Understanding Your Credit Score

You’ve just applied for a mortgage or auto loan and your lender comes back with a three-digit number that summarizes your credit worthiness and you have no clue what that number really means. What is the difference between a 540, a 670 and a 780? If you’re not familiar with credit scores then these seemingly random numbers can make it difficult to determine where you stand. And in today’s difficult economic environment, you need every point you can get. In this article we’re going to find out exactly what these numbers mean to lenders – and to you.

 
*Range above based on the FICO credit score, which is used by most lenders.

Outstanding: 800+
If your credit score is over 800 then you’re pretty much the best of the best as far as the lending and insurance worlds are concerned. With scores this high, you represent an outstanding credit risk, almost non-existent, and you’ll qualify for the best deals. Consumers that score in the 800+ range typically have a long credit history with multiple credit accounts that have been paid on time for years. There are no derogatory records such as collections, bankruptcies or charge-off accounts and very little credit card debt. These people are almost immune to the credit crisis.

Very Good: 750 – 799
If your credit score is between the 750 – 799 range, lenders will view you as a very low credit risk and you’ll qualify for some of the lowest lending rates available. You manage your credit responsibly by paying your bills on time and keeping your credit balances very low in relation to the credit limits.

Good: 700 – 749
Credit scores in the 700 – 749 range are categorized as a low credit risk. There may be a history of late payments in the past but all of your accounts are currently paid on time and have been for the last several years. You also manage your credit card debt reasonably well and are not close to maxing out on your credit cards. Scores in this range won’t always qualify for the best deals but they will definitely qualify you for very competitive rates and terms.

Not Bad: 650 – 699
Now we’re starting to get into the riskier credit score ranges. If your credit score is in the 650 – 699 range, lenders and insurers will view you as a moderate credit risk. You probably have older derogatory items on your credit report that aren’t hurting your score as much as they used to. A score in this range could also be the result of high credit card balances or too many applications for new credit in the last few months. With scores in this range you should still be able to obtain credit and insurance, but your rates will be considerably higher and the terms would be much less attractive than they would be if you were in the 700+ categories.

Poor: 600 – 649
If your credit score is in the 600 – 649 range, then lenders and insurance companies will view you as a high credit risk. Scores in this range are typically considered “subprime” by most lenders. Your credit score could be lower than average because of derogatory items on your credit report, such as late payments, collections or even bankruptcy and/or you may have high amounts of credit card debt. Scores in this range are less likely to get approved for standard credit products and usually pay very high interest rates and even less appealing terms. It’s also important to note that scores in this range have a high possibility of being denied for credit or insurance.

Very Bad: Below 600
Consumers with scores below 600 are considered very poor credit risks and will have a very hard time finding a lender willing to take the risk to approve your applications. If you are approved, you’ll be charged extremely high interest rates and/or insurance premiums. Credit scores below 600 are usually caused by chronic late payments, collection accounts, or public records appearing on your credit reports. Combining excessive applications for new credit with large amounts of credit card debt can also lower your scores to this level. It will be difficult for you to obtain new credit without the help of a co-signer, a large down payment or collateral.

No Credit Score
There is one other category that we haven’t talked about and that is the ‘no credit’ category. In order for lenders and insurers to accurately predict your risk they need to evaluate your credit score. If you don’t have a credit score, they can’t predict your risk and will typically bet on the safe side and decline your application or price it very poorly. There are a few reasons why you may not have a score:

You don’t have any credit accounts in your credit files. In this case, having no credit score is better than having very bad credit for the simple fact that there are some lenders that will take the risk and give you a shot at establishing credit with them for the first time. These lenders are typically retail store accounts with smaller credit limits and higher interest rates. Another option could be a secured credit card. With either option, you can establish your credit by opening an account and managing it responsibly. This means making your payments on time and keeping the balances as low as possible. After 3 – 6 months of use, your credit report will be able to be scored.
You have credit accounts in your credit reports but you have not been using the credit cards or loan accounts regularly enough for there to be recent information or activity in your credit reports. In order for there to be a credit score, at least one of your accounts need to have been updated within the last 3 – 6 months to show activity. If you haven’t used any of the accounts in the last year or so, it might be a good idea to charge something small and pay it off just to show some type of activity on the account in your credit reports.
You have a deceased indicator on your credit reports. If you have a joint account with someone who passed away, it is possible that the lender will report the account as belonging to a deceased person. And if you’re a joint holder on the account, that notation can show up in your credit files too. If it does, you won’t be able to be scored until the deceased indicator is removed from your credit reports.

by Edward Jamison, Esq.

