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Tuesday, November 8th, 2011

Social Networking, DNA may Affect Credit Soon

Living in the Information Age has a number of advantages: we can avoid holiday crowds to shop from the comfort of our living rooms, and even ditch the commute to work remotely from home. But new stirrings in the credit card industry about future plans for collecting and using customer information have raised warning cries from a number of consumer advocates.

A recent article in Time magazine discusses plans that credit card issuer Visa has to gather more information from consumers to better target ads and evaluate credit card applicants. Sources report that the company has plans to collect information from a number of sources, including:

  • Social networking websites, on which many consumers discuss their interests and post (even if indirectly) about their desires and spending habits.
  • Credit bureaus, which they already use. This is why filing for bankruptcy has an effect on a filer’s ability to get credit in the future: credit card issuers can see that the bankruptcy took place for seven to ten years after it’s filed.
  • Search engines, such as Google and Bing. This information could include not only shopping habits and interests but also information about everything a person researches, including words like “mortgage loan help” and “payday loans offers.”
  • Insurance claims, which might paint a picture of a person’s health, driving habits, and more.
  • DNA databanks. This last information source has caused the most uproar: information hardly gets more personal than a person’s genetic code, and the potential applications of such data are mind-boggling.

So how would credit card issuers use such a bevy of private data to their benefit? In a lot of ways, according to analysts. And many of them could seriously hurt consumers.

DNA or insurance claim data, for example, could reveal to credit card issuers a person’s health history or likelihood for developing a genetic condition. If that condition typically leads to significant medical expenses, the credit card issuer might deny the person credit—after all, many people end up discharging high medical bills in bankruptcy, and credit cards often get the same treatment in Chapter 7 cases.

Insufficient Legal Protections

What worries some analysts is that the U.S. currently has no laws in place to prevent such elaborate information gathering or denying credit on the basis of information like genetic code. As usual, the technology available has progressed far faster than the legislation designed to regulate that technology.

Another major concern? Identity theft and data breaches. It’s hardly uncommon to hear about data leaks and breaches in the news, but imagine the potential fallout if thieves had access to more than names and social security numbers.

At present, of course, neither Visa nor any other credit card issuer has such information on hand. But it could be a less distant future than we first imagine.

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Posted in Identity Theft, Your Credit Score | No Comments »

Tuesday, October 4th, 2011

Report: Credit Scores During the Recession

The Fair Isaac Corporation (FICO), which develops the primary formula used to calculate credit scores, released data this week on changes to credit scores during the economic turmoil of the last several years. The report shows credit score distribution from 2005 through 2011 and indicates that, on average, our credit scores have not changed significantly since the collapse of the housing market in 2007.

If that sounds fishy to you, don’t worry: the term “average” here is meant mathematically. Individual credit scores fluctuated in various ways:

  • More people in the highest group: In 2005, when the stock and housing markets were still going strong, 16.9 percent of Americans had a credit score in the highest range (800 to 850). In 2011, though, the highest-scoring group has swelled to 18.1 percent.
  • More people in the lowest group: In 2005, people with credit scores between 350 and 599 stood at 23.6 percent of the population. This year, the number has risen to 24.9 percent. Early in the recession, people with the lowest scores (350 to 499) jumped, too, though that percentage has leveled out in the last two years.
  • Fewer people in the middle: Those with credit scores between 600 and 799, usually considered to be in the middle of the credit scoring pack, saw their numbers decrease between 2005 (59.5 percent) and 2011 (56.5 percent).

Making Sense of the Numbers

While the findings at first may seem confusing or counterintuitive, there is a satisfying explanation behind the shift toward the extremes of the credit-scoring spectrum during a downturn.

  • The strong shore up: People who already have fairly strong credit scores tend to be more financially secure than those with lower scores. When the economy sours, these people tend to pay down debt more quickly than they might have otherwise, save more money, and avoid new sources of credit. These actions not only prepare them for potential financial road bumps (such as unemployment) but also improve their credit scores.
  • The weak struggle: People already overextended on credit tend to be less financially secure and may be hurt especially hard by tough economic times. Job loss, reliance on new lines of credit and unexpected expenses could cause this group even more financial distress, thus lowering their scores further.

Individuals close to either end of the spectrum may move further toward that end in tough times, thus lowering the total percentage of folks in the middle.

