Understanding Biz Credit Cards

Here is a special bonus for our readers; the Credit Union Guy gets real about Business Credit Cards with Erica Sandberg of CreditCards.com.

Minors with Credit Cards-Good idea?

As minors cannot sign a contract until they are 18 they cannot be involved as a co-signer on a card. A parent cannot cosign for their kids as the kids cannot sign on to the card with them. Cosigning for your kids is a relatively straightforward process, both of you will be on the application and both will sign. The parent’s credit will be evaluated for approval. If it is approved, the proper management of the card and the parent’s credit background will elevate their adult child’s credit score. Of course, if the card is not managed well or the parents have a lapse in managing their credit, that can be detrimental  to the young person’s credit score. 

 

 

However, being younger than 18 does not lock a young person out of having a credit card. They can be placed on an established credit card as an authorized signer. This gives them all the rights of usage without the responsibility. But it will start to build their score for them provided the parent has a good score to start with. Yes, the minor can start building that FICO score while they are a minor. The best option:  Parents can remove the minor from the account anytime they wish! 

 

This is especially helpful when the card has been misused.

 

The major disadvantage of minors with credit cards is their occasional lack of responsibility. They might use the card for parentally unauthorized usages like a Miley Cyrus concert or go hog wild buying MP3’s on iTunes or Amazon. There are a variety of opportunities for minors to misuse a card. It is up to the parent to ensure the child understands the limitations and responsibilities related to managing the card and teach them how their current authorized usage will benefit them in their adult life.

 

One option that families have in training their kids to manage money is the Meriwest Credit Union Flow Card. The Flow Card is an electronic checking account (no checks allowed) that is managed by a parent and their child. Flow Cards come with free online banking, online bill pay, and mobile banking options. Your child cannot overdraft a Flow Card! The account is ideal for those students who are aged 13-24 years old. It gives parents an opportunity to teach their kids about managing money with a debit card as the parent and the kid will both have access to the account information. This is good training for eventually managing a credit card.

 

Meriwest Credit Union is an Equal Housing Lender. All accounts are insured by the NCUA to $250,000.

Going from Bad to Worse – Collections are a Curse!

What do you know about collections? I get a lot of questions like: How long can they stay on my credit report? What effect do they have on my credit score? What’s the best way for me to pay them off and get them out of my life? 

Do you wonder about these things? A lot of folks do. Every day I get questions from our members about collections and how they affect their credit. Let’s see if I can give you some answers!

A collection takes place after we have been delinquent on a payment. That payment can be on a utility, a loan or a payment for other services where you may be billed later like a carpet cleaning. Technically, you can be late up to 89 days on your utilities like your water bill, heating bill, or even your phone or cellphone bill, even that invoice from the carpet cleaner. So long as you pay it by the 89^th day, no one at the credit bureau needs to know about it. Sure, the water company might charge a late fee or the cellphone provider might temporarily cancel your internet service, but it will not appear on your credit report and cost you a reduction in your credit or “FICO” score.

But, if you allow that bill to go unpaid that additional day so that is it 90 days late, your credit score will suffer. As a general rule, most businesses turn unpaid debt that is 90 days old to their internal collection departments or they may sell unpaid debt to a collection agency for further collection. What that means to you is a severe beating of your credit score. If you had an excellent score, it is now just okay. If you had a good score, your score has dropped significantly. An unpaid collection on your credit has the same power on your score the first day as it does seven years later when it expires and drops off your report! Unpaid collections drag your score down and prevent you from accessing future credit on good terms and rates.

My debt went 90 days delinquent and now a guy named Ralph is calling me from the collection agency. What can I do to stop this? You have a right to privacy and can write them a letter requesting they stop calling you. That’s the law and it works! Write the letter telling them to stop calling you and send it certified mail to the collection agency. Then, they can only call you to tell you they will stop calling or if they decide to take further legal action. Otherwise, all phone contact stops. Remember to keep a copy of your letter!

