Sunday, November 30, 2008
Retail Credit and the Impact to Your Scores

The holiday shopping season is around the corner and it's more important than ever to shop wisely. In this economy saving money is on everyone's mind, but you should think twice before accepting a common discount used by retailers. If you have done any shopping at all, you've must have been asked when you bring your purchases up to the counter if you'd like to save 10% or so on your purchase by opening a store credit card. It's quick, easy and you save money, what could be bad about that?

This process is common and legitimate and does offer customers an opportunity to save money. But before saying yes, you should understand what's really happening behind the scene. When you agree, the cashier enters some basic identifying information that you provide which is then fed into an automated process developed by the retailer, which evaluates your credit report and credit score information to give them an answer. If you are approved, you get the discount and you may think nothing of it. But by accepting that offer, you are essentially applying for credit and it counts as an inquiry on your credit report which may lower your credit score. How much could it affect your credit? That depends on many factors including how much debt you already have and your overall score. Regardless, think first if that discount is really worth it. Even if you cancel the card or don't use it again, the inquiry will still show on your report for two years.

If you do decide to accept the offer, don't forget to pay that credit card bill when it arrives. It's easy to overlook a new bill that you have not had beforehand and if you forget and pay 30 days or more late, you will then impact your credit even more negatively. And somehow that discount will become very expensive!

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Sunday, November 23, 2008
The Basics of Underwriting

Years back I worked as a Finance and Insurance Manager at an RV dealership. My role was to sell what are referred to as "after-market" products like insurance, extended warranties and RV products to customers who had purchased an RV. But more importantly, I was to assist the customer in securing financing for the purchase. I would have the customer fill out a credit application and using the information from that application I would request a credit report and FICO score from one of the 3 major credit bureaus, Equifax, Experian or Trans Union. The credit bureau or bureaus would send back the customers credit report and a credit score. With this information I would determine which lender I would send the customers application to in order to get the best interest rate possible.

Finance companies that grant credit for RV purchases have different lending criteria then, for example, a mortgage lender. Some companies only wanted to see consumers with good credit, while others were willing to take on more credit risk and would accept less then perfect credit reports and credit scores. Of course, the more troubled the consumer's credit, the higher the interest rate.

When determining which lender I would use depended on several factors that were provided for in the credit report. First and most important, was the credit score. Many of my sources of funding, my lenders, would give me a credit score range that was acceptable for them to approve the credit application. At the time, if a customer's FICO score fell between 700-850, I would send the application to the financing companies that offered the best financing rates.

Lenders that accepted less then stellar credit looked with more scrutiny at the factors that drove the score. I would always look for the most damaging factors and work my way through the list all the way to the least damaging. The first area I would review would be public record such as bankruptcies, judgments and tax liens. Collections, although not a public record by definition, would also be reviewed along with true public records. Next were the delinquencies (payment history reported as being 30 days late or worse). After delinquencies I would determine the credit capacity (how much of available credit was being utilized on credit card account.) And finally, I would review the list of credit inquiries and the amount of time the applicant has had credit. All of these factors helped me determine which lender I would choose to place the financing.

Once a credit application was approved, the lender would send me the loan documents, which were signed by the customer and the financing process was complete. If I was unsuccessful in finding a company that would finance the purchase, the sale was terminated and the customer's down payment was returned.

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