Biblical Origins of Credit Report Law?

I listened to a pretty terrible webinar this afternoon designed to teach mortgage lenders the "inside secrets" about how credit scores "really" work. I just love to torture myself listening to self-proclaimed experts spouting inaccurate credit advice. Misinformation such as hard inquiries causing a 3-point score drop each and that a paid off mortgage record will hurt your credit score.

One thing mentioned during the webinar did catch my attention, though. The speaker said that:

the reason negative records expire from your credit reports after 7 years is biblical. The bible said that debts should be forgiven after 7 years.

Hmmm...this is interesting. I've never heard of this bible/Fair Credit Reporting Act connection before. A quick Google search turned up the following passage:

"At the end of every seven years you shall grant a release of debts.  And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the LORD's release" (Deuteronomy 15:1-2).

I suppose it is possible that there's a connection here. US bankruptcy laws preceded the Fair Credit Reporting Act. If there was a direct connection to scripture it would probably be from these earlier regulations that carried over into the FCRA.

I'll have to do a little more research on this. Are there any biblical scholars or colonial historians out there with information to share?

Emily Davidson is editor of CreditBloggers.com and a former credit expert for the credit bureau, TransUnion. She writes about credit and personal finance topics.

Tips for Buying a New Car

Normally a dedicated used car buyer, I just bought my first ever new car over the weekend. It's a Honda Fit; affordable, great gas mileage and ideal for living in a crowded city. Here are few tips from my first hand experience:

• Start shopping online - Browse and compare cars online before narrowing your list down to a few makes and models. Don't forget to consider similar used options that might be less expensive. Revise this "short list" down to one car by taking a few test drives.
• Get an insurance quote before you buy - Call your insurance company to see how much your rates might change with your new car and factor this cost into your decision making.
• Negotiate by email, phone and fax - This is key! Most auto dealers now have online departments that specialize in replying to customer emails. We were able to reduce our price significantly by negotiating with competing dealers in our area. And saved a lot of time and energy too.
• Apply for an online auto loan - Even if you don't use it, getting an auto loan quote online will help you negotiate the best financing rates with a dealership.
• Make sure your loan doesn't have a pre-payment penalty - Paying your auto loan off early can save you a bundle on finance charges.
• Avoid expensive "up-sells" - Car dealers can make a lot of money on overpriced perks like car mats, clear coating, extended warranties and "touch of class" packages. Either negotiate the prices way down or skip them.

With a little preparation and online work, it can be easy to get a great deal on a new car!

Emily Davidson is editor of CreditBloggers.com and a former credit expert for the credit bureau, TransUnion. She writes about credit and personal finance topics.

Funny Money Friday: Stock Market Crash Jokes

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

The stock market has taken another dive this week, the second time that we've gone through 300+ point drops this year. Big problems in the mortgage industry and corporate lending markets don't seem to be going away anytime soon. CNN has gone so far to call it "The End of the Credit Party."

While I continue to watch the value of my 401(k) tick down, here are a few good stockbroker jokes for Funny Money Friday:

Merrill Lynch has adjusted its investment portfolio: 50% cash and 50% canned goods.

Bumper sticker on Wall Street:  My other Porsche is for sale.

How many investment bankers can you fit in the back of a pickup truck? Only 2 - you have to leave room for the lawn mowers!

I have an uncle down at Wall Street.  He used to have a corner on the market. Now he has a market on the corner.

"Get my broker, Miss Jones."

"Yes sir.  Stock, or Pawn?"

Have a great weekend!

Emily Davidson is editor of CreditBloggers.com and a former credit expert for the credit bureau, TransUnion. She writes about credit and personal finance topics.

Squabbles Over the FTC Insurance Study Miss the Real Issue

The Federal Trade Commission released a report earlier this week about the use of credit scores in settling auto insurance rates. The report revealed a few conclusions, including the fact that credit scores do accurately predict a customer's future claim filing.

Already a highly controversial practice, this latest study on insurance risk scores has sparked a bevy of press releases from each corner of the debate. According to different groups, the FTC study definitively proves their opposing view points. Here's a quick summary:

Insurance Journal
According to this insurance trade journal, the FTC report backs their position that the use of credit scores makes insurance more affordable and fair. Their headline? "FTC Finds Use of Credit Helps Consumers."

"Now there should be no doubt about the value of using this highly predictive underwriting and rating tool...To achieve the goal of pricing based on an individual's risk of loss; insurers simply want to use the most accurate, statistically valid tools available and credit information has proven to be one of the best predictors of loss. With these findings, legislators and regulators should be very comfortable with insurers' use of insurance scoring."

