Monday, February 15, 2010

Subprime Cards: 640 Equals 79.9



I don't know about you guys, but I cannot wait to get my own credit card with an APR of 79.9 percent.

Thanks to the recently passed CARD Act of 2009 [PDF Summary], credit-card lenders are scrambling for new ways to gouge generate credit lines for FICO-impaired borrowers.

Yahoo: Card Provider Defends 79.9% APR

Aw, heck. What's to defend? If the default risk dictates a rate that high, then you as parasite lender ought to be free to offer your product to whatever victims customers find it suitable to their needs.

"We need to price our product based on the risk associated with this market and allow the customer to make the decision whether they want the product or not," according to a statement issued by Miles Beacom, CEO of Premier Bankcard, the South Dakota credit card marketer that mailed test offers in September and October featuring 79.9 percent and 59.9 percent annual percentage rates (APRs) on cards with $300 credit limits. Premier markets credit cards issued by First Premier Bank.


For those trainwreck-gazers in the crowd, here's a PDF of the Fees & Limitations for First Premier's current (2010-02-13) online card offer. I mean, how sweet are these terms?

Initial Credit Limit: $300
APR for Purchases & Cash Advances: 23.9%
One-Time Processing Fee: $95
Annual Fee: $75
Add'l Card Fee: $29 per Card
Late Fee: $29 or $35
Credit Limit Increase Fee: 50% of Increase Granted
Internet Access Fee: $3.95 (One-Time Fee)
Autodraft Fee: $11 or $7

And there's a market for this.

[Says Miles Beacom, CEO of Premier Bankcard:] "From our initial research we know that 83 percent of the people who accepted the offer are fully aware of the interest rate they are receiving and the purpose of the credit card to help re-establish credit. If anyone accepts the offer and didn't fully understand it or no longer wants it they can take advantage of our full refund of fees policy."


That's mighty compassionate. Mother Teresa had nothing on these guys.

"There's 70 million people out there who have been identified with problem credit," says Beacom, adding those are people with FICO scores lower than 640. "These are people who have had problems with their credit in the past."

He likened people with bad credit to bad automobile drivers who must pay higher auto insurance premiums if they want to continue driving. "These are people who have had those same accidents or speeding tickets with their credit."

He adds: "It's going to be very difficult for these individuals to obtain credit after February."


I'm not sure that's a bad thing, given that "easy" apparently means bending over for a 79.9 percent APR.

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— Posted by Michael @ 8:33 AM



Monday, February 01, 2010

TrueCredit Now Using VantageScore




What's your credit score?
Regular visitors to IYM and Money Musings probably know that I'm a big fan of TransUnion's TrueCredit monitoring service, having been a subscriber since March of 2007. (Check out my TrueCredit review for details.)

I hadn't logged into TrueCredit since November, and when I went in to update my info this weekend, I found that they're no longer reporting so-called "FAKO" (like FICO, but different) scores:

VantageScore Intro


Hmmm. Now, I first heard of (and mentioned) VantageScores back in 2006. So, for TrueCredit, this change has been a while coming. (Though according to Sun's Financial Diary, TransUnion was reporting its single-bureau VantageScores back in 2008.)


VantageScore


Yay! More obfuscation on the part of the credit bureaus! How grand!

VantageScore Brush-Up


Because our credit-consuming public was so obviously in need of yet ANOTHER credit-scoring scale (yes, Virginia, that's sarcasm), the three bureaus stepped up to the plate with VantageScore. Supposedly, its calculations are standardized across the three bureaus ... though if you check all your VantageScores, you still won't see the same score three times. This is because banks and other financial entities all have their own methods of reporting info to the bureaus. (For example, the credit union which held our 990-day Honda car loan reports only to Equifax, and not the other two bureaus.)

As I wrote back in 2006, VantageScores are a two-part entity. The first part — the numerical one — ranges from 501 to 990. The higher the number, the more favorably lenders should view you.

The second part of VantageScore takes you on a trip back to elementary school, where you're assigned a credit-risk letter grade from A to D, and then F. The ranges look something like this:


Letter RatingScore RangeCategory
A901-990Super Prime
B801-900Prime Plus
C701-800Prime
D601-700Non-Prime
F501-600High Risk


Great, huh? So do you feel like a kid again — specifically, one who's about to get beat up at recess?

No? Well, maybe you should.

Why VantageScore?


Why did we need another credit-scoring model? Well, lenders and bureau execs have told us that more "industry standardization" was needed, and that "short credit-history" (aka "thin file") borrowers were unfairly penalized in the FICO model.

As the VantageScore Solutions site explains:

VantageScore is a new generic credit scoring model that opens doors to the opportunities that having credit creates. Created by America's three major credit reporting companies, VantageScore's highly predictive model uses an innovative, patent-pending scoring methodology to provide lenders with a consistent interpretation of consumer credit files across all three major credit reporting companies and the ability to score a broad population. This means lenders can help more creditworthy borrowers, and millions of Americans who use credit infrequently can be accurately scored.


Oh, how I love it when credit quants "open doors to opportunities" with their new and "highly predictive" models. Such financial innovation has worked out so well for us the last several years, hasn't it? I mean, at this point, when I hear the words "financial" and "innovation" used together, I tend to run the other way.

And this:

FOR THE LENDER

VantageScore enables mainstream lenders to score more consumers more accurately. The VantageScore model was built utilizing anonymous consumer credit data reflective of current economic conditions. The design methodology and management framework ensures that VantageScore will continue to deliver a highly predictive capability.

FOR THE CONSUMER

VantageScore facilitates greater access to credit for the underserved or those with thin credit files who deserve access to credit at fair terms, conditions and pricing. VantageScore also provides score accuracy and consistency for the "full file" consumer.


