To put it in the simplest of words, getting a loan modification means that the lender is not getting as profitable of terms as the original agreement.  The lender almost always loses because they are reducing principal balances or interest rates.  Because of this fact alone, the lender will usually report something negative to your credit report.  So, most of the time, obtaining some sort of loan modification should affect a borrower’s scores because they are not meeting their original obligation.

There currently is no ‘code’, or specific way, for a lender to report a loan modification to the credit bureaus.  I’ve seen it report in the form of late payments, charge-offs, settled debts, or just as comments in the comment section.  If a lender reduces the principal amount of the loan, they sometimes report it as ‘paid for less than the balance owed’, which is not good. If the principal balance isn’t being reduced, and just the payment / rate is changing, this could have no effect on your credit since payments and rates are not part of the credit scoring model.

Some lenders won’t even consider a loan modification unless a consumer is 90 days late – and getting to that point definitely hurts your credit.

I’ve heard of larger lenders like Chase and Citi give their 3 month trial period, telling consumers that they’ll stop reporting to the credit bureaus during that period, and then afterwards reported that whole time as late payments….so you have to be careful.

Once many loan modifications are complete, the lenders will report the loan as ‘current – pays as agreed’. However, that will not remove any derogatory history that occurred before that.  If a borrower had late payments, etc., that will still report negatively on the credit report.  Also, the amount delinquent plays a role in the credit score too.  If someone went 90 days late before the modification, his or her credit will be hurt far more than a borrower who only went 30 days late.

My advice: Negotiate with your loan holder exactly how the modification will be reported to the credit bureaus.   Sometimes they’ll agree to keep it clean and then it won’t affect your credit score one bit.

What’s considered perfect today? Shoot for a 750 and that will get you the best deals on almost everything.  Better credit means more leverage. You’ve heard to term “it’s a buyer’s market.” You’ve also heard the term “It’s a seller’s market.” Well, for the first time in almost three years it is now a buyer’s market in the consumer credit environment. But, it’s a buyer’s market only if you have good enough credit to deserve the very attractive rates offered by almost all lenders. If you’ve been putting off paying down credit card debt now may be the time as paying down credit card debt is the fastest way to significantly improve your credit scores.

So work on getting that credit score up today!  If you want to do it yourself, check out our FREE e-book with tons of information.  If you need help, Wellness Credit is a credit repair company located in Colorado that serves credit needs nationwide.

Here’s a brief summary of what this Act does for cardholders, among others…

• Credit card companies cannot increase interest rates on existing credit card balances unless a customer is at least 60 days late.
• A guaranteed 21 day grace period on payments.
• 45 days advance notice of any interest rate increases.
• Tough rules around issuing credit cards to consumers who are under 21 years old.
• In the event of an interest rate increase, the credit card company must revert to the original rate after the customer makes six months of on-time payments.  Clearer disclosure of account terms before an account is opened.
• Restrictions on over limit fees. If a consumer has not “opted in” to allow a credit card issuer to approve a transaction that puts you in an over limit positions, they have to either decline the transaction or not charge you the over limit fee.
• No additional fees because of the method of payment.
• Billing statements must be mailed 21 days prior to the due date, and companies cannot charge a late fee if a payment is late due to a delay in processing.  Applications of payments above the minimum now have to be applied to the balance with the highest interest rate.
• A credit card company cannot raise interest rates in the first year of a customer relationship, and promotional interest rates must last at least six months.

So what should I do in 2010 in order to position myself in the best place?  You can find yourself almost completely exempt from the credit crunch by doing two things:

1. Getting out of credit card debt, and
2. Increasing your credit scores.

By getting yourself out of credit card debt it allows you to escape the abusive treatment by lenders. Remember, things like interest rate and minimum payment increases only matter if you carry a balance. Getting out of and staying out of credit card debt puts you in a very enviable position.
A second byproduct of getting out of credit card debt is the significant benefit to your credit scores. “Debt” makes up a whopping 30% of the points in your FICO® scores, which places it a close second behind whether or not you have negative information on your credit reports. And as many people have learned the hard way, the minimum score requirements to not only qualify but also qualify at the best interest rates have become more difficult to satisfy.

This means higher FICO scores equals approvals where in the past a higher FICO score meant an approval with the best rates.

http://articles.moneycentral.msn.com/Banking/YourCreditRating/weston-5-ways-to-kill-your-credit-scores.aspx?page=1

Essentially what happened was FICO simulated the impact of a variety of credit behaviors on FICO scores of both 680 and 780.  This is layed out in the below chart: 

Unfortunately, this information is not entirely correct.  It holds true for some cases, but it leaves out some very important points.  What FICO did not disclose and the article does not convey is that four of the five actions listed above will cause your credit file to be scored in a new scorecard!

FICO scores measure your credit file’s potential risk by scoring it using a unique algorithm specifically designed for your file type, called a scorecard. That means if you have a bankruptcy then you’re scored in a bankruptcy scorecard. If your credit file only has one or two accounts then it’s scored in what’s referred to as a thin file scorecard, and so forth and so on.

