Q&A: FICO Vice President Jim Wehmann on understanding your credit score
NEW YORK - It's an important bit of information that determines a lot about your financial life. But if you wanted to be in the loop, it came with a price tag.
That never seemed fair, but now consumers can increasingly see their FICO score for free -- the three-digit number that determines if you'll be approved for a credit card or loan.
Fair Isaac Corp., the company that developed the FICO score, has been working with credit card issuers and lenders to allow them to show customers their FICO score online or on monthly statements. Seeing the score frequently pushes consumers to improve their finances, says Jim Wehmann, a vice president of FICO's scores business.
People with higher FICO scores, which generally range from 300 to 850, are offered lower interest rates on mortgages or have an easier time getting approved for credit cards or loans.
FICO scores are calculated using information from your credit report, a detailed list of your past and current debts. But roughly 45 million Americans have no credit history or credit score, according to the Consumer Financial Protection Bureau. FICO is developing a scoring system for these so-called "credit invisibles."
Wehmann offered insight on what you should know about your credit score. Excerpts have been edited for clarity and length.
Q: What's the fastest way to improve your FICO score?
A: Always make your payments on time. Roughly 35 percent of your score is based on payments. That's going to be the most important factor.
Q: What hurts your score the most?
A: Not making your payments on time. Delinquencies and other negative events - collection items, bankruptcy, foreclosures - will have a significant negative impact on your score.
Q: What's the biggest mistake people make when it comes to their FICO score?
A: Not fully understanding that the behavior that they take today could impact their score and their ability to get credit later.
Q: It has become easier to get a free FICO score. Big credit card issuers, such as Discover, Chase, offer the score to their customers for free. How did that happen?
A: We launched something called FICO Score Open Access, which allows lenders to freely share with consumers the score that the lender is using. We launched the program two years ago and it's grown significantly. About 65 million people right now are eligible to get their FICO score for free through their lender and we expect that number to grow over the coming months. There's a lot of attention given to the largest financial institutions, but we're working with credit unions, community banks and smaller organizations.
Q: Is it true that each person has several different FICO scores?
A: Yes. We have a few different versions. Some lenders use older versions of the scoring methodology, and some are for specific types of lenders.
Q: Who are the credit invisibles?
A: They're called invisibles for a couple of reasons. One is they don't have credit scores. Some don't have credit files, so they have no credit history; no credit card or mortgage or auto loan or personal loan. No data has been captured by the credit bureaus. They're young people who are just starting out, who don't have any credit, or they may be immigrants to the country where they don't have a U.S.-based credit history.
Q: What information does FICO need to create a score?
A: From a FICO perspective they are not scoreable because we don't yet have six months of history on them or we haven't had an update in six months.
Q: If there's no credit history, what information will you use to build their score?
A: Wireless or landline or cable bills.
Q: When will that FICO score be used?
A: We're in a pilot phase. We've built the score and we are right now working with lenders for them to validate the score based on their actual applications.
Q: When will it be ready?
A: We have 12 lenders in the initial pilot, so we're going to wait until they do their validations before we make it widely available to all lenders, probably by the end of the year or first quarter of next year
The 10 Commandments of Wealth and Happiness
I'm now financially independent. I didn't get this way overnight, nor did I do it by selling books or advice. I did it the same way you can: one paycheck at a time over many years.
One of my young staffers recently asked if I could condense everything I've learned into 10 simple ideas that would serve as a guide to those starting out, starting over, or maybe beginning to realize they're not where they'd like to be. While certainly a challenge, it's a worthy one. So here goes: the 10 commandments of achieving financial independence and being happier while you do it.
1. Live like you're going to die tomorrow, but invest like you're going to live forever. The ease of making money in stocks, real estate, or other risk-based assets is inversely proportional to your time horizon. In other words, making money over long periods of time is easy -- making money overnight is the flip of a coin.
Money is like a tree: Plant it properly, care for it occasionally, but not obsessively, then wait.
Stare at a newly planted tree for 24 hours and you'll be convinced it's not growing. Fixate on your investments the same way, and you could miss out on a game-changer.
