Credit

The quest for a perfect credit score

Interesting article here from CNN Money. I would have to question if their quest for the perfect credit scores costs them more than it’s worth. It seems these people will do anything to raise their score, including taking out loans when they don’t have a need for it. I think you must way the benefit of a higher score against the cost of having it, if you’re spending more than the benefit received from a higher score, you need to stop and take a break.

A major league pitcher dreams of throwing a perfect game. High schoolers eyeing the Ivy League study furiously in hopes of earning 2400 on the SAT. Meanwhile, Chris Peplinski is pursuing his own brand of flawlessness: an 850 credit score.

The 37-year-old stay-at-home dad from Rogers, Ark., has already nabbed 813 on the FICO scale, the credit scoring system most lenders use in sizing up potential borrowers.

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That ranks him above more than 82% of Americans and comes with a big payoff: It entitles him to ultralow rates on loans, saving him tens of thousands of bucks over a lifetime.

More from CNNMoney.com:

• What’s the Perfect Credit Score?

• 6 Steps to Improve Your Credit Score

• 800 Club: Couples With Perfect Credit

Nevertheless, Peplinski won’t be satisfied until he hits the maximum: 850. Why? “Your credit score tells a lot about you,” Peplinski explains. “A high score means you’re responsible and in control of your life. You’re trustworthy.”

To reach his goal, Peplinski voraciously reads up on every element that goes into a FICO score, checks his number every three months, and tweaks his behavior to eke out every possible additional point.

Two years ago, he took out a car loan even though he and his wife, Chrissy, had the cash to buy their wheels outright. He figured that adding to his mix of credit might boost his score.

In spite of Chris’s best efforts, landing an 850 may be a quixotic goal — only about 0.5% of Americans manage it, FICO reports. “The 850 score is kind of like a unicorn,” says John Ulzheimer, a credit scoring expert with Credit.com who used to work for FICO. “Everybody talks about it, but nobody’s seen it.”

The reality is that you don’t need to catch the unicorn to catch the best rates. But adopting some of the habits of Peplinski and other members of the 800 club can help you improve your own score.

And that can translate into real money: On a $300,000 30-year fixed-rate mortgage, the most credit-worthy borrowers will pay $14,200 less than those one tier below, $25,600 less than those two tiers below.

[See the Six Popular Credit Score Myths]

FICO, the Minneapolis company that produces the scoring model, divulges the five factors that determine your magic number — your payment history, the amount you owe on credit lines and loans, the length of your credit history, how much new credit you’ve applied for, and the types of accounts you’ve had — plus what percentage of your score each factor represents.

But as for exactly how many points you’ll gain or lose for, say, taking on a mortgage, being late on a bill, or charging credit cards up to the max? That’s proprietary information: “It’s a black box,” says FICO spokesman Craig Watts.

Mystery feeds obsession. Much the way fans of TV’s Lost met up online to postulate theories on the show’s ending, some credit score aficionados passionately debate their hypotheses on message boards like the FICO Forums at myfico.com. Others use themselves as guinea pigs to discover which moves will nudge a score up or down.

[See A Guide to the Latest Credit Card Tricks]

While most people could tell you their number only from the last time they got a loan — if at all — true FICO fiends know their score as well as they know their spouse.

Of the score strivers MONEY interviewed, most check their score obsessively, at least every few months — at a cost of $50 or more a year. They also fixate on their credit reports, upon which the scores are based.

Leland Lim, a 41-year-old doctor from the Bay Area, is vigilant about scanning these for errors that might drag down his number. “It took me three years to get a derogatory entry on one of them corrected,” says Lim, who now earns an 806.

As for what makes an 800-plus score, these self-made experts basically say the same thing FICO does: Payment history is the single most important factor.

“I have this fetish about paying bills as soon as they come in the house,” says Dick Husemann, 66, a retired Air Force officer from Wilmington, N.C. He and his wife, Brenda, 69, attribute their high scores — matching 818s — to the fact that they’ve never missed a credit payment.

The Husemanns also never charge more than 10% of their credit limit. They’re not alone in that; most score enthusiasts aim to keep a low “utilization ratio,” or the amount they owe compared with the amount of credit available to them. FICO verifies that a low ratio can help your score.

Chris Peplinski used his knowledge of this principle to help his wife boost her number. When they met seven years ago, Chrissy’s credit cards were maxed out and her score was a low 466. (Today he jokes: “I tell people when they’re dating someone new, ask about your date’s credit score!”)

Chris helped her get on a repayment plan. A sales manager for General Mills, Chrissy now has tons of available credit she’s not using and a score of 786. Chris occasionally applies for additional credit cards to goose the couple’s credit lines further, even though he knows the FICO model will ding his score in the short term for opening a new account.