Point being, all of our credit files are not scored the same way AND not all are scored using the same FICO formula. Four of the five actions above are negative. And, when a clean file suddenly is hit with something negative it will go from essentially a “clean credit file” scorecard to a “derogatory file” scorecard. The result is a completely different measurement for EVERYTHING on your file. So adding a foreclosure or a settlement or a 30-day late payment or a bankruptcy to your credit file doesn’t “cost” it the points you see above. It causes everything on your file to have a new value so the score change can’t be attributed just to the negative item. The score change has to be attributed to the change in scorecards.

Point differences for the exact same action on the exact same FICO score can be anything but exactly the same. John Ulzheimer, one of the creators of the FICO score, re-interviewed FICO’s Public Affairs Director, Craig Watts. He was able to confirm from Watts that the examples in the FICO chart were “hypothetical” and “could vary significantly” from consumer to consumer. You can Ulzheimer’s his full article here.

http://www.credit.com/news/experts/2009-11-29/real-fico-score-damage-point-amounts-clarified.html

In summary, not all credit scores and scorecards are created equally!  Be careful what you read out there!

FICO scores are created to be as objective as possible.  According to the Equal Credit Opportunity Act, lenders cannot use this type of information when issuing credit.  The scores do not consider your race, color, religion, national origin, sex or marital status. Other factors not considered are your age, your salary, occupation, title, employer, date employed or employment history.

According to Fair Isaac Corporation, “independent research has shown that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.”

 1)   You have a new credit law, The Credit Card Accountability Responsibility and Disclosure Act of 2009, which partially became law in August 2009 and will completely become law in either February of 2010 or December 1, 2009 if Democrats have their way.

2)   You have a new FICO® score, FICO 08, which is now live and commercially available at all three of the credit reporting agencies. This new FICO score promises to do a better job of predicting future credit risk.

3)   You have millions of credit card holders who have seen their credit limits reduced, accounts closed, interest rates increased and/or their minimum payment requirements increased.

4)   In addition you have billions in lost home equity, which means no more safety net for those consumers who have excessive credit card debt.

5)   You have debt settlement companies aggressively marketing their services like vultures circling a dying carcass without fully disclosing the downside of possible lawsuits and severe credit damage to their customers who use their services.

6)   And finally, you have media and the undereducated that are spreading fallacies about the credit world, and are causing panic.

All in all, it’s a tough environment to survive and thrive in. Here are what I believe are the most important things that we consumers should be focused on over the next 24 months:

• Continue to Improve Your Credit Scores
  • Continue to make your payments on time regardless of what you read or hear – Debt settlement companies would have you believe that the best way to serve you is to suggest that you stop making your payment to your credit card issuers. The theory is that a lender who isn’t getting paid might be more flexible for a consumer who isn’t making their payments. I guess it’s the “I’m lucky to get something” hypothesis. The problem is that many credit card issuers will gladly work with their debtors and work out settlements or payment plans directly, without the intervention of debt settlement companies.
    This helps them to collect more than what they’d get from a 3rd party settlement company and it will also mean that you are paying them more of what you owe them, which is a good thing. It will also protect you from litigation should the credit card issuer grow tired of you avoiding them at a debt settlement company’s request.
  • Pay down your debt to no more than 10% - The new FICO score, FICO 08, is more sensitive about your revolving utilization percentage, which is the relationship between your balances and limits on credit card accounts. This means those of you who are highly utilized will suffer more as lenders continue to convert to this newer credit score, and many have already made the switch.If you can’t get your balances to less than 10% of your credit limits then get them as low as possible and your score will benefit. Why is this important? It’s simple. Lenders are being more critical about credit scores than in the past 36 months. A good score, say 700, two years ago would have gotten you approved at their best deal a lender had going. Today it will get you approved but not with the best terms. Shoot for 750 to ensure you of the best terms. And, be aware that mortgage lenders not only want 750 but they also want a larger down payment in many cases.

• More Cards Are Better, Shoot for Five –This is counter intuitive but we’re living in a bizarre credit world. Those of you who have less than five credit cards are in a bad position. A bad position because of a couple of reasons, which are:
  • You have fewer options if one of your credit card issuers changes your terms – Tens of millions of consumer have seen the terms of their credit card accounts changed adversely over the past 18 to 24 months. This means lower credit limits, higher rates, higher minimum payments and closed accounts in some cases. If you have only one or two cards then you leave yourself without options should one or more of your credit card issuers start misbehaving. And for those of you who think you’re immune from this because you have good FICO scores, think again. FICO released a study several months ago that showed that, at a 2 to 1 ratio, cardholders who saw their credit limits decreased had median FICO score of 770. Nobody is immune.With more cards you give yourself the option to move your business elsewhere and not lose the access to the capital that a credit card provides.
  • Think About Litigation If You Know You’re Right –
    Fair Debt Collection Practice Act (FDCPA) lawsuits are going to eclipse 8,500 this year, which will easily be a record. According to John Ulzheimer, a professional expert witness, “many consumer are finding that they can’t get legitimate errors corrected on their credit reports. The choice they have is to live with it for seven years or take someone to court and force them to listen.”Many collection agencies are finding it hard to avoid lawsuits despite a huge growth in outstanding delinquent receivables. Some are calling for a revamping if the FDCPA but any politician that chooses to reduce consumer protections at this time in history is asking to be voted out of office.

