Bureaus fined for credit score confusion

51w4H0Y7W7L._SX333_BO1,204,203,200_The Consumer Financial Protection Bureau today ordered Equifax and TransUnion to pay more than $23 million in restitution and fines for deceiving consumers about the usefulness and actual cost of credit scores they sold to consumers. Regulators said the bureaus also lured customers into expensive subscriptions when people thought they were getting free scores.

The CFPB said the bureaus were selling scores without making it clear that they weren’t the FICO scores lenders typically use in their decisions. TransUnion was selling VantageScores and Equifax sold a proprietary score. (Important to note here that VantageScores are now offered for free by many sites, including my employer NerdWallet.)

Credit scoring can be complex, and people are easily confused about the different types of scores and how they’re used by lenders. For example, many people think they have one credit score, when in fact we have many, and those scores change all the time.

People often don’t understand that the scores they’re seeing aren’t necessarily the ones used by lenders. Most lenders use some version of the FICO credit scoring formula, but FICOs come in many different versions and iterations. There are different generations of FICO scores and formulas tweaked for different industries, such as credit cards or auto loans. Furthermore, the FICOs you get from one major credit bureau will differ from the FICOs you can get from the two other bureaus.
Before VantageScore, the bureaus often sold proprietary scores that were used by few, if any, lenders. That led consumer advocates to label these proprietary scores as “FAKO” scores. VantageScores definitely aren’t FAKOs, since they’re used by 20 of the 25 largest financial institutions. But they may be used behind the scenes–for marketing or testing, rather than for deciding whether you get a loan or the interest rate you’ll get.
A VantageScores can give you a general idea of how lenders might view you as a credit risk. If you’re in the market for a major loan such as a mortgage or auto loan, however, you should consider buying the appropriate FICOs from MyFICO.com to get the clearest idea of where you stand.

4 hacks to boost your credit scores–fast

FICO-score-calculation-300x281Losing points from your credit scores is all too easy — and getting them back is hard. But if you know how credit scoring works, you can hack the process to rehabilitate your numbers faster. Here are four effective strategies to do just that.

(This article first appeared as “4 hacks to boost your credit score quickly” on DailyWorth.)

Pay your credit cards twice each month. Even if you pay your balances in full every month, using up too much of your available credit at any given time can hurt your scores. You can lessen the damage by making two payments each month: one just before the card’s statement closing date and another just before the due date. The first payment typically reduces the balance that’s reported to the credit bureaus, while the second assures that you don’t wind up paying interest or incurring a late fee on any remaining charges.

Dispute old, small collection accounts. The latest version of the leading credit scoring formula, the FICO 8, already ignores collection accounts where the original balance was less than $100. Not all lenders use this formula, though, so you might see an increase in your scores if you dispute that $50 parking ticket you forgot to pay or the $75 medical bill that slipped through the cracks of your insurer’s reimbursement system. The collection agencies that report these minor bills may not bother to respond to the credit bureaus’ investigation attempts, especially as the accounts approach the seven-year mark, where they’d have to be dropped from your credit reports anyway.

Get added as an authorized user on someone else’s account. Another person’s good history with their credit card could be imported into your credit bureau files to help burnish your scores. Plus, the other person doesn’t have to give you access to the account — you can be an authorized user in name only. Some card companies will allow this importing only if you’re a relative, so check in advance.

Pay off your credit cards with a personal loan. Paying down your credit card balances widens the gap between your available credit and the amount you’re using, which is great for your scores. If you can’t pay your cards off immediately, consider moving the balances to a three-year personal loan. Balances on such installment loans don’t affect your scores as strongly as balances on credit cards. Check with your local credit union first, since these member-owned financial institutions tend to offer the best rates and terms on personal loans.

For more of my DailyWorth columns, visit https://www.dailyworth.com/tags/liz-weston.

Big changes afoot for credit bureaus and your scores

check-credit-report-easilyCredit bureaus will have to hold off on reporting delinquent medical bills and supply actual human beings to review disputes under an agreement announced today with New York’s attorney general.

The Wall Street Journal reported that the agreement, to be announced later today, will change how credit bureaus operate nationally. Bureaus will have to wait 180 days before reporting any medical debt on people’s credit reports. When an insurance company pays a medical bill, all references to it will have to be deleted from the individual’s reports.

This is a big deal, since the Consumer Financial Protection Bureau estimates about 43 million Americans medical collection accounts on their credit reports. One such collection can devastate an otherwise pristine credit report and cause credit scores to plunge.