Individual Habits Most Important

Another important factor in determining credit scores is a person’s individual spending and saving habits. Because these tend not to change much regardless of external forces, recessionary times might not affect credit scores as much as they affect other economic indicators such as home prices and interest rates.

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Posted in Economic News: How Are We Doing?, Your Credit Score | No Comments »

Monday, September 19th, 2011

Changes on the Way for Credit Scores?

Though the Fair Isaac Corporation (FICO) introduced a new credit-scoring model more than three years ago, lending institutions are only now beginning to adopt it. According to a new report on Credit.com, the delay could be bad news for consumers hoping to apply for credit or loans.

The new model, called FICO 8, was ready for adoption in 2008 and rolled out in 2009. But, aside from Citibank, which adopted the new scoring method earlier this summer, the major lenders in the U.S. (including Bank of America, Wells Fargo, Chase, Fannie Mae and Freddie Mac) have yet to change their scoring techniques.

FICO Background

The FICO credit score is generally heralded as the gold standard in the lending industry. This score ranges from 300 to 850 and determines what kind of rates consumers get on loans (and whether they qualify for loans at all).

Negative credit actions (including defaulting on loans, filing for bankruptcy, going into foreclosure, etc.) lower a credit score; positive credit actions (paying bills on time, having a low credit usage ratio, etc.) raise it.

Is the Delay Hurting Borrowers?

Sources note that FICO 8 introduces scoring tools that could give consumers a better chance of qualifying for loans, including:

  • Less emphasis on unpaid debts under $100. Many of those debts, it seems, might be from the doctor. According to the Commonwealth Fund, 14 million Americans are currently fighting medical bills. And the FTC notes that half of all debts in collections are medical.
  • More consumer categories. Rather than dividing consumers into 10 groups, FICO 8 carves out 16, meaning that scoring tools will be able to more accurately predict consumer behavior.
  • Fairer comparisons. The old credit-scoring model (still currently in use in much of the country) essentially had one ruler for every lender. The new model allows lenders to compare someone with, say, a short credit history to others with histories of a similar length. This will help provide a more accurate picture of whether or not someone is a good credit risk compared to her peers.
  • Credit utilization will count more. To balance the effect of counting small unpaid debts less, high credit utilization ratios will hurt a score more significantly (i.e. those with maxed out on cards will suffer).

Possible Reasons for Delay

According to Credit.com, the delay in adoption of FICO 8 might be related to a number of factors. Fannie and Freddie (responsible for underwriting most mortgages in the U.S.), for example, are currently facing opposition in Congress to the government support they enjoy. After suffering major losses in the mortgage meltdown, they may be more focused on staying afloat than changing the way they do business.

As for other major lenders, the outlook isn’t much better. Seventeen major banks are now facing lawsuits regarding toxic assets they sold to investors during the mortgage boom. Depending how the suits play out, those institutions could owe serious money that they may or may not have. Considering those conditions, a non-essential policy change may seem frivolous.

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Monday, April 25th, 2011

Understanding the Changed U.S. Debt Outlook Rating

The credit rating agency Standard & Poor’s made waves last week when it announced that it had downgraded the outlook on U.S. debt from “stable” to “negative,” leaving many ordinary Americans wondering what the change means for the economy and how debt rating works in the first place.

Here’s a look at what our country’s debt rating might mean in future months and how that rating is like an individual credit score.

Rating the U.S. Debt

Currently, the United States has a credit rating of AAA, which is the highest rating possible. This rating indicates that the U.S. is a stable country and is likely to repay any loans it takes out. But there’s more to the story.

  • Outlook on U.S. debt: While the other two major credit rating agencies (Moody’s and Fitch Ratings) have not announced any changes to their ratings on the outlook for U.S. debt, Standard & Poor’s downgraded that rating last week, citing as one reason the continued inability of Congress to make a decision regarding the long-term future of spending policies.
  • A warning move: While the change in the outlook rating does not officially alter the country’s credit rating, it serves as a warning and reminder to legislators and others in positions of power that the country’s financial stability and credibility on the world stage are at stake.
  • Potential for positive impact: Some commentators have mentioned that the changed credit rating could actually prove beneficial to the country, as it may push Congress to act swiftly (and without unnecessary political posturing) in taking steps toward changing financial policy.

