Combating Credit in this Era Let’s start out by saying what everyone already knows, the credit system is flawed and predatory in many ways. The concept of paying back what you have borrowed is pretty straightforward and providing an incentive to pay back your debts is needed, but how credit affects your life outside of…
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Understanding Your Credit Score Credit has become so essential to most big purchases you as a consumer will have to make, and that can be scary if you do not know how credit works. Credit can be confusing, but the more you can learn and utilize your credit effectively, the better off you will be…
How Could You Be Hurting Your Credit? The more you know about how credit works, the better your score will be. This is because, without a lot of background knowledge, your own logic and reasoning will oftentimes fail you. There are a lot of factors that go into creating your credit score, so trying to…
2 Big Mortgage Programs Are Re-evaluating Credit Worthiness.
Due to a new rule issued on Tuesday by the mortgage-finance giants’ federal overseer, Fannie Mae and Freddie Mac, will have to consider new alternatives to FICO to determine an applicant’s creditworthiness. This ruling, executed by the Federal Housing Finance Agency, is extremely beneficial to the credit score system “VantageScore”, which is owned by the three credit reporting giants, Equifax, TransUnion and Experian.
“One of my priorities is to ensure that the American people have a safe and sound path to sustainable homeownership, which requires tools to accurately measure risk,”
FHFA Director Mark Calabria described in his written statement. Mr. Calabria later added that this new rule
“is an important step toward achieving that goal.”
“The FICO Score has been the industry standard for credit scores for decades because it is trusted by lenders to be independent, predictive and reliable, and we are confident that it will remain the superior choice by any measure established by [Fannie and Freddie],”
Joanne Gaskin, the company’s vice president of scores stated regarding the FHFA rule.
Small Lenders Make Big Impacts
Nonbank lenders have asked for the ability to use a credit score provided by VantageScore in the process of determining the creditworthiness of those applying for mortgages. These lenders, who make up more than half of the mortgage dollars issued in America, state that these alternative scores would allow for a greater amount of people to enter the mortgage market and lead to an increased number of mortgage approvals. The end result is hypothesized to provide a potential boost to home sales along with the economy in general.
A step in the right direction
Tuesday’s final rule is extremely advantageous to VantageScore because it abolishes language from a December proposal that would have prohibited any credit-score models developed by a company related to a credit-reporting firm. The FHFA eliminated that restriction amid pushback from the credit-reporting industry and congressional lawmakers. Without the beneficial addition of VantageScore to the lending scene, the monopolization of Fico when determining applicant's creditworthiness would keep us from progressing to a new age of economic well being. We as a company never really thought this day would come but it appears it has. Credit Law Center views this a positive movement for the credit industry and a huge step in the right direction.
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Even Heroes Need Credit Protection
It can be hard for military families to maintain good credit scores because of the constant moving, changes in their jobs, international deployments, and inconsistent income for military spouses. While these things can all make it challenging to maintain high credit, military families are also afforded other advantages that can help solve that issue.
Steer Clear of Bad Debt
Steering clear of bad debt is the best thing you can do to begin boosting your credit for anybody. Bad debt is just any debt that costs a lot of money in interest with minimal return. So, credit card companies and payday loans that charge high interest rates and don’t offer any return other than that short-term loan are perfect examples of bad debt.
While some people may claim that all debt is bad debt, that is not always the case. Mortgages and student loans can be beneficial for you in the long-term, as long as they charge lower interest rates, because they give you something in return. Paying these debts off every month can also help improve your credit! Credit card debt, however, lowers your credit score. Keeping that balance at zero is ideal because it is expensive to have credit card debt and it hurts your credit. Avoiding bad debt like this from day one will benefit you in the long run.
Look for Military Credit and Loan Benefits
For military personnel deployed overseas, there are regulations in place that dismiss all annual credit card fees. The Department of Veteran Affairs also offers VA Mortgage loans for the families of those with a military member on tour outside of the United States. VA Mortgage Loans are loans backed by the government that offer military families mortgage loans with lower interest rates, sometimes even if they have lower credit scores. The Servicemembers Civil Relief Act also offers help for military families through restricting fees, terms, and interest rates for things like home rentals, auto loans, credit cards, and mortgages.
All of these tools don’t necessarily benefit your credit score in a direct way, but they do improve your general financial position. By doing this, you now have the ability to raise your credit score through other means, for example, reducing your bad debt. That gives you more flexibility with your finances and thus the ability to manage your credit more successfully.
