Friday, November 30, 2012

Alternative Credit Scores

Over 70 million adults in the U.S. do not have a credit score or have a very limited credit history. Individuals and families living with limited credit files are forced to take advantage of alternative financial sources to cash their checks or get temporary short term loans aka Pay Day Loans. Users of alternative financial sources generally pay very high costs in relation to the usual transactions you might perform at your credit union. Cashing a paycheck could cost $3 - $15. A two week $200 payday loan could cost as much as $45 if paid on time. If the loan cannot be paid off right away, it has to be renewed. In California, that means the loan principle and interest has to be paid and a new loan created. How many times will a person have to pay $45 to maintain and renew the loan until they can afford to pay it off completely?

Several companies have created alternative credit scoring products based on the analysis of non-traditional data, including rental and bill payment history, insurance payments, debit-card use and public records. They are trying to use this data to predict the payment history of people who don’t have access to traditional credit products that can be tracked through a FICO score.

That is basically what a credit reporting bureau does for people with their credit. It reports the usage of the various forms of credit a person has and tracks the payments made and balances carried. Through a computer algorithm it creates a number that can predict, with fair certainty, the future payment history of an applicant. Those with FICO scores over 740 are more likely to make their payments on time and manage their outstanding balances better than someone with a score of less than 740.

Why do some people want to use alternative credit data? There is a profit motive as vendors can sell more products and services if there is a universe of more qualified buyers. It could also help families struggling with traditional credit by showing their propensity to pay their rent, utility bills, auto insurance, and other regular payments. By using alternative data, lenders stand to reach a large group of potential borrowers about whom they currently have little or no information. For these consumers, alternative credit scores strengthen lenders’ ability to:
-         Reliably rank order risk;
-         Efficiently evaluate applicants for credit or design offers for credit;
-         Increase approval rates while controlling for acceptable levels of risk

Meriwest works exclusively with Experian Credit Bureau. Experian offers various forms of credit reports. We use three specifically:

-         For all auto lending, direct lending to our members and through the Credit Union Direct Lending (CUDL) Network we use the FICO Auto 2 score. This is provided by Experian, and is a variation of the basic FICO score – more heavily weighted to the existence and performance on previous auto loans compared to the traditional FICO score.  This is similar to the “Auto Industry Option Scores” listed below.
-         For our other consumer loans, we use a custom score from Experian called a “Fast Start” score.  It is based on credit and personal characteristics such as their time on the job, how long they have been a member, and other data.
-         We also look at the Experian BK (Bankruptcy) score.  This is a predictor of the applicants likelihood of filing (or needing to file) bankruptcy, and is used as a risk measurement in our analysis.

We don’t use alternative scores, but do tend to look at our borrowers differently than a traditional bank. In a traditional commercial bank, credit score lending is King. If they are looking for a FICO score of 740 or above and that’s where you score, your application has a preliminary approval pending review of debt and income. If your FICO Score comes in less than 740, your application will be declined due to credit. They will take no further action on your behalf outside of sending you the decline letter.

Credit unions, in general, take a more holistic view of their borrowers. Sure, the FICO score is an important part of the loan qualification. Credit Unions would like to see a 740 FICO Score just like the big banks. But if you miss the score by this much (thumb and forefinger showing an inch), you may still qualify for a loan at a credit union. Why? They look at the whole person, not just their credit score. They look at how long you have been employed in the same business or the same employer. How long have you lived in the area? Or at the same home? How long have you been a member of the Credit Union? Have you borrowed from them before? All of these questions go into making the credit decisions. I am not saying that everyone with a less than 740 FICO Score gets a loan. But, if someone misses the target score by ten or twenty points, it is not the end of the loan. Credit Unions can take these questions into consideration and possibly make the loan for them at a slightly higher rate. This is called, Risk Based Pricing. If there is increased risk in lending to someone, say a 720 vs. a 740 FICO Score, we can price our interest rate a little higher accordingly to offset the risk.

Here is a run down of the more common credit scores and alternatives to credit scores:

FICO Score: Created by the Fair Isaac Corporation, FICO is the best-known credit scoring system in the United States. It is a way of measuring an individual's creditworthiness. A FICO score is a quantification of a variety of factors in an individual's background, including a history of default, the current amount of debt, and the length of time that the individual has made purchases on credit. A FICO score ranges between 300 and 850. The higher the score, the more likely that individual will pay their bills in a timely manner.

