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Understanding Credit Scores: Insights From Kansas Attorneys – A credit score is intended to determine someone’s ability to repay a loan. They help lenders determine who is trustworthy, and therefore who should get credit, and what their interest rates will be.
But while credit scores may seem like objective measurements, traditional scoring models are based almost entirely on someone else’s credit history, which penalizes disadvantaged communities and perpetuates social inequality.
Understanding Credit Scores: Insights From Kansas Attorneys
The findings come from a new study by the Federal Reserve Bank of Kansas City’s Denver regional branch. Economist Ying Lei Toh’s research also explains efforts to improve credit scores, including measures that benefit people who have not built a credit history.
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Toh spoke with Colorado producer Rachel Estabrook about her research and what consumers can do to increase their access to credit.
Ying Lei Toh: The traditional credit scoring system doesn’t really create a level playing field. They favor consumers from more privileged backgrounds, higher-income families, and predominantly white neighborhoods. And they tend to be better indicators of credit than people with lower credit scores. To some extent, credit scores account for differences in access to credit across communities.
You’ve found that credit scores don’t always accurately predict who will be able to repay. Why not?
A credit score is based on a consumer’s number of credit accounts, their credit score, loan amount, and repayment history. The most influential factor in calculating a credit score is a consumer’s payment history—so, if you have a long record of on-time payments, this will boost your credit score.
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Consumer credit utilization rates are also taken into account. This is the share of credit you are using out of the total amount of credit you are using. The lower the balance on your card, the better your credit score compared to your credit limit. People in the highest credit score range have less than 5% of their credit score.
Why don’t credit scores take into account how much money you have in the bank? Can this lender know if you can afford to pay off your credit card?
Yes, many times lenders are reluctant to lend to consumers with poor credit simply because they don’t know anything about their credit. Historically, bank account balances and earned income were not factored into a credit score, although the new credit scoring model is based on cash flow and business data rather than credit history.
The way the credit scoring model works is that it rewards people who can get the first line of credit, especially if they can “pig” on the credit of someone with a credit history or credit score. “Piggybacking” means doing things like becoming an authorized cardholder on someone else’s credit card or making a loan with someone else. This is an opportunity for someone with no credit to get a head start on their first line of credit and give them a head start, because if you join someone else’s card as an authorized user, you actually inherit the credit history of that account.
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People who come from privileged families or low-income families, and you know, black and Hispanic families, they don’t have access to that with others who can “pig.”
There are some credit card lenders that are willing to lend to consumers without a score, but the typical scenario is that consumers have some difficulty getting started. The worst case scenario is that some consumers actually start their credit history because of negative events such as debt collection or bankruptcy. In this case, when consumers start with these negative events, they end up with a lower credit score than they should have, and research shows that people who start with a lower score end up in the lower score bucket. .
One statistic in your article that struck me was that a quarter of people who want credit say they can’t get it or don’t want to.
Yes, these consumers may actually have credit, but they’ll just get a low credit score that doesn’t actually reflect their true credit. And, these consumers come from privileged communities and families.
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How can the financial system more accurately predict someone’s ability to repay a loan, and hopefully avoid penalizing the poor?
Yes, the credit scoring industry and federal regulators have made efforts to promote the use of alternative data in credit scores. I think it’s especially looking at rent and actual payment data. Currently, rent and utility data are not systematically reported to credit agencies. The only circumstances in which homeowners or utility companies report these charges are if the consumer is delinquent and does not pay the bill. Thus, only negative payment or rent payment events are reported, but positive payment events are not. Encouraging this data to be included in a credit score helps consumers.
But there is some reluctance to use these factors because of unclear regulations on how to use such data, as well as consumer protection implications.
Make sure you make your credit card payments on time, as payment history is the single most influential factor on your credit score. If you plan to apply for a loan in the future, it’s best to apply for a loan early. Consumers can start applying for a credit card at age 18 if you have income or join your parent’s credit card. So when you start applying for credit early, you give yourself time to build a longer credit history that will benefit your credit score.
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The second thing is to keep your credit score low. Lower your outstanding balance compared to your credit limit. Don’t wait until the end of the month or the end of the billing cycle to pay it off. We can make multiple payments in a month, which will reduce your usage.
I think there’s a consensus among some consumers that carrying a balance on your credit card is a good thing, but it’s actually not good for your credit score.
Check your credit report for errors. You can request a copy of your credit report each year from the three major credit bureaus. People don’t necessarily have inaccurate account or debt collection information on their credit report.
For people who are wondering what else they can do to improve their credit score, there are credit building products that consumers can apply for – products like credit card lender loans.
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These days, especially in Colorado. We can help you keep going. The Lookout is a free, daily e-newsletter with news and events from all over Colorado. Register here and we’ll see you in the morning! A bad credit score can work against you in more ways than for you. It can be difficult to get approved for a new loan or line of credit, and even if you qualify, you may pay a higher interest rate to get the loan. A low credit score also means paying higher security deposits and higher insurance premiums for utilities or phone service.
In this case, you may want to consider a tactic called “paying for deletion,” in which you remove certain negative information from your credit report. As tempting as it may sound, better credit doesn’t have to be a quick fix.
What are the deletion fees? “Payment to Deletion essentially means that when you contact the creditor or contact them, you agree to leave the balance with an agreement that the debtor will contact the credit bureaus and remove the discriminatory comments or instructions.” Late payments on accounts,” says Paul T., CPA attorney and attorney in Williamston, Michigan. Joseph Tax Law founder Paul T. Joseph.
To file a claim for removal, you must send a letter to your creditor or debt collection agency. Charges for deleted letters should include the following:
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You ask the debtor to return any negative items on your credit file related to late or missed payments or collection accounts. By paying off some or all of the outstanding balance, you are hoping that the creditor will show good faith and remove the negative information on your credit report for that account.
Fair Credit Reporting Act (FCRA);
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