Find Military Friendly Bank Accounts and Credit Unions
USAA is a perfect example of a financial institution made for military families. To even join USAA, you have to be active in the military, a veteran, or the child of a veteran. There are other institutions that offer benefits for military families as well, though. US News and World Report claims that these are the top ten banks and credit unions for military families:
- Navy Federal Credit Union
- Arkansas Federal Credit Union
- Andrews Federal Credit Union
- Randolph-Brooks Federal Credit Union
- Fort Knox Federal Credit Union
- USAA Federal Savings Bank
- Langley Federal Credit Union
- First Citizens Bank and Trust Company
- Tyndall Credit Union
- Air Force Federal Credit Union
It is a misconception that you have to live near a branch of one of these institutions to utilize their advantages. Most of the time, you can join while even living across the country to receive the benefits they offer for military families.
Locate Other Organizations Specifically for Financial Help
There are many free resources and organizations set up to help military families with their credit and finances, especially if you live next to a military base. Many of the organizations help both those in active duty service and veterans. Here are some examples of organization to contact if you want some financial assistance:
- American Military Family
- Coast Guard Mutual Assistance
- American Red Cross
- Veterans of Foreign Wars Unmet Needs Program
- Navy-Marine Corps Relief Society
- Air Force Aid Society
- Operation Homefront
- Army Emergency Relief
The best thing you can do is take steps now to protect your financial future. Building and fixing credit can take a long time to do, so taking advantage of all the opportunities offered to military families early on can help set you up for financial success in the long run.
Who Uses Your Credit Information?
As a consumer, you are probably well aware that lenders often use your credit information for various reasons. Whether you are renting an apartment or buying a car, you can pretty much always expect your credit to be checked, but did you know that there a many other companies that have access to your credit report? Collection agencies are amongst the most popular types of companies to do this without your consent.
Collection Agencies and Your Credit Report
A collection agency is an organization that specializes in collecting an individual’s or a business’s debt. They use your credit report for two reasons. The first is skip tracing. Skip tracing is how collection agencies find those difficult to locate consumers. They use credit reports to find those consumers because your credit report lists your current and all of your former addresses. This makes it easy for debt collectors to locate you.
The second reason a collection agency might want to view your credit report is to see what you can afford. Viewing your entire credit report can help debt collectors decide if you would be able to pay off your debt or not. They can also use your credit report to go as far as to decide whether or not to sue you.
Collection Agencies and Your Credit Score
Your credit score is a good indicator of your ability to pay, and your collection score is a special type of credit score that relates specifically to being able to pay back debt. If you have a collection score that indicates you would most likely be able to pay your debt, then a collection agency will put forth more time and energy into trying to collect your debt versus someone with a worse collection score.
Anytime your credit is pulled, regardless of who does it, a record of the access, or an inquiry, is posted. There are, however, two different types of inquiries. A soft inquiry occurs when you pull your own credit report just to review it. These do no harm to your credit score. A hard inquiry, though, can negatively affect your score. Those occur when your credit is being checked by a lender. Unfortunately, inquiries from collection agencies can be either, meaning there is a chance your score could be damaged if a hard inquiry is posted.
Knowing that collection agencies can check your credit information without your consent can be frustrating. It might even prompt you to question whether or not it is legal for collection agencies to do this. Well, the short answer is yes, it is legal.
As long as the collection agency uses your credit information to help with their debt collection, then it is fair game for them to pull it. The Fair Credit Reporting Act (FCRA) states that any consumer reporting agency can access consumer reports if they have reason to believe they can use that information to collect debt, thus establishing the official legality of the collection agencies accessing your credit information.
Who is Looking at Your Credit Report?
As a consumer, you expect lenders to check your credit report when you apply for a loan. But did you know lenders are not the only companies looking at your credit report? Even when you aren’t trying to borrow money, other companies will still pull your credit for various reasons.
The Fair Credit Reporting Act makes it possible for credit companies to release your credit information to your potential employers. They would do this as a part of your background check. Employers must get your written permission before pulling your credit report, but if you decline, the Federal Trade Commission gives the employer the right to turn down your application immediately.
When you sign up for water, electricity, or gas, there is a chance you will be asked to submit a credit check. This is because you pay your utility bill after having already used those utilities, which means the utility company is essentially giving you a short-term loan. You have to pay for the water, electricity, or gas you used last month by a certain date, so if your credit score is lower, then the utility company might decide to charge you a deposit beforehand.
Oftentimes, when you are looking for an apartment, the landlord will ask for your credit information. They do this to see how likely you would be to pay your rent on time based on your past financial behavior. Depending on how low your score is, you could be asked to pay a higher amount for your security deposit or even get rejected by the landlord altogether.
Credit Card Companies
Credit card companies will probably check your credit when you apply for a card, but the Consumer Financial Protection Bureau says that they can also look at your credit at any time once you are their official customer. These creditors will do this in order to prescreen you and decide whether they should offer a new card to you or not. This is legal under the federal law: The Fair Credit Reporting Act, but you do have the option to refuse this prescreening.