Having human beings review disputes is another significant change. Currently, humans stick a code on disputes before they’re sent to lenders, but the process is highly automated. Errors that have been removed from a report can crop up again (and again and again) when the lenders upload their data files to the bureaus. Getting problems fixed can be a frustrating process when you can’t get a human being to intervene.

The changes won’t happen overnight. The bureaus have three and a half years to roll them out.

How much will bankruptcy hurt your credit scores?

DrowningA reader whose credit scores have already been badly damaged by late payments and charge-offs had a question: How much more would her scores drop if she filed for bankruptcy?

For years the creators of the leading FICO credit scoring formula were a bit vague about the answer, saying only that a bankruptcy filing is “the single worst thing” that can happen to your scores.

Three years ago, though, the FICO folks provided a peek into how the formula treats a bankruptcy filing as well as other major negatives. You’ll find the post that covers that topic on FICO’s Banking Analytics blog. I go into more detail about this in my book “Your Credit Score,” but you’ll see that, indeed, the impact of a bankruptcy is bigger than that of other negatives. As with other black marks, a bankruptcy hurts already battered scores proportionately less than it does those with higher scores. But in the three examples given (people who started with scores of 680, 720 and 780), everyone ended up in the low to middle 500s. Not a great place to be. Futhermore, it takes years for credit scores to recover. To get back to “good” credit of 720 and above will take 7 to 10 years.

So does that alone mean people should avoid bankruptcy? Heavens, no. Bankruptcy puts a legal end to collection efforts and the ongoing damage unpaid debts can do to your scores. If you can get your act together and start using credit responsibly after a bankruptcy filing, you can start to rebuild your scores immediately. If you continue to struggle with un-payable debt, you may never be able to rehabilitate your credit.

Obviously, if you can pay your debts, you should. Many people who can’t wind up doing themselves more damage, and throwing good money after bad, in vain struggles to pay their bills. If you’re falling behind and can’t see how you’ll catch up, you’d be smart to at least talk to a bankruptcy attorney about your options.

 

 

 

Credit scores “overly penalized” for medical bills, regulator says

Zemanta Related Posts ThumbnailIf you have a collection account on your credit reports, chances are pretty good it’s from a medical bill. And chances are also good that the collection is having an outsized impact on your credit scores.

Today the Consumer Financial Protection Bureau released a study saying credit scores unfairly penalized people with medical collections. Those scores underestimated the creditworthiness of such people by 16 to 22 points, according the bureau’s review of 5 million people’s credit reports.

The byzantine way medical care is bought and paid for in the U.S. contributes to the problem. Even if you’re insured, it’s easy for a medical bill to slip through the cracks.

“Sometimes insurance does not cover everything.  Sometimes [people] do not know what they owe because of how complicated the billing process can be,” CFPB Director Richard Cordray noted in a prepared statement.  “Other times they may not even know they owe anything, thinking that their insurance will cover the bill.  Sometimes the debt is caused by billing issues with medical providers or insurers.  Complaints to the Bureau indicate that many consumers do not even know they have a medical debt in collections until they get a call from a debt collector or they discover the debt on their credit report.”

FICO, creators of the leading credit score, have already tweaked the formula to ignore collections under $100. The next version of the score, FICO 9, will use “a more nuanced approach to assessing consumer collection data,” promised spokesman Anthony Sprauve. With this formula, scheduled to be released later this year, “medical collections will have a smaller impact than non-medical collections.”

The problem, as credit industry insiders will tell you, is that most lenders continue to use older versions of the FICO formula that don’t have these upgrades. So even though FICO concedes the point that medical bills aren’t as predictive as other types of collections, they can still unfairly wallop your scores.

 

Should your credit card issuer have to give you free credit scores?

Zemanta Related Posts ThumbnailThe Consumer Financial Protection Bureau today called on major credit card issuers to provide free scores to their customers on their statements or online. The regulator’s idea is that low scores could tip people off to problems in their credit reports–problems they might not otherwise find, since too few people get their free credit reports each year.

Creditors use a variety of scores to evaluate and monitor their customers–scores that measure everything from the likelihood of default to the likelihood the user will stop using the card. It’s the score that measures the likelihood of default that the regulators want customers to see.

I believe you should be able to see any score that’s used to evaluate you, and that you shouldn’t have to pay for it. Getting scores from your credit card company could be a good start, assuming the companies aren’t allowed to sub in some “FAKO” score that no one actually uses.

The problem comes in the execution. Seeing their scores is likely to make a lot of people upset, and not just the folks with low scores. People with high scores usually want to know why their scores aren’t even higher. Credit card companies may not want to mess with having to explain how scores work or take the heat for a process they don’t control. (Credit scoring formulas are created by other companies, like FICO-creators Fair Isaac, and applied to data held by the credit bureaus.)

