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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, 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 »

Thursday, December 30th, 2010

Lawsuit Challenges Legality of Pre-Employment Credit Checks

The U.S. Equal Employment Opportunity Commission (EEOC) has filed a lawsuit alleging that the practice of conducting pre-hiring credit checks by Kaplan Higher Education Corporation, a company that provides test-preparation and post-secondary services, discriminates against certain classes of Americans and is therefore unlawful.

And, in case that’s a little too much legal information for your comfort level, here’s what that means and why it’s good news if you’re struggling with debt and/or recovering from bankruptcy.

So What’s the Deal with Pre-Hiring Credit Checks?

Here’s a look at the basics of employer-conducted credit checks.

  • What they are: As part of the hiring process, many employers (as many as 60 percent, according to some polls) have begun running credit checks on job applicants (in addition to conducting criminal background checks). In theory, these credit checks are valuable to employers because they divulge information about an applicant’s overall capabilities.
  • Why they’re controversial: While few people oppose the practice of running credit checks for applicants to positions that involve finance, many consumer advocates have spoken out against credit checks for applicants in non-financial fields. After all, if the current recession has taught us anything, it’s that poor credit can have little to do with a person’s responsibility, intelligence and job worthiness. Further, a few states have already made pre-employment credit checks illegal for non-finance jobs.
  • The current lawsuit: The EEOC’s charges against Kaplan include allegations that Kaplan’s practice of conducting credit checks before making hiring decisions constitutes to discrimination, because black and Latino Americans reportedly have statistically lower credit scores than white Americans.
  • The legal reasoning: According to a Credit.com piece on the issue, the case has teeth because it applies legal reasoning the EEOC used to show that criminal background checks also disproportionately affected black job applicants because blacks are more likely to be arrested than whites.
  • The reason it’s important: If the court rules that pre-employment credit checks lead to discriminatory hiring decisions, such credit checks could be outlawed in more states, potentially making employment easier to find for people who have struggled with debt problems.

Potential Outcomes of the Case

While the lawsuit is still in its early stages at this juncture, it has the potential to change the current state of pre-employment credit checks in the U.S. The court could, depending on the evidence presented, rule that pre-employment credit checks amount to discrimination in the hiring process.

This could be good news for people recovering from a bankruptcy filing or otherwise fighting debt burdens, because being denied employment for credit-related reasons can lead to a frustrating and debilitating debt cycle.

In the mean time, you may want to consult with a bankruptcy lawyer if you have been denied employment because of something in your credit report.

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Posted in The Law and Your Money, Your Credit Score | No Comments »

Wednesday, December 15th, 2010

Your Post-Bankruptcy To-Do List

If you’ve filed for bankruptcy, you’ve probably already heard a thing or two about how important it is to rebuild your credit. A recent post at CreditBloggers.com provides an excellent guide for how, precisely, a person can begin this daunting process.

Here’s a look at some of the key tips discussed on the post.

Know Where Your Credit Stands

If you haven’t already, now is the time to visit AnnualCreditReport.com and get a free credit report from each of the big three credit reporting bureaus (every American is entitled to one free credit report per year from each bureau). When you get the report:

  • Review all the information carefully: Accounts that were discharged in your bankruptcy filing should have a balance of zero dollars and indicate that the debt was forgiven in bankruptcy.
  • Look for mistakes: Check for any incorrectly reported information – this could include a report that you still owe money on an account that was discharged.
  • Contest the mistakes so they can be removed: If you notice any incorrectly reported information, contact the credit reporting bureau and identify the problem. You’ll probably be asked to send written documentation that you no longer owe the debt, but the process will be worth it because the less your credit report says you owe, the better off your credit will be.

Start to Make Credit Amends

Once you’ve figured out how your credit looks, it’s time to start engaging in the kind of behavior that will replenish your credit report with positive credit actions and thus make you look like a more attractive credit risk to potential future lenders.

One of the most important things to keep in mind while focusing on rebuilding your credit is to be wary of credit scams – they abound, and scammers often target people who have recently filed for bankruptcy. Here are some common scams to avoid:

  • Advance fee loan scams: This term covers a variety of scams, but for people trying to rebuild after bankruptcy, advance fee scams might involve someone posing as a lender and “guaranteeing” you a loan – if you agree to pay a fee in order to have that loan offered to you. If, in fact, you were able to get a loan and make regular payments on it, the loan would likely help you rebuild your credit. But if it’s an advance fee scam, what will likely happen is your loan will never materialize and the fee you pay will be gone forever.
  • Credit repair scams: These, too, are sadly common. They involve a company promising to “repair” or “wipe out” your credit record – even if the information on it is completely accurate. Of course, this is not legal to do and will end up costing you money that you’d be better off saving or putting toward real credit-building ventures.
  • New credit file scams: This variety of scam involves a company giving you a “new credit identity” – essentially, the company gives you an Employee Identification Number (EIN) to use with the credit bureaus in lieu of your Social Security Number. The claim is that you’d get to build credit from a clean slate, but the catch is that this is highly illegal and could lead to jail time and/or hefty fines. Plus, all the time you spend building your “new” credit identity is time in which your real credit identity just languishes.

