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CREDIT
CARD NEWS YOU CAN USE™
Updated daily by Frankford Financial ©2008 All Rights Retained. Unauthorized
duplication strictly prohibited.
Credit Scoring: qualifying for low interest credit cards
Ever wonder how a creditor decides whether to grant you credit? For years, creditors
have been using credit scoring systems to determine if you'd be a good risk for
credit cards and auto loans. More recently, credit scoring has been used to help
creditors evaluate your ability to repay home mortgage loans. Here's how credit
scoring works in helping decide who gets credit-and why.
What is credit scoring?
Credit scoring is a system creditors use to help determine whether to give you
credit. Information about you and your credit experiences, such as your bill-paying
history, the number and type of accounts you have, late payments, collection
actions, outstanding debt, and the age of your accounts, is collected from your
credit application and your credit report. Using a statistical program, creditors
compare this information to the credit performance of consumers with similar
profiles. A credit scoring system awards points for each factor that helps predict
who is most likely to repay a debt. A total number of points-a credit score-helps
predict how creditworthy you are, that is, how likely it is that you will repay
a loan and make the payments when due.
Because your credit report is an important part of many credit scoring systems, it is very important to make sure it's accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:
• Equifax: (800) 685-1111
• Experian:
(888) (397-3742)
• Trans Union: (800) 916-8800
Why is credit scoring used? Credit scoring is based on real data and statistics,
so it usually is more reliable than subjective or judgmental methods. It treats
all applicants objectively. Judgmental methods typically rely on criteria that
are not systematically tested and can vary when applied by different individuals.
How is a credit scoring model developed? To develop a model, a creditor selects
a random sample of its customers, or a sample of similar customers if their sample
is not large enough, and analyzes it statistically to identify characteristics
that relate to creditworthiness. Then, each of these factors is assigned a weight
based on how strong a predictor it is of who would be a good credit risk. Each
creditor may use its own credit scoring model, different scoring models for different
types of credit, or a generic model developed by a credit scoring company.
Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like-race, sex, marital status, national origin, or religion-as factors. However, creditors are allowed to use age in properly designed scoring systems. But any scoring system that includes age must give equal treatment to elderly applicants.
What can I do to improve my score? Credit scoring models are complex and often
vary among creditors and for different types of credit. If one factor changes,
your score may change-but improvement generally depends on how that factor relates
to other factors considered by the model. Only the creditor can explain what
might improve your score under the particular model used to evaluate your credit
application.
Nevertheless, scoring models generally evaluate the following types of information in your credit report:
• Have you paid your bills on time? Payment history typically is a significant
factor. It is likely that your score will be affected negatively if you have
paid bills late, had an account referred to collections, or declared bankruptcy,
if that history is reflected on your credit report.
• What is your outstanding debt? Many scoring models evaluate the amount
of debt you have compared to your credit limits. If the amount you owe is close
to your credit limit, that is likely to have a negative effect on your score.
• How long is your credit history? Generally, models consider the length
of your credit track record. An insufficient credit history may have an effect
on your score, but that can be offset by other factors, such as timely payments
and low balances.
• Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "prescreened" credit
offers are not counted.
• How many and what types of credit accounts do you have? Although it is
generally good to have established credit accounts, too many credit card accounts
may have a negative effect on your score. In addition, many models consider the
type of credit accounts you have. For example, under some scoring models, loans
from finance companies may negatively affect your credit score.
Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.
To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.
How reliable is the credit scoring system? Credit scoring systems enable creditors
to evaluate millions of applicants consistently and impartially on many different
characteristics. But to be statistically valid, credit scoring systems must be
based on a big enough sample. Remember that these systems generally vary from
creditor to creditor.
Although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately, and more impartially than individuals when it is properly designed. And many creditors design their systems so that in marginal cases, applicants whose scores are not high enough to pass easily or are low enough to fail absolutely are referred to a credit manager who decides whether the company or lender will extend credit. This may allow for discussion and negotiation between the credit manager and the consumer.
What happens if you are denied credit or don't get the terms you want? If you
are denied credit, the Equal Credit Opportunity Act requires that the creditor
give you a notice that tells you the specific reasons your application was rejected
or the fact that you have the right to learn the reasons if you ask within 60
days. Indefinite and vague reasons for denial are illegal, so ask the creditor
to be specific. Acceptable reasons include: "Your income was low" or "You haven't
been employed long enough." Unacceptable reasons include: "You didn't meet our
minimum standards" or "You didn't receive enough points on our credit scoring
system."
