Credit Scores & Credit Reports: How The System Really Works

Murphy Canyon Chapel

Military Saves Campaign 2009

Financial Readiness Symposium

Evan Hendricks, Editor/Publisher

Privacy Times February 24, 2009

Basics Of The Credit Score

 If winning isn't everything, why do they keep score?  – Vince Lombardi

 

All right, everyone, line up alphabetically, according to your height. 

– Casey Stengel

What Is A Credit Score?

A number that reflects your credit worthiness at a given point in time.

The higher the score, the better the risk (Generally)

     

$150,000 30-Year, Fixed-Rate Mortgage

720-850 5.63% $864

700-719 5.75% $875

675-699 6.29% $927

620-674 7.44% $1,043

560-619 8.53% $1,157

500-559 9.29% $1,238

     

Mortgage vs. Auto Loans

Excellent Marginal Poor 720-850 640-719 500-559

Mortgage

30-yr Fixed 5.5% 7.4% 8.1%

Home Equity 7.8% 9.3% 12.1

48-Month 5.2% 11.4% 17.2% New Car Loan

48-Month 5.9% 12.0% 14.4%Used Car Loan

     

Translation$24,000 New Car (Financing)

‘‘Marginal’’ 127% In Higher Interest = $3,300*

‘‘Bad Credit’’ 255% In Higher Interest = $6,700*

* More than one w/ Excellent Credit

     

Who Makes Them?

75% of Lenders Use FICO Model

Equifax’s “Beacon” (Multiple Versions)

Trans Union’s “Fico Classic”

“Experian/FICO Risk Model.”

Who Else? (Knockoffs)

TrueCredit (Trans Union)

PLUS (Experian)

Vantage Score

FICO Scoring Range

  780-850 – Low Risk

      740–780 – Medium-Low Risk

      690–740 – Medium Risk

      620–690 – Medium High Risk

      620 & Below – High Risk or “sub-prime.”

500 & Below – Fawgettaboutit

FICO Scoring Factors

Payment History (35%) Severity, Quantity & Recency of Delinquencies

Amount Owed—Extent of Indebtedness (30%) Ratio of Credit Balance To Credit Limit, How Much Owed?

Length Of Credit History (15%) Type Of Credit (10%) Inquiries (10%)

Payment History (35%)

Track record with lenders. (Pay on Time?)

Length Of Positive Credit History. (The longer the better.)

How Long Since Most Recent Negative Item? Severe Unpaid Debts (Bankruptcy, Collections,

Liens, Foreclosure) Severity & Quantity of Delinquencies

(Pages 15-16)

How Much Do You Owe (30%)

Ratio: Credit Balance vs. Credit Limit

Quantity of Credit Accounts(Too many, Too Few? No Magic Number)

How Old Are Accounts? How Long Since You’ve Used Them

(Pages 16-17)

Length Of Credit History (15%)

The Longer The BetterSpecific AccountsTotal of All Accounts

Type of Credit (10%)

Bank Credit Cards vs. Store Charge Cards

Mortgages vs. Finance Company Loans

New Credit – “Inquiries” (10%)

Designed To Catch “Credit Sprees” Not Supposed To Penalize Mortgage,

or Auto Loan Shopping (Page 20) How Old Are Accounts? How Long Since You’ve Used Them

The Importance Of Being Recent

0-11 12-23 24-35 36-47 48-HIGH NO DELQ

MONTHS SINCE MOST RECENT MAJOR DELINQUENCY

RIS

K

LOWLOW

Special Tips Closing Credit Cards Can Lower Score

Watch Out For Instant Credit (Page 29)

Paying Off Credit Cards Every Month Doesn’t Always Mean A Higher Score

Warning! Paying Off Old Debts The Wrong Way Can

Make Your Score Drop

Watch Out For:* Credit Repair

* Credit Counselors

* Debt Consolidators

Accuracy/Reliability Study?? 11% had middle scores between 575-630 and a

range of 30 points or more between highest, lowest scores; i.e., one CRA pegged consumer as “sub-prime” while other CRA did not

21%, “extremely consistent,” (range of fewer than 20 points between the highest and lowest scores)

31% had range of 50 pts or more between scores 5% had range of 100 pts or greater between scores Footnote: CFA/NCRA Study

Where Do We Stand? (FICO)                    800-Above–11percent                    

750-799 – 28 percent                     700-749 – 19 percent                     650-699 – 16 percent                     600-649 – 12 percent                     550-599 – 8 percent                     500-549 – 5 percent                     499 and under – 1 percent

Where Do We Stand? (Experian)                       New England – 699                     West North Central – 695                     Mid-Atlantic – 690                     East North Central – 684                     East South Central – 677                     South Atlantic – 675                     Pacific – 674                     Mountain – 670                     West South Central – 656

Re-Scoring Mortgage Applicants

Only Reliable Help Available: ‘Resellers’

Avg. 30-pt. FICO Score Increase

Must Be Referred By Broker Or Lender

(Resellers may not deal directly with Consumers!)

Anti-Trust Lawsuit Pending

Where Do I Find?

