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Current State of Credit Card Market

On December 27, 2017, the Consumer Financial Protection Bureau released its biennial report on the credit card market. Here are a few interesting facts from the report. We have more than $4 trillion in used and unused credit; however, that is lower than it was in 2008 when it was $4.4 trillion. In the past two years, credit card debt has increased by nine percent with most active credit card users (60%) engaged in online services. Consumers opened 110 million new credit card accounts in 2016, which is 50% more than in 2010. The credit card market is huge and like it or not, most of us are a part of it.

The Fair Credit Reporting Act

The federal Fair Credit Reporting Act (FCRA) of 1970 was enacted to ensure fairness, accuracy, and privacy of data collected by credit reporting agencies. One of the outcomes of the FCRA is that it mandates that the three major credit reporting agencies or credit bureaus: Equifax, Experian, and TransUnion each provide us with a personal credit report once every 12 months. The option is to request that all three credit reporting agencies send their reports at the same time, or to order one of each at three different times during a twelve-month period. The reason that you should get credit reports from all three of the major credit reporting agencies is that even though they have the same purpose, they are competitors and may have collected different data. It will take about 15 days to get the report.

We can request these credit reports either by: accessing www.annualcreditreport.com, a website authorized by the federal government; calling 877-322-8228, or sending by USPS the completed "Annual Credit Report Request Form." Deceptively, even when accessing the federal government's website, four ad-choices that seemingly appear to be part of the federal government's website, but, really are outside of its borders, all lead to the same company. This company professes to "Get your 3 scores and reports from all 3 Bureaus as of (add today's date here)." Consumers may miss the fact that when they provide personal information on this dubious website they are signing up for a credit monitoring service and an identity theft insurance policy at the monthly cost of $39.95, that is about $480 annually. Maybe some people want this service, I don't know. But, the free credit reports that are available through the FCRA are bundled into the benefit package of the website's pop-up ad and appears as the only option for consumers to order the reports This is one of the times when the adage "Consumers beware" really applies.

Now what?

About two weeks later, pages and pages of credit reporting data arrives. While one may want to put this aside, it really is best to start exploring the data for accuracy as soon as possible. After all, the sooner the erroneous data is identified, the faster it can be fixed, and the credit score improved.

Along with the credit report will be instructions on how to resolve inaccurate or incomplete data on that specific credit report. Contact information for the three credit reporting agencies, instructions and templates to dispute errors can be found at https://www.consumerfinance.gov/.

The most common errors found in the credit reports are: identity errors including demographic misinformation and activity suspicious of identity theft; account balance errors with closed accounts labeled as open or balances incorrectly labeled as delinquent or late; data management errors with accounts reported several times from different creditors or incorrect data appears after it was resolved; and, balance errors with an incorrect credit limit or current balance.

Credit reporting agencies have 30 days from when a dispute is received to correct or remove inaccurate or incomplete data from its credit report. If resolution is not forthcoming, submit a complaint through the federal government's Consumer Finance Protection Bureau at https://www.consumerfinance.gov/.

Common Misconceptions about Credit Cards related to Credit Reporting (and the Truth)

* Don't get a credit card, just use pre-paid or debit cards. (Responsible use of a credit card establishes and builds a credit history)

* Carry a balance on your credit card; it will help your score.

(Time, meaning paying at least the minimum balance by the due date; and, utilization, meaning keeping the percentage of statement balance over total available amount less than 30%, are the most important things you can do to help your credit score.)

* Only have one credit card.

(This could either be a truth or a misconception. Some people have trouble managing more than one credit card for a variety of reasons. However, if someone is able to manage more than one credit card, then go for it. The benefit of having multiple credit cards is that it spreads out debt over multiple credit limits; and, therefore, keeps that utilization percentage low.)

* Opening a credit card will hurt my credit score.

(The credit score will only be reduced by about five points with a new credit card.)

* Don't accept a credit limit increase.

(An increase in credit limit, as long as there is not more spending, will decrease the utilization percentage. Requesting a credit limit increase may trigger a credit bureau inquiry that will lower the credit score about ten points. When the bank offers a credit limit increase, no credit score points are lost.

Credit Scoring

Credit reporting agencies use different scoring models, so your credit score may vary based on the agency. The reason is different scoring models may consist of different variable and different algorithms. For example, the credit score reported for an inexpensive used car loan may have a different focus and value than the credit score for a first home mortgage. Timing is also a factor. When the credit reporting agency updates the score and when the request is made impacts the credit score. Some say the numbers can change daily.

How can banks, creditors, and consumers make sense out of all the different scoring models and the different credit reporting agencies?

FICO[R]

FICO[R], the acronym for Fair, Isaac Corporation (Bill Fair and Earl Issac), scores, as determined by five "ingredients," are reportedly used in about 90% of lending situations daily to judge a consumer's credit risk. While the basic "ingredients" are known, the calculation for this hot commodity is their proprietary algorithm. The scoring range is either from 300 to 950, or 250-900, with a higher score indicating lower credit risk. A high FICO[R] score could lead to more loan approvals, lower interest rates, and better terms. Equifax, Experian, and TransUnion may each report a different FICO[R] score when queried at the exact same time.

Five "Ingredients" of a FICO[R] score, version 8

35% payment history

30% amount of debt

15% length of credit history

10% new credit

10% credit mix

To make things even more complex there are industry specific credit scoring available, for example Auto FICO[R]. There have been multiple revisions of FICO[R] scoring throughout its 25 years of existence. Currently, most banks are working with version eight, although earlier versions with different algorithms are still in use today. In FICO[R] Score 9 unpaid medical collections have less of a negative impact than they had in previous versions.

FICO[R] scores may be available to you for free through credit card companies and banks, and with loan applications. At a cost of about $20 (one credit bureau) or $50 (all three credit bureaus) you can buy your FICO[R] scores through myFico.com.

Future Nur$e$' Money Matter$

Some of the topic options for upcoming issues of The Maryland Nurse are the financial toxicities of health care, financing nursing retirement through social security, nursing education loans, and the cost of drugs. Please contact Dr. Charlotte Wood, Editor of The Maryland Nurse at theMarylandNurse@gmail.com with your thoughts about today's topic as well as future topics.

References

Central Source, LLC. (2018). AnnualCreditReport.com. Accessed https://www.annualcreditreport.com/

Fair Isaac Corporation. (2017). Understanding FICO[R] Scores. Accessed at https://www.myfico.com/Downloads/Files/myFICO UYFS Booklet.pdf

Federal Trade Commission (n.d.) Consumer information: Money and credit. Accessed at https://www.consumer.ftc.gov/articles/0155-free-credit-reports

The Consumer Financial Protection Bureau (2017). Consumer tools: Credit cards and credit reports and scores. Accessed at https://www.consumerfinance.gov/

Barbara Biedrzycki, MNA Treasurer
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Author:Biedrzycki, Barbara
Publication:Maryland Nurse
Date:May 1, 2018
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