Credit scores are a mystery to many American consumers. Even the most seasoned professionals are shocked to learn how easily their credit can be destroyed. In CREDIT SCORE POWER, author Tracy Becker offers insight into navigating the scoring system and fo
CREDIT SCORE POWER
A VIEW INTO THE MISUNDERSTOOD RULES OF CREDIT AND WHAT MAKES FOR THE BEST SCORESBy TRACY BECKERiUniverse, Inc.
Copyright © 2011 Tracy Becker
All right reserved.ISBN: 978-1-4620-0717-2Contents
CHAPTER ONE Who Are the Credit Bureaus, and What Do They Do?.....................1CHAPTER TWO Credit Scores and the Credit-Scoring Systems.........................15CHAPTER THREE Shopping for a Mortgage or Loan....................................37CHAPTER FOUR Having the Best Credit..............................................56CHAPTER FIVE Negative Information................................................71CHAPTER SIX Examples of Financial Stress.........................................101CHAPTER SEVEN Credit Monitoring and Identity Protection..........................111
Chapter One
Who Are the Credit Bureaus, and What Do They Do?
Credit-reporting agencies were created in the 1900s, when people started moving across the country. At this time, it was difficult to track consumer credit histories, since they could default on loans, move easily from place to place, and just begin again in a new area. Within the United States, there began to be many more banks and lenders, so payment histories were harder to track for each individual. In the past, there would be a local lender who could see each individual's full credit history, since they had control of all the lending. That lender being the only available choice for borrowing money made it easy to regulate payment patterns. Because of these growth changes, the need for an entity that could provide all of an individual's or business' credit history, no matter where they were located at any given time, was paramount.
Credit bureaus, also known as credit-reporting agencies (CRAs), are nongovernmental agencies that collect and sell information. There is more than one agency because, like most businesses, they compete for profits. Two of them are public, and one is a private company. For the most part, the information they provide includes histories of creditworthiness, showing how business and consumers rate in terms of their ability to meet debt obligations. The CRAs provide many other services related to gathering information, statistics, and selling information to companies for marketing purposes.
Personal credit profiles provide creditors, collectors, and solicitors with a view of a consumer's history for a period of seven to twenty years. Generally, positive information can remain for the period it is open and active and can be removed after two years of inactivity (closing of account). Although information does not have to be reported for longer than this period, many creditors will leave it on the report indefinitely. Negative information generally remains for seven to ten years, depending on what it is. I speak more about this and the exceptions in later chapters. The three major consumer credit bureaus that supply the majority of consumer credit are TransUnion, Equifax, and Experian.
TransUnion
TransUnion has been in business since 1968, with headquarters in Chicago. It is a private company that recently sold more than half of its shares. The Pritzker family, who owns Trans Union and much more, reported that they sold 51 percent of their stake to a private equity firm, Madison Dearborn, in 2010. This sale was the result of many disputes within the family, after which they agreed their $15 billion empire, which included TransUnion, would be divided by 2011. TransUnion is the smallest of the three reporting bureaus, supporting more than fifty thousand customers on five continents and more than five hundred million consumers across the globe.
Equifax
Equifax was founded in 1898 by two brothers—Cator and Guy Woolford, a bank employee and an attorney, respectively— who started compiling information reported by creditors on the history of payment patterns of their shoppers. They published their findings in the form of a guide, which they sold to merchants for twenty-five dollars. They also sold credit reports on individual consumers. It was such a success that it has grown to be the business it is today.
Equifax is a public company that has been gathering information for consumers and businesses for over one hundred years. It employs over seven thousand people in fifteen countries. Equifax focuses on solutions for business and provides consumers with credit reports as well. The business solutions Equifax provides include information and lists to help a business market to the right consumer. Since information is power, the recording of individuals' credit histories and personal information makes the bureau a valuable resource for business.
Experian
In 1996, the old Experian (which was called TRW) was combined with the CCN Group by GUS plc, the British conglomerate. The CCN Group was Europe's largest information bureau. Everyone recognizes the name TRW, and some consumers still use the name, not realizing the company is no longer TRW but Experian. Over the ten-year period after the two companies merged, GUS developed and strengthened Experian. Then, in 2006, GUS demerged the two, and Experian became an independent company. Experian is a public company that employs about fifteen thousand people and provides data and services to clients in more than sixty-five countries.
On a consumer level, the three CRAs serve as a library of information about how patterns of payments reflect individual credit histories. Creditors constantly provide updated and new information changes in credit history, whether positive, negative, accurate, or in many cases, inaccurate. This information is compiled and resold to members who make decisions about approving credit applications. There are hundreds if not thousands of regional bureaus across the United States under contract or owned by one of the three bureaus mentioned.
