New Credit Standards Not Really Worth Your Worry

Bankrate.com recently posted Good credit score of past not so good now which opens with the following:
“Those with good credit may well recall being showered with praise by a mortgage broker during the initial purchase for that solid credit score. That was then. This is now.”

The article goes on to warn readers that while you might have sparkling credit it may not be enough to earn you a better lending rate. Reading this article could put fear into the hearts of would be buyers or at least make you feel like things are really spiraling out of your control. But, just how bad is it?

I asked Coors Credit Union Senior Mortgage Consultant, Ron LoSasso for his take on new credit standards.

So, Ron, how worried should buyers be?

He replied, “Although there are now adjustments in the rate due to credit scores the typical
increase is only an 1/8 to the rate. On a $200,000 loan amount this is an increase of the monthly payment of approximately $16.00 per month. Perhaps the cost of one Grande Latte per week.”

While you shouldn’t be scared off by new credit standards, it is helpful to understand how we got here. The new standards are neither arbitrary nor a result of tightened lending. All banks, brokers and credit unions must abide by the same standards. The change came about as Fannie Mae and Freddie Mac, the nation’s two largest lenders, redefined risk after suffering huge losses last year.

So the new standards really don’t affect the lending landscape much. You’ll still be making fair comparisons when shopping for a mortgage. But, as Ron says, “One advantage to coming to a credit union is to compare all loan programs including these agency type loans to the Portfolio
Loans that credit unions may offer.”

Another advantage is that credit union lending is strong. In contrast to many major banks, very few credit unions were burned by foreclosures; therefore they’re still able to give good rates on home loans.

And don’t let the new score standards turn you into a procrastinator. Yes, if you score is poor or even good you should take some time to clean up errors, pay down debt, or other actions to increase your score. But, if you’ve already got an excellent score of say 720 and you’re thinking of eating ramen for a few months to get it up to 740 you could be taking a big gamble You could miss out on current low rates or while you are working to better your score, you’d only be saving a few lattes worth a month.

The best way to prepare for purchasing a home is to get in and speak with a Home Loan Consultant. They can tell whether your score is in need of help or if you should start shopping now.

Your Credit Karma

The ancient concept of Karma basically means what goes around, comes around. The creators of Credit Karma believe that this is especially relative to your credit score. And that is the idea behind the free credit score monitoring service Credit Karma.

The general idea is that any action a person takes either positive or negative, will have an inevitable equal effect in the future. Your credit score is kind of an expression of this concept; an index of your credit history: your credit karma.

What I like about the Credit Karma site is the simulation piece. Recently FICO revealed the formula for how your actions affect your score. Credit Karma includes a simulator that shows you how various actions might change your score, based on FICOs secrets. Now, of course, you could figure this out yourself, but that might require a calculator and use of your brain which takes time. Credit Karma does it in an instant and lets you play around with scenarios.

To use Credit Karma you will have to give some basic personal information, like your social security number.But the company’s privacy policy states that your SSN is not stored and your personal information is not shared. My husband and I been using the service for several months and have not had any problems.

You will be shown “offers” (a.k.a. advertisements) for services such as credit cards, but that’s to be expected on a free site and they are easily ignored. Credit Karma asks you to vote on the offers, which my guess is that they use the voting to further customize the offers.

I’m not plugging this service for any reason other than I want you to know about this quick easy way to monitor your credit score. I haven’t been in touch with the company and am not receiving anything from them. I just think it’s handy. We were thinking about refinancing our mortgage and wanted to check on our scores. Sure we could have ordered a copy of our credit report, but at the moment we just wanted a quick check. Credit Karma gave us the numbers instantly. We did end up checking our credit report as well.

FICO Discloses How Mistakes Affect Your Score

You know that paying your credit card late or going over the credit limit can affect your credit score. But now FICO reveals just how damaging mistakes can be.

FICO assigns consumers a three-digit number between 300 to 850. The higher your score the better, and the more sensitive you’ll be to mistakes. Those with good or excellent credit -- so-called prime borrowers -- put more points at risk with each mistake.

CreditCards.com put the cost of damage into dollar perspective by running some scenarios:

For a consumer who started with a FICO score of 780:

• Following a 30-day late payment, the consumer's car loan rate would jump nearly 3 percent, costing the borrower $26 more each month.
• Following a debt settlement, the consumer would pay as much as $109 more each month on a home mortgage.

