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Showing posts with label scores. Show all posts

Sunday, April 13, 2014

Credit Scores Payment Choice and Durbin

The policy implication from a recent paper released by the Federal Reserve Bank of Boston is that younger, less educated, and lower income consumers, as a group, may be adversely affected by the Durbin interchange fee cap.

The study looked at the relationship between credit scores and consumer payment choices. It found that even when controlling for several variables that affect payment behavior, consumers with a higher credit score have a higher probability of holding a credit card, and a lower probability of holding a debit card. Moreover, cardholders with higher credit scores were found to use credit cards for a higher share of their payments and use debit cards less.

The study postulates that if financial institutions attempt to recoup forgone interchange revenues due to the Durbin amendment by charging a debit card fee, consumers with low credit scores are more likely to be harmed by a debit card fee. Low credit score consumers -- who tend to be younger, less educated and lower income -- use debit cards more intensively than those with high credit scores because their access to alternative means of payment is restricted.

Read the paper.

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Wednesday, August 14, 2013

How a Trial Loan Modification Affects Credit Scores

Loan modification – a process by which your mortgage lender changes the terms of your mortgage to lower your payments and help you avoid foreclosure – comes with risks to your credit scores. Struggling homeowners often dont realize that when they pursue a mortgage modification, they could be sacrificing their

good credit scores. For some people, credit damage is the very thing that makes foreclosure so scary. So its terribly sad and ironic when these people get a loan modification approved only to discover their credit has been trashed in the process. Im going to tell you how to mitigate the damage loan modification does to your scores and come away from the process with your credit rating as intact as possible.

Qualifying for Loan Modification By Missing Payments

Although the governments official Home Affordable Modification Program (I never understood that whole “Making Home Affordable” or “Home Affordable Modification” business. The syntax there is just terrible. Has Uncle Sam ever heard of plurals?) does not require you to miss payments, your bank might.

Heres the rationale behind the “You have to miss payments or you cant get a loan modification” song and dance that so many lenders sing: They dont want to modify your home. Dont get me wrong, foreclosure is pricey and while most states allow lenders to sue you for those costs, thats just additional time and resources the lender has to put up. A loan modification reduces the banks profits. So if youre still paying your mortgage – no matter how hard that mortgage payment makes it for you to get by each month – your lender figures you can continue making that payment. In the lenders eyes, if youre not missing payments, youre not hurting and thus dont need a mortgage modification.

Missed Mortgage Payments and Your Credit Score

Every time you miss a mortgage payment, even if you do it strategically just to qualify for a loan modification, your credit takes a hit. The worst part of this is that the better your credit is, the more missing mortgage payments hurts your score. For example, if you have a credit rating of 750 and you miss a mortgage payment, you could see your score drop 100 points overnight. Because the FICO scoring formula is a trade secret and the other entries on your credit report play a role in the points you gain and lose, there is no surefire way to know exactly how much a single payment hurts you. The bank, of course, could care less about your credit. The credit bureaus are the same. As a matter of fact, I read an article just yesterday on Experians website claiming that the credit hit you take when strategically missing payments to qualify for modification doesnt matter because – get this – if you need a modification your credit must already be in the toilet anyway.

Ignorance. Plain and simple.

Loan Modification Reporting Codes Could Trash Your Credit Score

The reporting codes a lender uses when it reports information to the credit bureaus makes all the difference in situations such as these. When any creditor reports an account to the credit bureaus, it does so using a code. Once you enter a trial modification, your mortgage lender can report your modified loan in one of two ways: AC or CN. One is good. The other will gradually destroy your credit.

The CN and AC Trial Modification Reporting Codes

When the HAMP program was first put into practice, lenders had no way to notify the credit bureaus that the new, lower mortgage payments were the result of a loan modification trial period. Such things were

Payments too much? Modification can help.

uncommon, and the code for reporting them did not exist. So did lenders get together and rally for a new reporting code that was more accurate? No. They reported trial modification payments to the credit bureaus using the “AC” code. AC denotes partial payments. These consumers payments were not, of course, partial. They were the new assigned payment. Because the modification was not permanent, however, these borrowers credit scores suffered.

