Credit Industry News Announcements
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The Oregon Department of Consumer and Business Services Insurance Division is reminding the insurance industry of new credit scoring legislation, which passed in the 2009 Legislative session and apply to personal insurance policies issued or renewed on or after Jan. 1, 2010
Questions have been raised regarding the interpretation of certain provisions in sections (2)(a) and (2)(b) of Senate Bill 377, DCBS said. Thus, it has provided a list of frequently asked questions and answers on its Web site.
Senate Bill 260, which passed in the 2003 Legislative Session, imposed limits on an insurer's use of credit history or insurance scoring for certain types of personal insurance. It allowed insurers to use a consumer's credit information only when issuing new personal insurance policies. If an insurer assigned a consumer to a less favorable rating category for a personal insurance policy based on the use of the consumer's credit information, that consumer could request a rerating of that policy no more than once annually. Senate Bill 377 (SB 377), which passed in the 2009 Legislative Session, expanded the rights of a consumer to request rerating of a personal insurance policy and provided additional consumer protections. In particular, the results of a rerating can only be used by an insurer to reduce a consumer's premiums.
According to DCBS, if an insurer uses the consumer's credit history or insurance score at any time in the rating of a personal insurance policy, the consumer may request, no more than once per insurer per policy line annually, that the insurer rerate the consumer according to the standards that the insurer would apply if the consumer were initially applying for the same insurance policy.
The insurer shall rerate the consumer within 30 days after receiving a request from the consumer, DCBS. After rerating the consumer based upon the request, the insurer may not use credit information from rerating to increase the premium on any personal insurance policy the consumer holds. If the consumer qualifies for a more favorable rating category, the insurer shall reduce the premiums on all the personal insurance policies the consumer holds in the related policy line for which the consumer's credit history and insurance score would entitle the consumer to lower premiums if the consumer were applying for a new policy. The effective date of any rate change is the date of the consumer's request.
For more information, visithttp://www.insurance.oregon.gov/bulletins/bulletin2010-02.html.
The recession may have done a number on your credit score, even if it spurred you to reform spendthrift ways and cut up your credit cards. For many, the drops have come at the same time that lenders have tightened their standards and demanded higher scores to get the best interest rates.
Even if you haven't had major credit troubles, like a foreclosure, your score may have dropped if you missed a few deadlines or boosted your balances when cash was tight. A study by credit bureau Experian found that average credit card balances in the top tier of borrowers are 22 percent higher than they were a year ago.
And some people's scores have suffered even though they thought they were doing everything right. Credit card companies have been lowering credit limits and closing accounts in an attempt to minimize their risk -- 13 percent of people surveyed in January by Credit.com said their card company had lowered their credit limit over the past few months, and 11 percent said a card company closed their account.
Your credit score is the numerical summary of the information in your credit reports, which lenders use to predict the likelihood that you will repay your loans. The most common score that lenders use is the FICO score, which ranges from 300 to 850. The higher the score, the better. The median score tends to run between 710 and 720.
Your credit score can have a surprisingly large impact on your life -- affecting not only interest rates and terms made available to you, but your ability to get an apartment, cellphone service and affordable car insurance. And this magic number can make or break your ability to qualify for a good mortgage deal.
"It has become a very score-driven industry," said John Ulzheimer, president of consumer education for Credit.com. You generally need a credit score of at least 620 to qualify for a loan that can be bought by Fannie Mae or Freddie Mac, which gives you a wide range of mortgage options. Borrowers with low credit scores have always found the Federal Housing Administration mortgage program more welcoming, but even the FHA is growing more demanding about scores. The agency has proposed that, starting this summer, the program allow only borrowers with scores above 580 to qualify for a loan with 3.5 percent down payment. Those with scores below 580 would be required to make down payments of at least 10 percent.
Brad Sherman, vice president of residential lending for Nationwide Mortgage Services in Rockville, said most people need a 740 or higher to get the best rates these days. For people with scores below that level, Fannie and Freddie generally base rates on 20-point brackets of credit scores -- the lower your score, the higher your interest rate and the higher amount of equity, or cash down payment, the lender will require. "Having more equity in a house could counteract a poor score, but you still need to have at least a 620," Sherman says.
