Get a CLUE About Your Insurance Score

A reader e-mailed me to voice her distress over her auto insurance rates. Prior to her divorce, she and her husband had been able to obtain reasonable rates for their two cars. But the divorce was messy. Their house fell into foreclosure as it languished in the stagnant real estate market. Bills that were supposed to be paid by her (now ex-) husband went into collections. Her credit score began dive. She eventually filed for bankruptcy. As things went from bad to worse, she was stunned to learn that her application for new auto insurance coverage was denied.

"I've never filed a claim or gotten a ticket for anything!" she wailed. "My husband and I always paid our insurance on time, and my driving record is totally clean!"

One thing that may have impacted her ability to get insurance for her car is her credit history and public records information. Insurance rates for homes and cars are often linked to credit scores. Insurers justify increased rates by relying on statistical analyses that purportedly show a correlation between an insured's credit history and likelihood of filing a claim.

This means if your credit file shows a history of late payments, foreclosure, tax liens, garnishments, bankruptcies, lawsuits and judgments, you may be smacked with high insurance rates or even be denied coverage.

This data - plus any information on claims you have filed (and sometimes even inquiries about your coverage that do NOT result in a claim) - is entered into a little-known database called CLUE (Comprehensive Loss Underwriting Exchange) or its smaller competitor, A-Plus. These national databases are used by insurers to determine whether you get new insurance. Insurers may also look at your claims history and "insurance score" when deciding whether to renew your coverage or how much to charge for your premiums. Because it is a national database, other insurance companies can review your claims history for five years. This may include losses for a property before you even owned it.

Some home buyers learned this the hard way, with deals falling through because of inquiries - not necessarily claims - that cause the property to be "blacklisted." The previous owner may have inquired about coverage for water damage; even though the owner may never have filed a claim, the information is posted into the database, and insurers will assume that there is a problem.

Consumer advocates have been pushing hard for reforms. As a result, some states have passed legislation to prohibit the inclusion of inquiries that did not result in a paid claim. Other states have begun passing laws to limit or prohibit the use of credit scores as the sole determining factor in deciding insurability or rates (see if your state has such laws); however, many insurance companies still rely on them to some degree.

Given the fact that 79% of credit reports contain errors, it may be concluded that rates may be artificially inflated or insurance unfairly denied when determined - in whole or in part - by credit history.

The good news is that this specialty report is governed by FCRA. Under the FACT act, you have the right to obtain a copy of your CLUE or A-Plus report each year, and the right to dispute inaccurate or incomplete information on those reports. If you have been denied coverage, had your policy cancelled or your premiums have increased, the insurer must notify you in writing; in addition, you are entitled to a free copy of your report (in addition to the free report you are allowed each year).

To get a copy of your CLUE report, visit ChoicePoint's Web site or call toll free: 1-866-312-8076. To get a copy of your A-Plus report, call toll free: 800-627-3487.

You will not get your actual insurance "score" - just the history of claims. Because your credit score is factored into whether you are insurable and what your rate will be, you should also purchase your credit score as well in order to get a complete picture of what your insurance company is seeing.

You May "Discover" New Fees in Your Credit Card Bills

Discover is introducing another way to enforce fiscal responsibility – or, as others may see it, another way to collect additional fees from its customers.

Beginning May 1, Discover will penalize its card holders for exceeding their credit limit twice by imposing the "penalty interest rate" (which, not surprisingly, is being raised from 29% to 31%). This action is in addition to the $39 over-the-limit fee Discover already charges.

Discover is not the only card issuer that is instituting rate increases for exceeding credit lines – Chase and Bank of America are including similar clauses in their member agreements.

According to calculations by The Red Tape Chronicles, affected customers will pay heavily for going over their limit:

A consumer with a $10,000 balance and a 15 percent interest rate who pays the minimum payment each month would pay $2,800 in a year and still owe $8,598 on that balance.

A consumer with a $10,000 balance and a 31 percent interest rate who pays the minimum payment each month would pay $4,047 in a year and still owe $8,891.54 on that balance.

