Credit Myths

COMMON CREDIT SCORE MYTHS

A lot of credit score myths about fico score ratings get spread around and some of them are just outdated information. Sometimes even lenders can give you the wrong advice and it can get confusing. But the bottom line is bad information can cost you money no matter who you get it from.

Fico score ratings are used for most mortgage lending, which means, you need to know what will hurt or help your credit score points. To make it clear, here are some of the most common credit score myths.

Checking your credit report will hurt your credit score

Checking your own credit report and credit score counts as a soft inquiry and does not go against your score. However, if anyone else like a lender or credit card company is checking your credit report, this is considered a hard inquiry and will generally knock off about 5 credit score points.

The credit score rating system treats multiple inquiries in a 14-day period as just one inquiry. The system ignores all inquiries made within 30 days prior to the day the credit score is computed. So if you want to minimize the damage from credit inquiries, shop for a loan in that short period of time.

Closing old accounts will improve your credit report score

Sometimes even lenders will tell you to close your old and inactive accounts as a way for improving your credit report score. In most cases, closing old accounts will actually have the opposite effect with the current credit score rating system.

Canceling old credit accounts can actually lower your credit score because it makes your credit history appear shorter. If you want to reduce your levels of available credit, it's better to reduce or close new accounts instead. Applying for new credit is more likely to lower your score.

You need to check more than just FICO score rating

If you ever hear this from anyone, consider it a red flag. All of the three major credit reporting bureaus offer FICO credit score ratings using the formula developed by Fair, Isaac. Even though each one gives the scores a different name you only need a fico score rating from the three major credit reporting bureaus.

At Equifax, the FICO score rating is called the Beacon credit score. At TransUnion, it’s called Empirica. At Experian, it's known as the Experian/Fair, Isaac Risk Model.

The reason each of the three major credit reporting bureaus will have three different scores is because they don’t all share the same data. So when checking your credit report, just make sure it comes from the three major credit reporting bureaus: Experian, Trans Union and Equifax.

Examine your credit reports from all three major credit reporting bureaus before you apply for a big loan like a mortgage. Fix any errors in all three reports before you shop for a loan because it takes time to correct your credit report.

Credit counseling will hurt your score

The current FICO credit score rating system ignores any reference to credit counseling that may be in your file. The researchers at Fair, Isaac, the company that created the FICO credit scoring rating system, found that people getting credit counseling didn’t default on their debts any more often than anyone else.

However, any late payments you've had with creditors will hurt your credit score. Credit counseling can hurt your ability to get a loan because you probably have had trouble paying creditors.

Some lenders will back away if you are in credit counseling. Others may see it differently, but usually will charge you higher interest rates than if you had perfect credit.

The best way to improve your credit report score is paying your bills on time and paying down credit card debt. Check your credit report regularly for any errors and make sure you don't fall for these common credit score myths.

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What Is The Difference with Credit Scores

I would like to take the opportunity to provide you the difference between FICO verses FAKO.  The term Credit Score is a generic terminology that is used to refer to the numeric value given to your credit history. Basically your credit score is calculated based on information contained in a credit report. 

There are a few companies that sell credit scores. Each of the credit bureaus has their own version of the credit score. Equifax has PLUS, Experian has BEACON, TransUnion has EMPIRICA.

However, there is a new score called Vantage Score that has been developed by the three bureaus that also looks at non-traditional forms of debt, such as apartment rentals, leases, and utility payments. 

How Does This Effect FICO Scores? 

Unlike FICO’s traditional 300 to 850 scale, the VantageScore goes from 501 to 990, as reported by TransUnion:

A: 901–990

B: 801–900

C: 701–800

D: 601–700

F: 501–600

A person's VantageScore might not be exactly the same from each credit bureau, since the data each credit bureau collects could still vary. However, in theory, the VantageScore should be more consistent across all three credit bureaus, since the same calculation formula is used across the board. Here is the breakdown of VantageScore.

VantageScore Calculation Categories

Category	Description	Weight
Payment History	how timely and consistent your payments are	32%
Credit Utilization	debt-to-credit ratios and how much credit is available	23%
Credit Balances	what your total debt is; most likely, delinquent debt is counted more harshly than current debt	15%
Depth of Credit	length of credit history	13%
Recent Credit	how recent and many new hard inquiries and new accounts there are	10%
Available Credit	how much credit can be accessed, for example, could you spend $50,000 of credit tonight or within the next week	7%

It’s important to know the difference with your credit scores and report. 

Your credit report is a tickler file of your past financial behavior. mostly showing how you deal with debt. If you’ve have a  bankruptcy, short-sale, or had a foreclosure in your past, all of this will be recorded in your credit report. There are credit bureaus, agencies and independent companies that collect all this credit information into one convenient 3 digit number via an algorithm, resulting in a credit score. With credit scores, things are not as cut and dry as they are with your credit reports, since you can obtain different versions of these numbers from a variety of places, the most well known and widely used by banks and lenders is the FICO score, but other alternatives also exist, called “FAKO”) scores. 

