Kevin Hunt: Six Secret Credit Scores And How You Can Alter Them

When you sign up for a credit card, you're making the credit-card company a life partner. It knows where you shop, when, what you buy, whether you pay your debts on time and if you're a sucker for a balance-transfer offer that leads to high interest rates.

It knows a lot more than the credit score any consumer can get, free, each year from Equifax, Experian and TransUnion. (Visit http://www.annualcreditreport.com or call 1-877-322-8228.) Credit-card companies, and the banks that own them, compile dozens of secret scores unavailable to consumers.

Will credit card companies work with you

Will credit card companies work with you

Adrian Nazari, CEO of CreditSesame.com, says there are 49 known "custom" credit scores.

"These are more proprietary, internal-risk models," he says. "I have worked with some of the major banks as an adviser and we can't disclose some of the exact risk models they have because it is proprietary. But it is safe to say that if two people have the same [credit] score and the same income and live in the same neighborhood and have the same characteristics they may not get the same treatment from two different banks because they don't exactly match."

That's the power of the secret scores. Here are some of them, with Nazari as a tour guide, and what you can do to minimize damage or even turn them into an asset.

Where do all those credit-card mailings originate? You're scored, secretly, even before the first offer arrives. A credit-card company could use a combination of secret scores outlined below — behavior, revenue and bankruptcy, among others — and then use a response model to determine if you'd actually respond to an offer. Then it targets you.

"Chase is known to be strong on the East Coast," says Nazari, "but through the acquisition of a number of assets, including Washington Mutual, they've found an entry to the West Coast area. They're offering very aggressive incentives [like $300 to open a checking account] to buy the market. It may not make sense for them, but they're trying to buy the market."

Advice: You'll know what the credit-card company really thinks of you by the offers it sends out. Sit back and wait for the best one.

Every purchase counts. This is how a credit-card company determines if you're a risk. Let's say you're a Nordstrom regular who pays off your monthly balance, then suddenly shift to an Ocean State Job Lot customer who carries a monthly balance. The credit-card company could flag you as a higher-risk customer.

"It looks for consumer spending patterns," says Nazari, "sometimes even where people are shopping. The idea is to gather that intelligence and then use that, for example, to see if the consumer is a higher risk whether they may be a candidate for certain types of products. Sometimes it can work for consumers and sometimes it can work against consumers."

Advice: Avoid late payments (the credit-card companies also look at how much you've paid in fees), exceeding your credit limit and increasing your credit limit.

This is the sucker search: Credit-card companies look for higher-risk candidates likely to spend freely, carry a balance each month and pay higher rates.

Will credit card companies work with you

"If they realize you carry a balance from month to month," says Nazari, "you may be more likely to get a zero-percent-interest balance-transfer offer so once that introductory period is over, you're 80 percent more likely to pay 17.99 percent interest on the rest of that loan. So you become highly profitable."

Advice: Don't become highly profitable for the credit-card companies. The consumer has little control over this hidden score other than retaining a good-to-excellent credit rating.

This algorithm assesses the likelihood you'll file for bankruptcy, typically generated when a customer opens a line of credit and the card issuer checks the applicant's credit report.

"On the one hand," says Nazari, "banks are looking for consumers that are making them more profit and on the other hand they are looking for consumers that are becoming more and more risky.

Advice: Monitor your credit report and resolve any issues. Pay all bills on time and maintain low debt balances. Avoid opening accounts indiscriminately because it invites too many inquiries on your credit report.

Here's where it might pay to have a bad credit history. This secret score tries to determine if you'd pay a credit-card company after defaulting on a debt. A low score here could dissuade a debt-collection agency from spending much time pursuing you.

"If you default and the bank feels you may not pay them," says Nazari, "they will be willing to work with you and give you a better deal. If you're not a career criminal, you may not get a better deal."

Advice: Avoid collections. Or realize when you can get away with ignoring a collection agency.

Are you tempted by offers from competing credit-card companies? If your score is high, the credit-card company will let you know with some tempting offers to continue using its services.

"A zero-percent [interest] credit card could be a strategy here," says Nazari. "Or if you have a credit card with them that you're not using, that's when you'll get those checks in the mail that tells you to transfer your balances. Or they're willing to waive that $50 [annual] fee to help you keep your card."

Advice: Let them know you're tempted by other cards. Call and ask for lower rates or request a zero-percent balance transfer. Or stop using the card and wait for the offers to come in.