While a short sale may be a good move financially when you can’t find someone to buy your home for the full loan amount, it still has very serious credit implications. It is very likely that your credit scores will suffer greatly because of the short sale and believe it or not, may have the same implications as a foreclosure.

The reason that your scores will suffer is because of how your mortgage lender will report the loan to the credit reporting agencies.  Remember: Credit scores are smart…but they are only as smart as the information reported by your lenders.

The ONLY way that credit scores know that you’ve disposed of your mortgage via a short sale is if your mortgage lender chooses to report that to the credit bureaus.

There are two ways that the loan can be reported:

1. “Settlement accepted on this account.”
2. Or  “Settled for less than the full loan amount.”

The exact verbiage will vary by bureau but they all mean the same thing…that the loan was not paid in full according to the terms of the original loan agreement.  Short sales and deeds-in-lieu of foreclosure are all “not paid as agreed” accounts, and considered the same by the scoring model.  Scoring models will consider short sales or deeds in lieu to be a serious negative item, and in fact, will come out just as bad for your credit or FICO scores as a foreclosure.

To make a long story short:  short selling, deed in lieu, and foreclosure all affect your credit score the same way.

If you are in a situation like this, contact us at Wellness Credit to see what credit solutions we have for you.

The fact is, income is not a factor in determining your credit scores. In all actuality, it’s impossible to use income in the credit scoring calculation. This is because the information used to determine your credit scores is derived solely from the information contained in your credit reports. It’s also important to understand that just because it can go into your score doesn’t mean that it actually does go into them. The information must be predictive, legal, and it must be readily available on your credit reports.

Let’s take a quick look at exactly what makes up your credit reports. All credit reports can be divided into the following sections:

• Personal Identifying Information – this section includes your name, address, social security number and date of birth. It can also include employment information, previous addresses and other known aliases. This information is reported by your creditors and comes directly from the applications that you submitted when you applied for credit with them.
• Account Information – this section includes all of your credit accounts – which are also commonly referred to as trade lines. This is the bulk of the information that makes up your credit report and contains the type of account, the date the account was opened, the credit limit on your revolving accounts or the loan amount on installment accounts, the balance and your payment history – all of which are used in determining your credit score.
• Public Records – this section includes bankruptcies, judgments and liens. There are many other types of public records but these are the only ones that are reported in your credit report and therefore, are the only ones that are used in the credit score calculation. A word of advice: public records can never be good – they are always bad so you should avoid them at all costs.
• Collections – this section includes collection accounts that are reported by collection agencies. As with public records, collections are never good and they are most certainly used in the credit scoring calculation.
• Inquiries – this is a listing of anyone that has accessed your credit report and on what date. Inquiries remain in your credit report for two years and occur whenever you apply for credit. These hard inquiries are included in the credit scoring calculation but only those that have occurred in the last 12 months. You may also see promotional or soft inquiries, which occur whenever a lender orders your report in order to make a pre-approved offer of credit in the mail. These types of inquiries are not counted in the credit score calculation.

Now that we know what’s included in your credit reports, let’s go over what’s NOT included. Your race, your salary and your level of education – all of these things are not included in your credit reports. As such, none of these things can be used in the credit scoring calculation. Some people would argue that your salary, race, and level of education have an indirect impact on your credit scores because they play a part in how you establish and manage credit. This is probably true, but the fact remains the same. Race, salary, and level of education are not on your credit reports and therefore do not have any overt impact on your credit scores.

The bottom line is that your credit score only looks at information that is contained in your credit reports. And guess what? Your income is NOT included in your credit reports. You could be the world’s richest person but if you don’t manage your credit wisely, you could also have one of the world’s lowest credit scores.

The lawsuit filed by FICO against Experian, TransUnion, and VantageScore Solutions has been partially dismissed, but will likely continue later on this year. In addition, FICO announced that FICO 08, its most recent credit score will be available in all three of the credit reporting agencies in August 2009! This means that Experian has agreed to finally install and provide credit scores (several months after Equifax and TransUnion have.)

How is FICO 08 different than the old FICO?

1. Consumers who have a large amount of credit card debt or are highly utilized will likely see lower FICO 08 scores. This is because of the added importance of credit card debt built within the model.
2. Authorized Users:  Adding yourself onto the credit card of another person in an attempt to “piggyback” your way to a better score will be impossible sooner rather than later.
3. Benefits! A benefit to consumers is FICO 08’s logic, which ignores very low dollar collections, commonly referred to as nuisance collections. Consumers who are seeing their scores lowered by collections with an original amount less than $100 will see immediate benefit with FICO 08.

Now it’s just a matter of time before banks and lenders accept and start implementing the new models….it looks like momentum is building and hopefully won’t take too long.