If a creditor says you were denied credit because you are too near your credit limits on your charge cards or you have too many credit card accounts, you may want to reapply after paying down your balances or closing some accounts. Credit scoring systems consider updated information and change over time.
Sometimes you can be denied credit because of information from a credit report. If so, the Fair Credit Reporting Act requires the creditor to give you the name, address and phone number of the credit reporting agency that supplied the information. You should contact that agency to find out what your report said. This information is free if you request it within 60 days of being turned down for credit. The credit reporting agency can tell you what's in your report, but only the creditor can tell you why your application was denied.
If you've been denied credit, or didn't get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application. If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information in your credit report.
Maintaining Your Credit Rating
A creditor may not threaten your credit rating while you're resolving a billing dispute.
Once you have written about a possible error, a creditor must not release information to other creditors or credit bureaus that would hurt your credit reputation. And, until your complaint is answered, the creditor also cannot take any action to collect the disputed amount.
After the creditor has explained the bill, if you do not pay in the time allowed, you may be reported as delinquent on the amount in dispute, and the creditor may take action to collect. Even so, you can still disagree in writing. Then the creditor must report that you have challenged your bill and give you the name and address of each person who has received information about your account. When the matter is settled, the creditor must report the outcome to each person who has received that information. Remember that you may tell your own side in your credit record with a 100-word explanation.
Defective Goods or Services: Your new sofa arrives with only three legs. You
try to return it; no luck. You ask the merchant to repair or replace it; still
no luck. The Fair Credit Billing Act allows you to withhold payment on any damaged
or poor-quality goods or services purchased with a credit card, as long as you
have made a real attempt to solve the problem with the merchant.
This right may be limited if the card was a bank or travel and entertainment card or any card not issued by the store where you made your purchase. In such cases, the sale must have been for more than $50 and must have taken place in your home state or within 100 miles of your home address.
Prompt Credit for Payments and Refunds for Credit Balances: Some creditors will
not charge a finance charge if you pay your account within a certain period
of time, often called a grace period. In this case, it is especially important
that you get your bills, and get credit for paying them, promptly. Check your
statements to ensure that your creditor follows these rules:
Prompt Billing. Look at the date on the postmark. If your account is one on which no finance or other charge is added before a certain due date, then creditors must mail their statements at least 14 days before payment is due.
Prompt Crediting. Look at the payment date entered on the statement. Creditors must credit payments on the day they arrive, as long as you pay according to payment instructions, for example, sending your payment to the address listed on the bill.
Credit Balances. If a credit balance results on your account (for example, because you pay more than the amount you owe or you return a purchase and the purchase price is credited to your account), the creditor must make a refund to you. The refund must be made within seven business days after your written request or automatically if the credit balance still in exists after six months.
Canceling a Mortgage: Truth in Lending gives you a chance to change your mind
on one important kind of transaction-when you use your home as security for a
credit transaction. For example, when you are financing a major repair or remodeling
and use your home as security, you have three business days, usually after you
sign a contract, to think about the transaction and to cancel it if you wish.
The creditor must give you written notice of your right to cancel, and if you
decide to cancel, you must notify the creditor in writing within the three-day
period. The creditor must then return all fees paid and cancel the security interest
in your home. Until the three days are up, a contractor may not start work on
your home, and a lender may not pay you or the contractor. If you must have the
credit immediately to meet a financial emergency, you may give up your right
to cancel by providing a written explanation of the circumstances.
The right to cancel (or right of rescission) was provided to protect you from decisions that are hasty or made under pressure, possibly putting your home at risk if you are unable to repay the loan. The law does not apply to a mortgage to finance the purchase of your home; for that, you commit yourself as soon as you sign the mortgage contract. If you use your home to secure an open-end credit line-a home equity line, for instance-you have the right to cancel when you open the account or when your security interest or credit limit is increased. (In the case of an increase, only the increase would be cancelled.)
Lost or Stolen Credit Cards: If your wallet is stolen, your greatest cost may
be inconvenience because your liability on lost or stolen cards is limited under
Truth in Lending. You do not have to pay for any unauthorized charges made after
you notify the card company of loss or theft of your card. So keep a list of
your credit card numbers and notify card issuers immediately if your card is
lost or stolen. The most you will have to pay for unauthorized charges is $50
on each card even if someone runs up several hundred dollars worth of charges
before you report a card missing.
Unsolicited Cards: It is illegal for card issuers to send you a credit card
unless you ask for or agree to receive one. However, a card issuer may send,
without your request, a new card to replace an expiring one.