Consumers Union
The Consumers Union approached the FTC study with a completely different perspective. They assert that the FTC report confirms that the use of credit scores leads to discriminatory pricing. Their headline? "FTC Study Confirms That Credit-Based Insurance Scores Mean African Americans and Hispanics Pay More for Auto Coverage"

"It's not fair that consumers with spotless driving records can be penalized with higher premiums just because of their credit score," said Norma Garcia, Senior Staff Attorney with Consumers Union. "Insurance premiums should be based on the risk of an accident, not a consumer's bill paying record for other goods and services."

American Insurance Association
The AIA praised the FTC insurance study as validation of the usefulness of insurance credit scores in their release titled "FTC Study Demonstrates Value of Using Credit Information for Auto Insurance."

"The FTC's study confirms what we have long professed, and many previous studies have shown, credit-based insurance scores help refine insurance pricing to better reflect an individual's risk profile.  We believe scores reduce subsidization of bad risks by good ones, meaning most consumers pay less for insurance."

Center for Economic Justice, Consumer Federation of America, National Consumer Law Center & National Fair Housing Alliance
These consumer advocacy agencies joined forces for a press release denouncing the FTC study, calling it a "fatally-flawed report [that] relies on handpicked data by insurance industry."

"Representatives of consumer and civil rights organizations today condemned a congressionally-mandated report on insurance credit scoring by the Federal Trade Commission (FTC) as biased insurance industry propaganda. The groups called for Congress to reject the defective study and ban the use of credit scoring in insurance."

So, who's right? It's hard to tell with all the shouting, but the reality of insurance credit scoring is that both sides are basically correct.

Yes, credit scoring is an effective and accurate way to predict insurance risk and the practice helps many consumers save money.

Yes, the use of credit scores over driving record to set insurance rates isn't logical and the practice does lead to African-Americans and Hispanics paying higher rates.

I think all the sides of this debate are really missing the big issue here: Why do African-Americans and Hispanics have lower credit scores than other groups? The credit scoring system itself is completely blind to race, address and other potential discrimination points. A shift in credit scores within these demographics represents a socio-economic crisis far greater than any squabble over car insurance.

Emily Davidson is editor of CreditBloggers.com and a former credit expert for the credit bureau, TransUnion. She writes about credit and personal finance topics.

Credit Cards, Parking Meters, and the 21st Century

Parking meters are not a factor in my small town life, but every time I come across one of those "feed me your coins" relics, I marvel at how slowly some municipal governments are moving toward "smart" meters that accept credit cards.

I know ... why should meter management be any different from other aspects of government?!  Precisely because 21st Century technology makes possible a new breed of smart meters that are easy to use, easy to manage, efficient, and fair both to drivers and the jurisdictions that install them. That must be why parking meters that take credit cards … as well as the old-fashioned dimes and quarters … are being tried in cities like New York, Milwaukee, and Philly, as well as in many other locations.

Even a village not too far from where I live is planning to replace the traditional, individual parking meters in its "downtown business district" with high-tech multi-space machines that take coins, bills, and credit cards. The more aesthetically pleasing new machines will lead to less meter-clutter on the streets.

For municipalities, fewer coins means less frequent emptying and therefore, greatly reduced collection costs. Also, newer machines mean fewer breakdowns and less vandalism. For drivers, credit card convenience is the key selling point. Who wants to have to dig around for loose change, especially when they're in a hurry? 

Unfortunately, some of the systems being tested seem unnecessarily cumbersome and costly. For example, in Boston, you had to get a credit card receipt, then return to your car and, using the "sticky tape" on it, paste the receipt onto the inside of your windshield. Other cities and towns just require that the receipt be displayed, but either way, it seems to me that there has to be a better ... a 21st century ... way!

Another problem with the Boston meters was discovered by The Boston Globe: The machines were in violation of MasterCard and Visa's rules. While merchants accepting credit cards cannot require that purchases be above a certain price, Boston had set a $2 minimum when paying with plastic. While you'd think Boston could work this problem out, when last I heard, the meters had been set to cash only.

Back when they were accepting plastic in Beantown, some of the issues the new meters raise for drivers became clear:

1. It's no longer possible to use up the time left on the meter by the last car.
2. They don't make change. So if you'll only need 15 minute's worth of time, you had better dig for that quarter, or you'll be paying for time you won't need. 
3. It continues to be a pain to try to get a machine to accept a buck. In Boston's case, that means that some people gave up and fed the machines plastic, so they paid $2 for what otherwise would have cost them 25 cents.

Leave It to Beverly Hills
Beverly Hills and West Hollywood worked out a great deal, where they get to test solar-powered, wireless meters for six months before they actually have to buy them. These meters fit right onto the already existing poles and may actually help to reduce traffic congestion, because they warn drivers that it's against the law to park at them during rush hour. Now that's smart.

