Navigating Your Credit: A Report Card for Adulting

Navigating Your Credit:  A Report Card for Adulting

By:  Jason L. Van Dyke, Esq.

My previous articles discussed why it’s a bad idea to respond to the radio and television debt settlement commercials and also why bankruptcy is rarely the answer to financial problems except in certain extreme situations.  This article examines the importance of your credit report and score as well as a few of the methods through which both can be legally manipulated.  A credit report and score is designed to examine how well a person is able to keep their financial house in order, which means it should be viewed as though it were a report card on your status as an adult. 

While most people have multiple different credit scores that are determined by a variety of methods, the most important of these is the FICO (Fair Isaac Corporation) score.  This isthe score everybody thinks of when they hear about credit because it’s the only score currently used by mortgage lenders in determining eligibility and interest rates for home loans.  A borrower will typically need a score of 700 (preferably higher) to qualify for a lender’s best rates.  Those with a FICO score lower than 640 are not typically eligible for any kind of mortgage.  The average U.S. FICO score is about 687, but the median FICO score is about 723.  While these statistics are probably bad news for some readers, they come with a caveat:  A FICO score is relatively easy to manipulate if you understand how both the score itself and the credit industry functions in real life. 

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The largest part of your FICO score (35%) is based upon payment history.  This is the entire reason that I wrote the first two articles in this series: Bankruptcy, liens, judgments, settlements, charge offs, repossessions, foreclosures, and late paymentsare the biggest causes of an unacceptably low FICO score.  These are the problems that typically require an attorney or other professional to fix.  The second largest part of your FICO score (30%) is based entirely on your “debt to limit ratio”, the number of accounts with balances, and the amount owed on various types of accounts.Although it seems counterintuitive, this is why opening new credit card accounts or obtaining credit limitincreases on existing accounts can actually improve your FICOscore.  While this is an effective tactic, it also requires the discipline to avoid carrying a balance on open accounts and to avoid using credit as if it were free money.

The remaining portion of your FICO score is the length of their credit history (15%), types of credit used (10%), and recent searches for credit (10%).  That is another reason to avoid closing old credit accounts: older accounts with a longer payment history are viewed more favorably than newer accounts with less payment history.  It can also adversely affect your credit to pay cash for that car purchase.  Why?  Because an installment loan on your credit report is a different type of credit than a revolving account (like a credit card).  The credit reporting system doesn’t know that you paid cash for that new car, so it has no way of rewarding you for being responsible.  That’s just how the system works: it rewards widespread and responsible use of credit and punishes those who don’t use credit or who use the credit they have irresponsibly. 

The ease through which the FICO score can be manipulated has not gone unnoticed to lenders.  Whether you know about it or not, there is now a new The FICO, however, is not the only credit score that it’s important for you to stay on top of.  A new score that is commonly used for approval of things like credit cards was the creation of a joint venture between the three credit bureaus and is referred to as VantageScore.  Although the principles of maintaining good credit are similar, VantageScore is known to place a greater emphasis on trending data than FICO (such as the amount of recent credit and the credit currently being utilized) while placing almost no emphasis on the amount of available credit.  While VantageScore provides some benefits for those who are trying to rebuild their credit, it is also a system that is far more difficult to manipulate in the short term.  Although VantageScore is becoming more popular among lenders, it still remains far behind FICO in popularity.  Both systems place an important premium on payment history, which is where efforts to manage your credit score should be focused. 

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Since so much of both scoring models involves payment history, it’s only natural for most attorneys to start there in the repair process.  This involves in-depth analysis of a client’s credit and the attemptedremoval of all derogatory information related to payment history.Such entries can remain on a person’s credit report for up to seven years (except for public records like bankruptcy and judgments, which are reported for ten years).  So how does a late payment or collection account get fixed?  As with other issues in creditor-debtor law, this is where it pays to hire an attorney who is familiar with the collection industry and its practices. 

I have mentioned in past articles that very few banks and other creditors handle their own collections.  The debt is either sold to a junk debt buyer (Midland Funding, LVNV Funding, CACH, etc.) or the work is farmed out to a third party debt collection agency.  At this point, it is the owner of the debt or the collector that is typically reporting to the customer’s credit rather than the creditor himself.  In fact, it is unlawful for a bad debt to be “double reported” to credit bureaus and there are penalties in place to discourage this type of behavior.  The good news about collection agencies is that both the agency and its employees work almost solely on commission.  They don’t give a damn how the client collects his money, as long as they get their commission (which can be as high as 50%).  They are after “low hanging fruit” and typically don’t have the resources available in house to fully comply with strict federal credit reporting laws. 

