The credit reporting agencies have long had a very simple business model. They all sell credit reports to any company that has a “permissible purpose” to see and use the information, and they gladly accept the reporting of information if it fits their financial services mold. Traditionally (and with very few exceptions), the core account information on your credit reports is your mortgage, auto, student or personal loan, one of the various forms of plastic (credit, charge, retail and petroleum), 3^rd party collections, and three public records (bankruptcy, liens, judgments).

As you may have already figured out, this isn’t an exhaustive list of our monthly obligations. There are utilities (both public and private), insurance payments (for those who don’t pay all at once), 2^nd tier credit obligations (title loan, pawn loan, payday lending), and anything else that requires a perpetual monthly payment. Of course, none of the items in this paragraph show up on your credit reports, unless you default. And unless you choose the difficult path of forcing ECOA Reg B on your lender, you’re unlikely to get any credit for properly managing these obligations.      

There are a variety of reasons all of your obligations don’t show up in your credit files. First, and foremost, credit reporting is a voluntary act.  Neither you nor the credit bureaus can force any company (even a lender) to report anything to the credit bureaus. Some companies are simply not willing to incur the costs and liability that comes with reporting data to a credit reporting agency.

Of course there are benefits to reporting data to a credit bureau. You’ve heard the phrase, “the carrot and the stick?” Well, credit reporting is the stick. Miss a loan payment and all the world knows about it because it’s likely going to end up on your credit reports. Miss a utility payment and it’s like a tree falling in the woods…nobody knows about it (other than your utility provider).  And as long as you “cure” the account, no harm no foul.

I already know what some of you are thinking,“If this is true then why is there a defaulted (enter utility company name here) bill on my credit report?” Just because utility companies don’t regularly report to the credit bureau,s it certainly doesn’t mean they can’t impact your credit.  If you ignore them long enough they’ll simply outsource the collection activity to a 3^rd party collection agency and – you guessed it – they do report to the credit bureaus.  Oh, and your power, cable, water, phone, gas, or electricity has also been cut off, which is the best “stick” you can possibly have as a service provider.

Even if a lender reports your account to the credit reporting agencies there’s no guarantee that ALL of the important attributes of the account will be included with their reporting. Some credit card issuers will withhold your credit limit and not report it to the credit bureaus. This is problematic because it can lower your scores.    

Now, just because something isn’t on your credit report doesn’t mean you can’t try getting it on there. You can ask the credit bureaus to add it. You can certainly ask the lender or service provider to report it. And, you can certainly go overboard and try and leverage the legal system. I’m an expert witness in a case right now where a woman is suing her mortgage company for NOT reporting her mortgage to the credit bureaus, which is a huge waste of time because there’s no law requiring them to do so.

It looks like we’ve established that you simply cannot get all of your obligations on your three traditional credit reports, where it matters most.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.

A credit card for your kid? Pshaw. But wait – don’t shake your head at me. There are legit reasons to give your kid plastic. Reasons that could make your offspring a savvy spender, increasing the odds they’ll be able to support you in your geezer days.

 Nip abuse in the bud

 Some 60 percent of Americans with credit cards carry a balance to the average tune of $7,300, said Matt Schulz of CreditCards.com. Think their parents taught them about credit cards? Giving your child a credit card is scary, but letting them dive into credit unsupervised is even scarier. I’m talking “Blair Witch Project” scary.

“I’m all for teaching kids about credit as young as possible,” says Beverly Harzog, a writer for Credit.com. “If they’re ready.” Certainly before they shove off for college and some may be ready – gasp – as young as middle school.

So trust your ability to make a credit card an educational tool (if I may get all didactic on you).

When shopping, explain how the card works and when the bill arrives, explain it again. Due date? Check. Payment options check? Check.  Interest rate? Check. Grab a calculator and show them what an interest rate is – in real dollars. Talk about what happens if you don’t pay off the balance in full and make a rule to always do so.

“There have to be boundaries,” said Linsey Knerl of 1099Mom, who introduced her 9-year-old daughter to plastic through low-balance store gift cards. “There has to be conversation. There has to be follow up.”

