The Worst Mistake
The worst mistake you can make when starting a credit repair effort, is to imagine that a derogatory account is accurate just because you recognize it. Recognition alone is not a valid test of accuracy – and the mistake could ruin your score.
Knowing the Rules Pays Off
Credit reporting accuracy is a matter of compliance with reporting rules. The credit bureaus, often blamed for our problems, are actually quite good at compliance. The vast majority of reporting errors originate with reporting entities (original creditors, collectors, etc.) The credit bureaus report the data they are given, and if a reporting entity provides out-of-date or otherwise erroneous information the bureaus include it in their reporting – at least until you challenge it.
Time Will Not Cure Your Ills
It is up to you to police the accuracy of your own reports. Credit repair requires a realistic and proactive effort. The passage of time will not cure your ills. Reporting errors, if ignored, are more likely to compound than they are to correct. Even the seven year reporting limit is likely to be a meaningless mile-marker for most errors which have a way of living on for decades.
John Defaults on a Credit Card
If you have ever looked at your credit report and seen more than one collector reporting the same debt, you are not alone. Here is an example of a typical sequence of events that affects millions of consumers:
John defaults on a credit card. Six months later the credit card issuer (the original creditor) charged off the debt and sold the account to Collector “A”. Six months later Collector “A” re-sold the account to Collector “B”. Four months later Collector “B” re-sold the account to Collector “C”.
Fourteen months after the charge-off, the credit card issuer (the original creditor) is reporting a past due balance, Collector “A” is reporting the collection, Collector “B” is reporting the collection, and Collector “C” is reporting the collection. Here is how it looks:
- Original Creditor: Charge Off with balance reporting as past due
- Collector “A”: Collection with balance reporting
- Collector “B”: Collection with balance reporting
- Collector “C”: Collection with balance reporting
John’s credit score is 150 points lower than it would be if the reporting entities were in compliance with reporting rules. To be in compliance, the Original Creditor would have updated the past due balance to zero when they sold the account to Collector “A”. And Collector “A” and “B” would have withdrawn their reporting entirely when they sold the debt. Here is how John’s credit report should look:
- Original Creditor: Charge Off with zero balance
- Collector “C”: Collection with full balance reporting
The correct version eliminates the past due balance with the Original Creditor and two of the collection accounts in their entirety. A world of difference.
FICO De-Stresses the Past
There is an unprecedented opportunity to restore your credit score and minimize the impact of the errors of the past. FICO, the creator of the credit score used by the vast majority of lenders, seems to have revised their formula to put less emphasis on the past and more on the present. This means that credit repair efforts made today may be surprisingly effective. If you aspire for better scores, act now.
Rocket Booster for Your FICO Score
One of the most powerful things you can do to boost your score is to open new accounts after the date of your last derogatory event. FICO puts major positive weight on new accounts (managed properly) with post-derogatory open dates. The logic is that you are showing your ability to get back up on the credit horse and ride again! A bit of advice, do not imagine that your old accounts are good enough to do the job just because you have brought them current. Open a couple of new accounts today and show that you are back in the game.
Rebound from Bankruptcy
How many people file for bankruptcy and then stick their head in the sand for years, believing their credit life is over? On the contrary! As far as your credit score is concerned bankruptcy really is a fresh start. Once your bankruptcy is discharged, clean up all of the errors on your credit report (or hire a credit repair company), rebuild your credit following the advice in the paragraph above, and watch your scores bounce back. Take the right steps and your post-bankruptcy scores can be over 700 within a year.
Recover from Foreclosure
Another new and exciting FICO behavior we are seeing is the speedy disregard of isolated negative events. Consumers with otherwise good credit now find that even major derogatory issues, like foreclosures, are forgiven within a year. For FICO forgiveness the derogatory issue must be resolved and cannot continue to show a past due balance, so once you wrap up your foreclosure, check your credit report to insure the lender is reporting properly!
What is Happening?
To shine a little light on the issue, there is good reason for FICO to be moderating their algorithm to favor forgiveness and reward good behavior. In fact, FICO is entirely statistically based and simply reflects the changing relationship between consumer credit and default rates. The recent formula adjustments are not intentionally charitable, but merely indicate that the positive correlation between past derogatory credit and default is decreasing. In fact, credit default nationwide is decreasing apace, thereby driving FICO to reduce risk measurements accordingly.
