More data collected from more sources is used
in unexpected ways.
Credit scores can jump up and bite your clients in ways you'd think were almost impossible.
If your client fails to pay parking tickets, a library fine or bills for other municipal services, for example, he or she may see a hike in loan rates or credit card rates. They also could wind up as one factor in your client's rising property casualty premium rates.
More towns are giving unpaid parking tickets to collections-a factor that can lower credit scores. So, incidentally, is the IRS.
More loan contracts allow for rate hikes if a client's credit situation changes.
More people are using credit scores. Property casualty insurers, employers, landlords and cell phone providers often consider credit scores. Utility companies and telephone companies may use them to determine whether to require upfront deposits.
What if you have clients who don't have credit scores because they are immigrants, young adults, widows, widowers, recent divorcees or young adults? Certain companies still can estimate or predict a person's credit score. But your client may need to shop around.
"The biggest growth area for these scores is for one-quarter of the population of adults who don't have a credit history," says Fair Isaac Corp. spokesman Craig Watts. That company's "expansion" credit score helps lenders assess those with no credit. It examines such alternative factors as rent payment history, utility payments and record club memberships.
TransUnion, in Chicago, is most heavily moving into "predictive" scores, says Chet Wiermanski, TransUnion vice president for analytical services. These examine changes in the consumer credit file over short periods that may signal an intent to obtain additional financial services.
So don't be surprised if a client who has been shifting large balances among credit cards, suddenly gets barraged with offers of low interest rates on home equity credit lines.
The growing importance of credit scores, however, doesn't bode well for those with a hard time managing liabilities. The growing variety of credit scores also may be very confusing.
"Many creditors will buy multiple scores," notes Maxine Sweet, vice president for public education of Experian in Costa Mesa, Calif. "They may buy a generic score and also an auto loan score." Large lenders and insurers often use custom scores.
Moreover, different scoring models weigh data differently. In a credit risk FICO score, Watts says, payment history accounts for 35% of the FICO score. On the insurance risk side, it counts for 40% of the insurance risk score. "An insurance risk score is looking for stability," he explains. "A credit risk score is looking for willingness to repay."
The three major national credit bureaus say their new "VantageScore" should help make life easier for everyone trying to understand credit scores. Their score measures credit risk in easy-to-understand lettered grades.
But how simple it will be remains a question. Fair Isaac's Watts says his company introduced a similar model in 1999, but lenders weren't interested. Letter grades could mislead clients, he adds. A client with a top "A" score easily could be rejected by a lender seeking income from credit card late payment fees.
Bottom line: Whenever your clients check a credit score, they need to keep in mind there are numerous scoring models and to know the possible statistical ranges and exactly what they mean. This can vary based on product, lender and the company issuing them.
Generally, credit scores range from, say, 200, to as much as 1,000. Generally, a bad score is below 620.
The most widely used Fair Isaac "FICO" score ranges from 300 to 850. A slight difference in its credit score can mean thousands of dollars out of your clients' pockets. For example, say your client recently applied for a $216,000, 30-year fixed-rate mortgage. A great FICO score of 760 to 850 earns a low 6.12% interest rate. A score of 620 to 639 would snag 7.71%. Difference in monthly payment: $230.
About all your client can do to improve a score is obtain credit reports, upon which the credit score is based. Correct inaccuracies and make certain credit bureaus obey federal rules on how long bad information may stay on a credit report. Clients must be sure outdated bad information is removed by writing to the consumer reporting agencies with documentation. Those are:
Equifax: 800-685-1111; www.equifax.com
Experian: 888-397-3742; www.experian.com
TransUnion: 800-916-8800; www.transunion.com
Clients are entitled to one free copy of a credit report annually from each of those credit bureaus. But they can only get them by visiting www.annualcreditreport.com, calling 1-877-322-8228 or writing to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, Ga., 30348-5281.
Accurate negative information may stay on a client's credit report for seven years. Bankruptcy information may be reported for ten years, and, in certain cases, longer.
Information about an unpaid judgment typically can be reported for at least seven years. There's no time limit for:
Information on criminal convictions.
Information reported in response to an application for a job that pays more than $75,000 annually.
Information reported because you've applied for more than $150,000 worth of life insurance or credit.
The most important factors in determining a credit score generally are whether a client pays bills on time and keeps payments current.
Clients are entitled to obtain credit scores from the consumer reporting agencies, upon request, but can expect to pay $4 to $8 for a score. The Federal Trade Commission says it may cap those fees if they get out of hand.
Historically, lenders have kept credit scores under wraps. However, today lenders that use a credit score to underwrite a loan on a one-to-four family home usually must disclose it to the applicant. Whether there can be a separate fee for it remains a question.
"Based on our experience, credit bureaus charge a single fee for producing a document that includes both a credit score and a credit report," says FDIC spokesman Frank Gresock. If there's a separate charge, he notes, "the fee for the credit score (under the Real Estate Settlement Procedures Act) can only be enough to cover the lender's cost to obtain it."
Trying to build or rebuild a client's credit? Closing accounts often won't help. In fact, says Experian's Sweet, fewer accounts may hurt. Better, she says, to have more accounts with lower balances. The old advice that clients keep only one or two credit cards actually could hurt a score.
Your client might:
Search for a lender that uses a credit score that evaluates other factors besides credit history.
Apply to a bank or credit union for a secured card.
Have a loan cosigned.
Apply for revolving credit. A retail credit card may prove easier to get than a bank card.
Warning: Credit reporting is completely voluntary by lenders. So be sure your client confirms in advance that on-time payments will be reported to the credit bureaus. Then, get a copy of the credit report to make sure it does.
What if a client can't get a mistake corrected on a credit report? Federal Trade Commission staff attorney Christopher Keller suggests:
Under the Fair Credit Reporting Act, a client can write a statement of up to 100 words stating reasons for disputing the accuracy or completeness of a credit report item. Submit it to the credit bureau. It must be added at no charge.
When applying for a loan, a client may request in writing that the lender consider information indicating that the credit history being considered is inaccurate. "Regulation B," which implements the Equal Credit Opportunity Act, requires a creditor to consider it.
Your client can sue under the Fair Credit Reporting Act for negligent or willful noncompliance. Besides damages, a successful suit can net a victim court costs and attorney fees.
Your client can resubmit a dispute to the consumer reporting agency, but only if the client has additional documentation.
Consider contacting the furnisher of the incorrect information with documentation, Keller suggests. Obtain a letter of correction, which then can be submitted to the credit reporting agency.
Gail Liberman, who has Florida real estate and mortgage broker licenses, is coauthor of several books, including Rags to Retirement (Alpha Books).