How Medical Collections Hurt Credit Scores

We all know that ignoring our credit card bills will most likely lead to collections. We also know that if we break a lease and skip out on the last months rent, this too could lead to collections. What if we don’t pay a utility or phone bill for several months? Not only would we end up with no power or phone service, but you guessed it, we’d probably end up with collections as well. What we don’t expect is inefficient communication between our doctors and our insurance company damaging our credit and credit scores.

Between uninsured Americans and the bureaucratic red tape between large healthcare companies and insurance providers, medical collections have become increasingly common in consumer credit reports. The problem is that a lot of consumers believe that medical collections are overlooked or excluded from their credit and credit scores. Unfortunately, medical collections are no different than other types of collections and can wreak havoc on your credit scores just as easily. The most frustrating thing with medical collections is that in most cases the consumer isn’t the cause, yet they end up paying the price as though it were.

One reason for the large misconception about medical collections is due to how some industries view them. While medical collections hurt your credit scores just as badly as other collections, most industries don’t view medical collections as negatively as other collections. The mortgage industry in particular, will frown on unpaid collections but tend to overlook or turn a blind eye on unpaid medical collections. Even FHA guidelines aren’t overly concerned with medical collections when determining a consumer’s eligibility for a mortgage loan. This begs the question, “why do credit scoring models view medical collections the same way they view non-medical collections?” There are a couple of reasons:

As long as the companies that build the credit scoring models continue to treat medical collections as normal collections, they’ll continue to hurt your scores. Unfortunately, the blame doesn’t lie solely on the credit scoring models…the credit reporting agencies are also part of the problem. Read on…
Credit reporting agencies are just as guilty for the way medical collections are handled because they allow collection agencies to report the medical collections. If they are reported in your credit report the credit scoring models will see these accounts and they will continue to damage your scores. If the credit bureaus would implement a policy that would NOT allow medical collections to be reported if the collections were caused by insurance claim errors. This would require the doctor’s office and the collector to prove that the collection is valid before it could be reported which is exactly what the Fair Credit Reporting Act was intended to do. Sadly, this will never happen. Keep reading…
If the credit scoring companies and the credit bureaus ever did change the negative impact of medical collections on credit scores, the collection agencies would hit the roof. Think about it, if medical collections didn’t hurt your score, what motivation would people have top pay them? The problem is that collection agencies represent a hefty client base for the bureaus and generate a pretty large revenue stream. If the credit bureaus ever decided to change how medical collections are reported or treated, you can bet that the collection agencies would throw their proverbial weight around.
So what does this mean to you and how can you keep this from happening? This is a tough one because there’s really no easy answer. The best option would be to avoid medical collections if at all possible. This may mean paying for medical debts until your insurance company processes the claim and pays the bill. The problem with this solution is that not everyone has the funds to do so. Another option might be charging the services to a credit card but this too can cause problems because higher utilization on your credit cards can cause your credit scores to fall.

In this case there’s just not a simple solution. Until the credit industry makes changes to flaws in the system, consumers with medical collections caused by insurance company incompetence will continue to suffer from poor credit scores.

 by Edward Jamison, Esq.

Going from Bad to Great

Do you have a client with bad credit? Not quite sure just how bad it really is? Frustrated and confused when it comes to deciphering the mess and trying to figure out what to do about it?

Well, you’re not alone.

In this article I’m going to help you figure out exactly how bad their credit is and what you need to do to help them raise their scores and retake control of your sale.

The first step to figuring out where they stand is to find out what their lenders are reporting to the credit reporting agencies. To do this you’ll need to order their credit reports from all three of the major credit reporting agencies. Although there are numerous websites to order reports and scores from, they don’t need to spend a dime.

Thanks to the Fair Credit Reporting Act, everyone in the U.S. is entitled to one free copy of their credit reports once a year from each of the credit reporting agencies. To claim their reports they can go to www.annualcreditreport.com or call 1-877-322-8228. If they’d rather do it the old fashioned way, they can even mail in this request form – https://www.annualcreditreport.com/cra/requestformfinal.pdf – and they’ll mail their reports to them.

After you’ve obtained their credit reports, you’ll need to assess the information and determine the following, primarily:

• Are there any negative/derogatory items in the report; and
• How much debt do they have?

Let’s focus on the first question. It’s safe to assume that if they have negative information in their credit reports, it’s hurting (not helping) their credit rating. It’s also safe to assume that if they have a lot of this information; it’s likely causing their situation to be even worse.

