Tracy Becker Credit Expert and Author

Co-signing Student Loans

Co-signing on student loans means the co-signer who may not have control of the payments will still have the updated payment history on their credit record.

The CFPB says, “Outstanding student loan debt has now crossed the $1 trillion mark. Student loans have eclipsed credit cards as the leading source of U.S. household debt outside of mortgages. This is a major issue for students, recent graduates, and their families”.

We are finding that student loan defaults and delinquencies are at an all time high and those who have co-signed are, in many cases, left with the scars on their credit causing great problems moving towards the future.

Stay at home spouse can now use their partners income to get approval for credit cards

The Credit Card Act of 2009 has been amended to help “stay at home spouses” who are working in the household raising children or are addressing other issues that need full time attention. In the past spouses who are working hard to care for an ill and aging parent, raising children, or even going back to school for a better education have given up the ability to get approval for credit due to lack of income. In the past non income earning spouses were in a vulnerable position since their ability to cultivate and manage their independent credit and scores was limited to the individual income they could prove. Without the ability to get your own credit and continue to build it actively when faced with a divorce, death of spouse, or the loss of the income earning partners position, a dead end quickly presents itself. Now with the ability for consumers over the age of 21 to use their spouses income as part of the qualification for a primary credit card approval, independence plus the development and nurturing of credit can continue. You never know when an opportunity will arise where credit is an essential part of participating. It is extremely important to keep excellent credit and scores. Having credit and using it well is a key factor in having high credit scores.

Credit Tip: Thirty day late payment on a mortgage due to change in service provider could cause a rejection for a refinance or purchase!

One recent 30 day late payment on a mortgage will cause a rejection for a refinance or purchase and will drop scores over 100 points for many consumers. This impact to the credit score can last for years costing dramatic financial losses, frustration, and a failure to meet personal and financial goals. For many loan officers and real estate professionals it will mean the loss of an opportunity to fund a loan or sell a property. Consumers need to be very careful reading their mail since many loans are being transferred to new service providers. If consumers miss notification thinking a letter is junk mail or a promotional offer they can easily find themselves in this position. If the consumer never received notification we can begin the fight with the creditor to remove the late. BE SURE TO WARN YOUR CUSTOMER BASE OF THESE POTENTIAL PITFALLS!

Leased cars and credit scores

A popular cause of huge decreases in credit scores are collections at the end of a car lease. Many consumers roll in to the car dealership looking to turn in their car at the end of the lease. Some return to the dealership looking to negotiate for a new car while others just want to end the relationship and move on to another brand entirely. Once the dealer accepts the car, even if they say it looks “ok”, it does not mean the consumer will not be billed for damaged discovered later on when the car is inspected by the experts from the “official” home office. In many cases with varied types of cars we have seen collections update on credit destroying scores. When asked consumers usually say, “the dealer told me everything was fine when I handed the car in”. We have also heard, “the dealer told me not to worry about the damage since I was getting a new car with them they would have it waived”. Some did not agree with the charges and refused to pay. In any or all of these situations the dealer is not the bottom line or the decision maker since the car goes back to the company in most cases where they make the ultimate decision. If you are turning a car in make sure to call the official leasing or financing division and get feedback from them on any charges that might be outstanding. Always get a letter from the leasing company acknowledging closure of the lease and zero balance owed. Following up and doing your own homework can save a great deal of frustration and protect your credit.

Is It True That Credit Card Grantors Can Close An Individuals Accounts Without Notice?

Many of us have found ourselves in a position over the past 5-7 years where one or more of our credit cards were surprisingly closed by the creditors. It is usually a shock and never seems to come at a good time. Even those with excellent credit and no need for the extra credit card feel slighted when they find out they have been rejected for continuing use of a credit card. Some even try to fight the creditor to re-open it with no success. The worst is when a creditor closes a credit card on us right before we are applying for a mortgage, causing our score to plummet. When balance to limit ratio’s change due to a reduction in the aggregate limit, it could drop scores substantially, depending on the current balance.

For example, if we have $50,000 of credit card debt with a $25,000 balance and a card closes that has a $25,000 limit we have gone from 50% balance to limit ratio to 100%. This action could drop our scores 50-100 points depending on our current Fico scores. This drop could cause a rejection for a mortgage or a much higher interest rate, costing us hundreds of thousands of dollars over the term of the mortgage.

How could this be that creditors are allowed to just close credit cards on us without notifying us in advance? Isn’t this wrong and illegal? Unfortunately, the answer is that it may be wrong to us but it is completely legal. Since the Credit Card Act of 2009, many changes were made to protect the consumers interest but not regarding creditor’s closing credit cards.