A Word of Warning
In spite of all of the clear signals that FICO is paving the way for consumers to recover their credit score pride, there is still one area in which they are resolutely inflexible. High credit card balances can still kill your credit score. If your credit card is reported to the bureaus with a balance in excess of 60 percent of the available line, you will lose points. How many points? A credit card balance in excess of 80 percent of the account limit can knock 100 points off your score. The less you use, the less the impact, but do not get caught by surprise when you need your score to be good.
Clean Up Your Credit Report
In spite of all of these new opportunities, if your credit report is loaded with erroneous accounts, duplicate collections, or any type of misreported information, all of your good efforts may be in vain. Now is the time for credit repair. Check your reports super carefully. Do not miss a single thing; just because an item is small does not mean it is not killing your score. And remain vigilant. Credit reports have errors and they do not fix themselves. Need help? Give a call.
Don’t Trust Your Credit Report!
On February 11, 2013 the FTC released the results of a study on credit reporting accuracy. Their conclusion is that consumers cannot afford to trust the accuracy of the information assembled by the credit bureaus – and provided to lenders, landlords, insurance companies, etc. in the form of credit reports. The importance of credit repair has never been more clear.
“These are eye-opening numbers for American consumers. The results of this first-of-its-kind study make it clear that consumers should check their credit reports regularly. If they don’t, they are potentially putting their pocketbooks at risk.” – Howard Shelanski, Director, FTC Bureau of Economics
The Big Picture
In brief, 26 percent of the study participants found errors on their credit report; specifically, “One in four consumers identified errors on their credit reports that might affect their credit scores.”
Our Take on Credit Report Accuracy
As dramatic as these numbers sound, it gets worse. The odds of reporting errors increase dramatically if you have had credit problems in the past. In other words, once you have had legitimate derogatory events, your accounts are often moved into an exception status, increasing the odds of reporting mistakes.
The most common instance is the case of a charge-off (of a defaulted account) by a creditor who sells the account to a third party collector, who may resell the account, and so on. Each of these entities can report the account to the credit bureaus. While there are rules meant to protect consumers from experiencing a multiple score impact from a single event, the odds of errors in this chain of events increase with each reiteration of the debt.
Credit Bureaus Frustration Revealed
Also of interest, the study provided fascinating insights into consumer interaction with the credit bureaus. Only 37 percent of the people who disputed information with the credit bureaus said that all of their concerns were addressed, while 63 percent of the people who disputed information were not satisfied with the response and unable to fully correct their errors.
Our Take on the Credit Bureaus
The credit bureaus have a daunting job. They receive billions of bits of data from millions of entities, including creditors, collectors, and public records repositories. The accuracy of a credit report depends on all participants in the system. Many of the errors on credit reports originate with creditors and other reporting entities and are not automatically caught by the bureau software. This fact underlines the importance of consumer vigilance and the need for a clear path to dispute and correct errors.
There is More to Come
Underlining the enormous importance of this issue, there has been another major investigation launched by the Consumer Financial Protection Bureau (CFPB) into the practices of the credit bureaus and their dealings with consumer disputes.
Reporting accuracy is only half the issue. Resolving errors with the credit bureaus is as important. As noted above, 63 percent of the participants in the study were unable to correct their reporting errors. Whether this is due to systemic inadequacies, or the result of illegal actions designed to ignore and discourage consumer attempts to rectify errors on their credit reports, is not clear, but the CFPB investigation should provide some interesting results.
The Moral of the Story
The message here is that consumers need to look out for themselves. It may seem like an odious task on top of the other stress in your life, but it is necessary to check the accuracy of your credit report on a regular basis – and to dispute the errors you find. Proofreading a credit report is not for everyone. To do a proper job you must have some knowledge of reporting rules, reporting period limits, requirements of reporting entities, and the patience to examine everything. Credit repair companies, like Sky Blue, are here to assist consumers who do not have the time, knowledge, comfort, or patience to manage this task themselves or who are concerned with the downside of missing a critical error that may impact their financial life.
The Inquiry Illusion
Credit inquiries may have no impact on your FICO scores; and when they do, the impact may be so minimal and short-lived that you would be well advised to ignore them, rather than launching a credit repair offensive. How can this be?
The Score of Choice for Lenders
The FICO scoring model is the statistical decision tool of choice for most lenders. The number of lenders using other non-FICO score models (including Vantage, PLUS, and TransRisk) peddled by the bureaus and other credit report sites are negligible. Hence it is only the FICO response to an inquiry that matters – and in most cases the FICO approach to inquiries is far more favorable than other models.
