MarketWatch recently addressed the issue of unpaid medical bills and the effect that those unpaid bills have on one's personal credit. The reader asked if medical bills are treated the same as outstanding credit card debt and whether it affects the FICO score.
According to the MarketWatch reporter, medical bills are treated differently than credit card debt and as a result, "don't always have a direct effect on your FICO score." That's because medical debt is not always reported to the credit bureaus – just the debts that have been sent to a collection agency. And the debt owed for medical bills does not count toward your total debt utilization ratio – that is, how much you owe on your credit card balances compared to your credit limits.
However, your Credit Mama has a few words of caution. Once your unpaid medical debt is forwarded to a collection agency, the debt is very likely to be reported to the credit bureaus. And as a collection debt, it will have a significantly negative impact on your FICO score.
If you are trying to qualify for a mortgage or car loan, a lender will look closely at any unpaid bills, including medical. Most mortgage lenders require that any unpaid bills over $500 (or multiple bills adding to $500) be paid in full before they will lend for a home or investment.
Fannie Mae guidelines generally require that collection accounts (including medical) in excess of $250 per individual account or $1,000 in the aggregate must be paid in full.
Given the current credit crisis, I believe most underwriters will not waive this requirement.
Medical bills are one of the top three reasons people file for bankruptcy, accounting for half of all U.S. bankruptcies. Most frightening is that 75.7% of those whose illnesses led to bankruptcy had insurance at the onset of the illness, according to a study published in the journal Health Affairs.
Bankrate.com suggests contacting the hospital directly to see whether you can qualify for low-income waivers or financial assistance, and researching nonprofit organizations that specialize in helping people with high medical debt to negotiate on your behalf to reduce the balance. Once you get sent to collections, you are dealing with a for-profit company that is not interested in you – just your repayment of the debt.
In case you missed it - a previous post on the new medical FICO scoring system that is being developed.
Tuesday, September 16, 2008
Thursday, August 21, 2008
Overdraft Protection Will Cost You
Overdraft protection, a service offered by many banks as a convenience, kicks in when a bank approves a transaction and the customer doesn't have enough funds to cover the cost. The bank allows the transaction to go through, like a temporary loan, and then charges the customer a fee somewhere in the range of $25 to $35, regardless of how much the transaction was.
As many unsuspecting consumers have discovered, the convenience factor comes at a cost. One reader wrote that he had deposited a check for several thousand dollars in his bank account. Unbeknownst to him, however, the bank did not release the funds for several days. During that time, he assumed he had funds in his account, and used his debit card for a number of minor transactions – groceries, gasoline, movie tickets, prescription medications. Every transaction racked up an overdraft fee of $35. "That's $140 just in fees… and none of my purchases was over $35," he wrote.
According to a CNN Money article, debit card transactions account for nearly half of all overdrafts, with most of these transactions averaging far less than the overdraft fee itself. And if you don't repay your overdraft within a few days, some banks charge additional fees. The Center for Responsible Lending states that financial institutions "manipulate the order in which they clear deposits and withdrawals in order to maximize overdrafts," and estimates that Americans now pay $17.5 billion each year in fees for abusive overdraft loans, more than the $15.8 billion total paid out to cover those loans.
It's an issue that Congress has decided to act upon. Rep. Carolyn Maloney (D-NY), who introduced the "Credit Cardholders' Bill of Rights Act of 2008" (H.R. 5244), and Rep. Barney Frank (D-Mass.) are trying to protect consumers from such hefty fees with a new proposal: the Consumer Overdraft Protection Fair Practices Act (H.R. 946).
"I've been working on reducing sky-high overdraft fees for several years now," Congresswoman Maloney wrote to CNN Money.com. "Overdraft loans can be useful financial tools, but many consumers are being enrolled in costly overdraft protection programs without their consent." The legislation would require that consumers would have to "opt in" to overdraft protection programs, and banks would not only have to inform consumers when they are about to overdraw their accounts and allow them to cancel the transaction, but also would have to provide full, written disclosure of the overdraft policies to consumers.
But with banks countering massive losses in their mortgage portfolios with revenue-generating practices such as exorbitant overdraft fees, anytime rate hikes, universal default, and reducing the window between the time a bill is mailed and the payment due date, your Credit Mama is guessing that such a move will meet with great resistance by the banking industry lobbyists.
As many unsuspecting consumers have discovered, the convenience factor comes at a cost. One reader wrote that he had deposited a check for several thousand dollars in his bank account. Unbeknownst to him, however, the bank did not release the funds for several days. During that time, he assumed he had funds in his account, and used his debit card for a number of minor transactions – groceries, gasoline, movie tickets, prescription medications. Every transaction racked up an overdraft fee of $35. "That's $140 just in fees… and none of my purchases was over $35," he wrote.