Creditors can close accounts for many reasons and some seem quite legitimate, like late payments occurring, going over the limit, and filing a bankruptcy. Creditors can also watch your credit reports and assess your spending, payment patterns, and management habits. If they feel you are carrying balances with other creditors that might make you a riskier bet they can shut you down without warning. Inactivity of credit is a common reason creditors close accounts as well, so if you don’t use your credit card accounts at all they may pull the plug. Also, if you open too many accounts in a short time your ability to manage all of that new credit at once may be questionable.

A creditor can close a credit card account for a delinquency, inactivity, or default without informing the consumer. When creditors close accounts due to poor credit they have to notify the card holder 30 days after the closing. Although it may seem wrong to take this action against the consumer without warning, there are valid reasons. Although many consumers would not take a negative action some would spitefully rack up charges once they know the account is closing, having no intention to pay them back.

So how can consumers protect themselves from credit cards closing by the grantor?
1. First keeping low to moderate balances is a great help. Trying to stay at 20-40% aggregate and individual balance to limit ratios on credit cards is a good way to keep the credit risk alarms from going off.
2. Making sure all credit cards are active a few months out of the year is a great idea. Consumers don’t have to charge a lot of money in those few months they just need to make a small purchase.
3. For those who have many cards and only carry a few with them they can put recurring auto pay memberships on the cards they don’t carry like EZ pass, gym memberships, etc.
4. Making sure your credit is excellent and keeping it that way will also insure you look your best for those watching. Those with poor credit should search out an excellent credit repair company and get a free assessment of what can be done.
5. Many credit monitoring products help you daily, weekly, monthly to evaluate your credit standing while watching your balances. This is a great way to stay on track of your credit activity.
6. Only opening new accounts when you have strategically decided it is the right time and the right credit account. Randomly opening credit is never a good thing.

Some consumers are under the false impression that if credit is closed by the consumer it impacts them less than when the creditor closes the account. This is totally false. The scores can drop just as much depending on many factors including the balance to limit ratios on revolving credit.

Spring is in the air!

This is the season for romance but with romance comes relationships and for many marriage. Although we all have the best intentions and high hopes for the future of our relationship we all know the reality could be very different from the original dream. When a relationship ends in divorce or a break up, many successful individuals have assets to split which may include a property with a joint mortgage. If the property is given to one of the parties in the divorce agreement the mortgage must be refinanced into their name. Many divorce agreements state this must occur but if it is not done immediately there is no real way to enforce it. If the party who is taking over the property cannot qualify for the mortgage, due to lack of income or poor credit, the original mortgage will remain. Both parties will be responsible no matter what the divorce decree states unless the loan is refinanced. If the mortgage is not refinanced the individual that no longer reaps the benefit of the property will still incur delinquencies associated with the mortgage on their credit, remaining legally responsible if the loan defaults. If that individual wants to buy a property of their own in the future and they need mortgage approval their income will have to cover both the old and the new mortgage. This could be another issue since their income may be inadequate to cover both.

A $60 Collection Account Can Cause Huge Credit Score Drops

A collection account can be placed on credit reports for something as minor as not paying a parking ticket, library book fee, or a magazine subscription. If a creditor is not paid within a period of time the debt owed by the consumer gets passed on to a collection agency. Many of these agencies purchase or borrow the debt hoping to make a profit by collecting a commission once the debt is paid by the consumer. Most consumers do not realize that just because the debt is paid it does not mean the delinquent account will suddenly correct itself. In many cases, if the debt is a small amount of money, paying it off could reduce the score even further.

Medical collections, for example, are a popular cause of credit score reductions since many very responsible consumers expect their health insurance to cover the costs of service and send payment in a timely manner to the physician. Sometimes the physicians billing department makes an error as well and the health insurance company may not receive the claim, kicking the outstanding invoice back to the insured. Once the insurance claim is made we usually forget about it thinking all is well. When a thin letter arrives in the mail with an unrecognizable return address most would shred it thinking it is junk mail. Months go by and what wasn’t covered by the insurance company is now a collection being updated on credit which can easily cause an excellent 780 Fico score to drop down to a 680. This could mean a much higher rate or a rejection for financing.

Besides medical collections, parking tickets, magazine subscriptions, and library book fees, there are utility bills. Cell phone services, land line phone services, TV, and wireless bills that consumers refuse to pay due to poor service, erroneous overcharges, or just not agreeing with the statement, can wreak havoc on credit. These types of collections can be very difficult to remove depending on the situation. In many cases they could be as little as $60 yet end up costing over $100,000 in extra interest and fees on a mortgage. It makes sense to pay the extra $60 before it becomes a collection and hurts credit scores, even if you don’t agree with the creditor.

