Big Brother is Watching

If you've been following the financial news over the past couple of weeks, chances are you've heard about the CompuCredit lawsuit and the potential impact on credit scores.

On June 10th, the Federal Trade Commission filed a lawsuit against CompuCredit, for the deceptive marketing of their Aspire Visa card to sub-prime borrowers. According to the lawsuit disclosures, CompuCredit was penalizing their customers for using their Aspire Visa cards with certain merchants.

A few examples that were given were massage parlors, bars, tire companies and even marriage counselors.

They were using a scoring model that helped to predict their customers' risk based on where they shopped. How in the world does buying tires or going to marriage counseling impact credit scores?

You can imagine the frenzy this piece of information is causing. Furious consumers and media outlets were demanding to know why "where" you shopped could negatively impact your FICO scores. Well, therein lies the problem... unfortunately, the media lumped these scores with FICO scores and simply put - these aren't FICO scores, folks.

This caused an awful lot of confusion and in an effort to set the record straight, here's some additional context that should help shed some light on this touchy subject:

1. First and foremost, 'where' you shop or where you use your credit card does NOT impact your FICO scores. Remember, FICO scores are based on credit bureau data so FICO scores can only use data that is contained within your credit reports.
   
   And guess what? Your credit card charges and usage patterns are not included in your credit reports. Credit card statements, yes but credit reports? No.
   
   
2. The type of score that CompuCredit is using to track 'where' you shop is known as a behavior score. Behavior scores are used to evaluate your usage of just one credit card account in particular.
   
   Now that you can breathe a little easier knowing that where you shop won't hurt your FICO scores, lets look take a look at why banks use these behavior scores and what goes into them.
   
   
3. Your credit card usage patterns and 'where' you shop is important to the banks that issue these credit cards. This data helps them paint a picture of your individual credit risk on a particular account. These behavior score models use what is called psychographic or lifestyle data.
   
   
4. Psychographic data is not something new and has been around for a very long time. Have you ever gotten a call from one of your credit card issuer's fraud department wanting to know if you just charged a $1,500 in shoes from Nordstrom's?
   
   That call was based on a change in your shopping pattern. This information is also used for marketing purposes. For example, if you frequently use your credit card to buy airline tickets, wouldn't it be a good idea to market a new airline rewards card to you?

So now that you understand how and why these behavior scores are used, what can you do about it? The answer is - not a darn thing.

Almost all credit card companies capture, monitor and use your usage information to evaluate your account. There are those that question the legal validity of this practice but it's really not a matter of your rights. It's completely legal for these companies to capture this data and use it.

CompuCredit got in trouble because of their allegedly "deceptive" marketing tactics, not because they were using the data to evaluate their client's credit risk.

What can you do to avoid companies like CompuCredit in the future?

It's simple - become a low risk borrower.

Mange your credit wisely, continue to pay your bills on time, keep your balances low and you'll automatically lessen the importance of the lifestyle data that CompuCredit and other credit card companies rely on.

It's also important to keep in mind that CompuCredit is a sub-prime credit card issuer and that means their customers are already high risk. It also means that their creditors are already watching what they do very closely.

If you don't want them watching you, make sure you're a low risk borrower and you won't have a thing to worry about.

by Edward Jamison, Esq.

Credit Alert

August 13th, 2008
by Edward Jamison, Esq.

Most people have never checked their credit score. They have always used credit wisely and have probably never been denied a loan. Long story short, they have never really had a good reason to worry about their credit score.

They do now.

Why? Because banks are systematically lowering credit limits on credit cards and HELOCS, even for borrowers with spotless credit records.

So when they receive notification from their bank of a drop in their available credit, they usually don't think too much about it at first. They say to themselves that they had no plans to max out their credit cards anyway. And besides, they just got their HELOC as a financial safety net or they only used it to finance a new car at better rates with a nice tax deduction.

But what the banks aren't telling them is the negative impact lowering their credit limits will have on their credit score.

As soon as a borrower's credit limit is lowered, it changes their Credit Utilization Rate, (CUR), which is a major component of their credit score. Credit Utilization Rates are calculated by dividing outstanding loan balances by the amount of credit available.

For example, if a borrower has $10,000 in credit card debt with an available credit limit of $40,000, their Credit Utilization Rate is 25%. But if their credit limit drops to $10,000, their CUR leaps to 100%.

The same thing happens when a bank freezes a HELOC.

As a result, millions of people who have never worried about their credit scores and who have spotless records are getting a rude surprise the next time they apply for a loan.

That's what Michael Isroff believes happened to him. He had a mortgage on his condominium in Chicago, plus a home equity line of credit with a balance of $12,000. This spring, National City froze his HELOC which had a credit limit of $100,000. National City wrote in a letter that Isroff wouldn't be allowed to borrow any more against his home's equity, and he would have to pay off the balance over time. In effect, his credit limit was reduced from $100,000 to the $12,000 that he owed.

Like most people, he didn't think too much about it at the time because he didn't really need it, it was just nice to have.

But when he went to refinance, his mortgage broker told him there was a problem. The best programs and rates were only available to borrowers with a credit score above 720 and he was two points short. He didn't know it then, but his credit score dropped overnight from 760 to 718.

And he's not alone.

There are millions of borrower's just like him who are going to need help repairing their credit to purchase a home, rent a decent apartment, buy a new car, get insurance, buy a cell phone or even just get a good job.

What can you do about it?

Call 877-783-7248 or visit www.credit-boost.net