In 2010, a new reporting code, “CN,” was finally introduced that demonstrated partial payments as the result of a trial loan modification. The CN code has no immediate negative effect (although it may in the future, should FICO decide that consumers who are undergoing a trial modification present a greater financial risk to other creditors).

Verify How Your Bank Reports Your New Home Loan Modification

When it comes to credit, Ive never been able to tell if loan officers lie through their teeth because they just dont care (or dont get a commission if they cant make things work out) or if they tell tall tales as a result of their own ignorance and inability to admit that they simply dont know the answer to some of your credit questions. So, heres your warning: Dont listen to anything a loan officer tells you about your credit. Ever. EVER. By all means, ask how different financial actions will impact your report, but never take the loan officer at his word. Always double-check on your own.

For this reason, you need to insist that your lender report your trial loan modification as “CN” and not “AC.” If you can push hard enough to get it in writing, do it. And always, always, always pull your own credit report afterward to make sure that your lender is keeping its word. The last thing you want to do is save your home only to throw away your good credit.

How to Get a Real Free Credit Report Without a Credit Card

Mortgage Debt Re-Aged and Disputes Marked Frivolous

What is a Key Derogatory on Your Credit Report?

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Tuesday, May 21, 2013

25 000 Unsecured Personal Loans Why Approval With Poor Credit Scores Is Possible

Once upon a time, the chances of people with bad credit ratings getting a $25,000 unsecured personal loan was next to nil. But despite the economic problems that are so prevalent today, applications for such large sums without security or good credit scores have every chance of being approved.

It might seem strange, but the truth is that loans are approved on the basis of other aspects of the application, and not solely the credit score that the applicant has. This effectively means that credit history is irrelevant in terms of getting the green light, so the chances of getting loan approval with bad credit or excellent credit are pretty much equal.

Still, the idea that there are unsecured personal loans available to anyone who wants one is not quite accurate either. There are criteria by which lenders measure the suitability of the applicant. Depending on their circumstances, the ability to repay can either be confirmed as likely or unlikely.

Loan Limits for Applicants

Financial need is the motivation behind any loan application, but lenders have to assess the ability of a borrower to repay the sum borrowed before any decision can be made. For example, a $25,000 unsecured personal loan may be affordable to Applicant A but Applicant B, even if their incomes are the same.

Repayment is the principal basis of any approval, and why lenders set loan limits for certain categories of applicants. For example, there are less stringent conditions set on loans between $1,000 and $10,000, than for loans in the $10,000 to $30,000 range. And, if the loan is unsecured, getting loan approval with bad credit is very unlikely for sums of $50,000 to $100,000.

In fact, security is a standard requirement for very large loan sums. This is because of the perceived risk involved for the lender. Usually, unsecured personal loans are small is size, though $20,000 and $25,000 are available.

Where Credit Scores Are Applied

The only area that credit scores are applied to is in calculating the interest rate to be charged. The lower the score, the higher the rate, and vise versa. It is this that makes a $25,000 unsecured personal loan affordable or not. The rate affects the size of the monthly repayments, which in turn decides whether the debt can fit within the debt-to-income ratio.

This ratio stipulates that no more than 40% of income should be dedicated to repaying loans, with the remaining 60% used for general expenses and preparing for those unexpected expenses that can pop up. Getting loan approval with bad credit is impossible if the 40:60 ratio is exceeded.

One way to ensure the ratio is not exceeded is to lower existing debts before applying for the larger unsecured personal loan. This can be done by taking out a series of small loans to pay off specific debts.

Improving Your Approval Chances

There are other aspects to consider that can greatly help in an application for a $25,000 unsecured personal loan. One is to seek a longer loan term, so instead of repaying the principal over 24 months, choose 60 months to lower the required monthly repayment to something more manageable. Then, getting loan approval with bad credit becomes easier.

Another is to be precise regarding the purpose of the loan. If an unsecured personal loan is to be used for clear debts, then lenders are much more open to approval. However, if it is to finance a vacation or to buy a new car, then it can be more difficult.

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