Greater Central Baptist Church

Don Romano is providing this supplement in support of his talking points. It is representing his views and not that of The Coalition for Debtor Education. For additional information or answers to any questions, he can be reached at (516) 627-0800 or e-mailed at don@shelter-rock.com.

Every time you use credit or apply for credit, the credit bureaus are notified. There are 3 credit bureaus (Equifax, Experian and Trans Union). Most creditors report to all three bureaus but some don’t. This is why when you apply for a mortgage all 3 bureaus are contacted. You should also keep in mind that it can take of up to 90 days from the time you use your credit, or pay down your outstanding balance, to the time it is actually reported to the bureaus.

Reviewing credit reports has always been very subjective. Each individual underwriter draws off his or her own experience in deciding the creditworthiness of an applicant. Each lender develops its own set of standards for mortgage products for their underwriters to work with. This combination leads to a certain amount of inconsistency in deciding the creditworthiness of applicants with similar credit profiles.

Fair Isaac Company, based in California, attacked this problem in the late 1980’s. They studied millions of credit files, looking for patterns that could accurately predict potential default rates. Once these patterns were identified, a mathematical model was developed that was capable of predicting the probability of an applicant defaulting on a loan. The intention was to take the human element out of the decision process. The program that they wrote was then incorporated, with minor modifications, into each of the 3 bureaus. This enabled the bureaus to assign a credit score associated with an applicant. Equifax issues a Beacon Score, Experian a FICO Score and Trans Union an Empirica Score. Since the data reported to each bureau is slightly different, the scores will also be different. Most lenders will use the middle value in determining the score used to evaluate the applicant.

The actual formula for calculating a credit score is a trade secret and the statistical modeling that the formula is derived from is constantly being revised. There is, however, some general information that has become available over the years.

Your credit score is developed from a sampling of the data in your report. This means two things. First, having a longer credit report is better than having a short report. A late payment on one credit card when there are only 3 pieces of information on your report is going to have a greater impact that if you have 20 pieces of credit on your report. Second, reports run within weeks of each other, with no apparent differences in how credit has been utilized, can yield different scores. Different samplings of data can yield different scores.

Your “Score” is a number between 300 and 850. The higher the number, the better a credit risk you are. A score below 680 is generally a cause for concern for a lender and in this credit environment a score below 720 will trigger a pricing adjustment. As a score decreases, the pricing adjustment gets worse. Should the score fall below 620 it becomes a serious issue. An applicant at this level will be limited not only in the types of mortgage products available but will be required to put a higher down payment on the purchase. Anything below 580 generally is too low for any type of credit. Because of all the research done on patterns of consumer defaults, the lending industry has been able to create a sliding scale of interest rates. Instead of simply approving or declining an application, a lender now has the ability to price a mortgage based on the probability of default. This is called “risked based pricing”.

A loan is considered delinquent if the borrower has fallen behind on his payments for 90 days or greater. An applicant with a score below 600 has a 1 in 8 chance that he will become delinquent in at least one of his outstanding loans. As the score moves to 659 the odds fall to a 1 in 26 chance, from 660 to 679 it drops to 1 in 38, from 680 to 699 it's 1 in 55, from 700 to 719 it's at 1 in 123, from 720 to 759 it's at 1 in 323, from 760 to 799 it's at 1 in 597 and at 800 and above it falls to a 1 in 1,292 chance. These odds are only approximate and they are constantly being revised. Loans age and the economic conditions of the country change over time. New data is constantly being added to the computer model to reflect these changes.

The credit score is based on approximately 45 different criteria from your credit profile. The most important component is how you currently pay your bills. This represents approximately 35% of your score. Your most recent history carries the most weight here. Recent minor late payments can easily have a greater impact than severe credit problems in the past. For example, the common assumption that you need to wait 7 years after a bankruptcy before you can be considered for a mortgage is simply not true. The discharge need only be 2 years ago as long as you have properly re-established credit. You will pay no higher an interest rate than if the bankruptcy never occurred.

The second most important component is your credit utilization. How you utilize your existing credit impacts roughly 30% of your score. The closer you are to your credit limits on your credit cards, credit lines, etc, the greater the chances you have of having financial difficulties. Knowing this, you are in a stronger financial position to distribute your debt over several cards, instead of focusing on one credit card with a high balance.

Many people are afraid to have too many credit cards. They feel that having the credit available is too large a temptation. They will maintain only one card and keep a balance on it. The only danger in this approach is that should there be any minor problems in paying the monthly payment, it ends up having a larger than necessary impact on your credit score. A safer approach would be to have several cards, even if you only use one regularly. The more data available for your score to be based on, the more representative the score will be of the way you use your credit.

The longer the credit history you have, the better. This can impact your score by as much as 15%. Short credit histories can mean one of two things. You may simply have had no need, or want, for credit or you simply couldn’t get credit. There is no way to distinguish between these two totally different conditions. It is in your best interests to start developing a positive credit history as soon as you can. You never know when you are going to want, or need, credit in the future.