To interpret the derogatory information in their credit reports, you can follow these general rules:

• Any information in the public records section of their credit report is considered a major delinquency, no exceptions.
• Any information that is equal to or worse than a 90-day late payment is also considered a major delinquency. This includes foreclosures, collections, short sales, collections, repossessions, settlements and severe late payments (90+ past due or more).
• If any of the above information is less than 12-24 months old then it’s going to have even more of a negative impact on their credit rating.
• If you see numerous of the above items, they’re being penalized for the volume as well.

Now that you have a good idea of what negative information is affecting their credit rating, the next step is to determine if their debt is exacerbating the problem. Surprisingly, most people overlook this category in this evaluation process and focus only on the negative information (or lack thereof).

What they don’t realize is that the level of debt is almost as important as paying bills on time. If their debt is excessive, it can hinder their scores and drastically slow their recovery to improvement. Here are some general rules that can help you interpret if the amount of debt they’re carrying is hurting them:

• Add up the total number of accounts that have a balance. The more they have, the lower their scores could be.
• Add up the total number of credit card accounts with a balance. Again, the more they have, the lower their scores could be.
• Determine the utilization percentage of the credit card accounts that are currently open and on their credit reports. Divide the credit card balances by their individual credit limits. The higher these percentages, the lower their scores will be.
• Now add together all of their credit card balances, and the associated credit limits for each of those cards. Only use open cards for this step. Now divide the total balance by the total limit. The higher this percentage, the lower their scores will be.

Now I know you’re saying to yourself, “that’s just great, but now what?”

You basically have two choices:

• Refer your clients to a professional credit repair expert
• Do it yourself

If there is even the slightest chance of raising their credit scores enough to close your sale, a good credit repair company should be able to do it within 30 to 60 days. In some cases much faster.

But if you decide to do it yourself, now it’s time to put a plan in place to raise their scores.

If you follow the advice that I give you, their scores will have no choice but to improve. Remember, their poor credit scores are only indicative of the information being reported in their credit reports. If you can remove inaccurate items, how they manage their credit and change their credit patterns, you can positively impact their scores by changing what’s being reported in their credit reports.

Here are the steps to follow:

• If there are inaccurate items on their credit report, your clients will have to dispute them. Have your clients contact the Three Major Credit Bureaus and dispute the accuracy of said items in order to force the credit bureaus and creditors to either admit or deny their accuracy.
• If their credit is beyond bad, it’s going to take an epiphany on their part. You have to understand and accept that how they’ve managed their credit up to this point is exactly the opposite of how they should be managing it. You can’t fake your way through this. It will require a significant change in their lifestyle and habits. If they’re willing to take on these changes then read on…
• The only way to improve their credit standing is to address the things that they are doing wrong. There is no blanket advice that anyone can give you that will work 100% of the time. Their recovery actions will be different than those of another person in the exact same situation.
• Their recovery plan will involve an initial purging of their current credit accounts. It’s highly likely that they are using creditors who are more concerned about whether or not their next payment will ever arrive and less worried about helping them recover. The goal at the end of the day is for your clients to be able to pick and choose the lenders they like and have them fall over themselves trying to get their business.
• Unlike advice given by other so-called “experts”, their recovery journey should be taken head on – not by avoiding the issue. In fact, if your clients are discouraged and are planning on exiting the credit environment for more than 12-18 months, you might as well stop here. The only way to improve their standing is for them to jump right back into the credit environment. Half your battle will be to convince not only their lenders and insurance companies but also the credit scoring models that they are a new person. You can’t do this if your clients try to live a credit-free life.
• Re-establish credit using any means necessary. They’re not going to get the best rates for years to come, but that’s okay. They should have known this was coming. They should already be used to paying very high interest rates, so this shouldn’t be too hard for them to swallow. Keep in mind that it’s only temporary. You have to build up their credit report with properly managed credit card and loan accounts, and this is going to be costly.
• Once they’re re-established, it’s time to convert. This will be the most rewarding phase of their credit journey. It’s when you’ll be able to look their current lenders in the eyes and tell them to take a hike because they’ve just been replaced with better lenders. Better, in this case, means unsecured credit cards with low interest rates and high credit limits and maybe even benefits like airline miles or cash back. It also means competitive rates and terms on car loans, mortgages, and insurance.

This recovery process should take less than 5 years. In fact, if they do it right, your clients should start enjoying credit products reserved for the elite even while they still have some nasty delinquencies on their credit reports. They don’t have to be gone…but they do have to be a clear reflection of their PAST credit management skills.

Of course, if you and your clients don’t have 5 years, you might want to refer them to a professional credit repair expert.

By: Edward Jamison, Esq

Big Brother is Watching

If you’ve been following the financial news over the past couple of weeks, chances are you’ve heard about the CompuCredit lawsuit and the potential impact on credit scores.