However, the best recommendation is to pay it and get it out of your life. This sort of debt is not your friend. Once you pay a collection, it changes from an upaid, also known as an open collection, to a paid or closed collection. Immediately upon paying it, your credit score will bump up a bit. As time goes by and the debt is 24 months, 36 months, and further into your past, you will see your score improve. With the collection’s status changing from an open/unpaid collection to a closed/paid collection on your credit report; it will still be a negative item, but much, much less than a collection that is unpaid. It will remain on your report for the balance of the seven years after you have paid it; i.e. if you pay it after two years, it will show as a paid collection for the five remaining years. 

With older collections some agencies may be inclined to provide you a fairly steep discount to pay them. Collection agencies buy your debt at a discount. You just have to ask for a lower pay off amount and start negotiating with the representative. If you decide on an amount, get it in writing and attach your check to it when you pay it. Then you have a contract with the agency. Do not send any money until you get your agreement in writing. 

Also, good debt offsets bad debt. This means that if you have other credit obligations besides that one debt that went bad, each time you make a payment on them you will improve your credit position. On time payments and keeping your debt balances low and under control are the keys to improving your credit score.

  

Questions? Ask the Your Credit Union Guy, Greg Meyer at gmeyer@meriwest.com

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 Our next Credit Myths Financial Workshop will take place this Wednesday Sept. 25th at our Main Office at 6:30pm. If you wish to join us, please contact me at gmeyer@meriwest.com or 408-365-6328 to reserve a spot. Don't be shy. We have space! 

Our October Workshops will be held at our Sunnyvale Financial Center on El Camino @ Fair Oaks in Sunnyvale. 

Auto Financing 101 

October 16th - 6:30pm to 7:30pm

Learn how to plan for, research, and negotiate your deal and financing for your next car. Be a step ahead of the car dealer. Take this class! 

Credit Myths

October 23rd - 6:30pm to 7:30pm

What are the top ten myths of credit? We will tell you and reveal the truth behind these myths. 

Both will be held at our office at 563 E. El Camino Real, Sunnyvale CA

Please RSVP with me at gmeyer@meriwest.com or 408-365-6328 to reserve your spot.

A History of FICO Scores Part II

In the 1950’s, someone asked the question, how can we judge someone’s credit without having to read the entire credit report?

You see, not only was time an issue, reading the reports and making judgments based on the information in them became an issue. You could have two loan underwriters look at the exact same loan package and come up with wildly different opinions on a person’s credit. Some would give their approval of the loan and others denied the credit. There was no set of rules that told underwriters how to decipher and utilize the information they were gleaning from credit reports. It was all just “someone’s opinion,” very subjective.

Thousands of new borrowers were being approved daily and lenders needed a way to mitigate or gauge risk and develop a national standard for credit worthiness. In 1956, a company named Fair Isaac Company came out with a revolutionary idea; Credit Scores, also knows as FICO Scores.

How does the scoring work? FICO takes several important financial factors into account. The two most critical factors are the borrower’s payments and the balances they maintain. These items make up 65% of the score; 35% for the payment history and 30% for the balance ratio. That’s why a late payment has such a serious effect on our score. Collections are worse for us and our scores. The effect of a late payment on a loan or credit card will start to diminish after 24 months. If one has an open collection, the collection will have the same weight on their score on the last day of seven years as it did on the first day it was placed on the person’s report. The lesson here is very simple, make your payments on time and you will never have to deal with late payment issues or collections.

Balances play a role in our score if we don’t pay them down. 30% of your score is determined by the balances a person is carrying vs. how much they have available. Maintaining outstanding credit card balances by paying only the minimum payment can be very detrimental to your score. We have to make an effort to pay our outstanding balances off. For scoring purposes, the balances are added together and a ratio is calculated vs. the total amount of credit available.

The three remaining factors are our History. How long have we managed credit? That accounts for 15% of our score.

