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A message from NAMB president Jim Nabors II, CRMS

National Mortgage Professional
Jan 04, 2006

The world of credit: The 10 commandments of credit John Hudockcredit, guidelines, The following are what I consider "The 10 Commandments of Credit." This is by no means a complete list. There are dozens of other items I could list, some of which could be more important to you than what I have selected. 1. Pay your bills on time, or at least never more than 30 days late. This should be the basis for good credit. Besides having the ability to repay a loan, your payment history is the next most important item. The trigger date for late payments is 30 days, then 60 days, 90 days, etc. Each period is another category with a greater point deduction. It is very important to keep all credit accounts within the agreed payment period to establish credit. If you are more than 30 days late, the account changes from an open account to a derogatory account. This is very serious because even if you pay your account current or close the account, it will remain derogatory, lowering your credit score for up to seven years. You must arrive at a fair settlement with the creditor to report as paid in full with no derogatory comments. I feel this is excessive and may not be a correct representation of an individuals true credit habits. It is possible that the payment was misplaced by the creditor or you never received a statement. Either way, your score is reduced for seven years. 2. Budget your income. Setting up a budget is paramount in any successful personal financial plan. A budget is actually a plan for spending and saving your money. There are many benefits to having a budget. Many individuals attempt to do this mentally, but if your income ratio to expenses is close, you must be able to see the reality of the numbers. Making and following a budget means you can have money for the things you want. When you are not tracking your expenses, cash always seems to disappear. Income is the amount of money you make. Expenses are what you spend your money on. A balanced budget is when your income is at least as much as your expenses. The most important factor in budgeting is maintaining simple, but accurate records. When starting your budget you will need to keep track of where your money comes from and where it goes. You should record what you spend in a spreadsheet or notebook, and try to keep receipts for what you spend. Without a budget, you do not know accurately where your money goes, and perhaps you can't afford things you would like to have. When you know where your money goes, you feel and actually are more in control. It's easier to pay your bills on time, save money each month and avoid money problems. Start a checking account and get a debit card. That way, when you pay for purchases, you will already have a record of them. This will reduce the individual expenses you must track to only the cash payments you make. A checking account will also provide a vehicle to establish an automatic method to make payments and develop an excellent payment history. Each month, compare your actual expenses to what you have in your budget. To make this work, you must keep your spending within your plan, constantly looking for ways to reduce your expenses. You have more control over expenses than income. It takes perseverance, especially in the beginning. It will take some time to set up a plan that works for you. You can make all the changes you need to make it work. The sooner you start, the easier it will be. 3. Use credit cards to your advantage. There are many credit card considerations. The main consideration is to use your credit card as cash and pay the balance in full every month. Credit cards are good for two things: convenience and increasing your credit score. You should never use credit cards for any long-term credit it is entirely too expensive. You increase the cost of anything you purchase by more than 20 percent, unless you pay the balance in full each month. The higher the balances on your credit cards, the more you lower your credit score and the more interest you pay on anything else. It is ridiculous to pay more than 20 percent extra by using your card to purchase anything and then not paying the balance each month. Paying your balance each month could save you the more than 20 percent for other things you need or want. Also, never have a credit card without a grace period. You need this time to manage your expenses. The grace period should be at least 20-25 days. The current average interest rate is about 21 percent, but no interest is charged if the balance is paid in full during the grace period. Use the bank's money, pay each account in full when due and pay no interest. Always check your monthly fee, annual fee and any other fee on your monthly statement. Read your agreement and keep your balance below 25 percent of your high limit. Some credit cards will charge a late fee if they receive your payment on the day it is due. This is illegal. Contact the credit card issuer immediately and have the late fee removed. You should use each credit card once every six months. Credit card issuers are now canceling some credit card accounts if they are not used. The current credit scoring system requires you to have at least two credit cards or revolving accounts; the credit reporting agencies (CRAs) claim the number is required to evaluate your payment habits. Actually, you need three to four open trade lines with each repository. Credit cards are the most appropriate, since they report to all three credit repositories. You should restrict the number, and do not have more than four credit cards. There are two types of credit cards available: "unsecured," requiring credit scores above 620; and "secured," which require a deposit. Normally, for a secured credit card you need to deposit the amount of the credit card limit to get a credit card issued. Some programs will charge the amount of this to the credit card, then deposit this amount into a low-interest bearing savings account. All secured credit cards charge an annual membership fee (anywhere from $29 to $150). 