Credit 
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How Your Credit Score Affects Interest Rates

I was taking advantage of a promotion by myFICO and Equifax that let you see your credit score for free (it was a promotion for the first 10,000, sorry :( , but it was also no strings from what I could tell, I already had an Equifax login from checking my credit history for free annually, so it took 10 seconds) when I saw these charts comparing credit scores to APRs on various loans, here’s one for a 30 year fixed mortgage:

Credit Score 30 Yr. Mortgage
760-850 5.766%
700-759 5.988%
680-699 6.165%
660-679 6.379%
640-659 6.809%
620-639 7.355%
600-619 9.158%
580-599 9.744%
550-579 10.117%
500-549 10.502%



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 Credit 
3
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5 Credit Questions with Fair Isaac’s Barry Paperno

Following my guest post on my good friend JD’s Get Rich Slowly about How to Prepare for Buying a Home, I was contacted by a PR firm asking whether I’d be interested in talking with Barry Paperno, consumer operations manager at Fair Isaac. Fair Isaac is most well know for developing the FICO score, otherwise known as your credit score, which is probably one of the the most important numbers you need to know prior to getting a mortgage. Since it was relevant, I shot over five questions for Mr. Paperno and he was kind enough to answer them (I’m emphasized parts of his answers that I feel are valuable).

jim: Barry, could you give us a little background about yourself and your role at Fair Isaac?
Barry Paperno: Prior to joining Fair Isaac in 1995, I served as Operations Manager with Experian, running their San Francisco Bay Area consumer assistance office. There we provided credit reports and counseling to consumers, investigated disputed credit items, and corrected credit reporting errors. At Fair Isaac, I’ve helped educate lenders, credit bureaus, and consumers on FICO scoring; while managing customer service operations for myFICO.com. I currently head up training and consumer education programs for Fair Isaac, and manage the FICO Forums online community at myFICO.com.
jim: What are some simple steps consumers can take to improve their credit score?
Paperno: Other than the obvious step of paying bills on time, reducing credit card debt is the single best step people can take to help their score. A scoring factor called “credit card utilization” plays a big part in FICO scoring. This calculation, expressed as a percentage, looks at the proportion of balances to credit limits on your credit cards. While the general rule is “the lower the better,” the ideal utilization percentage is under 10%.
jim: What is the biggest mistake people make when it comes to their score?
Paperno: By not educating themselves about credit reports and credit scores well in advance of applying for credit, people often make the loan application process much more stressful than it needs to be — particularly if errors on the credit report are resulting in a lower than expected FICO score. It’s important to understand that the credit bureau investigation process for correcting errors typically takes about 30 days to complete, and that your FICO score can’t change unless the credit information used in the score is corrected. So, if you’re going to be applying for credit, check your credit report and FICO score early on, so that if there’s an error you’ll have time to get the necessary corrections made.
jim: What are some common misconceptions people have about their credit score?
Paperno: A couple of the most common scoring misconceptions are: 1) if you pay off your credit card balances in full each month you will always have good score; and 2) if you have too much available credit your score will suffer:

  1. For most people, paying off their credit card balances each month is a great way to ensure a high score. For those who tend to max out their cards before paying them off each month, however, it’s a different story. The credit card balance showing on your last monthly bill is typically the balance that the lender will report to the credit bureau, so that’s what will show up on your credit report as the account’s balance. If your “credit card utilization” percentage is high as the result of having charged up to the limit before paying it, your score could be hurt. The solution here is to either make sure you have enough available credit so that your normal credit card activity doesn’t hurt your score, or cut back on your charging habits.
  2. The “conventional wisdom” for many years, particularly among mortgage lenders, was that too much unused available credit could indicate a high level of future risk to a lender if the borrower were to use that credit at a later date. As a result, for years people have been advised to close credit cards as one way to reduce this potential risk and raise their FICO scores. While it’s not hard to understand the rationale that went into this thinking, the results of extensive research conducted by Fair Isaac show that, on the contrary, a high amount of unused available credit is actually helpful for your score — along with a good payment record, low percentage of “credit card utilization,” and a sufficient length of credit history. My recommendation here is to simply leave those unused credit cards open.
jim: Do you have any recommendations for young people just starting to develop a credit history?
Paperno:
  1. Always pay everything on time, use your credit cards moderately so their balances stay as low as possible, and open new accounts only when necessary.
  2. Be aware that you don’t need a lot of credit to have a good FICO score. All you need is one account on your credit report that has been open for at least six months and that you have used at least once within the past several months.
  3. If you’re looking to obtain your first credit account, a “secured” Visa or Mastercard that’s reported monthly to the credit bureau is an excellent way to start developing a credit history. It works just like a bank card, with the difference being that the potential risk to the lender is reduced. The lender will set your available credit line equal to an amount you place on deposit in a savings account. This deposited amount can then be used as collateral for the debt should you fail to make the monthly payments. A secured card, when paid as agreed for a period of time, often later converts to an “unsecured” account with a higher credit limit and no deposit requirement.