We’ll have to stay tuned to see if any major issuers bite. In the meantime, you can get free scores from sites like Credit.com and Credit Karma, although they aren’t the FICO scores most lenders use. For those, you’ll need to go to MyFico.com and pay.

Explore other options before foreclosure

Dear Liz: Two years ago we moved to another state. Our old house hasn’t sold in that time, as the housing market there is terrible. We have it listed for $255,000 and owe $242,000. A recent appraisal came back at $190,000 to $205,000 despite the fact that it’s in good condition and only 11 years old. We were thinking we should do a mortgage release on the property to get rid of it as we just can’t keep up the mortgage payments any longer. We didn’t think a short sale would work because there’s been no interest yet on the property. Any suggestions?

Answer: What you’re calling a “mortgage release” is actually a foreclosure, and it would devastate your credit for years to come. That may turn out to be the best of bad options, but explore others first.

Perhaps there’s been no interest in your property because the asking price is too high. Talk to a real estate agent with experience in short sales about what listing price is likely to generate offers. A short sale would hurt your credit scores, although perhaps less severely than a foreclosure if you can persuade the lender not to report the deficiency balance (the difference between what you owe on the mortgage and the sale price). The advantage of a short sale is that you’d spend less time in mortgage lenders’ “penalty box” and may qualify for another loan within two years.

Join our credit chat tomorrow

liz-credit-mythsI’ll be hosting a live video panel discussion about credit myths and facts tomorrow, Dec. 13, at noon Eastern/9 a.m. Pacific. Joining me will be John Ulzheimer of SmartCredit.com, Gerri Detweiler of Credit.com and Maxine Sweet of Experian.

This is a reprise of a conversation we had at FinCon13, the financial blogger conference held in St. Louis this fall. People there really seemed to get a lot out of it, so we thought we’d share our insights with a broader audience.

My panelists have the inside scoop on the credit industry. John has more than two decades’ experience working in the consumer credit industry, including stints with credit bureau Equifax and credit score creators Fair Isaac (creators of the FICO scoring formula). Gerri’s my go-to expert on consumer credit and debt collection; she’s also the author of the books “The Ultimate Credit Handbook” and “Slash Your Debt.” Maxine Sweet leads Experian’s consumer education efforts and knows how to give clear, concise (and correct!) answers to your questions.

You’ll find the live video stream here. Please bookmark the site and join us tomorrow for insights you won’t find elsewhere. Thanks!

It’s okay to close credit accounts sometimes

Dear Liz: I have heard that you should never close credit card accounts of your own volition because that can hurt your credit scores. Are there any exceptions? I received a credit card several years ago, when my credit scores were in the toilet because of a number of collection accounts and delinquencies. I had no other open credit cards, so when they offered me unsecured credit, I accepted it willingly. The interest rate was (and is) 23.99%, and I was charged a $72 annual fee. Now, six years later, my credit scores are greatly increased. But you would never know it by this issuer. They have refused my request to lower the interest rate, and the annual fee has now gone up to $99 a year. My credit limit is $2,100 and a credit line increase of $150 would cost me a $14.95 fee. Under these circumstances, would you still counsel not to close this account?

Answer: Closing credit accounts won’t help your credit scores and may hurt them. But that doesn’t mean you should never close an account.

If you have several other credit cards, your credit scores probably won’t suffer much of a hit from a single account closure and will recover quickly from any damage done. You don’t want to close accounts if you’re still trying to improve your scores or if you’re in the market for a major loan, such as a mortgage or auto loan. Otherwise, though, there’s no reason to continuing paying for a card you no longer need.

If this is still your only credit card, you should use your good scores to open one or two cards with better deals. Then you can say good riddance to this one.

Don’t let 0% offers result in maxed-out cards

Dear Liz: I’m trying to transfer some credit card balances to existing accounts that are now offering 0% for 12 to 18 months. If I come close to maxing out the credit limit using one of those offers, will that affect my credit score adversely? Or, should I open up a new card, since I’ve gotten several 0% offers recently?

Answer: Using all or even most of your credit line on any revolving account can hurt your credit scores.

Although opening a new card may ding your scores a few points, it’s usually preferable to spread your debt over several accounts rather than pile it all on one card. This advice assumes you plan to use these offers to pay off your debt as rapidly as possible, rather than as an excuse to continue carrying balances.

If you can’t pay off your balances before the teaser rates expire, consider getting a three-year personal loan from your local credit union and using that to get free of debt. The interest rate you pay may be somewhat higher initially but you’ll likely save money in the long run.