4. Protect your identity. There is a difference between "credit theft" and "identity theft." Credit theft also known as credit fraud is when someone makes purchases on accounts that are yours. The fraudster will take one or more of your credit card numbers and use it as his own. Even though credit theft can be difficult, it is nowhere near as hard to deal with as identity theft. Identity theft is when a criminal uses your personal information to open new accounts. In the case of identity theft, the criminal will obtain personal information about you and use that information to secure credit in your name. They will open these credit accounts and take out loans in your name, which could be for anything from autos to home equity loans. The six most important guards against identity theft are as follows: - You should guard your personal identifying information. Before divulging it, you should find out how it will be used and whether it will be transferred to third parties. You should find out whether you have the choice of opting out of having the information shared with third parties. - Make certain that personal financial information is disposed of properly. You should be certain that items containing personal information such as charge receipts, insurance forms and bank statements are disposed of safely. - Disclose your Social Security number only when absolutely necessary. You should ask to use alternative numbers as identifiers whenever possible, including on your motor vehicle license. - Periodically check your credit report. - Carry only the credit cards and identification you actually need. If you lose credit cards, notify the creditors by phone and request that a fraud alert be placed in your file. - Pay attention to billing cycles. Bills that do not arrive on time may have been misdirected by identity thieves. For more information or to report fraudulent activity, contact the national repositories: Equifax (www.equifax.com), Experian (www.experian.com) and TransUnion (www.transunion.com). 5. View your credit report at least once per year. You should obtain and review a copy of your credit report from each of the three major credit reporting agencies at least once a year to make sure your information is accurate. The reports are free if you live in Colorado, Georgia, Massachusetts, Maryland, New Jersey and Vermont. The cost ranges from $1 to $9 in the other states. Your credit report is free in all U.S. states if: 1. You were denied credit, insurance or a job; 2. You are on welfare or unemployed and looking for work; or 3. Your report is inaccurate due to fraud. The new Fair and Accurate Credit Transactions Act (FACT), adopted in December 2003, provides all consumers a free copy of their credit report (one from each bureau each year) without the scores. If you see any errors on your credit report, contact the creditor and the credit bureau. If you do not get cooperation from the repositories in correcting errors on your credit report, call the Federal Trade Commission (FTC) at (877) 382-4357 and file a complaint. 6. Understand "good" and "bad" credit. There isn't any constant or fixed deduction for any negative on your credit report. There is no specific reduction for any considered action. The deduction is relative to the entire credit report. This is called "segmented scoring." In calculating each trade line deduction, we have assigned fixed numbers to develop relative actions. In the "mortgage model," the credit bureaus designate an 850 as the highest score and the banks cite 720 as the highest score necessary for a preferred interest rate. There are 130 points that are unnecessary. The amount of the credit score that you should be concerned with is approximately 85 percent of the credit score. To get to a "target score" (a specific level of score), we have 15 percent flexibility. This is where minor deficits in your credit profile can remain until resolved or deleted by time. 7. Don't pay late accounts without an agreement. I am not suggesting that you fail to pay any legitimate bills, but it is not to your advantage to pay off any late account that is more than 30 days late unless the creditor agrees to certain conditions. You should give your creditor two choices: either remove the trade line from your credit report; or mark the account closed with a zero balance with no additional comments. Unless you do this, even if the account is paid in full, it will remain as a derogatory on your credit report for up to seven years. It is quite difficult to legally restore your credit without somehow satisfying your outstanding debts. If it is a legal debt, you should always make an effort to pay it. However, the act of paying off a debt can actually hurt your credit. Negative credit is allowed to stay on the credit report for a maximum of seven years, except for a bankruptcy, which may remain on the credit report for 10 years. This seven-year period begins on the "date of last activity" (DLA) in other words, when the last action took place on the account. By paying an outstanding, delinquent debt, you will change the account status to a "paid collection," "paid was late" or "paid was charged off," which will still stand out as a very negative listing. Regardless of what the creditor states, it is not up to the credit repository as to what is on your credit report. The creditor reports what they want to the repository; they can put on or take off any trade line and any information they determine is accurate, complete and current. It is very important you receive, in writing, a satisfactory settlement before you pay off any derogatory account. A payment could also change the DLA so that it will start all over, increasing the time that this derogatory will stay on your credit report. It may be to your advantage to close all derogatory accounts and make arrangements to pay them, if the creditor will agree to a proper settlement agreement. 8. Understand what constitutes a credit score. Your credit score is like a credit report reduced to a three-digit number that ranges from 350-850. Since 1991, each of the CRAs utilizes the Fair Isaac Corporation's (FICO) algorithm to provide credit scores. The bureaus each market their credit scores under a different name. These three scores are what most lenders will look at when evaluating your credit for loan applications. Most lenders use the middle score. Your FICO score, as it is generally called, was meant to be based on your credit history. If the credit information is accurate the reflection is correct. Unfortunately, there are consistent errors in each credit report that can cause, at times, a dramatic lowering of the credit score. My first inclination was to suggest that you practice good credit habits and not concern yourself with the credit score, but FICO and the three CRAs will not let you do that. They have placed a very high importance on credit scores. Most scores are artificially low since they are based on inaccurate information. You must understand what factors make up your credit score and what you can do to increase this three-digit number. For mortgages the score ranges from a low of 350 to a high of 850; 720 and above is the preferred score for most lenders, which will give you the lowest interest rates. A score from 500-620 is considered sub-prime, with higher interest rates. Any score below 500 is generally too low for any type of credit. You probably need open lines of credit. The best and fastest method is to start with a secured credit card, since they report to all three national credit bureaus. The current scoring models are in the process of being updated. They have determined more factors that affect your creditworthiness, which I interpret as incorrect. For example, if you do not have an auto loan or mortgage, the result is a deduction from your credit score. I feel this is unfair to consumers. 