First off, utilization 101…Mark has a credit card with a $1,000 credit limit. That is, his credit reports show a $1,000 credit limit. His current balance as reported on his credit reports is $500. The utilization of that card is 50% because the balance ($500) divided by the credit limit ($1,000) equals .50 or 50%. Now we can get started.

It’s important to note that the figures I use for my next few examples HAVE to be reported on your credit reports to make these math problems accurate. That’s the bottom line. If it’s not on our credit report then all bets are off.

Line Item Utilization – This is the same calculation as described above for Mark but done for every single open credit card or credit card with a balance. So if you have 10 open credit cards, and open in this examples means it’s not closed, then you’ll have 10 different line item measurements. This is important because the number of highly utilized credit cards on your credit report is a consideration in most credit and insurance risk models.

Aggregate Utilization – This is the same calculation as described above for Mark with one huge difference. For this calculation we are going to combine all of the open credit cards on a credit report to do the math. For example, if I have two credit cards and each has a $5,000 balance and a $10,000 credit limit then I have $10,000 in aggregate balances and $20,000 in aggregate credit limits. Divide $10,000 by $20,000 and you again get .50 or 50%. This measurement is important because the higher utilization the percentage the more risky you are to lenders and insurance companies and the less attractive their terms will be.

High Balance in Lieu of Credit Limits – In some cases your credit cards will not have a credit limit reported. (Note: I’m not talking about charge cards. I’m talking about revolving credit cards that are not reporting a credit limit). In those cases most credit scoring models will look for the historical highest balance, which is typically reported by the credit bureaus, and use that figure in lieu of the missing credit limit. So, if I have a credit card with a $10,000 credit limit but it’s not being reported then the credit score will look for my highest balance figure. If it finds, for example, that your highest historical balance was $7,500 then that’s the figure it will use in lieu of the missing $10,000. So, with my same $5,000 balance and a $7,500 “pseudo limit” I appear to be 67% utilized on that card instead of the true 50%. This is a line item measurement and an aggregate measurement, meaning it is the same regardless of which is being calculated. This practice of withholding credit limits got the credit bureaus sued in a class action case several years ago because Capital One was not reporting credit limits. The case was dismissed because, in my opinion, the court simply couldn’t grasp the details of the problem and the breadth of its impact. Shortly after the lawsuit was filed Capital One began reporting credit limits for the first time in their existence. So, some good did come out of the case.

Missing High Balance and Missing Credit Limit – Now this is a tricky one. In some examples a credit card account will be missing the credit limit and the highest balance. Most credit scoring systems will simply ignore the account for the above referenced utilization calculations because, well, you have no limit to include in the math. This can help the consumer’s scores and it can also hurt the consumer’s scores. For example, if you have a very high balance on that particular credit card but no limit or high credit then that balance can’t increase your aggregate utilization because it’s ignored for that math. It can hurt your score in the example where you have a very low balance relative to the credit limit, which isn’t reported because you don’t get any value of the large difference between the balance and the limit, which is called open-to-buy.

Shadow Limits – A shadow limit isn’t a credit card that’s been left under a leafy tree. Instead it’s the unpublished maximum preset spending limit that all credit cards have, even charge cards that are marketed as not having a preset spending limit. That would suggest that you could use your charge card to buy a $100,000 Mercedes, if the dealership took plastic for such a purchase. And while some very wealthy individuals might be given that amount of shopping power, it’s atypical. The shadow limit is not reported to the credit bureaus so the high balance is the next best figure to use when calculating utilization. And if it’s a charge card the newer FICO scores will not count it in utilization at all. There are, however, revolving credit cards that are also marketed as not having a preset spending limit and, thus, a shadow limit.

The moral of this story is simple; you’d like to do business with credit card issuers who do report the credit limit to all three credit bureaus. It give you the ability to strategically use that card so that you never exceed some self applied utilization percentage. For example, if you know your credit card has a credit limit of $10,000 (and it’s being reported to the credit bureaus) and you never want to exceed 10% utilization on that card then you know you can never allow more than $1,000 to be reported to the credit bureaus as a balance.

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!

5. Go Small and Go Local – As consumers, we tend to focus on the largest 5-10 banks and tend to forget about the thousands of lenders who are NOT treating their customers poorly. Credit unions are a great example of these lenders. If you are sick of how you’re being treated by your Manhattan bank then perhaps you need a local credit union or local bank on your side.

6. Don’t Exit The System – The country if on fire with angry consumers who are claiming to have sworn off credit for the foreseeable future because of how they are being treated by their lenders. “From now on if I can’t pay cash for it I won’t buy it.” Eh, that plays well on the big screen but it’s not realistic. Carrying around cash to pay for things is a bad idea.  And good luck using debit cards for things like business travel and European vacations.  Stay in the system, please.