That kind of gamesmanship is all part of the quest for 850. With lenders now routinely closing inactive accounts, Lim rotates all his credit cards into circulation so that he’ll continue to have a lot of available credit to figure into his utilization ratio.

But because his charges also affect that ratio, a few months before applying for a loan, he stops using the cards or pays them off before the statement is generated. That way, he says, “my score jumps a bit” — just in time for the lender to see.

The 800 club members are also conscious of their mix of credit.

Lim became interested in the scoring process two years ago while refinancing a home-equity loan into a home-equity line of credit. Having heard that revolving debt could affect a score more than an installment loan, he studied up.

His research revealed that HELOCs are not considered revolving debt in the FICO model. (The scoring firm confirms.) And remember that car loan Peplinski took out even though he didn’t have to? He did it because FICO favors those with a variety of credit types, such as mortgage, credit cards, and auto loans.

“I probably paid $100 in interest,” he says. “But it was worth it because we raised our credit scores by 15 points.”

Strategic default: When to call it quits on your home that’s worth less than you owe

If your home is worth less than you owe on it you’re not alone, major media is estimating that 1 in 5 or 20% of homeowners owe more than their home is worth. So what the heck are you supposed to do if you’re one of those people? It could take years before you are back to owing just what the house is worth, in some cases this could be 10 years or more. This article will help those folks stuck in this situation figure out what they should do by helping people evaluate the positives and negatives of walking away. For many people, this financial decision alone could be the most important one they’ve ever made. It could be the difference in retiring 10 years earlier, or being able to pay for their kids college.

I’m going to start this discussion by dismissing the moral or ethical implications of walking away from a debt (I’ll save this for you to decide). Rather than focus on what is morally or ethically right to do in this situation, I’m going to focus on what makes the most financial sense. In doing this, I’m going to first show you the upsides and then the downsides.

Starting with the positives (this list may not be all inclusive):

• Get to live rent free anywhere from 3 months to up to 15 months. Typically people live in their house after the foreclosure process has begun before being evicted for around 6 months.
• You can pay off other debts hanging over your head with cash saved in not paying rent.
• Can go out and rent a much bigger and better place for less money than you are already paying.
• Instantly take the stress away of staying in a bad situation.
• Start building for a positive cash flow future.
• Chance to reevaluate what got you into this situation so you can avoid it next time.
• With so many people going into foreclosure, banks will likely have to lower their future standards for home ownership, making it easier for you to buy another home with a stained credit report.
• Banks often pay you to leave the house early. How about an extra few grand just to hand over the keys and leave after your 6 months is up? They would rather do this than fight you in court quite often.
• Millions of other people are doing the same, people will understand your reasons and not judge you as harshly considering the circumstances.
• Get out now so you can re buy earlier than others when your credit score is restored. If you’re able to re buy earlier, you’re probably going to get a better deal on real estate than those people who wait and default in a few years.
• It may be better for you to wait and file bankruptcy and start over, as quick as 2 years after bankruptcy people are eligible to qualify for a new home loan.

And now for the negatives (not all inclusive):

• Some states allow banks to file deficiency judgments to collect the difference in what you owed versus what your home sells for at auction.
• It may be more difficult to rent with poor credit. You may be required to put both first and last month rent down or you may not qualify to rent without a cosigner
• You may face a ton of collection calls
• You may lose a home that you really love and have a connection to.
• It will negatively impact your credit for certain.
• You may owe taxes for the months you don’t pay but still live in the property and even if the property remains unoccupied until someone else takes title.
• Bad credit could impact future job searches.

Depending on how far upside down you are, it often makes financial sense to simply walk away. If you’re smart about it, you can change your financial position from extremely under to owing very little to anyone in just a few short months. You have to be willing to move away from credit though, and start living life with just cash. You have to ask yourself how long will it take to bring your home value up to what the house is even worth. If you can do that quickly, than staying probably makes sense. If your home is worth 15% less than you owe, and you’re in other debt, you’re probably fighting a losing battle and would be better off walking away and taking the credit hit. You should consider bankruptcy as a way to start over.

In the future, if you’re married and don’t live in a community property state, it may make sense to put the home mortgage in only one spouses name, and put the other spouse on title. This way only one persons credit is ruined if you were to have default. I will talk about this subject in the very near future.

The above article should not be construed as advice, rather as opinion. Consult a professional for specific advice for your situation.

Divorced and deceased in Arizona, will the survivor be chased down by creditors?

As promised, on to more Reader questions:

Bernie wrote:

My daughter is divorced (2009) and lives in Scottsdale, AZ. On June 18, 2010 her ex-husband, who lived in Mesa, AZ, died suddenly and unexpectedly from a heart attack at age 50. She is now seeking guidance with respect to the fiscal ramifications of the death, in particular how to avoid inheriting her ex-husband’s debts.