According to a CNN Money article, debit card transactions account for nearly half of all overdrafts, with most of these transactions averaging far less than the overdraft fee itself. And if you don't repay your overdraft within a few days, some banks charge additional fees. The Center for Responsible Lending states that financial institutions "manipulate the order in which they clear deposits and withdrawals in order to maximize overdrafts," and estimates that Americans now pay $17.5 billion each year in fees for abusive overdraft loans, more than the $15.8 billion total paid out to cover those loans.
It's an issue that Congress has decided to act upon. Rep. Carolyn Maloney (D-NY), who introduced the "Credit Cardholders' Bill of Rights Act of 2008" (H.R. 5244), and Rep. Barney Frank (D-Mass.) are trying to protect consumers from such hefty fees with a new proposal: the Consumer Overdraft Protection Fair Practices Act (H.R. 946).
"I've been working on reducing sky-high overdraft fees for several years now," Congresswoman Maloney wrote to CNN Money.com. "Overdraft loans can be useful financial tools, but many consumers are being enrolled in costly overdraft protection programs without their consent." The legislation would require that consumers would have to "opt in" to overdraft protection programs, and banks would not only have to inform consumers when they are about to overdraw their accounts and allow them to cancel the transaction, but also would have to provide full, written disclosure of the overdraft policies to consumers.
But with banks countering massive losses in their mortgage portfolios with revenue-generating practices such as exorbitant overdraft fees, anytime rate hikes, universal default, and reducing the window between the time a bill is mailed and the payment due date, your Credit Mama is guessing that such a move will meet with great resistance by the banking industry lobbyists.
Thursday, August 14, 2008
77 Percent Chance Your Credit Card Rate May Change for Any Reason
Imagine if after a year of owning your car and paying down your loan, the car dealer told you that your interest rate on the car loan was going up by double-digits because the dealer was having a bad year. Outrageous! you think. He can't do that!
Yet that is exactly what credit card issuers are doing. A survey released by Consumer Action, a nonprofit education and advocacy organization, found that 77 percent of the major financial institutions they contacted said they reserve the right to increase a cardholder's interest rates - even on existing balances - at any time and for any reason.
The reasons cited by bank officials included "the economy," "business strategies," or "market conditions" (the stated cause of recent rate hikes by Bank of America and Capital One).
At a time when a number of banks are finding themselves too heavily invested in failing mortgages, it is all too clear that some of the shortfall in profits may be covered by bumping rates and fees for consumers like you and me.
Other items of note:
Yet that is exactly what credit card issuers are doing. A survey released by Consumer Action, a nonprofit education and advocacy organization, found that 77 percent of the major financial institutions they contacted said they reserve the right to increase a cardholder's interest rates - even on existing balances - at any time and for any reason.
The reasons cited by bank officials included "the economy," "business strategies," or "market conditions" (the stated cause of recent rate hikes by Bank of America and Capital One).
At a time when a number of banks are finding themselves too heavily invested in failing mortgages, it is all too clear that some of the shortfall in profits may be covered by bumping rates and fees for consumers like you and me.
Other items of note:
- The average default rate is now 26.87 perent, up from 24.51 percent in 2007. The highest default rate in the survey was HSBC, with a default rate at 31.99 percent. Default rates can click in for a number of reasons, including late payments to another company, too many inquiries on your credit file, or even a small drop in your credit score. Once your rate adjusts to the default rate, it's very difficult to re-adjust it downward.
- "Chasing balances" is becoming a common practice whereby banks reduce credit limits based on their assessment of a customer's risk. A reduced credit limit negatively impacts your credit score by increasing your debt utilization ratio, which may then trigger the universal default clause. And if the consumer isn't aware that the limit has been decreased, he or she may very well be hit with an over-the-limit fee and then a penalty interest rate for being over the limit.
Monday, August 11, 2008
Shopping for Student Loans Damages Credit Scores
Fact: Too many credit inquiries can damage your credit. That's because the credit scoring formulas assume that the borrower is financially troubled and may even be going bankrupt.
Fact: If you comparison shop for a mortgage or car loan to try to get the best interest rate, FICO's secret credit scoring algorithms lump together all related inquiries that occur within a short period time. Such credit inquiries have a relatively neutral impact on credit scores.
Fact: The New York Times recently reported that students and parents shopping for the best rates on private student loans DO NOT benefit from the same type of calculations as those shopping for home or auto loans. Translation: each time you compare a new student loan, your credit file gets dinged with another inquiry. Each inquiry can drop your score up to 5 points.
It's a bad equation for students and parents:
If you have a thin credit history (as many students just getting out on their own often do), such inquiries may have an even greater impact. Anyone who has shopped for a mortgage knows that a measly five points can make a big difference in qualifying for that higher tier interest rate break.
