Archive | May 2016

The Esoteric World of Understanding Credit Scores

dvThe Jackson family just recently lost their only means of transportation when the family’s SUV engine died rendering it useless. The family’s SUV met its surmise in the morning as the Jackson’s were heading out to work and school. Mr. Jackson, the sole breadwinner, worked as a fireman and was usually dropped off at the firehouse right after their three kids were dropped off at school. On this particular morning the vehicle never made it out of their driveway. The children became frantic as they wondered if they would be able to make it to school. Each kid wanted to know why, what, and how as they inundated their parents with a flood of questions. Mr. Jackson began interrogating Mrs. Jackson about the last time she took the SUV in for an oil change. Mrs. Jackson began to feel as if she was being blamed for the vehicle breaking down and became irate. Mr. Jackson raised his voice as he expressed to his wife the importance of vehicle maintenance. Mrs. Jackson, who was usually always calm, unknowingly began shouting in an attempt to be heard. Simultaneously, the children all started yelling amongst themselves while their parents jousted in an attempt to knock the other down with insults. The ruckus reached a fever pitch then abruptly stopped as Shelly, the youngest of the children, began to cry.

That morning the Jacksons all made it to their destinations because of the support of their friends. After having the vehicle looked at by their mechanic, a decision was made to purchase a new SUV because the cost of repairs outweighed the cost of acquiring a new vehicle loan. Besides, the SUV was six years old and the couple figured it was time to get a new one. The Jacksons knew that they both had excellent credit and getting a loan through their credit union would be a cinch. So, Mrs. Jackson gathered their information and applied online for a new vehicle loan through their credit union. They were instantly approved for the auto loan and they were awarded the best rate available because of their excellent credit scores. When Mr. Jackson was dropped off at home later that evening, Mrs. Jackson greeted him with the good news. With the loan already approved, the couple decided that they would go shopping for a new vehicle on the weekend.

When the couple arrived at the first dealership, they were bombarded by salesmen asking them if they needed any help. Mr. Jackson knew that he held a slight advantage over the dealer because he already had funding for his loan. He figured that he could go in and shop around and not worry about being approved for a loan or haggled on the price. The couple finally decided on a vehicle they both liked and was ushered into an office to close the deal. When the salesman sat down he instantly began to tell them about the benefits the vehicle offered. He talked about the upgrades they could get and the importance of adding an extended warranty to protect the vehicle. Mr. Jackson denied all of the offers and said that he already had financing. Without breaking a sweat the salesman asked Mr. Jackson if he did not mind telling him what rate he was getting. Mr. Jackson said sure and told him the rate. The salesman then told the Jacksons that he could get them a much lower rate than the one their credit union was offering. Mr. Jackson quickly said, “No, we are going to stick with the one we currently have!” Then the salesman gave them an offer they could not refuse, he said that he could knockdown the rate by up to 2 percentage points. The salesman then left the office to give the Jacksons some time to think about it.

Mrs. Jackson was really hesitant about using another lender and did not want to go through the trouble of applying somewhere else. Mr. Jackson was intrigued by the lower rate and wonder how much he could save per month. They both worried about having their credit pulled again because they did not want their credit scores to go down. The salesman came back in and asked them if they had made a decision.

Hesitantly, the Jacksons decided to see how much lower of a rate they could receive. When the salesman came back with the numbers they were blown away by the difference. The biggest variance was that of the credit scores. The Jacksons wanted to juxtapose their scores with that of the dealer. Mrs. Jackson pulled up their current credit scores through an online site and told the salesman what their scores were.

The salesman showed them their scores and it was almost 100 points higher than the online site scores. Mr. Jackson decided to call his credit union and ask them what their scores were. The credit union scores showed a difference of almost 50 credit points. Feeling flabbergasted and frustrated the Jacksons decided to hold up on the auto loan until next week. When they arrived at home, Mr. Jackson immediately went online to order his FICO credit scores. Again, these scores were also different. The Jacksons decided to wait until Monday so they could talk to their banker about the varying types of credit scores.

That Monday morning the Jacksons came into my office with an abundant amount of questions about their credit scores. I sat them down and offered them some water or coffee; but they both refused because they were focused on getting down to business. I explained to them that the rate we gave them was the best rate that we offered and we did not negotiate on our rates. They wanted to know why their credit scores were so different with each pulling. I told them that their credit scores depended on what credit scoring system was used when it was pulled. I told them that there are three credit reporting agencies and each of them has different scoring ranges for their credit scores. Equifax score ranges are from 280 to 850; Transunion are from 300 to 850; and Experian are from 330 to 830. Each of them may have different information being reported to them from different sources and creditors. Thus, because of these differences the credit scores could be different by several credit points. In addition, FICO has its own scoring system. Contrarily, the information FICO use is being pulled from the three major credit reporting agencies. So, your FICO Experian score may be different than your FICO Equifax score. On top of that, the three major credit reporting agencies has joined together to create their own unique scoring system to challenge the dominance of the FICO scoring system. Their new system is called the Vantage Scoring system and they scores range from 501 to 990. I also explained that each of the credit reporting agencies have specific scoring systems for auto lenders, mortgage lenders, and other lenders of different loan types. I also told them that most of the free online credit score sites may use different reporting agencies as due lenders.

