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Friday, December 21, 2007

Fair Isaac's Revamped Credit Scoring System: FICO 08

So, I may not have to write a letter to Fair Isaac complaining about the FICO credit scoring system after all. Fair Isaac is in the process of rolling out a new version of FICO called FICO 08.

Here are two clips from a WSJ article:

"...Higher-risk borrowers may find it tougher to get credit, while those with less-risky profiles -- though they may have gotten approved for credit accounts in the past -- will start to get better deals from lenders.

Two people with the same FICO score currently could see their scores diverge under the new system. One possible reason: FICO 08 gives more points to consumers who maintain a variety of credit types, such as credit cards, a mortgage and auto loan, because it shows they can manage payments on different kinds of loans. On the other hand, the new scoring system penalizes to a greater degree borrowers who use a high percentage of their available credit.

FICO 08 also will draw greater distinctions among different borrowers who are at least 90 days late in making a loan payment, known as a serious delinquency. Traditionally, many credit-scoring models grouped subprime consumers into one general category. But Fair Isaac says its new model will give a higher score to a borrower in arrears if they also have a number of other credit accounts in good standing. Conversely, a person's score could drop if he or she has multiple delinquent accounts.

'Overall, more consumers will see their FICO scores go up slightly than will see their scores drop,' says Tom Quinn, vice president of global scoring solutions for Fair Isaac..."

"...FICO 08 also aims to curtail the growing business of allowing people to polish their credit by "piggybacking" on someone else's good credit history. In recent years, credit-repair Web sites have sprung up that arrange for subprime consumers to boost their scores by becoming authorized users on accounts held by strangers with better credit. When scoring a consumer, FICO 08 won't take into consideration credit-card accounts for which that person is an authorized user. But the move also will hurt legitimate users: People who give a credit card to a child or a spouse as an authorized user to help boost their credit score..."


FICO_08: examples of how the new scoring models could affect consumers.  From WSJ Online

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Thursday, December 20, 2007

Cash: The Only Way to Buy Major Appliances

I admit: I was a bit spoiled when I was young. Up until my late teen years, I never had to do my own laundry. Even when I was an adolescent and sent off to boarding school, they had folks to take care of that stuff.

Doing laundry in college wasn't so bad, since the machines were never too far away, and I always had the option of letting it pile up then take it home for washing.

In my twenties, I started living on my own, and then laundry became a real pain in the neck. I moved quite a bit, and I never lived close to a laundromat. I would have to fill up huge sacks and lug my clothes, along with detergent, a few city blocks to get to the machines (I didn't own a car back then.) I would then have to pay up to $7 per load to get the job done. I hated it. It was a waste of time, energy and money.

In my early thirties, I ended up living in a house where the owner had a washing machine, but no dryer. I would hang my clothes to dry, and that got on my nerves eventually.

Now that I'm pushing forty, I have absolutely no tolerance for doing laundry in an inefficient way. Many of my friends who live in big cities send their laundry out, which I think is the right thing to do if you have the money and don't have the time and energy for it. But, since adulthood, I've never been comfortable with the idea of having someone else wash my clothes, even though I'd be paying for the service. I feel that dirty laundry is a very personal thing.

When I was living with the mother of my child, she handled the laundry. I paid for everything, and she handled the leg work. Eventually the loads got so big (with all the baby clothes) that she started to complain that the laundry duties were breaking her back and taking up too much of her time. I empathized, and told her that I would buy a washer and dryer for the apartment, even if I had to use a credit card. At that point, all she had to do was clear out the lower level closet which has the laundry hookups; she was using this closet to store old shoes, clothes and things I couldn't even identify.

She never cleared the closet.

On my own again, I realized that I had to buy a washer and dryer, and fast. At this point in my life, putting thousands of dollars on a credit card is simply unacceptable, so I saved up for a few months, then went shopping for a new washer and dryer in my area.