 Let them piggy back

 After your kid shows signs of financial stability, consider helping them build their credit history. Your options include:

Pre-paid gift cards – These popular cards from Visa or MasterCard almost always have maintenance fees, so use them carefully.

Pre-paid credit card – This type of card won’t build credit, but the upside is that a child as young as 13 can get one.

Secured credit card – Put $500 in a bank account to secure the credit limit, then if the bill doesn’t get paid, the bank uses the deposit to cover it. Make sure the issuer reports the payments to the three major bureaus, Experian, TransUnion, and Equifax.

Debit card – Set your kid up with a debit card before graduating to credit. Tie it to their bank account and set up notifications so you can see where your child is charging. If they can’t handle debit, forget about credit for now. The downside is that a debit card does not establish credit history.

Authorized user – It’s still your account and your responsibility to pay, but as an authorized user your kid can make charges on your card. Be specific about what items you are allowing them to charge and remove them immediately if they screw up. Authorized users build some credit history, but not as much as a co-signer.

Tip: Consider credit from a security standpoint, Knerl suggests. “Would you freak out if you lost your checkbook? Imagine you’ve got a 15-year-old running around with your credit card. And kids never lose anything right?”

Co-signer – At 21, your grown child can get a credit card as long as you sign off on it (or if they can show a stable source of income). On their own, your child might only qualify for a secured credit card with a low limit and high interest rate. But think twice before you put your own credit history on the line, because if junior goes on a shopping spree, you are legally both on the hook to pay it off.

“The earlier you start, the easier it is to get credit later on,” said Jeanine Skowronski, a writer at TheStreet.com. “When I was 18 my mom co-signed for me. Then when I got to the point in life when I was trying to buy a car, it was a lot easier because I had a credit history.”

When the time comes, sort through credit offers being sent to your kid and help them evaluate their options. If your kid heads to college without some experience with plastic, the opportunity is ripe for epic fail.

“So many students go to college and don’t have a handle on why they need to pay the bill in full, how this can snowball into a real albatross around their neck when they graduate,” said Laura Rowley of DailyFinance. With tight boundaries that you set, failure may come, but in small doses. Aside from staying out of debt, more and more employers are checking applicants’ credit history, meaning solid credit lessons early on could improve chances of employment down the road.

 911

 In an emergency, having a credit card could help your kid. As long as you and s/he have the same definition of emergency.

Julia Scott blogs about saving money on everyday expenses like groceries, gasoline, and gifts at BargainBabe.com.

So how do we  show off  our credit “know how”?  We’re not going to run around telling people how low our interest rates are.  We’re not going to run around showing people how many credit card offers we get in the mail. No, there just aren’t that many ways to show off your credit smarts.  But, here are a few…

The FICO Pro Certification –  AllRegs  has been authorized by FICO (the company behind the FICO credit scoring system) to certify consumers and professionals as a “FICO Pro” if they successfully complete a variety of online coursework.

I’ll frequently run into LinkedIn profiles highlighting the “FICO Pro” designation.  Many of the folks who’ve earned the FICO Pro designation are in the business of credit repair and will use their new knowledge to attract new customers. 

Earning the FICO Pro deisgnation doesn’t take long, either.  “It can all be done in an afternoon”, according to Tom Gazaway, CEO of New Jersey- based Hawkeye Management ( and a FICO Pro, himself).  “There are three sections of the curriculum each followed by an online test.” 

The FCRA Certification – The credit industry’s trade association is known as the CDIA, or the Consumer Data Industry Association.  The CDIA offers an online course that will certify your knowledge of the Fair Credit Reporting Act - the comprehensive set of rules and obligations regulating credit reporting agencies and companies who use credit reports.     

This certification is limited to consumers who work in the credit industry.  I’ve been certified twice (in 1991 and 2011) and can tell you from personal experience that it’s a very difficult testing process - as it should be given the importance of complying with the Act.

It took me several weeks to get through the online coursework, each followed by an assessment exam.  The final exam took about an hour.  Those who take and pass the certification exam can add “FCRA Certified” to their resume or curriculum vitae. 

The CreditSesame Credit Badge – This one might make the most sense for the general consumer population.  CreditSesame allows you to get your credit score for free, based on your Experian credit report data. ( I’ve written about free credit score options for Mint in the past.) 