On June 10th, the Federal Trade Commission filed a lawsuit against CompuCredit, for the deceptive marketing of their Aspire Visa card to sub-prime borrowers. According to the lawsuit disclosures, CompuCredit was penalizing their customers for using their Aspire Visa cards with certain merchants.

A few examples that were given were massage parlors, bars, tire companies and even marriage counselors.

They were using a scoring model that helped to predict their customers’ risk based on where they shopped. How in the world does buying tires or going to marriage counseling impact credit scores?

You can imagine the frenzy this piece of information is causing. Furious consumers and media outlets were demanding to know why “where” you shopped could negatively impact your FICO scores. Well, therein lies the problem… unfortunately, the media lumped these scores with FICO scores and simply put – these aren’t FICO scores, folks.

This caused an awful lot of confusion and in an effort to set the record straight, here’s some additional context that should help shed some light on this touchy subject:

1. First and foremost, ‘where’ you shop or where you use your credit card does NOT impact your FICO scores. Remember, FICO scores are based on credit bureau data so FICO scores can only use data that is contained within your credit reports.

   And guess what? Your credit card charges and usage patterns are not included in your credit reports. Credit card statements, yes but credit reports? No.

2. The type of score that CompuCredit is using to track ‘where’ you shop is known as a behavior score. Behavior scores are used to evaluate your usage of just one credit card account in particular.

   Now that you can breathe a little easier knowing that where you shop won’t hurt your FICO scores, lets look take a look at why banks use these behavior scores and what goes into them.

3. Your credit card usage patterns and ‘where’ you shop is important to the banks that issue these credit cards. This data helps them paint a picture of your individual credit risk on a particular account. These behavior score models use what is called psychographic or lifestyle data.
4. Psychographic data is not something new and has been around for a very long time. Have you ever gotten a call from one of your credit card issuer’s fraud department wanting to know if you just charged a $1,500 in shoes from Nordstrom’s?

   That call was based on a change in your shopping pattern. This information is also used for marketing purposes. For example, if you frequently use your credit card to buy airline tickets, wouldn’t it be a good idea to market a new airline rewards card to you?

So now that you understand how and why these behavior scores are used, what can you do about it? The answer is – not a darn thing.

Almost all credit card companies capture, monitor and use your usage information to evaluate your account. There are those that question the legal validity of this practice but it’s really not a matter of your rights. It’s completely legal for these companies to capture this data and use it.

CompuCredit got in trouble because of their allegedly “deceptive” marketing tactics, not because they were using the data to evaluate their client’s credit risk.

What can you do to avoid companies like CompuCredit in the future?

It’s simple – become a low risk borrower.

Mange your credit wisely, continue to pay your bills on time, keep your balances low and you’ll automatically lessen the importance of the lifestyle data that CompuCredit and other credit card companies rely on.

It’s also important to keep in mind that CompuCredit is a sub-prime credit card issuer and that means their customers are already high risk. It also means that their creditors are already watching what they do very closely.

If you don’t want them watching you, make sure you’re a low risk borrower and you won’t have a thing to worry about.

by Edward Jamison, Esq.

Credit Alert

August 13th, 2008
by Edward Jamison, Esq.

Most people have never checked their credit score. They have always used credit wisely and have probably never been denied a loan. Long story short, they have never really had a good reason to worry about their credit score.

They do now.

Why? Because banks are systematically lowering credit limits on credit cards and HELOCS, even for borrowers with spotless credit records.

So when they receive notification from their bank of a drop in their available credit, they usually don’t think too much about it at first. They say to themselves that they had no plans to max out their credit cards anyway. And besides, they just got their HELOC as a financial safety net or they only used it to finance a new car at better rates with a nice tax deduction.

But what the banks aren’t telling them is the negative impact lowering their credit limits will have on their credit score.

As soon as a borrower’s credit limit is lowered, it changes their Credit Utilization Rate, (CUR), which is a major component of their credit score. Credit Utilization Rates are calculated by dividing outstanding loan balances by the amount of credit available.

For example, if a borrower has $10,000 in credit card debt with an available credit limit of $40,000, their Credit Utilization Rate is 25%. But if their credit limit drops to $10,000, their CUR leaps to 100%.

The same thing happens when a bank freezes a HELOC.

As a result, millions of people who have never worried about their credit scores and who have spotless records are getting a rude surprise the next time they apply for a loan.