The Parallel with Individual Credit Ratings

As anyone who has ever file for bankruptcy, applied for a mortgage or thought about borrowing money for a car knows, individuals have credit ratings too. And, as with the credit rating for the United States, credit ratings for individuals are used to help lenders and investors determine whether or not to lend money to a person and on what terms.

If Standard & Poor’s actually downgraded the country’s credit rating, it would have a similar effect on the nation as seeing a drop in a credit score would for an individual. In other words, the U.S. would have more difficulty borrowing money and could suffer a variety of financial consequences.

So how can a country (or an individual) keep its credit rating as strong as possible?

  • Pay bills on time.
  • Pay down as much debt as possible.
  • Try to keep credit usage low (that is, stay well below the limit).
  • Keep old accounts active (but not maxed out).
  • Contact creditors before bill due dates if there is ever reason to expect inability to make timely payments.

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Posted in Economic News: How Are We Doing?, Your Credit Score | 1 Comment »

Friday, July 16th, 2010

Credit Scores in the U.S. at Record Lows

A recent report from the Associated Press notes that Americans’ credit scores have dropped to all-time lows, with 25.5 percent of the country scoring below 600. Here’s a closer look at that figure and what it might mean for future borrowing.

Credit Scores & Borrowing

When you apply for a loan, most lenders review your FICO credit score, which can range from 300 to 850 and is based on the information in your credit report. Higher scores qualify borrowers for larger loans and loans with more attractive terms (like lower interest rates); lower scores indicate that a borrower might be a greater risk to a lender, and so qualify borrowers for smaller loans and ones with higher interest rates.

The recently released data on credit scores reportedly show the following figures:

  • Scores of 599 and below: The number of people in the “low” range of credit scores has apparently jumped since the Great Recession hit—while a typical year finds that about 15 percent of those with active credit (about 25.5 million people) fall into this category, currently 25.5 percent (about 43.4 million people) reportedly score in this range.
  • Scores in the middle range (650 – 699): Sources indicate that this group traditionally comprises about 15 percent of active credit users, but has fallen to 11.9 percent in recent years. The shift suggests that those most likely to take out home and car loans might now be deterred from doing so because of lowered credit scores and thus more costly loans.
  • Scores in the high range (800 and above): The good news, it seems, is that the number of people with very high credit scores have increased: while the typical average hovers close to 13 percent, recent research found the group to comprise 17.9 percent of credit users.

So what does this mean for individual consumers and the larger economy?

A Slow Recovery?

Sources note that much of the economic growth in the boom years before the Great Recession was fueled by borrowing—also known as debt. While Americans were spending plenty of money, much of it was money they didn’t actually have (in the form of credit cards, mortgages, car loans, etc.).

The sky-high foreclosure rate and steadily climbing number of personal bankruptcy filings suggests that we’ve learned a lesson or two about debt as a nation, which may mean two things: first, that lenders will be a bit more discerning when issuing loans; and second, that borrowers will be a little more cautious when applying for them.

This could translate to a slow recovery, as we pare back our spending in favor of building up safety nets.

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Posted in Your Credit Score | No Comments »

Sunday, June 13th, 2010

Seattle Earns Dubious Debtor Distinction

It turns out that Seattle leads the country in a category other than caffeine consumption. According to a survey cited in the Seattle Post-Intelligencer, among the 20 most populated metropolitan areas in the country, Seattle has the highest average amount of consumer debt.

The survey, conducted by the information services company Experian, found that the average Seattle consumer owes $26,646. This figure is almost $2,000 more than the national average debt per consumer of $24,775.

However, the news is not all bad for residents of the Emerald City. The survey also revealed that Seattle consumers have very few late payments and stay below their credit limits. These signs indicate that Seattle consumers are using their credit wisely and maintaining healthy credit scores, despite their high level of borrowing.

According to the survey, Seattle narrowly edged Dallas, which has an average consumer debt of $26,599. According to the Dallas Morning News, Dallas is tied with Miami for the lowest average credit score among its consumers, and the number of missed loan payments is higher than the national average.

Rounding out the top five American cities with high amounts of consumer debt were Denver, Atlanta, and Phoenix. Perhaps surprisingly, the two largest cities in the country finished near the bottom of the list. New York came in at number 17, while Los Angeles consumers had the lowest average debt of large American cities.

In conducting the survey, Experian took samples of consumer credit reports from each of the 20 metropolitan areas. The numbers include items such as credit cards and car loans, but do not take into account mortgage debt, which is often excluded from consumer debt surveys.