If you are a regular user of credit cards, you should know that credit card issuers generally allow you to exceed your credit limit by 10 percent or more without warning. Credit card companies say they do this to prevent embarrassment or inconvenience in the check-out line. But with these stiff new penalties in place, you will pay for years for the privilege of using more credit than you have.

To maximize your credit score, you should not be charging more than 10 percent of your credit limit anyway, because of the negative impact of a debt utilization ratio. Know your credit limit. Stay below 50 percent of your limit (10 percent if possible). And if your credit card company offers e-mail warnings to let you know that you are approaching your credit limit, sign up today.

Identity Theft Protection or Legal Extortion?

If you've ever examined your credit card receipts, you've probably noticed that your credit card number has been reduced to a series of Xs with no more than four or five digits visible, and no other identifying information, such as expiration date.

That is, unless you've shopped at Costco, FedEx Kinko's, Toys 'R Us, IKEA, StubHub, Coffee Bean Tea & Leaf, or Jewell Food Stores, eaten at big Burrito Group eateries such as Mad Mex, purchased flowers at 1-800-FLOWERS or watched a movie at AMC Theaters.

These companies, among many others, have been targeted with class action lawsuits for violating a 16-month federal law designed to protect consumers' credit card information. The Fair and Accurate Credit Transaction Act (FACTA) prohibits companies from printing more than five digits of a credit card number or the expiration date on receipts to reduce the threat of identity theft.

Lawsuits have been flooding the legal system as consumers strike back against what they say is flagrant unresponsiveness to the FACTA statute. More than 300 class actions have been filed since the law went into effect in December 2006.

At stake is the livelihood of businesses across the country, from big box retailers and restaurants to small businesses such as parking garages and newsstands. With every noncompliant receipt assessed at anywhere from $100 to $1,000, companies are facing potential damages in the billions of dollars. The lawsuits are so financially damaging that retailers are threatening to file bankruptcy.

At issue is the fact that the plaintiffs don't need to demonstrate any real or actual damage caused by the violation or even that the companies had willful intent to cause harm. All they need is a receipt to claim statutory damages because a company has "flouted the law." Warehouse-club giant Costco is liable for as much as $17 billion – 15 times the company's 2007 profit – despite the fact that there are no claims of actual harm.

"In 22 years, I have never had a plaintiff sit across the table from me and say, 'I have no damages. My identity hasn't been stolen. I'm just bringing this lawsuit because I can,'" said David Block, a lawyer with Jackson Lewis, in a recent Law.com article. "There's something inherently wrong with a lawsuit where the plaintiff has no injury."

Defense lawyers are characterizing the lawsuits as "legal extortion," since the defendants did not profit from the infraction and plaintiffs have not shown evidence of actual harm. And some judges are paying attention – 12 have refused to certify some of these cases as class actions.

Many companies facing massive damage claims are quietly settling. Earlier this year, a class action lawsuit against big Burrito Group eateries was settled for FACTA violations. According to the settlement, customers who used a credit or debit card at various times at various big Burrito Group eateries last year are entitled to a $7 "settlement relief card." The cards can be used only at the company's Mad Mex restaurants under various restrictions. The settlement also calls for the company to pay for $105,000 in legal fees. Coffee Bean Tea & Leaf agreed to give customers free drinks and pay plaintiffs' lawyer fees. StubHub settled for undisclosed terms.

Should companies be compliant with the law? Heck yes. Should they be punished to the full extent of the law? Well, that depends. Bankrupting businesses or imposing maximum financial penalties will ultimately have a lasting negative impact on the quality and price of retail and online services. What price are we willing to pay to punish companies that were slow to comply with the law?

Thin is In with Experian's New Credit Scoring Tool

According the Federal Deposit Insurance Corp., there are nearly 73 million consumers in the United States with "thin" or no credit files – that is, they have little or no credit in their name. This segment of the population – typically students, young people, minorities, recent immigrants and those with low incomes – is traditionally underserved because lenders favor borrowers with more "meat" in their credit files, which allows them to better assess loan risks.