I tried Circuit City, Lowe's, Home Depot and Best Buy. The prices, selection and customer service were best at Best Buy, so I decided to make my purchase there. After poking around and asking lots of questions, I decided on the LG TROMM WM2487H 4.0 cu. ft. front load washer, and the LG TROMM LG DLE7177RM 7.3 cu. ft. matching electric dryer. For those of you who are interested, here is my review.

I paid $1,143.99 for the washer, and $999.99 for the dryer.

LG TROMM LG DLE7177RM 7.3 cu. ft. Electric DryerFirst, these machines are very handsome. They are perfectly matched in color, size and form, and they are stackable (the stackable feature is very important to me since my laundry closet is quite narrow.) The Best Buy delivery guys did a great job installing the machines; the installation was challenging due to the tight closet. When stacked, the two machines just barely fit inside my closet vertically, which was a huge relief. But the front ends of the machines extended out beyond the closet door. My solution: I just removed the closet door, which was very easy. These babies are so pretty that I probably wouldn't have closed the closet door anyway.

The washer has a huge capacity, which is important to me since I need to wash comforters and such. Even after stuffing one of my queen-sized comforters in the washer, I still have room for a sheet or two. The dryer can handle two queen-sized comforters easily. I know because I've done it.

LG TROMM WM2487H 4.0 cu. ft. Front Load WasherThese washers use very little water, which is perfect for me because the plumbing system in this place can't handle the large volume of water that most top loading washing machines use. Less water also means less energy used per load, which saves on my electric bill.

The washer removes easy stains, but it's not as good as a top loader at removing tough stains when using a regular cycle. You can, however, use the a special "stain cycle" button for loads with stubborn stains; this feature simply adds more time to the wash, and it works.

The washer easily removes all types of odors. The steam feature is great and I use it for all my loads. The superheated steam really penetrates the clothes, which is evidenced by the way the clothes smell when the wash is done.

Another advantage of front-loading washers is that they are much easier on your clothes, so your clothes will last much longer. The top loader at my parents house used to be so rough on my clothes that my t-shirts -- or anything else made from thin cotton -- would last 5 months, tops.

If wash times are a concern then this LG front loader may turn you off. Most of my loads take an hour and forty-four minutes to finish. The "delay wash" feature can help; it's a feature that lets you set the wash to start up to 19 hours in the future. So if you know you'll be getting up at 9 a.m. on a Saturday morning, you can set the machine (on Friday night) to start the wash at 7 a.m. the next morning. Wake up and the wash is done.

One of the main selling points of this particular washer is the steam feature. When I first started using the machine, I thought the steam feature was bogus, because I would put my face right up to the plastic outer window (don't worry, the inner window is heavy glass) and I couldn't see any steam at any point during the wash. So I set the washer on a steam cycle, added a typical load, then started a wash. I then paused the machine in mid-cycle. When I opened the washer door, a huge cloud of steam came out, and the steam was extremely hot! I almost burned myself. No need to worry about getting a sanitary load when you use the steam feature.

Both the washer and the dryer have a child lock feature which works great. My daughter, who is smart enough to figure these things out, wasn't able to get the washer door open or mess up the wash by playing with the many controls. (I spied on her when she made an attempt. I tricked her into thinking I was in the shower. Heh.)

You can set the washer to spin super fast after the rinse cycle, which is great because the clothes come out of the washer with most of the water extracted. This translates to less time in the dryer, which in turn saves on the electric bill. When the spin is set to extra-high, the machine puts on quite a show. It's like watching a Navy jet take off from an aircraft carrier. The speed is pretty intense. My daughter gets a real kick out of it, so I guess it's not a guy thing.

The door on washer is not reversible, but the dryer door is. The washer has an internal heater so you don't have to worry about water temperatures. Also, the washer drum is tilted by 10 degrees which makes loading and unloading easier.

The dryer includes a hard, plastic rack which you can use for drying anything from sneakers to delicate sweaters. The rack gives you the power to dry just about anything that can fit in the machine. There's also a "wrinkle care" feature with the dryer. When wrinkle care is selected, the dryer turns on intermittently after the cycle ends, to prevent the clothes from getting wrinkled. I use this feature all the time.