Why is there different types of scoring? 

There’s a licensing cost to use FICO, which has prompted some financial companies that need to buy and use scores, to opt for the more cost effective solution of developing or resorting to proprietary scoring models. Many financial companies are high volume users of such scores, since they evaluate risk levels for lots of accounts. This chance to grab a piece of the credit score market has encouraged reporting agencies to develop and offer their own scoring system to the public. 

You may end up applying for a loan based on the “wrong” credit score (one that your lending is not using - a FAKO score). I’ve heard about people ending up with expensive loans than they bargained for, because they were relying on numbers that were different from those used by their lenders. So before paying to see your score, make sure you know what it is you’re picking up. Ask your lender or bank what they’re using: is it a FICO or a Vantage score that they’re basing their evaluations on? Better yet, some banks may be willing to share your credit information with you for free, so it doesn’t hurt to ask!

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Will a Foreclosure or Short Sale effect my Credit Scores?

Reporting is up to the lender, but generally, a short sale is going to cause about the same amount of damage to your credit report and FICO score as a foreclosure.

Effects on your credit report

There is no doubt that you will have much more damage to your credit report with a foreclosure than with a short sales. It will also take much longer to repair and restore your score once your financial difficulties are resolved.

For a Foreclosure

Expect about the same things to take place. Quite often this means a loss of between 200-280 points on your FICO score. A pre-foreclosure FICO of 675 could drop to as low as 395, essentially eliminating you from future credit approvals. It may be as long as three years before you can qualify for another home loan.

For a Short Sale

Expect to have some credit score damage, but nowhere near as much. Loss of FICO points will be around 75-125 and your report will show it listed as a ‘pre-foreclosure in redemption’ which is far less negative. You will most probably be able to secure a new home loan in about a year and a half.

It would be a good idea to consult with a lawyer, tax accountant (CPA) or a good professional real estate agent who is experienced with short sales. So don’t consider doing this alone. Get the help you need.

What I Look For In A Credit Card Company

Credit repair really does work, but it's not magic and doesn't happen over night. With the current economy thousands of folks out of work and unable to pay the bills, credit repair is needed.

When you're looking for a credit repair company you will need to find one with a full, knowledgeable customer service department that has live representatives you can actually talk to.

Look for a company that is established. So many companies come and go, giving the other a bad name.

Choose a company that stays in contact with the client on a regular basis. The most important part of credit repair is monitoring the flow of credit reports being sent in by the client. Some credit repair companies will take the client's money and not follow up. A good credit repair company will have a system or agent that will notify the client of any past due reports or any personal information needed. Find a company that follows this closely.

An active owner is imperative to a successful credit repair company. Find a company that has an owner that you can talk to personally if you have concerns. And last but not least find a company that is licensed and bonded in all 50 states.

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Tell Me About The New Credit Card Laws

In the last couple of weeks, I've had friends, family and clients ask me about the new credit card laws and what I thought about it. My response was-------------. Being in the business of credit repair and restoration, I should have been up to date with all of this stuff, without fail I did some research and some online reading. So, for you folks interested in what's new with the Credit Card Law, here it is.

Most of the major reforms of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act that President Obama signed into law last May of last year, does give consumers added protections.

Here's a look at the key changes:

1. Billing practices

Payments will be due at the same time each month, with notification of the bill made at least 21 days in advance of its due date. Payments will be applied to highest interest-rate balances first so that customers can pay off their balances quicker and more cheaply. Finally, credit-card companies will use simple and plain english on all their documentation/materials/statements that are related to the account and periodically show how long it would take consumers to pay off their existing balance and interest charges if they paid only the minimum due.

2. Interest-rate reform

All interest-rate increases on outstanding balances will be prohibited and card companies must notify the credit card holder 45 days in advance of an interest-rate increase hike. Moreover, there cannot be any interest rate increases for the first year any account is open.

3. Overdraft and over-limit protections

Credit Card holders now will to opt-in to a overdraft program instead of being automatically enrolled - at least the customers now have an option. Well, at my bank, I was asked if I wanted to participate in the overdraft program for a fee. With this new opt-in feature, if you try to make a purchase that exceeds your limit or overdrawn debit account, your card will simply be DECLINED- Yes, you will be declined and embarrassed. Under the old rules, the transaction could go through and the consumer would have to pay a fine. This option works to your advantage to avoid any derogatory records on your Credit Score.

4. Protections for the Young folks

Those under 21 will have to prove that they can pay off their card limits or have a cosigner before they can be granted a card.

Caution: For those parents who want to co-sign, I would not recommend doing this. Let me explain, if you as a parent fail to make a monthly payment, and visa-versa, you are both jeopardizing your credit scores.

THE REAL TRUTH IS

Credit card companies seeing the law coming into effect, have already cut credit limits, closed accounts, and increased rates in anticipation of the changes. When the laws go into effect this will be much harder to do. So basically the new law having a preset start date has given the credit card companies the room to pre load the risk. So we can only wait and see what happens......

Guide To Credit Card ACT 2009

Low Interest Credit Cards