Kudos to Suzanne Woolley for authoring an article which accurately portrays how one can improve their credit.
Tom Davidson has written and illustrated another great article which I know you will enjoy reading. Here are the first few paragraphs which lead into the link to his wonderful presentation:
“HELOCs (Home Equity Lines of Credit) are widely used. Simply having one makes many people more comfortable. My wife and I had a standby HELOC for many years – ready to use as a convenience or in an emergency. Luckily that emergency never happened, but we felt well prepared knowing we had ready access to a substantial amount of cash that could be used for anything we needed. When I was a financial advisor, a HELOC was on my checklist to discuss with every client – at least those who were prudent with their money.
ReLOC: A Retirees Line of Credit
Is there a better alternative for homeowners over age 62? A ReLOC may be a far better choice for many retirees. ReLOC is a nickname that stands for either Retirees Line of Credit or Reverse Mortgage Line of Credit. While ReLOCs share many features with HELOCs, three unique features make a ReLOC a line of credit designed for retirees:
- The amount you can access grows every month
- You don’t have to make payments until you permanently leave your home
- The loan can’t be canceled, reduced, or frozen as long as you keep up with basic mortgage obligations (property tax, homeowner’s insurance, basic maintenance, and Homeowner’s Association dues).
Here’s the borrowing limits for a ReLOC and a HELOC for a 63-year-old in a $400,000 house who lives to age 99:”
Cancelling infrequently used credit cards may seem like a good strategy, but your credit score may be adversely affected. Adam Carroll, Founder and Chief Education Officer of National Financial Educators, explains: “When you have a long-standing trade line, which is what a credit card is considered on your credit report, and you cancel that card for whatever reason, your score will actually go down as a result because one of the main impacts on your credit score is the length of credit history.” A shorter credit history translates to higher risk in the eyes of lenders.
Sean McQuay, Credit and Banking Expert at NerdWallet, agrees but includes another reason to keep older cards, noting that closing a card account results in “decreasing your overall credit line, which basically signals that a bank trusts you less.”
In addition to decreasing your overall credit line, closing an infrequently used account raises your credit utilization your total credit in use compared to your cumulative credit line. High credit utilization suggests a greater chance of falling behind on payments and/or defaulting on debts.
To avoid these pitfalls, make periodic small purchases on all your open credit cards to keep them active and pay the balances in full at the end of each billing period. By keeping credit spending low, you can still address debts while getting the full benefits of your credit account.
It’s okay to concentrate most of your credit spending in one account to maximize rewards. Just use alternate accounts often enough to keep them from being closed for lack of activity.
JUNE 09, 2016
Equifax, Experian and TransUnion today launched a new website, http://NationalConsumerAssistancePlan.com, to inform and update consumers about implementation of the National Consumer Assistance Plan, an initiative launched by the three companies in March, 2015 to enhance their ability to make credit reports more accurate and make it easier for consumers to correct any errors on their credit reports.
“Providing both consumers and businesses with accurate, transparent credit reports is our first priority,” said Stuart Pratt, President and CEO of the Consumer Data Industry Association, the trade association representing the consumer data industry, including the three national credit reporting agencies. “The nationwide consumer credit reporting companies are making important changes to their procedures that will improve their ability to collect accurate information, and we want to make sure consumers know about the new options available to them.”
The National Consumer Assistance Plan is being implemented over three years, and the new website will serve as a vehicle for updating consumers about changes to their ability to interact with the nationwide consumer credit reporting companies.
Changes included in the National Consumer Assistance Plan include:
- Consumer experience:
- Consumers visiting www.annualcreditreport.com, the website that allows consumers to obtain a free credit report once a year will see expanded educational material.
- Consumers who obtain their free annual credit report and dispute information resulting in modification of the disputed item will be able to obtain another free annual report without waiting a year.
- Consumers who dispute items on their credit reports will receive additional information from the credit reporting agencies along with the results of their dispute, including a description of what they can do if they are not satisfied with the outcome of their dispute.
- The credit reporting agencies (CRAs) are focusing on an enhanced dispute resolution process for victims of identity theft and fraud, as well as those who may have credit information belonging to another consumer on their file, commonly called a “mixed file.”
- Data accuracy and quality:
- Medical debts won’t be reported until after a 180-day “waiting period” to allow insurance payments to be applied. The CRAs will also remove from credit reports previously reported medical collections that have been or are being paid by insurance.
- Consistent standards will be reinforced by the credit bureaus to lenders and others that submit data for inclusion in a credit report (data furnishers).
- Data furnishers will be prohibited from reporting authorized users without a date of birth and the CRAs will reject data that does not comply with this requirement.
- The CRAs will eliminate the reporting of debts that did not arise from a contract or agreement by the consumer to pay, such as traffic tickets or fines.
- A multi-company working group of the nationwide consumer credit reporting companies has been formed to regularly review and help ensure consistency and uniformity in the data submitted by data furnishers for inclusion in a consumer’s credit report.