The biggest winner in my IRA is Apple (AAPL). I don't remember exactly when I bought it, but I'm guessing it was in 2002 or 2003. My split adjusted price is around $1 a share: As I write this, Apple's trading at around $126 a share. Had I been listening to CNBC or some other outlet promoting constant trading, I almost certainly wouldn't still own it.
The lesson? Enjoy your life to the fullest every day -- live like you're going to die tomorrow. But since you're probably not going to die tomorrow, plant part of your money in quality stocks, real estate or other investments; then hold onto them. Don't ignore your investments entirely -- sometimes fundamental things change indicating it's time to move on -- but don't act rashly. Patience pays.
2. Listen to your own voice above all others. My job as a consumer reporter has included listening to countless sad stories about nice people being separated from their money by people who weren't so nice. While these stories run the gamut from real estate deals to working from home, they all start the same way: with a promise of something that seems too good to be true.
And they all end the same way: It was to good to be true.
If someone promises they can make you 3,000 percent in the stock market, they're either a fool for sharing that information or a liar. Why would you send money to either one? When you hear someone promising a simple solution to a complex problem, stop listening to them and start listening to your own inner voice. You know there's no pill that's going to make you skinny. You know the government's not handing out free money for your small business. You know you can't buy a house for $300. Stop listening to infomercials and start listening to yourself.
3. Covet bad economic times. Wealth is realized when the economy is booming, but that's not when it's created. Wealth is created when times are bad, unemployment is high, problems are massive, everybody's freaking out, and there's nothing but economic misery on the horizon.
Would you rather buy a house for $400,000, or $200,000? Would you rather invest in stocks when the Dow is at 12,000 or 7,000?
Nobody wants their fellow citizens to be out of work. But the cyclical nature of our economy all but assures this will periodically happen. If you still have a job, this is the time you've been saving for. Stop listening to all the Chicken Littles in the media: The sky isn't falling. Get busy -- put your cash to work and create some wealth.
4. Work as little as possible. A friend of mine, Liz Pulliam Weston, once wrote a great story called Pretend You Won the Lottery. She asked her Facebook fans to describe what they would do if they won the lottery. From that article:
Most of the responses had a lot in common. People overwhelmingly wanted to:
Note these goals are largely achievable without winning the lottery. And that was her point: Listing what you'd like to do if money is no object puts you in touch with the way you'd really like to spend your life.
- Pay off all their debts.
- Help their families.
- Donate more to charity.
- Pursue their passions, including travel.
My philosophy takes this concept a step further: When it comes to work, you should try to do something that you regard as so fulfilling that you'd do it even if it didn't pay anything. In other words, the word "work" implies doing something you have to do, not something you want to do. You should never "work."
If you're going to spend a huge part of your life working, don't fill that time with what makes you the most money. Fill it with what makes you the most fulfilled.
5. Don't create debt. I'm always getting questions about debt. "Should I borrow for this, that, or the other?" "What's an acceptable debt level?" "Is there such a thing as good debt?"
There's way too much analysis and mystery around something that isn't at all mysterious. Paying interest is nothing more than giving someone else your money in exchange for temporarily using theirs. Rule of thumb: To have as much money as possible, avoid giving yours to other people.
Don't ever borrow money because you want something you can't afford. Borrow money in only two circumstances: when your back is against the wall, or when what you're buying will increase in value by more than what you're paying in interest.
Debt also affects you on a level that can't be defined in dollars. When you owe money, in a very real way you're a slave to that lender until you pay it back. When you don't, you're much more the master of your own destiny. There are two ways to achieve financial freedom: Have so much money you can't possibly spend it all (something exceedingly difficult to do) or don't owe anybody anything. Granted, since you still have to eat and put a roof over your head, living debt-free doesn't offer the same level of freedom as having massive money. But living debt-free isn't a matter of luck or even hard work. It's a simple choice, available to everyone.
6. Be frugal -- but not miserly. The key to accumulating more savings isn't to spend less -- it's to spend less without sacrificing your quality of life. If going out to dinner with your significant other is something you enjoy, not doing it may create a happier bank balance, but an unhappier you: a trade-off that is neither worthwhile nor sustainable. Eating an appetizer at home, then splitting an entree at the restaurant, however, maintains your quality of life and fattens your bank account.
