Know the Score. May 20, 2015

Transcription

1 Know the Score May 20, Credit Builders Alliance, Inc. Some rights reserved. CREDIT BUILDERS ALLIANCE and the accompanying Logo are trademarks of CreditBuilders Alliance, Inc. This document is licensed under a Creative Commons Attribution-Noncommercial-Share Alike License (US/v.3.0). Noncommercial uses are permitted on the condition that you include an attribution to Credit Builders Alliance. If you alter, transform, or build upon this work, you may distribute the resulting work only under the same or similar license to this one. More information regarding the license is at: Requests for permissions beyond the scope of the license should be directed to Credit Builders Alliance, Inc., at Credit Builders Alliance ("CBA"), a not-for-profit organization, makes this information available for informational purposes only. This information is not intended as legal, financial, or other advice, and you and your clients should consult qualified advisors before making any decisions. CBA does not represent that any of the information will produce results.

2 What you will learn How to describe the key players in the credit industry and how consumers are affected by and can engage with the different entities in order to exercise their rights and make a positive impact on their credit profile. Abasic understanding of the different types of credit reports and scores that are on the market, and the different types of business and consumer purposes that they serve. Recent relevant updates! How to use a client s credit report as a fundamental coaching tool to help clients make informed decisions about how to positively impact their credit profile in order to achieve their financial goals.

3 Know the Score The Players Rulemaking & enforcement authority historically fractured, CFPB now a game changer Voluntarily submit data; may or may not report to all 3 (still regional inconsistencies) The Government Models designed differently based on consumer files (FICO, VantageScore, etc.) Lenders & Other Businesses (incl. public records) Consumers Risk Score Modelers Credit Reporting Agencies Big Three: Experian, Equifax, TransUnion Also CoreLogic Credco, subprime CRAs for payday loans and alt. data; specialized CRAs with medical, employment, checking account history (e.g. FIS/Chex Systems) SOURCE: Experian

4 Know the Score The Reality Credit reporting = Voluntary, For-profit system. Dependent on comprehensiveness and accuracy of data in/data out. Result: The system doesn t collect data on everyone, or may be collecting only negative data on some. SOURCE: Experian

5 Know the Score The Tools Credit Report: summary of credit history Credit Score: risk model used by lenders/other businesses Both are important! Sometimes they serve different purposes.

6 Know the Score The Tools Information is Key: Reviewing credit reports & scores with clients at intake helps you understand their financial circumstances, shows them what creditors/businesses will see (or not), and helps them make the best credit building decisions in the moment and also plan for future goals. Timing is Key: Pulling reports & scores at least 6 months before seeking to achieve their goal provides time to build credit and correct and update information.

7 Know the Score There are thousands of scores What Score? Q: A: Lenders use different scores designed to measure risk for different types of lending --including mortgage, auto, and personal finance loans.

8 Know the Score Why so many scores? Non-lenders may also use credit scores calculated A: for other purposes: Insurance companies may use credit scores not only to predict the likelihood of payment, but also to assess a consumer s risk of being in an accident and/or filing a complaint; Hospitals may use scores to assess capacity to pay medical expenses and debt; Telecoms companies may review scores to determine whether or not to require a consumer to make a down payment in order to establish an account; Landlords may use scores to determine whether or not a consumer qualifies for rental housing; and Banks may use scores to determine an applicant s eligibility for a checking or savings account.

9 Know the Score All Scores are Educational but Two Stand Out FICO (Fair Isaac) Major lenders, including mortgagelenders backed by Fannie Mae and Freddie Mac Equifax a FICO model FICO website FICO Score Open Access for Credit and Financial Counseling Major lenders Examples only and not meant to be an all-inclusive list VantageScore Experian and TransUnion VantageScore 3.0 Credit Bureau websites Third party credit report/score services sites like:credit Karma, Credit Sesame, Credit.com SOURCE: Experian

10 Know the Score Fair Isaac FICO Scores Generic Mortgage Personal Finance Bankcard Installment Score Auto MANY GENERATIONS (latest: FICO9 & FICO Alt. Data) Experian Equifax TransUnion Different bureau, different algorithm FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.

11 Know the Score VantageScore VantageScore 3 GENERATIONS (latest: VS3.0) Experian Equifax TransUnion Same algorithm across bureaus VantageScore is a registered trademark of VantageScore Solutions, LLC.

12 Know the Score What we know about FICO Traditional FICO: SOURCE: FICO

13 Know the Score VantageScore VantageScore 3.0: SOURCE: VantageScore

14 Know the Score Recent Changes to FICO Beginning in Fall 2014: FICO 9 will no longer weigh unpaid medical debts as heavily. FICO 9 scoring will not consider paid collections What this means: Some consumers can expect to see credit scores rise up to 25 points. Consumers who experience a score increase may qualify for better interest rates on credit products. Source: NY Times

15 Know the Score Context: What is a Good Score? Range Score? Meaning Subprime(Poor) No access or unfavorable rates & terms Non Prime (Fair) Reasonable or good rates & terms Prime (Good) Better rates & terms SuperPrime (Excellent) 780+ Best rates & terms Note: there is no one score and ranges are not static, but depend on the lender/business as well as overall consumer performance at any given time.