Just under one-third of your score is based on the amounts you owe. A key element is the portion of your available credit that you've used, called your "credit utilization ratio." Your available credit shrinks when your card company decreases your credit limit or closes an account. If the balances on your other cards remain the same, then your utilization ratio goes up and your score can go down.
There's good news, however, for homeowners whose home-equity credit lines' limits have been lowered because of declining property values. Such limit reductions do not affect credit scores.
Even a relatively minor score change can make a big difference in your interest rate. According to the FICO Web site, borrowers with scores of 760 to 850 paid average rates of 4.613 percent on 30-year $300,000 mortgages this week, while those with scores of 660 to 679 paid average rates of 5.226 percent -- translating to a payment difference of about $40,300 over the life of the loan. (You can run your own numbers at http://www.myfico.com.)
No matter what happened to your score during the recession, taking the following steps a few months before you apply for a mortgage can improve your score and translate into big savings.
-- Check your credit reports from all three credit bureaus, Equifax, Experian and TransUnion. Your credit score is based on information from your credit reports, and errors can unfairly hurt your score. You can get free credit reports from all three bureaus every 12 months at http://www.annualcreditreport.com, or you can order them directly from the bureaus for about $10 each. It's important to check all three because each can be slightly different, and an error can appear on just one version.
- Beware of offers of "free" reports and scores that require you to sign up for an expensive credit-monitoring program. Maxine Sweet, vice president of public education for Experian, recommends reporting any errors to the bureau online, which can speed up the process because you input the information directly into the bureau's system. Disputes must be processed within 30 days, but they usually are settled faster, she said.
-- Start paying down credit card balances. "It's the fastest way to improve your score," said FICO spokesman Craig Watts. The lower your balances, the better for your score. Keep in mind that it's the balance that the credit card company reports to the credit bureau that counts -- usually the total charges reported on your monthly statement -- not whether you pay your bill in full. Ulzheimer recommends keeping your balances below 10 percent of available credit, starting three to six months before you apply for a mortgage.
-- Pay your bills on time. This is the most important factor in your credit score. Late payments remain on your credit report for up to seven years but have a smaller impact on your score as time passes. If you're having cash-flow issues, make at least the minimum payment by the due date, which is more important to your credit score than whether you pay the bill in full. And be vigilant about payment changes -- several card companies increased their minimum payments from 2 percent to 4 percent or 5 percent over the past several months, which caught many cardholders off guard.
-- Don't close accounts before applying for a loan. Closing credit card accounts can never help your score, Watts said. In fact, your score is likely to drop if you close the account and maintain the same balance on your other cards, which increases your utilization ratio. Even though you may want to stick it to the card company after it raises your interest rate or imposes a new annual fee or inactivity fee, wait until after you get the mortgage to make your move. Then pay down the balances on your remaining cards so you can keep your overall utilization ratio low.
-- Avoid opening new cards in the months before taking out a mortgage. "Each time you apply for a new card, there's a very slight impact on your credit score," said Steven Katz, a spokesman for TransUnion. "Three or four applications over a period of months multiplies that impact and can have the effect of making you look credit-hungry in the eyes of lenders."
-- Pay off old fines. A library fine, parking ticket or missed utility bill can ding your score by as much as 100 points if the account ends up going to collection. Check your credit report for signs of trouble, and pay off any old fines before they come back to haunt you.
Kimberly Lankford is the author of "Rescue Your Financial Life" (McGraw-Hill) and "The Insurance Maze" (Kaplan).
Many people are looking for ways to rebuild their bad credit score and while there are different plans with which you can do so, one of the more common ways is with a secured credit card. While many top lenders and reputable financial institutions offer secured credit cards, sadly, few people take advantage of the benefits they offer.
Secured credit cards work just like a regular credit card only the cardholder is required to deposit money into an account with the card issuer or bank, which secures the credit card. Some people are wary about doing this but a secured credit card usually brings a lower interest rate as a result of being secured.