Electronic Fund transfers Example:
On his way home last Friday night, John Jones realized that he had no cash for the weekend. The bank was closed, but John had his bank debit card and the code to use it. He inserted the card into an automated teller machine outside the front door of the bank; then, using a number keypad, he entered his code and pressed the buttons for a withdrawal of $50. John's cash was dispensed automatically from the machine, and his bank account was electronically debited for the $50 cash withdrawal.
John's debit card is just one way to use electronic fund transfer (EFT) systems that allow payment between parties by substituting an electronic signal for cash or checks.
Are we heading for a checkless society? Probably not. But making a dent in the large number of paper checks in the country's banking system is clearly one advantage to electronic banking.
Today, the cost of moving checks through the banking system is estimated to be about $3.00 per check, including the costs of paper, printing, and mailing. Moreover, checks except your own check presented at your own bank take time to cash: time for delivery, endorsement, presentation to another person's bank, and winding through various stations in the check-clearing system. Technology now can lower the costs of the payment mechanism (to about $1.50 per transaction) and make it more efficient and convenient by reducing paperwork.
EFT in Operation: The national payment mechanism moves money between accounts
in a fast, paperless way. These are some examples of EFT systems in operation:
Automated Teller Machines (ATMs). Consumers can do their banking without the
assistance of a teller, as John Jones did to get cash, or to make deposits,
pay bills, or transfer funds from one account to another electronically. These
machines are used with a debit or EFT card and a code, which is often called
a personal identification number or "PIN."
Point-of-Sale (POS) Transactions. Some debit or EFT cards (sometimes referred to as check cards) can be used when shopping to allow the transfer of funds from the consumer's account to the merchant's. To pay for a purchase, the consumer presents an EFT card instead of a check or cash. Money is taken out of the consumer's account and put into the merchant's account electronically.
Preauthorized Transfers. This is a method of automatically depositing to or withdrawing funds from an individual's account, when the account holder authorizes the bank or a third party (such as an employer) to do so. For example, consumers can authorize direct electronic deposit of wages, social security, or dividend payments to their accounts. Or they can authorize financial institutions to make regular, ongoing payments of insurance, mortgage, utility, or other bills.
Telephone Transfers. Consumers can transfer funds from one account to another- from savings to checking, for example-or can order payment of specific bills by phone.
What Law Applies? The Electronic Fund Transfer Act answers several basic questions
consumers have about using EFT services. A check contains information that authorizes
a bank to withdraw a certain amount of money from one person's account and pay
that amount to another person. Most consumer questions center on the fact that
EFT systems transmit the information without the paper:
• What record will I have of my transactions?
• How do I correct errors?
• What if someone steals money from my account?
• What about mail solicitations for debit cards?
• Do I have to use EFT services?
Here are the answers the EFT Act gives to consumer questions about these systems.
What Record Will I Have of My Transactions?
A cancelled check is permanent proof that a payment has been made. What proof of payment is available with EFT services?
If you use an ATM to withdraw money or make deposits or a POS terminal to pay for a purchase, you can get a written receipt, much like a sales receipt you get with a cash purchase, showing the amount of the transfer, the date it was made, and other information. This receipt is your record of transfers initiated at an electronic terminal.
Your periodic bank statement must also show electronic transfers to and from your account, including those made with debit cards, by a preauthorized arrangement, or under a telephone transfer plan. The statement will also name the party to whom payment has been made and show any fees for EFT services (or the total amount charged for account maintenance) and your opening and closing balances.
How Do I Correct Errors?
The way to report errors is somewhat different with EFT services than it is with credit cards (see the section on correcting credit billing errors). But as with credit cards, financial institutions must investigate and promptly correct any EFT errors that you report.
If you believe there has been an error in an electronic fund transfer relating to your account:
1. Write or call your financial institution immediately if possible, but no later than 60 days from the date the first statement that you think shows an error was mailed to you. Give your name and account number and explain why you believe there is an error, what kind of error, and the dollar amount and date in question. If you call, you may be asked to send this information in writing within 10 business days.
2. The financial institution must promptly investigate an error and resolve it within 45 days. For errors involving new accounts (opened in the last 30 days), POS transactions, and foreign transactions, the institution may take up to 90 days to investigate the error. However, if the financial institution takes longer than 10 business days to complete its investigation, generally it must put back into your account the amount in question while it finishes the investigation. For new accounts, the financial institution may take up to 20 business days to credit your account for the amount you think is in error.