Every time you apply for credit an inquiry appears on your report. Too many inquiries can negatively impact your score. This is a misunderstood component of your score. First, the number of inquiries only contributes 10% to your score, so it’s not in itself a major component. Second, credit inquiries from non-credit issuing entities aren’t counted. So, if your insurance agent runs your credit report or your landlord does, there is no impact on your score.

If you're shopping for a car and every dealer you talk with runs a credit report, this is counted as one inquiry. Inquiries for consumer debt dated within a 14-day period are considered one inquiry and inquiries for a mortgage within a 45-day period are considered one inquiry.

There is a common misconception that there are numerous errors on your credit report. Over the 20 years that I’ve been in this business, I’ve reviewed thousands of credit reports finding but a handful of mistakes. Anytime we find derogatory items on a credit report we discuss them with the applicant. Items that the applicant thinks, at first look, as being erroneous usually turn out to be correct after a closer investigation.

For instance, the applicant didn’t realize that the payment history of the car loan he co-signed for would appear on his credit report. This quite often is the first time the applicant sees the detailed payment history. All correspondences regarding this loan would routinely be mailed to the primary borrower. It’s not until the loan is delinquent, that the lender will contact the co-borrower.

A mysterious lender appears on the report. Upon further investigation it turns out to be a different name for a bank that the applicant was already using. Another common occurrence would be the result of one institution acquiring another. The applicant may not immediately recognize the new lender as the same lender he has been dealing with for years.

A collection account appears on the report. It turns out to be from an old medical bill that was long forgotten. Doctors and hospitals will turn over outstanding bills to a collection agency if your insurance company, or you, don’t pay them quickly enough. The collection agency may or may not follow up with you, but they will immediately report the collection account to the credit bureaus.

They know full well that you will be applying for some form of credit in the future. Their collection account will appear and you will then contact them to correct the matter. It is only a matter of time.

Do you think that doubling up on the minimum payment on this month’s Visa bill will release you of the responsibility of making the required payment next month? Unfortunately, unless the creditor is specifically instructed to do otherwise, the additional payment will be used to pay down the outstanding balance. Not making next month’s payment will result with a 30-day late notation on the account in addition to you now being obligated to pay the late charge on the account.

Do errors happen? Yes. The typical errors are due to the blending of credit data on similar named people living at the same address. A father giving his name to his son will inevitably cause the credit data to blend. Bear in mind this is only a real concern when one has good credit and the other bad. If both have good credit, even this error is meaningless.

Another typical example is when someone steals your credit card, or all your cards, and starts charging to your account. This is not as serious as it seems. Once you’ve notified the creditors as to what has happened, they will immediately alert the credit bureaus, and your file will reflect the theft.

The errors that you need to be pro-active with are situations when the creditor neglects to update your file. This is common when you pay off a collection account or a judgment. Once the creditor gets his money, he has no incentive to correct your records. You need to be sure that you get confirmation, in writing, that your bill was satisfied. Keep that along with a copy of your cancelled check and any other correspondences regarding the matter. Should the creditor not report that the account was paid to the bureaus, you will have all the necessary paperwork to prove otherwise. Your documents will supercede the data in your credit file.

It’s easy to keep your credit report accurate. If you have a product dispute with a store, do as much as you can in writing and keep copies of everything. If you have a problem with your insurance company paying a medical bill, stay on top of the problem and follow it through to the end, keeping copies of everything.

If you are contacted by a collection agency in error, have them confirm it to you in writing. If you are turned down for credit, you are entitled to receive a free copy of your credit report. Ask for it and review it, you may find out they received a report on the wrong person or you may have errors that need to be corrected. Supplying copies of the documents you kept to this creditor will prove that you are entitled to the credit you applied for.

You can routinely monitor your credit report for free. Each credit repository is required by law to supply you with a copy of your report on an annual basis for no cost. All you have to do is ask. www.annualcreditreport.com is a site that is provided free to the public. The best way to utilize this site is to visit it 3 times a year. Each time requesting your report from one of the repositories. Each repository is required to give you a copy of your report annually for no charge. By staggering your requests over the year you see your report every 4 months. This gives you the ability to address any issues on your report before they present a problem.

Companies promote themselves to consumers via many avenues. Newspaper advertisements, billboards, radio and television reach a broad group. More and more, companies are electing to promote their products through target marketing. Advertising in a specialty magazine is one way. Sponsoring a sporting event is another. None of these approaches are intrusive. You can simply ignore them by turning a page, changing a channel or simply by doing something else. Direct solicitation is another story. When a company elects to market themselves this way they force a response from you, wasting your time and energy. The telephone solicitation that makes you answer the phone or the direct mail pieces that clutter your mailbox are becoming more and more common.

Where do companies get your contact information from? There are several places and some are less obvious than others. We all know when you subscribe to a magazine that your mailing address appears on a list of subscribers and that list is used by the publisher to sell you additional magazines. When you investigate a product on the Internet you will be contacted by local distributors of that particular product. Companies can purchase lists from many sources. The publisher of the magazine you subscribed to may elect to sell the list of subscribers to another entity. For example someone who subscribes to Road and Track fits the profile of a car enthusiast making him a target for a company that sells car accessories.