Summary

The main takeaways that I got from interviewing Barry was that the majority of your score is determined by sound credit management – pay on-time, don’t get too extended, simply be responsible. However, at the edges, such as getting your score that extra ten points, depends on optimizing some of your decisions. For example, one of the more recently popular credit tips involving not canceling unused cards, a tip Barry mentioned. Keeping them open means your utilization is lower (which is good) and runs counter to the advice even the professionals would give.

Another idea, one that is intuitively obvious but often overlooked, is the fact that you could have mistakes on your report and those mistakes take up to thirty days to correct. If you need a loan within thirty days, it could be using a score that reflects inaccurate or incorrect information. This makes sense to people, it’s simply a matter of remembering it!

Remember, you get a free copy of your credit report from AnnualCreditReport.com from each of the credit bureaus every single year. It won’t include a score but it will include your history, which you can verify as correct. If you want your score, many hardcore credit score watchers from the likes of CreditBoards.com (quite possibly the most popular credit related forum with nearly 75,000 members) really like myFICO.com.


 Debt 
14
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How to Fight Debt Collectors

List of Credit Card Debt This guide is designed to equip you with the information you need to fight debt collectors attempting to collect personal, family, and household debts. This does not cover business debts.

Debt collectors buy old debts from companies or lenders for pennies on the dollar. For them, it’s a business transaction. They are doing whatever they can to get you to pay the debt. They’re facing increased regulation because many have used intimidation tactics such as yelling and insulting their targets. They’ve often blatantly lied or otherwise deceived their targets. They’re often run into cases of mistaken identity and continue to harass the wrong parties. Many debt collectors are not nice people because they operate in an environment where they are often treated in the same way, though that shouldn’t excuse their behavior.

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 Credit, The Home 
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Buying A House? Check Your Credit History Now

A lot of my friends are thinking about buying, or have already bought, a home this summer. If you’re planning on buying a house in the next year, check your credit history right now for inaccuracies (it’s free!). According to Consumer Reports, about 13 million inaccuracies are discovered each year, which means there’s a uncomfortable chance your credit report will have something wrong on it. Hopefully it’s something harmless, but if it isn’t then you’ll want to correct it asap.

Not buying a house for several months? This is actually the perfect time to check because it can take as many as 90 days to correct error (yeah, ninety days) because the bureaus need to research your claim.

Check your credit history for free at the government mandated AnnualCreditReport website. You can get a copy of your report once every year from each of the three bureaus. If you’re buying a house, I’d get all three at the same time to verify accuracy. If you aren’t and just want to use it, I’d stagger them out a few months so you can get a rolling 3-month old view of your credit history.

Happy house hunting!


 Credit 
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TransUnion Free Credit Score Settlement

If you had a credit card, loan or credit account between January 1987 and May 28th, 2008, you are eligible to file a claim in a preliminary settlement of a class-action lawsuit (though not slated to be approved until September, though it’s probably going to happen). That’s a whole lot of people. The lawsuit was filed eight years ago in Chicago and alleges that TransUnion sold consumer profile information to businesses, which is a violation of federal law. What started in Chicago certainly didn’t stay there, eventually there were 14 federal lawsuits. Yikes!

(Thanks to Cap, if you used TransUnion or TrueLink between December 1, 1999 and April 16, 2007, you can get three months of credit monitoring through a settlement in the Robert V. Townes, IV v. TransUnion, LLC and TrueLink, Inc. case, deadline for that settlement is July 22, 2008)

What Do You Get?

You may be eligible for one of two options:

(1) Basic relief. Free credit monitoring for six months, which gives you daily access to your credit report and credit score and 24-hour credit-monitoring service. This normally costs $59.75. Those who elect this option may get a cash payment if there’s money left from the $75 million settlement fund.

(2) Enhanced relief. An alternative enhanced set of services” in exchange for a full release of claims. This options includes nine months credit monitoring, a suite of insurance scores and TransUnion’s mortgage simulator service. This option normally would cost $115.50. You won’t be entitled to any cash payment under this option. [Source: Phuong Cat Le of SeattlePI.com]

What Are My Option?

Option 1, basic relief, is the only one where you could potentially get money (if there’s any left over). If you elect basic relief you can get the free credit monitoring for 6 months or a $59.75 cash payment. I don’t think there will be any cash left over in the $75 million settlement fund (there never seems to be, plus you figure with the internet and how fast information spreads, you’ll get a pretty high percentage of the estimated 160 million eligible Americans registering for this).

Option 2, enhanced relief, has no cash out option and comes with three aditional months of credit monitoring, and a “suite of insurance scores.” There’s conflicting interpretation of “suite of insurance scores.” Some news outlets are reporting that it’s your credit score, others call it a different score that insurance companies use to determine your rates. I didn’t know that there were even separate scores (there may not be) in the first place. Bottom line, you will get a credit related number for free that you otherwise would’ve had to pay for.