There are many situations that could cause credit score drops that most would not even think of.

For example:

1. An individual finds they are leaving a roommate situation early or a couple is splitting and the person leaving neglects to take their name off the cable or FIOS account. Later the bill is left unpaid by the user of the service and the collection is updated on the account holders credit.

2. Once an account is closed if there is an outstanding fee that was generated later on with the utility company if a new address is not given to the service provider and the final bill is generated the invoice will never be received by the account holder who has moved on.

3. A ticket is generated through a camera violation. The driver shreds the ticket thinking it is frivolous junk mail.

These situations occur often and most of us just don’t realize how much this can cost us. In most cases we are able to fix these problems. If you are in a situation like this do not rush to pay the collection until you speak with one of our experts.

If you have experienced something like this in the past please share!

Impact of a Minor Collection Account

A collection account can be placed on credit reports for something as minor as not paying a parking ticket, library book fee, or a magazine subscription.

If a creditor is not paid within a period of time the debt owed by the consumer gets passed on to a collection agency. Many of these agencies purchase or borrow the debt hoping to make a profit by collecting a commission or a higher amount than the purchase price they paid for the debt. Most consumers do not realize that just because they pay the collection does not mean the delinquent account will suddenly correct itself. In many cases if the debt is a small amount of money paying it off could reduce the score even further.

If you have experienced this please share it with us?

Why is getting rid of old credit cards that you may not use much a bad thing?

How many times have I heard, “This card is so old and I rarely use it. I want to close it immediately and I know that will help my credit right?” Too many times is the answer!

This is false. Keeping credit cards open and making sure they are active at least once a year can keep credit scores much higher. The older your credit, the better it is for your credit score. Average age of credit contributes to your credit score number. Since being in the credit game longer shows you have had more practice at managing credit it makes you less of a credit risk and can add 10, 20, 30, even 50 points on to your credit score depending on your average age of credit.

Once you close an account it can drop off after two years of activity. If the account is very old it could have a major impact on your credit score once it falls off. Keeping credit active can prevent the creditor from automatically closing the account due to lack of use. Inactive credit usually closes after it has had no use for a year.

Scorecards & Credit Scores

“How can my credit score be so low? I have been paying all my important accounts on time for 10-20 years, doesn’t that count for anything?”

“I have millions of dollars in the bank and own many properties how can I have such a low credit score?”

“How can one account with a late payment for such a small amount of money do this to my credit score?”

The answer to these questions is vast and complicated since credit and scoring is determined by many factors, some of which are cloaked in secrecy.

Most mortgage banks use the Fico score to determine the risk of a potential borrower. Back in the 80’s, Fico, a bunch of lenders, and one of the credit bureaus came together to figure out a better way for lenders to predict this risk. They wanted a more automated system that complied with the laws and made it easier for them to approve more loans, helping more of those deserving to, fulfill the American dream of home ownership. The credit bureau provided Fico with data from millions of unique credit profiles over varied time periods. Fico studied this information zeroing in on trends and negative outcomes, while learning what symptoms occurred before these delinquencies manifested on credit.

Here is an example:

Individuals who opened many accounts within a year or two showed a much greater likelihood of default.

This trend could then become a variable that would make up a scorecard. The scorecard is used to define the amount of points assigned to the unique credit file based on the history of the consumers credit. If you had one new account you might get more points while an individual with 4 new accounts would get less.

There are many different scorecards that are used depending on the credit behavior found on a consumers credit. For example, there may be scorecards for those with no delinquencies, coming out of bankruptcy, having new late payments, and new credit or thin credit file consumers. A consumer with new accounts and over 4 inquiries may have a completely different scorecard than one with no new accounts and 4 inquiries. This could mean they have a totally different amount of points for each category of their credit based on the unique scorecard assigned.

As you can see once the right scorecard is determined the points then follow based on more detailed events occurring on the credit. So although we know debt, length of credit, history, variety of credit, and new credit all help determine scores, there are more layers of scoring that we cannot know. A great amount of information about scoring is proprietary and therefore a secret of the formula creator. The key for our customer base and potential referrals is to know their credit and scores, watch them consistently, take action to manage them, and use timing and strategy when making decisions that will affect them. Credit is an asset that can help build wealth, determine the home and neighborhood we live in, and even put a child through college giving them better opportunities. This is a powerful tool that if nurtured and used wisely can change lives.



Feel free to call us with any credit questions or feedback!

Making sure credit is analyzed with future financial goals in mind is a MUST before taking an action that can foil those plans and limit a consumers options for a better quality financial life.