Getting an unsecured credit card, when you have bad credit, often is difficult or brings a high interest rate, which can cause troubles down the road. So, if your goal is to improve your bad credit score by using a secured credit card, then putting money into an account to show you are trustworthy isn’t going to be a problem.
While a secured credit card can be a great asset in rebuilding bad credit, you will want to be sure that you are in the financial position to use the card and pay off charges. Only by doing this can you raise your credit score, but make sure you are financially stable position before using any type of credit card for rebuilding your credit.
By Karen Byrd
Shortly after Byron Hebert started his business, Daytona Limos, in 2007, he applied for and received two business credit cards from Capital One. With credit lines of $7,000 and $25,000, they were an invaluable tool in managing the cash flow of the Daytona Beach, Fl.-based limousine service.
However, in November, Hebert learned that the cards had one big downside: Capital One was reporting the accounts on his personal credit report. Listing his business’ debt alongside and in the same manner as his personal debt gave the impression to anyone who checked his credit that he was overextended, Hebert says.
Capital One spokesman Steve Schooff says reporting the accounts to both the consumer and commercial credit bureaus is “standard industry practice.”
Traditionally, that hasn’t been the case. JP Morgan Chase and American Express say they check a consumer’s credit report when they apply for a business credit card, but report the accounts to the consumer credit bureaus only if they become delinquent. The accounts are otherwise reported to the so-called commercial credit bureaus, including D&B and Experian’s Small Business Services. Small business owners appreciate the practice, because it allows them to use the cards for business expenses without worrying that they may appear heavily indebted on a personal level, says Gerri Detweiler, a credit adviser with educational web site Credit.com.
When a highly-utilized business credit card appears on a person’s individual report, the negative effect could snowball quickly. For example, the addition of $20,000 of business debt to the $20,000 Hebert already owed on his personal credit cards led Bank of America to close one of his personal credit cards and cut the limit of another, from $35,000 to $9,900, just $200 above his balance. As a result, Hebert’s credit score, once in the high 700s, fell to the low 700s.
“What really gets me is that if I wanted to apply for a loan, I’d have to list my income – I can’t list the company’s entire gross revenues,” Hebert says. “Yet the creditors will look at all the debt my business has, even if the company pays those credit cards.”
Bank of America declined to comment on an individual case. Company spokeswoman Betty Reiss said the company monitors accounts for risk and may make adjustments accordingly.
Capital One is the first large issuer to start reporting business credit-card accounts that are in good standing to the consumer credit-reporting bureaus. And even if small business owners deem the practice unfair, it is legal. Issuers can report business credit-card usage to consumer credit reports as long as they have the business owner’s authorization to check their personal credit, says Gene Truono, a managing director with the consumer regulatory compliance banking practice at BDO Consulting. Typically, consumers grant that authorization when they apply for the card.
Business credit cards can be a valuable cash-management tool for small business owners. They tend to have more generous credit lines and their rates are slightly lower than those associated with consumer credit cards, says Truono. But they have drawbacks that, once the CARD Act comes into effect February 22, 2010, will only get stronger. Here’s what small business owners should know before they sign up.
Most – if not all – business credit cards include a personal liability waiver in their terms and conditions. By opening and using the card, you agree that, if the account becomes delinquent, the issuer can come after your personal assets for the balance. That includes any charges made by any business employees you designate as authorized users of the card.
The CARD Act does not apply to credit cards used for business purposes, says Truono. Although card issuers may elect to apply the same rules to their consumer and business-card portfolios to keep their operating costs low, that move will be a voluntary decision. So, as of Feb. 22, 2010, issuers will not be allowed to hike interest rates for existing balances on consumer credit cards, but they will still be able to do that with the credit cards issued to and used by businesses.
Although most issuers do not report business credit cards to the consumer credit reporting agencies right now, they do report the accounts if they become delinquent. If times get tough for the business and the owner can’t make a card payment, they have to dig into their personal savings in order to keep the account current – or risk a hit to their personal credit.
FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining your FICO score.
These percentages are based on the importance of the five categories for the general population. For particular groups - for example, people who have not been using credit long - the importance of these categories may be somewhat different.