Vantage Score: A consumer credit rating product developed by three credit rating agencies - Equifax, TransUnion and Experian - as an alternative to the FICO Score. VantageScore uses a different rating scale (501 to 990) than FICO (300 to 850), and is branded as a score that provides lending institutions and banks information related to sub-prime financing. The score is calculated through a weighted average of a consumer's available credit, recent credit, payment history, credit utilization, depth of credit and credit balances.

Auto Industry Option Scores: Auto lenders are unlike other kinds of creditors. Many other creditors look at the entire credit picture to make a decision. However, some auto lenders base their decision solely on how previous auto loans were managed. So, even if your credit scores are bad, if you never missed a car or truck payment or sent one in late, your Auto Industry scores will most likely be higher than the standard FICO scores.

Veritas (by Digital Risk): Most recent alternative; used for home mortgage credit analysis. It Integrates borrower credit characteristics with property and local real estate market data along with proprietary behavioral prediction models. 

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Our next Credit Myths workshop is this Wednesday the 5th of December
Credit Myths and Repair
6:30pm    Wednesday    December 5th 
Meriwest Credit Union Main Office
5615 Chesbro Ave, San Jose CA 95123
Click here to RSVP!

Monday, November 19, 2012

Your FICO Score-Mystery no More!

Is your FICO score a mystery to you? Don’t feel bad, most American consumers don’t know their FICO score much less how it is determined. Generally, your FICO score can vary from 300 at the lowest to a high of 900. People ask me, “Hey, Credit Union Guy, what’s a good credit score?” Today, a good score would be in the neighborhood of 740. At this level you can access good rates on car loans, home financing, and credit cards. Go below 740 and you may find yourself paying higher rates of interest on your loans and credit cards.

“What is a FICO?” FICO is an acronym for the Fair Isaac Company; the company that invented the calculations that result in a measurement of credit risk. The score is determined by an algorithm. In a sense, it is a highly complex algebra problem that takes into account your payment history, the ratio of your loan and card balances vs. your available balances, the length of your credit history, your credit request inquiries and the types of credit you are managing. The formula for exactly how the score is calculated is proprietary information and owned by Fair Isaac.

“Why does the FICO score exist?” In the old days of lending, loan managers looked at the physical credit report for a person and made a judgment call on the risk involved with making a loan to that person. Back then, two loan underwriters might look at the same report and have very different opinions on the applicant’s payment history. Credit Scoring took the judgment call out of the process. A person either scored well or they didn’t. Another reason for FICO score is volume. As our population grew and more people started using banks and credit unions, the loan volume increased significantly. In order to speed the loan process, the FICO score was used. Loan processors can input a minimum of data and get a score for a credit decision rather than reviewing the entire credit report.
Here is an approximate breakdown of how it is determined:
·   35 percent of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how timely) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall score.

·   30 percent of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have that have maxed out lines, the lower your score will be. The rule of thumb is to keep your card balances at 30% or less of their limits.

·   15 percent of the score is based on the length of time you've had credit. The longer you've had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.

·   10 percent of the score is based on the number of inquiries on your report. If you've applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven't used the cards or gotten the loans). The more recent these inquiries are the worse for your credit score. FICO scores only count inquiries from the past year.

·   10 percent of the score is based on the types of credit you have. The number of loans and available credit from credit cards you have makes a difference; installment loans vs. revolving lines of credit. There is no magic number or combination of types of accounts that you shouldn't have. These actually come more into play if there isn't as much other information on your credit report on which to base the credit decision.

Questions? Ask the Meriwest Credit Union Guy at

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The next Meriwest Credit Union Financial Education Workshop will be our Reality Based Budgets Workshop for teens and college students on Wednesday, Nov. 28th at our Monta Loma Financial Center in Mountain View. This workshop takes through a post college money management simulation where they are given a salary, rent, car payments, and other bills and build their living budget. 

Our Monta Loma Financial Center is located at the corner of Rengstorff and Middlefield  Road in the Monta Loma Shopping Center. The program begins at 6pm. We hope you can join us. Please RSVP at our Events Link.

Friday, November 2, 2012

Working on your Home?

You have waited a long time. You worked your way through a recession. Perhaps you have watched your home lose value and slowly regain some it back as our economy has shown signs of improvement. The time has come for you to do some work on your house that has been put off too long.

