Wednesday, March 16, 2005

Are You A Credit Fiasco Waiting to Happen?

How TRUSTING Are You? How well do you know the people who might have temporary access to your filing cabinet, check book or wallet? Now think: there's the guy who installed new cable outlets...your cleaning lady... the neighbor who feeds your cat when your away. Like most of us, you are probably pretty trusting until the precise moment you are either robbed or betrayed. Believe me, I've been there. Once the damage is done it is very costly and time consuming to have it undone.

The only way to protect yourself from identity theft is to keep your personal details behind a solid unrelenting wall of common sense. Don't carry your social security card in your wallet and DO have a locked filing cabinet or home safe where you store your check books, passport, un-used credit cards, bank statements, W-2's, pay stubs and anything with your social security number or account numbers that could be used to impersonate you. Sad but true--a very high percentage of people who use your good name are known personal or business acquaintances who had just enough information to forge a credit card or bank application behind your back. Once these folk are using your name you have two ways of finding out: 1. Checking your credit report or 2. The collector's dogs chase you down. By then things will look bad. Real bad.

And another thing: all those credit card companies who keep sending you 'pre-approved' credit applications are on fishing expeditions. They have retrieved your name and address from Public Tax Records and other databases. Shred any applications you receive from such sources.

If you are shopping for a mortgage, do so with trusted banks or personal brokers and confine your 'shopping' or application process to a 2 week period to limit the 'hits' on your credit score.

The NEVER Rules:
NEVER loan a credit card to a friend.
NEVER leave your wallet in your office when you go to a meeting.
NEVER shop on an unsecured online site.
NEVER let your passwords be known to anyone for anything.
NEVER email your passwords or account numbers (faxes are safe).
NEVER respond to a bank online request for your passwords or identity information.
NEVER co-sign a note with anyone for anything.
NEVER open a joint bank account with a friend or loved one.
NEVER give out your Social Security Number to a lender who doesn't ask you to sign a an Authorization form (informing you of your rights).
NEVER shop online for a mortgage if you value your credit score (online lender 'hits' will lower your score because they farm out your application to multiple lenders at once).
NEVER be late on your mortgage payment (banks will work with prior notice, not excuses).
NEVER be late on your credit card or other revolving account payments.
NEVER rack up your credit card balances (over 40% balance) before you apply for a mortgage.
NEVER apply for any new credit cards 90 days before you apply for a mortgage.
NEVER close credit card accounts even if you aren't using them (just lock them up).

NEVER open new credit accounts while waiting for your mortgage to close!

NEVER EVER buy a car or major applicance while waiting for your mortgage to close!

ALWAYS:
Always keep your PIN numbers, Social Security Card and Credit Cards safe. I will add to the Never list as they arise. Your additions and comments welcome. Every day somebody presents a situation inspiring another NEVER rule.

Wishing you every credit sanity
Loannetter

Credit Reports Defined

Your Credit Report Is A Record of Your Financial Behavior.
These records deonote patterns established over your borrowing lifetime You may be surprised to see records of employment and mortgages or credit card accounts over twenty years ago still reporting. Three national credit reporting bureaus maintain these records. These reporting bureaus: are Equifax, Experian, and Trans Union.

Credit reports (also known as your credit file, credit profile, or credit history) contain: Your identification, including your name, telephone number, and address, as well as your Social Security Number, birth date, and employer. (The information usually includes previous addresses and employers too.)

Your credit history, which details how you pay your bills to banks, credit unions, finance companies, mortgage companies, and retail stores. Also included are any existing public records, such as bankruptcies, judgments, and tax liens. Inquiries, or authorized credit checks by companies receiving your applications for credit, or your name for the purpose of offering you credit (usually within a 90 day period) are also reported and can affect your score negatively. Usually 1 to 3 points per 'hit'.

Your business accounts, medical history, purchases paid by cash or check, as well as your gender, national origin, race, and religion are not contained in a credit report.

How Credit Scores Work & What Lenders Look For:
When you apply for loans, credit cards, and/or leases, issuers review your credit report while evaluating your application, as well as your credit score(s). Today, some employers review the credit reports of applicants. Your credit also may be checked to qualify you for overdraft protection as well as to determine your ATM limit. Also, most insurance companies check their customer’s credit data when considering applicants or even setting premiums. The score information they receive helps establish the liklihood of claims filed for financial risk categories.

The information on your credit report detailing each of your accounts is sent to the credit bureaus by lenders. Also, information is obtained from public records, or provided by consumers themselves. Information usually remains on credit reports for seven to 10 years from the date the account is paid and/or closed, except for adverse information. Adverse information usually is recorded for seven years and generally includes late payments and other delinquencies as well as any civil judgments and bankruptcies. Foreclosures stay on you report 10 years but all these things have less and less effect as time goes on. Unsatisfied tax liens may remain on credit reports indefinitely and can be real show stoppers!