Depending on how good your credit is, you’ll earn an online badge that memorializes your credit status as being good, excellent or “credit guru”.  “People work hard to achieve great credit. The badges give them a way to show it off in a secure way”, says Adrian Nazari, CEO and Founder of CreditSesame.com.   

To get your badge, set up a member profile and then claim your free credit report and score via their website.  You’re then given the option to share your credit badge.  I tested it myself and I can certify that it’s really free, and no credit card is required.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.

Photo: BigBeaks

It’s a very simple question with a very complicated answer.  Exactly how does a credit card solicitation find its way into your mailbox?  I don’t think most people understand just how many moving parts there are “behind the scenes”, all with the goal of getting a card into your back pocket or purse.  The chronology of events that occur prior to an offer being made is long and fairly misunderstood.

Step 1 – The Decision

Credit card issuers don’t do anything arbitrarily, especially when deciding whether or not to market a credit card to an individual or a group of individuals.  The decision is generally one that’s based on a variety of metrics including, but not limited to, take rate (the percentage of consumers who will actually bite on a credit card offer, aka “response rate”), activation rate (the percentage of approved applicants who will activate the card when received), usage rate (the percentage of approved and activated card holders who will actually use it), and profit and loss (the amount of revenue generated by the cardholders minus write offs and overhead).

If a card issuer determines that marketing a specific type of card to a specific consumer or geography will yield a large number of users who will generate enough revenue…then we’re on to step 2.

Step 2 – The Prospecting

Walk to your mailbox almost any day and it’ll be filled with credit card offers.  Why your mailbox?  Again, it’s not arbitrary but based on hundreds of decision variables, which is often called the “selection criteria.” In order for you to get one of those offers the credit card issuer has to believe that you meet their criteria for credit risk.  That’s usually one of the most important traits in the issuer’s mind.  How in the world do they know what kind of risk you pose if you haven’t applied for credit?  Here’s where it gets fun…

The credit reporting agencies all have massive databases and you’re in all of them.  And unless you’ve “opted out” of receiving pre-approved credit card offers, they’re selling your information to credit card issuers for their prospecting purposes.  Don’t get me wrong, they’re not actually selling your credit reports, yet.  They’re just selling the issuers a list of consumers and addresses that meet their criteria for credit risk. Follow me…

John’s Bank wants to test market a new credit card in the Atlanta market.  Let’s say hypothetically my bank wants to acquire 5,000 new test customers in that area.  But I don’t want just any 5,000 customers.  I want 5,000 customers with FICO scores greater than 720.

So, my next step is to tell the credit bureau that I want to buy a list of consumers who all live in Atlanta (I’ll give them a zip code list to go from) and all have FICO scores greater than 720.  The credit bureaus then take that criteria and provide me with “counts” or the volume of consumers who meet my relatively simple requirements.  Let’s say 2,500,000 people meet the “Atlanta plus FICO 720” criteria.

I can buy the entire list of 2,500,000 prospects if I want.  But, remember, I only want to take on 5,000 new customers for my small test.  A typical response rate for a credit card solicitation mail campaign is about half of 1%, which means if I mail my offer to all 2.5 million people I will likely end up with 12,500 new customers.  That’s too many for my test.  What does the bank do?

The next step in the process is for the list to get cut down to a size that will likely yield a number of new customers with which I’m more comfortable.  And, since the response rate will likely be about ½ a percent I tell the credit bureau that I just want 1,000,000 prospects.

Step 3 – The Deployment

Now that we’ve determined 1,000,000 prospects will leave me with 5,000 new customers it’s time for me to send them the offer.  The credit card issuers don’t do this in house.  They’ll outsource the process to a professional mail house that will take delivery of the entire list of 1,000,000 prospects and merge their names and addresses on the credit card offer and drop them in the mail.

At this point the mail house sends the credit bureau a list of everyone who was sent an offer.  It won’t be exactly 1,000,000 because some will be dropped because of address issues and other issues.  The credit bureau takes that list of posts promotional inquiries on their credit reports.

Step 4 – The Delivery

A few days later you get home from work, check your mail, and find a new credit card offer from John’s Bank.  99.5% of you will trash it straight away.  But, 0.5% of you will open it and find the offer appealing enough to fill out the accompanying application and send it back to me for processing.   What have you just done?  You’ve technically applied for credit with John’s Bank.