Please note that:
The rules that credit-card companies have to live by changed dramatically with the enactment of new regulations last month. Now, some of the rules for consumers striving to maintain good credit are changing, too.
For the most part, card holders would still do well to pay on time, keep their balances low and refrain from applying for too many credit cards at once. But some of the old tenets may not always hold up, as credit-card companies continue to adapt to the new environment and look for ways to run their for-profit businesses.
Case in point: Many issuers introduced annual or inactivity fees in the weeks leading to or immediately after the Credit Card Accountability, Responsibility and Disclosure Act went into effect. “Now folks have to decide – do they want this card badly enough to pay the fee, or do they close it,” says Barry Paperno, the consumer operations manager at FICO. It’s a question of more than just losing a credit line. Closing a credit card can have a big impact on one’s credit score. That is, unless you do some groundwork in advance.
With the help of some easy – if often counterintuitive – steps, you can improve and retain a healthy credit score even in today’s fast-changing credit environment. Here are five:
here.) But with credit issuers lowering credit limits left and right these days, having too few credit cards puts a much more important credit-score component at risk: credit utilization, or how much of your available credit you're using. Credit utilization makes up 30% of your score. “More cards mean more available credit and more options if an issuer decides they don’t like you,” says John Ulzheimer, president for educational services at Credit.com. Generally, having four or five credit cards is better than having just one or two, he says.
Expanding your credit-card portfolio isn’t something you should do tomorrow – it’s a strategy to be executed over time. If you have just two cards, now is the time to open a third. But wait at least six months or a year until you apply for a fourth.
Some types of payment cards don’t report credit limits to the credit bureaus. They include all charge cards from American Express and may include some high-end credit cards that are marketed as having no preset spending limit, such Visa Signature and MasterCard World. (These cards have a credit limit, but card holders can exceed it and must pay off the excess in full on their next bill.)
When the FICO scoring system comes across such an account, it will either bypass it for the purpose of calculating credit utilization, or substitute the credit limit value with that of the highest balance on record for the account. The most current FICO scores from TransUnion and Equifax bypass charge cards, according to Paperno. So as far as those two bureaus are concerned, your charge card spending will not affect your utilization.
But in cases where the FICO formulas substitute the credit limit value with that of the highest balance, consumers who spend roughly the same amount each month could end up with lower scores than they deserve. The solution: run up a balance that’s much higher than usual, and your utilization ratio will improve in the following months, Ulzheimer says, and so will your score. (Just pay off that balance in full the next month to avoid interest charges.) Your score will drop during the month for which your card appears maxed out, so don’t execute this strategy if you’re shopping for a mortgage or another large loan.
To find out if you have cards that don’t report a credit limit, check your credit report. You can order one free report a year from each of the three credit bureaus on AnnualCreditReport.com. Charge cards are typically reported as “open,” while other credit-card accounts are reported as “revolving,” Paperno says.
Mix business and personal
Before the passage of the CARD Act, credit experts routinely advised business owners to keep business and personal expenses separate: use a business credit card for the business, a consumer credit one for their own expenses. Not any more. The CARD Act doesn’t apply to business credit cards, so using a personal card for your business expenses is safer, says Detweiler. On the flip side, that may easily hurt your credit, especially if your business expenses are high. Even if you pay those high balances in full each month, they will be listed on your credit report and you could appear overextended. (Of course, there’s no guarantee that this isn’t happening to you even if you’re still keeping things separate. Some issuers now report business credit card accounts to the consumer credit bureaus.) “There’s no easy answer here,” Detweiler says.
Listen to this news conference with U.S. PIRG's Ed Mierzwinski, Harvard Law Professor Elizabeth Warren and Univ. of Washington student leader Tim Mensing. Audio stream: http://bit.ly/aXkZH1
The Credit CARD Act goes into effect on February 22nd. This is a big victory for students and all consumers.
Help spread the word by sharing this page with your friends: post it on Facebook and send some emails!
Download our Consumer Guide to Credit Cards for tips to avoid credit card debt and to learn what to look for when signing up for a credit card.