3. The financial institution must notify you of the results of its investigation. If there was an error, the institution must correct it promptly, for example, by making a recredit final. If it finds no error, the financial institution must explain in writing why it believes no error occurred and let you know that it has deducted any amount recredited during the investigation. You may ask for copies of documents relied on in the investigation.
What about Loss or Theft?
It's important to be aware of the potential risk in using an EFT card, which differs from the risk on a credit card.
On lost or stolen credit cards, your loss is limited to $50 per card (see Lost or Stolen Credit Cards). On an EFT card, your liability for an unauthorized withdrawal can vary:
• Your loss is limited to $50 if you notify the financial institution within
two business days after learning of loss or theft of your card or code.
• But you could lose as much as $500 if you do not tell the card issuer
within two business days after learning of loss or theft.
• If you do not report an unauthorized transfer that appears on your statement
within 60 days after the statement is mailed to you, you risk unlimited loss
on transfers made after the 60-day period. That means you could lose all the
money in your account plus your maximum overdraft line of credit, if any.
Example:
On Monday, John's debit card and PIN were stolen. On Tuesday, the thief withdrew $250, all the money John had in his checking account. Five days later, the thief withdrew another $500, triggering John's overdraft line of credit. John did not realize his card was stolen until he received his bank statement, showing withdrawals of $750 he did not make. He called the bank right away. John's liability is $50.
Now suppose that when John got his bank statement he didn't look at it and didn't call the bank. Seventy days after the statement was mailed to John, the thief withdrew another $1,000, reaching the limit on John's line of credit. In this case, John would be liable for $1,050 ($50 for transfers before the end of the 60 days; $1,000 for transfers made more than 60 days after the statement was mailed).
What about Mail Solicitations for Debit Cards? A financial institution may send
you an EFT card that is VALID FOR USE only if you ask for one, or to replace
or renew an expiring card. The financial institution must also give you the following
information about your rights and responsibilities:
• A notice of your liability in case the card is lost or stolen
• A telephone number for reporting loss or theft of the card or an unauthorized
transfer
• A description of its error resolution procedures
• The kinds of electronic fund transfers you may make and any limits on
the frequency or dollar amounts of such transfers
• Any charge by the institution for using EFT services
• Your right to receive records of electronic fund transfers
• How to stop payment of a pre-authorized transfer
• The financial institution's liability to you for any failure to make or
to stop transfers and
• The conditions under which a financial institution will give information
to third parties about your account.
Generally, you must also get advance notice of any change in the account that would increase your costs or liability, or would limit transfers. A financial institution may send you a card that you did not request only if the card is NOT VALID FOR USE. An unsolicited card can be validated only at your request and only after the institution makes sure that you are the person whose name is on the card. It must also be sent with instructions on how to dispose of an unwanted card.
Do I Have to Use EFT? The EFT Act forbids a creditor from requiring you to repay
a loan or other credit by EFT, except in the case of overdraft checking plans.
With some exceptions, your employer or a government agency can require you to
receive your salary or a government benefit by electronic transfer. However,
you have the right to choose the financial institution that will receive your
funds.
Special Questions about Preauthorized Plans:
Q. How will I know that a preauthorized deposit has been made?
A. There are various ways in which you may be notified. Notice may be given by
your employer (or whoever is sending the funds) that the deposit has been sent
to your financial institution. Otherwise, a financial institution may provide
notice when it has received the credit or will send you a notice only when it
has not received the funds. Financial institutions also have the option of giving
you a telephone number you can call to check on a preauthorized deposit.
Q. How do I stop a preauthorized payment?
A. You may stop any preauthorized payment by calling or writing the financial
institution, but your order must be received at least three business days before
the payment date. Written confirmation of a telephone notice to stop payment
may be required. You should also contact the merchant or organization you authorized
to debit your account. Q. If the payments I preauthorize vary in amount from
month to month, how will I know how much will be transferred out of my account?
A. You have the right to be notified of all varying payments at least 10 days
in advance. Or you may choose to specify a range of amounts and to be told only
when a transfer falls outside that range. You may also choose to be told only
when a transfer differs by a certain amount from the previous payment to the
same company.
Q. Do the EFT Act protections apply to all preauthorized plans?
A. No. They do not apply to automatic transfers from your account to the institution
that holds your account or vice versa. For example, they do not apply to automatic
payments made on a mortgage held by the financial institution where you have
your EFT account. The EFT Act also does not apply to automatic transfers among
your accounts at one financial institution.