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

Tuesday, December 7th, 2010

Can No-Limit Credit Cards Hurt Your Credit Score?

A recent article in the New York Times warns of the potential credit-score harm that a no-spending-limit credit card can have. And, while a credit card with no spending limit may seem like a product that would only be available to folks with strong credit, actually using one might backfire.

How Your Credit Score Works

In order to understand how no-spending-limit cards could hurt your credit score, it’s important to know how a credit score is calculated. Here’s a summary:

  • Payment history: Your record of on-time payments is one factor that determines your overall credit rating. Unsurprisingly, timely payments help improve your credit score and late or missed payments can hurt a score.
  • Available credit ratio: This refers to how much credit you’re currently using compared to how much you have at your disposal. As a general rule, using only a small percentage of your available credit is best for your credit score; maxing out credit cards or otherwise approaching the limits of what you can borrow is worse.
  • Age of accounts: Older accounts are considered “better” than newer ones because they demonstrate your long-term ability to handle credit.
  • Diversity of accounts: This factor refers to what kind of variety you have in your credit sources. It’s best to have credit from various sources (e.g. from a mortgage, a car loan, a student loan, and a credit card rather than just four credit cards). Theoretically, this demonstrates your ability to handle different kinds of credit.
  • Credit inquiries: Having lots of credit inquiries on your credit report can damage your score. This is because inquiries happen when consumers apply for a new loan or line of credit. A person trying to take out lots of new credit in a short time is seen as a high credit risk.

How No-Limit Cards Can Affect Your Score

No-limit credit cards play into the “available credit ratio” factor of the credit score. Depending on how your card issuer reports your account to the bureaus, one of two things can happen:

  • The card is reported as an “open account”: In this scenario, the card issuer reports the account as, essentially, one without a set limit. Because of this, the no-limit card shouldn’t have much of a negative impact on your credit score.
  • The card is reported as a “revolving account”: In this scenario, the card issuer must report an account limit, which usually defaults to your current balance or your highest balance within a certain time period. Naturally, this method of reporting would essentially show your card as "maxed out" at all times - even though you can always take on more debt - and put a significant dent in your credit score .

So how to decide whether a no-spending-limit card is for you? First of all, figure out how your issuer plans to report your account to the credit bureaus. And if it identifies the revolving account technique, you might want to drop that application form.

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Posted in Finance 101: Secure Your Future, Your Credit Score | 1 Comment »

Monday, May 17th, 2010

Consumer Borrowing, Retail & Median Home Prices Boost Economy

Government groups have published numbers for various economic indicators for March and April (such as unemployment and bankruptcy data), giving a little insight into how our nation’s economic situation is changing. Here’s a summary of a few of these telling figures.

Consumer Borrowing Up in March

Since February of 2009, consumer borrowing in the U.S. has reportedly been falling, as we collectively try to claw our finances out of the red.

But March 2010 showed a surprising increase in consumer borrowing—a $1.95 billion increase, according to sources, which far outstripped the $3.85 billion loss many experts expected.

The increase could be a fluke, but it could equally be a sign that American households are becoming more optimistic about spending money.

Retail Rises Slightly in April

Retail sales blossomed in March, thanks in part to an early Easter. April’s numbers represent smaller growth, but growth nonetheless:

  • March retail sales saw a 7.9 percent increase over sales in March of 2009.
  • April retail sales grew only 0.5 percent compared with those a year earlier; however, in April 2009, sales decreased 2.7 percent from the previous year.
  • Combined sales in March and April increased by 4.8 percent; January and February sales increased by only 3.3 and four percent.

While the slower growth in April may seem like cause for concern, many analysts are not worried, pointing to the fact that some growth occurred and that this year’s early Easter likely shifted people’s shopping patterns.

And, as one commentator in a recent New York Times article notes, economic recoveries don’t always happen linearly.

Median Home Prices

NPR reported this week that median home prices are on the rise in about 60 percent (91 out of 152) of the country’s cities surveyed.