Renovating the bathrooms and the kitchen in your home can give you some good bang for your buck when it comes to increasing the value of your home. How do we pay for it? One of the best ways is to use your home’s equity to finance that improvement. A Home Equity Line of Credit can be your ticket to a new kitchen. You may be able to deduct the interest on your taxes (check with your tax consultant). 

Here at Meriwest Credit Union, lines up to $250,000 have no application fees nor do they have any third party fees like title costs. Also, interest rates are at their lowest point in years, meaning you can save a lot of money in interest charges. Check our Home Equity Line of Credit Page or contact your local Meriwest Credit Union Financial Services Representative for details. Now let's talk about unlicensed contractors.

Beware of Unlicensed Contractors

It is about this time of year when someone with a pickup truck and a smile may knock on your door, mention something about your house that may need work, and they'll offer to do it at a cost that seems almost too good to be true.

Frequently, they'll tell you they were working in the area anyway, which is part of why the job will be so cheap. But it pays to do a bit of research. Here's why:

Liability. Legitimate businesses carry two kinds of insurance that protects both themselves and you, the customer...
  • Liability insurance. If the contractor or his employees cause damage to your property, or a neighbor's property, they will generally carry insurance or have posted a bond to ensure that they can make good on any damages. Sure, you can file a lawsuit and maybe win a judgment. But having a judgment and collecting on it are two different things. A licensed contractor will generally have enough insurance coverage to ensure you will be made whole in case of any kind of claim.
  • Workers compensation. Unlicensed contractors typically don't provide workers compensation coverage to their workers. Most states require this coverage, which covers any medical costs incurred by workers injured on the job, as well as some disability benefits. If a worker gets injured on the job, and this insurance isn't in place, that worker could sue both the employer and you, the property owner, for damages.
Jail time. It's true: In some jurisdictions, using unlicensed contractors not only jeopardizes your own finances - it's actually a crime.

Scams. Most unlicensed contractors mean to actually do the work. But one common scam goes like this: The scammer will begin work, then asks you for money "to go buy some of the materials they need." Then you give the contractor the money, and you never see them again. Or there may be an injury, for which you as the property owner are expected to provide compensation. The injury could be legit... or it could be part of the scam.

Worse yet, unscrupulous contractors could begin work, tear your roof open, for example, and then demand much more money than agreed upon to close the roof. Had you used a legitimate contractor, you would have recourse to your state licensing boards for unethical work or breaches of contract. Legitimate contractors don't want to lose their license, so they will work very hard to satisfy you as a customer and prevent racking up a track record of complaints.

How to Avoid Them
·        The simplest thing to do is ask for their license number. If they can't give it to you, or claim to be "working under someone else's license," then don't let them touch a thing.
·        Also, ensure the contractor gets a permit for any construction projects or anything that involves digging. Legitimate contractors will normally arrange for the permits themselves.
o       If they ask you to get the permit, consider that a red flag. It may be they are no longer welcome at the permit office - or they don't have the cash to get a permit. Either way, it doesn't bode well. 
·        Ask for references in your area. If the contractor has a good reputation and has provided good value and service to his customers, the contractor will be happy to share his or her references with you. No references? No Job!
·        Don’t forget to check social media like Yelp or traditional rating agencies like the Better Business Bureau. Look for a contractor with good Yelp ratings and no complaints filed at the BBB. That will make your decision a lot easier!

The Bottom Line
Using licensed contractors is a smart move in many ways: It encourages and supports the legitimate, law-abiding businesses in your community. You can generally expect a better quality of work. It encourages employment in your community, as unlicensed contractors are more prone to hire illegal workers. And it protects you against unwanted liability when things don't go as planned. You could be liable if an unlicensed contractor or one of his workers is injured on your property. Licensed, legitimate contractors will have Workman’s Compensation Insurance for him and his crew. In this case, you would not be liable for injuries incurred in the performance of the work on your property. 

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Meriwest Pre-Owned Auto Sale 

November 10-11, 2012

Last Auto Sale of the Year!

Sale Hours:
  • Saturday, November 10: 9:00 a.m. - 5:00 p.m.
  • Saturday, November 11: 9:00 a.m. - 5:00 p.m.

Meriwest Credit Union
5615 Chesbro Avenue
San Jose, CA 95123

Take Advantage of this Event!

  • Rates as low as 1.24% APR offered to qualified members**
  • Over 200 quality pre-owned vehicles
  • Trade-ins welcome
  • Up to 100% financing available on all vehicles for qualified buyers***
  • Loan officials on-site