When I get the application back from you I’ll pull your full credit report and score.  I do this to set the final terms of the card including the rate and the credit limit.  Technically since I used credit report screening I have to offer you something.  That’s the law. It’s called a “firm offer of credit or insurance.”

There are ways around that requirement though, like if you just filed bankruptcy the day before.  But most of you will get a new card with a super cool John’s Bank logo on it.  Within 30 days an innocuous envelope shows up in your mail with a Delaware return address.  You open it and see your new card.  And after you call to activate the card I’m happy to call you a new customer of John’s Bank.  Welcome!

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit.

Photo: Brian Turner

Have you ever heard of a company called Consumerinfo.com?  You probably have not.  But, chances are that you have heard of (or seen) FreeCreditReport.com and FreeCreditScore.com.  Both of those sites are owned by Consumerinfo.com and guess who owns Consumerinfo.com… Experian.

On March 22, 2011 David Waring, a consumer who lives in San Diego, filed a class action lawsuit against Consumerinfo.com, essentially Experian, because of the actions of FreeCreditReport.com and FreeCreditScore.com.  As with all class action lawsuits there is a large number of potential class members. Could YOU be a member of the class?  Read on to find out.

The plaintiff alleges that he and other consumers who signed up for services via the aforementioned sites were deceived because the credit score provided by Consumerinfo is not the actual score sold to lenders, yet their advertising suggests that it is used by lenders to assess creditworthiness. The score on their websites is the “PLUS” score, which isn’t even commercially available to lenders so it can’t be used to determine your creditworthiness.  Experian discloses as much, “Calculated on the PLUS Score model, your Experian Credit Score indicates your relative credit risk level for educational purposes and is not the score used by lenders.”

The problem is that on another one of their sites they state that your “Free Credit Score Matters” and “Your credit scores determine the amount credit lenders will make available to you and the interest rates and payments on mortgages, credit cards, auto loans, insurance policies, and more.” This, of course, isn’t true because none of the aforementioned lenders use your “Free Credit Score” for anything. Further, there is no disclosure in their ubiquitous television ads about how the score you get for free is not used by lenders.

The core service offered by the Consumerinfo sites (and there are a lot more than just the two mentioned in the lawsuit) is actually a credit monitoring service that includes a free score as the “loss leader” to get consumers to sign up. Despite the use of the word “free” in the URL the services aren’t actually free.  There is a trial period of seven days and if you don’t cancel your trial credit monitoring service during that time frame your credit card, which you gave them when you signed up, is charged $14.95 each month until you do cancel.  At best I’d call this “conditionally free.”

FTC fines and CARD Act requirements

Experian has gotten their hands slapped by the Federal Trade Commission in the past for how they market their “free credit report” services. They’ve paid two fines to the FTC equaling $1.25 million because of deceptive sales practices. The CARD Act even addresses how free credit reports can be marketed, which is funny considering the CARD Act was meant to curb egregious practices of credit card issuers.

The CARD Act states websites that give away free credit reports must contain the following mandatory disclosure across the top of each and every web page that mentions free credit reports;

THIS NOTICE IS REQUIRED BY LAW. Read more at FTC.GOV. You have the right to a free credit report at AnnualCreditReport.com or at 877-322-8228. The ONLY authorized source under federal law.

Experian, in response, simply started charging $1 for their “free” credit report and then subsequently changed their marketing focus to free credit scores instead of free credit reports.  If you haven’t figured it out already, the marketing of free credit SCORES does not require the above mandatory disclosure.  As I said in this interview with the New York Times, Experian remains two steps ahead of the FTC.

I reached out to Experian regarding the litigation and this was their statement, “Experian’s practice is not to comment on pending or ongoing litigation involving the company.”

Who’s in the class

The lawsuit class “period” covers the time frame from March 22, 2007 to present.  This means everyone who purchased services from FreeCreditReport.com, FreeCreditScore.com or Consumerinfo.com during that four-year period could be a member of the class. Clearly this means the class size could number in the millions.