For a consumer who started with a FICO score of 680:

• Following a 30-day late payment, the consumer would pay $41 more each month for a car loan.
• Following a 30-day late payment, the consumer would pay as much as $95 more each month on a home mortgage.
• Following a debt settlement, the consumer would no longer qualify for a credit card.

Previously FICO has been secretive about their formulas and how they affect consumer credit by revealing this information FICO hopes that consumers will understand how their actions contribute to credit standing.

Don't Buy Your Credit Report

The following is a repeat performance of a post which first ran on July 31, 2008.

Credit report, blah, blah, blah. You might be sick of hearing how important it is to review your credit report. And every personal finance article preaches that you need to review your report often. If you watch any television advertising probably an easy third of the ads are about poor credit, credit scores or credit reports--even if you're watching kids shows.

Most of those ads infuriate me because they hype fear (as most advertising does) and play down the facts. The one that really gets me is the one below.


Yeah, it's cute. It's also a scam. Here is your first clue...they ask for your credit card information. Duh, they are going to charge you for something you can get for free.

FreeCreditReport.com will give your credit score for free, but it will also require you to enroll in their Triple Advantage credit monitoring. The fine print:
When you order your free report here, you will begin your free trial membership in Triple AdvantageSM Credit Monitoring. If you don’t cancel your membership within 9 days of enrollment, you will be billed $14.95 for each month that you continue your membership. If you are not satisfied, you can cancel at any time to discontinue the membership and stop the monthly billing; however, you will not be eligible for a pro-rated refund of your current month’s paid membership fee.

The most misleading aspect of FreeCreditReport.com is their name. It's confusingly similar to the legitimate site AnnualCreditReport.com. In fact FreeCreditReports has a better name than the actual site for ordering your free report. If my memory is correct FreeCreditReport scored that URL long before the official site.

AnnualCreditReport.com is an easy and secure site that lets you receive credit reports from each of the three reporting agencies from one location. You can order all three at once or just one at a time. You are entitled by law to view your each of your 3 reports once every 12 months. Some people like to get all three at the same time to compare. Others like to space them out throughout the year so they can monitor changes.

So here are some Do's and Don'ts

• Do take the message from the cute ads seriously
• Don't follow their links
• Do get your report for free from AnnualCreditReport.com
• Don't ever give credit card information to get your credit report.
• Do make sure you read and understand the fine print of anything you sign up for.
• Don't tune out credit report information, it's important and even though you think you everything those things can change.

How Long do You Need to be Employed to Get a Car Loan?

This question was recently posed to me by a reader. It's a good one and brings up a few topics. First off, every loan application asks for employment status and history.

I asked the Coors Credit Union lending manager to give a general comment and this is what she said, "There is no minimum to apply. However it is preferred that an applicant has at least 6 months employment history, again preferably at the same employer."

But, the answer also depends on your situation and your credit score. You probably are aware of how important a good credit score is for qualifying for a loan and for getting a good rate, but employment can subtly affect your loan as well. Generally, lenders like to see consistent employment history of two years, but that doesn't mean others can't get a loan.

First-time buyers can get a better rate by waiting until they've been at a job for six months. For many first-time buyers the biggest hurdle is credit history. Often they just don't have much. You can qualify for a better rate and begin to build your credit by finding a co-signer. The loan will be yours. You'll make the payments and build credit history. However, if you can't make the payments your co-signer will be liable. If payments aren't made both of your credit scores will suffer.

Lenders look at numbers to determine risk. The higher the risk the higher your interest rate. Two things determine the risk level:

1) credit score

2) debt-to-income ratio

In some cases, you may be asked to provide proof of income. For example, self-employed people may need to provide documentation of income.

It is not impossible for unemployed people to get a car loan, however, you cannot claim unemployment benefits as income.

One thing to keep in mind when buying your first car, or any car, is that you are not locked into the rate you get. After a year your credit score could improve and if you stay with the same job your employment history will be more secure. At this time you could refinance your loan for a lower rate and possibly drop the co-signer if you have one.

Experian dumps Fair Isaac

Even more changes are up with your FICO score. In mid January Experian sent a Dear John letter to Fair Isaac with intent to end their 6-year relationship with myFICO.com. This doesn't mean the Fair Isaac won't be using Experian data to calculate credit scores. It means that Experian's reports will not be available to consumers through myFICO.com. However, Fair Isaac will continue to provide lenders data from the three reporting agencies: TransUnion, Equifax and Experian.