Finding ways to save is important, but avoiding deprivation is just as important.
Diets suck. Whether they're food-related or money-related, if they leave you feeling deprived and unhappy, they're not going to work. But there's a difference between food diets and dollar diets: It's hard to lose weight without depriving yourself of the foods you love, but it's easy to reduce spending without depriving yourself of the things you love.
Cottage cheese isn't a suitable substitute for steak, but a used car is a perfectly acceptable substitute for a new one. And the list goes on: watching TV online rather than paying for cable, buying generics when they're just as good as name brands, using house-swapping to get free lodging, downloading books from the library instead of Amazon. No matter what you love, from physical possessions to travel, there are ways to save without reducing your quality of life.
7. Regard possessions not in terms of money, but time. You go to the mall and spend $150 on clothes. But what you spent isn't just $150. If you earn $150 a day, you just spent a day of your life. Almost every resource you have, from physical possessions to money, is renewable. The amount of time you have on this planet, however, is finite. Once used, it can never be replaced. So when you spend money -- especially if you earned that money by doing something you had to do instead of what you wanted to do -- you're spending your life.
This doesn't mean you should never spend money. If those clothes are all that important to you, by all means, buy them. But if it's really not going to make you that much happier, don't. Think of it this way: If you can live on $150 a day, every time you forgo spending $150, you get one day closer to financial independence.
8. Always consider opportunity cost. This is related to the commandment above. Opportunity cost is an accounting term that describes the cost of missing out on alternative uses for money.
For example, when I said above that not spending $150 on clothes puts you $150 closer to independence, that was a gross understatement. Because when you save $150, investing those savings gives you the opportunity to have more savings. If you're earning 10 percent, $150 invested for 20 years will ultimately make you $1,000 richer. If you can live on $150 a day, ignoring inflation, you can now retire nearly a week sooner, not just a day.
One of the exercises in my book, Life or Debt, is to go around your house and identify things you bought but probably didn't want or need. A quick way to do this is to find things you haven't touched in months. These were probably impulse buys. Add up the cost of these things, multiply them by 7, and you'll arrive at the amount of money you could have had if you'd invested that money at 10 percent for 20 years rather than wasting it.
And when you do this, consider the stuff in your closet, the stuff in your garage, the rooms of your house that you heat and cool but don't use, the new cars you've bought when used would have worked. The truth is that most of us have already blown the opportunity to achieve financial independence much sooner. Maybe now's the time to stop.
9. Don't put off till tomorrow what you can save today. Shortly after I began my television career in 1988, I went on set with a pack of smokes, a can of soda, and a candy bar. I explained that these things represented the kind of money most of us throw away every day without thinking about it; at the time, about $5. But compound $5 daily at 10 percent for 30 years, and you'll end up with about $340,000. That's why learning to save a few bucks here and there and investing it is so important.
Fortunes are rarely made by investing big bucks, nor are they often made late in life. Wealth most often comes from starting small and early.
There are limited ways to get rich. You can inherit, marry well, build a valuable business, successfully capitalize on exceptional talent, get exceedingly lucky -- or spend less than you make and consistently invest your savings over time. Even if you're on the road to any of the former, why not do the latter?
10. Envy is your enemy. You can either look rich or be rich, but you probably won't live long enough to accomplish both. I've lived both ways, and trust me: Being rich is way better than using debt to appear rich. Most of us will admit that, when on the verge of making a purchase, we're often thinking of what our friends will say when they see it. Normal human behavior? Sure, but it's not in your best interest, or theirs. Making your friends jealous isn't nice and feeling envy for other people's possessions is silly. Possessions have never made anyone happy, nor will they.
Decide what really makes you happy, then spend -- or not -- accordingly. When your friends make an impressive addition to their collection of material possessions, be happy for them.
One of the stupidest expressions ever coined was: "The one who dies with the most toys wins." When you're on your death bed, you won't be thinking about the things you had -- you'll be thinking about the times you had.