That’s what Michael Isroff believes happened to him. He had a mortgage on his condominium in Chicago, plus a home equity line of credit with a balance of $12,000. This spring, National City froze his HELOC which had a credit limit of $100,000. National City wrote in a letter that Isroff wouldn’t be allowed to borrow any more against his home’s equity, and he would have to pay off the balance over time. In effect, his credit limit was reduced from $100,000 to the $12,000 that he owed.

Like most people, he didn’t think too much about it at the time because he didn’t really need it, it was just nice to have.

But when he went to refinance, his mortgage broker told him there was a problem. The best programs and rates were only available to borrowers with a credit score above 720 and he was two points short. He didn’t know it then, but his credit score dropped overnight from 760 to 718.

And he’s not alone.

There are millions of borrower’s just like him who are going to need help repairing their credit to purchase a home, rent a decent apartment, buy a new car, get insurance, buy a cell phone or even just get a good job.

What can you do about it?

Call 877-783-7248 or visit http://www.credit-boost.net

5 Big Credit Mistakes

It’s surprising how many consumers make the same credit scoring mistakes over and over again. In an effort to educate consumers on credit and credit scoring, we’ve compiled 5 common credit scoring mistakes into a list that defines each mistake and explains why they are bad and how to avoid them:

Credit Mistake #1: Closing Credit Cards Accounts

This is probably THE biggest credit mistake that consumers make. What you may find surprising is that closing credit card accounts can hurt your credit score almost as badly as missing a payment.

Not only is this the number one on the top five credit scoring mistakes, it’s also number one on the list of credit myths.

Ironically, most consumers make this mistake based on poor advice from a mortgage lender as a strategy for improving their credit scores. A word of advice people, when you’re dealing with something as sensitive as your credit and credit scores, make sure you do your homework before trusting some of these so called ‘industry experts’ before following through with their advice.

There are two important reasons why you should not close credit card accounts:

1. Eventually, the accounts will fall off of your credit reports – The information in your credit reports are subject to certain rules in regards to how long it can remain in the report. In most cases, credit information will remain in your credit reports for seven years from the account’s DLA or date of last activity.

When an account is open, the DLA will continue to update each month and the open account will never reach that seven-year mark.

If you close the account, the DLA will stop updating and the clock will start ticking. Eventually the account will be completely removed from your credit reports.

Why would this be a bad thing?

It’s simple – you never want to get rid of old, positive information in your credit reports. This information actually helps your credit scores.

Credit scores want to see this positive account information. They want to see your long, perfect history of making your payments on time because this information significantly helps your credit scores.

This information significantly helps your credit scores so why would you ever want that history to disappear? You wouldn’t! Here’s an analogy for you: let’s say you made straight A’s in high school. What if the record of that perfect scholastic accomplishment were permanently deleted seven years after you graduated? Would you ever want that history deleted? Of course you wouldn’t. The same is true for the credit reporting environment.

So, what should you do with old credit cards that you don’t use any longer?

What you don’t want to do is to let the account become inactive. When this happens, the credit card companies aren’t generating any revenue for your account.

Eventually they’ll close the unused account because you’re more of a liability than an asset. You can prevent this from happening by using the card every few months for low dollar purchases like dinner or a tank of gas.

When the bill comes in, just pay it in full. If you do this, it will ensure that the account will never be closed and you’ll always get credit for your good payment history.

2. You could cause a spike in your revolving utilization and tank your scores – The percentage of your available credit in comparison to the debt you owe is a very important factor in calculating your credit scores.

This is often called “revolving utilization,” or your debt-to-limit ratio.

For example, if you have an open credit card with a $1,000 credit limit and a $500 balance then you are using 50% of your available credit. This means that you are 50% utilized on this particular credit card.

Now lets add a second credit card to the mix.

Let’s say you have another open, but unused credit card account with a $1,000 limit and a $0 balance. This would put your total revolving utilization at 25% because you have $2,000 in available credit limits and $500 in total balances.

If you divide your total balances by your total credit limits, you’ll get your total aggregate revolving utilization: $500 divided by $2000 equals .25 or 25%.

So how will closing unused credit cards hurt your credit score? When you close an account, the amount of available credit decreases, which could result in a higher revolving utilization and lower your score.

Let’s use the example from above and close the second unused credit card account. When you close the account, you remove it from any utilization calculation and now you’re stuck with one open credit card account with a $1,000 limit and a $500 balance.

This caused your utilization to go from 25% to 50%.

Remember, you divide the total balance by the total available limit so $500 divided by $1,000 is .50 or 50%. As this percentage increases, your credit score decreases.

When you’re talking about several unused credit cards with high limits, you can just imagine what closing credit card accounts could do. I’ve seen consumers go from a 10% utilization to almost 100% utilization because they closed all of their credit card accounts except the one they were currently using.

