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Your credit score, also known as a risk score, is a number that supposedly is a measure of your creditworthiness.
Credit scores can be computed in many different ways, and thus, there many different scores. However, all of these scores are based on statistics and data analysis of credit reports. Their reliability in measuring actual creditworthiness is tested by studies that measure the actual future behavior of people, from a sample that is representative of the general population, with their credit score. The goal of any credit score model is to be able to identify as many people as possible that are actually good credit risks, while also identifying the bad risks. If the credit scoring model is too stringent, it may eliminate many people who are actually good credit risks, thus, decreasing profits to lenders because they are eliminating these potential customers who failed to pass the minimum score set by the lender. On the other hand, if the scoring model is too relaxed, it may give high scores to people who are actually poor credit risks, and this, too, will decrease profits for lenders, because they will lend money to many people who may not pay back the loan. Thus, the value of credit scores to lenders, and why they prefer one score over another, is the predictive value of the score in assessing the creditworthiness of people—to know which people will pay back their loan, and which will be significant credit risks. In other words, they can know, that, for instance, 6% of the people with a particular credit score will default on their loan, but only 2% of the people with a score of at least 700 will default. This allows lenders to measure risk accurately, which, in turn, allows them to maximize their profits.
Thus, lenders use credit scores to qualify loan applicants, and to determine what interest rate to charge. A higher credit score indicates a lesser credit risk, and therefore lenders will be willing to charge a smaller interest rate for your business. A lower score indicates a greater credit risk, and thus, if lenders even lend you the money, they will charge a higher rate of interest on a loan to compensate them for taking a greater risk. This is similar to the interest rate that bonds pay—bonds with a lower credit rating have to pay a higher interest rate to compensate investors for the greater risk of default. As a number, scoring allows companies to set standards, such as requiring a minimum credit score to be considered for a loan, and it allows computerized systems to screen for all people above a given credit score in order to send out solicitations for credit cards or for insurance, or offer tiered incentives, with customers with the highest score, being offered the lowest interest rate. Without a credit score, each credit report would have to be examined in detail, consuming time and resulting in different evaluations of credit based on the personal judgment of the person examining the credit report. Thus, credit scores save time and money for the companies that use them, and they provide a greater consistency by using a specific model to arrive at a credit score. This makes credit decisions faster and fairer. Because the credit score is updated as new information is added to the credit report, recent items have more significance than older items. Thus, payment problems in the past become less important if current payments are timely. This enables a consumer to raise his score if he starts paying promptly consistently.
Although there are innumerable ways of calculating credit scores, the most important—important because most credit grantors use these scores—are calculated using the software of Fair Isaac Corporation, (NYSE:FIC) called the Classic FICO credit score, which has been in use since 1989. Although Fair Isaac has developed a newer scoring model called the NextGen FICO, now in a 2.0 version, the Classic FICO is still the most commonly used score in the lending industry. Your FICO scores are based only on credit information in your credit report and this information is gathered from various sources, but mainly from lenders who lend money or extend credit to you, such as credit card companies and banks. The 3 main repositories of this information are the credit reporting agencies (CRAs) TransUnion, Experian, and Equifax. Each CRA also has their own name for the Classic FICO score and the newer NextGen FICO score, and have recently collaborated to create a new scoring model called VantageScore.
The use of credit reports and their derivative credit scores, however calculated, is predicated on a simple principle—that past and current creditworthiness is predictive of future creditworthiness.
The FICO score is not necessarily the best at measuring creditworthiness or predicting future credit behavior, since neither can ever be measured precisely, but because most lenders use the FICO score, this increases its importance both in determining whether you will get credit or not, and how much you will pay for it. The FICO score ranges from 300 to 850—higher scores indicate greater creditworthiness. The median FICO score in the United States is 723. The 3 major credit reporting agencies all issue FICO scores based on the information in their credit files, but Experian and TransUnion also have a separate score based on a variation of the FICO model and have slightly different ranges. The Experian score ranges from 330-830, and TransUnion, uses what they call the Emperica model—the Emperica score ranges from 150-934. Equifax calls their FICO score the Beacon.