According to the Consumer Financial Protection Bureau, The Fair Credit Reporting Act makes it possible for credit reporting companies to release your credit information if it is to offer insurance coverage or set a premium charge for insurance. Just like the credit card companies, insurance companies will also use your credit to offer you insurance deals through prescreening. You can decline this prescreening process for the insurance companies as well.
If you are looking for television, internet, or phone service, then your credit will most likely be pulled by those providers. This is just for those providers to check and assess the likelihood of you paying your bill for their service.
Nursing Homes and Assisted Living Facilities
Nursing homes and assisted living facilities operate like apartment building when it comes to your credit score. They will often check your credit to make sure you are financially responsible enough to live in their facility, especially considering that it can be expensive to live in a nursing home or assisted living facility.
Government Agencies and Courts
The Fair Credit Reporting Act allows credit reporting agencies to release your credit information for three reasons. The first is in response to a court order, the second is in response to a subpoena, and the third is for child support and enforcement purposes. The government also has the right to check your credit if you apply for government assistance in order to see if you actually qualify for it or not.
What is Freezing Your Credit and Should You Do It?
Freezing your credit prevents lenders from seeing your credit reports. It can be a beneficial thing to do for many reasons and, thankfully, it is now free due to congressional action following the Equifax breach. Freezing your credit is important to prevent a data breach and protect your credit. Is it an extra step to prevent your credit information from being used wrongfully. So, if somebody were to apply for credit in your name, then the lender would not be able to access your credit because it is frozen, and thus would not be able to approve the loan.
You may be asking if this process is complicated or worth it. Well, it is as easy as picking up the phone. You can easily freeze your credit online or over the phone, as well as unfreeze it when you need to apply for credit yourself. You can even set up a short period of time to lift the freeze temporarily if you know when you’re going to be applying or looking for a credit loan.
Another good thing about freezing your credit is that it will not affect your credit score. So, you can do it whenever you need. Parents can even do it for their children to help protect their credit for them.
Freezing your credit cannot protect against all forms of identity theft
If somebody has access to your existing credit card information, or if they have your social security number, then you are still at risk for identity theft. So, even if you freeze your credit, you still need to monitor all of your finances and make sure there is no fraudulent activity.
Debt collectors and lenders you have been borrowing from previously can also still see your credit information even if it is frozen. So, freezing your credit does not block everybody from viewing your credit, but it can still be very beneficial in protecting your credit.
Fico Score: The Score Lenders Use
FICO scores were created in order to help lenders make faster, more efficient decisions when it comes to determining a consumer’s risk. Understanding how FICO scores work may seem difficult at first, but there are a couple of factors that end up determining the score you are given. If your number is higher on the 300-850 scale, then you are considered a less risky consumer. Typically, a score above the mid 700s is ideal for a lender.
If your credit score did not exist, then lenders would have to pull your credit report and spend hours looking it over to decide your lending risk. With a credit score, lenders can essentially see an accurate depiction of what is in your report by just analyzing a single number. To create that number, companies like FICO take the financial information from your credit score and use a mathematical model to forecast your lending risk. There are many factors that go into this model.
Your payment history makes up 35 percent of your credit score because it is so important. This is because the lender would expect you to continue the same payment habits you have exemplified in the past, preferably over many years. If you do not have a long payment history, then you are more likely to be judged by a single mistake.
If multiple years ago you accidentally paid a bill late, but your payment history has been of high quality since, then a lender most likely would not penalize you for that mistake. But, if you made a mistake more recently, then a lender would have to question what might have changed in your life to cause that mistake, and if it is possible that this mistake could turn into a trend. So, even one missed payment can drop your score for that reason, and if you pay late habitually, then your credit score would drop even lower and you would be considered extremely risky.
Your credit utilization ratio is the amount you owe in comparison to the total line of credit you have borrowed. This ratio accounts for 30 percent of your FICO score. This means that if you were to charge a lot of money every month, but also pay your balance completely, then your ratio would indicate that you are not a risky borrower as that information would show up on your credit report. But if you were to max out all of your credit cards, then your credit utilization rate would be much worse. Even if you made each payment on time, it would not be too difficult for a lender to worry about your ability to take on another line of credit and make those payments on top of your current payments. So, high debts can cause your FICO score to be lower.
The Length of Your Credit History
Making up 15 percent of your FICO score, the length of your credit history is also important. The longer your credit history, the more a lender can predict about your future behavior. So, if you have a payment history consisting of many years of on time payments and low debt, then a lender could assume that this good behavior will continue. On the other hand, if your credit history is short, meaning you just began building it, then lenders could be skeptical about your risk as a borrower. They cannot make a reliable decision without enough history to support that decision. The good news is that it often only takes one or two years of healthy credit use for lenders to begin trusting you.