Credit Score Rating System: A Numbers Game
The FICO Score system was first invented by the Fair Issac Corporation. Lenders pull your credit report when taking a loan application. You should receive a copy of your report with your FICO Score and review from your lender or mortgage broker. Not all banks like to give you your report...I don't personally understand this approach to withholding information that you have every right to see. You can go to http://www.annualcreditreport.com/ and order one free report every year.

Unfortunately, Free Credit Reports now offered to every US citizen (once a year) do not list you FICO Score. While the information provided in free reports is useful to verify that everything on your report is accurate, you still need to know your score to approach negotiating a rate for a mortgage or credit card. Your FICO Score puts you in a paticular 'risk category' and the better your score, the better interest rate you will be offered. It's the holy grail of credit risk. It's a great idea to order one Bureau (of the three) and see how that looks first. If anything is amiss you can dispute it...and then check again in a month or so with a 2nd request.

Your credit score is a numeric indication of how likely you are to repay debts such as loans or lines of credit. Credit scores also are designed to indicate your creditworthiness in comparison with other consumers. Credit scores are based on the data in your credit report and are generated by computers using artificial intelligence. The scoreing range is from 300 to 900. Because there are 3 bureaus, you will have 3 FICO Scores. The middle number is called your FICO Mid Score and that is the number most widely used to determine your risk category. Some lenders prefer a particular bureau's score and you can hope it's your higher score!

Many types of credit scores are used, including custom scores or Alternative Credit reporting for people who have not maintained credit accounts. In addition, each lender requires different score minimums for application evaluation and approval. Also, lenders may review several credit score reports before making a final decision during the course of an application. Underwriters have their preferred sources that report up to the minute information.

Because no one score is the definitive credit score, 720 and above is generally considered a high score, while scores below 600 are considered low. Still, cases always vary by lender. And, because so many different scoring methods are used, a score of 750 from one source may not indicate the same as a score of 750 from another. 700 seems to be a magic number for self employed people and 680 will suffice if you can document full employment for two years.

It seems frustrating, but the difference of one point..say 679 instead of 680..could mean the difference in a favorable interest rate. You may need to take some quick steps to improve your score! (Paying down a credit card under 30% balance is a good rule of thumb to improve your score within 30 days.) When you apply for a loan, your broker or banker should review any issues for you in person or over the phone after reviewing your Credit Report. They take into account other factors (including your current debt-to-income ratio) when you apply for a specific loan. Your broker or bank is legally required to give you a copy of your complete report and they should be able to explain the codes for you.


Lenders always obtain the most recent score whenever an applicant applies for credit because each person’s score changes every time information is added (reported) to credit bureau files. For example, your credit score may change when you pay a credit card bill, make a loan payment, or open a new line of credit.

Credit scoring is based on many factors that may include:
* Payment history
* Amount of available credit
* Amount of credit currently being used
* Length of credit history
* Recent requests for credit

Under the Equal Credit Opportunity Act, credit scoring may not use gender, martial status, national origin, race, or religion as factors.

Of course, lenders usually do not base credit decisions solely on credit scores. Lenders usually make other considerations, such as income and length of employment at current employer, when evaluating applications. Also, many consumers do not realize that achieving the best credit scores may take 20 to 30 years because lenders consider older credit histories optimal.

ALWAYS:
Become informed about the status of your business and personal partners credit scores before entering into any joint ventures. When you marry or enter into joint credit accounts such as bank or credit cards, the credit scores of your partner or spouse will automatically impact each other, often in a negative way if one party has lower scores.

You can assist another person in raising their score if they have minimal or no credit history. Tread carefully here! The reverse of the desired result can happen! Avoid this by keeping your finances appropriately separate. Discuss your concerns with your mortgage planner or banker before applying for joint credit of any kind. These days, the more time you have the better!

Wishing you every credit sanity,
Loannetter

©2005 susan templeton loannetter

Good Credit Scores=Good Behavior

Remember, your credit scores are based on your financial behavior, so good behavior is key to maintaining good credit scores as well as improving your current position.

The List below is a quick review of how responsible borrowers behave.

