Tuesday, June 12, 2007

Cosigning a Loan?

What would you do if a friend or relative asked you to cosign a loan? Before you answer, make sure you understand what cosigning involves. Under federal law, creditors are required to give you a notice that explains your obligations.

The cosigner's notice states:

* You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.
* You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.
* The creditor can collect this debt from you without first trying to collect from the borrower.* The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.
* This notice is not the contract that makes you liable for the debt.

* Laws in your state may forbid a creditor from collecting from a cosigner without first trying to collect from the primary debtor.

Cosigners Often Pay

Studies of certain types of lenders show that for cosigned loans that go into default, as many as three out of four cosigners are asked to repay the loan. When you're asked to cosign, you're being asked to take a risk that a professional lender won't take. If the borrower met the criteria, the lender wouldn't require a cosigner.

In most states, if you cosign and your friend or relative misses a payment, the lender can immediately collect from you without first pursuing the borrower. In addition, the amount you owe may be increased by late charges or by attorneys fees if the lender decides to sue to collect. If the lender wins the case, your wages and property may be taken.

If You Do Cosign

Despite the risks, there may be times when you want to cosign. Your child may need a first loan, or a close friend may need help. Before you cosign, consider this information:

* Be sure you can afford to pay the loan. If you're asked to pay and can't, you could be sued or your credit rating could be damaged.

* Even if you're not asked to repay the debt, your liability for the loan may keep you from getting other credit because creditors will consider the cosigned loan as one of your obligations.

* Before you pledge property to secure the loan, such as your car or furniture, make sure you understand the consequences. If the borrower defaults, you could lose these items.

* Ask the lender to calculate the amount of money you might owe. The lender isn't required to do this, but may if asked. You also may be able to negotiate the specific terms of your obligation. For example, you may want to limit your liability to the principal on the loan, and not include late charges, court costs, or attorneys' fees. In this case, ask the lender to include a statement in the contract similar to: "The cosigner will be responsible only for the principal balance on this loan at the time of default."

* Ask the lender to agree, in writing, to notify you if the borrower misses a payment. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.

* Make sure you get copies of all important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement, and warranties, if you're cosigning for a purchase. You may need these documents if there's a dispute between the borrower and the seller. The lender is not required to give you these papers; you may have to get copies from the borrower.

* Check your state law for additional cosigner rights.

For more info and to order your credit report with FREE credit score please visit www.reliacredit.com

Monday, June 11, 2007

Credit scoring change overdue

THE SAVAGE TRUTH | But 'authorized user' change may hurt some women

In March I wrote about the dangers of "lending" your good credit to desperate strangers seeking to borrow money at interest rates lower than their own credit rating would justify.

Web sites had sprung up to act as "matchmakers" between people who needed improved credit, and people who have excellent credit and were tempted to earn some extra money every month by allowing these deadbeat strangers to become "authorized users" on their credit card accounts. The sites collected fees from both parties.

(Authorized users have no liability for payments, and do not have to undergo a credit check before being added to an existing account.)

Violates credit-repair act

It was a practice that should have been stopped by the government. The services clearly violate the Federal Credit Repair Organizations Act, because of how they accept payment for promises to boost the deadbeats' credit, according to John Ulzheimer, of Credit.com

I'm surprised no state or federal prosecutor sued these companies for facilitating bank or insurance fraud. By fraudulently enhancing a credit score, all three participants - the borrower, middleman, and "lender" of credit -- were participating in a deception.

Now, Fair Isaac, the company that created FICO, the most popular credit scoring system used by lenders nationwide, has announced that its new scoring model will no longer factor the scores of "authorized users" into its FICO accounts.

It's a move that should put an end to the enticement of letting a stranger use your credit-worthiness when applying for insurance or a loan. But it may also affect many unwary people, causing their credit scores to drop sharply.

This change could have a huge impact on women. Many women who use their spouse's credit card are unaware that they are not joint holders of that card.

Instead, they have gone for years as an "authorized user" on the spouse's card. Most card issuers do report payments on a user's credit report. But now, that payment history will no longer count as part of the credit score!

In the future, if that woman wants to purchase insurance or open a new account, she may find she has a very low score -- simply because those credit cards are no longer counted in her score.