Credit Information Uses
Credit bureaus also offer services to businesses, helping companies across the globe manage risks and rewards related to lending to consumers and other businesses. These services include:
• Credit Services: They maintain databases that· hold information about all consumers on a national, and in many cases, global level.
• Decision Analytics: They offer analytical tools· and skills that help give organizations support to make better decisions.
• Marketing Services: Through their marketing· services, they help clients find and keep customers.
• Interactive: They open communications between· consumers and businesses by providing many services, including e-mail, telephone, direct-response mail, and text. This enables businesses to develop a larger client base.
• Protection Products: The bureaus also sell products· that allow consumers to manage and protect their personal credit profiles and to view a variety of credit score models.
Many businesses use lists of specific types of consumers who fit into their desired category of clients. For example, Capital One offers a 0 percent interest rate credit card to a consumer who lives in an area where the average income is over $90,000. They are looking for a consumer with five other lines of credit with at least 40 percent of balance to limit ratio on credit card debt, a mortgage, a student loan, and an automobile loan or lease. This type of consumer may be the best choice for the creditor issuing this card, since this consumer is more likely to transfer high balances over to this card. Capital One can go to the CRAs and request a consumer list based on these specifications.
Use of qualification-specific lists could also work for a company that is negotiating tax debt or looking for potential foreclosure candidates. CRAs can supply a list of all consumers with unpaid tax liens or borrowers who have four to six consecutive late payments on their current mortgage. A creditor might be looking to market to students looking for used textbooks. In this case, a list might be requested of consumers in a certain age range with open student loans. They might look for a lower-income address as well. These are just a few examples of some of the ways these lists might work.
After speaking with thousands of bankers and consumers, one question that often comes up is about being solicited by various companies. These companies, such as debt settlement, credit card, mortgage, loan modification, and even credit restoration firms, buy lists of specific categories of consumers from CRAs. This is a huge source of revenue for credit bureaus (Experian, TransUnion, and Equifax). Since their business is gathering detailed information about all consumers—including their spending habits, debt accumulation, home ownership status, and much more—it makes perfect sense they would use this information to make more profits. These lists are available to any business for the right price.
How often have we been interrupted by a phone call, at the worst possible moment, to find out we are approved for the "opportunity" to have our debt settled for a fraction of the price, refinance our mortgage, restore our credit, buy life or car insurance at better prices, and much more? I have heard of businesses getting these solicitations as well. They come in many forms, such as regular mail, e-mail, and, of course, those phone calls. These days, many people keep a shredder near the desk where they read mail, so they can securely dispose of all the credit card offers (and more).
So, now you know how that telemarketer who called you last week might have gotten your information. How the insurance company that sent you a promotional letter knew you just bought a new home or car or even had a car accident. You can imagine the power and money these lists could provide to any business.
After giving you a picture of the negatives associated with these solicitations, it is important to understand the positives, too. Many times we learn more about what is available, scam or valid, and are given new ideas about our choices when we engage these solicitors. I personally learn about many scams by listening and evaluating what I hear and read from this information. Of course, that includes the radio advertisements, but the difference is we have more control over the radio ads, and the information is presented to us by turning on the radio as opposed to getting literature or phone calls directed at us specifically as individuals.
A variety of consumers call us to ask questions about their choices after speaking with companies that have contacted them through these lists. Consistently, they are asking for recommendations from their CPAs, financial planners, mortgage experts, or trusted friends who refer them to us for advice. When interviewing these consumers, we uncover the fact that the information they are given by the sales representative is usually only a portion of the truth. Many consequential factors are withheld, such as the tax ramification of settling debt, ratios of savings, decrease in their credit score, time it takes for their credit to recover, and so on. It is helpful to remember that in most cases these calls have motivated consumers to pursue more information about the choice they have been offered and often lead them to a better solution for their situation if they do their homework.