Because the FICO score from each credit reporting agency is based on the information in their own files, and because these files have slightly different information in them on each person, the FICO score will also differ from the 3 agencies, which is why many lenders get 2 or 3 scores. If the lender gets 2 scores, generally the lower one will be used in determining whether to give the consumer a loan or at what interest rate it will charge. When 3 scores are obtained, generally the middle score is used.
The NextGen FICO score, developed by Fair Isaac in 1999, was designed to better identify people's creditworthiness. More people had better scores under this new model, thus, allowing lenders to make more loans, but, purportedly, it also identified credit risks better, thus, eliminating more of the actual credit risks. However, these results are from Fair Isaac, the developer of the model. Because lenders don't have as much experience with the new score, and have not verified that this new model is, indeed, better at assessing credit risk, they have not adopted the new score extensively. The Classic FICO is still the most prevalent score.
The 3 CRAs also have different names for the NextGen FICO score:
PinnacleSM Score at Equifax
FICO® Risk Score, NextGen at TransUnion
Experian/Fair Isaac Advanced Risk Score at Experian
According to Fair Isaac Corporation, ¼ of all adults in the United States—about 50,000,000 people—either lack a credit report or have insufficient information in their credit reports to determine a reliable credit score. These people include immigrants, young adults, the recently divorced or widowed, and ethnic groups that typically do not use credit.
To better gauge the creditworthiness of these individuals, Fair Isaac has sought additional information from sources other than credit reports to compute a more reliable score. Because this score is based on different sources of information and computed differently, it has a new name—the FICO Expansion score.
The FICO Expansion score measures consumer risk based on credit data which is not in credit reports, such as deposit account records, pay day loan cashing, and purchase payment plan performance. The FICO Expansion score attempts to measure the likelihood that the consumer will become severely delinquent (more than 90 days past due) in his payments, for up to 24 months after scoring. Like the Classic FICO score, the Expansion score ranges from 300 – 850, with higher numbers indicating greater creditworthiness.
Fair Isaac Credit Services is a subsidiary of Fair Isaac Corporation that organizes this information into consumer files; produces the reports and risk scores for business clients; and resolves consumer disputes. The new scores will be available through myFICO.com. Call 1-866-838-3427 for answers to any questions.
A new credit scoring system, called VantageScore, has been developed by Equifax, Experian and TransUnion—touted to provide a more consistent scoring system for creditors, and that gives creditors an alternative to the FICO score. There will still be some differences among the scores of the 3 agencies because each credit agency has slightly different data in their files on each person, but the methods used to compute the score will now be the same for all 3 agencies.
The new credit score will have the following scale:
Although the new scores are immediately available to creditors, they won't be available to consumers until later this year. However, it remains to be seen just exactly how many lenders actually use the new score. Many lenders have standardized on the FICO score, and may well continue to use that, especially since the FICO score has been around for a while, and has a track record of predicting the future creditworthiness of the loan or credit applicant. Another reason why the FICO score may be difficult to supplant is that many banks and mortgage companies sell their mortgages in the secondary mortgage market, which generally requires pooling the mortgages, which in turn, requires gauging the risk of these mortgages. Using a new scoring system that has not been extensively tested as to how well it actually measures risk would introduce uncertainty in the secondary mortgage markets. Thus, those companies that want to sell their mortgages in the secondary market, which is most of them, might well be reluctant to use anything other than the FICO score to assess risk.
Although the credit reporting agencies are saying that their new credit score is superior to the FICO score (see TransUnion's introduction to VantageScore), this would be virtually impossible to establish within a short time, since there would be a need to correlate the score with actual future credit behavior.
To raise your credit score, you must be both financially responsible and savvy. Why? Because your credit score is a derivative. It derives from the information in your credit report, which, in turn, is derived from information from your lenders and other people you have business with, and whether this information is good or bad depends on how well you manage your finances.
Being financially responsible means paying your bills on time, and not going too far into debt in relation to your income. When you don’t pay your bills on time, it means that either you are not organized and responsible, which means that you will not be reliable, or that you are in financial trouble, which means that you are a greater credit risk.
Being financially savvy means that you know how to save, earn, and invest money. While this document certainly can't cover such a broad subject, it is actually the most important determinant of your creditworthiness—its very foundation!
