Your Credit History – wealth and identity

Our recorded credit history is tracked by the three national credit bureaus (Equifax, TransUnion, and Experian) and each calculates a credit score. Though the credit score is a required component for loans it is NOT based on our entire financial history and it may not represent us correctly. It is up to us to ensure that it does. Why is this important? For your wealth and your identity.

Each credit bureau uses an algorithm (model) to generate a number (FICO score) based on your recorded credit history that is, imperfectly, a measure of the risk the system associates to someone with your recorded history. Lenders who depend on credit bureau reports for assessing whether or not to lend, use this score as one measure of your “credit worthiness”. Those with no financial history or less than sterling repayment records are likely to face higher cost loans IF they are able to obtain a loan at all. It is true that loans are available for those with lower credit scores but additional requirements will be imposed, including a low debt-to-income ratio. Even then, the loan will be at a higher rate.

Couples can sometimes be surprised when one partner lowers the expected family credit score. These couples may be effectively managing their financial life and yet obtain a low combined credit score that will raise their cost of borrowing. In most cases, the partner with the higher credit score applies for the loan singly to obtain the best rates (‘excellent’ rates are generally available with a FICO of 780 or higher), while the other partner must rebuild their history.

As time goes on, more and more of our interactions are managed electronically. Hand-in-glove with electronic transactions come ways for us to be identified and verified electronically. It is now more common for our financial identity to be confirmed by using facts found in one of our three credit bureau history records. It is crucial that you know and can recognize all information in each of these reports.

Once you have checked your history thoroughly, you’ll find an annual check-up to be quick and sufficient. Obtaining your credit history and checking it for errors can be completed on your own or with our assistance. If you need to make corrections, let us know or contact the specific credit bureau directly.

Finally, when you are getting ready to take out a loan for a large purchase be sure to first check your credit history (more than three months ahead) – you don’t want surprises.

So how might you be able to improve or maintain your credit score? Here are a few essentials to keep in mind:

  • don’t miss payment due dates – set up automatic minimum payments even if you pay your accounts in full (this will protect against the unexpected)
  • monitor your cash flow – don’t over extend yourself – try not to use more than 30% (better at less than 10%) of available credit (credit used compared to total credit available is called the ‘utilization rate’)
  • don’t apply for a lot of credit from different sources all at once – it can set off major alarm bells and may impede new financial loans for several months
  • if consolidation is indicated, try to keep your total credit the same and never close your oldest credit card
  • installment loans (i.e. car, mortgage) can have a positive impact on your score – be sure your lender actually reports to at least one bureau (some don’t)
  • your credit history can include a lot more than just a car loan or credit card – utility, cable, rent, and cell phone payment history can all be tracked and used either to boost the score or knock it down
  • if retirement is on the horizon, make extra effort while you are still earning to maximize all aspects of your credit history and bolster your credit score
  • if retired, disabled or unemployed restrain your credit card purchases and instead find ways to reduce expenses – it is more difficult to recover from credit card debt when income is limited
  • verify your credit history on a regular basis and correct errors promptly

Credit history is not a statement about you personally but a less than perfect measure to determine ‘credit worthiness’. It is best to capitalize on the rules to obtain the best score possible. Moreover, since credit history is now used to verify identity, it is incumbent on us to ensure the records have captured our information accurately.

Feel free to give us a call if you need help with the process.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Keeping your personal data private

Personal privacy means clients not wanting specific entities or people to have access to their personal data. Personal information hacked from various databases or revealed through social engineering (i.e., individuals are manipulated or conned into divulging information) become commodities that are sold. Once the data is available it becomes more difficult to stop it from being used. This information can potentially be used to locate people, steal personal financial assets or health care resources, and even impersonate individuals (i.e. identity theft). The best way to prevent identity theft is by preventing the initial access to private personal data.

Some personal information may appear irrelevant but when combined with other information can be sufficient to provide access to your financial or health care resources.

