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Credit Scores

Wednesday’s need-to-know money news

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Zemanta Related Posts ThumbnailToday’s top story: Credit score companies ordered to pay millions in refunds. Also in the news: How the Trump presidency will impact housing, how to refresh your finances in the new year, and how to become an extreme saver in 2017.

Credit Score Companies Must Refund $17.7 Million to Customers
Could you have a refund on the way?

How the Trump Presidency Will Impact Housing in 2017
A glimpse into the future.

Ask Brianna: How Can I Refresh My Finances for the New Year?

How to Become an Extreme Saver in 2017
Every penny counts.

Bureaus fined for credit score confusion

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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.

Wednesday’s need-to-know money news

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common-retirement-mistakesToday’s top story: How to make the 10 years before retirement count. Also in the news: Tips on reining in holiday spending, which generation has the best credit score, and which insurance most car renters can say no to.

5 Ways to Make the 10 Years Before Retirement Count
Fattening your nest egg.

5 Frugality Pros Help You Rein In Holiday Spending
Avoiding the after-holidays sticker shock.

Average U.S. Credit Score Rises; ‘Silent Generation’ Wins Bragging Rights
The older you are, the better your score likely is.

Which insurance most car renters can just say no to
Deciding which insurance you need.

Q&A: Credit cards just keep coming

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Dear Liz: I use only two credit cards. But I have several credit cards I never use. When the cards expire, the issuers send me new ones. I just received two more cards, with new expiration dates, which I will not use. I keep hearing that cancellation of cards results in lower credit scores. How can I cancel all the unused cards I have without affecting my 797 score, and how can I stop them from sending me new ones without my authorization?

Answer: Your issuers can continue sending you new cards until the accounts are canceled. Your “authorization” isn’t necessary once you’ve applied for the card. Some credit card companies will close an account that hasn’t been used in more than a year, but others will keep accounts open hoping you’ll start using the cards again someday.

Having several credit cards is typically good for your scores — of which you have many, by the way, not just one. But you don’t have to keep unwanted cards forever. If your scores are in the high 700s you can close the occasional credit card account.

What you don’t want to do is shut down a bunch of cards at once, or close your highest limit cards. Credit scoring formulas are sensitive to the amount of your available credit you’re using. Anything that significantly reduces the amount of available credit you have can hurt your scores.

Q&A: Credit score after bankruptcy

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Dear Liz: This is just to add to your observation that credit scores tend to improve after a bankruptcy. I filed Chapter 13, which required a five-year repayment plan. At that point my score was around 640. The day of the discharge, I was able to get a car loan at 3% interest. Also, the bankruptcy dropped off my credit reports seven years from the filing date, and my scores actually dropped a good bit.

Answer: It’s pretty unusual for scores to go down after a bankruptcy drops off your credit reports. It’s possible you weren’t looking at the same type of score because there are many different formulas in use. It also could be there were other changes that happened simultaneously, such as a high balance on a credit account or an old, paid-off loan that a creditor stopped reporting.

It’s not unusual, though, for someone who completes a Chapter 13 to get a competitive rate on a loan where there’s collateral, such as an auto loan, assuming he has a job, credit score expert John Ulzheimer said.

“Debt free plus employed equals not a bad risk, especially if they put down a decent down payment,” Ulzheimer said.

Great credit is a powerful tool

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Credit report with score on a desk
Credit report with score on a desk
Credit scores are a financial tool, but whether they’re a lever or a hammer depends on how good they are.

You can leverage great scores into great deals — on loans, credit cards, insurance premiums and cell phone plans. Bad scores can hammer you into missing out or paying more.

The lifetime cost of higher interest rates from bad or mediocre credit can exceed six figures. In my latest for the Associated Press, how to save thousands of dollars in interest by building great credit.