Finally, 10% each is allocated to the types of credit we manage and the number of inquiries made on our report annually.

With this data put into a computer algorithm, a number could be determined. That number would be an indicator of risk. A high number would indicate less risk is involved in lending to a person where, conversely, a low number would indicate a lower likelihood of repayment. This also led us to “FICO Score Lenders;” lenders that only grant credit based upon a predetermined level of score.

What is a “FICO Score Lender?” Typically, our major banks are using the FICO score as the primary determining factor in making their initial credit decisions. Let’s say a financial institution has 300 offices in California. On any given day, each office might send a loan application to their loan underwriting department. The underwriters, the staff who decide credit decisions, might number a dozen but receive 300 applications in one day. Prior to 1956, they would have to view each credit report to make a decision. Now, they enter the social security number of the applicant and the credit bureau gives them a number. If today’s number is 740, then any applicant with a FICO Score of 740 or above will get a further review of their loan package. The borrowers with a FICO Score of 739 or less are declined for credit as they did not make the score. Not only does the FICO Score help us determine risk, it helps lenders render faster credit decisions. Often, we can approve someone based on their credit within 24 hours.

Some may ask if using a score like this is fair. The FICO Score is basically colorblind. Credit is ultimately granted to those who have proven they can manage it well. It is typically declined for those who manage it poorly. Over the years, the score has been adjusted down for times when credit was loosened and adjusted upwards for times when we had to tighten up on the use of credit. Today, most financial institutions are looking for borrowers with a FICO Score of 740.

Are credit unions just like banks on FICO Scores? Not necessarily, credit unions generally take a more holistic approach to lending; meaning they tend to take a look at the “whole borrower,” not just their credit score. Before a credit union renders a credit decision on someone, we will take into account how long this person has been on the job? How long have they have lived in the area? How long have they been a CU member? Of course, a CU will consider their income and debt to income ratios before we provide our final decision. What this means is, if a borrower comes in with a FICO Score at 739, or 735, we don’t automatically decline their loan request. We take a wider look at our borrower to determine their creditworthiness.

Can banks help their clients with loans just like credit unions do? Sure they can, but they don’t! They will tell you they don’t have the time. It takes to much time to make decisions on marginal credit applications. Time is money and we need that money to show a profit to our shareholders.

I used to work for a bank that called itself the “Largest Financial Services Provider in the World.” One of my bosses once said to me, “We need to make profit. If we don’t make a profit, we might as well be a credit union.” As if there is something wrong with that?

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Thank you. I hope you enjoyed our history of FICO scores. If you want to learn more about credit, please attend our next Credit Myths Workshop this Wednesday the 24^th at our Monta Loma Financial Center in Mountain View: 580 North Rengstorff Ave, Mountain View CA.

To RSVP for this workshop, click this link.

Credit Myths and Credit Repair

Credit Myths and Repair    April 24th at 6pm   Monta Loma Financial Center

Learn how collections, credit inquiries, and late payments effect your credit score. What is a FICO score? You will learn how to access your credit report and your credit score for free. Learn from the experts.

A History of FICO Scores and Why We use them - Part One

We have spent a lot of print on what goes into creating your FICO score. We know who FICO is, Fair Isaac Company, and they invented the score. We have learned the five factors that go into it; Payments, Balances, History, Inquiries, and Types of Credit and how each of these factors are weighted. We have learned how FICO scores are affected by debt and collections. What we have not covered is why FICO exists at all. Why do we need FICO Scores?

Back in the day, we used your entire report, read it page by page, to learn how you manage your credit. We would check your collections, payment histories, and other data in making a lending decision. It took time to make loan decision. It was not like today where lending decisions can be made instantaneously online or within 24 hours of receipt of the application. Often, two or three people would have to review a loan file before it could be approved. That all changed with the advent of the FICO Score in the 1950’s.