How long does it take to pay a $2,000 credit card debt with minimum payments?
When it comes to your financial health, minimum payments on your credit cards are poison.
A $2,000 credit balance with an 18% annual rate, with a minimum payment of 2% of the balance, or $10, whichever is greater, would take 370 months or just over 30 years to pay off.
Making minimum payments on your credit card is a treadmill to nowhere," says Greg McBride, chief financial analyst at the personal finance website Bankrate.com. During that time, you would end up paying more $4,931 in interest and charges, 146% more than the original balance on the card, according to an online calculator on credit-card comparison site, CreditCards.com.
Most people are unable to make these calculations themselves. When given a similar calculation on how long it would take to pay off a credit card with just minimum payments, only 2% of people were able to answer correctly, according to the survey by TotallyMoney.com, a U.K.-based personal finance website. They also underestimate the amount of interest they'd have to pay off: Only 4% were able to give the correct amount of interest. What's more, one-third of respondents thought they would actually be able to avoid paying interest by making the minimum monthly payment.
There's also a broader impact. Around 30% of the FICO credit score is based on how much people owe on their accounts. "Owing money on credit accounts doesn't necessarily mean you're a high-risk borrower with a low FICO Score," according to FICO. "However, when a high percentage of a person's available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments." In some cases, showing a very small balance and never missing a payment shows a person is good at managing cards and may be better than carrying no balance at all.
It pays to manage credit cards carefully. And paying off credit cards on a large number of accounts with outstanding balances may also be damaging to your credit score and indicate higher risk of over-extension," FICO says. "Someone who is close to maxing out several credit cards has a high credit utilization ratio and may have trouble making payments in the future."
And having no credit cards at all is another no-no, experts say. Credit cards are an essential financial tool when embarking on a career and building a credit history, says Ben Woolsey, president of credit-card advice website CreditCardForums.com.
The Little-Known Texas Law That Can Save You From Medical Debt
by Fox Business
Five years ago, Julie was taken by ambulance to the emergency room. "At that time I provided all my info including insurance information," she wrote on the Credit.com blog. "One year later I received a threat from the ambulance company that my account was going to be sent to a collection agency. I immediately called my insurance company...(which) states they were never billed, and now the statute is up for filing a claim. What should I do?"
If Julie lives in Texas, she may count herself lucky. That's because under Texas civil statutes, a health care provider must "bill a patient or other responsible person for services provided to the patient not later than the first day of the 11th month after the date the services are provided." And that's the longest they can wait to bill. In some cases they must bill even sooner, by "the date required under any contract between the health care service provider and the issuer of the health benefit plan." (For example, if a provider is a participating provider in a health insurance plan that, by contract, requires them to bill the insurance company within six months, then they would have to bill within that time frame.)
If they don't? The Texas law goes on to say that providers who violate this law "may not recover from the patient any amount that the patient would have been entitled to receive as payment or reimbursement under a health benefit plan or that the patient would not otherwise have been obligated to pay had the provider complied..." Essentially, the patient will only have to pay what they would have had to pay had the bill been submitted on time.
Julie isn't the only person who has encountered this type of problem. A commenter named Sue says she was involved in an auto accident and although she gave the hospital her Medicare card, they never billed Medicare, and a collection agency is now trying to collect $20,000 from her.
And Brenda wrote that she is also fighting a collection account where "my husband's insurance company was never billed and (insurance) will not pay it now because it is so old."
But patients who don't live in Texas aren't not necessarily out of luck, says attorney Richard Alderman, director of the Center for Consumer Law, University of Houston Law Center. "In my opinion you should have other redress or defenses if the doctor does not properly submit the bill," he says.
For example, patients who seek medical care from providers in their insurance company's network may have additional protections. The contracts providers such as doctors or hospitals sign with insurance companies may require them to bill in a timely manner. If they do not, those contracts may prohibit providers from billing patients for amounts that would have been covered had the bill been submitted in a timely manner.