A Fair Isaac statement put it this way:

• This action by Experian is specific to our consumer business unit.


• Fair Isaac is dedicated to offering FICO® Scores to financial institutions via all three of our bureau partners to provide the most independent and fair representation of a consumer’s credit picture.


• Experian recently recommitted to continue offering FICO® Scores to its lending clients.


• To meet consumers’ credit empowerment demands, Fair Isaac will continue to offer both Equifax and TransUnion credit management services through our myFICO.com web site.

After February 13, 2009, Experian FICO® scores and credit reports will no longer be available through myFICO. This affects three of Fair Isaac's products:

1. Suze Orman’s FICO® Kit
2. FICO® Credit Complete
3. FICO® Standard

Experian has not announced plans to make FICO scores available to consumers. Current law states that consumers are entitled to reports from all three credit bureaus, but that is not the same as your credit score.

You might want to log on to myFICO before Feb. 14th and get your credit score that includes the Experian data--especially if you looking at getting a loan anytime soon. Experian will continue to work with Fair Isaac to provide lenders with the FICO® scores they use in their lending decisions. Not sure what future plans Experian has or why they terminated the FICO contract, but for now the announcement puts consumers as the big losers.

What's up with FICO Credit Scoring Changes

Fair Isaac, the company behind your credit score, will unveil a new version of its FICO credit scoring formula, called FICO 08. (As you guessed it was supposed to be released last year--never name a project after it's release date. That's just asking for delays.) Anyway...

If you not familiar with Fair Isaac and FICO, I am embarrassed for you...just kidding. The FICO is that crazy number that controls your life and tries to give lenders some idea of whether or not you can pay back loans--your credit score. The FICO ranges from 300 to 850. The higher your score the less risk you pose. The number is derived from a complex algorithm of several different inputs based on how you've handled payments in the past.

The new FICO 08 is expected to give lenders a better risk assessment and be fairer to consumers. So here's how Fair Isaac has tried to improve FICO:

Authorized Users: You might be an authorized user on a credit card if the original application was filed using your spouse's name. Previously you could not have the history of these accounts taken into consideration, so some spouse's may end up with a low credit score due to lack of credit history.

Not all Collections are Equal: The new scoring will not just ding you if you've had an account go to collections. Now the size of the collection and the number will be considered. Collections can happen to anyone. Maybe you moved and the bill was not forwarded. Or maybe you've had a spat over a product and the other party sent the bill to collections for spite.

One Bad Apple Doesn't Ruin the Bunch: Now one mistake can't take you down for good. If all other history is good you can still come out with a good rating.

Available Credit is More Important than Ever: As always you want your available credit to be much higher than your used credit. But with some lenders lowering credit limits the margin may be tighter. However, FICO will weigh this heavier than ever. So this puts an end to the debate of whether or not you should close unused cards. Keep them open to keep your available credit high. To avoid having them closed down by the card issuer use them sparingly, but regularly. You might want to set up a reoccurring bill such as a cell phone or video rental account just to keep the card active, yet manageable.

Mix it Up: Also weighed heavier will be the mix of accounts. Only having credit cards will not be viewed favorably. FICO also wants to see some fixed payment accounts like car loans, personal loans and mortgages.

The hope is that the new scoring will help lenders make better decisions and decrease loan defaults. For everyone else it's still best to use credit in moderation and pay your bills on time. And don't forget to review your credit report several times a year. Remember, your credit report is not the same as your credit score. But, by reviewing your report you'll be able to catch errors that can adversely affect your score.

What's Your Credit Age?

No, no don't fret this isn't another score that you need to track. This one is purely for fun.

This a simple quiz that tests How Old You are In Credit Years. Like your credit score the higher you score the better. Unlike your credit score no one will use this one to determine your credit worthiness.

The credit age is scored in years and unlike those health age quizzes in this one the older you are the better. Credit Age won't access your credit file. You do need some knowledge of your own credit history, but nothing too specific. It's also free and non-personal. So again it's just for fun, no risk involved.

The quiz ranks you not only by age but in the following categories:

• Credit Newbie: You’ve not built any real or good credit.


• Credit Curious: You still have a lot to learn, but with the right moves and enough time you can build solid credit.