9. Avoid credit score deductions. You should maintain at least three to four open trade lines of credit with each repository. An open trade line is credit granted to you that you have paid as agreed from the day it was started. If you are more than 30 days late on any trade line, it becomes a derogatory account and will remain a derogatory account for up to seven years, even if you pay all past-due balances or pay your account in full. You must have at least two open lines of credit from creditors that report to the repositories to have a credit score above 500. You must have at least three open lines of credit to have a credit score above 600. There are five types of information used to calculate a credit score at any given point in time. Each type of information counts as a percentage of a total FICO score: - Payment history: 35 percent - Amounts owed: 30 percent - Length of credit history: 15 percent - Types of credit in use: 10 percent - New credit: 10 percent These are not fixed percentages for any deduction and they are based on the importance of the five categories for the general population. For particular individual groups, such as people with relatively short credit histories, the factoring of the categories will differ. Credit inquiries account for 10 percent of the total score and are part of the "new credit" category. Their importance depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. What's also important is the mix of information, which varies from credit report to credit report for any one person over time. In an attempt to justify the credit score, FICO lists four adverse actions for each repository on each credit report. It is intended as an explanation for consumers and illustrates the top four adverse conditions for the credit report. All three repositories use the same code numbers for the same adverse action but do not list them in the same order on the credit report. Sometimes there does not appear to be a relationship to the credit information and codes. There are currently 38 adverse actions. FICO takes deductions from the credit score for each of these that apply. Many actions are similar and use every tactic to reduce your credit score. 10. Know your credit rights. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or to receive free information on consumer issues, visit the FTC's Web site, www.ftc.gov or call (877) FTC-HELP. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the United States and abroad. Credit card information - Cardholder protections. Federal law protects your use of credit cards. - Prompt credit for payment. An issuer must credit your account the day payment is received. The exceptions are if the payment is not made according to the creditor's requirements or the delay in crediting your account won't result in a charge. To help avoid finance charges, follow the issuer's mailing instructions. Payments sent to the wrong address may delay crediting your account for up to five days. If you misplace your payment envelope, look for the payment address on your billing statement or call the issuer. - Refunds of credit balances. When you make a return or pay more than the total balance at present, you can keep the credit on your account or write your issuer for a refund if it is more than a dollar. A refund must be issued within seven business days of receiving your request. If a credit stays on your account for more than six months, the issuer must make a good faith effort to send you a refund. - Errors on your bill. Issuers must follow rules for promptly correcting billing errors. You'll receive a statement outlining these rules when you open an account and at least once a year. In fact, many issuers include a summary of these rights on your bills. If you find a mistake on your bill, you can dispute the charge and withhold payment on that amount while the charge is being investigated. The error might be a charge for the wrong amount, for something you didn't accept or for an item that wasn't delivered as agreed. Of course, you still have to pay any part of the bill that's not in dispute, including finance and other charges. If you decide to dispute a charge: 1. Write to the creditor at the address indicated on your statement for billing inquiries. Include your name, address, account number and a description of the error. 2. Send your letter promptly. It must reach the creditor within 60 days from the date the first bill containing the error was mailed to you. The creditor must acknowledge your complaint in writing within 30 days of receipt, unless the problem has been resolved. At the latest, the dispute must be resolved within two billing cycles, but not more than 90 days. - Unauthorized charges. If your card is used without your permission, you can be held responsible for up to $50 per card. Provide reliable sources of the disputed information and inform them of the nature of the consumer's dispute. In some cases, if you report the loss before the card is used, you can't be held responsible for any unauthorized charges. If a thief uses your card before you report it missing, the most you'll owe for unauthorized charges is $50. To minimize your liability, report the loss as soon as possible. Some issuers have 24-hour, toll-free telephone numbers to accept emergency information. It's a good idea to follow-up with a letter to the issuer. Be sure to include your account number, the date you noticed your card missing and the date you reported the loss. - Disputes about merchandise or services. You can dispute charges for unsatisfactory goods or services. To do so, you must have made the purchase in your home state or within 100 miles of your current billing address. The charge must be for more than $50. These limitations don't apply if the seller also is the card issuer or if a special business relationship exists between the seller and the card issuer. First, make a good faith effort to resolve the dispute with the seller. No special procedures are required to do so. If these conditions don't apply, you may want to consider filing an action in small claims court. John Hudock is president of The International Credit Club and The World of Credit, two companies specializing in credit report problems and scores. He can be reached at (570) 829-5696 or e-mail woc@epix.net. John invites e-mails on any credit topic. He will answer each one and publish any that will benefit his readers. Please be specific with your questions.
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