Accidental credit card closures

Kiplinger's has posted a fascinating article about credit cards online. Included in this article:

Q: I hadn't used my credit card for about a year when my bank canceled my account. Can a bank do that?

A: Afraid so. Even if your account is in good standing and you haven't been late with a payment even once, an issuer has the right to rescind your card. Some have even closed accounts on active customers because they incurred no fees or interest charges. "There's no regulation that says you must continue doing business with someone who's not profitable," says David Medine, associate director of credit practices at the Federal Trade Commission.

Yikes! I have never heard of a bank closing a consumers credit card account but it does seem entirely possible. If this happens to you, your credit score could drop fairly dramatically. Especially, if the the card that is closed is the oldest on your credit report or one of only a few cards you have.

The moral to this story: Be sure to use all your credit cards at least once every few months.

   

Weekend assignment

This weekend, reserve a half hour or so to go online and check your credit scores. Regularly checking your credit reports and scores can help you guard against identity theft and spot damaging inaccuracies. Checking your credit scores now means you won't have to worry about them when you want to apply for a new account later.

Plus, be sure to read this interesting article about credit scores from Business Week. As a refresher, you can also read the CreditBloggers post about how 30, 60 and 90 day late payments really impact your credit scores. By Monday, you'll be informed about your credit and ready to tackle the holiday shopping season!

It's simple to overlook this one...

It's well known that a prime target of identity thieves is your mail. Your mail has most of the information needed to fill out a credit application in your name. The only thing missing is your social security number.

Those of you who use shredders, bravo! You probably shred everything that has your name and address on it. Well done.

Here's a sneaky tidbit that you need to know about...check out the inside of catalogs. More and more catalogs have a pre-filled out order form within their pages. If you aren't careful you'll shred the name and address on the outside of the catalog but forget to rip out the order form. It can easily be overlooked.

Trust me, if I can figure this out then so can an identity thief.

You'll be getting a ton of catalogs over the next month. Please be careful to shred all of your sensitive information.

What's The Difference Between Credit Scores, Application Scores and Custom Models?

Scores, scores, scores...too many scores. One of the most common questions I hear is "what is an application score?" and "how is that different from my credit score?"

In order to really understand the whole scoring landscape you really need to expand that question to include custom scoring models and insurance scoring models.

Here's a definition of 4 of the most common types of "scores" used today by lenders and insurance companies.

Credit Bureau Scoring Models - These scoring models use only the information on your credit reports to generate a "credit bureau risk score." These scores are used by pretty much all lenders when you apply for credit. They are designed to predict whether or not you will pay your bills on time. They are the least powerful of the scores we'll define. However, they are also readily available for any lender to use and are the least expensive. As such, they are by far the most popular and commonly used scores.

Application Scoring Models - These scoring models use information from BOTH your credit reports AND your credit application. Again, these scores are designed to predict whether you will pay your bills on time. They are more powerful than credit bureau scoring models but are also more expensive and more difficult to implement. They are more powerful because they take into account information from your application, which credit scoring models can't do. There is a lot of predictive information that can be pulled from an application...your salary, time on the job, household income and time at your residence just to name a few. These are not as common as credit bureau scoring models.

Custom Models - These are the Rolls Royce of the bunch. They are by far the most powerful models but are also very expensive because they have to be custom built for each lender that uses them. To buy a custom model and maintain it can cost well into the 7 figures. They are only used by the powerhouse lenders who can afford them. They are so much better than all other types of models that lenders who use them can do a much better job of separating the future "good" payers from the future "bad" payers. So much better that they justify their cost.

Insurance Credit Scores - These scores aren't used by lenders...they are used by insurance companies. They are designed to predict a couple of things (depending on whose insurance score you use). Some are designed to predict whether or not you will file a homeowners or auto claim. And others are designed to predict whether or not your premiums are likely to outpace your claims. Yep, you got it. These are predicting whether or not you will be a profitable insurance customer.

These scores use information from your credit reports and also previous insurance claim data.

So let's summarize...

Least expensive, least powerful, most common - Credit Bureau Scoring Models
More expensive, more powerful, less common - Application Scoring Models
Most expensive, most powerful, least common - Custom Scoring Models
Unique to the Insurance Industry - Insurance Credit Scores

Enjoy the knowledge!!