I’ve been involved in several class action lawsuits as an expert witness. These types of cases can take years to resolve.  As such, we should not expect news any time soon and we certainly should not expect a quick resolution. But, I’ll be watching the process closely and will provide you updates as often as possible, given that many of you are probably members of the class.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow him on Twitter here.

(iStockphoto)

Every once in a while it’s important to take a moment and give yourself a little reality check, especially when it comes to the world of personal finance. I think it’s about that time. What you’re about to read is going to come across as coarse, but you need to hear these things in an unvarnished manner.

Here are four things you probably don’t want to hear about credit — but you should.

1. Banks are not your friends so don’t expect them to act like they are

Bank of America recently announced plans to implement a $59 annual fee on about 5% of their cardholder accounts in April.  The reaction was swift and emotional. OUTRAGEOUS, ILLEGAL, IMMORAL!!  One reader even called them “mean spirited,” yet a $59 annual fee is 16 cents a day.  It’s less than you spend getting your hair done, going out to dinner, running up a bar tab, etc.  In the grand scheme of things, $59 is a drop in your bucket.

It’s clear that many of us have unrealistic expectations when it comes to banks and credit card issuers.  These companies are FOR PROFIT organizations.  That means they’re in it strictly for the money, your money.  They don’t care about your personal situations, they don’t care about your excuses, they don’t care that the dog ate your checkbook.  They want to be paid, they want to make money, they want to make MORE money and they want it to come from YOU.  The sooner we stop thinking about banks and credit card issuers like we think of our family and friends the better off we’ll be.  And finally, if you don’t like annual fees, take your business elsewhere.

2. It’s your job to choose good bank products

Let me repeat that; it’s your job to ensure that the credit products you choose are actually good products. DYODD = Do Your Own Due Diligence. I have a friend who sends me stock tips from time to time and he always ends his emails with DYODD. What that means is “Don’t complain if you buy a dog.”  That same acronym applies to bank products.

If monthly fees are going to be offensive to you, don’t choose pre-paid debit cards. If annual fees are going to bother you, you probably shouldn’t open a credit card because there’s no guarantee that your “no fee” card won’t have an annual fee next year. If a $5 ATM fee is going to infuriate you, don’t use that bank’s ATM machines. And finally, if paying interest is going to drive you crazy, don’t revolve balances. Avoiding offensive bank products is actually quite easy.

3. Getting into debt was your choice

I know, I know… you didn’t ask you to lose your job and you have to survive and credit cards are your only way to pay. That’s a reasonable, in not fully acceptable, excuse for being in debt. But, “The banks kept giving me more credit cards” is not. In general, pulling out that little piece of plastic and swiping it is a voluntary act, regardless of how or why it got in your wallet. If you don’t want to get into debt them don’t use credit. Trust me, I’m fully aware that some people are addicted to credit cards. For those people, avoidance is the right strategy — and you know that was hard for me to write.

4. Credit is a privilege, not a right

This has to be my favorite one. How many advertisements for credit (and insurance) have you seen or heard with this tagline… ”get the savings you deserve?” I can assure you that no bank or insurance company believes that you “deserve” anything. Further, if you want to do business with them then you’ll have to earn the privilege of doing so.

You don’t deserve a card, a mortgage loan, a car loan, or any other credit related product. Remember, at the end of every dollar you borrow from a bank there’s an investor. That investor might be the Federal government, a hedge fund, a pension fund, a non-profit organization, or a consumer.

Every single entity on the “lender” end of the equation has a right and obligation to ensure that whoever they’re letting borrow their money is going to pay it back. It’s because of that obligation that there’s a hurdle between you and their money. That hurdle has gotten harder to jump over during the past few years, which is probably not a bad thing.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger forMint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow him on Twitter here.

(photo: sterlic)

I’ve been writing for Mint.com since July 2010 and I’ve covered credit law several times in my articles. Now, let’s see if you’ve been paying attention. Below are 5 multiple choice questions that cover the Fair Credit Reporting Act, Fair Debt Collection Practices Act, and the CARD Act.  The answers are at the end. Good luck and don’t cheat!