National Credit Reporting Assoc. (www.ncrainc.org)

Potential Help www.peoplescreditbureau.com

Farmers Branch, Texas www.veracity.com

Denver, Colorado

Reason Codes (For Denying Credit)

05 = Too many accounts with balances 24 = No recent revolving balances 05 = Too many consumer finance accounts 09 = Too many new accounts 15 = Insufficient length of credit history17 = No recent non-mortgage balances 10 = Proportion of revolving balances to revolving

credit limit is too high22 = Serious delinquency, derogatory public record

or collection

‘Thin File’ Problem Many People Don’t Have FICO Score But They Pay Their Bills

Rent, Utilities, Phones

Fair Isaac Is Working On New Model

Pay Rent, Build Credit www.payrentbuildcredit.com

04/10/23

Obtaining Your Reports

www.annualcreditreport.com 1-877-322-8228

www.Equifax.com 1-800-685-1111

www.Experian.com 1-888-397-3742

www.TransUnion.com 1-800-888-4213

Extra Free Reports Available Under State Law(Page 78)

Reading Your Report (Chapter 5)

1) ‘Header’: Name, address, SSN, employment

2) Credit History: Mortgages, Credit cards, Auto & Student Loans – Ever Late?

3) Public Records? Tax Liens, Judgments

4) Inquiries – Whose Looking At Your Credit Report, and Why

‘Derogatories’ First Bankruptcy Court Judgments Liens Foreclosure Collections

9 = Charge Off 8 = Repossession 5 = Over 120 Days Past 4 = 90-119 Days Past Due 3 = 60-89 Days Past Due 2 = 30-59 Days Past Due 1 = On Time     

Disputing Errors By Mail

Certified Mail By 800 Phone Number

– Take Notes, Get Names, Operator Numbers

Through CRAs’ Web Sites– Print Out Screens– (Pages 94-95)

Types Of Inaccuracies

Someone Else’s Data ‘Mixed’ Onto Your Report

Creditor Mistakenly Reports Delinquency Balances Incorrect Capital One: Doesn’t Report Credit Limit Identity Theft

Studied History 1989 James Williams 1990 US PIRG 1991 US PIRG 1991 Consumers Union 1993 US PIRG 1998 US PIRG 2003 Federal Reserve Board 2003 CFA/NCRA 2004 US PIRG

Arthur Anderson(1992) 8% Of Those Declined Requested File

2% Of Those Disputed Data

Conclusion: Only fraction were wrongly declined credit

Arthur Anderson(1992) “ … Policies & procedures of the AICPA

prohibit us from allowing public access to reports relating to … procedures (which) were established that misinterpretation of data prepared for a client would not occur…However, I confirm that out study uses statistically valid sampling techniques and supports the result …

‘Partial Matches’

7-of-9 SSN Match, Similar First Names “Judy Thomas” 541-69-5678

Klamath Falls, Oregon = “Judith Upton” 541-69-5679 Stevenson, Washington

Exact SSN Means Other ID Data Ignored ID Thieves Happy

Identity Theft Exact SSN Match

Myra Coleman 271-74-4267

Itta Bene, Mississippi

Maria Gaytan 271-74-4267

Madeira, CA

Can Ignore Date of Birth

Challenging Numbers

7,000 – 10,000 dispute letters per day 3 Disputed Items per dispute letter 10-12 letter per hour =2 minutes per dispute Handle volume thru code punching Outsourcing

…Actual court testimony from officials in the credit industry will make you shudder …

-- Michelle Singletary Washington Post

Kittell: Are they’re other methods of investigation despite the CDV or other than the CDV?Fluellen: No, we send out a CDV.Kittell: That's it. If it comes back one way, good for the consumer, if it comes back agreeing with the creditor, then not agreeing with the consumer, then it stays?Fluellen: Correct.Kittell: Basically, Equifax takes the word of the creditor, whatever the creditor says is what Equifax does?Fluellen: Yeah.

Identity Theft

2003 FTC Survey = 10 million Victims Fastest Growing Crime Used To Be Case-by-Case Now Thieves Are Going ‘Wholesale’ Criminals Talk About It In Prison

Golden MomentIdentity Theft is possible

because when the thief applies for Credit using some or all of your identifiers, the credit bureau provides your credit report. This enables the creditor to approve the application.

ID Theft’s Main Damage

Your Credit Report Is Polluted by the Thief’s Bad Payment History

Credit Score Plunges Calls From Debt Collectors Time & Energy To Clean Up Mess Humiliation & Emotional Distress

How To Watch Out For It

Check Your Credit Report For:

Unfamiliar Accounts (Tradelines)

Unfamiliar Inquiries

Credit Monitoring Services $$

Military Personnel Overseas

Especially Vulnerable Certain People Know Your Personal Data,

and, The Fact You’re Stationed Overseas You Have A Lot on Your Mind, Checking

Credit Report Is Not One Of Them Crime Can Go Undetected For Year(s)

(Pages 115-116)

ID Theft Goes Beyond Credit

Criminal

Medical

Taxes, Social Security & Govt. Benefits

Thank You!

Any More Questions?www.PrivacyTimes.com

www.CreditScoresandCreditReports.com

www.IDwatchdog.com