Opting Out
If you would still like to opt out of being solicited via CRAs, I am providing information taken directly from the Federal Trade Commission's site, www.ftc.gov/bcp/edu/pubs/ consumer/alerts/alt063.shtm:
"The credit bureaus offer a toll-free number that enables you to 'opt-out' of having pre-approved credit offers sent to you for five years. Call 1-888-5-OPTOUT (567-8688) or visit www.optoutprescreen.com for more information. When you call, you'll be asked for personal information, including your home telephone number, your name, and your Social Security number. The information you provide is confidential and will be used only to process your request to opt out of receiving pre-screened offers of credit. In addition, you can notify the three major credit bureaus that you do not want personal information about you shared for promotional purposes—an important step toward eliminating unsolicited mail. Write your own letter or use the information (SEE BELOW) to limit the amount of information the credit bureaus will share about you. Send your letter to each of the three major credit bureaus:
Experian 901 West Bond Lincoln, NE 68521 Attn: Consumer Services Department
TransUnion Name Removal Option P.O. Box 505 Woodlyn, PA 19094
Equifax, Inc. Options P.O. Box 740123 Atlanta, GA 30374-0123
"(Please reconfirm these addresses if you are using this info after 2011.)
"The letter should have the date, your full name, Social Security number, date of birth, address and previous address (if you have moved within the last two years). It should state: I request to have my name removed from your marketing list. Attaching proof of address and your Social Security number is a good idea as well.
"Do Not Call
"The federal government has created the National Do Not Call Registry—a free, easy way to reduce the telemarketing calls you get at home. To register your phone number or to get information about the registry, visit www.donotcall.gov, or call 1-888-382-1222 from the phone number you want to register. You will get fewer telemarketing calls within 31 days of registering your number. Telephone numbers on the registry will only be removed when they are disconnected and reassigned, or when you choose to remove a number from the registry.
"The Direct Marketing Association's (DMA) Mail Preference Service lets you opt out of receiving unsolicited commercial mail from many national companies for five years. When you register with this service (for a $1.00 fee), your name will be put on a 'delete' file and made available to direct-mail marketers. However, your registration will not stop mailings from organizations that do not use the DMA's Mail Preference Service. To register with DMA's Mail Preference Service, go to www.dmachoice.org.
"E-mail
"The DMA also has an E-mail Preference Service to help you reduce unsolicited commercial e-mails. To opt out of receiving unsolicited commercial e-mail from DMA members, visit www.dmachoice.org/EMPS. Your online request will be effective for five years."
Business Credit
Business credit is based on a company's employer identification number (EIN), its payment history, and financial reports. One of the biggest differences between business and consumer credit is that the late payments can affect business credit more, depending on how high the debt is in comparison with other open accounts. If late payments are made to a vendor owed $20,000 in debt and there are other vendors with higher debt owed, the score will be affected less. If a business is late paying a vendor with the highest debt on the business's credit report, the scores plummet. Payment history is dependent on dollar value of the debt for each vendor. The higher the debt owed to the vendor, the heavier the dip in score if a late payment occurs.
Business Scores
We will discuss personal scores, such as FICO, in the next chapter, but credit bureaus also create scores for businesses. There are four main scores discussed in this section that are related to Dun & Bradstreet Credit: paydex, financial stress, commercial credit, and Dun & Bradstreet (D&B) rating. Dun & Bradstreet was one of the first companies created to provide information for business-to-business decision making. As lenders needed risk data when underwriting loans and credit extensions for consumers, it makes perfect sense there would also be a need for the same type of information when deciding to lend money or give credit extensions to businesses. In 1841, the first CRA was created with business credit histories as the focus. It was a businessman named Lewis Tappan who set up shop in New York. Eight years later, he turned over his business to Benjamin Douglass, who continued to build the company's reputation. In 1859, Douglass turned the company over to Robert Graham Dun. In 1849, John M. Bradstreet opened a competing company in Ohio. The companies were fierce competitors until they merged in 1933 to become Dun & Bradstreet, known today as the oldest and most popular source of business credit reporting. Dun & Bradstreet merged with TransUnion in 2010 and has been using the vast consumer credit bureau's information to build upon its already sophisticated programs and products. It has fine-tuned many of its scores and indexes.
Paydex
For a business, one of the most important scores is its D&B Paydex score. Knowing what this number is and having the ability to increase it can mean acquiring financing needed to start or grow your business. These abilities can make the difference in achieving your business goals or losing your business. Dun & Bradstreet's definition of the Paydex score is: "The D&B Paydex score is its unique, dollar-weighted numerical indicator of how a firm paid its bills over the past year, based on trade experiences reported to D&B by various vendors. The D&B Paydex score ranges from one to one hundred, with higher scores indicating better payment performance."
A strong Paydex score can help give a business access to credit lines for marketing efforts, buying or leasing needed equipment, and getting the supplies required to land bigger clients and higher revenues. Obviously, if the score is low, the opposite will occur.
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Excerpted from CREDIT SCORE POWERby TRACY BECKER Copyright © 2011 by Tracy Becker. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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