My Thoughts

  1. All the estimates put the settlement cost in the billions, yet TransUnion said they’d earmarked $75 million (this could always go up). They must not think people are going to sign up for this.
  2. Option 1 seems more like a waste of time for the consumer and a boon for TransUnion. Getting credit monitoring for six months and then not renewing is like getting life insurance for six months and then canceling. Sure, you’re protected for six months but then what? Maybe you forget to cancel something or end up renewing the service, both earn money for TransUnion (turn a big long lawsuit in a money making venture, brilliant!). I wonder if we’ll hear complaints in six months (maybe I’m just cynical) about it. Nix that, no credit card will be required.
  3. Option 2 seems a little better, though it still has the failings of Option 1, but you get to see some credit related score for free.
  4. If you aren’t interested in either option, I’d register for Option 1 and see if you can get cash; that’s likely what I’ll be doing. I think we need to see the options all spelled out and finalized before reserving judgment.

How To Participate

First, you’ll have to register. After June 16th, 2008, you can register online at www.listclassaction.com or by calling them up at 1-866-416-3470. As of May 31st, the website doesn’t work yet.

Lastly, you can always get a free copy of your credit report, thanks to Federal Law, through AnnualCreditReport.com.


 Personal Finance 
4
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LifeLock CEO on the Today Show

LifeLockThis morning the CEO of LifeLock, Todd Davis, was on the Today Show with Matt Lauer to defend his company’s service. He was there to answer a few pending lawsuits about how the LifeLock service doesn’t work and that its claims to protect and prevent identity theft are fraudulent claims. Lauer really hammered Davis (as hard hitting as the Today Show can possibly be) but there were some pretty interesting statistics Davis brought up:

  • Only a 105 out of a million customers have been victims of identity theft.
  • Todd Davis, advertising his SSN for the last two years, has had 87 attempts with only one successful hit in Texas where someone was able to get $500.

My opinion of LifeLock has always been that the $10 you pay each month is essentially insurance on your time. Becoming a victim of identity theft, even if you are diligent in every single possible way, is like winning the lottery (a small firehouse charity one).

Just to give you a basis for comparison, the Privacy Clearinghouse 2007 Identity Fraud Survey reported that there were 8.4M cases of identity fraud in 2007. If there are 304M potential targets (that’s the census estimate and it does include children and babies, but they can be victims too) and a 2.73% chance of becoming a victim. With LifeLock’s measures (many of which you can implement yourself such as opting out of junk mail and freezing your credit reports), you have a 0.01% chance of becoming a victim.

So, going back to the Privacy Clearinghouse’s data, the mean fraud amount was $5720 in 2007 and the mean resolution time was 25 hours per victim; so your $10 a month is buying you insurance against that < 2.73% chance (that's if you did the average to protect yourself) of losing 25 hours. To calculate what that's worth, you look at how valuable you think your time is and whether the $10 a month is worth it.

LifeLock shouldn’t be considered bullet proof protection against identity theft, it should be considered time insurance against dealing with it.


 Credit 
11
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How To Start A Credit History

When you’re young, have little or no income, and want to build a credit history, it’s really difficult. The current credit environment has made it much more difficult so here are a few methods I’ve used, or have seen recommended, in the past in order to build your credit history.

One tip that has been removed from lists like these is the Authorized User tip. In the past, a parent could add a child onto one of their accounts as an authorized user and the child would see credit history benefits. Many people took advantage of that by “renting” out these authorized user slots and so FICO responded by cutting that link. Now, it appears, that authorized users have no bearing. This is the case of people trying to subvert the system for profit and the system, rightfully, punishing everyone. You can read more about the whole authorized user practice here.

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 Personal Finance 
11
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Investigating A Error On My Equifax Credit Report

When the Federal Reserve lowered the target federal funds rate last week, lots of people started inquiring about refinancing options to see if they could get a better loan. I was among the crowd. I requested refinancing information through LendingTree and fielded a few offers before deciding that refinancing was not a viable option for me at the moment. One of the lenders pulled my credit and Equifax was obligated to tell me about it.

I learned that my score was a 643, not surprising that it’s not an awesome score because I recently closed out some balance transfer arbitrages, but the listing of items that adversely affected my score did concern me:

  1. 78 – Serious delinqncy, derog, public recd or collection with balance
  2. 58 – Insufficient length or lack of credit history
  3. L – Length of time since legal item filed or collection item reported
  4. F – Prop. of bal. to high cr. on bk rvlvng or all rvlvng accts
  5. Y – Inquiries impacted the score but not significantly

Items 2 isn’t much of a concern overall and items 4 and 5 are certainly related to my balance transfer arbitrage days, but what about Items 1 and 3? Legal item? Collection item? Delinquency? This calls for a trip to the Equifax for a copy of my credit report (my one freebie each year) and a side trip to their Equifax Online Dispute page.

After reviewing my account, there was one entry in the Collections category for an account with “PPL ELECTRIC UTILITIES,” a power company that appears to be located in Pennsylvania. About a year ago I cleared up some errors on my credit report from another bureau for a cell phone that wasn’t mine, an social security number linked to my account plus some address history; could this be a leftover from that account? It appears so.

What’s infuriating is that the other SSN was identical except a six was replaced with a zero and Equifax felt it was “close enough” to link to my account! I don’t understand why it didn’t have to be an exact match. Anyway, I submitted a dispute and we’ll how quickly they can get that resolved.


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