UNDERSTANDING CREDIT AND CREDIT REPAIR

UNDERSTANDING CREDIT AND CREDIT REPAIR
What can I expect to Learn about Credit and Credit Repair Subject matter in no particular order What’s the process where I receive all those credit card offers What IS a FICO Score What is the range of FICO scores What are 30/60/90 day lates What is the Law that gives rights to Consumers Receiving my “FREE” credit report FICO Website Reading an entire Credit Report Repairing Credit How to write a good letter How does the FICO score impact mortgage loans

What can I expect to Learn about Credit and Credit Repair Today we will take a logical approach to one of the most important financial documents in a persons life….. Their CREDIT REPORT! Most people are concerned and involved in the physical health but far too many people ignore their financial health. Credit Reports are one of the fundamental financial documents that are misused and misunderstood.

Why Use a FICO Score FICO scores were created more than 60 years ago by two guys (William Fair and Earl Isaac) that came up with an algorithm to boil a credit report down to an easy to understand score. It also helps to eliminate discrimination at the same time. (Certainly not 100%... But a big improvement.) The company name is a combination of the last name first letters and CO used to identify a company. Hence the name FICO (F for Fair / I for Isaac / CO for Company) By having all lenders use a FICO score it makes loans move along at lighting speed compared to the old days. Let’s see why….

Why Use a FICO Score If we go back to a time before FICO scores were used many lenders operated something like this. A borrower could apply for the EXACT same loan at two different banks and get two wildly different underwritings performed. Both banks want to make loans but their criteria may be WAY different. Bank A looks at the borrowers credit report. A credit report by the way that probably took the bank a week or more to receive through snail mail.

Why Use a FICO Score It’s also a report that the borrower had NO RIGHTS to see or have an opportunity to be pro-active and correct any errors. The borrower was at the mercy of the Credit Bureau and the Bank. So, at Bank A, the underwriter has a system (their own system) of “scoring” a borrowers credit report. Every bank would have their own system, so this is not unusual. Bank A might say that a paid off car loan might earn the potential borrower 5 POINTS.

Why Use a FICO Score Bank A might be looking for a minimum score of 60 to make a loan. However, Bank B, having a different scale to rate credit reports may assign 20 POINTS for the same car loan that Bank A gave a score of 5 POINTS. BUT Bank B has a minimum credit score of 350 to make a loan. Completely arbitrary. In addition, because of the manual nature of the underwriting, the personal feeling and beliefs of underwriters come into play (and they should not…. Only financial feeling and beliefs should be involved)

Why Use a FICO Score So if you have an underwriter that personally does not like people with Italian last names, they could find ways to deny the applicant. By using FICO scores, every borrower has a record of their past payment history, borrowing history, open and closed loans, etc. etc. The FICO score algorithm does NOT look at race, ethnicity, etc. It ONLY looks at the history of the borrower as reported by companies that report to them about their customers.

Why Use a FICO Score Think for a moment about how much that FICO score can increase productivity and have lenders make better decisions. It’s not a perfect system, but it’s a damn good one for sure. Todays class will not go deep into every aspect of what goes into a score but we will talk about all the sections well enough to have an excellent grasp. The chart can be found on

MYFICO.COM WEBSITE

FICO CHART

FICO CHART Payment History counts for 35% of your score Amounts Owed counts for 30% of your score Length of History counts for 15% of your score New Credit counts for 10% of your score Credit Mix counts for 10% of your score

POLLING QUESTION #1

FOUR TYPES OF INQUIRIES (PROMOTIONAL) There are four types of inquiries in the credit reporting world. Promotional Inquiries Hard Inquiries Soft Inquiries Consumer Inquiries

FOUR TYPES OF INQUIRIES (PROMOTIONAL) Lets start with Promotional Inquiries Promotional Inquiries DO NOT reduce the credit score! But what IS a promotional inquiry and how does it get on my credit report. Here’s how it happens. A bank decides to start offering credit cards to people that live in their area. Let’s say this bank only services Staten Island, NY. The bank has a meeting with the marketing dept. and they decide on some of the following for their marketing campaign.