Your Options for Dealing With Credit Card Debt

In general, simply ignoring your credit card bills will not make them go away. If you default on your credit cards, the credit card company can sue you to recover its debt. Filing for bankruptcy can stop all collection efforts and eliminate your credit card debt. But it may not be for everyone. Read on to learn more about what happens if you don’t pay your credit card debt and whether bankruptcy can help you.

If you stop making payments on your credit cards, the first thing you will receive is a lot of collection letters and phone calls from your credit card company telling you that you are in default. Depending on how much you owe, if you ignore the collection calls, the credit card company can assign your account to a collection agency and write it off as a bad debt or take you to court.

If the credit card company sues you and you do nothing, it will obtain a judgment against you. Once a creditor has a judgment, it may be able to garnish your wages, levy your bank accounts, or place liens against your assets. However, if you don't have any assets worth going after and you have no or little income (the amount that a creditor can garnish from your paycheck is limited by law), the creditor won't be able to take anything from you.

Filing lawsuits and pursuing borrowers in court is expensive. In most cases, credit card companies want to avoid the hassle and expense of litigation. As a result, they will typically be willing to settle your account for less than you owe.

However, most credit card companies don’t consider settling until you have been in default for many months. During this time, you will have to endure numerous calls and other collection attempts by the credit card company or its agents. But even if you are willing to work with your creditors, settling your credit card debt can have negative tax consequences (discussed below).

Potential Tax Consequences of Credit Card Debt Settlement

If a credit card company agrees to settle your account for less than the balance you owe, it is essentially forgiving a portion of your debt. Under certain circumstances, the Internal Revenue Service (IRS) may consider this “cancellation of debt” to be taxable income. If you have a significant amount of forgiven debt, it can substantially increase your tax liability.

Further, recent income tax obligations are typically nondischargeable in bankruptcy. This means that you would not be able to wipe them out even if you decide to file for bankruptcy after settling your debt. Whether the IRS will consider your forgiven credit card debt taxable income depends on numerous factors including your financial situation. Because tax laws are extremely complex and tend to change frequently, talk to a tax professional in your area to learn about the tax implications of settling your credit card debt.

If you are struggling to pay your credit card bills, filing for bankruptcy can stop the collection calls and wipe out your credit card debt (without negative tax consequences). However, whether bankruptcy is the right choice for you depends on a variety of factors including the amount of income, assets, and debt you have.

Keep in mind that once you receive a bankruptcy discharge, you will not be eligible for another one for a long time (discharge limits vary depending on the type of bankruptcy filed but if you filed for Chapter 7 bankruptcy and received a discharge you can’t file for another Chapter 7 for eight years). As a result, if you only have a small amount of credit card debt, filing for bankruptcy to wipe it out may not be in your best interest.


Strategies To Work With Your Credit Card Company If You Miss A Payment

Did you miss a credit card payment deadline? This can be alarming, and you might think that you will immediately incur the wrath of your credit card company. Don’t panic. Do get on the phone and contact your credit card company to make arrangements.

What If You Just Forgot To Pay?

If you have the money to pay, it is simple enough to pay a few days late. Most credit card users have neglected to make a payment from time to time. If you call customer service, you can probably even get your finance company to waive the late fee. Most financing companies give their customer service representatives the authority to waive late fees once a year as a courtesy to their good customers.

What If You Don’t Have The Money To Pay Promptly?

Lots of people get into financial difficulty from time to time. When it comes to making a choice between paying an overdue electric bill and making a late credit card payment, you might reasonably choose to keep your lights on.

If you do not have the money to pay your credit card minimum balance right now, you should still get on the phone and explain the situation. The company representative will probably ask you why you lack the money and when you think you can make a payment. If you are sure that you will have the money in a couple of weeks, it might be best to simply pay late, accept the late fee, and move on. If you cannot make your minimum payment in the near future, you should be able to work out other arrangements.

Financing companies would rather collect their money late than not at all. Most credit card companies can work with you to extend your payments. They may offer to extend reduced payment schedules or give you a month’s grace period. This arrangement might increase the overall amount you will have to pay to settle your debt, but you might be able to save some of your credit rating. Late payments can show up on your credit rating, but they are a lot better than reports that you made no payments at all.

Different companies have different rules, but it is almost always better to communicate than to simply avoid answering the phone when they try to contact you! If you stall long enough, your account might be turned over to a collection agency that will be more aggressive than your financing company. In time, they could even pursue legal action. That will certainly be more expensive that simply negotiating with your credit card company as early as possible.