Okay, so FICO saves us time in getting loan approvals. How did it come about?

In the 1860’s, a few regional credit bureaus started to crop up. They maintained lists of people or businesses that used credit and kept a record of their credit volume and payment histories. This allowed merchants to give credit to their customers without having to have a personal relationship with them as had been customary in the past.

In 1898, the first national credit bureau opened its doors. The Retail Credit Company, later to be known as Equifax, was born in Atlanta. For $25, merchants could get a list or “Merchant’s Guide” that listed those who were known to have good credit habits and would be a good credit risk. For many years, the Retail Credit Company (Equifax) would be the only game in town, and in the USA for that matter, where financial institutions and other lenders could gather information to judge risk when lending.

In 1900, the first versions of a credit card were issued. “Proprietary Cards” were issued by oil companies and department stores to good customers. This allowed these customers to purchase goods and pay them back at a later date. The cards were only accepted at the issuing store. While modern credit cards are issued for consumer convenience, “Proprietary Cards” were issued as a means of stimulating customer loyalty.

What about the other two credit bureaus? Where did they originate? In 1866, UTLX started doing business. They were a manufacturer of tank cars to be pulled by trains. Later, they started their own credit bureau and were known as TransUnion. In  1901, the Cleveland Cap and Screw Company was founded and that was later to became known as TRW and, eventually, the Experian Credit Bureau we know today. These companies, TransUnion and Experian, started tracking consumer credit usage in the 1960’s.

Between World War II and the advent of the other two credit bureaus in the late 1960’s, there was an explosion in credit! Prior to WWII most lending was local; merchants provided credit to local families or businesses. Many loans were made on the basis of bank references and personal recommendations. During this time, the ability to check someone’s credit on a nationwide basis had not been established.

As G.I.’s returned home after the war, the job market expanded and the demand for consumer products and home purchases grew dramatically. Loan volumes grew and financial institutions hired large numbers of loan processors and loan underwriters. As volumes grew, processing times got longer and customer patience was shorter.  

Finally, someone asked the question, how can we judge someone’s credit without having to read the entire credit report?

Check out Part II of our History of FICO Scores coming in next week!

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Workshops!

This month's Financial Education Workshops are taking place at our Monta Loma Financial Center in Mountain View: 580 North Rengstorff Ave, Mountain View CA. Please RSVP for either of these workshops at this link.

Auto Financing 101       April 17th at 6pm    Monta Loma Financial Center

Learn what insiders know about the auto buying process. What tricks do dealers use to get you to buy? Is my interest rate negotiable? How do I get the best deal on a purchase and financing? Meet our Personal Auto Shopping Service Manager, Bill Fultz who has 25 years of experience at car dealerships and now shares his knowledge with our members. 

Credit Myths and Repair    April 24th at 6pm   Monta Loma Financial Center

Learn how collections, credit inquiries, and late payments effect your credit score. What is a FICO score? You will learn how to access your credit report and your credit score for free.

Questions About Your Credit You Should Know the Answers To

What is a good credit score? Lenders see the FICO score as an indicator of risk. The higher the score, the odds are favorable that loan repayment will take place. As the score gets lower, the odds decrease that payments will be made on time. Right now, most financial institutions are looking for a FICO score of 740. This is rather high when you consider the score tops out at around 850. Prior to 2007, lenders were accepting a 680 FICO score as A- credit. Those who had a 680 then were able to access good rates and terms for their consumer and home loans. Regrettably, in the recession, people with a 680 FICO score were facing trouble with adjustable rate home loans, over-extended credit obligations, and even job losses. Many people with a good FICO score were obliged to put off payments on credit cards due to job losses. Many suffered through foreclosures on homes that had interest rates that adjusted up while the home’s value adjusted downward. As the economy improves and the job markets get better, we should see the “good” FICO score come down a bit from 740. Will we see 680 as the “good” score again? Maybe, but not for awhile.