FOUR TYPES OF INQUIRIES (PROMOTIONAL) Here is the criteria they decided to use (as long as it is not discriminatory, they can proceed). Send promotional letters only to people in Staten Island Only people that have at least a 700 FICO score Must have a mortgage in good standing for at least 3 years Etc etc.

FOUR TYPES OF INQUIRIES (PROMOTIONAL) So where does the bank get the names so they can mail their promotional advertisement? They go to a Credit Bureau like Trans Union and request to buy a list of all the people that fit this “filtered” criteria. The bank may pay the bureau a fee of say 10 cents per name that fits the criteria. The credit bureau does not do a full inquirey, they only scan their files to see who fits. No one has applied for credit yet.

FOUR TYPES OF INQUIRIES (PROMOTIONAL) Let’s say that Staten Island had one million residents but only 200,000 fit the criteria. The bank purchases the name and address of these 200,000 people. The bank then sends these people a promotional letter that we have all received at one point in our lives. It reads like this. Congratulations, you have been Pre-Selected to receive a credit card with up to a $10,000 credit limit.

FOUR TYPES OF INQUIRIES (PROMOTIONAL) Sound familiar? ½ the people that receive this letter will throw it away. The bank understands this as it is just the cost of doing business. At this point nothing more happens with the potential new customer. With the rest of the people (100,000) that fill in the info, sign it and send it back….. We go to the next step….

FOUR TYPES OF INQUIRIES (HARD) When a person signs this invitation it’s the same this as if they shook the lenders hand giving the lender permission to pull their credit report in full. This is called a HARD inquiry. The HARD inquiry is the one that reduces the borrowers credit score by about 5 points. Does the borrower now have a new credit card? The answer is…. It DEPENDS…..

FOUR TYPES OF INQUIRIES (HARD) Once the lender receives the potential new customers signed application the bank pulls that potential new customers FULL credit report (HARD Inquiry). This is the credit pull that decreases a borrowers credit score. The reason is that FICO views a HARD credit pull with higher risk “every time” a borrower applies for credit. I put quotation marks around “every time” because FICO gives a break to people shopping for Mortgage Loans and Car Loans.

FOUR TYPES OF INQUIRIES (HARD) Here is the reason why. If a person is shopping for a Mortgage Loan or Car Loan they may visit several places is a short time and at the end they only end up with ONE Mortgage or ONE Car Loan! Therefore FICO has decided NOT to punish borrowers that are shopping for Mortgage Loans of Car Loans. FICO allows for the borrowers credit to only be hit one time in a 45 day period if the borrowers has multiple inquiries in either Mortgage of Car Loans.

FOUR TYPES OF INQUIRIES (HARD) The inquiries must be within a 45 day period to count as ONE. The reason FICO does not offer the same leniency for credit card applications is that a potential borrower could send out 10 applications in a week and potentially get approved for 10 cards. THAT alone would increase the new borrower risk to any lender. As we learned in a prior slide, new credit will also diminish a borrowers credit score.

FOUR TYPES OF INQUIRIES (HARD) Back to the bank that just pulled a HARD report on the “new” borrower. The bank will now analyze this report in full in order to make a decision to lend OR DENY! If they discover that certain things have changed for the worse or that there are things missing on the report the bank can deny or make a different offer. For example, the bank sees that in the past 30 days the potential new customer has missed payments on several loans on the report. That borrowers score would have also dropped significantly.

FOUR TYPES OF INQUIRIES (HARD) The banks criteria for the offer of getting a credit card up to $10,000 included a minimum credit score of 700. If this borrowers score has now dropped below 700 the bank could do the following based on why and how much the score dropped. The bank could 100% deny the application They could offer the new customer a lower credit card limit They could increase the interest rate on the credit card (if this was disclosed in the offering)

FOUR TYPES OF INQUIRIES (SOFT) Let’s assume that they approve the application and the borrower receives their new card. The bank might want to monitor how their new customer is handling credit for a while. The bank then conducts SOFT pulls on the credit report for a while. A soft pull does not reduce the borrowers credit score. A soft pull also is not a complete pull of the credit report. It is just a snapshot of any changes.