Filing a Complaint: First try to resolve your complaint directly with the creditor
or bank involved. If you are still unable to resolve the problem, you may file
a written complaint with federal agencies responsible for enforcing consumer
credit protection laws.
Filing a Complaint with Federal Enforcement Agencies: If you have a complaint
about a bank or other financial institution, the Federal Reserve System may
be able to help you. The Federal Reserve System investigates consumer complaints
received against state-chartered banks that are members of the System. Complaints
about these types of banks will be investigated by one of the 12 Federal Reserve
Banks around the country. The Federal Reserve will refer complaints about other
institutions to the appropriate federal regulatory agency and let you know where
your complaint has been referred. Or you may write directly to the appropriate
federal agency by referring to the listing at the end of this publication. Many
of these agencies do not handle individual complaints; however, they will use
information about your credit experiences to help enforce the credit laws.
When writing to the Federal Reserve, you should submit your complaint-in writing whenever possible-to the Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, Washington, DC 20551. Be sure to provide the complete name and address of the bank, a brief description of your complaint, and any documentation that may help us investigate your complaint. Please do not send original documents, only copies; remember to sign and date your letter. The Federal Reserve will acknowledge your complaint within 15 business days, letting you know whether a Federal Reserve Bank will investigate your complaint or whether your complaint will be forwarded to another federal agency for attention.
For complaints investigated by the Federal Reserve (those involving state-chartered member banks), the Reserve Bank will analyze the bank's response to your complaint to ensure that your concerns have been addressed and will send you a letter about the findings. If the investigation reveals that a Federal Reserve regulation has been violated, the Reserve Bank will inform you of the violation and the corrective action the bank has been directed to take.
Although the Federal Reserve investigates all complaints about the banks it regulates, it does not have the authority to resolve all types of problems, such as contractual or factual disputes or disagreements about bank policies or procedures. In many instances, however, if you file a complaint, a bank may voluntarily work with you to resolve your situation. If the matter is not resolved, we will advise you whether you should consider legal counsel to resolve your complaint.
Penalties under the Laws: If you decide to bring a lawsuit against a creditor,
here are the penalties a creditor must pay if you win.
Truth in Lending and Consumer Leasing Acts. If any creditor fails to disclose
information required under these acts, or gives inaccurate information, or does
not comply with the rules about credit cards or the right to cancel certain
home-secured loans, you as an individual may sue for actual damages and any
money loss you suffer. In addition, you can sue for twice the finance charge
in the case of certain credit disclosures, or if a lease is concerned, 25 percent
of total monthly payments. In either case, the least the court may award you
if you win is $100, and the most is $1,000. In any lawsuit that you win, you
are entitled to reimbursement for court costs and attorney's fees. Class action
suits are also permitted. A class action suit is one filed on behalf of a group
of people with similar claims.
Equal Credit Opportunity Act. If you think you can prove that a creditor has discriminated against you for any reason prohibited by this act, you as an individual may sue for actual damages plus punitive damages-that is, damages for the fact that the law has been violated-of up to $10,000. In a successful lawsuit, the court will award you court costs and a reasonable amount for attorney's fees. Class action suits are also permitted.
Fair Credit Billing Act. A creditor who breaks the rules for the correction of billing errors automatically loses the amount owed on the item in question and any finance charges on it, up to a combined total of $50 even if the bill was correct. You as an individual may also sue for actual damages plus twice the amount of any finance charges, but in any case not less than $100 nor more than $1,000. You are also entitled to court costs and attorney's fees in a successful lawsuit. Class action suits are also permitted.
Fair Credit Reporting Act. You may sue any credit-reporting agency or creditor for breaking the rules about who may see your credit records or for not correcting errors in your file. Again, you are entitled to actual damages, plus punitive damages that the court may allow if the violation is proved to have been intentional. In any successful lawsuit, you will also be awarded court costs and attorney's fees. A person who obtains a credit report without proper authorization or an employee of a credit-reporting agency who gives a credit report to unauthorized persons may be fined up to $5,000 or imprisoned for one year or both.
Electronic Fund Transfer Act. If a financial institution does not follow the provisions of the EFT Act, you may sue for actual damages (or in certain cases when the institution fails to correct an error or recredit an account, for three times actual damages) plus punitive damages of not less than $100 nor more than $1,000. You are also entitled to court costs and attorney's fees in a successful lawsuit. Class action suits are also permitted.
If an institution fails to make an electronic fund transfer or to stop payment of a preauthorized transfer when properly instructed by you to do so, you may sue for all damages that result from failure.
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