1. Credit Reporting Agencies will be violating the law if…

A.  They have incorrect information on your credit reports

B.  They refuse to carry out a consumer dispute

C.  They disclose a copy of your credit report to a 3^rd party without your permission

D.  All of the above

E.  None of the above

2. Banks will be violating the law if…

A.  They place incorrect information on your credit reports

B.  They pull your credit files without written or oral permission

C.  They refuse to show disputed accounts as being “in dispute” on credit reports

D.  All of the above

E.  None of the above

3. Collection Agencies will be violating the law if…

A.  They call you at work

B.  They discuss your debt with your spouse

C.  Report the collection to the credit reporting agencies without notifying you first

D.  Add interest to the original dollar amount of the debt

E.  None of the above

4. Credit Card Issuers will be violating the law if…

A.  They raise your interest rate on all future charges

B.  They raise your interest rate on existing balances

C.  They implement a new annual fee

D.  They try and charge you more than 29.99% interest, ever

E.  All of the above

5. Free Credit Report offers will be violating the law if…

A.  They do not overtly disclose that you can get free credit reports at annualcreditreport.com

B.  They take a credit card number and charge you after a trial period has expired

C.  They cross sell you “marketing scores” instead of your real credit scores

D.  They only allow you to view your credit report online for 30 days

E.  None of the above

ANSWER TO NUMBER 1:  E. None of the above.

Simply having incorrect information on your credit report isn’t an unlawful act. If you notify them that it’s incorrect and they refuse to correct it, and then they share it with a lender… that’s illegal. And, your permission is not required to disclosure your credit report to a 3^rd party. Finally, if they determine that your dispute is frivolous or irrelevant then they can ignore it.

ANSWER TO NUMBER 2:  C. They refuse to show disputed accounts as being “in dispute” on credit reports.

Simply placing incorrect information on your credit report isn’t an unlawful act. If you notify them that it’s incorrect and they refuse to correct it… that’s illegal. Banks can sell your defaulted debts to debt buyers or collection agencies without your permission. The Fair Credit Reporting Act requires that “furnishers” of items in dispute shown them as being “disputed” on your credit reports while the investigation is in process.

ANSWER TO NUMBER 3:  B. They discuss your debt with your spouse.

Collectors may call you at work unless you instruct them not to do so. They can also freely report the debts to the credit reporting agencies. They can also charge interest on the debt. But, they can’t talk about it with your spouse. The FDCPA (Fair Debt Collection Practices Act) mandates that collectors NOT discuss the details of outstanding debts with anyone but the debtor or his/her attorney.

ANSWER TO NUMBER 4: B. They raise your interest rate on existing balances.

Credit card issuers can still raise interest rates on future charges as long as they give you 45 days advance notice (there are some exceptions when they don’t have to give you notice). They can also implement a new annual fee under the same conditions and there is no cap on interest rates. But, they can no longer raise interest rates on existing balances.

ANSWER TO NUMBER 5: A. They do not overtly disclose that you can get free credit reports at annualcreditreport.com.

Taking a credit card and charging you for a subscription once a trial period has ended has gotten criticism for being deceptive but apparently it’s not illegal because many companies still do it.  And, you are almost never sold your real credit scores on any website, and that’s not illegal.  It is also not illegal to only display your credit report online for 30 days, so you better print it!

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger forMint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow him on Twitter here.

(iStockphoto)

On February 22, 2011 the bulk of the Credit Card Accountability, Responsibly and Disclosure Act (CARD Act) marked its one-year anniversary.  Now that it has been around for over a year and fully digested by the credit industry, it’s time to take inventory on some of its successes and failures.  And, like you know I love to do, bust a myth at the same time.

Success: Identity theft is down, in part, because of the Act

Identity theft incidents were down 28% in 2010 from 2009, according to Javelin Strategy and Research.  And, the newly released “Top Consumer Complaints in 2010” statistics from the Federal Trade Commission show that the number of complaints about identity theft dropped from 278,078 in 2009 to 250,854 in 2010.  It’s still the number one complaint, but not by as much as in the past.  Debt collector complaints are catching up (shocking).

This is completely coincidental, but the CARD Act can take some credit for the reduction in identity theft incidents and complaints.  The Act made it illegal for credit card issuers to charge over-limit fees on credit card transactions that took your balance over your predetermined credit limit.  So, in reaction, the credit card industry simply declines those transactions because of their inability to hit you with the $35 over-limit fee.

