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:

As you can see, the difference between a 759 score and a 760 score is .222% on your 30-year fixed mortgage loan. If you have a $100,000 loan, the 0.222% turns into an extra $2,149.71 in interest over the course of the loan. OK, so that’s not a big deal right? But if you could get your credit score up from 639 to 640, you drop your interest rate from 7.355% to 6.809%, a difference of 0.546% (worth $5,509.24 on that same loan). If the loan gets higher, you’re talking about real money here.

That’s why it’s important to know what your credit score is before you go out and get a loan and why you try your hardest to improve your credit score. While I’ve never used it, the credit score experts over at Credit Boards seem to love myFICO.

One note of caution, your interest rate isn’t determined solely on your credit score. There are other factors involved but the credit score is an integral part of that equation.

Here were some other rates (for comparisons sake):

15 Year Fixed Conforming Mortgages

36 Month New Auto Loan

10 Year Fixed Home Equity Loan

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).

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.

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.

This 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.

My friend recently purchased a home and had to go through the rigamarole of apply and then re-apply for a mortgage. As it turns out, in the time between his first check and his second check, he had one hard pull on his report (the first check) and his score had fallen approximately 6 points. His girlfriend had the same first check plus an additional credit card inquiry, so two hard requests, and her score fell approximately 11 points. This is pretty consistent with the numbers I’d read online.

Here it is in his words:

If you are interested, [redacted] and I had to have our score[s] re-checked for our mortgage because it had been more than 120 days for us. According to our loan guy, mine [credit score] dropped ~6 points and [redacted]’s dropped ~11 points. This is consistent with numbers I’ve heard in the past about hard check[s] since I had one more hard check on my record (the previous mortgage credit check) and [redacted] had two (the previous mortgage check and one credit card check). So, roughly each check is ~6 points.

I’ve also heard that all mortgage related inquiries in a 30 day period are lumped together as one check, since everyone assumes you will be requesting quotes from multiple sources. These figures are consistent with that.

If you have a student loan from Sallie Mae and recently opted for graduated or extended repayment plans, Sallie Mae probably reported your recent loan payment as a partial payment to Equifax and they marked it as delinquent. If all that happened, your Equifax credit score, one of the most important numbers of your adult life, took a big hit as a result of that reporting error (or “glitch,” as they would say) by Sallie Mae. Sallie Mae, based out of Reston, Virginia, happens to be the largest student lender in the United States and this mistake has caused a significant drop in credit scores, as many as a hundred points!

What happened was that Sallie Mae had offered a special payment payment plan (graduated or extended repayment plans) and accidentally reported those payment plans as partial payments to Equifax. Equifax, in seeing only “partial payments,” coded the accounts as delinquent. If you have any student loans, you probably recognize that they’re probably one of the largest debts you have and getting it marked delinquent is bad. Sallie Mae and Equifax discovered this last Friday and the problem was fixed by Tuesday, though approximately 10% of the 10 million Sallie Mae customers were ensnared by this coding snafu and saw their scores decline (according to their spokesperson).

Were you affected? No, unless you did two things. First, do you have a loan with Sallie Mae? If so, did you agree for a “graduated or extended repayment plan?” A graduated or extended repayment plans was an arrangement where you can stretch the typical 10 year payment period over 12 to 30 years, with smaller payments in the beginning.

Does this matter? No, unless you are planning on getting a loan in the next few weeks. I stand corrected, this will matter if an existing loan sees you delinquent on a loan and then jacks up your rates (smells like Universal Default clauses on credit cards), but outside that scenario you’re probably safe. If you don’t plan on borrowing money for a house or a car or anything else for a few weeks, I wouldn’t worry about it because your score will go back to normal once they sort things out.

What to do if your score fell and you need a loan? No problem, you can call up Sallie Mae at (888) 2-SALLIE and request a credit reference letter to indicate that the delinquent account is Sallie Mae’s fault and not your borrowers. You can take that letter to the lender and notify them that your account simply has a problem in it. You won’t need to pull your Equifax report and request a fix or anything, they’re working on it.