Finally, I've read a few reviews over @ epinions.com. Some folks have complained about a horrible mold smell from the washer. I haven't experienced this. The way I see it, their problem is one or more of the following:

  • They used regular detergent instead of high-efficiency (HE) detergent (need to use HE detergent only in these new front loaders.) Regular detergents will cause excess sudsing in the washer (like when you put regular dish detergent into a dishwasher), and this will cause water to get into places where it doesn't belong. Also, standard detergent may contain nutrients that fungi can feed on.

  • They do not give the washer a chance to air out when done washing. The instructions indicate that you should leave the door open for a while after each load, to air out the machine, which I do. I also leave the detergent compartment open for a while, since I noticed that some water tends to get left in there after each wash.

  • They leave soaking wet loads in the washer for days before removing them from the washer. Fungi just love that. You probably think I'm exaggerating, but I'm not. People do this.

  • They have the washer located in a damp, poorly ventilated basement, which is the perfect breeding ground for mold (FYI: mold is a fungus.)
Read this review and you'll see what I mean. Those who get lazy and/or don't read the instruction manual will certainly have problems with the washer. Those who do the right thing -- like me -- are very, very happy with it. I recommend both the washer and the matching electric dryer to anyone in the market for new washing appliances. I can also recommend Best Buy as an appliance retailer. Your questions and comments are welcome.

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Wednesday, December 19, 2007

The Fed's Plan for Dealing with The Mortgage Problem

The Federal Reserve has released it's plan on how to tackle the problems in the American mortgage industry. Here's how I feel about certain bullet points from the Fed's press release:

  • Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan.

  • Creditors would be required to verify the income and assets they rely upon in making a loan.

It's a real shame that Alt-A mortgages were abused. I was hoping this financing option would be available to me when I'm ready to buy, since I am self-employed and have undulating income. The way it looks now, ALT-A loans may eventually disappear from the market forever.

FYI: With stated income mortgages, you provide the lender with your social security number so that they can check your credit score, but the lender doesn't require hard proof of income, like a 2 years of tax returns or payment stubs. A stated income home loan is a type of Alt-A mortgage.

  • Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase.

Weak! The Fed should simply ban all mortgage prepayment penalties and be done with them. This is one (of many) reason why I like credit unions much more than banks: a federally chartered credit union cannot charge prepayment penalties, ever. The Federal Credit Union Act of 1934 prohibits federally chartered credit unions from assessing prepayment penalties of any type on any loan.

A credit union is a financial institution that's owned by its members. When compared to credit unions, banks tend to offer more services, and they tend approve loans and credit card applications more readily. But credit unions almost always have better interest rates on loans, better yields on savings and certificates of deposit, and reasonable fee schedules. Also, with credit unions, the terms and conditions attached to loans and credit cards are invariably more consumer-friendly.

I like the idea of benefiting from both worlds: I keep my savings in a credit union, and my business checking account with a large bank.

  • Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread premiums” unless the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans. The consumer’s written agreement with the broker must occur before the consumer applies for the loan or pays any fees.
This will definitely help. During the height of the mortgage origination frenzy, mortgage brokers would target subprime borrowers with loans that would likely go into foreclosure, so as to make big money with premium spreads.

  • Creditors and mortgage brokers would be prohibited from coercing a real estate appraiser to misstate a home’s value
Fraudulent appraisals were a big part of the problem, and lots of guilty appraisers won't be prosecuted due to lack of evidence. This proposed rule would certainly help to keep appraisers honest.

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Tuesday, December 18, 2007

Renting Has Its Benefits...

Today, I was reminded of one of the key benefits of renting: you don't have to pay a dime when expensive problems happen.

my brand new water heaterI went to take a shower this morning, and found that I had no hot water. For me, taking a cold shower is tantamount to torture, so I immediately called the management for help. The maintenance manager, Don, was at my door within 20 minutes. He checked my water heater and found it dead, which was surprising because it was less than 5 year old. There was water all over the heater and on the floor, so it was a corrosion issue. He told me that I could wait until the next day for a new heater, or he could install one right now, but I would be without water -- both hot and cold -- for about 6 hours (it takes a while to drain a water heater, and for my place you have to shut down the entire plumbing system in order to get the job done.)