Credit Cards: Advantages & Disadvantages

There are advantages and disadvantages to using credit cards. For some, credit cards are a useful tool in a consumer’s box of payment options. For others, credit cards are a never ending source of debt and a constant drain on family finances.

If you have receive a pre-approval notice, or are thinking about applying for a credit card, take a moment and review the credit card advantages and disadvantages listed below. Knowing how credit cards work and having a good understanding of the potential pit falls of credit card usage can make you a more informed consumer and a better borrower.

Convenience – Credit cards are one of the most ubiquitous forms of consumer payment available on the market. Most cards are accepted at nearly all retailers, whether online or at in-store locations. In fact, they are usable in so many locations, from grocery stores to car dealerships, that consumers rarely need to carry cash.

Record Keeping – To keep track of your cash purchases you will need to get a receipt from every store at which you shop, which is sometimes neither possible nor practical. This can make month-end or year-end accounting a nightmare. Credit cards companies, on the other hand, track your purchases and make that information available online in a neat, easily accessible spreadsheet of sorts. Most credit card companies allow you to enter budgets, set spending limits on your card, and categorize spending so that your statements are sorted according to your unique spending habits. Most credit card companies allow you to export purchasing data to your local computer accounting software, making data entry and analysis even easier.

Company Perks – Most credit card companies offer programs which give you perks based on the money you charge on the card. A popular program is airline miles, by which you obtain one, or several, airline miles (or points) for each dollar you spend on the card. Once you accumulate a certain amount of points you can book a free airline ticket. Another popular perk program is the credit card offering cash back, which, for every dollar you spend on your credit card you receive a certain percent back in cash or in credit off your next payment. Some credit card companies offer discounts at stores and retail locations, and some credit card companies even give you access to exclusive memberships and savings clubs.

Purchase Protection – Sometimes the things we buy are lost, stolen, or broken. If we buy them with cash, we can rarely recover the lost payment or get a replacement item, without having to pay additional fees, or to re-purchase the entire item again. However, credit cards offer purchase protection programs which allow you to recover the cost of an item is it is lost, stolen, or damaged, and if it was purchased using that particular credit card. It’s akin to having an automatic insurance program with every purchase you make. The purchase program works mostly with consumer items like electronics, furniture, jewelry, and the like. Consumable items like food and auto fuel are rarely, if ever, covered under credit card purchase protection programs. With some credit cards, purchase protection is offered free to users, while other companies charge a few dollars a month for this added service.

Identity Theft Protection – Identity theft is a rising concern for all consumers, not just credit card users. However, credit card companies have stepped up with purchase and identity protection plans that can help you avoid identity theft, or recover money if you do become a victim.

Effect on your Credit Score – One of the surest ways to improve your credit score is to add trade lines to your credit profile. All credit card companies report your credit activity to the credit reporting agencies, which can help improve your score. If you use credit wisely, and don’t maintain too high a credit card balance relative to your maximum credit limit, your credit card usage will likely contribute in a positive way, helping to raise your credit score. Thus, a credit card can actually help you overcome bad credit, through proper, long-term usage. However, if the credit card is not used wisely, it can work to damage your credit score, and that is discussed more below under credit card disadvantages.

Cash Advances – This is another category which serves as both an advantage and disadvantage. Most credit cards allow you to take a cash advance. In this way, your credit card works almost like a cash machine, allowing you to tap into your credit line and to withdraw cash. You can take a cash advance through most banks, ATM and cash machines, and even at some local retail stores. A cash advance would be used in those very few situations where the place at which you are making a purchase does not accept credit cards. It can also be used to make a payment to an individual who does not accept credit cards. For example, if you are purchasing something privately from an individual, but you don’t have the cash available to make the purchase, you could use a cash advance through your credit card to obtain the cash or a cashiers check to pay that individual. Cash advances usually carry higher than normal fees and interest rates, and for that reason they are discussed below in the disadvantage section as well.

Cash Advances – While convenient, cash advances can also be a disadvantage of credit cards, if not used properly. Some consumers who get used to the ease of credit card access will too often tap into their credit lines through cash advances. Many credit card companies have cash advance fees based on a flat fee per advance or as a percentage of the amount advanced. Either way, the fees can pile up quickly; and when combined with the higher than normal interest rates associated with cash advances, a credit card user can quickly find themselves at their credit limit, or behind in payments. In the past, payments you made to your credit card each month would go first toward regular purchases at lower interest rates, and lastly to the cash advances. That served to keep credit card balances high and profits higher for the credit card companies. New regulations force credit card companies to apply your payments to the higher interest debt first, and while this is an improvement over older practices, cash advances are still associated with higher interest rates and fees across most credit card companies.