What is your credit score? CreditKarma.com is a good site to get your FICO and Consumer Vantage scores for free. There are a lot of sales offers there, but the score info is worth it. Knowing your score and checking it at least a few times a year can help you manage your credit. If your score is low, you can look for ways to improve it such as paying down debt or settling collections. If your score is good, continue to utilize practices that maintain it like making all your payments on time and not acquiring unnecessary credit lines and credit inquiries that might negatively affect your score.

Often, a low score could be related to a delinquency, collection, or bad information. It’s a good idea for someone to view the details of the credit score to understand the steps they can take to help improve the score.

Do you know what is in your Credit Report? AnnualCreditReport.com was begun in 2002 when Congress passed the FACT Act. The Act says the FTC and the three credit bureaus shall provide U.S. consumers with a copy of their credit report from all three bureaus for no charge on an annual basis. I recommend everyone access this site every year. I hit it on or about my birthday to check my report and verify the info on there is accurate and it all belongs to me. It is a simple identity theft protection tool to which every American has access. Knowledge is power and understanding your credit report is one of the most powerful pieces of financial knowledge.

How much do I owe? This is a no brainer that people should always know. They should know what they owe in credit debt, meaning any loans and credit cards that are outstanding. They should also be aware of any Debt Collections they may have. Too many people have no idea what debts they owe. .

More importantly, I would ask the question:

How long will it take me to pay off my debt? This is the more relevant question. What resources do you have to pay your debt? Can you concentrate a greater amount of money on them from your budget to get them paid sooner? Paying down your debt improves your FICO score. Incurring high balances or maxing out cards diminishes your score. Paying down these balances props up your score and shows creditors that you are a “good risk.”

What rates are you paying on outstanding balances? Lower rates mean you can pay off your debt faster, and save money on interest payments. You should examine your loan and credit card interest rates regularly; like the same time you check your credit report. If the report is good and your score is fine, you may want to consider transferring your card balances to lower rate cards and cancelling your higher rate cards. Another option is to contact your card holder and request a lower interest rate. Closing old cards we have had for years is not always a good option as the positive history of the card usage helps our FICO score. If they will not lower your interest rate, as a consumer you have the option of moving your money should you choose. But keep in mind that some of the low rate offers may only be introductory. Know what the rate will be after that “intro-rate” expires.

How do inquiries affect my credit?  It is important to know that multiple inquiries from different creditors can be trouble for your score. Applying for multiple credit cards at once is not a good idea. Each inquiry will take a few points off your score. It’s not a lot, maybe 8-14 pts depending on your credit standing and they only last a year against your score. But, multiple inquiries from various creditors can generate negative effects your FICO score and then you have to wait for them to drop off for your score to improve. Multiple inquiries from auto and home lenders in a short amount of time can be combined into one inquiry. You were not shopping for five cars at five auto dealers! You were shopping for one car and one loan at multiple dealers. The same holds true for multiple real estate loan inquiries while loan shopping. Lesson; know what credit you want to apply for before applying.

How does cosigning for my kid’s loan affect my credit? When you cosign a loan it goes on your credit report as if you were the main responsible party. Do you know why? It is because you ARE THE MAIN RESPONSIBLE PARTY! You are the one with a credit score. You are the one with a history of repayment. The entire loan depends on your child or whomever you co-signed the loan with, making proper repayments. If they don’t, the financial institution will look to you to make the loan good. The balances incurred by both parties on the loan will have an effect on your overall balances owed to creditors as if it were your loan. If you cosign for a credit card and the balance is used to maximum limit, that high balance could and most likely will have a negative effect on your FICO score. If co-signing for a family member or friend, think twice. Parents, things get better when your children can apply for credit on their own without your help. 

Federally insured by NCUA. We do business in accordance with the Federal Fair Housing Law and Equal Credit Opportunity Act.
Copyright 2013 Meriwest Credit Union. All rights reserved.