Traveling: Watch out for ID theft

If you are traveling for Thanksgiving or the upcoming holidays, be sure to keep a close eye on your identity. A press release today warns travelers about the added risks of using a hotel's WiFi network. According to the article, using shared internet hotspots at airports and hotels can increase your risk for a hacker accessing your computer or PDA. If you do use public WiFi:

• Install a firewall system on your computer to guard against virtual intruders
• Don't keep sensitive records or files on your computer
• Don't access sensitive accounts online such as banks and investments when you are on a shared network
• Disable file sharing and peer-to-peer features on your computer

You can also guard against identity theft while traveling for the holidays by leaving unnecessary credit cards and personal documents at home in a safe place. You should also leave a photocopies of your wallet's contents and account information with a trusted person back at home. If your wallet is stolen or you encounter identity theft, these documents can help you report the crime quickly.

Do you know Innovis?

You may have heard the name in passing...seen their mysterious logo...but what is Innovis?

Innovis is often called the "fourth credit bureau." A relative newcomer to the credit reporting industry, Innovis collects consumer data and sells it to creditors for the purpose of creating mailing lists. Remember, all those mail offers you received after your last move? That was Innovis. The company is also used by Fannie Mae and Freddie Mac to track loan delinquencies.

Innovis isn't as consumer friendly or open as the other credit bureaus - Equifax, Experian and TransUnion. The sparse website for Innovis includes little more than a mailing address where you can send your request for a copy of your report. They list the price as $3 to $8, but I'm going to see if I can order mine for free by citing FACTA regulations.

The good news? Innovis data isn't used in a situation where you could be turned down for credit, insurance or a job, according to an NBC report. (Warning: the phone number listed in this report is disconnected) So even if there are damaging inaccuracies on your report, you won't be negatively harmed. Unless you count receiving less junk mail as being a negative!

ID Theft By Parents

ID Theft By Parents

My friend’s teenage stepdaughter thinks she has been a victim of identity theft. The perpetrator, unfortunately, is her mother. Increasingly, children are becoming victims of identity theft as their parents, who can’t get credit themselves, hijack their information.

My first recommendation was for the daughter to get her credit report from the federally mandated free report site www.AnnualCreditReport.com so she can find out what is listed. But when she tried to order it, she discovered minors cannot request a report online from that service.

So I called my contacts at Experian (whose execs are always very quick to respond to my questions – thank you!). Their spokesperson explained that generally, minors should order their free reports by mail, and include a copy of their birth certificate, along with a copy of their parent’s driver’s license or other id to verify the current address.

This particular situation is tricky, however, because Mom may be the one misusing her daughter’s information and so the daughter can't enlist her help. Experian offered to call the girl’s father (who lives at another address) and get a copy of her report to her through him.

What will this girl do if she does find out her mother is using her information to commit identity fraud? There is no easy answer. The companies that extended credit or services are going to want to get paid. And they aren’t likely to just say, “No problem” if she explains what happened. She probably won’t want to report her mother to the police. But if she doesn’t act, she may be stuck with bills or bad credit for years.

The best advice I could give her is to read the Identity Theft Resource Center’s guide which details the different types of adult/child identity theft and suggests ways to deal with it. The site offers numerous tips and strategies for this tragic situation.

Parents have no right to ruin their child’s credit and future in this way. If you are tempted to “borrow” your child’s information to get credit because you can’t, stop. Even if you plan on paying the bill on time, if anything goes wrong you can affect your child's ability to get a job or go to college. Get help from a non-profit agency or debtor’s anonymous immediately.

Credit card offer infiltration

Just yesterday, CreditBloggers had a post about the increase of sneaky credit card solicitations. Today it seems that the problem is going digital. American Express has started soliciting credit card offers to their existing customers via email. It's standard practice for existing customers to receive information about their accounts, rewards program deals and third party offers by email, but this is the first time I have seen a pre-approved credit card offer in my inbox.

This offer makes me a bit nervous because email is definitely not a secure means of transmitting information. The card's online application is secure and they do require you to verify your identity before applying, but it still makes me somewhat uncomfortable. Plus, I am not sure that opting-out from the credit bureau's pre-approved marketing programs would include these emails.