The meters are also smart but less driver-friendly, in Milwaukee, where the meter minders get updated reports … so they know which cars to ticket. Makes more sense, I guess, than having to place a receipt just-so in a car, but still … this is the 21st Century! Why are we ticketing people for such minor traffic infractions when we have so many more important problems to address?

Seems to me that we'd all be better off with smart parking meters that charge our credit cards for the time we use -- once we drive away. No more meter maids! No more tickets!

Are high-tech parking meters already in place where you live? What do you see as their pros and cons?

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com.

Reader Question: How do I Rebuild After a Bankruptcy?

Bankruptcy is meant to offer financially devastated consumers the change of a fresh start. However, this clean slate comes with a few hidden catches. The process of rebuilding your credit history after a bankruptcy isn't always simple. Melinda wrote in with a question about building her credit:

I have been discharged from my bankruptcy for about 2 months now.  What can I do or should I begin to build "good" credit through any particular practices?  How?  I have been thinking just to stay away from buying/financing another car, getting any credit cards or anything like that forever.

Melinda's desire to avoid credit "forever" is understandable, but not reasonable. She is actually in a fairly good position to open a new account now that her bankruptcy has been discharged. (Lenders and creditors won't usually issue new accounts to consumers who haven't been discharged yet because there is a risk that the account could be included in the filing). Ironically, her email signature included a very appropriate quote:

"The future depends on what we do in the present" - Mahatma Gandhi

This is really the key to rebuilding credit! Your credit future post-bankruptcy depends on what you do in the present. Opening new accounts and using them responsibly will help add new positive information to your credit report. Slowly, this positive information will begin to outweigh the negative records from your past. With a few years of work, Melinda could have a fairly good credit score.

Opening a credit card is a good first step toward establishing credit post-bankruptcy. Instead of accepting one of the many offers she's probably receiving in the mail, Melinda should look online for an offer that meets her needs. I recommend a secured credit card because the rates and fees are often much lower than a traditional unsecured subprime credit card.

Secured credit cards work by having the customer deposit money into a savings account as collateral for the credit limit. If you put $500 into the savings account, you'll get a $500 credit limit. When you close the account or it transfers to being unsecured, you'll get the $500 back with interest. Unlike a pre-paid credit card, secured credit cards report to the credit bureaus and can help you build up your credit history.

Auto lenders often market to post-bankruptcy consumers as a good way for them to rebuild their credit. But beware of these loans that often come with extremely high interest rates. It's much safer to start with a credit card and then apply for a loan once your credit is improve and you really need a new car. This article on rebuilding credit has more tips to help Melinda get started.

Emily Davidson is editor of CreditBloggers.com and a former credit expert for the credit bureau, TransUnion. She writes about credit and personal finance topics.

 

To Renz Nichols, President Certegy Check Services: Apology NOT Accepted

Today I opened my mail to find a letter from Renz Nichols, President of Certegy Check Services. Renz tells me that a rogue Certegy employee sold data from numerous checking accounts -- likely including mine -- to a data broker who in turn sold that data to a subset of direct marketing organizations. According to the letter, that data may have included my name, address, telephone number, account number, expiration date for check and debit cards, checking accounts, transactional data and date of birth.

The letter goes on to talk about all the things Certegy has done in light of this theft, such as notifying the credit bureaus and law enforcement.

What has me seeing red is the advice to monitor my credit report by going to the free credit report site AnnualCreditReport.com!

I have already requested my free annual credit reports within the past twelve months, so I am not entitled to another copy, unless I am a victim of identity theft or live in a state that gives me extra copies. Neither apply to me -- yet. You should be providing me with a year of free credit report monitoring from all three credit bureaus, along with identity theft detection and resolution services.

Sorry, Renz, the apology doesn't cut it. This is not a case of a lost tape that probably hasn't been compromised. In this case, you know an employee was selling information -- maybe mine -- for illicit gain.

You need to do better.

Gerri Detweiler – Personal finance author, radio host and credit expert. Gerri contributes budgeting, debt recovery and savings information online.

You've Got Mail - From Your Credit Card Friends!

In 1998, credit card issuers could count on a response rate of 1.2% to the offers for new cards that they sent out. For every 1,000 pieces mailed, 12 people would sign up.

The projected response rate this year is only 0.28%, or four times less than what the credit card industry received less than a decade ago. Now, for every 1,000 pieces of mail, not quite three of us bite at the offers being sent to us.

