Tuesday, July 19, 2005

New Threats To Your Credit Score

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 New Threats To Your Credit Score
Everyone knows that an unpaid creditor can leave a mark on your record for years to come. But now, even your health club or local librarian can lower your score.

 By Liz Pulliam Weston

Most people know, and can accept, that an unpaid credit card bill can wind up in a collections account that will devastate their credit scores.

But did you know that your credit also could suffer from an unpaid parking ticket, a traffic fine you ignored or a forgotten library book?

A growing number of local and state agencies are using private collection companies to boost their revenues. More than 600 public libraries from Eugene, Ore., to Broome County, N.Y., turn unpaid accounts over to private collectors like Unique Management Services. Cities and courts hire others, including Municipal Services Bureau, to track down overdue parking, traffic and court fines.

Many collection agencies quickly report these overdue accounts to at least one of the three major credit bureaus, and the black marks send consumers' credit scores tumbling. Anyone who's had a spat with a phone company, health club or an insurer turn into a collection knows that this is a pretty big club to waive over the heads of consumers.
Consumer advocates question the fairness of allowing people's credit histories to be besmirched by collection actions that have nothing to do with how they handle credit.

Lenders that rely heavily on credit scores should be concerned as well. They could be rejecting otherwise reliable -- and profitable -- clients because of a distorted view of their default risk.

(Of course, these lenders also may accept such customers and simply charge them higher interest rates, in which case the consumer, as usual, bears the cost.)

I must disclose, right here, that I'm not a glacially impartial observer on this particular issue. My own otherwise sterling credit got smacked by one of the first libraries in the country to hire Unique.

This embarrassing little incident happened several years ago, when we moved from Laguna Beach to Los Angeles. Some helpful soul packed away some library books in a box that wasn't reopened for months. In the meantime, the U.S. Postal Service diligently forwarded our mail to a complete stranger in Newport Beach (all the while arguing, in its inimitable USPS way, that the misdirection wasn't actually happening). This stranger kindly sent me regular packages containing things like our credit-card statements and my 401(k) rollover check, but somehow the overdue notices never made it to our new home.

Yes, I should have kept better track of the public property I'd checked out. But I didn't, and I had no clue about the collection until I applied for a new credit card and -- for the first time in my life -- was turned down.

Once I found the black mark on my Trans Union credit report, I promptly paid the fine and the collection fee. But the notation remained, keeping myTrans Union credit score 50 points or more below those for the other two credit bureaus, which didn't include the notation.

It's been seven years, and the black mark has fallen off that report. I was fortunate that my strong credit history kept the damage from being worse. Others aren't so lucky. Those with thinner or more troubled credit histories can easily find a single collection action prevents them from getting loans, or forces them to pay higher interest rates. That's not the end of the financial effects, either, since insurers, landlords and employers also use credit information to evaluate applicants.

The concern that some collections can wrongfully distort a credit score is nothing new.

Community lending groups figured out several years ago that medical-related collections on a consumer's report aren't necessarily a sign that she was a bad credit risk, as I wrote in "Community investing spreads the wealth."

All it takes is one illness or accident to result in unpayable bills for someone who has no insurance or inadequate coverage; that doesn't necessarily mean she won't pay her other debts (although medical bills were implicated in half of all bankruptcies, according to a recent Harvard University study).

A spokesman for Fair, Isaac Co., creators of the leading FICO credit score, said the company would like to know whether certain collections are really predictive of future problems, but can't do the necessary research since credit bureaus don't distinguish among types of collections.

"We would love to be able to parse out medical bills," said Fair, Isaac spokesman Craig Watts. "We don't want to go in with any assumptions [about whether or not medical bills are predictive of future defaults], but we'd like to do some analysis."

The current system works well enough for lenders that there's little demand for change. Sure, they may miss out on a few potentially good customers, but they're able to identify more than enough good prospects to keep profits flowing.

"It's of little consequence to lenders. It doesn't matter to them," Watts said. "Of course, to the individual consumer, it matters a lot."

We could ban collection agencies from reporting municipal and library accounts to the credit bureaus. A less heavy-handed approach might be to require collectors and the bureaus to simply classify these accounts by their origin. Then the companies that create credit scores can crunch the numbers to see which collections should really count.

If the results are as I suspect -- that unpaid parking tickets and library fines are often due to absent-mindedness, rather than an indicator of financial instability -- the impact of these collection accounts on credit scores would be mitigated.

That might deprive government agencies of some revenue from scofflaws, but it would make the credit-scoring system a little more fair for the rest of us.


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