Apparently the New York State Attorney General's office has stepped in and asked Fair Isaac, creator of the FICO score, to treat student loan borrowers the same as those shopping for mortgages and car loans. The Times reports that Fair Isaac isn't changing its policy any time soon and believes its policy doesn't cause any damage most of the time.
However, at least one credit bureau – Experian – confirmed that that this policy may have an impact on credit scores. And a spokesperson for Sallie Mae, the nation's largest private student loan lender, says the company does, in fact, see the negative impact on credit scores and believes that students should not be penalized for trying to make smart financial decisions.
The Times still recommends comparison shopping with 3-4 lenders, preferably within a week or two. Fair Isaac did say that IF there is any negative impact on credit scores, it is more likely to occur when people apply to smaller or specialized student loan lenders, and a lesser impact when applying to big banks.
The Times' advice:
"Start with a lender or two that your college recommends, since it may have negotiated special terms with them... [shop] one bank, one finance company that specializes in student loans and then [look] for nonprofit loan agencies that work with people in the state where you live or the state where you attend college (or both, if you’re lucky enough to have a choice)."
Check this list of lenders or ask people in the financial aid office whether a nonprofit lender serves the college.
Fact: If you comparison shop for a mortgage or car loan to try to get the best interest rate, FICO's secret credit scoring algorithms lump together all related inquiries that occur within a short period time. Such credit inquiries have a relatively neutral impact on credit scores.
Fact: The New York Times recently reported that students and parents shopping for the best rates on private student loans DO NOT benefit from the same type of calculations as those shopping for home or auto loans. Translation: each time you compare a new student loan, your credit file gets dinged with another inquiry. Each inquiry can drop your score up to 5 points.
It's a bad equation for students and parents:
Too many inquiries = lower credit score.
Lower credit score = higher rates on student loans.
If you have a thin credit history (as many students just getting out on their own often do), such inquiries may have an even greater impact. Anyone who has shopped for a mortgage knows that a measly five points can make a big difference in qualifying for that higher tier interest rate break.
Apparently the New York State Attorney General's office has stepped in and asked Fair Isaac, creator of the FICO score, to treat student loan borrowers the same as those shopping for mortgages and car loans. The Times reports that Fair Isaac isn't changing its policy any time soon and believes its policy doesn't cause any damage most of the time.
However, at least one credit bureau – Experian – confirmed that that this policy may have an impact on credit scores. And a spokesperson for Sallie Mae, the nation's largest private student loan lender, says the company does, in fact, see the negative impact on credit scores and believes that students should not be penalized for trying to make smart financial decisions.
The Times still recommends comparison shopping with 3-4 lenders, preferably within a week or two. Fair Isaac did say that IF there is any negative impact on credit scores, it is more likely to occur when people apply to smaller or specialized student loan lenders, and a lesser impact when applying to big banks.
The Times' advice:
"Start with a lender or two that your college recommends, since it may have negotiated special terms with them... [shop] one bank, one finance company that specializes in student loans and then [look] for nonprofit loan agencies that work with people in the state where you live or the state where you attend college (or both, if you’re lucky enough to have a choice)."
Check this list of lenders or ask people in the financial aid office whether a nonprofit lender serves the college.
Thursday, August 7, 2008
FICO Decides to Keep Piggybackers After All
Fair Isaac Corporation has had a change of heart.
The creator of the FICO credit score had planned to roll out its new FICO '08 scoring system this year. Among the changes in this new version: banning "piggybacking," the process by which consumers with no credit or poor credit can benefit by being added as authorized users to the accounts of credit cardholders with good or excellent credit. Piggybacking was often used by parents to give their children a head start in building a good credit history or by a spouse trying to help their partner improve his or her score, but came under intense scrutiny after private companies started to profit from a business model that boosted credit scores of those who were paired with someone with good credit. Lenders were outraged by the practice, saying it dramatically increased their risk.
It is estimated that more than 50 million U.S. consumers are legitimate authorized users on another person's credit card. The new provision would effectively lower credit scores for millions of consumers, forcing them to pay more for everything from mortgages to car loans. And since about 1% of consumers would no longer have enough of a credit history to get a score at all, according to a survey by Credit.com, those consumers may not qualify for a loan at all.
Another concern dealt with regulatory issues. Lenders must comply with the Equal Credit Opportunity Act, which requires them to consider a spouse's credit history when weighing a potential borrower's credit risk. They warned Fair Isaac that such a change would prohibit them from using FICO scores if they wanted to be compliant with the ECOA.
At a recent Congressional hearing, the company announced that "after consulting with the Federal Reserve Board and the Federal Trade Commission earlier this year, Fair Isaac has decided to include consideration of authorized user trade lines present on the credit report." In a company press release, they state that their scientists have discovered a way to restore authorized user credit accounts to the calculation of FICO '08 scores while making it "much hard to game the system." No further details were provided regarding this technology.