A survey is a common way for criminals to easily collect information about you since we’re all inclined to be helpful. More active methods could include a sham customer service agent with your account number or the last four digits of your social security requesting that you provide additional personal information or make payments. You should be particularly resistant to answering unsolicited questions when you’re in a good mood or when tired. Remember that these are times when we may be more vulnerable to a well-trained manipulator (they can reach us by phone, online, email or even at your door).

When connecting through public networks, through unsecured email, or when using a public computer, or considering a new technology be sure that your personal information is not open for others to steal. At minimum use passwords, logout when finished working on a public browser and erase the browser history.

You might be surprised by the ways that privacy can be violated:

1) Financial identity – fraudulent use of bank or credit cards. The identity may be used to originate loans, get new credit cards, and open new accounts. This will appear in a credit report and in monthly reports.

2) Driver’s license – forged driver’s license can accumulate multiple traffic violations in your name and even result in suspended license, warrant for arrest or increased insurance rates.

3) Social Security and IRS identity – in 2012 the IRS predicted losses of $21B from tax refund fraud alone.

4) Medical identity – phony health insurance claims can result in erroneous diagnosis (a frightening scenario!) based on records that are not part of your health history, not to mention the costs.

5) Child identity – child’s information and social security number thefts are vulnerable since children don’t monitor their reports.

6) Synthetic identity – this is the use of several identifications to create one new person.

7) Online Home Technologies – these technologies by default record information which is fed back to their database.

Keep in mind that a breach today may yield no obvious impact but creates the potential for future use or abuse.

There is much to think about before adopting new technology and divulging personal information. Personal information can be secured, but it requires ongoing care and thoughtfulness which can at times be both challenging and daunting. You need to take the first step by understanding the various risks (which is the goal of this article), determining what you will do and always taking a secure approach before adopting the latest tech “toy.”

ETNs (as ETFs) are they a good idea in your portfolio?

ETNs (as ETFs) are they a good idea in your portfolio?
Opinion expressed by Edi Alvarez, MS, CFP

Unlike an exchange-traded fund (ETF), an ETN (exchange-traded note) is your uncollateralized loan to investment banks. The banks promise exposure to an index’s return, minus fees. The draw is that, many (but not all) ETNs are taxed like stocks, regardless of the ETN’s true exposure not as ordinary income. These benefits could be a godsend for a hard-to-implement, tax-unfriendly strategy. You might think that you can have your cake and eat it, too.  Did we learn nothing from the bail out?

In fact, ETNs are dangerous tools in the hands of ‘professionals’ and a disaster for the unsuspecting public. They are one of the easiest ways individual investors and advisors unwittingly enter into contract relationships with vastly more sophisticated investment banks. It is hard to believe that in the midst of ‘financial regulation’ that ETNs (unlike mutual funds and most exchange-traded funds) are not registered under the Investment Company Act of 1940, or the ’40 Act, which obliges funds to have a board of directors with fiduciary responsibility and to standardize their disclosures. ETNs, on the other hand, are weakly standardized contracts. Where an ETN investor should fear what s/he doesn’t know, s/he instead is gulled into thinking s/he understands the risks and costs s/he bears.  If you can’t get yourself to read the prospectus carefully and analyse the fee structure caveat emptor.

The ETN is a fantastic deal for banks. An ETN can’t help but be fabulously profitable to its issuer. Why? They’re dirt-cheap to run. They’re an extremely cheap source of funding. More important, this funding becomes more valuable the bleaker an investment bank’s health – they can have their cake and eat it too! Finally, investors pay hefty fees for the privilege of offering this benefit. Believe it or not this isn’t enough for some issuers. They’ve inserted egregious features in the terms of many ETNs. The worst appear to insert a fee calculation that shifts even more risk to the investor, earning banks fatter margins when their ETNs suddenly drop in value (examples include DJP and GSP but there are many more).