There are times where a letter from an attorney will cause the collection agency to stop collection efforts entirely.  This is because it takes a great deal of time and effort to fight an attorney and the time of a collector is better spent on the accounts of folks who don’t have attorneys.  For the more determined agencies that don’t tuck tail at the first sign of a lawyer, it’s far less hassle for them to take a settlement (which means a commission for them) and delete the entry from the customer’s credit entirely than it is to argue about it.  Although the credit reporting system was designed to be punitive in nature, collection agencies and most debt buyers are typically savvy enough to understand that enforcing this punishment often results in the debtor deciding to pay nothing.  That means no commission. 

The next step in the repair process is helping a client to rebuild their credit and establish a positive credit rating.  Obtaining an affordable mortgage is a big step in this process, but in cases where that is not possible, attorneys will assist clients in cleverly gaming the system to raise a FICO score.  This is where most clients fail because they refuse to listen to their attorneys.  They view credit free money that they will re-pay when and if they get around to it.  It is the job of the lawyer to counsel his client that credit is money that they are paying out of pocket to borrow.  That is, after all, why the fancy $300,000.00 law licenses we hang in our office say “Attorney and Counselor at Law” rather than simply “Attorney at Law” or “Lawyer”.  An attorney that fails to counsel in this regard is, in my view, committing malpractice by omission because they are doing nothing for their pay other than provide a temporary solution for a long-term problem that can only be corrected by modifying ones behavior. 

The manner in which one should modify his behavior has been the subject of endless debate, which I have narrowed down to two different theories:  (1) Dave Ramsey and (2) Robert Kiyosaki.  Everyone should consider both because both offer some great practical advice.  The first book you should read is The Total Money Makeover by Dave Ramsey, because it contains a number of useful money and debt management concepts such as the debt snowball.  I like Ramsey because he understands that the first step to solving a debt problem is to stop digging – and he emphasizes it ad nauseaum.  The problem I have with Ramsey is that his strict adherents become so frugal and adverse to any kind of debt or risk that they end up killing their economic libido and entrepreneurial spirit.  In short, they remain stuck in the “rat race” and never achieve real financial independence.  That is why I recommend that people read Rich Dad, Poor Dad andRich Dad’s Cashflow Quadrant , by Robert Kiyosaki, after reading The Total Money Makeover.  Kiyosaki provides outstanding and guidance on how money works and how it can work for you.  Readers learn the real difference between assets and liabilities and the various means through which to become truly financial independent.  Of course, my criticism of Kiyosaki is that he doesn’t seem to understand just how financially under water most people truly are.  He understands that poor people remain poor because they buy liabilities that they think are assets.  He encourages readers to buy actual assets.  This would be great advice, except that it’s extraordinarily difficult to find a way to afford an investment that provides a reliable return of 5% per year while you still have six figure student loan debt costing 6.8% per year.  Readers of my last article will know why student loan debt is worse and more dangerous than any other kind of debt. 

In concluding my series, I would encourage readers to be mindful that, as Proud Boys, we glorify the entrepreneur.  There are many of us who want to be entrepreneurs either as small business owners or investors in other businesses.  Some of us are less than interested in that type of thing.  The goal for all of us, however, is to become financially independent.  That goal cannot realistically be achieved by anyone without a solid credit reputation.  Personal credit is not only used in all types of lending, but also in various licensing processes, as part of a the risk assessment for certain types of insurance, and even in the employment process of some companies.  As much as your credit will affect your life, it’s of the utmost important that you take control of your credit before your credit takes control of you.  Uhuru!

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Jason L. Van Dyke is licensed to practice law in Texas, Colorado, Georgia and Washington D.C.  He has been practicing in the areas of criminal defense, debt collection, and real estate law for ten years.  He is a member of the Texas chapter of The Proud Boys and lives in Crossroads, Texas.  The views expressed in this article are general in nature and should not be used or construed as legal advice for any specific situation.