This marks significant improvement from the final quarter of 2009, when only about 40 percent of median home prices were rising. Here’s a look at some of the hard numbers:

  • 36 percent of all first-quarter sales were foreclosures and other distressed properties;
  • Nationally, the median price was $166,100, about 0.7 percent below the median price in the first quarter of 2009;
  • Prices jumped significantly in Saginaw, MI; Akron, OH; and Cleveland, OH; and
  • Prices fell significantly in Orlando, FL; Ocala, FL; and Cumberland, MD.

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Posted in Economic News: How Are We Doing? | No Comments »

Saturday, February 27th, 2010

Shortcomings of the Credit CARD Act

This week saw the much-anticipated date (February 22) on which the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) took full effect. And, while it theoretically introduces many new consumer protections, it leaves plenty room for “creativity” from card issuers.

Center for Responsibility Lending Responds

The Center for Responsible Lending released a humorous (though cynical) animated video that highlights some of the areas not addressed by the new act—and illustrates ways in which credit card issuers have adapted their policies to maintain profit levels. These include:

  • Interest rate hikes: To compensate for lost revenue, some card issuers have already raised users’ interest rates. Even users in good standing may be “forcibly eligible” for this, as the video claims.
  • Over-limit fees: If you accidentally exceed your credit limit, your cardholder likely charges a fee. And, with new restrictions in place on other charges they can assess, you might see this fee jump.
  • Inactivity fees: On the other hand, if you use your card too infrequently, you might see a fee for that, as well, because that means you’re less profitable for the company.
  • Increased minimum payments: Another technique some card issuers are using is to up the minimum amount you can pay each month. This could be profitable for those who won’t be able to afford the increased payments and can be charged an under-payment fee.

The Regulation-Creativity Relationship

As the video illustrates with a graph, more consumer protection may seem like a good thing, but in practice, it often means that card issuers just get more “creative” with fees they charge reasons they charge them.

If you’re thinking now is a good time to get out of credit cards altogether, you’re not alone, but, before you cancel your cards, consider this:

  • Your credit score: Part of your credit score is based on age of accounts (older ones are better); another part is based on diversity of credit (so eliminating one type entirely would hurt you).
  • Your reentry: If, at some future time, you decide you want a credit card again, you’ll likely have to contend with uber-high interest rates (above 70 percent) because you won’t have any recent credit card history.

The video exaggerates a little (by mentioning, for example, a “legibility fee” for left-handed users), but by doing so draws attention to the more serious matter of how significantly your credit card could change.

Be sure to read all correspondence from your card issuer, even mailings that seem like junk: some of them might contain important details about the new rates and fees you may have to pay. These statements will also come in handy if mounting fees and interest force you into bankruptcy.

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Posted in Your Credit Score | No Comments »

Friday, October 2nd, 2009

New Restrictions from the Fed Limit Credit Card Companies

In a press release September 29th, the Federal Reserve introduced rules for implementing the Credit CARD Act of 2009. Specifically, the rules provide strategies for credit card issuers to follow in order to comply with the terms of the Credit Cardholders’ Bill of Rights, which was enacted earlier this year and takes full effect in 2010.

The rules outline appropriate actions for the following areas.

Proof of Income at Application

Currently, most credit card issuers do not require applicants to provide proof of income when they apply for cards. But the Credit CARD Act calls for proof that applicants will be able to make timely payments, so the Fed’s new rules require potential cardholders to show:

  • Income from salary, wages, bonuses, part-time work, military work, self-employment, tips, commissions and seasonal/irregular jobs
  • Income from investment dividends, interest, retirement benefits, public assistance, child support, alimony and other types of maintenance
  • Savings accounts and/or investments
  • Credit reports and/or credit scores

These rules address problems in the credit card industry that also manifested themselves in the subprime mortgage lending industry during the real estate boom that peaked in 2007.

Restrictions on Younger Applicants

Because credit card debt for college students has gotten attention as it has increased in recent years (the average 2008 graduate owed $3,173, according to Sallie Mae), the Fed’s proposed regulations address this issue as well.

Specifically, the Federal Reserve’s guidelines indicate that:

  • Credit card companies cannot lure college students with free items in exchange for filling out an application within 1,000 feet of a college campus.
  • Card issuers can still offer free items to college students, but they may not make receipt of these items contingent upon filling out an application.
  • Potential cardholders younger than 21 must provide proof of income or have a cosigner on their application. According to the Fed’s rules, the cosigner can be anyone 21 or older (broadened from the Credit CARD Act’s specification that this person must be a parent or guardian).

