Mastering Money

Something New to Affect Your Credit Score

Due to budget crunches, there are some major U.S. cities that are hiring private collection agencies to collect on small claims that are usually ignored by the population.  Since a delinquent account handled by a private collection agency can potentially land in a credit file, many people in large cities have recently discovered that unpaid fees such as parking tickets, dog-catcher fines and library fees are lowering their credit scores.  It is actually up to the city to decide whether the information will end up in a person's credit file.

If it sounds trivial, consider this:  hundreds of cities around the country are owed millions of dollars in unpaid fines.  Since 1997 Chicago began using a collection agency to track down unpaid parking fines.  The revenue from tickets has doubled from $68 million to $154 million.  In Florida, some cities have used private agencies to find swimmers who haven't paid "beach rescue" fees after they were rescued by lifeguards.  I'd be grateful if someone saved my life.

One private company, Unique Management Services, works exclusively with libraries around the country and handles collections for 750 libraries.  This is BIG business.  Unique says it has annual revenue in the millions of dollars, and its business is growing 15% per year.  Unique uses "soft" tactics.  They let library patrons know the library isn't mad at them and wants them to return the books they borrowed.  About half of their call-center employees are students at a local Baptist seminary.

Interestingly, some cities are using collection agencies to collect on fines that are over a decade old.  The Philadelphia Parking Authority had tried this, but had to cease due to numerous complaints by debtors and  media coverage. 

In order to be reported to a credit bureau, a bill has to be more that 30 days delinquent.  It doesn't matter the size of the fine, as even small fines in any activity in a credit file can do major damage to a credit score.  Maxine Sweet, vice president of public education at Experian, one of the three credit bureaus, says no matter the amount, even small unpaid fines in your credit file can have a seriously negative impact on your credit report, "on par with a tax lien or a bankruptcy."

FICO scores range from 300 to 850; anything above 700 will get you the best rate on a loan.  However, a municipal fine such as an unpaid parking ticket reported to a credit bureau can reduce your credit score by 100 points, making it hard for someone with previously good credit to receive the best rate on a loan.  Collections activity can stay on your credit report for seven years.

It is important to note that consumers should try to come to an arrangement to have the fines wiped off their credit reports before they pay them.  Consumers should call the government agency or the collection agency and ascertain that if they pay the fine, the collection activity will be removed from their report.

Go to creditboards.com to see sample letters to send collection agencies and other advice to help consumers get items removed from credit files.

Improving Your FICO Score

You actually have three FICO scores, one for each of the three credit bureaus:  Experian, TransUnion and Equifax.  Each is based on information the credit bureau keeps in your file.  The score will change as the information in your file changes.  For a bureau to determine your FICO score, they must be aware of at least one account that has been open for at least six months with activity during the past six months.  These scores are called FICO scores because the credit bureaus use software developed by Fair Isaac Company.

Okay, so you don't think it's so important to improve your credit score?  You know your credit history isn't so hot, but so what?  Who cares? 

Lots of people care.

When you apply for a new credit card, or a car loan, or even a mortgage, lenders use your FICO score to assess the risk they are taking in loaning money to you.  Therefore, your FICO score will determine the rate you pay as well as how much a lender is willing to loan you.  It's rather like the rich get richer and the poor get poorer.  If you have bad credit, and your FICO score is low, you are considered a bad risk to those who are loaning you money.  If you loaned money to someone, wouldn't you check their payment history?  It's the old economic rule of risk / reward, which states the higher risk you take, the higher your reward should be, only the investor is not you; the investor is the mortgage company and they are investing in you.  They are making an investment in you by lending you money, and if you are a high risk, meaning there is a strong probability you will have problems paying the money back, they will charge you more to loan you the money.

It could be your FICO score is so low, they don't even want to take the risk at all.  You'll get rejected.  They figure, no matter what they charge you, it isn't worth the risk.  It isn't worth earning all that interest because they figure you'll never be able to pay the principal back.

Insurance companies also look at your FICO score.  If you have a low score, they'll charge you a higher premium.  Why?  Because they can.  Again, the rich get richer and...you know the rest.  They figure if your payment history is bad, then you are a higher risk, and that is what insurance companies know best; it is what they are in the business of doing:  estimating risk, whether that risk be if you home will burn down, if you will get into an accident, or if you will be able to pay your obligations.  They charge higher premiums to everyone who is a higher risk, no matter the risk.

Finally, suppose you are really fed up with your boss, hate your current job, start looking for a new job, find your dream job in the paper, and you apply for it.  Well guess what?  The Human Resources Department for that employer will probably check your FICO score, along with your criminal history and your drug use.  Why your FICO score?  Because they can.  Again, it gives the Human Resources Department and your prospective manager more insight into they type of person you are.  Do you pay your bills on time?  Sometimes they feel that's indicative of other behaviors in your life, such as, do you report to work on time?

Just some food for thought.  For ways to improve your FICO score, see my blog under Secret Sauce.