By Michelle SingletaryThursday, February 25, 2010
"Credit card debt, does it ever end?" That's a haunting line delivered by comedian Amy Poehler in a 2006 "Saturday Night Live" skit also featuring Steve Martin and Chris Parnell. The sketch was brilliantly and simply titled "Don't Buy Stuff You Cannot Afford." (You can view it at Hulu.com).
So here we are in 2010, contending with a new law aimed at helping cardholders who have gotten deeply into debt for stuff they could not afford and have been kept there by lenders' policies.
This week, the second phase of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (also known as the Credit CARD Act), which put into place a number of consumer protections, went into effect. Here are answers to some of the many questions I've received from cardholders about those protections.
One reader asked: "Can banks still charge over-limit fees if you go over your limit because of monthly interest charges on your account?"
First, the Federal Reserve has created an interactive Web site (http://www.federalreserve.gov/creditcard) to help cardholders understand the new safeguards. One of the site's features is a summary of the new law's main provisions.
Under the law, companies can no longer push you over the limit with fees or interest charges. Those over-limit charges can only be assessed when a transaction or an extension of credit causes you to exceed your limit.
You should also know that issuers are prohibited from making the amount of credit available conditional on the consumer's consent to the payment of over-limit transactions. Issuers also can't charge interest on the fees themselves -- for example, for being over the limit or late.
Most of the questions I'm getting are from people who aren't happy about changes to their credit-card agreements prompted by the new law, and now they want to kick their card and issuer to the curb. However, they are worried about the almighty credit score.
"Do I get penalized if I choose to discontinue using a company's credit card?" asked another reader. "I was told that if you cancel a credit card, it will affect your credit score. It should be my right to cancel a credit card without any penalty from anyone." A third asked: "If I choose to opt out by closing an account that has a balance, and continue to pay down the balance under the current term, will that have a negative impact on my credit score?"
In some cases, closing an account can have a negative impact on your credit scores. For others, there are little or no repercussions.
Determining which group you fall into depends on how much of your available credit you're using on each of your credit cards. You need to calculate your credit utilization rate. What percentages of your credit line are you using? This will help you decide whether to close the account.
What most affects your score when an account is closed is the presence of outstanding balances on other open accounts -- not the closure of the account in itself. The scoring system looks at how much credit you are using compared to how much you have available.
If you have a large outstanding balance relative to your limit, then canceling a card could decrease your score. If you have multiple credit card accounts, all with zero balances, however, you could close one or more if you aren't happy with the new terms with little effect on your scores.
Closing a credit card account won't affect the duration of your credit history. Credit bureaus keep records of closed accounts in consumer credit files for years (seven years for negative information, longer for positive information). A closed account will continue to appear on your credit report where it is accessible for the calculation of FICO scores. The FICO score, the one most lenders use, considers both open and closed accounts when calculating length of credit history.
If you have more questions about the CARD Act, send them to me at email@example.com.
If you own and use a credit card, make it your business to know at least the basics of the new law. If you won't take the time to know what's in the law, I want you to pull out your credit cards right now.
Get a pair of scissors.
Now cut up every single one.
I'm not saying you need to close the accounts just yet, but stop using the cards. Otherwise, you'll just be racking up debt that never ends.
Wednesday, February 24, 2010
By William Davis
Being late on payments or defaulting on a credit card account can lead to a negative effect on a person's credit score, and a recent report showed more people may be having problems with debt.
According to Moody's Investors Service, credit card charge offs increased to 11.15 percent in January, which is a rise of 0.83 percentage points compared to December. Charge offs are credit card debts that companies no longer expect to be repaid.
Though charge offs were up, the number of early-stage delinquencies did show improvement. Accounts that are more than 30 days late dropped to 5.96 percent. This is the first time early-stage delinquencies were below 6 percent since September.
"The improvement in the early-stage delinquency rate was contrary to seasonal patterns that typically lean toward rising early stage delinquencies this time of year," said William Black, senior vice president with the company.
Experts note that a decline in early-stage delinquencies could lead to a lower number of charge offs for credit card companies. If delinquencies and charge offs decline, lenders may be more inclined to make credit card offers to consumers as the credit crunch eases.
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