To accommodate this change, the phased rollout of FICO '08 has been halted temporarily. It is not clear when the rollout will take place.
The creator of the FICO credit score had planned to roll out its new FICO '08 scoring system this year. Among the changes in this new version: banning "piggybacking," the process by which consumers with no credit or poor credit can benefit by being added as authorized users to the accounts of credit cardholders with good or excellent credit. Piggybacking was often used by parents to give their children a head start in building a good credit history or by a spouse trying to help their partner improve his or her score, but came under intense scrutiny after private companies started to profit from a business model that boosted credit scores of those who were paired with someone with good credit. Lenders were outraged by the practice, saying it dramatically increased their risk.
It is estimated that more than 50 million U.S. consumers are legitimate authorized users on another person's credit card. The new provision would effectively lower credit scores for millions of consumers, forcing them to pay more for everything from mortgages to car loans. And since about 1% of consumers would no longer have enough of a credit history to get a score at all, according to a survey by Credit.com, those consumers may not qualify for a loan at all.
Another concern dealt with regulatory issues. Lenders must comply with the Equal Credit Opportunity Act, which requires them to consider a spouse's credit history when weighing a potential borrower's credit risk. They warned Fair Isaac that such a change would prohibit them from using FICO scores if they wanted to be compliant with the ECOA.
At a recent Congressional hearing, the company announced that "after consulting with the Federal Reserve Board and the Federal Trade Commission earlier this year, Fair Isaac has decided to include consideration of authorized user trade lines present on the credit report." In a company press release, they state that their scientists have discovered a way to restore authorized user credit accounts to the calculation of FICO '08 scores while making it "much hard to game the system." No further details were provided regarding this technology.
To accommodate this change, the phased rollout of FICO '08 has been halted temporarily. It is not clear when the rollout will take place.
Tuesday, August 5, 2008
Identity Theft Alert: Anheuser-Busch Workers at Risk
If you work or have worked at Anheuser-Busch, your personal information (including Social Security number, addresses, date of birth, and more) may have been among those stolen when laptops disappeared from Anheuser-Busch's St. Louis headquarters in June.
Nationwide, about 150,000 people are affected; of those, 87,500 are in Florida.
If you have been affected, you are entitled to one year of free credit monitoring service.
Nationwide, about 150,000 people are affected; of those, 87,500 are in Florida.
If you have been affected, you are entitled to one year of free credit monitoring service.
Thursday, July 31, 2008
Credit Card Companies Pull Back on Soliciting Via Direct Mail
The days of receiving credit card solicitations in your mailbox on a weekly or even daily basis may be over… at least temporarily.
Facing increasing delinquencies, consumers who are already credit-stretched, industry competition and profit losses, credit card companies have pulled back the reins on mailbox pitches, reducing the number of direct mail offers by an average of nearly 14 percent in the first quarter of 2008 compared to the same period in 2007.
According to a report in MSNBC.com, JPMorgan Chase reduced its mail volume by 34 percent, HSBC had a 23.3 percent reduction, and Bank of America and Capital One both cut mail volume by more than 17 percent.
Mortgage and loan companies cut their direct mailings by 6 percent. A handful of companies, including American Express, Discover and Washington Mutual, increased their volume slightly.
Of course, while there is a measurable decline in direct mail volume from banks and consumer lenders, there still is an enormous amount of direct mail solicitations landing in mailboxes, with an estimated 4.2 billion pieces of mail sent by financial service companies. According to Direct Marketing Association, U.S. banks and credit institutions spent $13.4 billion last year on direct marketing, generating $178.8 in sales.
Facing increasing delinquencies, consumers who are already credit-stretched, industry competition and profit losses, credit card companies have pulled back the reins on mailbox pitches, reducing the number of direct mail offers by an average of nearly 14 percent in the first quarter of 2008 compared to the same period in 2007.
According to a report in MSNBC.com, JPMorgan Chase reduced its mail volume by 34 percent, HSBC had a 23.3 percent reduction, and Bank of America and Capital One both cut mail volume by more than 17 percent.
Mortgage and loan companies cut their direct mailings by 6 percent. A handful of companies, including American Express, Discover and Washington Mutual, increased their volume slightly.
Of course, while there is a measurable decline in direct mail volume from banks and consumer lenders, there still is an enormous amount of direct mail solicitations landing in mailboxes, with an estimated 4.2 billion pieces of mail sent by financial service companies. According to Direct Marketing Association, U.S. banks and credit institutions spent $13.4 billion last year on direct marketing, generating $178.8 in sales.
Subscribe to:
Posts (Atom)