Don got the job done in just under 3 hours, which made me very happy. He also replaced the rusted toilet hardware in both my bathrooms. Got some new, all-plastic hardware which should last a long time.

Total price tag for all repairs (hardware and labor): two bottles of fruit punch flavored Gatorade (I gave Don one for drinking while working, and another for the road.)

Yep, feeling pretty good about renting at the moment. The cost of a new water heater plus labor is typically in the $X,XXX range, and can go higher. It's the kind of emergency expense that can cause unprepared consumers to get trapped in a sinister debt spiral. It's one of the many reasons why it's so important for homeowners to have a fat store of emergency cash available at all times.

Now if only I could only figure out what this creature is:

what is this creature?

These little monsters have started showing up unannounced and uninvited in my place. Can someone tell me what it is? This particular specimen was a fearless creature. While it was getting a cool drink of water, I was playing with it's antennae and getting up real close to it with my macro lens. This tough guy hardly flinched. Cheeky freeloader!

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Sunday, December 02, 2007

My Mom Can Be Such A Comedian...

A few days ago I was having a conversation with my mother, and, as usual, she asked how I'm doing financially. I told my mother what I tell everyone who asks: I have no complaints. Of course, I understand why my mom asks all the time. She's known me my whole life, and for a relatively large percentage of my time on this planet, I've had plenty to complain about, including massive credit card debt, a student loan-related judgment against me, and various creditors calling me incessantly trying to collect. I'm not rich, but I am pleased with my financial circumstances, especially when I consider my irresponsible past. I've learned a lot over the years, and one key thing I've noticed is that you can live quite well and be happy while earning a lot less than the Donald Trumps of the world, but only if you have no debt, or your debt is at a very manageable level. In other words: you'll be surprised how little money you can live on when you're not servicing mountains of debt. Yep.

So this conversation with my mother took an interesting turn this time around, as she asked me if I was aware of my brother's problems with credit card debt. I told her that I wasn't, and she proceeded to enlighten me about my older (by 3 years) brother's credit card debt, which is currently at a whopping $45,000, and rising. When she told me, I did not believe her. I thought she was pulling my leg. You see, when I was growing up, my brother always seemed to have his act together when it came to matters of money. He always had savings, when I had none. He always had a job during the summer breaks, whereas my summer work history was...well...spotty. I asked her why he had so much credit card debt, and she told me that he just wasn't doing well. I still didn't believe her.

The reason for my incredulity was simple: my brother and his family are all healthy (so no big medical bills), he has a steady job working with computers and -- OK, this is the big one -- he doesn't pay rent and he doesn't have a mortgage. Yes, being the oldest boy has it's privileges, and one key benefit that he, his wife and his daughter have been enjoying for about a decade now is living in my mother's house for free (and no: my mom doesn't live with them.) Don't get the wrong idea here: I am not, and never have been, bitter about my brother's free accommodations. I think it's great. The way I see it, if you can take advantage of a good thing, then do it. Besides, I really wouldn't want to live in the same house where I grew up (my sister feels the same way.)

The only housing-related bills my brother (I'll refer to him as Phil from now on) has to pay for are the utilities and property taxes. I know that old, stone and stucco house can be expensive to heat, but I'm still not feeling any sympathy. I also know that when things aren't going well between a man and a women (his marriage isn't the happiest), money tends to drain away, for all kinds of reasons. Still, $45,000?

So, my mother eventually laid this Godzilla of a question on me. She asked, "Why don't you and your sister put some money together and help your brother out?"

I didn't answer my mom. I sat silent for about 10 seconds, and she understood what that meant: sorry, but no. She quickly changed the conversation at that point.

