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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2009

Today's Credit Trends

Knowing six key issues could help brokers provide better aid for their clients

As credit guidelines tighten, the number of people affected grows. But you can actually close more loans during these tough times by understanding how the credit-scoring model works -- and how to overcome problems that could occur.

By getting to know the following six trends, brokers can better understand credit while ensuring their clients are on the right path toward making sound credit decisions.

1. Credit-limit reductions

One major trend involves credit-card companies reducing customers' credit limits. Creditors can reduce this limit whenever they want, even when customers have a perfect payment history and no derogatory credit. This increases customers' debt ratio -- their current balance versus their available credit -- and generally could lower their credit scores.

For example, a customer with a $3,000 balance on a card with $10,000 credit limit has a 30-percent debt ratio on that card. If the creditor drops the limit to $5,000, the debt ratio doubles to 60 percent.

Although brokers aren't always qualified to give financial advice, it does help to know how borrowers in this situation can improve their standing. Consider these options:

  • Spread out the balance among several different credit cards to keep each debt ratio lower.
  • Establish business credit, which does not necessarily impact personal credit.
  • Keep an extremely low or no balance on the card, in which case the debt ratio should not be affected. This can defeat the purpose of having available credit, but it also can help increase a FICO score.

2. Judgments on reports

More financial failures have led to more lawsuits, which have led to more judgments.

Legal judgments can stay on a credit record for as long as the particular state's statute of limitations allows. In the event someone moves, credit card companies can choose which state in which they wish to sue. Usually, they pick the one with the longest statute of limitations. For example, in California, a judgment can impact credit for 10 years. If the judgment is renewed before it expires, it often is for another 10 years.

Most credit bureaus, however, remove the judgment from credit reports after seven years.

3. HELOC reductions

Banks are lowering home-equity-line-of-credit (HELOC) amounts. Depending on how it's reported to the credit bureau, this also can impact credit scores.

If treated as revolving debt, the lower HELOC will cause a higher debt ratio, just as in the credit card scenario. This will not occur if it is treated as a mortgage.

To help clients, determine how the lowered HELOC is reported. Often, this is as easy as checking the account number; with Equifax, for example, the fourth and fifth characters designate it as a mortgage.

4. Credit-score predictions

Despite claims otherwise, it is virtually impossible to know if someone's credit score has increased or decreased without actually pulling credit. This is because there are many different calculations, combinations and accounts that go into a credit score.

There are no points associated to one particular incident in a score -- it's always a combination of factors. Some combinations can move consumers to certain "scorecards," which help dictate the credit score.

5. Collections on reports

Just as with judgments, collections on amounts owed have popped up on more reports.

Collections can stay on the credit report for 7.5 years from the last-activity date, often defined as the date on which the original creditor marked an account delinquent. This also can be the date of initial delinquency.

Generally, collection accounts seem to fall off reports after seven years, even if an individual has multiple collections associated with the same debt or fails to pay a renegotiated debt. When someone pays off a collection, although legally it counts as activity, the last-activity date should be frozen from when the account entered delinquent status. This is so credit bureaus do not accidentally report the collection longer than the statute of limitations allows.

If a lender uses an older version of the FICO system, however, your clients still may see credit scores drop after a payment on a collection account. With the newer versions of FICO, however, this is not an issue. It now includes a date of initial delinquency, not a date of last activity.

Clients may also claim that they are not responsible for a collection on a debt because they did not receive notice of the debt. It is important to remember that collections agencies must only prove that they sent notice -- not that it was received.

6. The 'bumpage theory'

Recently, more people have subscribed to the theory of "bumpage": If you pull your credit report multiple times daily, the number of soft credit inquiries will soon knock any hard inquiries off the report. Hard inquiries can lower a credit score; soft inquiries do not.

Most often, this is a waste of time. Credit inquires only count for 10 percent of the overall credit score. More important, any bureau that removes a hard inquiry within 24 months of the inquiry date violates the Fair Credit Reporting Act.

Regardless of where a hard inquiry appears on a credit report -- at the top or bottom -- if it occurred within a year, it can impact a credit score.


 


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