Big mistake.

Credit Mistake #2: Missing Payments

It doesn’t take a credit scoring expert to tell you that missing payments is a bad thing. The only reason I made missing payments second to Closing Credit Card Accounts is because this one is a no brainer.

It shouldn’t take a credit expert to tell you that missing payments is bad. Common sense should tell you that missing payments is bad. Credit scores are designed to predict how likely you are to miss payments in the future.

This means that they look at your credit history to view how you’ve managed all of your credit obligations.

Missed payments is the most powerful predictor of future late payments. The FICO score evaluates previous late payments in three different layers:

How Severe – How severe is the late payment? It doesn’t take a statistician to tell you that a 30-day late isn’t as bad as a 90-day late. The more severe the late payment, the more damaging it is going to be to your credit scores.

Consumers who have missed payments by a few weeks and then bring their accounts current score much better than consumers that have gone 90+ days past due. In fact, a 90-day past due is the threshold that will wreak havoc on your scores.

If you are unable to avoid a late payment, the next best option is to get those accounts current as quickly as you can.

How Recent – How long ago did the late payment occur?

If you’ve read some of my previous articles on credit scoring, you’ll know that the last 24 months of your credit history are critical because the FICO score places more emphasis on your recent credit patterns.

This means that a late payment 6 months ago is going to carry much more weight than a late payment from 4 years ago. To recover from late payments it’s important that you get current and stay current.

How Frequent – How often have the late payments occurred? Consumers that miss payments frequently are penalized much more severely than those that have missed a payment here or there in their past.

If you have a tendency to make late payments your credit scores will reflect your bad habits. Make your payments on time and you’ll never have to worry about losing points in this category.

Credit Mistake #3: Settling Accounts

One of the most common mistakes consumers make is assuming that ‘settling’ with a lender is a great way to save a little cash.

Unfortunately, they don’t realize what that a ‘settled’ indicator in their credit reports is actually derogatory.

“Settling” is a term used in the consumer credit industry that means accepting less than the amount you owe on an account. For example, if you owe a credit card company $5,000 but you can’t pay them the full amount then they will likely make you a deal for less than that full amount. They have “settled” for less than the full amount, which is likely much less than you contractually owe them.

This may seem like a good idea because you save quite a bit of money but as far as the credit scoring models are concerned, this is just as negative as other severe late payments.

The only way to avoid the damage to your credit scores is to arrange a deal with the lender to report the account as ‘paid in full’ as opposed to ‘settled’. If they don’t agree then it’s in your best interest to figure out how to pay them in full or else be prepared to suffer the damage to your credit for the next 7 years.

It’s also important to understand that if the account has already made it to the collection phase, the damage is already severe and settling won’t really make a difference. Settling is only an option if the account has already made it to a severe delinquency state.Â

Credit Mistake #4: High Revolving Utilization on Your Credit Cards

Most consumers believe that making your payments on time is all it takes to have good credit and earn great credit scores.

What they don’t realize is that almost a third of your score is determined by how much you owe on your credit card accounts. If you have high balances on your credit card accounts, you’re credit scores could be severely impacted by your revolving utilization.

In order to score the most possible points in this category, I advise keeping your revolving utilization at 10% or less.

Don’t be fooled when you hear some of these celebrity experts telling you that 50%, 30% or even 25% is best.

While 30% is considerably better than 50%, 10% or less is ideal. The lower the utilization percentage, the better your score will be. (*To read more about revolving utilization and how it’s calculated, please read the revolving utilization bullet in Mistake #1.)

Credit Mistake #5: Excessively Applying for Credit

Whenever you apply for credit your application gives the lender permission to access your credit reports. When they pull your credit reports, it automatically posts an inquiry in your credit record. This inquiry is a record of who pulled your credit report and the date it occurred.Â

Credit scoring models use inquires to determine if and when you shop for credit. Statistics show that consumers who have more inquiries are higher credit risks than those with fewer inquiries.

It is for this reason that the more inquiries you have, the more points you lose in the credit score calculation.

The exact point value of inquiries is a much argued topic and is impossible to give an exact point value because it really depends on all of the other information included in your individual credit file.

The best strategy would be to only apply for credit when you absolutely need to.

This means that you should avoid those in store offers of “10% off” in exchange for applying for a store credit card. This may sound like a great idea but the reality is that while you may save a few bucks on your purchase, those inquiries could end up costing you a lower credit score which could result in higher interest rates on auto or mortgage loans in the future.

There you have it. Now that you know the top 5 credit mistakes, you can avoid making the same mistakes that so many other consumers make.