Can 25 FICO Points Keep Me from a Good Interest Rate?

This really depends on how much credit you have to manage at once and what your current credit score is as it relates to the credit tiers. If you are near the edge of a tier, than yes, 25 points could affect the interest rate you may have to pay. If you have only one credit card, it would be difficult to maintain a high score and utilize more than 30% of the card’s available balance. The 30% rule is still valid, meaning that to maximize your score you should not utilize more than 30% of your available consumer lines such as credit cards. As your credit usage increases above 30% you will likely have a corresponding decline in your FICO score. That is not to say you cannot ever max out a card. They would not allow you such high available balances if you could not max them out. But, before anyone maxes out a card, they should have a plan on repayment. Consider your budget and manage your money so you can pay a larger amount than the minimum payment monthly. This will pay the card down faster and help build your score.

Quick Example: In Debt Forever

Credit Card Balance:      $2,500

Interest Rate:                 18%

Minimum Payment:        $  45

Years to Pay Off               10 (120 payments @ $45 each)

Total Payments:            $5,400

Total Interest Paid:         $2,900

Now you have actually paid a total of $5,400 on that original $2,500 balance, More than twice what you originally owed. In this example, a $100 monthly payment at this rate would pay off the balance in 31 months, 75% faster!

Your credit report shows your high balance usage on all of your cards. It also indicates how you have made payments. If there have been any late payments, delinquencies, etc. Lenders look at this data. It tells us if this person has the ability to pay off debt or live with it by paying their minimum payments.

Now, let’s say someone has a car loan, a home loan, and couple of credit cards. They have installment and revolving credit in their financial portfolio. This person can utilize a higher level of their credit cards and still maintain a high score due to the other accounts they have.

FICO looks at your total credit usage. As you gain experience and manage your credit where you have no late payments and have maintained credit cards and other credit given to you, and paid back balances, you will see your score get stronger and more resilient and less effected by the credit line usage factor.

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Credit Myth in California: If I get a divorce, I am not responsible for my spouse’s debts.

Credit FACT: California is a community property state. A spouse can be liable for debts entered into by the other spouse during the marriage, even if they were unaware of them. In these community property states, debts entered into during the marriage are considered community debts, and both spouses can be liable.

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Special Events

Family Financial Education: Identity Theft Workshop

This is a great workshop for the whole family. This one hour workshop is worth a lifetime of identity protection knowledge. You will learn how to protect your identity from thieves and hackers.

March 20^th at 6:30 PM

Meriwest Credit Union Main Office

5615 Chesbro Ave, San Jose CA 95123

To RSVP: Greg Meyer Gmeyer@meriwest.com or 408-365-6328

Credit Union Pre-Owned Car Sale

Take the Car of your Dreams and put it in your Garage!

All Day March 23^rd and 24^th   

Meriwest Credit Union Main Office

5615 Chesbro Ave, San Jose CA 95123

For more info: Link to Car Sale Page

Federally insured by NCUA. We do business in accordance with the Federal Fair Housing Law and Equal Credit Opportunity Act.
Copyright 2013 Meriwest Credit Union. All rights reserved.

Consolidating Debt with Personal Loans - Good idea?

The New Year is nearly here. A lot of us are thinking about our finances and how we can improve them in 2013. Personal loans play an important role for those who are trying to get out of debt quickly. Properly used, they can be an easy way to paying off high interest credit card debt. If they are used improperly, they are a fast ticket to a lower credit score.

Let’s keep in mind that bill consolidation, from the standpoint of a credit union, means eliminating debt, building credit scores, and creating a consumer solution that can be easily managed based on the member’s income. Depending upon the extent of the member’s debt, we will often ask that they close several of their outstanding credit cards. Why? It will do no good to consolidate their debt and have them run it back up. We will take a look at their credit and income to determine what credit can be retained by the member and what they would need to close in order to receive the loan or line of credit for the bill consolidation.

