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Kellum's korner: Dear manager: Don't let numbers numb your sales staff
The world of credit: Return on investmentJohn J. Hudockcredit, FICO
Today, everyone is concerned about the return on investment -
what we get out of something compared to what we put in. We
generally have two items to consider: our time and/or our finances.
As we get older, our time becomes more critical. We have to make a
decision: Do we devote our time or do we compromise and spend a
limited period to gain a limited working knowledge and then rely on
the experts to guide us?
Credit professionals have a responsibility to themselves, their
friends and their clients to be aware of the impact of regulations
and the evolution of the credit industry. Credit scores and their
impact on our daily lives continue to have an aura of mystery about
them. Every month, I receive hundreds of e-mails and phone calls
requesting the source of creditable credit courses.
Recently, I had the opportunity to be a consultant, helping my
son Thomas develop the curriculum for the most advanced credited
test and study guide on credit scoring that I feel is available.
The Credit Score Management Program is being offered by The
Institute of Consumer Financial Education (ICFE). The ICFE is a
consumer-oriented, non-profit, tax exempt 501(3)c, public education
organization based in San Diego. The ICFE, founded in 1982 by the
late Loren Dunton, was also known as the National Center for
Financial Education, and Paul Richard, RFC is the executive
director. They are offering the Credit Score Managers Certified
Course at www.creditscoremanager.org
or through a direct link from their Web site, www.icfe.org. Their programs also
offer many other tips on credit usage.
You have to understand your credit score. If you are in the
mortgage industry, you should know your credit score, but you
probably don't. You should know that 78 percent of all credit
reports have errors - some serious. This could be a case of what
you don't know could hurt you. Unless you review the information on
record at all of the national credit repositories, you could be a
victim of inaccuracies or worse, credit fraud or identity theft.
Your credit score gives lenders a current view of your
creditworthiness when it comes to repaying debt.
In my articles, I have written that the current and most widely
used method of credit scoring was developed by the Fair Isaac
Corporation. I was corrected by a representative of FICO, who wrote
me stating, "Sorry, but 'FICO' is a registered trademark for a
family of credit risk scoring products, not a synonym for the Fair
Isaac Corporation. It is a mathematical algorithm using a variety
of inputs [that] predicts the likelihood that a person will become
seriously delinquent in repaying a credit obligation sometime in
the next 24 months. The three major credit reporting organizations
sell FICO credit scores under different brand names; however, all
use the same Fair Isaac formula."
I have also written that a FICO score below 500 is considered
minimal or no credit. This is generally caused by a lack of open
active tradelines with no derogatoriness (payments 30 days late or
more). Once a derogatory is placed on any tradeline it may remain
there for up to seven years unless removed by the creditor. Any
comments or information placed on a credit report is at the
discretion of the creditor. FICO's representative countered, "Not
strictly true - the consumer has the right to add a statement to
the credit report. Also, creditors contribute information to the
credit bureau, but it is the credit bureau that compiles and
produces the credit report. So technically, all information on the
credit report is there at the discretion of the credit bureau."
I also wrote, "Whether this information is correct or not, it
can only be removed by the creditor," and FICO's representative
replied, "Again, only the credit bureau can remove information from
a credit report. Creditors can request that information they
reported be removed from the consumer's file, they can stop
reporting the information or they can change the information they
report, unless it reaches the time limitations set by law." My
interpretation of this is that FICO is saying that the
repositories, not the creditors or furnishers of information, are
technically responsible for the accuracies and completeness of the
credit report. I'll have to do further research on this with the
Federal Trade Commission.
This may all be moot, as lenders are beginning to use the new
VantageScore system. VantageScore was developed by the nation's
three largest credit bureaus. The system assigns a letter grade to
each applicant's rating - an 'A' for borrowers who are in the top
901 to 990 bracket, a 'B' for those in the 801 to 900 range and so
on down to 'F.' The higher your VantageScore, the lower your loan
rate. VantageScore was unveiled in March 2006. Though its scoring
system should be easier for most consumers to understand, it is my
opinion that the FICO scoring system has also evolved to become
fatally biased against the consumer, and unless drastically
revised, it will eventually be replaced by the VantageScore
system.
In my articles, I have defined credit into distinct, separate
categories. I continually put more emphasis on mortgage credit than
any other type credit. Mortgage credit is the level of credit that
is needed to satisfy the customer and a lender. All we really need
is an accurate credit report and a common sense evaluation. We do
not need complicated segmented probability trees, advanced
logarithms or anything so confusing that you can interpret the
results in too many different ways.
John J. Hudock is president of The International Credit Club
and The World of Credit, two companies specializing in credit
report problems and scores. He also has online continuing education
courses on credit approved by the Pa. Department of Banking and the
Pa. Department of Continuing Legal Education. John can be reached
at (877) 829-5432 or e-mail [email protected]. He invites e-mails on
any credit topic, will answer each one and publish any that will
benefit his readers. Please be specific with your
questions.
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