By: Edward Jamison, Esq.

Collections 101

With the recent mortgage debacle and the subsequent tightening of available credit – it’s no wonder that more and more lenders, hospitals, and landlords are turning their focus to collections in an effort to recoup some of their losses.

In the past twelve months I’ve seen a drastic spike in consumer complaints about collection agencies and their strong-arm tactics. Unfortunately, with the current economic downswing and the constant murmurs of a recession looming ahead, it’s only going to get worse. You need to know how to help your clients avoid collections before they happen – and how to deal with them if they do.

Collections will have a serious negative impact on your client’s credit reports and credit scores. They are never good and should be avoided at all costs because they are next to impossible to get removed.

But before we delve into how to handle collections, let’s clarify what a collection is and how the system works. A collection is an action taken by a lender (or service provider) in an attempt to collect an unpaid or delinquent debt. Some lenders will use their own internal collection departments while others will outsource debts to a 3rd party collection agency.

Either way, the collector’s primary task is to convince debtors to pay up.

Collection agencies work with lenders and service providers in two different ways. The first way is for the agency to buy the bad debt so that they own it outright. In all cases collection agencies purchase these debts for much less than the amount owed – usually pennies on the dollar. Another option is for the lender to consign the account to the collection agency. With this option, the lender agrees to pay the agency a percentage of whatever amount their collectors are able to recover. This percentage can vary, of course, but I’ve seen as high as 50% in some cases.

Once the collection agency takes over the account, they give financial incentives to their agents by rewarding them with bonuses if they are able to collect most – or all – of the outstanding debt. The more the agent is able to collect, the more money they get to put in their own pockets. Unfortunately, this can lead to some pretty ruthless and unethical collection practices.

Avoiding collections before they happen:

The easiest way to avoid a collection is for your clients to pay their bills – and pay them on time. Sometimes this may mean laying aside their pride and paying a bill that they don’t necessarily agree with just to avoid it going into collections.

If they don’t agree with a charge or feel that they’ve been treated unfairly by a provider – utility company, cell phone company, doctor, dentist, etc. – withholding payment isn’t a wise option. Eventually the service provider will turn the account over to a collector and when they report it in your client’s credit report; it will negatively impact their credit for up to seven years.

I can’t tell you how many times I’ve heard from disgruntled clients that refused to pay a bill ‘on principle’ and then ended up with a $72 collection on their credit reports. It’s just not worth the damage it causes. In the long run it’s just better for them if they bite the bullet and pay the bill.

When a collection is unavoidable:

We all know that life can throw your clients a curve ball when they least expect it – a job loss, death in the family, unforeseen illness, etc. In these cases, it may be impossible to avoid a collection. If they already have a collection, here are some very important things you should know about:

1. Fair Debt Collection Practices Act. Know their rights as outlined in the Fair Debt Collection Practices Act. If they have a collection and have been contacted by a collection agency, they only have 30 days to dispute the debt or to request the collector to validate the debt. They also have rights that protect them from harassing and unethical collectors. To read a summary of their rights, go to http://www.ftc.gov/os/statutes/fdcpajump.shtm.

2. Statute of Limitations. A lot of consumers confuse the credit reporting statute of limitations with the statute of limitations to collect a debt. In many cases the statue of limitations to sue for contract debt can be much longer than the debt can legally be reported to the credit bureaus. The debts are certainly still collectable, just not reportable. If they have a collection that is close to being removed because of the statute of limitations – 7 years – and they are able to pay it or settle it, have them do so. Collectors are suing to collect their funds more than ever and as I mentioned earlier, it’s only going to get worse.

3. Don’t ignore the collection! Recently I heard a very well known and highly respected consumer advocate celebrity advising people to ignore collectors if they don’t have the money to pay. This is probably the worst advice to follow when dealing with collections. Communication is vital. Avoiding collections does not make the collection or the bill collectors go away. In fact, the collection agency will most likely end up suing you if you owe them over $1,500, and possibly garnishing their wages or filing suit against them. Ignoring them won’t stop the process; it will only make it much worse and more expensive in the long run.

4. Paying “In Full” vs. Settling. I always advise clients to pay a collection, or at the very least to try settling with the collector. Remember, the collection agencies pay pennies on the dollar for these accounts. Your clients should try to negotiate and settle the debt for as little as possible. They can start by suggesting 20% of what they are asking and go up from there. Keep in mind that your clients are dealing with professional collectors. They’re going to push for them to pay it all up front rather than a payment plan because they want to get their commission sooner rather than later. Don’t let them push your clients into something they can’t do – structure a deal that works for your clients, not for them. When they do come to an agreement, get it in writing before they make the payment. But always remember…they are not lenders. They don’t have to set your clients up with a payment plan. Their attitude is “hey, you already had your chance to make payments to the creditor and you screwed that up. So why should I trust you?”