FOUR TYPES OF INQUIRIES (SOFT) Should the new borrowers credit score go way down, the bank may automatically increase the borrowers interest rate on the card. If you are asking how can the lender do this…. Well, it’s in your offering info before you applied and ALSO in you acceptance info when your new card arrives. Bottom line is that if a lender believes that you are now posing a greater risk to them, they will compensate for that HIGHER risk by increasing the interest rate.

FOUR TYPES OF INQUIRIES (SOFT) A lender can even go so far as to cancel your card immediately! If you have a balance on the card when they cancel it they usually allow you to pay off the balance according to the original terms over time. That brings us to the last type of inquiry…. Consumer

FOUR TYPES OF INQUIRIES (CONSUMER) Your consumer credit report is a VERY POWERFUL thing for any borrower that wants to take control of their FINACIAL health. Prior to the Fair Credit Reporting Act of 1974 borrowers were not allowed to see their credit reports or challenge anything. In 1974 Congress passed the law to protect consumers. This is why a consumer is allowed to request a FREE consumer copy of their credit report ONCE a year. Problem is, this FREE credit report does not come with a FICO score. A consumer must purchase that score. I HIGHLY recommend that they order and pay for their FICO score.

FOUR TYPES OF INQUIRIES (CONSUMER) Of all four types of credit inquiries ONLY the HARD pull shows up on the credit report that lenders pull. For example, if a borrower has pulled their consumer copy in the past year or so a new lender would NOT see that on their lender copy. Only the consumer can see ALL inquiries made on their report. Promotional inquiries are the same thing. Only consumers can see there on their consumer reports. No lenders will see that there have been promotional inquiries on the borrowers reports. ONLY other HARD inquiries will be seen by other potential lenders and ONLY certain HARD inquiries will reduce a borrowers credit score.

POLLING QUESTION #2

30/60/90 DAY LATE 30/60/90 Days Late….. How does it work and why is it important? All lenders have some type of grace period and / or deadline to receive and post a payment. Once the deadline is passed there is usually penalty to be paid by the borrower. Let’s see what you know about 30/60/90 day late reporting. You may be surprised by what you learn.

30/60/90 DAY LATE Let’s take this following example: We have a Mortgage Payment that is Due on Jan. 1st. When is that payment late? Here are the MOST common answer I have heard over the years by thousands of students…..

30/60/90 DAY LATE The payment is late on the 16th because they give you a 15 day grace period. Or any other date the student chooses such as the 10th, 15th, 30th because of the grace period. All of those answers are basically incorrect because if the due date for the payment is on the 1st the payment is actually LATE on the 2nd! Yes, the borrower may be granted a grace period by the lender in the contract but technically, the payment is late.

30/60/90 DAY LATE I have many students argue with me that it’s not a big deal to be 10 or 15 days late because of the grace period. I then ask them if they have rental properties. Those that say yes, I ask them when do they collect the rent? They all say on the first of the month FOR that month coming up. So the renters PAY their rent UPFRONT for the month BEFORE they live in the space. I then ask the student landlords if it’s OK if a renter pays 15 days late. MOST say heck NO! Interesting, isn’t it. When they are paying a bill it’s no big deal to pay past the due date but when receive payments they want them ON TIME! 

30/60/90 DAY LATE Let’s see how this works with being reported 30/60/90 days late. Most credit reports will classify 30/60/90 lates like this: All of the following are reported to the credit agencies on a monthly basis. 1 = 0 to 29 days (paid as agreed / On Time) 2 = 30 to 59 days (considered to be 30 days past due) 3 = 60 to 89 days (considered to be 60 days past due) 4 = 90 to 119 …….. 5 / 6 …. Etc… 7 = Bankruptcy 8 = 9 = Charge Off .. The lender gave up and wrote the debt off (this shows on a borrowers credit report also)

30/60/90 DAY LATE Going back to our example of a Mortgage payment that was due on Jan 1st. Please answer the following question. What is the LATES date a borrower can make the Jan 1st payment and ONLY get a 2 on their credit report? Did you say Jan 31st, Feb 1st, Jan 16th? Be honest. The correct answer is 59 days late and if you said Feb 28th or March 1st you are basically correct. If the borrower if you missed a payment for an entire billing cycle.