As a result, most "unscoreable" consumers pay bills and make purchases using cash, checks or debit cards – none of which is tracked by credit reporting agencies. And as the housing market continues to implode, more people will continue to rent instead of purchase, which means they won't have an established mortgage loan history for lenders to evaluate.

With profit margins eroding, financial institutions are looking to create new revenue opportunities by tapping into the billions of dollars in annual income represented by this currently underserved population.

Experian has launched a new credit scoring tool called Emerging Credit Score to help lenders "capitalize on missed opportunities" to "create new revenue opportunities" by factoring more than 25,000 attributes to measure thin or no-file consumers. It uses data from eBureau to track:

• Demographics
• Internet, catalog and direct-marketing purchases and payments
• Trades, inquiries and public records
• Property and asset records
• Telecommunications and utility data
• Industry specific and custom scores

Do Lenders Really Care?

While innovative ways of creating credit scores appear to be a boon for thin- or no-file consumers and financial institutions alike, the difficulty lies in having such scoring tools adopted by the banking industry. There already are a number of scoring models that purport to open the doors to this target population, including FICO's Expansion Score (released in 2004) and PBRC. Until banks use these tools on a regular basis to evaluate their prospects – something that has not been done industry-wide – the underserved population will not see much of a change. And if you have a traditional credit score from the Big 3, an expansion score will not be used in its place, which may seem particularly unfair if your credit history is rife with errors due to reporting mistakes or identity theft.

FICO Says… You Can't Have Too Much Credit

Once upon a time, not so long ago, having lots of available credit meant that you were "inevitably" doomed to go on a massive spending spree of epic proportions. Each unused dollar was a ticking debt time bomb, because even responsible users of credit would surely be lured into the vortex of temptation caused by those shiny cards with winking holographs.

But while conventional wisdom held that excessive credit – even unused – was a liability, Fair Isaac says there is no such thing as too much available credit when it comes to how they score credit. In fact, Fair Isaac's Barry Paperno states, "There really is never any good reason to close an account."

Three reasons why NOT to close an account:

1. The FICO score does not penalize you for having too much available credit. (Opening a bunch of new accounts may be a problem, but by itself, available credit is not a factor.)

2. While closing an account does not immediately eliminate all of the history associated for that account, the bureaus will automatically remove a closed account in 10 years (or less, if the credit card issuer decides to remove it). History – or how long you've had credit – accounts for 15% of your score. If you close an account that you've had for a long time, and your only remaining credit history is from credit cards or loans that were opened recently, it will negatively impact your score once that account falls off your report.

3. Closing an open account with a good history may negatively impact your ratio of balances-to-limits. Say, for example, that you have four cards with credit limits of $2,000 each, for a total available credit limit of $8,000. If you owe $1,000 on three cards, and you close the fourth, your debt ratio will increase from $3,000:$8,000 (37.5%) to $3,000:$6,000 (50%). This ratio accounts for 30% of your credit score. The higher the debt ratio, the lower your score.

Lenders Begin Revoking Home Equity Lines of Credit

On the heels of Bank of America's eyebrow-raising mass mailing telling thousands of customers that their credit card interest rates were jumping by as much as 100%, Countrywide has informed 122,000 customers that their home equity lines of credit (HELOC) have been suspended due to falling home values.

A HELOC is a revolving credit line with a limit proportionate to the homeowner’s equity in their property. They typically offer much lower interest rates than regular credit cards because they are issued against a “secured asset” — a home.

Other lenders, including Bank of America, Wells Fargo and Chase have acknowledged that they, too, will be following in Countrywide's footsteps by reviewing customer credit lines and lowering limits or suspending credit lines.

