Blog Archive for May 2009
Wednesday, May 27, 2009
Short Sales and Credit Scores
There has been a lot of debate about short sales and their impact on FICO scores. A short sale has the same impact unless the lender chooses not to report that the loan has been sold short, which is uncommon because it does go into a negative status. There is no universal way to report a short sale b/c the credit bureaus don't have a narrative or status code specific to "short sale." This should and could change.
I've seen short sales show up as either charge offs or settlements, both of which are accurate. If the lender charges off the deficiency balance then it's a charge off. And, because the lender accepted payment less than the full amount due it's a settlement.
Monday, May 25, 2009
Credit Scores and Income
The following question was submitted to Credit Expert Witness by Steven
Why are credit scores based on the available credit instead of total loan amount to total income? This makes it possible to have available credit more than income.
Nice question Steven. Keep in mind that credit reports do not contain your income, net worth, assets, holdings or anything else that defines your wealth. Therefore they can't feed this information into credit scoring models used to generate your credit scores. This makes using any income based measurements impossible for credit scoring models.
The reason credit scoring models measure available credit is because it's available on a credit report and it has proven to be predictive of future credit risk. That important combination causes it to be a very valuable component of our credit scores.
And yes, it is quite possible and very common to have more credit available than income. Think about a mortgage loan. Who takes out a mortgage loan that's less than your income? It has to be very uncommon. Add to that the available credit on credit cards and it far exceeds income in most cases.
Monday, May 25, 2009
Home Equity Lines and Credit Reporting
The following question was submited to Credit Expert Witness by Steven
I have a LOC on my house, the loan doesn\'t show up as mortage loan it shows up as unsecured credit, is this correct? If not, how do I fix it?
Another nice question Steve. A LOC or Line of Credit, assuming it's a Home Equity Line of Credit, generally shows up as a revolving account on your credit reports. It doesn't always show up as being a secured loan, which it was when you took it out but might not still be given the decrease in property values. In fact, some of it might be secured credit while some of it might be unsecured depending on the new value of your home.
The most important thing to watch out for when it comes to home equity lines of credit, especially those that are being heavily used and have high balances, is that it's not reporting in such a way that would cause credit scoring models to confuse them with credit cards. That would be a problem.
Look to see if the account is being reported as a home equity related loan. You can tell by looking for any sort of narrative description of the account that's specific to home equity, mortgage, secured by property, or any similar wording
Monday, May 25, 2009
Short Refinances and Impact to Credit Scores
The following question was sent to Credit Expert Witness by Jim.
If my GMAC mortgage approves me to reduce my overall loan and charge off the rest, how will this affect my score? They said that because I am in an interest only non FHA loan, it is worth nothing to them, and they cannot sell it. So if they reduce my loan (effectively taking out a new loan) and closing out the other loan (saying that 185,000 was charged off, or "loan was settled for less than original amount")
I called Fair Isaac and a guy there said it would be like a "short sale" and a "bankruptcy" effectively!!!!!! Is this right?
Nice question Jim and I wish I had better news for you. What you're referring to is called a short refinance. It's a combination of a short sale and a refinancing of your mortgage. They allow you to refinance but for a lower amount. It's like you've purchased the house from yourself but for a lower amount.
How they choose to report this to the credit bureaus is what determines what kind of score impact you're looking at. If they choose to report it as being a "settlement" or "charge off", both which are semi-accurate but not complete, then that will have a negative impact to your scores. It's not the same as a bankruptcy because a bankruptcy will spread throughout all of the debts that are/were included in the bankruptcy. But it will be the same as a short sale because a short sale does show up as a settlement or charge off.
Monday, May 25, 2009
Pay Off Credit Cards in Full Each Month? Good Idea or Not?
The following question was posted at Credit Expert Witness by an unnamed consumer
Is it good or bad to pay off your credit card balances in full each month? You don't make any credit card profit for the credit card company. I've heard it both ways. Which is true?
It’s good to pay off your balances every month because you don’t pay interest and you become less concerned about your interest rates. It’s not a great idea to carry a balance over a month because then you are paying interest. Using the card already generates income for the credit card issuer, from the merchant fee. Unfortunately, in this crazy credit card environment you could be considered a deadbeat for avoiding interest like this. Still, there’s a difference between what we know to be good and what we think banks will like. Not carrying a balance has too many good points.
Monday, May 25, 2009
What Do I Do If My Credit Limits Have Been Cut?
The following question was submitted to Credit Expert Witness by an unnamed consumer.
What do you do if your credit card's credit limit has been cut?
First off, don’t wait until a credit card issuer cuts your credit limits to react. You’re behind the 8-ball if you do so. You should have 5-7 open and unused credit cards at all times, good ones, with high credit limits. It might take you years to get to this point but once you’re there you’ve insulated your credit from damage if an issuer cuts your limit or closes your account.
This article should not be interpreted as legal advice or testimony. It does not represent any conclusive opinion of the author or any of the credit experts from ExpertCreditWitness.com.