Lessons for Consumers

  • Late payments are the single biggest factor in lowering credit scores. Dallas consumers’ rate of late payments was nearly 20 percent higher than the national average. This explains the city’s low credit ranking, and shows that making credit payments on time is crucial to maintaining a health credit score.
  • A high level of debt is not an insurmountable obstacle. Seattle consumers owe the most money, but also tend to make their payments on time. By using credit responsibly, Seattle consumers have been able to maintain decent credit scores despite their high levels of spending.
  • Living in a large city may be expensive, but doesn’t have to result in high amounts of debt or even bankruptcy. The presence of New York and Los Angeles at the bottom of the list suggest that it is possible to have high living expenses but maintain healthy credit.

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Posted in Your Credit Score | No Comments »

Saturday, May 22nd, 2010

Take Time for a Financial Tune-Up

Many people know that it's important to maintain healthy credit, particularly in a bad economy. But “maintaining good credit” is a vague concept at best. Here’s a look at some concrete steps you can take to improve your finances—even if you only have a few minutes to spare.

Fifteen-Minute Finance Boosters

Here’s a look at a few ways you can bolster your financial situation in a mere quarter hour.

  • Set up an emergency fund: Most experts advise having some money set aside for unexpected expenses (like car repair, illness or even job loss). This can be as easy as figuring out how much money you’d like to have in your fund (experts generally recommend anywhere from three months’ to one year’s expenses), setting up a high-interest savings account and starting regular contributions.
  • Look at your credit report: One essential part of maintaining healthy finances is keeping current with how the authorities view you as a credit risk. And, thanks to the Fair Credit Reporting Act, doing so is as easy as visiting www.annualcreditreport.com and following the prompts. All Americans are entitled to one report per year from each of the big three reporting bureaus. If you space them out, you could check up on your credit once every four months.
  • Review your bills: Take a look at the goods and services you pay for each month (utilities, cable, phone, insurance, etc.). Then do a little research online or by calling your providers and see if you can get a better deal somewhere else (or from your current provider). Bonus: the money you save each month can be funneled into your emergency fund.
  • Draw a map: In order to stay on top of your finances, you should be able to understand them fairly easily. Take out a sheet of paper and outline your accounts, debts and credit cards. Making a visual representation of your finances should help you see any unnecessary duplications and help you determine what you can eliminate to streamline things.
  • Think about retirement: Even if you already have a retirement account through your job, you can start a Roth IRA, which would grow tax-free. The government has instituted contribution limits, though, so do a little research before you commit.

One of the most important things to remember about improving and maintaining your finances is that you don’t have to do everything at once. A little work at a time can make a big difference in the long run.

Additional Resources

For more tips on maintaining strong financial skills, check out The Debtress blog.

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Posted in Finance 101: Secure Your Future | No Comments »

Wednesday, July 22nd, 2009

Ben Stein and Not-So-Free Credit Scores

The blogosphere has been all over Ben Stein, a financial guru, spokesperson and New York Times columnist, over his involvement with what appears to be a slightly shady "credit-score" site, FreeScore.com.

In advertisements, Stein shills for the group, which claim to offer you a free credit score. As several blogs point out:

  1. Your credit score doesn't tell the full story. While your credit score is important, you'll need more information if you want to take action to improve. In order to see what's bringing your credit score down, you'll need to see your credit report, which includes any claims against you.
  2. FreeScore.com isn't actually free. After giving you a "score" for free, they begin charging you monthly fees.

While some people may want to check their credit score monthly, in most cases you don't need this kind of scrutiny. In fact, simply requesting your credit score or credit report can affect your credit score.

You are entitled to a free annual credit report from the government. And the government makes one available at exactly one - and only one! - Web site: Annualcreditreport.com.

Don't be fooled by similar or imitator sites.

If you're in debt and trying to get out, you may become a target of predatory merchants. These groups are looking to make a quick buck off your troubles.

Avoid this by informing yourself, reading the fine print and sticking to reputable, trustworthy sites and sources.

Trying to repair your credit but can't keep up with the bills? Consider filing bankruptcy.

Filing bankruptcy doesn't have to ruin your credit for life. Learn more: Credit After Bankruptcy.

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Posted in Predatory Lending | 2 Comments »