During the housing boom, as property values soared, so too did the number of homeowners who tapped into their equity to fund remodeling projects, cars, vacations and other luxuries. Lenders were writing loans for 120% of a home's value – 100% for the primary mortgage and another 20% for a HELOC. Now that the pendulum is swinging the other way, and properties are losing value at a double-digit rate with no bottom in sight, the line of credit soon may no longer be covered by the value of the home. Nervous lenders are pulling back the reins, even on good customers who may not have used much of their HELOC and have made timely payments.

Many affected customers are expressing outrage, particularly those with high credit scores and stellar repayment histories. The lenders, they say, are miscalculating the value of their homes in an effort to be uber-conservative, and punishing them even though they have been good customers.

Countrywide has reportedly advised some irate customers that they can get another appraisal (at a cost of more than $400) if they want to appeal the closure of their HELOC. But given the fact that consumers may already have paid $2,000 or more in non-refundable fees just to open the HELOC – some just a year or two ago – the idea of paying for another appraisal for the mere "possibility" that the HELOC will be reinstated is a bitter pill to swallow.

What is my REAL credit score?

Dear Credit Mama,

I've been working hard to pay all of my bills on time and have almost paid off my credit cards. I want to see if my efforts have made my credit score go up. I've looked into buying my credit score online, but it's confusing because different companies have different ranges for what your credit score could be – some have scores that go to 850, some go to 990. What's the deal? And which one should I believe?

--Angie, St. Louis, MO



Dear Angie,

Very astute of you to notice this! You are right – not all credit scores are the same.

The "FICO" score was invented by Minneapolis-based Fair Isaac Corp. in 1988 as an attempt to quantify the odds that borrowers will repay loans on time. The company’s name is derived from those of Bill Fair and Earl Isaac, an engineer and a mathematician, who created the credit scoring concept and founded Fair Isaac in the 1950s.

FICO scores range from 300-850. FICO calculates your score using the following factors:

• 35% payment history
• 30% amount owed
• 10% tpes of credit in use
• 15% length of credit history
• 10% new credit

"Vantage" scores, dubbed "FAKO" scores, were developed by the three credit bureaus and introduced in 2006 to compete with FICO scores. Because they do not have the actual FICO formula (a secret as closely guarded as Coca Cola's recipe), they are only approximations of the FICO score.

Vantage credit scores range from 501-990. Each 100-point interval corresponds to a letter grade, in ascending order. A score of 501 to 600, for example, would translate into a grade of "F", while someone with a score greater than 900 would receive an "A." Vantage calculates your score using the following factors:

• 32% payment history
• 23% utilization of available credit
• 15% credit balances
• 13% length and depth of credit history
• 10% recently opened credit accounts
• 7% available credit

FICO Vs. FAKO

Consumers usually buy their credit scores from the credit bureaus – the VantageScore. However, Fair Isaac states that most lenders (90% of the 100 largest banks) use the FICO score. (To complicate matters, some lenders create their own variation on a FICO score, adding in their own criteria.) Your "FAKO" scores can differ from your FICO scores by as much as 50 points.

More than two-thirds of all consumers qualify for a grade of "C" or higher. FICO scores, by contrast, range from 300 to 850, with 85 percent of Americans coming in at higher than 600. If you found a score of higher than 850 then you are "buying" one of the other scores - not the FICO score that lenders use.

Fair Isaac has filed a federal antitrust lawsuit against the nation's three credit bureaus, alleging they are "misleading and confusing consumers" when selling their own version of the credit score. They contend that since Equifax, Experian and TransUnion own the consumer data it uses to create the FICO scores, they could "unfairly manipulate the credit score price, sales and distribution process" to promote VantageScore.

The bureaus claim that the new scoring model increases competition, giving more choices to credit grantors and consumers.

Having more scoring options is good for lenders, but not necessarily good for consumers. With multiple scoring models, the odds increase that a lender can find a score to use to declare you a subprime candidate and increase your rates.

If you are trying to qualify for a mortgage or other major loan, you will want to access the real FICO, not the FAKO. Our friends at mycreditroadmap.com can link to you a FICO credit reporting product that will give you reports and scores for each of the three national credit bureaus.