• Credit Capable: You understand how to care for your credit.


• Credit Connoisseur: You are the master of your finances. You know how to pay off your debts and save for the future.

And though it's short and fun Credit Age does give you an idea of where you stand in your ability to master your credit and debt.

Me? I'd like to say that I was really really old in credit years, but nope I'm Credit Capable. That's okay, I've always known that I've got some work to do.

I am 36
in credit years!

Friday Encore: What’s behind your credit score?

Friday Encore features a past blog posting that I thought you might not want to miss. Okay, call it a repeat if you want. When necessary the post may be updated with new information or data to keep it relevant. The following was originally posted February 28th, 2008.

What’s behind your credit score?

photo by Wearn

We all know how important it is to maintain a good credit score. But does anyone really know what determines your score? Not really. That is no one except the anaylists at the Fair Isaacs Corporation. FICO the credit score used by most lenders is a creation of Fair Isaacs, which is basically a data analysis company that offers many business analytics in addition to the infamous FICO. The formula used to determine FICO is a trade secret, but they do reveal the following factors that effect your score:

35%--punctuality of payment in the past (only includes payments later than 30 days past due)

30%--the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)

15%--length of credit history10%--types of credit used (installment, revolving, consumer finance)

10%--recent search for credit and/or amount of credit obtained recently

There are many resources for ways to improve your credit score. Often they’ll focus on a few tactics. Some will tell you close unused cards, others will tell you that’s a bad idea. But, as you can see that the weight of the formula is on punctuality and amount of debt. So if your score is low then focusing on anything but the top two isn’t going to move it much.

And what exactly is a good score? Scores range from the poorest at 300 to the highest 900. According to Fair Isaac the median score is 723. According to Experian (using the Fair Isaac risk model) the average credit score is 678. So you want to shoot for your score on the upper end of the scale.

You should review your credit report at least annually. Order your free copy of your credit report at annualcreditreport.com. This site is set up by all three reporting credit reporting agencies: Equifax, Transunion and Experian to enable easy ordering of all their reports.

Friday Encore: New Scores for No Credit

Friday Encore features a past blog posting that I thought you might not want to miss. Okay, call it a repeat if you want. When necessary the post may be updated with new information or data to keep it relevant. The following was originally posted March 11th, 2008.

New Scores for No Credit
The credit score--that silly little number that can opens or closes the door to so many things. And if you don’t have significant credit history you might feel that a good score is out of reach. But now the young, recently divorced or widowed, just moved to this country, and those operate only with cash can be scored.

Fair Isaacs has released their FICO Expansion score that uses aggregated data from PRBC (Pay Rent, Build Credit, Inc.). At PRBC people can establish credit without taking the traditional route of acquiring credit cards. The service is online and users pay a fee to have their rent and other bill payments verified. PRBC also offers a bill payment service. With that service you don’t need to have payments verified to make them count, but you do have to pay a monthly fee for the online bill payment.

Get credit for stuff you already do

Types of payments that PRBC and Fair Isaacs use to calculate credit score are:

• Rent
• Cable
• Phone
• Daycare
• Insurance
• Electric
• Natural Gas
• Cell Phone

So is this a good thing? Maybe. It’s good in that it can help you get a better loan rate. Lack of credit history usually means that you are viewed as high risk to lenders. FICO Expansion scores may make more lenders open to the idea of lending to those with less established credit histories.

But—there’s always a but—PRBC and FICO Expansion are still relatively new. Reporting and verification through PRBC can be spotty. The big 3 agencies Equifax, Experian and TransUnion aren’t offering similar reporting services—yet.

And then there’s always the old school way to build credit: use a credit card—that is if you’ll use it responsibly. But I gotta say I like the idea of getting recognition for things you are already doing—like paying rent.

Don't Buy Your Credit Report

Credit report, blah, blah, blah. You might be sick of hearing how important it is to review your credit report. And every personal finance article preaches that you need to review your report often. If you watch any television advertising probably an easy third of the ads are about poor credit, credit scores or credit reports--even if you're watching kids shows.

Most of those ads infuriate me because they hype fear (as most advertising does) and play down the facts. The one that really gets me is the one below.


Yeah, it's cute. It's also a scam. Here is your first clue...they ask for your credit card information. Duh, they are going to charge you for something you can get for free.