What you may not be aware of is that the credit agencies use their database of personal information to create lists that are then sold to various businesses. They can develop a list of consumers in a particular zip code, a list of consumers with car loans or mortgages and then sell those lists to any one willing to pay the price. They also get more personal, by developing list of consumers that have credit scores within a certain range and then sell those lists to companies in the finance industry. However, the newest product they are offering to companies is the most intrusive and something you need to be aware of.

The credit agencies are offering for sale, the ability for a company to know within minutes when you've applied for credit and what kind of credit you've applied for. So, for example, you apply for a mortgage with Shelter Rock Mortgage. As part of the process you will be required to grant Shelter Rock Mortgage permission to gain access to your credit report. When the report is run, an inquiry will appear in your credit file. Mortgage companies can subscribe to a service that will arrange for them to be notified the moment that inquiry appeared in your file. You will then be contacted by various companies looking for your business.

Marketing in itself is not a bad thing. It provides information to the consumer. The consumer then has more knowledge regarding product specifications and pricing upon which to make a decision. Even in the mortgage application example, the consumer should be in a more informed position to make a decision after receiving multiple offers. In the real world however, the consumer has no way of evaluating the integrity of the business that contacts him or the accuracy of the information that is being supplied. The consumer has no way of knowing if the company that has contacted him really is who they say they are or how good their information is.

If you feel the disadvantages of direct marketing out-weigh any benefit or convenience you receive from it, there are things you can do. You will never be able to eliminate receiving all direct solicitations but you can reduce them considerably.

You can stop the credit agencies from selling your personal information. You can call 1-888-5-OPTOUT or visiting www.optoutprescreen.com. This will enable you to stop the prescreened solicitations that are based on lists from the major consumer reporting companies.

Tired of receiving telephone calls all hours of the day and night from companies trying to sell you something? You can opt out of them also by calling 1-888-382-1222 from the phone number you want to register or visiting www.donotcall.gov.

The Direct Marketing Association (DMA), a trade association for businesses in direct, database, and interactive global marketing, maintains a Mail Preference Service that lets you opt out of receiving direct mail from many national companies. You can do this by sending a letter to: Direct Marketing Association, Mail Preference Service, PO Box 643, Carmel, NY 10512 or by visiting https://www.dmachoice.org/MPS/proto1.php.

The DMA also has an E-mail Preference Service to help you reduce unsolicited commercial e-mails. To opt-out of receiving unsolicited commercial e-mails from DMA members, visit https://www.dmachoice.org/EMPS/.

If you change your mind and wish to begin receiving these solicitations again simply contact each of these sources again and make the revision.

Financial Planning

Eastern philosophy is based on the concept of balance. This symbol of Yin/Yang illustrates the theory. Day and night, good and evil, pleasure and pain, inner strength and physical strength are examples of opposites that need each other in order to maintain equilibrium.

The approach commonly used in personal financial planning focuses on a rigid set of rules that works well in business budgeting but fails too often when used by individuals. In developing a business plan the primary day-to-day expenses, such as rent and utilities are identified first. Then the next level of expenses are listed, and so on. Having all expenses prioritized in this manner allows for a systematic reduction of expenses when income targets are not met.

Individuals are told to do something similar. Review all personal expenditures and categorize them into two categories, “needs” and “wants”. Forming a table that would look something like this:

Needs	Wants
Rent	Vacation
Food	Dining out
Transportation Expenses	Buy a new car

After you pay for all your “needs”, you can then decide which “wants” can be fulfilled with whatever money that left after the “needs” are paid for. People fail to meet their goals with this system for several reasons.

We live in an “instant gratification” society. We’re encouraged to buy now and pay later making the distinction between “needs” and “wants” difficult.

The rigidity of partitioning all expenses in a table form is intimidating, requiring a level of discipline that few people have.

No expense fits neatly into either category. For example, you can pay $500.00 a month in rent or $5,000.00 a month. There’s no question that you “need” a place to live but there certainly is a “want” component in determining how expensive a place you decide to live in.

This is an effective starting point; after all, you can’t reach your goal of improving your financial health without knowing your current position. From here is where the concept of balance comes into play.

Look at Yin/Yang, the black half is your “needs” and the white is the “wants”. There is fluidity in the boundary between the two halves of the circle. The “needs” and “wants” of your life not only continually cross back and forth but will straddle the boundary.

It’s only after you recognize this fluidity can you focus on understanding what you need to do and begin to implement your changes.

If you’re serious about improving you personal finances you need to acknowledge that it’s going to take time. No major change in life happens overnight. It’s also not going to be easy and mistakes will be made. Is it surprising that oriental philosophy also holds perseverance in high esteem?

Overall Approach

Ø Check your credit card balances; are they going down, up or remaining the same.

Ø Identify realistic changes you can make in your lifestyle that will permit you to save more money.