Friday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Introducing the new FICO score. Also in the news: What you need to know before car shopping, the best credit cards for earning rewards, and tips on how to supercharge your savings.

The New FICO Score: Better for Debtors?
Medical collection debt will no longer count against your score.

3 Tricks Car Salesmen Use that Everyone Should Know How to Handle
Don’t be caught off guard while car shopping.

The Best Credit Cards for Earning Rewards
Getting the most bang for your buck.

10 Tips To Supercharge Your Savings
Giving your savings a much needed boost.

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.

Credit myths that need to die

YCS4 coverThe more you understand about how credit works, the more frustrated you get with how much misinformation is floating around out there. At least, that’s true for me and the three experts who joined me last week on a Google hangout to talk about “Credit myths that need to die.”

John Ulzheimer, who’s worked at Equifax and Fair Isaac, has unique insight into the credit reporting world. One thing that drives him around the bend is the persistent myth that employers use credit scores to evaluate applicants. Another myth he hates: the one about how closing accounts hurts your credit scores.

Gerri Detweiler, who writes for Credit.com and runs the DebtCollectionAnswers.com, discusses how medical debts affect your credits and debunks the myth that you need to carry balances to improve your credit scores.

Maxine Sweet heads consumer education at Experian and battles the myth that there’s just one credit score.

Take some time today to check out our discussion. You’ll come away from it a lot more informed about credit and how to make yours the best.

Thursday’s need-to-know money news

Today’s top story: Mythbusting your FICO score. Also in the news: Steps retiring entrepreneurs should take, tax moves Boomers should make right away, and how retailers trick you into spending money.

5 Myths About Late Payments & Your FICO Scores
Mythbusting, FICO style.

10 Steps for Retiring Entrepreneurs
Using your company as a cash cow for retirement.

Tax Moves Boomers Should Make Now
Especially those on fixed incomes.

10 Retail Tricks That Make You Spend More
Reminder: Retailers are not your friend.

Ginormous Hack Targets 2 Million Accounts Spread 93,000 Websites Worldwide
Keep an eye on your email and social media accounts.

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.

Credit denial: a corporate trick or cause for alarm?

Dear Liz: A few years ago when buying my son his college laptop computer, I applied for the store card at a big, well-known electronics store (at the encouragement of the sales associate). I was denied. I have never been denied a credit card before. I have eight cards that are always paid off monthly, own my own home and have a satisfactory retirement income and a top credit score. By receiving the card, I would have had a substantial savings on the computer. The denial has bothered me ever since. Was this a ploy on the company’s part to deny me the savings?

Answer: That kind of bait-and-switch happens sometimes, but there may be other reasons you were denied.

When you were turned down, the company should have provided you with the name, address and phone number of the credit agency it used to evaluate you. You should have immediately requested your report from the agency to see if the information was accurate. Someone may have stolen your identity, and credit denials are often the first sign many victims have that there’s a problem.

A collections account also could have torpedoed your scores. Many people discover that a medical bill, library fine or parking ticket went unpaid only when they find the resulting collections on their credit reports.