They looked more confused when I finished than when they arrived in my office. I told them that the best way to be at ease about their credit is to pull all three credit reports and make sure that all the information is correct. Some information may not be reported or some may be fraudulent. In any case you may want to dispute some of the erroneous information or file a police report for the fraud. I told them to not worry about the inquiries because the scoring systems are intelligent enough to know that you are car shopping and not just randomly having your credit pulled. For instance, with FICO, an applicant can do 30 or more inquiries in a two week period and they will count it as one. Also, many underwriters know when someone is shopping for the best rate and will not look at the inquiries as a negative thing when making their decision.

Before they left my office, I told them to contact a credit professional because understanding how your credit work can be quite confusing. They both stood up and shook my hand and said that they felt better since I had explained to them why they were seeing different credit scores. As they left, I could sense that they still had a lot of questions, so I recommended to them some credit consultants who could help them. They thanked me and because I was so helpful and nice to them, they decided to keep the loan with us as a show of their loyalty.

Understanding how your credit work can be quite tedious. I would recommend that you pull your credit at least once per year. If you have any questions or don’t understand how to fix or repair your credit, please contact a professional

How to Get Your Teen Started With Credit Cards

rtyRecently, college students were offered credit cards on campus and thus often get into debt before actually earning an income. Although, now there is a Card Act of 2009 that no longer allows credit card issuers to advertise or promote their products and services on campus. Anyway, students still face potential pitfalls. The thing is every teen thinks that he or she needs a credit card just as well as a cell phone. So, it is a smart move for any parent to use these ubiquitous devices as teaching tools meaning that they should be monitored while explaining how valuable credit may be. And this will help to protect teens from abusing credit.

The following tips will help you to get started.

Check the teen’s credit report together.

It is not a secret that you can simply do this online. At first there should be no credit. Parents should explain that the use of the credit card will be reported to the major credit bureaus, thus any late payment will stay on the credit report for seven years. Teens should know and understand that credit reports are very important and they affect the cost of loans, mortgages, auto insurance as well as it impacts the decision of a potential employer or a landlord.

Parents can add a teen to their cards as an authorized user.

It can be useful to open a new account together with a teen. Just use a low credit limit and set up an online access to monitor spending.

Parents can consider student credit cards.

They are now offered by the major card issuers. They are provided with rewards including free FICO scores.

Secure credit card can be a good alternative.

These cards require a savings deposit in the bank that issues a card. So the credit limit is actually the amount of the deposit. Thus, teens can start building a good credit report while using the card regularly as well as paying on time and in full, of course.

There is a special card that is built for parents and teens – VisaBuxx.

It’s linked to the account of the parent and both (teens and parents) can monitor all the transactions online. Besides, this credit card can be automatically refilled if there is no money.

The point is parents and students (or teens) should cooperate. Credit cards are the first steps for any teen to start managing his own financial life. Parents should be patient. Don’t bail your teen up when he had reached his credit limit. Everyone makes mistakes and there are actually a lot of adults who fail with their credit and budget management. Let him consider a part-time job to get some extra cash for paying down the balance. Talk to your kid and explain the major points. Monitor his spending together and stay patient while paying attention to his mistakes. The truth is the earlier teens learn those financial lessons, the easier time they will have in their future life.

3 Popular Credit Myths!

tyMyth #1: You share a credit score with your spouse.

This is a myth! Both spouses have separate profiles. If you have joint accounts they will show up on both of your reports. If you call your credit card provider and add a spouse as an authorized user then that will also show up on both your reports. BUT, if you have no joint or authorized user accounts then there will be nothing that will affect your score from each other.

I ALWAYS suggest keeping separate credit profiles. The reason is simple. If you have a joint credit card and forgets to pay the bill, then both will incur a 30 day late. This along can easily reduce a score from a 750 to a 650. So there is no benefit to having a joint account. Keep separate profiles in case one spouse makes a mistake.

Myth #2: Your credit score only counts when you’re applying for a loan.

Our score is looked at for almost everything you do, such as:

*Applying for a job
*Applying for auto insurance
*Homeowners insurance
*Life insurance

Don’t fear the past. We all have made mistakes! It’s important to take control of your credit sooner rather than later and we hope this tip helps!

Myth #3: Paying off your credit cards in full will give you the best credit.

This topic is a huge debate! Some will say to keep a small balance (less than 10%), others will say to pay off your balance entirely. You see, these are both correct. Let me explain the difference.

Keeping a small balance: It’s no secret that FICO hits us dramatically for maxing out our credit cards. You will hear people say to keep your balance at 50% less than your limit, others will say 30%. Ideally the correct answer is between 1-9%, or in other words less than 10%. The theory on this is FICO will reward you for making payments per month which gives us great payment history. Payment history is a large part of our score so there is truth to this strategy.

Keeping a $0 balance: The argument here is that if you are not carrying a balance then you are not showing any payment history. Payment history is a large part of our score.

My opinion: I’ve changed my opinion on this strategy throughout the years and what I came up with after years of testing is this. I will suggest paying off your cards in full and have a zero balance. BUT I will suggest charging something small once every 3 months. For example, you can simply charge a pack of gum, or like I do, a tank of gas every 3 months. This will report as positive payment history.

The big caution here is to keep a 0 balance for a long period of time. By charging a small item every 3 months it’s enough to keep positive payment history.

This strategy will also be easier to remember compared to worrying what balance you are carrying over each month.

This entry was posted on May 24, 2016, in Finance and tagged .