Personally, I call BS.

The devout pessimist in me screams that VantageScore likely has much more to do with (1) muscling in on Fair-Isaac's FICO-based scoring monopoly, and (2) opening up new revenue streams for the bureaus and the VantageScore creators. How do I reach to this conclusion?

Although FICO scores and VantageScores are different, consumers should probably pull both [emphasis added] to see where they're at and realize that different lenders use different credit scores. [source]


Lookee here! More credit-score-reporting revenue and fees for the industry! Yippee!

Who's Using VantageScore?


We don't know. A quick scouring of Google suggests that "some" auto lenders use it:

Consumers repeatedly hear that they should check their credit score before they go to the dealer and apply for an auto loan. Should they check to see what their VantageScore is before they head to the dealer?

“This depends on what bank the dealer uses and if that bank uses VantageScore,” [Barrett Burns, president and CEO of VantageScore Solutions, LLC] says. “Seven of the top 50 auto lenders use VantageScore.”


Seven of the top 50 auto lenders, huh? Is that supposed to be a ringing endorsement?

And in an August 2009 PDF from OFHEO.gov, Mr. Burns states that "three of the top ten mortgage originators use VantageScore and two of the three ratings agencies incorporate VantageScore into their analytical models."

Three of the top 10 mortgage originators? Uhhh ... that's a bit better ... I guess.

(The PDF itself is a pretty interesting read IF you're in the mood to have VantageScore hard-sold to you, AND you happen to run one of our two main government-sponsored housing-related entities.)

And note, kids, that these shaky usage numbers are AFTER the VantageScore folks have had four-plus years to sell the benefits of their system to every lending institution on the planet.

Summary


So how do I feel about finding VantageScores, rather than FICO-like scores, appearing on my credit-monitoring screens?

How 'bout ... ambivalent.

I don't consider my $30 monthly TrueCredit fees as payment for constant viewing of my and my wife's credit scores. With no debt other that our mortgage, color me "not too worried" about how VantageScore LLC tallies me out on a financial-responsibility index. (One of the VantageScore explanations for why I currently have B-rated standing states, "Your average credit amount on open real estate accounts is too low." What exactly does that mean? Am I supposed to take these guys seriously?)

Rather, I'm primarily paying TrueCredit/TransUnion to send me alert emails when things change on any of our reports. New inquiries, new accounts — those are the things I want to know about as they occur. Beyond that, the credit scoring is just a value-added benefit.

Though now that VantageScores are displayed, it may be less "value" added than before.

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— Posted by Michael @ 8:10 AM



Friday, January 16, 2009

FICO 720: Top Shelf No More?



I'm currently reading Suze Orman's latest scribble, Suze Orman's 2009 Action Plan: Keeping Your Money Safe & Sound. Here's a bit from page 37 which caught my attention:

A year ago, I would have told you that a score of 720 or better was all you needed to get the best loan offers. But the fallout from the credit crisis has meant that the top tier has actually been pushed higher; some mortgage lenders reserve their best rates for individuals with FICO scores above 760. Unless you plan on buying a house in 2009, I wouldn’t worry as long as your score is at least 720. That’s still plenty good enough to keep most creditors happy.


I've been harboring the idea that "720 and above" marked the top level of FICO scores also, as far as lenders were concerned. But it doesn't surprise me that this High-Water Mark has now moved to FICO 760, if what Suze asserts is correct. (Although her comments seem to suggest this is primarily for mortgages.)

Full-blown economic hurricanes have a way of making banks reassess their lending practices. (Ain't that an understatement?)

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— Posted by Michael @ 8:35 AM



Friday, January 02, 2009

Credit Crunch Comes Knocking



If you're a megabank looking to reduce your exposure to a shrinking economy, whaddya do?

For starters, you slice your customers' credit-card limits.

Simple limit reductions are one way to accomplish this. Another way — and one which has now affected my household — is for banks to close old and unused credit-card accounts.

A few months ago, Chase sent me a letter regarding one of our card accounts. They'd noticed we were using one Chase card rather than the other, and so they had moved roughly half of the unused card's total spending limit over to the "more used" card. (It's "more used" because it offers cash back, kids. We have zero revolving debt.)

Included in that letter was an admonition from Chase: If we wished to keep the unused account open, we needed to use the card at least once by November 30, 2008.

Since that card's limit (after Chase's limit-swap action) was now only $4k, and therefore a small chunk of our overall credit limit, I elected to let the card lapse.

But I Overlooked Something...

We know that where credit scores are concerned, a user's debt-usage ratio is very important. It's computed as follows:

Debt-Usage Ratio


That ratio comprises roughly 30 percent of your FICO credit score. (Only your payment history is more important.)

When deciding whether or not to keep this particular card open, I figured that its $4k limit, since it comprised such a small amount of our overall credit limit, was too small to worry about. Keeping it open would mean little: Our revolving-debt usage ratio would be .046 rather than .049. Big whoop, right?

But I forgot to consider the card's age.

According to my TrueCredit (review) screen, we had opened this particular Chase account in 1999. It wasn't our oldest revolving account, but it was close!

Our next-oldest open account showed up in 2002. So if this Chase account had been our oldest, closing it would (in the future) shave three years off our credit-history age. And where FICO is concerned, older is better. (I've read that accounts "age" on your credit report for up to 10 years after they're closed. At that point, they supposedly drop off the report.)

Moral of the Story: If you're considering whether or not to keep a credit card open, be sure to consider the account's age as well as its available limit Both are factors in your credit score!

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— Posted by Michael @ 9:42 AM



Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


100%

Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]

100%

Savings Goal: $15,000
Currently: ~$15,115
[About Our Liquid Savings Goal]