Yet, from the industry’s point of view, direct mail is still very effective. Why? Because 42% of us got our newest card via a piece of mail. That’s the finding of a recent study of 400 cardholders, by the Auriemma Consulting Group, publisher of Cardbeat, a market research report for the credit card industry.

Still, as Cardbeat's Managing Editor, Megan Bramlette reported:

---

“Our data shows that most consumers do not enjoy receiving card solicitations in the mail. In fact, about 14% say that they are overwhelmed by the number of mail solicitations that they receive.”

---

On average, we actually open only 26% of the offers that arrive in our mailboxes – "with nearly half of respondents reporting that they do not open any of the credit card solicitations that they receive in the mail," according to the study’s findings.

It can’t make the industry happy that almost half of us toss these offers into the trash, unopened. (Remember to shred them, people!) But if issuers want to attract new customers, it still seems to be their best option. We’re more likely to respond to a piece of junk mail than we are to any other sort of offer, whether it’s a card we read about on the Internet, see advertised on television, or find out about at the bank.

IMPORTANT: If you would like to stop receiving unsolicited credit card offers in the mail, all you have to do is call 888-5-OPTOUT (888-567-8688)  or click here.

According to Cardbeat’s study, we typically get 11 credit card offers a month. If my mailbox is any indication, that number seems low to me. Please let us know what you think about the card offers in your mailbox!

Curtis Arnold - Curtis is the CEO/Founder of CardRatings.com, a website that provides ratings and reviews of over 20,000 credit card offers.

 

The Screws Are Turning

Even those who are not close to the mortgage business can't help but see all the newspaper articles about subprime lending. The various branches of our government are weighing in on the problems that are happening as a result of the lax underwriting. We've seen the posturing statements by the Congress's Committee Chairmen.  However, not much concrete has happened until this week. We are finally seeing some action in the trenches.

FannieMae has announced that it will comply with new guidelines issued by a consortium of agencies. The rest of the industry will likely follow. These guidelines include:

All fixed rate interest-only loans will be underwritten using the fully amortized payment, not just the interest portion. For example an application for a $200,000 6.5% loan would be underwritten with the payment of $1,264, not just the interest portion, $1,083. That's 16.7% higher, which means that qualifying ratios are affected. A borrower who had ratios of 36% before would have ratios of 40% now.

All interest only ARMs will be underwritten using the fully amortized payment at the fully indexed rate. The initial rate on a 5/1 ARM, for example, might be 6%. The initial interest-only payment would be $1,000 but if index plus margin is 7.5%, the borrowers would have to qualify for a payment of $1,398, 40% higher.

Option ARMs, the negative amortizing loans, must be underwritten as above AND the payment has to be based upon a loan balance of 115% of the initial loan. Thus a $200,000 loan would have to be underwritten assuming that it was really a $230,000 loan. Using a figure of index plus margin equal to 7.5%, that means the payment would be $1,608, a full 60% higher than the initial payment.  If some lender is discounting that initial payment rate even further, VERY likely the case, it means that the payment for underwriting purposes might be double the actual obligatory initial payment.

No one knows exactly what the full implications are going to be, but for many borrowers who are at the borderline for qualifying purposes are going to be disappointed. It is likely that the number of Option ARMs that have been originated in the recent past, as many as 50% of all loans in some markets, are going to see drastically reduced volume.

There are going to be further restrictions on stated income loans. Those lenders who told their borrowers who can't qualify to lie about their income will have that option taken off the table except for borrowers with very strong credit.

Finally, there are many lenders whose oversight does not lie with these agencies.  In fact, it's not clear exactly who DOES regulate them, meaning who did let them get away with poor practices?  If they don't sell loans to FannieMae and the investors who buy the loans don't adopt the same rules, there will be little change. Not a good sign.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Funny Money Friday: 50 Ways to Leave Your Credit Card

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

Cutting up a credit card is one of the great symbolic acts in modern times. Whether you are cutting up offers you've received in the mail, old expired cards or cards that you've paid off and don't want to use any more, there is something really powerful about taking scissors to your plastic. Just remember not to close those old accounts after you cut them up in order to avoid credit score damage.

Here are some creative ways to destroy your credit cards starting with "A":

 Art - This couple saves their names off old credit cards and keeps them in a small jar.

Animal - A new puppy's sharp teeth can make quick work of a credit card.

Axe - This guy really meant it.

Architecture -  A handy way to remind yourself that you are paying off your debt in the hopes of buying a house.

Aeration - With a hole punch.

Autopsy - An inquisitive fellow dissected his credit cards to remove hidden RFID chips.

Happy Friday!

Emily Davidson is editor of CreditBloggers.com and a former credit expert for the credit bureau, TransUnion. She writes about credit and personal finance topics.