30/60/90 DAY LATE Many borrowers think that getting a 2 on your credit report is not that big of a deal because a 1 is on time and a 2 is “just a little late”. 100% wrong way to look at this. A LATE payment that ONLY gets a 30 day late on a credit report can actually be 1 day short of 60 days late! ANY and ALL late payments on a credit report are BAD! All late payments will drastically reduce the FICO score as well as scare off many lenders or at the least INCREASE the borrowers interest rate.

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS We all understand that a lower credit score increases the interest rate a borrower pays. Can you tell me WHY? Most students say it’s because the borrower is more risky. Yes, that is a correct answer but I want to know WHY they are considered more risky? Can you explain? Let’s start with this question….. What determines the final interest rate on a Mortgage loan?

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS I hear many different answers such as….. Credit score Down Payment Income Etc….. I will give you a hint…….. ____ ____ ____ K It’s a four letter word that ends with the letter K… Be careful what you are thinking! 

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS ____ ____ ____ K Many answer like this….. BANK LUCK 401(K) Allow me to give you a hint……….

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS ____ I ____ K Still need help? ____ I S K Did you guess RISK That would be the correct answer. Memorize the following statement:

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS The HIGHER the RISK the borrower presents to the lender, the HIGHER the interest rate will be on the loan. Therefore, with all else being equal for two different borrowers EXCEPT for credit score, the borrower with the LOWER FICO score will pay a higher interest rate because they present a higher risk to the lender. Now for the full explanation of WHY they present a higher risk.

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS For insurance and other forms of statistics you have a rule that is called “The Law of Large Numbers”. That means that the larger the sample is the closer you are to a perfect answer. In other words, if there were only 100 people that lived in the USA and we asked all 100 if they were Republican or Democrat and they all answered we would have a perfect % of each. Lets’ say 48 said Republican and 52 said Democrat. That would translate to 48% of the population is Republican and 52% of the population is Democrat.

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS But the population in the USA is more like 350 MILLION. How do you get accurate numbers. Scientifically or mathematically you take a large enough SAMPLE of the population. The people at FICO have access to MILLIONS of credit reports and how they have performed for more than 50 years. They have a VERY LARGE sample so their margin of error is small. The example I am about to give you is not based on true and accurate numbers. It is just to give you an idea of how risk works in lending. Feel free to Google the true numbers if you like but the true numbers are not necessary for the EXAMPLE. It’s the CONCEPT that is important here.

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS Let’s say that we are a lender. We have $300,000,000 to lend. We lend our money as follows: 800 FICO 700 FICO 600 FICO Question: What does the FICO score ACTUALLY mean? Statistics have shown that more borrowers in the lower score category will go 90 days late in the following year than those in the higher score category.

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS All that the FICO score is saying is “What is the likelihood that a borrower will go 90 days late in the next year”. Let’s say that in the 800 category that only 1 person goes 90 days late next year and in the 700 it will be 3 and in the 600 FICO it will be 10 that go 90 days late. We are going to lend each score category 100 million dollars like this: 100 borrowers in each category borrow 1 million dollars each. That’s a total of 100 million per FICO category and a TOTAL of 300 million in loans. As the score goes down, the interest rate will increase.

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS 800 FICO 700 FICO 600 FICO How many borrowers : Amount of each loan: 1 Million 1 Million 1 Million Total lent in each category: 100 Million 100 Million 100 Million Interest Rate for each FICO 5% 6% 7.5% After one year 90 day late: 1 Person 3 People 10 People (These are EXAMPLES and not actual #’s) Earning interest on: 99 Million 97 Million 90 Million

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS 800 FICO 700 FICO 600 FICO Earning interest on: 99 Million 97 Million 90 Million Collection agents needed: Lawyers to Foreclose: As you can see, the lower 600 FICO score category may be EARNING a higher interest rate on the face, but after you take into account that so many people in the 600 category are not paying and the expense of hiring more collectors and attorneys to try to recouple that lost revenue, at the end of the day you make about the same as giving 5% interest to your 800 FICO category.