The above fees scratch the surface. Other examples of investor unfriendliness follow:  UBS’s ETRACS (AAVX and BBVX etc) have a 4% levy on top of the 1.35% fee called event risk hedge cost.  Barclays’ iPath (BCM, etc) add 0.1% fee futures execution cost.  Also an additional 0.5% index calculation fee charged for Credit Suisse’s Liquid Beta (CSLS, CSMA, etc).

When many players in the industry behave in ways that signal they can’t be trusted, it raises questions about all ETNs. What a shame. The best ETNs could be useful tools, fulfilling their promise of tax efficiency and perfect tracking but none of these do.

The ETN product creators have gotten away with such investor-unfriendly behavior by free-riding the goodwill conventional ETFs have created as simple, low-cost, transparent, tax-efficient products. Understandably, many investors have taken for granted that the ETNs’ headline fees are calculated just like expense ratios, that “gotcha” fees are not facts of life. Given how publicly accessible ETNs are I recommend that most stay away from them.

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The above is my opinion based on readings and triggered by the excellent article in Seeking Alpha article by By Samuel Lee on March 23, 2012 – Exchange-Traded Notes Are Worse Products Than You Think

What do you do if your mortgage is denied?

How do you prepare for a mortgage application? What do you do if your mortgage application is denied?

As of August of 2011 lenders rejected about 50% of received applications for mortgage refinance (according to the Mortgage Bankers Association).

We recommend to always know and improve your credit history before you apply for a mortgage or refi. – the key is to improve your credit score.  If the mortgage is still rejected then we look at the lender – was this because they are the wrong type of lender or is there something else going on?

Why might you not qualify for a mortgage?

If your mortgage application is denied, always find out exactly why the lender turned you down.  The law states that you have the right to receive a disclosure letter – but you want more than those general letters – so use the fact that you have the right of disclosure to find out the ‘real’ reason from the front person you worked with.

The best way is to take the disclosure letter to your loan officer and ask for an explanation that makes sense to you, something that you can do something about.  The front person is a great source of answers as to how your loan is perceived at that institution.

What reasons are there for rejecting a mortgage application:

1) Appraisal was too low to back the amount of loan requested – declined due to LTV (loan-to-value). Lowball appraisals kill many purchases and refinances, but if you are certain that it is a low appraisal it is worth reapplying with a different lender.  Try to find a mortgage lender that is local and uses local appraisals to ensure that they know the market value for your home.  One of our clients had an appraisal at $1.2M and yet it came in at $2.1M with a local appraisal – not a small discrepancy between appraisals!

2) Credit history problems should always be resolved before you apply because some credit fixes can take time (6-12 months).  If your credit score is slightly lower there may be quick fixes like paying off credit card balances but even they will take 3 months before they show up in all three credit scores.

Some lenders will do a rapid rescore to get a new score soon after you know that the three credit history companies receive your changes – but this can still take time.

3) A too high Debt-to-income ratio will require that you pay off debt so that your monthly payment obligations are low enough compared to the income you earn.  Although unusual some times we find that clients have not included all of their income. In most cases, we help clients select the best assets that will be sold to pay off debt and lower their monthly debt payments.

Most lenders follow Fannie Mae (45%) and Freddie Mac guidelines some have more stringent requirements (35-38%).  Forty-five percent is a very high DTI and we recommend that despite the allowed DTI you not exceed 35% DTI.  If you are trying to get a mortgage with a DTI above 35% consider carefully if you have the capacity to maintain this debt load if  you have an emergency or unexpected financial shortfall.

4) When selecting your mortgage consider the size of the lending institution.  Often we find that community banks and credit unions have more flexible underwriting standards.  This is particularly important for those who are self-employed.

5) Do not take mortgage rejection personally.  At times it is not ‘the right time for you’ to refinance or purchase a home.  It will be the right time for you if you take the opportunity to manage your finances, pay off debt responsibly and keep adding to your earning history.  Always get your finances in order 6 to 12 months ahead if you are planning to buy a home.  For many, this is their largest debt they will obtain in their lives.