16 Know the Score Score impact Missed payments and defaults have a significant negative impact Scenario Missed payments Starting Score Score DROP Ranges Bankcard 30 days days Auto 30 days days Mortgage 30 days days Charge-off or foreclosure Unpaid Charge-off, placed at collections agency Filing bankruptcy Source: VantageScore Solutions, LLC 2014

17 Know the Score Score Impact Best Practice Maintain ACTIVE trade lines (pay on-time and regularly) Keep balances low (=<30%) Don t close old inactive accounts in good standing if you don t need to Maintain mix of active credit trade lines Don t open more accounts than you need to

18 Best Practices Risk Factors Generated when a risk score is calculated Tell the consumer what to address in their credit history to become more creditworthy Are largely consistent from model to model Are usually included in or described in an adverse action notice VantageScore coming out with positive reason code explanations! Visit REASONCODE.ORG for VantageScore risk factors Sign up with FICO Score Open Access to share FICO risk factors with clients

19 Best Practices What we know Scores are important but

20 Best Practices What we know focus on the trend upwards, the range, and the underlying behavior detailed in the credit report

21 Know the Report What is on a credit report Know the Report! A credit report typically contains: Personal Identifying Information Name Address Social Security Number Date of Birth Credit History Open trade lines Active trade lines Derogatory items such as late payments & accounts in collections Public Records Bankruptcies Foreclosures Judgments Liens Inquiries List of creditors and other authorized parties that have requested and received a copy of the credit report in the last 24 months

22 Know the Report Statute of Limitations Open Accounts in Good Standing Closed Accounts in Good Standing Late or missed payments Charge Off/Collections Bankruptcy Civil Judgment Foreclosure Tax Liens Inquiries Indefinitely 10yrs from date of closure 7yrs from date of 1 st delinquency 7yrs from date of charge off 10 (Ch. 7) or 7 (Ch. 13) yrs from date of entry for relief 7yrs from date of entry 7yrs 7 yrs from paid date or no limit if unpaid 2yrs

23 Know the Report Types of Credit Reports Did you know There is not just one! Like scores, credit reports are customized by different data sellers for the needs of different businesses and for consumers.

24 Know the Report Different Reports Consumer Disclosure Reports One free copy annually from each of the main credit bureaus through (No free score yet ) Adverse Action: Consumer can request report within 60 days if denied a loan or employment due to information derived from a credit report (Mandatory FREE Credit Score Disclosure Notice) Online credit education & lender lead generation sites like: Credit Karma (TransUnion & Equifax reports) Quizzle (Equifax report) Business Division Reports Lenders and other Businesses: Access to credit reports directly from credit bureaus or through data resellers for underwriting and soft inquiries Nonprofits: CBA Access: Discounted access to credit reports directly from TransUnion & Experian for underwriting, financial counseling, and outcome tracking. CoreLogic Credco, etc.: HUD Certified Homeownership programs, lending nonprofits (tri-merge option for scores) Other Data resellers: Kroll

25 Know the Report Consumer sees: When reviewing a consumer disclosure report a consumer will see: Detailed information about each credit account, including dates of first delinquency, when the account will fall off the report, creditor contact information and more. Names of original creditor (if an account has been sold). Information on how to make a dispute.

26 Know the Report Lender/Business sees: When reviewing a business division report a lender or other business will see: Consolidated credit information about a consumer. Summary of # of active accounts, total outstanding debt, etc. Credit Score (with some exceptions) What lender/business may see may depend on their business rules and what they choose to review.

27 Know the Report What a Credit Report May Tell You Financial patterns that may reflect stability/ability to make ends meet On-time payments Delinquencies Collections accounts Inquiries Debt obligations that may reflect ability to manage emergencies and save Total outstanding current debt & debt-to-credit ratio Total debt outstanding in collections Access to asset building credit that may reflect potential for financial security # & type of trade lines (note: can t see equity on a credit report!)

28 CBA RECOMMENDATIONS: Identify and catalogue what is on the credit report Discuss these with clients and identify areas/issues to address Evaluate next best step

29 Deal with Debt New Developments! All 3 credit bureaus will use trained employees to review the documentation that consumers hand in when they believe there s an error on their report. Even if the creditor claims the information is accurate, a credit bureau employee must investigate further and resolve the dispute.in the past, credit bureaus sent about 85% of consumer disputes to the lenders themselves, instead of solving the issues internally. If a consumer receives a free report at AnnualCreditReport.com and discovers and successfully disputes an error in that report, they will be entitled to a second report at no charge. Debts that do not arise from contracts or other consumer agreements to pay, such as traffic tickets or government fines, will no longer be eligible to be recorded on credit reports. Changes should take effect sometime between mid-late 2015 and mid

30 Deal with Debt New Developments! Medical debt treated differently: Must wait a 180-day grace period before posting any information about medical debt on consumers credit reports. And once medical debts are paid by an insurance company at any time the information must be removed. Two major banks agree to Erase Debts From Credit Reports After Bankruptcies Put to rest the zombies of consumer debt bills that are still alive on credit reportsalthough legally eliminated in bankruptcy potentially providing relief to more than a million Americans. Two major banks have agreed to update borrowers credit reportsin May 2015 to reflect that the debts are extinguished. Other major financial institutions may also follow suit. 30

31 Best Practices Working with your Clients Consumers need to know what is on their credit report in order to impact positive change Help your client understand what credit score is important to follow in order to monitor their progress Make sure that clients are aware of their rights to view their credit reports on a regular basis

32 Questions Q&A Please type your questions into the chat box

33 Please contact us! Michelle Parker Relationship Associate Sarah Chenven Director of Programs & Strategic Initiatives