7. If All Else Fails, Litigate – If you’re finding yourself saddled with a garbage credit report because of errors and you can’t get the credit bureaus or lenders to correct your files then think about filing a lawsuit. You certainly wouldn’t be alone. There will be over 8,500 credit related lawsuits filed this year. Collections agencies are the targets in most of them but certainly the credit bureaus and lenders are in the cross hairs a fair amount too. Just be sure to hire a lawyer who knows what he’s doing.

So there you have it, seven solid strategies to hopefully minimize your chances of being treated poorly by your creditors. And while there are certainly no guarantees that you’ll exit this credit environment without a few scars, you can certainly make yourself as immune as possible by doing a few easy and inexpensive things. Good luck!

The mainstream card issuers have a shrinking window of time to remold their cardholder base to their liking. This means consumers will continue to suffer the at the hands of their credit card companies, unless they employ one or more of the following strategies.

1. Don’t Not Use Your Card – Ok, the poor grammar was intentional and corny but I think I’ve made my point. Credit card issuers are in business to make money and make a profit. They can’t do either unless you are using your credit card. And, the best news is that you do not have to carry a balance from one month to the next in order to drop a few dimes in your credit card issuers’ pockets. Each time you use your credit card the merchant (aka the place you used the card) has to pay the bank a fee. This fee is called interchange. It technically comes out of your pocket because many retailers will build the assumed fee into the price of the merchandise but it sure doesn’t feel that way when we buy stuff with our credit cards.

2. Shut Up! – In the past a viable strategy to get fees waived and interest rates lowered was to call your credit card issuer and complain or otherwise plead your case. That’s still a decent strategy but beware. Your credit card issuer might turn the tables and start asking YOU questions in order to determine whether or not they still want to do business with you. If you call them and THEY start asking questions about your job status and salary then hang up or you might just end up with a closed credit card.

3. Open Another Card, NOW – One of the worst strategies I see people employing today is the 1-card strategy. This is a consumer who has swallowed the Dave Ramsey gospel hook, line and sinker. The problem is that it’s unrealistic and appealing only to the lowest common credit denominator. You should have MORE cards, not fewer cards. Clearly this is a credit score play as well since having more available and unused credit limits are always good for your credit scores. So, if you have one or two credit cards right now, think about opening at least one more. This gives you options in case one of your credit card issuers starts behaving badly towards you. Nothing is more empowering than saying “I’ll take my business elsewhere” and then actually doing it.

4. Don’t Hide Behind Great FICO Scores – FICO published a study earlier this year and the findings showed that the median FICO score for a consumer who has seen his or her credit limit reduced was 770. A 770 FICO score is fantastic in any lender’s book and especially in this credit environment where lenders are gravitating to stronger borrowers. What this means is that just because you have great FICO’s it doesn’t fully shield you from adverse treatment from lenders.

Stay tuned for Strategies 5 through 7 coming soon!

30 Yr. Fixed Mortgage

*National Average, Loan Amount: $300,000

36 Month Auto Loan

*National Average, Loan Amount: $25,000

So, for someone with a 620 FICO score vs. someone with a 760 FICO score, they are paying $383/month MORE, which is $4,596/year! 

These are just 2 examples of bad credit severely affecting payments.  If you add in credit card APR’s, insurance rates, and other loans, the costs are even greater!  Not to mention most landlords and employers are checking credit before accepting new people too!

1.) Pay the debt in exchange for deletion

This situation is best for smaller collections ($500 or less), like medical collections or utility bills. You get the collection agency to agree to remove the listing from your credit report in exchange for payment.

2.) Settle the debt for a % of what is owed

This technique deals with debts that are more sizable (over $1000). This method involves negotiating with the collection agency to reduce the amount of the debt to an amount that you will be able to pay in one lump sum.

3.) Debt Validation

This method leverages the Fair Debt Collection Practices Act to force the collection agency to provide documentation that the debt is valid. It involves writing letters to the collection agency, but if the collection agency is non responsive, it requires a threat of filing a lawsuit.

4.) Dispute with the creditor

Disputing involves the Fair Credit Reporting Act which allows consumers to dispute a negative listing directly with the company reporting it on your credit report.

5.) Dispute with the credit bureaus

This method is the basic credit repair technique of writing letters to the credit bureaus to request an investigation of a collection on your credit report.

Using these techniques will help you fare better with collections on your credit report.  Just like anything else in life, practice makes perfect – Wellness Credit has perfected these techniques and has an incredibly high success rate negotiating collections.  Don’t hesitate to contact us to see how we can help repair your credit.  To see our success rates at settling collections and other debt, click this link: http://www.mywellnesscredit.com/our-success-rates/

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.