Deceptive Credit Scores
Most consumers are ignorant of the distinction between real FICO scores and these “other scores” for the simple reason that none of the websites selling credit scores (including the three major bureaus) make the distinction very clear, frustratingly calling their products “credit scores”, as if this were a universal standard.
Other Scores Behave Differently
In fact, none of the sites selling credit scores offer FICO scores except MyFICO.com, the site operated by the creator of the genuine FICO score. So, if you want to know the true impact of inquiries on your FICO scores you must check your real FICO scores, because the scores offered elsewhere on the Internet are irrelevant to lenders and respond differently to inquiries than FICO itself.
Multiple Inquiries – No Worry
The FICO model allows an unlimited number of auto, mortgage, or student loan inquiries in any 45 day period, and combined they only count as a single inquiry against your score. In addition, FICO will not even count the hit for 30 days. Once the hit is calculated it will range from 0 to 5 points depending on your overall profile, history, and depth of credit.
It Looks Worse Than It Is
People are often blindsided by the appearance of dozens of auto inquiries on their credit report, become needlessly distraught, and sign up for a credit repair service out of desperation. They may even observe their non-FICO score drop 30 or 40 points as a result. It all seems horrible, but it is an illusion. If they were to take a deep breath and check their real FICO score they would be relieved to see that their scores have not budged.
Disturbing Deceptive Denial Letters
If you apply for credit and are turned down, creditors are required to provide notification of the adverse action and to include the reason(s) for your denial. Denial letters are automated, and for the sake of expediency and the need to cover all bases, they list every contributing factor regardless of importance. In other words, your denial letter is virtually guaranteed to cite your inquiries as a reason for denial even when their weight in the decision was near zero.
What Really Matters
When it comes to credit repair, it makes sense to focus on priorities. Issues that matter should come first, and those that do not can be ignored. Inquiries are usually in this second category. This is made even more pertinent by the fact that inquiry hits fade so fast. Although an inquiry can continue to appear on your report for 2 years, the influence on your score usually fades to zero within 6 months.
The Credit Reporting System Could be Worse
We have never taken a stand against the credit reporting system. It is not perfect and there is abuse, which can be frustrating at times, but it could be worse. In fact, given that the dispute process (as mandated by the Fair Credit Reporting Act) is almost entirely self-policing, the credit bureaus do a pretty decent job.
But it Could be Better
Our approach to the three major credit bureaus has been to work with them as they are. Our strength as a credit repair company has been to understand the bureau’s quirks and failings and to make the most of it. Overall, this approach has consistently produced great results for our customers. But it could always be better. In a perfect world every dispute would be adequately considered, there would be no needless resistance, and the frustration factor would be near zero. That may be a long time coming, but we are moving in the right direction.
Introducing the Consumer Financial Protection Bureau
Starting September 30th, 2012 the newly formed Consumer Financial Protection Bureau (CFPB) begins their oversight of the credit reporting industry. This new federal agency means business and they are on your side.
The Creation and Role of the Agency
The CFPB was formed under the umbrella of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was a response to the financial crisis of the late 2000s. The CFPB started operation in July of 2011, and has already begun to flex its muscles. On Wednesday July 18th, 2012 they announced a $210,000,000 fee against Capital One for misleading sales practices involving credit card add-on products. In a pre-CFPB world a class action suit addressing this type of abuse may have gotten traction, but it is as likely that it would drag out for years, get settled, and probably be chalked up as a cost of doing business by the credit card company, even as the abusive practices continued.
An Exciting Future
At the moment it looks like the CFPB will be a significant force for positive change. And they have announced some new targets that we are very excited about, including debt collection and credit reporting, two very powerful industries which play important roles in the financial world and often cause terrible headaches for consumers.
“The Fair Credit Reporting Act sets out an ambitious goal: Credit reporting companies “shall follow reasonable procedures to assure maximum possible accuracy of the information” contained in credit reports. In this context, we are here to correct what is not going well, and we are here to see that this market is made to work better for those who are affected the most. And we will exercise our supervisory authority to make sure that the consumer financial laws are being followed.” – Richard Cordray, Director of the CFPB
Hoping for the Best
Based on our observations of the CFPB thus far, they have the clout, the will, the ability, and the teeth to make a difference. Although credit bureau oversight does not start until September 30th, we would not be surprised to see changes prior. In fact, we believe that the credit bureaus have already gotten busy reviewing their policies and procedures, adding staff, and are getting ready to prove their compliance. Have you been thinking about credit repair? We are thinking it is a great time to act.