My daughter’s ex-husband has a considerable amount of credit card debt. (est. $35,000) and has no assets other than an automobile that is valued at less than $3000. Her ex-spouse at the time of death was unemployed and has been for most of the past three years. It is likely that he wasn’t making anymonthly payments to creditors for at least the past year.

My daughter has approximately $20,000 in credit card debt and she owes approximately $15,000 on an automobile loan. She has always made regular, on-time payments on credit card accounts and the car loan, and her credit rating is excellent. Her only financial asset is money that is in her teacher retirement account; she doesn’t own any property. My daughter has been steadily employed since graduating from college in 1992 and she currently works as a XXXXX in Arizona, earning approximately a gross of $50,000 per annum.

My daughter was married in Massachusetts in 1998 and moved to Arizona in 2005 so that her ex-husband could find employment. From 2005 to 2007 her ex-husband was employed selling appliances, mainly to home builders. He lost his job three years ago as a result of the slowdown in the housing market.

My daughter and her ex-husband have maintained separate credit card accounts since before they were married in 1992. That is, her name has never appeared on any of his accounts and his name was never on any of her accounts.

In 2008 my daughter and her husband agreed to separate and their divorced was final in 2009. In the divorce decree they mutually agreed to an equal disposition of personal assets and assumption of full responsibility for debts that were in their respective names; meaning each took responsibility for credit card debt in their name.

Community Property — We are aware that Arizona is a community property state; we understand what that means, and consequently we are very concerned about how the community property designation complicates matters. In addition, we also understand that the level of joint liability for new debt ceased with the divorce.

The big question is, how can my daughter be protected from her ex-husband’s potential creditors?
My daughter’s ex-husband did not have a will. The funeral arrangements and the dissolution of personal items is being been handled by the deceased brother who resides in Massachusetts. The brother is also going to notify all creditors of the death.

It is unclear what protections my daughter might enjoy and how to respond in the event she is chased down by her ex-husband’s creditors. We are looking for guidance and possibly legal assistance to protect my daughter’s resources. Can you please give me a preliminary prognosis, or let me know if you need additional information before you can offer an opinion?

Bernie, thanks for your question. The fact is, it’s a stretch for me to believe that creditors would come after your daughter for his past personal debts. The potential litigation costs and possibilty that the creditor wouldn’t collect are too high in my opinion to believe that they would try and chase your daughter down for his personal credit defaults.  That doesn’t mean they won’t however. In the event they do, then I would retain an attorney in Arizona to help, but until then, in my opinion, you’re simply wasting money on retainer that you likely won’t need or use. I hope this helps!

What your spouse is doing financially behind your back could come back to hurt you

Depending on which state you live in, you might just be responsible for any and all spending incurred by your spouse, even if you didn’t sign a thing (other than a marriage license). Quite scary huh? I would agree. The fact is, you better protect yourself and take precautionary measures to best ensure you don’t get burnt. This article will take a brief look at the 9 states which are called “Community Property States” and the remaining states also referred to as “Equitable Distribution States.” Moreover, I will give you my opinion on how you can try and protect yourself from falling victim to a major surprise down the road (this article is not giving you any legal advice – consult a local attorney for specific advice for you and your situation).

Most couples go into marriage thinking they will always be together, the stats prove otherwise. Look at these staggering stats below:

The divorce rate in America for first marriage, vs second or third marriage 50% percent of first marriages, 67% of second and 74% of third marriages end in divorce, according to Jennifer Baker of the Forest Institute of Professional Psychology in Springfield, Missouri.

According to enrichment journal on the divorce rate in America:
The divorce rate in America for first marriage is 41%
The divorce rate in America for second marriage is 60%
The divorce rate in America for third marriage is 73%

Now that we’ve established that things often go wrong, it’s important to note that when they do, and a divorce is imminent, that’s when most people find out that their spouse has racked up a bunch of personal debt without your knowledge.

In general, states have adopted one of two ways of dealing with your divorce, so let’s distinguish which states are what. Below that, I will speak to the differences in how courts deal with your case depending on the law.

The nine states that are referred to as “Community Property States” are as follows.