5. Pay for removal. Some shady collectors will tell your clients whatever they want to hear if they think it will help them get them to pay the debt. If they offer to remove the collection from your client’s credit reports in exchange for payment, they shouldn’t believe it unless they get it in writing first.

The credit bureaus have strict policies regarding collections. The only way a collection will be removed is if it is an error or if the statute of limitations for reporting has expired. Think about it this way, if the credit bureaus removed a collection just because it was paid, how accurate would their reporting system be? Did the collection exist? Absolutely! If they were to remove the collection it would dilute the value of their credit reports. This is why the credit bureaus will not honor those pay for removal deals. Don’t let your clients fall for it unless they have it in writing to back it up if the collector tries to renege on the deal.

To Summarize:

Your client’s best option is to avoid collections all together. However, if a collection is unavoidable, the next best thing is to minimize the damage by having them pay it or settle it as quickly as possible. Be sure to tell your clients to get everything in writing, including a receipt, and make sure that the collection agency updates the account as “paid” in their credit reports.

By: Edward Jamison, Esq.

Credit Crunch

Edward Jamison is one of the nation’s leading credit experts.

New FHA Guidelines

FHA announces risk-based premium pricing and changes t FHAsecure
Washington- HUD No. 08-064

The FHA today issued final guidance that will permit its flagship mortgage insurance program to assist more homeowners who are struggling to keep up with their high-cost subprime adjustable rate mortgages. To ensure taxpayers do not assume the cost of this expansion, HUD’s Federal Housing Administration (FHA) will implement a fair and flexible premium pricing structure beginning July 14, 2008.

Modifications to FHASecure will help homeowners who can no longer afford their mortgages and missed up to three monthly mortgage payments over the past 12 months. As an alternative to foreclosure, eligible borrowers can refinance with FHA and lenders can voluntarily write down the outstanding subprime mortgage principal balances. Implementation of FHA’s new premium pricing plan on July 14 will coincide with the start date to expand FHASecure.

“With a flexible premium structure, FHA can fulfill its mission of assisting families who do not have access to prime-rate financing. Fair pricing will allow FHA to reach more troubled homeowners without placing excessive risk on its insurance fund,” said HUD Deputy Secretary Roy A. Bernardi.

Currently, FHA has a ‘one size fits all’ premium structure that charges borrowers 1.50 percent of the loan balance upfront and .50 percent annually regardless of their credit standing. FHA feels this approach does not treat borrowers equitably and may put the FHA insurance fund at risk. Under the new rule, FHA’s upfront mortgage insurance premium will range from 1.25 percent to 2.25 percent. Borrowers must continue to adhere to FHA’s strict underwriting criteria. By charging different premiums, FHA will operate like most other insurance companies. This premium structure will preserve lower premium costs for FHA’s traditional borrowers, including low-income and minority families who have a strong credit history and save for a downpayment.

By charging slightly higher premiums based on risk, FHA will be able to extend the benefits of its FHASecure program to more homeowners affected by the volatility in the mortgage market. Borrowers refinancing into FHA from the subprime market are better off, even with slightly higher mortgage insurance premiums, because FHA insurance gives them access to substantially lower interest rates, and lowers their overall mortgage costs. The difference between the existing 1.50 percent upfront premium and a 2.25 percent premium for a $150,000 mortgage is only about $7 per month. With families turning to FHA in record numbers, the agency is on pace through its expansions to help approximately 500,000 families refinance into its affordable mortgage product by the end of this year.

“Charging borrowers a fair premium based on their credit risk means that they pay their own way, allows FHA to reach more borrowers, and helps create a more financially sound FHA. That’s good news since FHA, like any other insurance company, supports its flagship program through its premiums – not taxpayer dollars,” said Assistant Secretary for Housing – Federal Housing Commissioner Brian D. Montgomery.

FHA has the statutory authority to charge as much as 2.25 percent for the upfront premium and .55 percent for the annual premium. This premium structure will give borrowers an incentive to improve their credit and thereby pay lower premiums. Today’s announcement will allow FHA to offer a range of premiums, depending on the level of risk borrowers represent based on their credit profile and the amount of their downpayment. In other words, to determine a fair premium, FHA will look at the borrower’s financial responsibility and how much they are willing to invest in their home.

To make this information available as soon as possible, HUD is posting guidance on risk-based pricing electronically on its website in advance of the Federal Register publication on May 13, 2008