  1. Always pay all of your bills on time. This proves your reliability and demonstrates consistent behavior and responsibility.
  2. Check your credit reports regularly and correct inaccuracies. Verify that the information reported about you is correct. Dispute anything incorrect with each of the credit bureaus immediately. Some disputes may require contact with financial institutions too. While it is best to document your disputes in writing, to all three bureaus simultaneously. Some bureaus provide customer service by telephone with instructions on how to register for a fraud alert.
  3. Monitor your accounts closely for signs of identity theft. Simply review each statement and verify that all bills are authorized, accurate, and your own. Guard PINs and account numbers, and always report unauthorized activity immediately. It is a good idea to maintain a list of your account numbers and their corresponding toll-free, 24-hour customer service numbers in a handy, secure place separate from of your wallet in case it is stolen or lost.
  4. Control your debt. Generally speaking, keep balances below 30% percent of available credit lines.
  5. Manage your available Credit. Lenders may conclude that applicants with multiple accounts, all with high credit limits, may have too much access to excessive unused credit that could result in the sudden or gradual accumulation of too much debt.
  6. Don’t try to change a score overnight by suddenly closing or opening accounts. Scores are based on complex statistical models that could make such actions backfire.
  7. Avoid excessive inquiries. Inquires indicate applicants are submitting applications, generating multiple requests for their credit report. Creditors may view too many inquiries as a sign of financial trouble.
NOTE: Credit Repair takes longer than creating the damage. It's also a lot less fun.

ALSO:
Don't shop for a mortgage lender for 3 months and then be surprised to see you have a drop in your FICO score of 40 points or more. I've seen it happen. What online lenders don't tell you is that they 'job out' your loan application to a number of brokers and every bank they send it to also pulls a report so the number of 'hits' increases exponentially.

REFINANCE HINT: If you have taken out a short term loan, say a 1/1 ARM just to get into your home and build a better credit score with the intention to refinance, be extremely careful that you behave ultra responsibly about all your credit behavior. Don't max out your credit cards during the month (stay under 30% of available balance) and undo what your good mortgage payment history is doing for you. Also, keep your credit spread across all your cards so the balances all below 30% if possible. Otherwise, you will be stuck in the world of higher interest rates for a very long time.

OLD WIVES TALE:
When you close credit cards...a popular misconception to improve your score...it actually LOWERS your available credit limit and your score.

Wishing you every credit sanity. Loannetter

©2005 susan templeton loannetter

HALT Identity Theft!

Most people find out they have been the victims of Identity Theft too late to prevent it. Watch your bank and credit card accounts every month for suspicious charges. Unexplained withdrawals should be reported to your bank immediately and investigated!


Early Signs:
Have you noticed any small suspicious charges on credit cards or bank accounts? This is an early warning sign of impending doom. If you have lost mail, bank statements, pay stubs, a wallet, credit card or check book--a thief or con may sell or hold them to use later.

If you suspect you have been exposed to Credit Fraud or Identity Theft, you should notify all three Credit Reporting Bureaus (details below) to put an alert on your file--even if you only suspect a person who had access to your personal details. Unfortunately, with the increase in online purchases, there is a substantial increase in intercepted information by hackers who put spyware onto your computer designed to seek out credit card and bank account numbers. Registering a Fraud Alert with the credit bureaus is done by phone (numbers below). The service is free.

Once your report is flagged, the Credit Bureaus will contact you before allowing a card or credit account to be issued in your name. I understand this can stay in place indefinitely--but it's a good idea to check in or repeat it every 90 days if you have ongoing issues. Unfortunately, once someone has your details they may 'hit' your accounts for small amounts to see if you notice for a few months before making major charges. It's always a good idea to report any suspicious charges to you bank and immediately close accounts that have been affected.

Federal Trade Commission Site:
Check out the FTC's excellent online articles about Identity Theft. You can also report a perpetrator of fraud on their system. Such a person will find it hard to work in the finance industry if they have been reported....and unfortunately some of them do hide out in legitimate organizations to gain access to victims:
http://www.ftc.gov/bcp/conline/pubs/credit/idtheft.htm


To put a Fraud Alert on your Credit Report call all 3 Bureaus:

Equifax Information Services: 800 685 1111
Trans Union Customer Relations: 800 888 4213
Experian: 888 397 3742

If you have experienced Identity Theft, read my blog titled Reporting Fraud and follow each step. It is up to individual consumers to report and correct their credit. The process is time consuming with long term benefits and it's free if you do it yourself. Beware of Credit Repair and Credit Counselling firms that offer to do this for you for a big fat fee. Their actions can have the reverse effect. If you choose that route, do check out the firm with the Better Business Bureau. Unless you problem is related to your own bad habits, it's far better to handle this yourself.

Wishing you every credit sanity! Loannetter
©2005 susan templeton

To Bankrupt Or Not To Bankrupt?

Bankruptcy is a very important legal option open to U.S. Citizens who have serious financial problems from which they cannot reasonably recover given their current circumstances. There are two types open to individuals: Chapter 7, sometimes know as a 'straight' or 'liquidation' bankruptcy and Chapter 13, also called 'wage earner' or 'repayment plans'.