Reports to the Credit Bureaus – If you make late payments to your card, or stop paying altogether, the credit card companies are often the first to report that data to the credit reporting agencies. This will have an adverse affect on your credit score and can affect your chances of getting credit in the future; not only credit cards, but also things like home mortgages, car loans, car and health insurance, store charge cards, and even student loans.

High Interest Rates– Credit cards usually feature interest rates higher than those at which you can borrow from banks. In general, the credit card interest rates will be a few percentage points higher than what you would receive on a personal loan, but in some cases the interest rate can be in the mid-teens. If you miss a payment or default on your credit card interest rates can rise to over 20% per anum. The higher the interest rate, the more you will pay each month on that card. If you pay only the minimum balance (usually 3-4% of the outstanding balance at any given time) higher interest rates will cause the credit line to negatively amortize, raising your outstanding balance and extending the amount of time you will be forced to make payments.

Teaser Rates – Most credit card companies offer low teaser rates, allowing you to make purchases at low or zero interest. However, those teaser rates often expire after only a few months, at which time interest rates can balloon, making payments unnaffordable for those carrying large balances.

High Fees – Like banks with insufficient funds fees, credit card companies also charge fees when you go over your credit limit or miss a monthly payment. These fees can be as much as $40 per month, which get added to your outstanding balance and can compound if not paid down promptly. Some credit card companies also charge maintenance fees on a yearly basis, just to have an open line of credit.

Ability to Get in Over Your Head Quickly – Many borrowers get in over their heads when the access to easy credit is made available to them. High interest rates and fees can push your balance, and monthly payments, into a range where it is hard to recover. Again, those who make only minimum monthly payments will find themselves paying on their credit cards for months and months, far surpassing the cost of the item which they purchased.

Credit cards can be a convenient way to pay for items, but they can also become a burden if not used properly. Before accepting the terms of any credit card, make sure to closely read the company’s credit card policy, interest rate features, and payment requirements. To use credit properly, make sure you purchase only those items for which you know you will soon have available cash. That way, you refrain from running high balances, paying interest, increasing the cost of the items purchased.


How Do Corporate Credit Cards Work?

Will credit card companies work with you

All credit cards work the same at the most fundamental level. A bank offers you a revolving line of credit with a piece of plastic that makes accessing that credit line easy for you and the vendors you do business with. Credit cards offer more convenience and purchasing power at the expense of interest and fees. The bank gets a profit from those fees in exchange for taking on the risk that you'll default on your credit. Beyond that, a corporate credit card has a variety of aspects that personal and small business credit cards do not.

A corporate credit card lets an employee go into the world with enough purchasing power to do her job, for example while traveling or while purchasing goods for the company. Despite the name, a corporate card is still issued to an individual. Your corporate card will bear both the company's name and your name. If something goes wrong with the credit, you will be personally responsible for any outstanding balances. In most cases, your credit will be considered along with that of the company before a corporate card is issued.

One of two types of corporate card, an individual payment card feels the most like a personal card. You as an employee are responsible for paying all balances on the card. You would then submit expense reports to justify what you bought using the card and be reimbursed by the corporation according to company policy. Companies issuing this sort of card are typically less watchful than others about their use because the employee pays bills directly.

With a company payment card, the company pays monthly balances or minimum payments on your corporate card. This payment will only apply to charges permitted by company policy. If you make unapproved purchases with the card, the company will either ask you to pay that balance directly or bill you for the charges internally. Companies issuing this kind of card tend to give the bills closer scrutiny, looking for employees who slip in unreasonable or personal expenses.

Corporate cards represent risk to all three parties involved. The issuing bank takes on a greater risk of default, as corporate credit is less reliable than personal credit. The company risks its employees abusing the credit line and sticking the company with the bill. As an employee holding a corporate card, you run the risk of higher interest rates on purchases you are stuck with and of damage to your personal credit if the company doesn't live up to its financial obligations to reimburse you.

Jake Wayne has written professionally for more than 12 years, including assignments in business writing, national magazines and book-length projects. He has a psychology degree from the University of Oregon and black belts in three martial arts.