This underscores the importance of monitoring your credit history at all times, though they caught this particular error pretty quickly. Some people use myFICO to monitor their credit report (since it monitors your Equifax report, they saw it immediately) but I’m not sure it’s worth $89.95 a year or $8.95 a month. Do I really need my FICO score monitored on a weekly basis? I don’t know. Either way, the service is available or you could just rely on the one a year availability of free credit reports via AnnualCreditReport.com.

(Photo by Kato von Kiwi)

Look! It’s a new credit scoring system for the credit bureaus! Isn’t that great!? It is, except it doesn’t address any of the problems I see with the credit reporting industry. In my mind I have a set of features I think all the credit bureaus should institute if they want to clean things up and make life easier for everyone. As great as that sounds in principle, the problem is that consumers aren’t the primary customers of credit bureaus; banks, credit cards, and other lenders are. All the features I’m about to list are ultimately great for both parties but I think the bureaus are too short sighted to realize this, but I’ll scream into the abyss and ask for these things. Maybe Congress can do something useful and force them offer these. (some of these features may or may not be already available, I haven’t checked, so let me know it’s already available!)

Easily Freezing and Unfreezing Your Account

This is one feature that companies offer nowadays and some states require it, but ultimately it’s very difficult to do. The bureaus should offer online account access that lets you freeze and unfreeze your account with the click of a button. You don’t want credit, tell them to freeze your account and not to let any requests through. If you want credit, log in, unfreeze it, apply for credit, when you’re granted it, freeze your account again. Yes, I understand that that credit bureaus want you to pay for this service but when they’re giving away your information for a fee, it’s not unfair for them to offer this simple service to you.

Email Notification of Inquiries

At a minimum, set up a service in which credit history requests trigger an email that gets sent to an email account of your choosing. Again, I realize that this has costs associated with it but roll that into the cost of a credit inquiry in the first place. It can’t possibly be all that expensive, per inquiry, to set up a system in which an email can be sent out.

Option To Accept or Deny Inquiries

Now, let’s say you opted to keep your account unfrozen, you get email notifications, what if you could accept or deny inquiries? You could deny all those unsolicited credit requests but keep all the legitimate ones, hopefully you can keep them straight in your head.

Reject Non-Perfect Inquiries

When I reviewed my credit recently, I had an incorrect address and two social security numbers listed on my account. I thought to myself - “how could I possibly have two social security numbers!?” When I asked the bureau, they said that sometimes that happens and that errors often result in inaccuracies in one’s history. The social security number was close but one number was wrong, isn’t that grounds to deny a request? Apparently not! Apparently, according to the CSR, it happens all the time. Well, I think it shouldn’t happen all the time and that it should happen, um, never.

If Nothing Else, How About A Password

So you apply for a credit card, enter in your credit bureau password. If nothing else, this is the easiest way to ensure that the request legitimately originated from you in the first place. This seems so simple to me that it should’ve already been implemented.

How This Helps Banks, Lenders, Credit Card Companies

Financial institutions shouldn’t be trying to deluge every single person in the world with credit card offers, they should be deluging those people who want to be deluged. It’s called targeted advertising, it’s why beer commercials are shown during football games, it’s why jewelry commercials are shown during the holidays and Valentine’s Day, and it’s why you see clothing and fragrance ads in men’s and women’s magazines. You might get a few errant signups by shotgunning the masses but it’s far more effective to send offers to those who are interested.

Lenders may complain that this will slow the credit process down (and these will), but if you’ve been reading the news, don’t you think it the market could’ve used some slowing down? Credit was flowing too fast for too long and now the likes of Citi, HSBC, Bank of America, Countrywide, and company are feeling the pinch. Slowing down isn’t necessarily a bad thing, unless you’re the one waiting to be bailed out. How is this related? Sometimes what you expect to be bad, in this case a slowdown in the credit approval process, might actually be good.