You can get a lot of bankruptcy information from your State Bar Association, some of whom publish informative articles online. Office supply stores also carry Do It Yourself Bankruptcy Kits. You have the right to represent yourself in court, however the complications of this area of law elude most of we mere mortals. It helps to read up on the implications for you personally before you make a decision that could affect the rest of your credit lifetime.

Credit Counseling: A Word of Warning:
There are a number of 'credit counseling agencies' and 'debt elimination firms' that may essentially allow you to lapse into a form of bankruptcy that does more harm than good to your credit. Several of these firms are being investigated for fraud and misinformation. They have been known to approach unsuspecting people with good credit scores and use scare tactics to take over their payment plans, thereby ruining their credit.

It pays to become informed of your options and while I don't personally recommend any firms, there are some very good sources for credit counseling. If you simply need help deciding which way to go...the best place to start would be with a good Certified Public Accountant! Lenders really don't like credit counselling agencies and will often treat this as a bankruptcy. They will insist that you are out of the counselling period before funding a mortgage. Not all credit counsellors register as a creditor on your credit report...so ask if they do before you commit to working with them. Those that don't may be worth a try!

Seeking An Attorney's Advice:
Fortunately, a number of law firms specialize in bankruptcy for a flat fee and this is a popular option. Be sure to ask around--a local attorney who doesn't handle bankruptcies should know who has a good reputation in this field. Many offer a free first visit to discuss your options. I always suggest getting more than one opinion on a matter that is this important to your financial future. The difference in a thorough BK lawyer and a lackadaisical one will be reflected in the final result and could impact your future credit report. I have seen evidence of poor BK management with charges still reporting on a client's credit report that should have been removed in the BK process.

Every person and situation is different so your filing should be carefully considered. An attorney can advise you of the long term implications and prepare the necessary documents. They will also accompany you to court and help you make informed decisions.It's also very important that you feel comfortable with the lawyer you choose. Interview more than one! The emotional side of bankruptcy is hard enough so you deserve someone you feel is empathetic to your personal situation.

Chapter 7 is the option most people chose when their resources are not sufficient to cover their debts and attempts to manage them further would be fruitless. There are many rules regarding who can claim Chapter 7 and how.


Chapter 13 is essentially a court managed re-payment system. Chapter 13 gives an individual a specific time frame in which to make good on debts, to dispute debts and make efforts to repay those they feel are justified. This procedure stops creditors from continuing to rack up interest charges and legal fees as time progresses.

2005 News: The U.S. Congress voted in 2005 to enforce a 'means test' on individuals who claim bankruptcy to make the process harder for individuals to escape responsiblity for their valid debts. Any responsible lawyer will advise you on which option makes the most sense given your current economic situation. Most will advise that you work with a CPA (certified public accountant) before taking on your case. The Federal Bankruptcy laws changes have made it much more difficult to 'write off' your debts.

Even though you cannot claim bankruptcy for another 7 years, some people use this as an unfortunate form of 'financial planning' . One reason given for the motion before congress is to prevent gamblers, drug dealers and other criminals from avoiding responsibility for paying their court fines and legal fees. Of course, lawyers could choose themselves to be more stringent in whom they represent--but our system of rules seems to require rule enforcers.

A clean slate: Whatever decision you make, there is a point when it is time to draw the line and stop suffering from past financial mistakes or circumstances beyond your control. You deserve the opportunity to clear the slate in the manner that is most suitable to your circumstances. I have heard people say this is a very freeing experience after feeling overwhelmed for years. You can finally answer your phone without fearing who might be on the other end demanding payment.

Creditors View: Once you have satisfied a bankruptcy proceeding, you may be surprised to find creditors knocking on your door offering new credit cards! They know you can't claim bankruptcy for another seven years and are willing to risk getting you on the hook again for high interest rates. Banks that specialize in Bankruptcy Buyouts (for Chapter 13) and One Day out of Bankruptcy Loans offer some reasonable options to help you get back on your feet. Work with a trusted broker or lender who can explain and research your options.

Try to avoid Home Foreclosure if at all possible. A Foreclosure will most negatively impact your FICO Score and your ability to get another mortgage at a decent rate for at least two or more years. Most conventional lenders won't fund a Bankruptcy client for 7 years and a Foreclosure client for 10 years. Still, plenty of lenders are willing to give you a chance.

Just don't go down the same path again. Unfortunately, the truth behind the stigma of bankruptcy is that 50% of people who claim bankruptcy once do so again. The biggest question you must ask yourself is: "Have you learned sufficiently from the humbling experience of claiming bankruptcy to never go there again?" Or perhaps more aptly: "Can you forgive yourself for being human?" Hopefully, both answers are 'YES!"

Wishing you every credit sanity! Loannetter

© 2005 susan templeton loannetter