HOW DOES THE FICO SCORE IMPACT MORTGAGE LOANS And that my friends… in the words of the famous radio broadcaster …. Is the rest of the story! Now let’s dive into reading an actual TRI-Merge Credit Repot similar to what most lenders use.

READING A TRUE CREDIT REPORT START TO FINISH The following credit report has been modified in the following ways: All personal info has been either changed or deleted for the original borrower. The trade lines are all real info EXCEPT for the obvious one(s) and they have no impact on the correct info.

POLLING QUESTION #3

READING A TRUE CREDIT REPORT START TO FINISH

TIPS ON REAPAIRING CREDIT There are a few ways that credit can be repaired aside from just over time. A borrower can actively persue corrections and updates and if they are working with a mortgage company that employs a Credit Uplift department that borrower may have their credit improved through Rapid Rescore program available to that mortgage company. Let’s talk about Credit Uplift through the lender first as that is the easiest one.

TIPS ON REAPAIRING CREDIT Credit Uplift can be accomplished in as little as 48 hours sometimes. One of the simplest and easiest ways to increase a borrowers credit score is to pay down credit card debts or pay off some loans. It is not necessary to pay off all credit cards in full. Sometimes, all that is needed is a few thousand here and a few thousand there. That alone can increase a score by 20 to 50 points or more. The borrower MUST do what is requested right away as time is of the essence.

TIPS ON REAPAIRING CREDIT Sometimes we have borrowers that have negative info from their parents because they are a Jr. In that case, if there is proof that the negative info belongs to someone else (MUST have proof) we can have it removed through Rapid Rescore Program and within a few days….. Score may increase as much as 100 POINTS! Yes, I said 100 POINTS! Usually we may only need 10 to 50 points to make it all work.

TIPS ON REAPAIRING CREDIT For the average person that is not applying for a mortgage loan they have to take matters into their own hands. The BEST way to get results is to follow the rules in the FCRA of Send all letters via CERTIFIED MAIL with RETURN RECEIPT REQUESTED. That method PROVES when your letter was received and starts the clock for the credit bureau to reply with their findings. Most people believe that the time limit is 30 days but it actually is stated as a reasonable period of time. It was the FCC that determined a reasonable period of time is 30 days.

TIPS ON REAPAIRING CREDIT This method will be the most expensive as Certified Mail is costly. But if done correctly will bear the greatest rewards in a timely manner. Of course, you could challenge items on your report via the credit bureaus website as that will give a time stamp. I still like old school and Certified Mail. Some other tips to follow: DO NOT go on and on and on about your situation

TIPS ON REAPAIRING CREDIT Some other tips to follow: DO NOT go on and on and on about your situation DO NOT swear or threaten them…. Usually an underpaid clerk will be reading your letter first. Your goal is to have action taken IN YOUR FAVOR. Be specific Only challenge items that are erroneous / old / etc. DO NOT challenge EVERYTHING on your report at one time… Bureaus will send you a “frivolous” letter and not do a thing.

TIPS ON REAPAIRING CREDIT Some other tips to follow: DO NOT challenge EVERYTHING on your report at one time… Bureaus will send you a “frivolous” letter and not do a thing. Be professional Provide any and all proof if you have it Be patient as this can take up to several months of back an forth

WHAT A DISPUTE LETTER MIGHT LOOK LIKE

TELL US ONE THING YOU LEARNED TODAY As I go around the room, please tell the class one thing that you learned today about Credit and Credit repair that you did not know before you got here!

You can order a copy of Doug Vairos book on Amazon Kindle for $2.95 so you can send a copy to anyone you want as a gift! THANK YOU for your time today.

Doug Vairo Cell:

UNDERSTANDING CREDIT AND CREDIT REPAIR

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