The Types of Credit You Use
If you have proven that you can make payments on not only one type of credit loan, but many, then you will be considered more trustworthy to lenders. For example, if you responsibly handle all of your credit cards, student loan debt, mortgage, and car loans, then you have proven that you can most likely handle multiple lines of credit at once. This category is not as important as some of the others when determining your FICO score, but it still does effect it by 10 percent.
The more you ask for loans, the lower your score can drop. Even if you have a trustworthy history of paying your credit debt off, asking for loans often will still hurt you. Lenders see this as concerning because they assume something is wrong in your life and that it is what is causing you to need more money so often. While this may not be true, it is enough to deter lenders from loaning you money. Lenders can see how often you ask for credit because each time you do, the bank or lender notifies the credit reporting agencies and a hard inquiry gets put on your credit report. This category also makes up 10 percent of your FICO score, which, again is not a huge portion of your score, but it is enough to raise concern if something is wrong.
How to boost your credit score.
When your credit score is not good enough to receive a loan, you might ask yourself what you can do to raise it, and how to do it quickly. Well, depending on why your credit is too low, you might have a few options. For instance, if you just have some credit card debt and that is what is hurting your score, then you definitely have more options than someone who has default accounts. Overall, there are multiple different ways to go about fixing your credit that can help you get a loan more quickly.
Pay Down Your Credit Card Debt
Your credit utilization ratio is the amount you owe on your card in relation to the limit on your credit card. The lower this ratio is for you, the better your credit will be. FICO even states that consumers with the best scores use an average of 7 percent of their credit limits. So, paying off all or at least most of your credit card debt could significantly raise your score, and quickly too.
If you don’t have enough cash to simply pay it all off, though, you could also try transferring the debt to an installment loan or a home-equity line of credit. These types of credit do not affect your utilization ratio, and thus do not hurt your score as much. In fact, increasing the number of different types of credit you manage could even improve your score as well. It is also important to note that you should keep your credit card account open even when you are done using it. This is because, once the account is closed, that card is no longer factored into your utilization ratio, so debt on other cards would be even more harmful to your score than if the other account was still open.
Pay Your Credit Card Bill by the Statement Closing Date
Credit card issuers often report your current credit card balance on your statement due date and not the payment due date. This means that if you are paying your balance right before the payment due date, then you might not be paying it early enough to help your credit score. If you make your payment before the statement closing date, however, then your low or zero balance will show up on your credit report This date can be found directly on the statement.
Ask for a Credit Limit Raise
Most of the time, credit issuers are willing to raise your credit limit yearly. By having a higher limit without using more credit, your credit utilization ratio will improve. This will help increase your credit score. But, if a large increase is granted, your credit report may get pulled. If this happens, then you receive a hard inquiry on your report which can inevitably hurt your score.
Piggyback Off of Somebody Else’s Credit
This strategy is often used for young people with little credit history. So, a parent could add their child as a user on their credit card and then that account history would show up on the child’s credit report. This of course depends on the issuer reporting it, but they do most of the time. If the parent had great credit history, then adding their child to their credit card account could immediately impact their child’s credit in a positive way. You don’t have to be related to someone to be added to their credit card account, though. Most of the time, credit card companies will permit anybody to be added to the cardholder’s account.
Take the Negative Information Off of Your Credit Report
It is imperative that you check your credit report in order to understand what is affecting your credit score and how. You can check your credit report for free once a year from all three major agencies (Experian, TransUnion, and Equifax) at annualcreditreport.com. Removing the information that hurts your score can significantly raise your score, especially if what is hurting your score occurred within the last two years. You need to make sure none of the negative activity is fraudulent. If somebody attempted to steal your identity, then your credit could be hurt in exceptional ways. You also have to make sure no lender has reported something mistakenly. If either of these things occur, you need to take steps to remove this information immediately, either by blocking the fraudulent activity or contacting the lender who made the mistake.
You can also fight to get mistakes removed from your record. If your payment history is otherwise spotless, yet you make a mistake and accidentally make one late payment, then you can contact the biller and ask them to remove the delinquency from your account. Taking information like this off of your report could greatly help your credit score increase.
If you need a loan quickly, this option might not be the best for you, but being patient can go a long way. If you continue building a strong financial history, overtime, your credit score will go up. The further away you get from a delinquency on your credit report, the less that delinquency impacts your score. The length of your credit history actually makes up 15 percent of your credit score, so just letting time pass while acting responsibly in terms of your credit, will raise your score.
Consumers with the highest scores, typically above 800, have an average account age of at least 11 years, with their oldest account being opened 25 years prior. This means that the longer you exemplify good credit behavior, the better your score will be. Closing your cards will not hurt you score in this area because the behavior from that card will still show up on your credit report and factor into the age of your credit history for at least ten more years. Opening a new card does lower the average act of your accounts, though. So, letting time pass can greatly boost your credit score if you exemplify continuous financial responsibility