Many parents added teens to their credit card accounts as authorized users to help them build a credit record. Now these accounts won't be included to help build the teens' good credit score.

I've always suggested the best way to help a young adult build a credit history was to open a "secured" card account, with a credit limit based on a deposit in a savings account at the credit granting bank.

Then the young cardholder can use the card to make purchases or cash withdrawals, and build up his or her own record of prompt and complete monthly repayments.

All of that payment history will be reported to the credit bureaus under the individual's name. (To search for a "secured card" go to Bankrate.com.)

A change for the better for all
While this change in FICO scoring may prove inconvenient for many of those who are well-meaning and legal "authorized users" of credit cards, it will close down a fraudulent process that affects all consumers by raising the cost of credit.

After all, if an individual can't qualify for credit on his or her own, but secures it fraudulently, there is a great likelihood of default -- whether on a mortgage or some other purchase.

And when lenders lose, we all wind up paying. That's the Savage Truth.

Terry Savage is a registered investment adviser.

For more info and to order your credit report with FREE credit score please visit www.reliacredit.com

Common Credit Score Myths

A lot of credit score myths about fico score ratings get spread around and some of them are just outdated information. Sometimes even lenders can give you the wrong advice and it can get confusing. But the bottom line is bad information can cost you money no matter who you get it from.

Fico score ratings are used for most mortgage lending, which means, you need to know what will hurt or help your credit score points. To make it clear, here are some of the most common credit score myths.

* Checking your credit report will hurt your credit score

Checking your own credit report and credit score counts as a soft inquiry and does not go against your score. However, if anyone else like a lender or credit card company is checking your credit report, this is considered a hard inquiry and will generally knock off about 5 credit score points.

The credit score rating system treats multiple inquiries in a 14-day period as just one inquiry. The system ignores all inquiries made within 30 days prior to the day the credit score is computed. So if you want to minimize the damage from credit inquiries, shop for a loan in that short period of time.

* Closing old accounts will improve your credit report score
Sometimes even lenders will tell you to close your old and inactive accounts as a way for improving your credit report score. In most cases, closing old accounts will actually have the opposite effect with the current credit score rating system.

Canceling old credit accounts can actually lower your credit score because it makes your credit history appear shorter. If you want to reduce your levels of available credit, it's better to reduce or close new accounts instead. Applying for new credit is more likely to lower your score.

* You need to check more than just FICO score rating
If you ever hear this from anyone, consider it a red flag. All of the three major credit reporting bureaus offer FICO credit score ratings using the formula developed by Fair, Isaac. Even though each one gives the scores a different name you only need a fico score rating from the three major credit reporting bureaus.

At Equifax, the FICO score rating is called the Beacon credit score. At TransUnion, it’s called Empirica. At Experian, it's known as the Experian/Fair, Isaac Risk Model.

The reason each of the three major credit reporting bureaus will have three different scores is because they don’t all share the same data. So when checking your credit report, just make sure it comes from the three major credit reporting bureaus: Experian, Trans Union and Equifax.

Examine your credit reports from all three major credit reporting bureaus before you apply for a big loan like a mortgage. Fix any errors in all three reports before you shop for a loan because it takes time to correct your credit report.

* Credit counseling will hurt your score
The current FICO credit score rating system ignores any reference to credit counseling that may be in your file. The researchers at Fair, Isaac, the company that created the FICO credit scoring rating system, found that people getting credit counseling didn’t default on their debts any more often than anyone else.

However, any late payments you've had with creditors will hurt your credit score. Credit counseling can hurt your ability to get a loan because you probably have had trouble paying creditors.

Some lenders will back away if you are in credit counseling. Others may see it differently, but usually will charge you higher interest rates than if you had perfect credit.

The best way to improve your credit report score is paying your bills on time and paying down credit card debt. Check your credit report regularly for any errors and make sure you don't fall for these common credit score myths.

Copyright © 2005 Credit Repair Facts.com All Rights Reserved.

This article is supplied by http://www.credit-repair-facts.com where you will find credit information, debt elimination programs and informative articles that give you the knowledge to correct your own credit and credit report.

For more info and to order your credit report with FREE credit score please visit www.reliacredit.com

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