FreeCreditReport.com will give your credit score for free, but it will also require you to enroll in their Triple Advantage credit monitoring. The fine print:
When you order your free report here, you will begin your free trial membership in Triple AdvantageSM Credit Monitoring. If you don’t cancel your membership within 9 days of enrollment, you will be billed $14.95 for each month that you continue your membership. If you are not satisfied, you can cancel at any time to discontinue the membership and stop the monthly billing; however, you will not be eligible for a pro-rated refund of your current month’s paid membership fee.

The most misleading aspect of FreeCreditReport.com is their name. It's confusingly similar to the legitimate site AnnualCreditReport.com. In fact FreeCreditReports has a better name than the actual site for ordering your free report. If my memory is correct FreeCreditReport scored that URL long before the official site.

AnnualCreditReport.com is an easy and secure site that lets you receive credit reports from each of the three reporting agencies from one location. You can order all three at once or just one at a time. You are entitled by law to view your each of your 3 reports once every 12 months. Some people like to get all three at the same time to compare. Others like to space them out throughout the year so they can monitor changes.

So here are some Do's and Don'ts

• Do take the message from the cute ads seriously
• Don't follow their links
• Do get your report for free from AnnualCreditReport.com
• Don't ever give credit card information to get your credit report.
• Do make sure you read and understand the fine print of anything you sign up for.
• Don't tune out credit report information, it's important and even though you think you everything those things can change.

You’re Scored in So Many Ways

I hate to be the one to tell you but you’re credit score isn’t the only way you’re rated. There are other databases collecting your personal information. Like you're credit score, you have the right to review them.

First there's the C.L.U.E. ®Personal Property report. It's an insurance claims history. The report shows a seven year history of losses associated with your personal property. It includes
date of loss, loss type, and amount paid along with general information such as policy number, claim number and insurance company name.

A close friend of the C.L.U.E. ®Personal Property report is the C.L.U.E. ®Auto report. It shows a seven year history of your automobile insurance losses and includes all the same data as the property report--it's just specific to vehicles.

If you want to see what is on these reports you have the right to a free report.

Then there is the A-PLUS report (Automated Property Loss Underwriting System). This database isn't as large as C.L.U.E. but it's the one insurance companies use to determine premiums. So you should take a look to be sure it's correct.

Interviewing for that dream job? Your potential employer might be doing their homework by looking into the ChoicePoint Workplace Solutions Inc. Employment History report. ChoicePoint supplies information related to your employment history. Get a free copy of this report by calling 1-866-312-8075.

Let's hope you didn't trash that last apartment because the Resident Data Inc. Tenant History by Choicepoint could determine not only if you'll get that next apartment, but maybe if you'll get that dream job. Employers sometimes judge your character by if you made your rent on time and if you left your last residents in good condition. This report has a different number, so take note and call 1-877-448-5732.

Remember you have the right to know what others are saying behind your back. If you want to make sure your records are accurate contact these companies.

Foreclosure or Bankruptcy? Bankruptcy or Foreclosure?

One can lead to another and some people may even choose bankruptcy to protect them from foreclosure. But which is, dare I say “better”? You’ve got to look at the long-term consequences to decide.

It’s probably safe to guess that anyone facing foreclosure has other financial struggles as well. But foreclosure doesn’t have to lead to bankruptcy. Both options do affect your credit score. The difference is the impact.

A homeowner who is stretched too thin may decide to skip the mortgage payment and continue regular payments to other debts that impact their credit rating such as cars or credit cards. A mortgage, or even a foreclosure, is one ding to a credit report. Though a big ding, credit scores are hurt more when payments are missed on multiple accounts.

A spokesperson for Fair Isaac credit reporting put it this way for CNNMoney.com, “while a mortgage default can savage a person's credit record, trying to pay off a loan they can't afford could be worse for borrowers if it leads to bankruptcy," said Craig Watts…"The time it takes to regain your credit score [after foreclosure] can be shorter than after bankruptcy".

Watts also said. “It typically takes three years of a spotless payment record after a bankruptcy before credit scores recover enough for someone to think about buying a home again. After abandoning a mortgage, a person may be able to buy a new house in two years or less."

Note that Watts isn't saying someone could recover from bankruptcy in just three years. Bankruptcy can stay on your credit report for up to 10 years.

It used to be that advice was always "do everything you can to protect your home." It's interesting how that's changed. The new mantra is "do everything you can protect your credit rating."