Session 8 Credit Reporting and Scoring

 
My online students are to read about credit reporting, watch a short video, and then participate in a discussion board about what each thinks are the two most important items displayed on a credit report, and why they are important.  Below is what I posted for them.  Mortgage and auto lenders – please tell about creative ways that you qualify an applicant who has a thin credit file.
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Session 8 Credit Reporting and Scoring
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Some of you are working ahead, and there have already been questions about credit reporting and scoring.  These are complex topics that we could likely develop an entire course around!
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Lenders do use credit reports and/or scores to make the decision whether to lend and if so, at what rates.  Today, prospective landlords, insurance companies, and even employers may make decisions about us based on consumer reports.  Fair or unfair, right or wrong, that’s the way it is for now.
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Credit reports are indeed important in our financial lives, and I certainly want to be sure that the information on mine is accurate.  Over the years I’ve had many errors on my credit reports but have never experienced difficulty getting them corrected.  Others have not been so fortunate.  Some of you may have already watched the eye-opening CBS 20/20 segment from February 2013, “40 Million Mistakes: Is your credit report accurate?” (see earlier announcement).
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Allen Wyatt in the 2008 “Understanding Your Credit Reportvideo gives the credit score a much loftier status than I do (the “all-important FICO score”).  Moreover, he states, “The pivotal part of your whole credit report is your FICO score; it should be prominently displayed in any credit report you review.”
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But your FICO score is not even a part of your credit report.  It is a three-digit score based upon information from a report.
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Credit bureaus use many different scoring models, even within the same credit bureau. Each bureau can use dozens of different credit score models based on the requirements of different lenders,” Credit Karma explainsEach credit score model has a slightly different formula that takes into account over 200 different factors of your credit report.”  The company also notes, “Because there are hundreds of credit scores that measure many different probabilities, consumers should not be overly concerned with the type of score or even their number.”
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The Fair Isaac Corporation (the “FICO” people) tells us that 65% of a credit score is related to payment history and amounts owed.  So as it turns out, some of the things that can increase your score also make financial sense!
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We will talk more about carelessness, ID theft and fraud later in the course, and Credit Karma may come up with regard to carelessness.  If you’d like an estimated credit score, use FICO’s credit score estimator or another one for which you do not disclose identity information.
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There are fraudulent credit repair companies that are perfectly willing to pull you into legal hot water, provided you send them a few bucks!  In fact, they can do nothing for you – legally anyhow – that you cannot do for yourself.  For more information about this, see the FTC’s “Credit Repair: How to Help Yourself“.
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When consumers try to manipulate scores, they often end up worse off than before. I would certainly not borrow money merely to try to improve a credit score. Focus first on making sound financial decisions.  That is, pay bills on time and borrow no more than is needed – even for college.  If you already have a solid and favorable credit history, just keep up the good work and a reasonable score will likely follow.
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For a FICO score to be calculated, a credit report must contain these minimum requirements:
  • At least one account that has been open for six months or more
  • At least one undisputed account that has been reported to the credit bureau within the past six months
  • No indication of deceased on the credit report
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Rebuilding credit after bankruptcy can actually be easier than establishing it in the first place, especially if there is such as a mortgage or auto loan that was reaffirmed.  But neither building nor rebuilding happens quickly; it takes patience, persistence, and diligence.
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Three years ago, American Banker Magazine mentioned a relatively new credit reporting agency, eCredable, in it’s “10 Big Ideas for Banking in 2013“.  I have become “virtually” acquainted with the CEO, and the service does appear that it may be helpful to consumers who are trying to rebuild and those who are just starting out.  It looks like it may be especially useful for those who handle their money responsibly but have just never been in the financial mainstream.  This segment of the population is increasingly important to lenders.
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One of the “big three” consumer reporting agencies, Experian, now reports rental payment and collections, but according to the Consumer Financial Protection Bureau, “Experian’s data currently only covers a small portion of rental properties.
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If you REALLY want to learn more about consumer reports, check out the January 2015 Consumer Financial Protection Bureau’s list of consumer reporting agencies.
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Below is what I had posted about the 60 Minutes report:
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For those of you who are interested, here are the 60 Minutes links:
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Each morning following this February report I was on the edge of my chair for news of action and was repeatedly disappointed.  Then on May 7, 2013, the U.S. Senate Committee on Commerce, Science, and Transportation, Subcommittee on Consumer Protection, Product Safety, and Insurance (yes, that’s a mouthful) held a hearing, Credit Reports: What Accuracy and Errors Mean for Consumers.
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Fast forward to March of 2015, when the three major credit rating agencies reached an agreement with New York Attorney General Eric Schneiderman to change the way they handle errors on credit reports. and the New York Times reported, TransUnion, Equifax and Experian Agree to Overhaul Credit Reporting Practices.
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Under the reforms, consumers can initiate a formal dispute to challenge inaccurate information and agencies must use trained employees to investigate the complaints.  Hear the 3-minute NPR audio here In April, FICO reports, “Why the upcoming credit bureau changes are a big deal for consumers”  and in August, Credit.com reported, “How Your Credit Score Could Rise Soon without You Lifting a Finger“.
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Let’s watch to see what comes of all of this. 

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