The National Consumer Assistance Plan builds on other steps the credit bureaus have made in recent years to improve consumer’s ability to resolve issues related to credit reports. In 2013, the companies launched a process under which consumers can upload documents digitally to dispute how their lenders have reported their accounts to the credit bureaus.
The plan was launched after cooperative discussions and an agreement with New York Attorney General Eric Schneiderman and a group of other State Attorneys General.
Source: News Release
There has been much discussion and several studies over the years regarding the potential value of leveraging rental data in assessing consumer credit risk. Which raises the question: Should rental data be widely reported to the three primary consumer credit agencies (CRAs)?
If rental data was reported, this might mean some consumers without loans or credit cards would get a FICO® Score, and gain access to more affordable credit. But how many? And how many of these consumers would be considered creditworthy by prospective lenders?
In 2015, FICO introduced FICO® Score 9, which scores rental data. This coincided with the first evidence of sufficient positive and negative rental data at the CRAs, a necessary condition for adding this data into the FICO Score algorithm.
Great news, right? Well let’s take a deeper look at some of the facts around rental data in the credit report.
Not Enough Rental Data in Credit Bureau Files Today
Much like with utility and telco data (covered in a prior Truth Squad blog, rental data is actually quite rarely encountered in consumer credit files:
- The US Census bureau estimates that there are 240 million adults in the US, with 35% living in rental housing.
- Of the roughly 80 million US adults who live in rental housing, we found that just 270,000 (or 0.3%) of those consumers have a rental trade line reported in their credit file.
- In fact, rental data makes up less than 1% of all the credit data being reported to the credit bureaus.
So while some have claimed that the inclusion in a credit bureau risk score calculation of rental data currently reported to the CRAs would significantly move the needle as far as scorable rates or access to credit, it’s just not the case.
Our research showed that only ~5,000 total consumers (out of 200+ million scorable files) became FICO scorable as a result of the inclusion of rental data currently found in their credit file. In the context of mortgage lending, a mere 1,795 consumers had scores that met the generally accepted FICO Score cutoff of 620 or greater once rental data was included in their score calculation.
Does Rental Data Make Thin Files Fatter?
Most mortgage lenders and the Government Sponsored Enterprises (GSEs) have underwriting standards that require a consumer to demonstrate experience in making payments on more than one tradeline — typically two to three tradelines. So perhaps the value of rental data is that it would allow more people to meet these criteria?
We checked how many consumers have a FICO® Score above 620, and have two or three tradelines reported to the CRA where one of those tradelines is rent. There were 280 people with two tradelines, one being rent, and 110 people with three tradelines, one being rent. That’s great news for these 390 individuals, but it shows that rental data currently reported to the CRA does not have a significant impact on access to credit.
Fact: The reporting of rental data has not reached meaningful volume such that inclusion of this data presently has a material impact on the total number of scorable US consumers or access to credit.
How Do We Get More Rental Data to Score?
Rental data does have potential to improve credit access, but not until much more of it is reported to credit bureaus. So why do we see so little rental data being reported?
The challenges of achieving broad national scale in rental reporting are significant. The first is the disaggregation of the furnisher market — much of the rental market is single property landlords. The second is a regulatory compliance hurdle — there is a general aversion among potential furnishers to take on the operational and compliance risks posed by becoming a CRA data furnisher.
We would encourage policy makers to support the broader inclusion of rental data at the CRAs to support consumers’ access to affordable credit. Should rental data start to flow into the credit report in meaningful volumes, the FICO® Score 9 algorithm can reward consumers for their successful history of on-time rental payments.
In the meantime, scores like FICO® Score XD — which analyzes non-traditional credit data found outside of the credit report — provide an onramp to mainstream credit for people with limited credit experience.
For more plain facts on credit scoring, see the other posts in our Truth Squad series.
Personal bankruptcy is surprisingly common in the United States. Almost 15 percent of the U.S. population has filed for bankruptcy sometime over the past twenty-five years, based on my calculations using the New York Fed Consumer Credit Panel/Equifax (CCP). In 2015, roughly 800,000 debtors filed for bankruptcy, according to court records, representing 0.64 percent of U.S. households. One of the consequences for filers is a mark on their credit report—a bankruptcy “flag”—which indicates that the consumer has filed for bankruptcy.
This bankruptcy flag is visible to creditors and, according to the credit bureaus, hurts filers’ credit scores. To limit these effects, the Fair Credit Reporting Act restricts the length of time that credit bureaus can fly these flags on reports for each (personal) bankruptcy chapter: the flag for Chapter 7—in which debtors get a full discharge of (unsecured) debts after unprotected (non-exempt) assets are liquidated—must be removed after ten years, while the flag for Chapter 13—a partial debt repayment bankruptcy designed to help people keep their homes—is typically removed after seven years. For economists, the fixed timing of the flag removal (and the difference across bankruptcy chapters) gives us a laboratory to explore how the lifting of bankruptcy flags affects borrowers’ credit scores and credit outcomes, by comparing these outcomes directly before and after flag removal…