Your credit history and tightening lending standards
So, what happened? The subprime lending market died a sudden death in 2007 due to high default rates leading to foreclosures and financial chaos. Banks responded by tightening lending standards on most consumer loans.
The impact of those new measures — some taken by the industry and some put in place by government regulations — is that a high credit score is very important these days. Let’s take a look at the mortgage market as an example of how things changed.
During the subprime mortgage boom, a borrower with a credit score of roughly 640 and below could finance a home through that market. According to the December 2012 issue of Money magazine, the average credit scores for people denied conventional mortgages was 729 during the months leading up to December and the average credit score for people who were able to take out conventional mortgages was 762.
Bear in mind that we’re talking about conventional mortgages here and it is important to make that distinction. There are certainly mortgage products available for those who don’t have outstanding credit scores, but those loans typically come with higher interest rates. If you want to take advantage of the low interest rates that have persisted over the past year, it’s a good idea to improve a credit score as much as possible. The same is true of business loans, car loans and other times when a buyer is asking a lender to extend credit — the best terms go to consumers with the strongest credit ratings.
Daniel Friedman of Eureka Springs-based Clear Credit LLC said there is some good news for consumers — their “true” credit scores may be better than reported. Friedman said he started his office for the purpose of helping lenders look at the credit histories of potential borrowers and helping clean up inaccuracies on credit reports. At the end of January, Friedman started offering his offices services to the public and now splits his time between his location in Eureka Springs and Bentonville — a natural market for a company focused on northwest Arkansas.
Friedman said that it is not uncommon for inaccurate and damaging information to be listed on credit reports. Credit bureaus operate under the federal Fair Credit Reporting Act (FCRA) and are required to list only information that is accurate and verifiable. Under the terms of that act, a consumer has the right to dispute any information on a credit report that is not accurate — if the consumer prevails, the inaccurate information must be removed and credit scores often improve as a result.
What could be inaccurate on a credit report? Collection accounts that were paid in full might not reveal that debts were handled by the debtor, dismissed bankruptcy actions might not be reported correctly, a debtor who paid on an installment loan on time might appear to have an history of late payments, etc.
“If information can’t be verified, it must be deleted,” Friedman said.
Here’s something else to keep in mind — creditors must follow the guidelines set forth in the federal Fair Dept Collections Practices Act (FDCPA). If, for example, an account is assigned to a collection agency, there are certain steps that agency must follow and it is not uncommon behavior to see agencies improperly pursue debts.
For example, a collection agency must have a copy of the original contract giving rise to the debt and must be able to produce that document when a debtor requests to do so. If that contract is not available, then the collection agency cannot properly pursue that debt and any negative history generated on the basis of that collection action must be removed from a credit report when a consumer files a dispute.
Friedman said his job is to both help clean up credit histories and to educate clients about how to keep their credit under control. He he considers it a successful case when he’s cleaned up a bad credit history, helped a client establish a good credit history and has taught that client how to maintain a good rating.
“As long as you have good credit, you can get what you need,” he said, adding that it is not accurate to say that only wealthy people need good credit ratings. People with high credit scores — regardless of income — will be able to have access to capital in emergencies or when getting loans.
He added that credit scores have an impact on more than loans — insurance policies, for example, use credit scores as one of the criteria when determining how much their customers will pay in premiums.
Want to see what’s lurking in your credit history. Under federal law, consumers can pull their credit reports for free from the three major reporting bureaus — Equifax, Experian and TransUnion — at AnnualCreditReport.com. For more information about Clear Credit, click here to visit the company online.
Benton resident. Rogue journalist. Recovering attorney. Email = Ethan@FirstArkansasNews.net.