each bureau. The FTC provides a sample letter that makes it easy.
Be prepared to wait. Sending in a dispute letter obligates the credit bureaus to act, which generally takes place within 30 days. If you don’t hear anything back in that timeframe, be prepared to follow up.
Remain vigilant. The good news, as Lee writes in her story, is that the FTC report found that four out of five consumers who disputed an error had at least some success in correcting the problem. But Lee offers up some important advice for even those folks who are successful. “New errors could be introduced in the future,” she writes. “Continually monitor your credit to ensure your information remains as accurate as possible.”
It seems like such a simple equation. If you want the best mortgage interest rate, be sure that your credit score is as high as possible. And for once, this deceptively easy to understand formula actually is true. You really can get better interest rates if you can boost and keep your credit score as close to the maximum of 850 and steer it clear of the low end of 300.
According to a recent story by mortgage and credit expert, Dan Green, there are some easy ways to get that all important credit score up to where it will really do a potential homebuyer some good. “Anyone can raise their credit score to “Excellent.” This is because credit scores are based on a formula and parts of the formula are well documented and described,” writes Green on the website, The Mortgage Reports.
So what does Green suggest? First of all, it’s important to understand what scores actually matter. While there are many credit reporting companies in the market, he says that only three matter when it comes to mortgages: Equifax, Experian and TransUnion. Not only are those the only three credit reporting outfits that matter, Green says that anyone considering buying a home needs to realize that only specific reports issued by these companies are used by mortgage lenders. They are:
The Equifax Beacon 5.0 report
The Experian/Fair Isaac Risk Model v2 report
The TransUnion Fico Risk Score 04
This is important to know because these are the reports mortgage lenders analyze when they’re considering your application for a home loan. “Your lender then takes the median of the three scores (i.e. the one in the middle), and calls it your credit score,” writes Green.
One benefit of applying for a mortgage is that a lender will supply you with a copy of your credit score for free. Green suggests you take advantage of this access to a free credit score and also pay heed to the notes that accompany them, which provide a road map to improving your score. Tips will include the obvious, like always paying your bills on time, and the less clear cut, such as keeping older credit cards open and using them from time to time.
Another bit of advice Green offers is to note how close you are to the credit limit on any of your cards. If you’re near the limit, that is a black mark against you in a lender’s eyes – the ideal is to have a balance of less than 30 percent of your credit limit. If you can’t pay down the limit, Green suggests asking the credit card issuer to up your card’s limit to get it below that 30 percent threshold. Paying close to attention to credit scoring details, insists Green, can up your score by 100 points in no time.