On the flip side, I guess it is better to receive these offers by easily-deletable-email than by pages of scan-and-shred paper mail. What are your thoughts on this practice? Submit your feedback in the comments section today.

Interest Only Mortgages...good idea or disaster waiting to happen

We've all heard of interest only mortgages. This type of mortgage is somewhat controversial because none of your payment goes against the principal amount of your loan. This means that if you borrow $300,000 to buy a house, even after you make your monthly payment...you will still owe $300,000. You haven't paid down the balance at all.

If you have an interest only loan locked in for 1,3,5 or 7 years then you'll still owe $300,000 after years of making payments.

So, the million dollar question is "are interest only loans a good idea or a disaster waiting to happen?"

What's wrong with making payments that don't lower your principal? Most people only live in their house for 5 years or so. After making payments that include principal for even 5 full years will only reduce the principal amount by a very small amount. So, in my example above you may still owe the bank $297,000 out of the $300,000. Not worth it in my opinion.

If after 5 years you sold the same house and netted (after the real estate agents ripped you off to the tune of 5% or so) $320,000 then you still walked away with a $20,000 tax free profit. So, what would have been the value of paying a much higher monthly payment just so you could pay down your loan a few thousand dollars...which you'd get back when you sold the house anyway.

Most of what you'll make on your investment you'll make in appreciation...not principal balance reduction. So, the smart play is to get in the house for as little as you can and allow it to appreciate.

And yes, your house is an investment. Never EVER get emotionally attached to your house. In fact, if you live in an area that has steady real estate appreciation the best investment you can make is to buy a fixer upper, fix it up, live in it for two years and then sell it by yourself (no real estate agents). Your profit is 100% tax free. If you never get emotionally attached to your house and you don't mind moving every two years then you will make big bucks. So big, in fact, that after you do this 5 or 6 times you should be able to pay cash for your next house.

Back to my subject, interest only mortgages.

Let's plug in some numbers...

Say I borrow $300,000 interest only at 6%. Multiply $300,000 by 6% and you get $18,000. Divide that by 12 and you get $1500. That's your monthly interest payment. That's much less than you would pay if you had to pay principal as well.

What's the drawback? My father and I had a discussion about interest only mortgages and his arguement is "you never own any part of it." Good point...but who cares. After 5 years you're still only going to own the toilets and maybe some of the windows. Who lives in a house for 30 years and makes their 360 payments? Even my father has refinanced his mortgage several times over the past 10 years and guess what...every time he refinances he starts over again...he still owes someone 360 payments.

Here's the only drawback I see...

Some people will use an interest only mortgage to get into a house that is way too expensive and which they could have never purchased with a conventional principal and interest mortgage. They think that just because you can qualify for $300,000 that you have to borrow $300,000.

What if you lost your job or were unable to refinace the interest only mortgage and buy more years of lower payments? Eventually your interest only loan will have to be refinaced, paid in full or allowed to convert to a loan which requires principal payments. In the last case your payment will shoot through the roof and you might default on the loan...aka foreclosure.

If you are disciplined enough to NOT borrow the max on an interest only loan you should be just fine.

Good luck!!

Keeping kids safe from identity theft

MarketWatch today featured an interesting article about keeping your children's identity safe. While child identity theft is still fairly rare, it is most commonly perpetrated by a relative or family friend. The damage isn't usually spotted until the child turns eighteen and is turned down for a credit card because of a low credit score.

The article references the Identity Theft Resource Center's tips for spotting signs of identity fraud. This includes finding pre-approved credit card offers in the mail addressed to your child and receiving suspicious collection calls. It also advises parents to check their children's credit reports annually.

Ordering a child's credit report isn't easy though (and it shouldn't be for obvious reasons). You shouldn't try to order a credit report for a minor through the standard retail process. The best way to order a credit report for your child is to call the credit bureau fraud hotlines. The fraud reporting systems for Equifax (1-800-525-6285), Experian (1-888-680-7289) and TransUnion (1-800-680-7289) include options for requesting a copy of your child's credit report when you are concerned about identity theft.