- Arizona
- California
- Idaho
- Louisiana
- Nevada – New Mexico
- Puerto Rico
- Texas
- Washington

“Equitable Distribution States”

- Alabama
- Alaska
- Arkansas
- Colorado
- Connecticut
- Delaware
- District of Columbia
- Florida
- Georgia
- Hawaii
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri – Montana
- Nebraska
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Utah
- Vermont
- Virginia
- West Virginia
- Wisconsin
- Wyoming

In a community property states, debt acquired during the marriage (as opposed to debt acquired prior to the marriage) is owned jointly by both spouses and is divided upon divorce, annulment or death. Joint ownership is automatically presumed by law, unless there is specific evidence that would point to a contrary conclusion for a particular debt. If you live in a community property state (listed below), both spouses are held accountable for any and all debts acquired during the marriage, even if the account was is listed exclusively in one spouse’s name. (source)

Equitable distribution. In all other states, assets and earnings accumulated during marriage are divided equitably (fairly), but not necessarily equally. In some of those states, the judge may order one party to use separate property to make the settlement fair to both spouses. (source)

According to Wikipedia, in a community property jurisdiction, most property acquired during the marriage (except for gifts or inheritances) is owned jointly by both spouses and is divided upon divorce, annulment or death. Joint ownership is automatically presumed by law in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property.^[2] The community property system is usually justified by the idea that such joint ownership recognizes the theoretically equal contributions of both spouses to the creation and operation of the family unit.^[3]

Division of community property may take place by item, by splitting all items or by value. In some jurisdictions, such as California, a 50/50 division of community property is strictly mandated by statute,^[4] meaning that the focus then shifts to whether particular items are to be classified as community or separate property. In other jurisdictions, such as Texas, a divorce court may decree an “equitable distribution” of community property, which may result in an unequal division of such. In non-community property states property may be divided by equitable distribution. Generally speaking, the property that each partner brings into the marriage or receives by gift, bequest or devise during marriage is called separate property (i.e., not community property). See division of property. Division of community debts may not be the same as division of community property. For example, in California, community property is required to be divided “equally” while community debt is required to be divided “equitably”.^[5]

Property that is owned by one spouse before the marriage is the separate property of that spouse, unless the property is “transmuted” into community property. The rules for this vary from jurisdiction to jurisdiction.

Whereas, with equitable distribution states, property and debt can be divided equitably, not necessarily equally. Creditors have very different rights in collecting their debts, depending on state law.

In summarizing the two different types of state law it’s critical to note that there are still significant differences in the way say Texas and California laws are written. No two states laws are identical, for simplicity we’ve lumped them together in two separate categories. Moreover, in equitable distribution states you may still be required to pay back personal debt incurred by your spouse. Generally speaking though, spouses can file bankruptcy individually and more easily in Equitable distribution states and it’s much tougher for creditors to come after you for debt your spouse has incurred.

What can you do to protect yourself? Don’t get married. Just kidding, but it’s not bad advice if you want to stay untangled financially, then again common law may treat you as married for legal purposes. For those of you who don’t have that option? Monitor your spouses credit file with their permission! You cannot legally acquire a spouses credit report without their permission. Before you get married, agree to monitor each others report on a semi annual basis. Be open about your finances, and pay attention to their spending. Chances are you don’t need to see a credit report to know they’re spending frivolously!

My point in writing this article was to raise awareness that in several states you can be held responsible by creditors for your spouses personal debt that they may have accrued with or without your knowledge. I’m also raising awareness that you must strive to be open with your spouse about everything financially. It would be a good idea to be open with each other and to keep some spending money on the side, in the form of cash, so that you can both spend freely and within budget. But just because you live in an equitable distribution state, doesn’t mean you won’t or can’t be held partially responsible for personal debt your spouse incurs. Remember, equitable doesn’t necessarily mean equal.

Build credit history with the Public Savings Bank Secured Visa

For individuals with no credit or those who have experienced a negative credit event like divorce or foreclosure, establishing credit history can be a real challenge. Without proper credit, everything from a car loan to an apartment or even a job can be denied.

When faced with problem credit, many people rely on prepaid cards to manage their daily expenses. However, prepaid cards simply provide access to your own money, not credit from a lender. These cards do not report to credit bureaus and do not help re-establish credit history. People need to demonstrate on-time monthly payments on a credit card in order to rebuild that important credit history.

So how can someone who cannot get a credit card rebuild their credit?

The Public Savings Bank Secured Visa offers people with low credit or no credit the opportunity to re-establish their credit history and work towards improving their credit score. Individuals make a deposit into an FDIC-insured account that acts as a security deposit. They can then make purchases anywhere Visa is accepted or take cash advances up to the deposited credit line amount, currently between $300-$2000. Payments are reported to all three major credit bureaus (TransUnion, Experian and Equifax) so customers can begin to establish credit immediately.

The Public Savings Bank Secured Visa does not require a credit check or even a checking account to apply. Customers can fund their account via Western Union, ACH, wire transfer, check or money order. The card has no annual or monthly fees, and offers 0% APR for 6 months. Rush shipping is available so customers can begin using their card just days after funding their account.

Building good credit is critical at a time when credit is getting harder to obtain. This card allows the customer to build good credit while enjoying all the benefits of a Visa card at very favorable terms.

Prospective cardholders can apply and be approved within a few hours.

VISA Secured Credit Card – Credit Score Not a Factor!