And in the case of Medicare, under the Affordable Care Act, providers must generally submit Medicare fee-for-service claims within one calendar year of the date of service. If they fail to do so, Medicare guidelines state "the provider may not charge the beneficiary for the services except for such deductible and/or coinsurance amounts as would have been appropriate if Medicare payment had been made."
An Ounce of Prevention
If you don't want medical bill headaches down the road, try to head off problems initially by doing the following:
Always double- (and triple-) check your insurance and personal information with the provider at the time of service, even if you've had the same insurance for some time. Policy or group numbers, may change, and can cause billing problems. Make sure your address and contact information are up to date as well.
Don't assume that no bill means no problem. After a visit to a medical provider you should receive an Explanation of Benefits (EOB) from your insurance company and/or a bill from your provider (if you have a balance due). Mark your calendar, and if you haven't received either within 30 to 60 days after you received the service, contact the provider. If they tell you not to worry about it, take notes (and keep them where you can find them later, if needed.) This, of course, assumes you know how to contact your providers, which can prove difficult in the case of hospital or emergency room visits, where medical bills may come from various providers.
Staying on top of these bills may allow you to appeal if your insurance company denies the claim, or to dispute a bill you believe is incorrect. The longer you wait, the more likely your bill will be turned over to collections and hurt your credit scores.
Contact your insurance company or Medicare for help if a provider tries to bill you for a service that you believe should have been covered. If the provider does not bill the insurance company in a timely manner, you may want to consider paying the bill then submitting it yourself for reimbursement. This can be critically important in situations where you see health care professionals who are outside your insurance network. They may not be under the same obligation to bill promptly, as in-network providers are.
If, despite your best efforts, a bill you don't believe should have been sent to collections winds up there, you have 30 days from the initial dunning letter to dispute the debt and request validation. (It's best to do so in writing with a certified letter.) If the collector responds that you owe the debt, but you don't believe you do, consult a consumer law attorney. Medical debt that goes into collections can have a significant negative impact on your credit scores. You can pull your free annual credit reports from AnnualCreditReport.com to see if you have any debts in collection, and you can check your credit scores for free once a month on Credit.com to see how a collection account is impacting your credit.
Black Knight: 6.5M borrowers stand to benefit from refinancing
Between traditional and HARP programs, approximately 6.5 million borrowers could likely both qualify for and benefit from refinancing, according to the latest Black Knight Financial Services Mortgage Monitor Report.
Black Knight Data & Analytics Senior Vice President Ben Graboske explained that these refinance opportunities could result in significant monthly savings for qualifying borrowers.
"By looking at current interest rates on existing 30-year mortgages and applying broad-based underwriting criteria, we found that approximately 6.1 million borrowers make good candidates for traditional refinancing," said Graboske. "An additional 450,000 meet HARP-eligibility guidelines. For both groups, the potential monthly savings could be substantial. Some 500,000 American homeowners with a mortgage could save $500 or more each month by refinancing at today's rates.
"Three million could save at least $200 per month. All told, in the aggregate we're looking at about $1.5 billion dollars that American homeowners could be saving every month. It's important to remember how rate-sensitive this population is, too; if rates go up just half a percentage point, 2.6 million people fall out of that refinanceable population," he said.
Leveraging data from the Black Knight Home Price Index, along with Census Bureau income figures, Black Knight also looked into the current state of home affordability. Even after two and a half years of consistent home price increases, payment-to-income ratios are still below pre-bubble levels nationally and far beneath those at the peak of the market.
"Today, the principle and interest payment on a median-priced home is equivalent to 21% of median gross monthly income nationally," Graboske said. "In the years before the housing bubble that ratio was closer to 25-26 percent, and at the height of the market in 2006, it peaked as high as 33%. The monthly payment on a median-priced home is $400 less today than it was in 2006. But, if we look at an example scenario where interest rates rise by 75 basis points a year and home prices appreciate by 3% annually, the payment-to-income ratio would be at 27% by 2017.
"In this scenario, the payment on the median-priced home would increase by $116 per month over the next year and $241 per month by March 2017. Overall, the impact of increasing interest rates on home affordability warrants ongoing attention," he said. "With all else being equal, a one percent increase in interest rates would impact affordability as much as a 13% jump in home prices."