What that meant was any thief who swiped your card and then tried to buy something expensive enough to take you over the limit was unsuccessful because the transaction was denied at the register.  In the past those same fraudulent transactions could have been approved because the card issuer could charge the fee. Thanks, CARD Act!

Failure: Advance notice is not required for account closures or credit limit decreases

Every once in a while I have a hard time writing about something because it seems so unbelievable.  This is one of those times.  The CARD Act requires 45-day advance notice for adverse changes to the terms of your credit cardholder’s agreement.  Sounds great, right?

The problem is that two of what I would define as being THE most adverse changes do NOT require any advance notice, at all.  The first is credit limit reductions.  The issuer is not required to give you any advance notice if they lower your credit limit.  They DO have to send you something if the reduction was done because of your credit reports or scores.  But that can come AFTER the limit has already been reduced.

The second is the account closure.  There is no requirement to notify you in advance that “Hey, we’re going to close your account in 45 days… HEADS UP!”  There is, again, an obligation to eventually notify you if your credit was the basis for their decision.

This was a win for the credit card industry because they feared that if you told someone about an upcoming closure or line reduction, they would charge up their card in advance.  I’m not sure I agree with them. I don’t know many people who would max their cards out of spite.

Myth: Universal Default has been eliminated

Universal default, the process where a credit card issuer jacks up your interest rate because of something you did with a completely different card, was handicapped by the Act — but not eliminated, as many believe. The only component of old-fashioned Universal Default that was eliminated was the retroactive interest rate increase, where they’d increase rates on existing balances. Thankfully, that has been eliminated.

Other components of UD still live on. If the card is over a year old then issuers can still increase your rates, for any reason, as long as they give you the 45-day notice. Worse, if your card has an expiring teaser rate or is tied to a moving index (the so-called “variable rate” card), then no notice is required before the increase.

So, if you miss a payment with your John’s Bank Credit Card, your Dave’s Bank Card can increase your rate.  And, if your FICO score drops, for whatever reason, they can all increase your rates as well.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow him on Twitter here.

How familiar are you with Regulation B of the Equal Credit Opportunity Act? Wait, wait! Don’t stop reading because I threw out an unfamiliar legal reference. What I’m about to tell you will change how you think about applying for credit, forever.

When you walk into a financial institution and apply for some sort of credit, you have to fill out an application. That application contains language giving the lender permission to pull your credit reports and scores. This gives them what’s referred to in the Fair Credit Reporting Act (FCRA) as Permissible Purpose to get your credit data.

The lender pulls your credit reports and scores. Then they use that information to determine if they want to approve your application and under what terms. If they approve you, you’re welcomed into the family.

If, however, they deny your application, you’re sent on your merry way empty handed and a week or so later you get the rejection letter in the mail. That letter is called a “Notice of Adverse Action” and it provides you with notice of your right to get a free copy of the credit report the lender used to reject your application (after July 22 that notice will also include the score they used to deny you). You can either claim your free credit report, or you can do what most people do, which is nothing.

What I just described happens tens of thousands of times every single day. It has become the typical process of applying for credit. In fact, it has become so common that almost nobody knows that we, the applicants, actually are forgoing a very significant right.

Shoebox Credit

Let’s go back to Regulation B of the ECOA. Reg B requires that creditors, when evaluating the creditworthiness of an applicant, consider ANY information an applicant presents that reflects the applicant’s creditworthiness. Further, at the APPLICANT’S request (that’s you) creditors MUST consider credit information not reported through a credit bureau if it’s a similar type of credit account that they would consider if it were to be reported through a credit bureau.

That was confusing, I know. Here’s the low down: if you walk into a bank and apply for a loan and you hand the lender a shoebox full of receipts proving that you pay rent, cable, cell phone, insurance, electric power, natural gas, or any other credit obligation they MUST consider it per ECOA Reg B. What does that mean to you? It means you better go find a shoebox.

Don’t feel bad if you didn’t know all of this. Almost nobody knows their rights under Reg B. In fact, so few people know it that the National Credit Reporting Association says that they believe “ECOA Reg B has been conveniently forgotten by both the industry and the regulators at a cost to many credit challenged consumers.”

