Credit Ratings (typewritten image)

Credit On the Spectrum

This should really be called, "how to buy a house". Good credit ratings are useful for a number of things, but the "biggie" is financing a house. For just about everything else, credit ratings for people on The Spectrum are incidental, since it's likely that your credit ratings are more than sufficient for the level of financial credit you want.


Credit Score

Credit scores are a raw number or mathematical index, based on several credit factors. In the US, the most common score is FICO (Fair Issac Corporation). FICO scores are designed to indicate the likelihood of a borrower being delinquent within the next 24 months.

Obviously, this is most significant for a limited class of credit (mostly credit cards and small businesses). It's only one of several factors for major transactions, such as house purchase mortgages and apartment rentals. There are several other scores besides FICO.

In other words, the FICO score per se isn't the key factor. What is important is good credit.



Why a Particular Credit Score is Seldom Used

The raw credit score has no real meaning because businesses use credit ratings for different purposes. For example a landlord will be more concerned about timely payment and defaults than assets and prior credit history. A mortgage company or long term lender is interested in assets and total debt, and sometimes income.

A creditor has particular criteria which are important to that creditor, so a particular credit score useful for a different purpose is probably ill-suited for that creditor. Large institutions of course establish their own scores, whereas small lendors use "seat of the pants" judgement. A small landlord, for example, after reading a few reports quickly realizes that the FICO score is useful only as a "sanity check" for xyr own judgement.

By way of example, a small landlord is going to be more interested in defaults and late payments than ratios of outstanding credit, because the defaults are a good indication of whether the tenant considers rent to be an optional clause of the lease. "Ability to pay" (on paper) is less significant than, "Will this person pay?"

Mortgages are of course multi-factored. A mortgage lendor is interested in ability to pay and liklihood of default.



HOWTO obtain credit

First understand credit and credit scores. (described above)

There are several things that affect credit and credit scores:

On-time payment
In many cases, this only includes late payments which are 30 days past due; however a missed payment sometimes falls into this category. Certain creditors (typically some utilities) develop a bad reputation and credit evaluators learn to ignore their reports.

"Pay By Computer" Bank Payment Services", described below greatly facilitate on-time payment because:
1. It's easier to make a timely payment; and 2. If you need to delay payment, it's easy to make two payments so that you can be sure to get at least the minimum payment timely paid.
Defaults
This is different from on-time payment because this represents a more serious breech of a loan agreement.

I am not sure if non-credit collections are considered "defaults". It may be that these are non-reportable except as a properly adjudicated judgement because there is no credit involved.

Liens and Judgements
This relates to amount owed, which can later be attached by an outside creditor. If it's a couple of parking tickets, there isn't much risk to the lender, but a major tax liability can block a future judgement by a lendor.

Income

Assets and Debt

Prior Credit History
Supposedly a long string of payments is a good indication of credit worthiness, but this is difficult to track. It is possible to "max out" a credit card or credit line, and after the amount posts pay it off. So if you have a $1200 line of credit on a credit card, you can pay for something at nearly that amount, and pay it off before interest accrues. That shows up as a maximum amount borrowed. If your income is fairly low, you may be able to find a friend or relative to let you run one of their purchases through your card.

Maximum Amount Borrowed
(see "Prior Credit History" above).

People With No Credit History

Identify existing credit
Examples include utility bills, and any commercially borrowed amount.

Try applying for a credit card
Likely sources are your bank, as well as national credit card companies.

Avoid credit cards that require a deposit.
The "deposit" arrangement means that there is no credit.

Ask your bank manager what amount consumer loan you can obtain for the purpose of establishing credit.

Some banks will include credit when issuing an ATM card.
ATM-only cards are usually preferrable; however if you are initially establishing credit, a hybrid credit/debit card may possibly be useful. Some banks like hybrid cards because many of the transaction charges are transferred to merchants. (Actually, the merchant pays substantially more but the bank doesn't really care.)


Bad Credit Items

Bad credit items are to be expected, so don't let a "bad credit" item discourage you.

Sometimes it's possible to work around credit problems. For example, even if credit is not initially available in a preferred form, it may be possible to work around that by obtaining the same thing later. (An example is a supplemental mortgage to force a cancellation of "PMI" insurance payments.)



Borrowing or Investments

Some types of credit are useless and can be harmful. For example, using a credit card as a "revolving credit" account can be very expensive. Even covering an unexpected expense can make it difficult to get out of debt.

It is possible to benefit from a credit card by limiting purchases to what you expect to pay in full when you receive the bill.

On the other hand a house can be a good investment. Real estate may or may not be a good investment in general, but if you are able to buy your dwelling, you have an investment that you are actually using.

Put another way, a house is a good way to multiply your debt 20-fold and be financially better off!



Using Plastic (Credit Cards) for Credit Financing

Generally it is uneconomical to use credit cards to finance a purchase beyond the "grace period". In other words, credit cards are economical for amounts paid off in full before credit becomes due.

There are exceptions, but those exceptions imply that you already have the financial ability to pay off the borrowed amount within a predetermined time period. Two examples:

1.   A large purchase that you intend to finance in a different manner
This could be a house, business purchase, or car, in which some short term funding is through a credit card. This only makes sense if you expect to either refinance the purchase or otherwise pay off the credit card amount.

2.   Low interest credit card "come-on" schemes to "transfer balance"
These are generally listed as "no-interest" but do include a transfer fee. As a practical matter, you need to devise a plan to automatically pay off a minimum without fail (e.g., by automatic payment by a bank). The credit card cannot be used for purchases because all payments go to the "no-interest" loan before being applied to pay-off amounts.

As can be seen, any "deal" from a credit card is especially complicated and must be carefully thought through.


The Big Kahuna - Buying a House

The real issue here is whether you would prefer your own place. If so, a house is a good investment because you use the investment.

"Self-Subsidized Housing" is discussed on a separate page (housing.html)




Other Issues

... not directly related to credit and credit scores


"Pay By Computer" Bank Payment Services

These are cost-justified by the postage, and more than justified by the convenience. They are also an excellent way to prove payment and consequently a good "anti-pranking" measure. I've had good experiences with these services when faced with malicious credit department employees.
Regarding the "malicious credit department employees", there may have been a business reason to encourage abusing customers; however I feel that since I am not attempting to cheat the company, I deserve to be treated with respect.

In contrast with a "business reason" justification, I had one representative tell me they did not accept cheques issued by bank "pay-by-phone" services. (At the time, banks would ask permission from payees.) A speculative guess is that bank payment services resulted in customers making documented complaints about the collections department, which of course causes problems for the collections department because they are only supposed to be abusive to "deadbeat" customers. In this particular case, the payment had been made, but it was obvious that the collections department was playing a game and didn't like it when a customer could simply say "No, it was paid, and if you want, the bank will send you the verification.".



Delayed Payments

If you need to delay a payment, try to make a minimum payment at an earlier date. Then if you mess-up with the delayed payment, you will not have a late payment, and only face the interest charges. (This applies mostly to people making full payment on credit cards.) That way, you are assured of timely payment and have less to worry about concerning making an error in the timing of the full payment.

This works best with "pay by computer" services because there isn't a separate postage charge for multiple payments. (If your bank has an "add-a-fee" per-payment charge, you would of course have to pay that fee.)



Automatic Payment Systems

I have avoided automatic withdrawal services because of the possibility of being charged if the withdrawal results in an "insufficient funds" rejection. Instead, I send the funds from my bank ("pay by computer" service).

In other words, unless the "automatic withdrawal" program is willing to indemnify you if the timing of their withdrawal results in "insufficient funds" charges, it's generally best to avoid it.



Credit Card Rebates

If the "rebate" does not automatically deposit as a payment to the credit card, it adds an extra layer of complexity. The best rebates are at a flat rate for all purchases, or flat rate for all purchases up to a given amount (not including stated exceptions such as discount stores, etc.) If the discount only applies to a limited class of purchase, it probably is not optimum.

More on so-called "rewards programs" at www.wisebread.com/credit-card-rewards-programs



Auditing Credit Card Bills

... is actually much easier than it sounds. If a thief has a buying pattern that matches your own, then it would be difficult to spot fraud unless it involved large amounts. Fortunately, it is unlikely that a thief would shop at the same places, or buy the same things as you. You will probably immediately spot the fraudulant purchase by casually looking at the bill. All you need to do is casually look.

Put simply, the "audit" consists of taking a quick look at the listed charges.

If you make on-line purchases, unrelated purchases are still easy to identify. If a vendor uses a 3rd-party billing agent, that vendor will generally make this clear when making the purchase because they don't wish to defend challenges from every customer who doesn't recognize the charge. (i.e., a vender billing through another business will tell you they are doing this.)

If you determine that an invalid charge has been made, request a replacement card.



Credit Reports

More information on credit scores is found by searching "Credit Score" on Wikipedia.

Credit Reports in the US (not the credit scores) are available through https://www.annualcreditreport.com This links to the three major credit reporting agencies. Since free reports are available once a year from each, you may wish to obtain only one of the three at any given time. If an email address is required, use a "throw-away" such as mailexpire.com or jetable.com.



GLBA Notices and Privacy Letters

If you receive a privacy notice (sometimes called a GLBA Notice in the US), that means that the business intends to distribute your personally-identifiable information. Prepare a GLBA letter and send it to each business that sends a privacy notice. You only need to draft (or copy) the letter once and only need to send it once to each business entity that sends these privacy notices out. You'll still get the notice every year, but your GLBA letter remains effective indefinitely.



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First posted Jan 06. Last revised 07 Mar 09.

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