When It All Happens

  • The first changes from the new law took effect on August 20.
  • On February 22, 2010, most major elements of the law (including regulations on rate hikes and younger applicants) will take effect.
  • In August 2010, the remainder of the provisions will become effective.

If you're struggling with credit card debt, bankruptcy may be one way to eliminate excessive financial burden. Consider talking with a local attorney about your options, including filing bankruptcy.

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Posted in Your Credit Score | No Comments »

Thursday, September 24th, 2009

Does Your Address Affect Your Credit Limit?

A recent report from msnbc.com suggests that your state of residence could affect your borrowing capability. A California man reportedly received a letter in the mail from one of his creditors informing him that his credit limit had been cut – simply because he lived in California

Since the economic crisis began more than a year ago, Americans have seen their credit limits slashed for a variety of reasons – a company’s economic distress, job loss, late payments, filing bankruptcy – but basing limit cuts on where someone lives seems unnecessary.

How It Happens

If you’re like the man in the article, you’ll receive a letter from your creditor informing you that your limit has been lowered. A call to a customer service representative may reveal the reasons why. But there may be no warning signs.

Generally, creditors cut limits for a variety of reasons:

  • Missed or late payments: If you have a history of not getting payments in on time, your card issuer may limit your ability to charge.
  • Universal default: If you default on another (unrelated) line of credit, some card issuers may see this as a warning sign and cut your limit. (New credit laws will end this practice in February, 2010)
  • Approaching your limit: Ironically, if you begin to approach your credit limit, you may be viewed as a riskier consumer and therefore have your limit cut.
  • Your credit score: If your credit report or score reflects risky behavior (missed payments, increased interest rates, other lowered limits), card issuers may cut your limit.
  • Financial struggles: As the recent economic situation has illustrated, your limit may be cut simply because your card issuer wants to cut its risk.

The recently introduced Credit Cardholders’ Bill of Rights may end some kinds of credit limit lowering, but most of the provisions of that law won’t take effect until 2010.

Is My State at Risk?

To know whether or not to be on the lookout for residence-based credit limit changes, you may want to check out the findings of the Corporation for Enterprise Development, which recently released economic data on all fifty states.

The group’s website includes an interactive map that allows you to view economic indicators for your states and compare it to other states to get an idea of where you fall in the national rankings.

The Lesson: Read Your Mail

Whenever you get mail from a credit card issuer, be sure to read it carefully – it could have important information about your credit future or cause you to file bankruptcy!

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Sunday, September 6th, 2009

Back to Basics with the AmEx Charge Card

We’ve seen the old is new again trend in fashion, hair styles—even the VW bug made a comeback. So I guess no one should be surprised that American Express is making a bold push for its “new” charge card.

The Original Charge Card

Ever wondered where the idea of credit cards came from?

As the legend goes, a businessman named Frank McNamara took some clients out for a fancy dinner in 1949. At the end of the meal, he realized—to his great embarrassment—that he hadn’t brought enough cash to cover the check.

And so plastic cards were born.

Charge Card Vs. Credit Card

Though the terms are occasionally used interchangeably, charge cards and credit cards are actually two different things.

  • A credit card is a source of revolving credit, meaning that you pay for purchases over time and accrue interest on whatever balance you leave unpaid. You have the option of purchasing well beyond your current means and making payments gradually.
  • A charge card essentially allows you to take out very short-term loans, usually for a month. At the end of each month, you must pay your balance in full. Should you fail to pay in full, you could be heavily fined or have your card canceled.

In other words, charge cards put significant pressure on users to purchase only within their means, where credit cards do not.

American Express’ New Advertisements

Though charge cards have been around for decades, they’ve fallen out of popularity with the rise of credit cards. But now, what with financial responsibility all the rage, American Express has launched a new ad campaign touting the benefits of its charge card.

The ads, apparently already showing up in newspapers, encourage users to spend responsibly. They further suggest to Americans: Don’t take chances. Take charge.

Can Charge Cards Help You?

If you’re trying to build or rebuild your credit (after filing bankruptcy, for instance), charge cards have certain benefits:

  • You can’t spend more than you can repay
  • You’re forced to pay in full each month, which can help with budgeting
  • If you adhere to the rules, you won’t be charged interest
  • Positive payment action can help improve your credit

In short, charge cards may work well for you, but remember that American Express isn’t the only company that offers them. As with any major decision, be sure to research a variety of charge cards before signing up for one.

If you have problems with credit card debt, consider talking to a local attorney about bankruptcy.

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Posted in Your Credit Score | No Comments »

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