Once again, I am sorry, but I'm almost ready for my midlife crisis, and I've only just started building a serious savings account. Why should I help Phil? I took some serious risks, used up all my 401K savings and worked hard to get where I am today. Phil should work hard too, get a second job if he has to. I had the same problems with credit cards not too long ago, and I did the right thing and paid them off. It took a while, and it was quite painful at times, but I did it, because it had to be done. Bottom line: I know that Phil has the inner fortitude to get disciplined and get serious about fixing his finances, so I'm not going to be a crutch for him. If we were talking about a medical emergency, I would happily open my wallet. But credit card debt? I don't think so.

It's just like the current situation with all the bad mortgage debt dragging down the American and global economies. Helping those speculators and investors out would create a moral hazard. People should be willing to bear the pain and take their lumps. Besides, if we get a recession, it will help to purge the ill-considered speculating, bad debts and bad investments that have created bubbles in markets all across the globe. Market players will eventually rise from the ashes stronger, wiser and more mature.

And so will my brother Phil, just as soon as he tames all that ugly debt.

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Saturday, December 01, 2007

Credit Score Peaks At 826, Then Dives to 803

So here's the latest snapshot of my charted, FICO® credit score, provided by TransUnion® :

Updated Chart of My FICO Credit Score - December 1, 2007: 803

I don't have enough room to fit as much time as I would like, but you can see that my score peaked at 826, then dropped 14 points, then went sideways for several months, and is now at 803.

I like the FICO scoring system. In my humble opinion, the system works. It's not perfect (see my gripe below) but if a guy like me -- someone who has had serious problems with debt in the past -- can go from having a truly terrible score to 826, that's proof enough that the system is reasonably fair. I went from 697 to 826 in one year, and I think that's pretty cool.

Ok, now here's what I don't like about the system: you have to continue playing the game if you want your credit score to remain high.

What's the game? You borrow lots of money via credit cards and pay it all back over time -- with no late payments, of course. You let the banks make money off you, and, in exchange, you get to borrow a lot more money, and you get much better interest rates. That's the game. Play the game right, and you can live in a nice house, consume lots of junk, drive a nice car, etc. Play the game wrong and life can get really hard, really fast.

So, yes, I borrowed a lot, and paid it all back. But now I have to continue to use at least one of my credit cards on a regular basis if I want my credit score to remain in the 800+ zone. If I don't use my cards at all, my score will decline steadily over time, and that's not fair. In essence, I am being penalized for not using credit cards, even though I am still a very responsible consumer. I still have debt that is being reported to the credit bureaus, but student-loan and car-loan debt doesn't carry as much weight as credit card debt in the eyes of Fair Isaac.

Here's what Fair Isaac has to say about it:

You have no recent revolving balance information being reported

The score evaluates the types of credit currently in use, or that you have used in the past, and will consider the mix of retail cards, bankcards, and installment loans appearing on your credit bureau report. In general, moderate and responsible use of revolving credit accounts will boost the score slightly. Research shows that consumers with very moderate usage of revolving credit accounts (charging low balances and repaying them on time) have slightly better repayment risk than those who do not use revolving credit at all.
So, Fair Isaac expects me to swallow that? That I have to maintain a small balance on my credit card in order to be considered an exemplary credit consumer? I mean, how much is "very moderate usage" anyway? $5? $25? $200? Yuck! That leaves a nasty taste in my mouth. Come on, Fair Isaac, you can do better than that! Seems to me that it's just an excuse to give the banks a shot of making some interest income off me. Seems to me that this is a classic case of conflict of interest, since banks pay Fair Isaac for their services. Yes, Fair Isaac makes money from many different sources, but here is a quote from the Fair Isaac website:

"Fair Isaac clients include...99 of the top 100 US banks and half of the top 50 banks in the world..."
Hmmm...

So, what are my plans? To be fair, I'm going to see if my score drops below 800. If it does, I'll write to Fair Isaac and complain. You never know. My arguments may be cogent enough to convince the firm that tweaking the FICO scoring algorithm is the right thing to do. Or maybe not, but I won't feel right if I don't try.

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