To understand how to increase your credit score, it makes sense to understand what affects the score. Below are the factors that affect your FICO score, although the VantageScore will almost certainly use the same information. Your FICO scores only depends on what is actually in your credit reports, and the same factors will have different weights depending on your credit profile. Nonetheless, it is easy to see why these factors affect your score, so the exact method of calculating the score is not all that important.
The 2 most important factors that determine your credit score are your payment history and the amount of debt that you have. Together, these 2 factors account for 65% of the score.
Payment history includes whether required payments were made on time, and if they were late, by how much. Were the delinquencies recent? More recent information has a greater impact on scores than older items.
Bankruptcies, judgments, suits, liens, wage attachments, and other signs of financial problems found in the public records will also have a negative impact, although, as with late payments, recent activity has greater weight than older items.
The greater the number of past due items, the more it will decrease your credit score, and the greater the number of accounts promptly paid, the more it will benefit your score.
Obviously, the amount of your debt is a significant factor. The greater the amount of debt, the lower your score. Thus, the more money owed on each account, and the more accounts with high balances, the lower the score. And since the amount of credit on each account is typically limited by what you are able to pay, a high ratio of account balances to total amount of credit—your credit utilization ratio—will also lower your credit score.
A longer credit history has greater predictive value, and thus, will have a positive effect on your score. Credit history is measured by how long the accounts have been opened, what type of account it is, and how active it is. The longer the average age of all of your accounts is, the higher the score.
How many and what type of accounts you have recently opened affects your score. Credit inquiries are listed in your credit report every time a lender looks up your credit report because you have applied for a loan. A greater number of recent inquiries lowers your score because applying for many loans within a short time can make you look desperate for money, and thus, a significant credit risk. On the other hand, developing a positive credit history after some delinquencies, or even a bankruptcy, will help to increase your score, because more recent items are more important than older items.
Because credit inquiries have an impact on your credit score, it helps to understand a little more about credit inquiries. Credit inquiries are categorized as a type of new credit because these inquiries result from your applications for new credit, which accounts for about 10% of the total score, although the exact percentage will vary according to the individual. Because there is little else to consider, credit inquiries will account for a bigger percentage of the score if you have few accounts or a short credit history. A credit inquiry is recorded when someone asks for your credit report from one of the credit reporting agencies. The Federal Fair Credit Reporting Act (FCRA) restricts access to your credit report to people or organizations that have a permissible purpose—as defined by the FCRA—credit card and insurance companies, banks, landlords, and any other business, organization, or person that has a legitimate need to know your credit history, and this need can only exist if you apply for what they have to offer—a credit card from a bank or place to rent from a landlord, for instance. Insurance companies are using a variation of the credit score—often called the insurance score—to evaluate potential risks. People with low scores tend to file more claims, and thus, the insurance score is used to screen out such people.
Employers can access your credit report only with your permission. Usually, only employers seeking to hire for important positions, which require integrity or where there are security concerns pull credit reports. Banks, for instance, will generally look at credit reports for potential hires. Inquiries by employers will appear in your credit report, but will not have any impact on your score.
Anyone who obtains a copy of your report under false pretenses can be fined substantially and jailed for up to two years.
There's a section on your credit report that lists everyone who accessed your report in the last 2 years. However, only the previous year is considered in the FICO score.
There are 2 types of inquiries to your credit report: hard and soft. A hard inquiry results because of some action that you have taken with a business, and that business wants to know what is your creditworthiness. To gauge this, the business will request a credit report from any or all of the CRAs, and this inquiry will be listed in requested reports. A soft inquiry is either not listed or not counted in evaluating your score.
Promotional inquiries—when businesses do a credit check to send you pre-approved offers of credit or insurance—is a soft inquiry, which does not affect your score. Administrative inquiries from a company that you are already doing business with also does not affect your score. Requesting your own report is also a soft inquiry, so it doesn’t hurt to look at your credit report periodically, which is what you should do to find and correct any mistakes.
If you want to remove your name from prescreened, pre-approved promotional offers for credit or insurance based on your credit report from Experian, Equifax, TransUnion, and Innovis Data Solutions for 5 years, call (888) 5-OPTOUT—(888) 567-8688—or submit your request online at OptOutPrescreen.com, the only website authorized by Equifax, Experian, Innovis, and TransUnion for consumers to opt out of firm offers of credit or insurance. However, if you want to opt out permanently, you will have to fill out the Permanent Opt-Out Election form available at the website, print it, sign it, then mail it at the provided address. If, after opting out, you want to opt in again, you can do so at the website.
When you apply for a mortgage, car loan or other credit, a lender is authorized to request your credit report. This is a hard inquiry, and this type of inquiry can impact your credit score. However, there is a special situation where multiple hard inquiries will not hurt your score. These are inquiries for loans such as mortgages or car loans, where you certainly have a compelling interest to shop around for the best deal, and so may apply at several places, but you are obviously just looking for one loan. Such inquiries will be listed as only one inquiry if they occur within a short period of time—14 days the Classic FICO score, and 45 days for the NextGen FICO score. (This process of listing multiple inquiries as 1 is called de-duplication, or de-duping, by the industry.) Many lenders continue to use the Classic FICO score.
The nature of your accounts—mortgages, credit cards, retail accounts, installment loans, and consumer finance accounts—will also have some impact, as this will indicate how much experience you have in dealing with different types of accounts. Accounts with consumer finance companies will lower your score.
Corporate credit cards are often issued to employees as authorized users, so that the employee can pay and track expenses. Corporate credit card bills must be paid in full every month, so there is no accumulation of interest. With a corporate credit card program, either the company takes responsibility for timely payments, or assigns that responsibility to the employee.
If the company takes responsibility, it will generally pay the bill after the employee files an expense report; otherwise, the employee pays the bill.
When the corporation is responsible, then an employee's credit record and credit score will not be hurt if the payment is late. Even when the employee is responsible—43% of the time according to 1 survey—the credit card companies may give the employee an extended grace period. American Express, for instance, the major corporate credit card issuer, won't report the delinquency for at least 180 days past the due date.
However, late payments can result in loss of rewards or require the payment of a fee to reinstate the rewards, or require payment of late, suspension, or reinstatement fees. It may also hurt the employee's relationship with the company, since it not only indicates that the employee isn't very responsible—a quality needed for most jobs—but the company may get less of a refund from the credit card company because of higher delinquency rates.
First, and foremost, is that no factor which is not in your credit report is used in computing your credit score.
Any factor that is not permitted by law to be considered for obtaining credit cannot be used in calculating your credit score. The federal Equal Credit Opportunity Act prohibits race, color, or national origin; religion, and sex or marital status. Receiving public assistance, renting, child support obligations, getting credit counseling, or exercising any consumer right under the Consumer Credit Protection Act also cannot be considered.
Your age (unless you're a minor) and where you live are not factors in your FICO score.
Salary, occupation, employer, date employed or even employment history are not used in calculating your score, but they will certainly be considered by any potential lenders of loans or credit cards that you apply for.
The NextGen FICO 2.0 score ranges from 150 to 950 and will generally give a higher score to many people by:
57% of consumers have a higher NextGen score than a Classic FICO, while the rest have a lower score.
Although not much has been published about the algorithm used to calculate the VantageScore, no doubt, much of the same information will be used, with similar weights. Besides the rating system shown above, the VantageScore will use information from the past 2 years, and any credit inquiries from mortgage, auto, and non-telco companies within any 14-day period will be treated as 1 inquiry, according to http://www.transunion.com/vantagescore.
A touted benefit is the scoring of individuals who would not have a score under the FICO model:
I have found no information as to what will be considered in calculating the VantageScore for these individuals, but without current information, how reliable can it be?
I would guess that when there is substantial information in a person's credit file, the VantageScore will probably depend on the same factors as the FICO score, since these factors are common sensible, and have been well tested.
Now that you know what factors influence your credit score, it’s easy to know what you can do to increase it. Pay your bills on time and lower your overall debt. This accounts for 65% of your score. A good way to always pay bills on time is to use automatic debit services, which almost every credit card company offers, nowadays. With automatic debits, the company automatically deducts the money from your checking or savings account, when it is due. You just have to make sure that there is enough money in the account. If the company doesn't offer such a service, close the account and just deal with those that do. Some companies don't have it in the hope that you'll forget to mail your payment on time, and thus, incur a late-payment fee. Late payments will not only cost you money, but it will also lower your credit score. You can also take advantage of automatic payment services provided your bank. Almost every bank offers this now, and, usually, it's free. Oftentimes the bank can pay the credit card companies electronically, so if you owe a balance on your card, you can save some money by scheduling payment of your monthly bill at the beginning of the billing cycle instead of when it is due. This will save the monthly interest on that payment.
Don’t necessarily close accounts, because they do give you some flexibility in meeting possible future financial problems, and having fewer accounts can actually lower your score, but do close any accounts that are charging a monthly or annual fee just to have the accounts. However, don’t start applying for numerous credit cards, either, because each of these applications will be listed on your credit report as separate inquiries, which can make you seem desperate for cash—a possible sign that you are in financial difficulty, and thus, a poor credit risk. This is particularly true for new credit users, who don’t have a long credit history. Build up your credit profile slowly.
There is advice—from the CRAs, no less—not to close old accounts, because a long credit history improves your score.
I find this puzzling. Only activity from the last 2 years is generally considered in computing your score, and all information older than 7 years, except for Chapter 7 bankruptcies (10 years), must be expunged from your credit file. Furthermore, even if you close an account, the account information remains in your credit report for 7 years, even though it's closed. And while having many open accounts with little debt on them helps to improve your score by lowering your credit utilization ratio, lenders will generally see this as a danger sign that you can take on too much debt later on.
If you are not using it, especially if you are paying an annual fee or the account charges a high interest rate, close it.
Another factor is the amount of debt on each line of credit compared to the credit limit for that account. Maxed-out accounts lower your rating, even if you have other accounts with a zero balance. (I also find this puzzling. If you have just 1 or 2 accounts that are maxed out, it may be because you transferred balances from credit cards charging a higher interest. This would be the intelligent financial move to make, so it makes no sense that it should lower your score! It probably doesn't lower it by much, though. However, the more accounts that are maxed out, the lower score, since this generally indicates that you are having financial difficulty.)
It is important to periodically review your own credit reports from each of the major credit reporting agencies, not only because mistakes can creep into the report, but because identity theft can ruin your credit.
Now you can get your credit reports free of charge at AnnualCreditReport.com, which is a centralized service for consumers to request free credit reports (also called credit file disclosures). It was created by the 3 nationwide consumer credit reporting companies, Equifax, Experian and TransUnion. Under the Fair and Accurate Credit Transactions Act (FACT Act or FACTA) consumers can request and obtain a free credit report once every 12 months from each company. You can also dispute credit information at this secure site.
There is an unusual way to improve someone's credit score by making that person an authorized user of a card where the legal owner of the account has a long and good payment history with that card—termed piggybacking. The reason why this works is because Fair Isaac—the company whose algorithm for determining credit scores, called the FICO score—treats the entire payment history as if it was the authorized user's own credit card. Thus, this is a good way to quickly raise the score of children who are starting to use credit, or for family members or friends emerging from bankruptcy.
The disadvantage for the legal card owner is that the authorized user might run up excessive charges on the credit card, especially since the user has no legal obligation to pay the bill. However, it has been suggested that this can be prevented by making the person an authorized user, but not giving him a card or the card number so that he can make charges, although what is to prevent an authorized user from learning the account number by getting a copy of his credit report? Nonetheless, it will still improve the authorized user's credit score.
There are some websites, such as Seasonedtrades.com and Creditlaunchers.com, that charge $1,000, or more, for this benefit. These websites also offer other credit services as well, although I don't know if they would be in the best interest of those seeking to rebuild their credit. Indeed, advertising the raising of credit scores may simply be a way to attract credit seekers to their other services. To pay so much money to raise one's score is a good indication that the person is not financially wise, and thus, is bound to have a lower credit score eventually, anyway.
There is also a disadvantage for the authorized user. If the legal card owner would stop making timely payments on the card—for instance, maybe he suddenly became hospitalized—this would negatively affect the credit rating of the authorized user.
The credit rating of the authorized user has no effect on the legal owner's credit record or rating, since it is the owner who is liable for the card. Note, too, that, although this can improve someone's score, especially someone with little credit, it will not overcome a generally negative credit history.
In the News (June 18, 2007)—
According to this New York Times article, Ron Totaro, vice president for global scoring solutions at Fair Isaac, has indicated that, starting in September, the FICO scoring algorithm will no longer include authorized user accounts in its formula for calculating FICO scores.
Unlike credit reports, credit scores are not generally free. Indeed, they are a very profitable business for both the credit reporting agencies and Fair Isaac. In fact, Fair Isaac has a site specifically to sell consumers their FICO credit scores at myFICO - FICO Credit Scores, Online Credit Reports and Identity Theft Protection. As of this writing, Fair Isaac is selling all 3 FICO scores and the credit reports from the 3 credit reporting agencies for $44.85. That's a lot of money for 3 numbers. Fair Isaac and the credit reporting agencies share the profits, I suppose. Fair Isaac needs the information in the credit reports to generate the number, and the agencies need Fair Isaac's software and methods for calculating the number. This is at least part of the reason why the agencies came up with their new VantageScore, because they get to keep all of the profits. Since the credit information is already contained in their databases, generating the number is virtually cost-free, and thus, most of the purchase price of VantageScores sold to the public will be profit! This huge profit margin is probably the true reason for developing VantageScore. Selling pricey credit scores to a hungry public is a gold mine! For the companies, that is. Your money is the gold being extracted. So, should you pay?
In certain cases, such as when shopping for a mortgage, it will be useful to know your score. Most lenders charge an application fee that could be hundreds of dollars, so knowing your score can help you to assess whether you have a real chance of getting a mortgage from a particular lender. A higher score will generally mean a lower interest rate and lower monthly payments. However, to get any real benefit from knowing your score, you will need to know which scores lenders are getting. I believe the FICO score will remain the favorite of lenders since it is well tested. Lenders generally get 2 or 3 scores. If you do get your scores and 1 score is significantly lower than the others, you should check your credit report from the agency with the low score to see if there are any mistakes in the credit report. You can also simply ask the lender to tell you what it is, but by that time, you've already paid the application fee. And if you are shopping for an auto loan or a mortgage, you should check all 3 credit reports, anyway. The only way to correct mistakes, which will raise your score, is by actually looking at your credit reports, and disputing anything that is not correct. Since correcting mistakes generally takes a least a month, it's best to start at least several months before shopping for a loan.
If you are not shopping for a mortgage or any other loan that requires an application fee, you shouldn't waste money on getting your score, especially since any lender is not going to consider your credit score alone. Income and job history will be just as important, if not more important. Because the score depends wholly on information in your credit report, knowing the contents of your credit report will give you a good idea of your score—whether it is high, low, or average. Another way to know is if you are getting a lot of solicitations—unless you have opted out—from credit card companies. The fees in these offers will indicate whether your score is high or low. If there are numerous regular fees (not including penalty fees), such as an annual fee and a monthly fee, for instance, or a security deposit is required, then your score is probably low. For someone with a low credit score, these fees can be very high, and the consumer would be foolish to respond to such offers. Remember, your credit score and your credit report are derivatives of your creditworthiness. By learning to avoid rip-offs, by learning how to save money on purchases, and to buy only what is needed and can be afforded, and paying your bills on time, you can be well on your way to raising your credit score, even without knowing the actual number.
The FICO® Score Estimator - Get a free estimate of your FICO credit score here by answering a few questions that will take less than 5 minutes. Your estimated score will have a low and a high estimated score with about a 50 point range.
A Chapter 7 bankruptcy can be listed in credit reports for up to 10 years from the date that the case was filed, and a Chapter 13 bankruptcy can be listed for up to 7 years after filing. Note that because a Chapter 13 case usually takes about 5 years from filing to discharge, a Chapter 13 bankruptcy can only be listed in credit reports for about 2 more years after the final discharge.
It might be surprising to learn that bankruptcy doesn't really hurt most people's credit that much. The reason is because bankruptcy generally discharges most unsecured, nonpriority debts, which includes almost all credit card debt, collections, and court judgments, and the consumer will not be allowed to file another bankruptcy case for years. Thus, the consumer becomes a better credit risk. Moreover, people who file for bankruptcy already have bad credit, with missing or late payments, collections, judgments, and other negative items in their credit files. Furthermore, bankruptcy places a definite time limit on accounts. In other words, a delinquent credit card account will be listed in credit reports for up to 7 years after the account is closed! If the account is never closed, then it can remain on the credit report indefinitely. Bankruptcy puts a definite limit on how long discharged accounts can remain in the file.
After bankruptcy, if the consumer is wiser financially and is diligent in making payments, his credit will actually improve greatly over the 2 years following the final discharge, since credit scores depend mostly on financial data accumulated over the past 2 years, with more recent data having more influence on the score.
Anyone receiving a bankruptcy discharge should review all 3 credit reports after the discharge to verify that all discharged debts have been listed as "Included in Chapter 7 Bankruptcy" or "Included in Chapter 13 Wage Earner Plan," depending on which type of bankruptcy was filed. If any discharged debts are not listed as such, then the credit reporting agencies should be notified, so the debts can be properly listed as discharged. Because bankruptcy petitions are public records, the credit reporting agencies will have to list the debts as being discharged, since there can be no dispute about the facts.
Fair Isaac has altered its FICO scoring model, calling it FICO 08, to hopefully better predict consumer defaults. FICO 08 will continue to have a range 350 - 800, and it will still rely heavily on the amount of debt and payment history. However, FICO 08 will no longer use authorized user accounts in calculating the score. More positive weight will be given to users who have multiple types of credit, such as auto loans and mortgages, in addition to credit card history, while the debt-to-credit ratio—the total debt compared to a user's total credit line—will be given greater weighting—a higher debt-to-credit ratio will have a more negative effect that it did in the classical FICO scoring model. Numerous late payments will also have a more negative impact, while an occasional late payment will have less impact than in Classic FICO. FICO 08 scores should start appearing in the 2nd quarter of 2008. Experian and TransUnion will be using the scoring system, but it is uncertain at this time whether Equifax will be using it.
(October, 2007) Many cases of identity theft rely on stolen social security numbers, which are then used to open credit accounts, often with high balances. The thieves max out the credit lines without any intention of paying back the loans, which leaves the people with those social security numbers on the hook. The identity theft victims then must go through the travails of convincing credit bureaus and creditors that it was not them who took out the lines of credit, and that they were the victims of identity theft.
A credit freeze, which stops the credit bureaus from issuing credit reports to potential creditors, prevents the thieves from getting any more credit with that person’s identity, since almost all creditors require a credit report before they will issue credit or pay out loans. The disadvantage is that the victim of identity theft also cannot get any more credit until he unfreezes his account.
39 states have various laws that allowed consumers to freeze their credit reports, at least to some extent, but now that the credit bureaus see the growing trend, and also see the potential profits to be made by allowing consumers to freeze and unfreeze their credit reports for a fee, all 3 have decided to allow it regardless of where the consumers live. TransUnion was the 1st, while Equifax and Experian will allow it soon—Experian on November 1, 2007. The current fee is $10 to freeze it and $10 to unfreeze it, for each report, except in those states that require a lower fee, and it is free for any victims of identity theft. Therefore, a consumer who is not a victim of identity theft will have to spend $60 to freeze and unfreeze all 3 credit reports. The freeze request can be made by mail, telephone, or email.
(6/18/2007) According to this New York Times article, Ron Totaro, vice president for global scoring solutions at Fair Isaac, has indicated that, starting in September, the FICO scoring algorithm will no longer include authorized user accounts in its formula for calculating FICO scores.
(11/4/2006) Many states are enacting laws, to prevent identity theft, that allow consumers to freeze access to their credit reports without their explicit authorization, which extends to almost any anyone wanting access to someone else's credit report, including credit card and cellphone companies, although consumers may have to pay a fee ranging from $5 to $20 to each credit reporting agency that issues a credit report, and another charge to unfreeze it, which can take up to 3 business days.
Half of the states have passed or are considering passing credit-freeze laws. Kansas, New York, Oklahoma, Utah, and Wisconsin have recently enacted credit-freeze laws. California was the first, but some portions of its law have been struck down by an appeals court, which affects only California, but challenges are likely elsewhere, as more states pass it, and enough time passes to mount challenges. 5 states allow only identity-theft victims to freeze access to their reports, and some states allow victims to freeze their accounts without paying a fee.
The big disadvantage for the consumer is that credit and other services that depend on credit checks may be more difficult and time-consuming to get.
Naturally, the finance and retail businesses oppose credit-freeze laws because of the burden on them. They argue that a consumer can place free, 90-day fraud alerts on their credit file, which requires the business requesting a credit report to verify the identity of the consumer. However, consumer advocates argue that fraud alerts are rarely effective.
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