Often, CU’s will recommend a member gets credit counseling prior to their consolidation. Credit Counselors teach the member how to budget, to use their online banking to manage their finances, and help them understand the consequences of extensive debt and its effect on their credit scores. It can also be helpful if the credit union offers workshops on these subjects as Meriwest Credit Union does. For more info on personal lines of credit, click here.

Any bill consolidation should offer you a lower rate of interest than that which you are currently paying and a more affordable payment. Currently, for someone with a 740 FICO score, we can offer 15% on a personal bill consolidation loan or 10.50% on a personal line of credit. Please keep in mind the line of credit is adjustable and when rates go up, which they will, this rate could rise rather quickly.

One of the dangers of bill consolidation is irresponsible borrowers. A person can get a consolidation loan, consolidate their debts into a more reasonable and affordable alternative and then go out and acquire more debt. This completely defeats the purpose of bill consolidation and puts them on the fast track to a low credit score or worse.

We must also consider that closing out a credit card account can lower your credit score. Closing out cards that we have had for a long time will negatively effect our credit. When those credit lines are removed we lose the available line as part of our balance ratio calculation (for more info on this, see our blog “Your Fico Score, Mystery No More”) and we lose the history of managing that credit after a few months. Opening a new line can offset some of the FICO points lost to closing a line.

Don’t want to close the line of credit? You have some options. You can cut the card in half and simply not use it thus leaving the account open. If you are a disciplined person, you can lock your credit cards in a drawer and avoid using them; out of sight, out of mind.

Homeowners have another option available to them; the Home Equity Line of Credit or HELOC. The HELOC is line of credit based on your home’s equity. Typically, it has a lower rate than unsecured personal loans and may offer tax advantages for some homeowners. It is handy for home improvement, bill consolidation, and a myriad of other uses. As a matter of fact, Equity Lines of Credit are worthy of their own blog! We will have one for you on that next year.

Alternatives: There are offers from credit card vendors to transfer balances at a lower rate. They encourage borrowers to use a credit card check to pay off debt at other vendors and transfer that debt to their card. Consumers need to be mindful that the low interest rate offered on these is usually a teaser and may go up in time. Some cards may offer a lowered rate for the life of the transferred debt. These can be a pretty good deal provided the borrower is responsible and does not incur further debt during the pay off period. But don’t miss a payment! You could be subject to penalty interest and see your preferred low rate rise well above 18%.

Some things to consider before combining balances on another credit card:

-          Do you have adequate credit limit for the transfer?

-          Is the Introductory rate a temporary Teaser Rate or fixed for the term of payoff?

-          Is there a fee for the balance transfer? (this increases your cost of borrowing.)

Finally, before considering any consolidation, can you buckle down and get out of debt on your own without help? Can you rearrange your budget, be disciplined in your spending, and commit your spare dollars to paying off your debt? If one eats out for lunch everyday, it can cost over $35 a week. Bringing a lunch from home can save $100 a month. That money can go a long way toward paying off debt. On any credit card or loan, you can make larger payments and any amount you pay over your monthly interest gets credited against your principle, thus reducing the amount of interest you will pay the next month. Keep that cycle up and you will pay off your debts a lot faster.

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Reality Based Budgets for Teens and College Students – Jan. 16^th

Our next Financial Education Workshop will be Reality Based Budgets for Teens and College Students. It is a post college simulation of renting an apartment, buying a car, and developing a spending and savings plan. It is a fun and interactive session for the whole family and really opens the door to discussions about managing money. If this is something you or a member of your family needs, please feel free to join us. These workshops are open to the public.

Reality Based Budgets

6:30pm January 16^th at our Chesbro Main Office Location

5615 Chesbro Ave, San Jose CA 95123

Please RSVP with Gmeyer@meriwest.com.

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Hungry for more information on Money Management? Check out Len Penzo’s Financial Blog. Len provides excellent financial insights with a sense of humor.

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!