“ECOA Reg B provides every American with the Federally protected right to build a credit history and credit score simply by paying everyday accounts on time, such as cell phone bills, rent and utilities,” says Michael Nathans, President of Trycera Financial Credit Services. “A large segment of the population doesn’t receive the most favorable rates or offers because they either don’t have credit scores or their credit scores are too low. Having even one or two ECOA-qualified credit accounts added to your traditional credit reports and scores could change you from a denial to an approval, and save you thousands of dollars on an auto loan, for example.”

The bottom line? The next time you walk into a bank, bring your cable bills and cancelled checks in a shoebox. Hand them to the loan officer and tell them you’re choosing to leverage your rights under ECOA Reg B and you want them to consider your cable payment history. They’ll look at you like you’re crazy, but if they give the box back without considering the paperwork, they’ll be violating Federal law.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit.

photo: BigBeaks

Credit card utilization is one of the most important credit score-related topics, and also one that’s often misunderstood. This complicated equation, also called revolving utilization, is an incredibly important factor in your FICO credit scores. Grab your credit reports and a calculator as I walk you through it.

Credit card utilization is the relationship between the balances on your credit cards and the credit limits on all of your open credit card accounts.  It is expressed as a percentage and is calculated a number of ways.  It’s so important that it is a key factor in the “Debt” category of your FICO credit score.  The debt category is worth 30% of your FICO score points and while the credit card utilization percentage isn’t alone worth all 30% (that’s a myth), it’s certainly key to earning and maintaining great scores.

Line Item Utilization – Calculate this first

The first way to calculate your credit card utilization is by doing so for each one of your cards.  So, go grab each and every one of your credit cards, retail store cards and gasoline cards and make a stack.  As long as they have revolving terms, meaning you don’t have to pay them in full each month, they need to be in your pile.

Each of those cards has a credit limit, which is the highest amount that can be charged on that card.  You can find the limit by looking at a statement or by calling the credit card issuer.  Or, you can look at your credit report.  Getting the limits from your credit reports is the most important method (because that’s how credit scores calculate utilization) but they aren’t 100% accurate 100% of the time.

For every card that has a balance (meaning you got a bill this month), divide that balance by the credit limit.  Then multiply that figure by 100 and you’ll get the utilization percentage on that card.  So, if you have a $50 balance and a $500 credit limit you’ll get 10%.  Your goal is to have the lowest possible percentages.

Now, you’re going to be tempted to cheat.  Just because you already did or plan to pay the balance in full doesn’t mean your percentage is 0.  Credit scores can’t tell what your intentions are and as long as the balance is showing up on your credit report then you will have a utilization percentage greater than 0.

NOTE: Sometimes credit limits don’t show up on credit reports.  This is what I was referring to earlier about it not being accurate 100% of the time.  If your report has missing credit limits on open credit card accounts then you’re not out of the woods.  Look for the field called “High Balance” and use that figure in lieu of the missing credit limit.  The high balance is the historical highest balance on that account.

Aggregate Utilization – Calculate this next

The method for calculating aggregate utilization is exactly the same as it was for line item utilization except for one difference.  You’ll need to add together all of the balances on your credit cards and all of the credit limits as well.  Then you’ll divide the aggregate balance by the aggregate limit.

Now, it’s important you do this right.  Just because you have a credit card that doesn’t have a balance doesn’t mean it won’t count here.  You’ll still include the credit limit, which will help your percentage.  This is the number one reason you don’t want to close credit card accounts even if you don’t use (or want) the card any longer.  The unused limit helps your utilization percentage.

What’s a Good Percentage?

According to FICO, the consumers who have the highest scores in the country (760 and above) have an aggregate utilization of 7%.  That’s about as clean of an answer you’re ever going to get to a FICO score question.  Of course that doesn’t prevent people from giving answers that are all over the place.  I’ve seen 30%, I’ve seen 50% and I’ve even seen 70%.

The way the scores are designed rewards consumers for having a lower rather than higher utilization.  So, generally, the lower the number the more points you’re going to earn in your score.  30% is better than 50%, but not as good as 7%.  And I’m not sure where in the world someone got 70%, that’s just terrible.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit.