Just a friendly reminder to our readers to check your credit card statements. Many Americans are discovering that in the month of July their credit card providers snuck up on them and slipped in fees, higher interest rates or other charges in advance of the enactment of the CARD Act, which will further regulate issuers of credit cards.
Here’s a breakdown of the phases and what they include.
First phase: August 2009
Consumers will now receive statements 21 days in advance of their payment due date. The industry standard before was just 14 days.
Card issuers must also give consumers 45 days of notice prior to an interest rate change.
Second phase: February 2010
Card issuers can only raise rates on existing balances if the consumer is A: 60 days or more past due, B: A promotional rate expired, or C: A consumer doesn’t complete the workout plan or D: A variable rate increase because of movement in an index.
The CARD act will also restrict access to credit cards for borrowers under the age of 21 without a co-signer. I expect that P2P lending will be a place to turn for these borrowers—and potentially as part of a long term trend, as these borrowers won’t be “hooked young” by credit in it’s plastic form.
Already credit card borrowers are turning towards peer to peer lending as a replacement/payoff strategy to their credit cards. Blogger Matt Jabs, of DebtFreeAdventure is conducting a “DIY Consolidation” with Lending Club after his credit card company hiked his rate up. I considered it myself after a credit card I no longer use increased its annual fee, but I decided instead to close the account, as interest on my remaining card is still low.
In sum, don’t forget to take a look at your latest statements to make sure that your credit card company didn’t sneak in adjustments to your agreement before the CARD Act took effect this month.
Showing posts with label credit. Show all posts
Showing posts with label credit. Show all posts
Wednesday, August 26, 2009
Thursday, June 18, 2009
Movie Review: Maxed Out
If you enjoy banking, finance and lending, I'm recommending that you rent the film Maxed Out.
"Maxed Out" was released in the summer of 2007 as a documentary and shows inside stories and behind the scenes tales of the credit industry, collections and bankruptcy--and left me a bigger believer in peer-to-peer lending than ever.
The film is unrated and covers some pretty heavy topics. Language includes a couple of "F-Bombs" and some discussion of suicide, but it wasn't so offensive that I felt bad about letting my tween daughter watch the film for financial literacy.
The bonus features are also very good including a 1940's educational film about credit (a fun one to watch) and an interview with Dave Ramsey.
Maxed Out also shows debt from the view of the consumer, the investor, the collector and many other steps along the way. It also shares diverse perspectives from Dave Ramsey who doesn't believe in debt, to a Real Estate agent who sees debt as a tool and a way of life to Robin Leach of Lifestyles of the Rich and Famous. I was surprised at how well the movie showed such varied perspectives without feeling fragmented or disjointed.
The subject matter movie is a downer for sure, but the movie is eye-opening in so many ways. It has a perky soundtrack and comedic interludes (not kidding). I think will motivate you to humanize your finances more. If you've seen it--please comment and let us know what you thought.
Monday, April 6, 2009
CreditKarma: Never Pay for Your Credit Score Again!
I feel like a moron. Just two weeks ago I paid $14.95 for three-month access to my credit score. Let me tell you a little story about how this began:
My neighbor, four doors down, has the same name as me, with the minor difference of a different middle initial. Her middle initial, happens to be that of my maiden name. Because I hyphenated my last names for the first few years after I was married, I have a registered “credit alias” that is exactly the same as her name, and a mailing address just a few digits off.
That really isn’t too much of a problem, except that because our addresses our so similar, and she doesn’t pay her bills, her collections accounts arrive on my credit score routinely.
Four more of these recently appeared on my credit report and were discovered by my mortgage bank during my refinance. I shot off another letter to TransUnion last week hoping to intervene before my rate-lock was threatened.
I’ve got to say, I’m pretty tired of paying for my own credit score. Yes, you can get a credit report free annually, (just one) but it’s far more helpful in a situation like mine to check it more frequently than that.
Finovate 2009 presenter, CreditKarma may be the solution people like me are looking for. It provides constant, free access to your credit score as well as some other features.
You can see how your credit score stacks up to those in your age range, state, or even email domain. You can also use their calculator system to see how adjustments in your financial situation would affect your score in theory. Would it help or hurt you to close a high-interest account, extend your credit limit, or even file for bankruptcy? I was surprised to know that paying off my credit card balance entirely will actually hurt my score, and that optimally I should be carrying some credit card debt. (Thanks anyway, but I’ll still be going debt-free). There’s a screen to view your long-term credit score over time, which will be very helpful for tracking identity fraud or excessive credit inquiries (which cost you points).
My neighbor, four doors down, has the same name as me, with the minor difference of a different middle initial. Her middle initial, happens to be that of my maiden name. Because I hyphenated my last names for the first few years after I was married, I have a registered “credit alias” that is exactly the same as her name, and a mailing address just a few digits off.
That really isn’t too much of a problem, except that because our addresses our so similar, and she doesn’t pay her bills, her collections accounts arrive on my credit score routinely.
Four more of these recently appeared on my credit report and were discovered by my mortgage bank during my refinance. I shot off another letter to TransUnion last week hoping to intervene before my rate-lock was threatened.
I’ve got to say, I’m pretty tired of paying for my own credit score. Yes, you can get a credit report free annually, (just one) but it’s far more helpful in a situation like mine to check it more frequently than that.
Finovate 2009 presenter, CreditKarma may be the solution people like me are looking for. It provides constant, free access to your credit score as well as some other features.
You can see how your credit score stacks up to those in your age range, state, or even email domain. You can also use their calculator system to see how adjustments in your financial situation would affect your score in theory. Would it help or hurt you to close a high-interest account, extend your credit limit, or even file for bankruptcy? I was surprised to know that paying off my credit card balance entirely will actually hurt my score, and that optimally I should be carrying some credit card debt. (Thanks anyway, but I’ll still be going debt-free). There’s a screen to view your long-term credit score over time, which will be very helpful for tracking identity fraud or excessive credit inquiries (which cost you points).
The site is free because of sponsorship (think Mint), but I found the sponsorship to be rather oppressive and cluttering. However, not so much that I won’t be using CreditKarma. Also, be reassured, that they fund the site through ad partnership only, not through selling your personal info.
There are some features that I especially like including a credit card debt calculator which allows you to either enter your projected monthly payment and calculate a payoff date, or enter a date and it will show you your estimated monthly payments. Adding a little extra value to this calculation is their friendly nudge that shows you how much you can cut your payoff time by paying just a little bit more.
At this time, CreditKarma is only showing credit scores from TransUnion, and not Experian and Equifax, but in my experience, TransUnion’s scores have always been the lowest (They’ve also been the only ones routinely confusing my neighbor’s accounts with mine).
Because CreditKarma is requesting your score on your behalf rather than for a lender, your credit score won’t be affected by the inquiry.
Jessica Ward is a freelance writer and blogger located in Seattle, WA. She blogs on finance, credit, family and food at http://www.pennywisefamily.blogspot.com/.
There are some features that I especially like including a credit card debt calculator which allows you to either enter your projected monthly payment and calculate a payoff date, or enter a date and it will show you your estimated monthly payments. Adding a little extra value to this calculation is their friendly nudge that shows you how much you can cut your payoff time by paying just a little bit more.
At this time, CreditKarma is only showing credit scores from TransUnion, and not Experian and Equifax, but in my experience, TransUnion’s scores have always been the lowest (They’ve also been the only ones routinely confusing my neighbor’s accounts with mine).
Because CreditKarma is requesting your score on your behalf rather than for a lender, your credit score won’t be affected by the inquiry.
Jessica Ward is a freelance writer and blogger located in Seattle, WA. She blogs on finance, credit, family and food at http://www.pennywisefamily.blogspot.com/.
Saturday, April 4, 2009
Microfinance: By Children, For Children
My only travels in the developing world thus far are limited to the month I spent in Ethiopia last year. I marveled at the ingenuity of the children—many of whom fended for themselves. When I visited orphanages, I carried with me more than 5,000 “twisting balloons” to make balloon hats and animals for the kids. The rough terrain, rowdy behavior and stray voltage common there was hard on the balloons, and they popped almost instantly.
What surprised me was that the children collected up every last scrap of broken balloon and put them to use. Some made jewelry, some built sling-shots, others took the ends and made hair elastics from them for braids. A balloon micro currency erupted in each building that I visited over the two weeks that my balloon supply held out.
Another thing that I’ve learned from families who have since visited is that the balloon currency still exists in some of the buildings—months later! Children have stashed and preserved balloons (some still intact and un-inflated) for another day.
My mind came back to this scenario when I saw a story today on the Children’s Development Bank (CDB). CDB is a bank run by and for children in India, Afghanistan, Bangladesh and Nepal.
CDB serves the street children of these countries. These kids use their entrepreneurial skills as workers for hire. Because street children are so vulnerable to theft, they rarely amass enough money to make an entrepreneurial move in building their business or education. Instead, they spend what they need to meet their day-to-day needs and spend the rest of their money on small luxuries (Pepsi and chewing gum were the favorites among the street children in Ethiopia).
CDB is solving this problem by providing interest-bearing deposit accounts to children as well as low interest microloans. The novelty of this plan is that the entire business is operated by children. A board of children determine who will receive loans—and they evaluate the credibility and creditworthiness of the child who wants the loan, as well as their intentions. The children on the advisory board also determine membership, eligibility and the size of the loan available as well as interest paid on savings for members of the bank.
Children are encouraged (and do) invest in the bank their daily earnings. They also take loans to improve their education or business services. They can borrow for items such as inventory (many children in Ethiopia had toilet-paper sales businesses) or shoe-shine supplies or any number of other tools to provide their services.
While the process is facilitated by adults with knowledge of finance, recordkeeping and banking, children are the decision-makers.
You can read more about the Children’s Development Bank by visiting their Web site at http://www.childrensdevelopmentbank.org/new.htm.
What surprised me was that the children collected up every last scrap of broken balloon and put them to use. Some made jewelry, some built sling-shots, others took the ends and made hair elastics from them for braids. A balloon micro currency erupted in each building that I visited over the two weeks that my balloon supply held out.
Another thing that I’ve learned from families who have since visited is that the balloon currency still exists in some of the buildings—months later! Children have stashed and preserved balloons (some still intact and un-inflated) for another day.
My mind came back to this scenario when I saw a story today on the Children’s Development Bank (CDB). CDB is a bank run by and for children in India, Afghanistan, Bangladesh and Nepal.
CDB serves the street children of these countries. These kids use their entrepreneurial skills as workers for hire. Because street children are so vulnerable to theft, they rarely amass enough money to make an entrepreneurial move in building their business or education. Instead, they spend what they need to meet their day-to-day needs and spend the rest of their money on small luxuries (Pepsi and chewing gum were the favorites among the street children in Ethiopia).
CDB is solving this problem by providing interest-bearing deposit accounts to children as well as low interest microloans. The novelty of this plan is that the entire business is operated by children. A board of children determine who will receive loans—and they evaluate the credibility and creditworthiness of the child who wants the loan, as well as their intentions. The children on the advisory board also determine membership, eligibility and the size of the loan available as well as interest paid on savings for members of the bank.
Children are encouraged (and do) invest in the bank their daily earnings. They also take loans to improve their education or business services. They can borrow for items such as inventory (many children in Ethiopia had toilet-paper sales businesses) or shoe-shine supplies or any number of other tools to provide their services.
While the process is facilitated by adults with knowledge of finance, recordkeeping and banking, children are the decision-makers.
You can read more about the Children’s Development Bank by visiting their Web site at http://www.childrensdevelopmentbank.org/new.htm.
IMAGE CREDIT: CDB Web Site www.childrensdevelopmentbank.org
Jessica Ward is a freelance writer, blogger and mother of two children. She blogs at www.pennywisefamily.blogspot.com.
Jessica Ward is a freelance writer, blogger and mother of two children. She blogs at www.pennywisefamily.blogspot.com.
Wednesday, January 14, 2009
Uncrunch America: Solve the credit crisis from the bottom up through social lending
Twenty-five year old entrepreneur Scott Krager has earned over 6,000 votes for his idea on change.org to solve the credit crisis from the bottom up through social lending. In the first round of voting it placed 2nd in the social entrepreneur category.
On Friday, Change.org will co-host an event at the National Press Club in Washington, DC to announce the top 10 rated ideas and plans for supporting the formation of a national advocacy campaign behind each idea. Krager's social lending idea is currently in 18th Place and needs 3,779 more votes to be among the final 10 ideas.
We interviewed Krager to find out more about uncrunch.org and his ideas to promote social lending.
What is your background and what inspired Uncrunch America?
I'm a small business owner myself. I know how valuable credit is to many small businesses. I've been following this space for the last few years. Kiva is what originally attracted me to the whole social lending niche, and then Prosper and Lending Club.
What is Uncrunch America and what do you hope to accomplish?
Uncrunch America is an organization that came out of a simple idea from Tobin Smith (leading equity and economic researcher, author and commentator) to 'uncrunch' the consumer credit markets for deserving, credit worthy Americans by promoting "social lending" networks and other web 2.0 financial education and management tools.
I fell in love with the idea and their website, and approached approached them with the proposal of promoting them by signing them up on change.org's voting contest: Top 10 ideas for Change in America.
My goal was to build awareness around social lending, gain the support of the Obama administration, and convince the government to match funds. Uncrunch.org supporters believe this is the most efficient way to put government funds to work for the people, not financial institution profits.
Who is behind Uncrunch America?
Tobin Smith and his organization ChangeWave, along with Lending Club, Credit Karma, Geezeo and OnDeck Capital.
How did you bring all the supporters together behind Uncrunch America?
I didn't personally. I signed up for change.org and submitted and promoted the idea. The founding companies have since reached out to their customers and followers to build support for the idea as well.
What has the reception been like so far for Uncrunch America?
So far, it has gotten amazing traction and I think it's because of how timely this idea is to the current credit crisis. First it made it to the second spot in the first round of voting with a few hundred votes. Now, it is in the 21st position (out of 90) in the second round of voting with 4 days left. I really thing it has a great chance of making it to the top 10.
What are Uncrunch America's biggest challenges?
The immediate challenge is to make it to the top 10 on change.org. Whether they accomplish this or not, I think their next challenge is to gain traction and get the message out there. Uncrunch will be promoted by all its partners, similar to the (RED) campaign, so it is critical that they get more supporters, and the message does not get lost in the noise.
What future plans does Uncrunch America have?
Unrcunch America will be launching a campaign to get their idea out there. In the process, they will be recruiting more members to help in this endeavor. I think it is a great initiative and hope they succeed.
Is there anything else you would like to add?
Vote, vote, vote. With only 3 days left to vote, I hope your readers click here and submit their vote for this idea. Making to the top 10 will be a great push for social lending in the US, and a great way to get attention from the incoming administration.
On Friday, Change.org will co-host an event at the National Press Club in Washington, DC to announce the top 10 rated ideas and plans for supporting the formation of a national advocacy campaign behind each idea. Krager's social lending idea is currently in 18th Place and needs 3,779 more votes to be among the final 10 ideas.
We interviewed Krager to find out more about uncrunch.org and his ideas to promote social lending.
What is your background and what inspired Uncrunch America?
I'm a small business owner myself. I know how valuable credit is to many small businesses. I've been following this space for the last few years. Kiva is what originally attracted me to the whole social lending niche, and then Prosper and Lending Club.
What is Uncrunch America and what do you hope to accomplish?
Uncrunch America is an organization that came out of a simple idea from Tobin Smith (leading equity and economic researcher, author and commentator) to 'uncrunch' the consumer credit markets for deserving, credit worthy Americans by promoting "social lending" networks and other web 2.0 financial education and management tools.
I fell in love with the idea and their website, and approached approached them with the proposal of promoting them by signing them up on change.org's voting contest: Top 10 ideas for Change in America.
My goal was to build awareness around social lending, gain the support of the Obama administration, and convince the government to match funds. Uncrunch.org supporters believe this is the most efficient way to put government funds to work for the people, not financial institution profits.
Who is behind Uncrunch America?
Tobin Smith and his organization ChangeWave, along with Lending Club, Credit Karma, Geezeo and OnDeck Capital.
How did you bring all the supporters together behind Uncrunch America?
I didn't personally. I signed up for change.org and submitted and promoted the idea. The founding companies have since reached out to their customers and followers to build support for the idea as well.
What has the reception been like so far for Uncrunch America?
So far, it has gotten amazing traction and I think it's because of how timely this idea is to the current credit crisis. First it made it to the second spot in the first round of voting with a few hundred votes. Now, it is in the 21st position (out of 90) in the second round of voting with 4 days left. I really thing it has a great chance of making it to the top 10.
What are Uncrunch America's biggest challenges?
The immediate challenge is to make it to the top 10 on change.org. Whether they accomplish this or not, I think their next challenge is to gain traction and get the message out there. Uncrunch will be promoted by all its partners, similar to the (RED) campaign, so it is critical that they get more supporters, and the message does not get lost in the noise.
What future plans does Uncrunch America have?
Unrcunch America will be launching a campaign to get their idea out there. In the process, they will be recruiting more members to help in this endeavor. I think it is a great initiative and hope they succeed.
Is there anything else you would like to add?
Vote, vote, vote. With only 3 days left to vote, I hope your readers click here and submit their vote for this idea. Making to the top 10 will be a great push for social lending in the US, and a great way to get attention from the incoming administration.
Tuesday, August 14, 2007
Credit scores on Prosper and how to get a free credit report: Part 2 of 2
In part 1 of this article, I discussed the distribution of credit scores, how credit scores are used on Prosper, and the distribution of borrowers on Prosper. In this article I will describe how you can obtain a free credit report, dispute a claim, and why it is important to have good credit.
Free Credit Report. In 2003 congress passed an amendment to the Fair Credit Reporting Act (FCRA) requiring each of the consumer reporting companies (Equifax, Experian, and TransUnion) to provide you with a free copy of your credit report at your request every 12 months. You can request this report by phone, by mail or on the web at AnnualCreditReport.com. The Federal Trade Commission has created a website to inform consumers of their options, as well as to warn consumers about impostor websites and services.
At AnnualCreditReport.com you have to fill in a form, provide them with your social security number, and answer some questions to prove your identity. After that they walk you through obtaining one credit report at a time from each of the three agencies. Each time you switch to a new agency you have to prove your identity again by answering questions based on information they have on file. Once you have completed the process you will have a report from each agency that shows your credit accounts and several years worth of payment history. What they don't provide you with is your actual credit score number. You have to pay if you want to see that. [Edit from Tom: See note at bottom on how to get Experian credit score for free as well.]
After looking through the data, it is possible that you will find an inaccuracy in your report. You will want to check all three reports because they will all be different. If you do find a mistake, don't fall for advertisements from companies that claim they can help you clean up your credit, quickly improve your credit score, or remove negative information such as late payments or bankruptcies from your credit record. Companies that advertise these services are usually fraudulent or are charging you fees (sometimes very expensive fees) for something that you can easily do yourself for free.
Disputing a claim. The websites for each of the consumer credit companies offer instructions for disputing a claim. They can be found at:
Free Credit Report. In 2003 congress passed an amendment to the Fair Credit Reporting Act (FCRA) requiring each of the consumer reporting companies (Equifax, Experian, and TransUnion) to provide you with a free copy of your credit report at your request every 12 months. You can request this report by phone, by mail or on the web at AnnualCreditReport.com. The Federal Trade Commission has created a website to inform consumers of their options, as well as to warn consumers about impostor websites and services.
At AnnualCreditReport.com you have to fill in a form, provide them with your social security number, and answer some questions to prove your identity. After that they walk you through obtaining one credit report at a time from each of the three agencies. Each time you switch to a new agency you have to prove your identity again by answering questions based on information they have on file. Once you have completed the process you will have a report from each agency that shows your credit accounts and several years worth of payment history. What they don't provide you with is your actual credit score number. You have to pay if you want to see that. [Edit from Tom: See note at bottom on how to get Experian credit score for free as well.]
After looking through the data, it is possible that you will find an inaccuracy in your report. You will want to check all three reports because they will all be different. If you do find a mistake, don't fall for advertisements from companies that claim they can help you clean up your credit, quickly improve your credit score, or remove negative information such as late payments or bankruptcies from your credit record. Companies that advertise these services are usually fraudulent or are charging you fees (sometimes very expensive fees) for something that you can easily do yourself for free.
Disputing a claim. The websites for each of the consumer credit companies offer instructions for disputing a claim. They can be found at:
If you dispute an item on your credit report the credit agencies are required to contact the lender and verify the disputed information. They are then required to let you know whether they were able to verify the information and who they talked with at the lending institution. If they cannot verify the information they are required to remove it from the report. My advice is to actively dispute any items that you know are incorrect. However, if you have legitimate negative information on there then don't bother to dispute it. The credit agencies do make mistakes, but they are also pretty good at verifying the original information, so if the negative information is correct than just work on improving for the future. As the negative information gets older your credit score will improve.
Identity theft. If in this process you discover you have been the victim of identity theft you can find information on recovering from identity theft at the Federal Trade Commission's website.
Free credit check from Prosper. Okay, so now you have your free credit reports and it will be a year before you can pull another official free credit report. What can you do in the meantime to keep an eye on your credit? Well, you can continue to get monthly reports at a cost of $9.95 per report or sign up with third party monitoring services for a similar fee. But, what if you want to do it for free? One lender on Prosper hopes to do just that. His plan is to routinely go part way through the process of creating a listing on Prosper as a borrower, until he gets to the point where it shows his Experian credit grade, and then cancel the loan process. This only works with Experian, but he hopes that by doing a similar process at other peer to peer lending sites he can check with other agencies. He figures that "it is a free and easy way to make sure my identity hasn't been stolen (at least by someone who applied for an account that checked Experian). I will probably sign up at Lending Club as well to monitor my Transunion report. If Zopa ever launches and uses Equifax I will be all set." This may work to some extent but it will not actually provide you your credit score (just Prosper's credit grade) or the detailed information that comes with a normal credit report.
Cost of poor credit. So, why all of the worry about checking and monitoring your credit? If you have got this far in the article, you probably understand the importance of having good credit. Having poor credit increases the amount that you have to pay for home and car loans. But what makes it even worse is that it can ruin marriages, contribute to poor health, and can even affect what job opportunities are available to you. One analyst at TheStreet.com suggested that having a poor credit score could cost you over $1 million dollars.
If you do monitor your credit, you should be aware that you may experience a significant change in your score this fall. Don't panic right away, it could just be due to FICOs change in their scoring algorithm. FICO is adding two additional categories on the low end of the scale, and eliminating the benefits of being an authorized user on a credit card with someone that has good credit. This has the potential to negatively affect tens of millions of scores, so be on the lookout for that change.
Update from Tom: Experian runs freecreditreport.com which provides users with a free credit report and credit score. This is seperate from AnnualCreditReport.com which provides you with one free credit report per year (without score). To get your free detailed credit report on Experian's freecreditreport.com you actually sign up for the Triple Advantage Credit Monitoring program which costs $12.95/month but if you cancel within the first 30 days it is free.
Friday, August 3, 2007
Credit Scores on Prosper - Part 1 of 2
Credit scores are the most important indicator in determining what rate you will pay when you borrow money. The worse your credit score is, the more you will have to pay in interest on your loan. Your credit score is made up of a number of components including the length of your credit history, the amount of debt that you carry, recent credit inquiries by lending institutions, and the number of late payments or defaults that you have on current or prior debt. Sometimes this score is called a FICO score because it is generated with software from Fair Isaac and Company.
There are three credit reporting agencies that produce credit scores: Equifax, Experian, and TransUnion. Each of these collect information about borrowers independently and the accuracy and quantity of information on a borrower can vary among the credit agencies. Because of differences in the data collected, the score for a given borrower can also vary among these credit agencies. Some lending institutions partner with one of these credit agencies and use them as an exclusive provider of credit scores and content, while others obtain data from all of the credit agencies when making a loan decision. Prosper exclusively uses Experian while Lending Club exclusively uses TransUnion for their credit data.
According to MyFico.com the distribution of credit scores for the general population is heavily weighted to the higher end of the spectrum with most scores falling above 700.
Prosper uses credit grades rather than displaying the raw credit scores. The following is a chart that explains that correlation.
I must say that when I came across this data I was quite surprised by this distribution. Matching the two sets of data together, we realize that E and HR borrowers combined represent only about 11% or 12% of the population (people below 520 cannot currently borrow on Prosper). Nearly half of the population falls into the AA or A credit groups.
Okay, ready for some shocking statistics? Here is the current breakdown of active loan listings on Prosper as of the writing of this listing:
Roughly half (49.4%) of the current loan listings are for HR borrowers, with only 2% for AA borrowers, and 2% for A borrowers. This is shocking when you consider that combined A and AA borrowers make up half of the general population while HR borrowers account for less than 10% of the general population.
One effect this has is that when lenders see an A or AA listing they think they are lending to the cream of the crop - the top 4% of borrowers. While, when lending to Bs or Cs they may be thinking, "This isn't too bad, I am still in the top 15% of loans". In terms of the number of Prosper loan listings they would be correct. However, in terms of the general population, lending to AA and A borrowers just puts you in the top half of borrowers, while Cs could put you in the bottom 25%.
This also clearly demonstrates that many borrowers are using Prosper as a lender of last resort. People who are unable to obtain credit elsewhere because of their low credit scores are flocking to Prosper in an attempt to obtain financing on their loan. Anyone with a score below 620 is considered subprime, which is the middle of the D credit grades on Prosper. With scores below that, many of the Es and most of the HRs would find it difficult to obtain a loan at any rate from traditional financial institutions.
The distribution of loan requests on Prosper suggests that Prosper is having difficulty attracting mainstream borrowers in the higher credit grades. This makes it difficult for lenders that want to lend large sums of money to borrowers in the top credit grades. These lenders are forced to spread the money out over a long time period, or aggressively bid down the rates on the small number of loan requests in the high credit grades. (See my previous article for why someone with good credit would want to borrow from Prosper.)
This is part 1 of a 2 part article about credit grades. Watch for an upcoming post in which I will describe how you can obtain a free credit report, dispute inaccuracies on your report, and monitor your credit. In part 2 I will also discuss how much it can cost you to have a poor credit score.
Edit/Clarification: In this post I compared FICO scores in the top graph to Experian's ScoreX scores used by Prosper. FICO scores run from 300-850 while ScoreX are from 330-830. There is really no one in the 830-850 range anyway, so trimming that doesn't really have an effect (same onthe bottom end of the scale). Although Experian's ScoreX scores are mathmatically scaled to match FICO scores they are produced by a different algorithm and could result in slightly different data. The overall analysis in this post should hold but the percentages may vary. Here's a short explaination from Wikipedia on the difference betwen FICO scores and Experian's ScoreX score:
For easy use, most scores are mathematically scaled so that they fall in the general range used by prominent scoring model competitors. Since the Fair Isaac Corp. provides the dominant scoring method, non-Fair Isaac method-generated scores often mimic FICO scores, (they often are derisively called "FAKO" scores).[1] Although not as widely used, these scores (e.g. TransUnion's "TransRisk", Experian's "ScoreX", and "PLUS" scores), are less expensive for borrowers to buy than is the FICO score. The business cost savings of buying and using non-FICO scores is financially tempting to some banks and credit card companies to use, as they need accurate risk assessment of millions of accounts.
Update: Part 2 of this article, which covers free credit reports, claim disputes and the importance of good credit is here.
There are three credit reporting agencies that produce credit scores: Equifax, Experian, and TransUnion. Each of these collect information about borrowers independently and the accuracy and quantity of information on a borrower can vary among the credit agencies. Because of differences in the data collected, the score for a given borrower can also vary among these credit agencies. Some lending institutions partner with one of these credit agencies and use them as an exclusive provider of credit scores and content, while others obtain data from all of the credit agencies when making a loan decision. Prosper exclusively uses Experian while Lending Club exclusively uses TransUnion for their credit data.
According to MyFico.com the distribution of credit scores for the general population is heavily weighted to the higher end of the spectrum with most scores falling above 700.
Prosper uses credit grades rather than displaying the raw credit scores. The following is a chart that explains that correlation.
| Grade | AA | A | B | C | D | E | HR |
| Score | 760 and up | 720-759 | 680-719 | 640-679 | 600-639 | 560-599 | 520-559 |
I must say that when I came across this data I was quite surprised by this distribution. Matching the two sets of data together, we realize that E and HR borrowers combined represent only about 11% or 12% of the population (people below 520 cannot currently borrow on Prosper). Nearly half of the population falls into the AA or A credit groups.
Okay, ready for some shocking statistics? Here is the current breakdown of active loan listings on Prosper as of the writing of this listing:
| Grade | AA | A | B | C | D | E | HR |
| Number of Listings | 54 | 56 | 113 | 230 | 382 | 500 | 1308 |
Roughly half (49.4%) of the current loan listings are for HR borrowers, with only 2% for AA borrowers, and 2% for A borrowers. This is shocking when you consider that combined A and AA borrowers make up half of the general population while HR borrowers account for less than 10% of the general population.
One effect this has is that when lenders see an A or AA listing they think they are lending to the cream of the crop - the top 4% of borrowers. While, when lending to Bs or Cs they may be thinking, "This isn't too bad, I am still in the top 15% of loans". In terms of the number of Prosper loan listings they would be correct. However, in terms of the general population, lending to AA and A borrowers just puts you in the top half of borrowers, while Cs could put you in the bottom 25%.
This also clearly demonstrates that many borrowers are using Prosper as a lender of last resort. People who are unable to obtain credit elsewhere because of their low credit scores are flocking to Prosper in an attempt to obtain financing on their loan. Anyone with a score below 620 is considered subprime, which is the middle of the D credit grades on Prosper. With scores below that, many of the Es and most of the HRs would find it difficult to obtain a loan at any rate from traditional financial institutions.
The distribution of loan requests on Prosper suggests that Prosper is having difficulty attracting mainstream borrowers in the higher credit grades. This makes it difficult for lenders that want to lend large sums of money to borrowers in the top credit grades. These lenders are forced to spread the money out over a long time period, or aggressively bid down the rates on the small number of loan requests in the high credit grades. (See my previous article for why someone with good credit would want to borrow from Prosper.)
This is part 1 of a 2 part article about credit grades. Watch for an upcoming post in which I will describe how you can obtain a free credit report, dispute inaccuracies on your report, and monitor your credit. In part 2 I will also discuss how much it can cost you to have a poor credit score.
Edit/Clarification: In this post I compared FICO scores in the top graph to Experian's ScoreX scores used by Prosper. FICO scores run from 300-850 while ScoreX are from 330-830. There is really no one in the 830-850 range anyway, so trimming that doesn't really have an effect (same onthe bottom end of the scale). Although Experian's ScoreX scores are mathmatically scaled to match FICO scores they are produced by a different algorithm and could result in slightly different data. The overall analysis in this post should hold but the percentages may vary. Here's a short explaination from Wikipedia on the difference betwen FICO scores and Experian's ScoreX score:
For easy use, most scores are mathematically scaled so that they fall in the general range used by prominent scoring model competitors. Since the Fair Isaac Corp. provides the dominant scoring method, non-Fair Isaac method-generated scores often mimic FICO scores, (they often are derisively called "FAKO" scores).[1] Although not as widely used, these scores (e.g. TransUnion's "TransRisk", Experian's "ScoreX", and "PLUS" scores), are less expensive for borrowers to buy than is the FICO score. The business cost savings of buying and using non-FICO scores is financially tempting to some banks and credit card companies to use, as they need accurate risk assessment of millions of accounts.
Update: Part 2 of this article, which covers free credit reports, claim disputes and the importance of good credit is here.
Saturday, July 7, 2007
Lending Club's Blog educates readers
Lending Club is challenging Prosper to become the leading peer to peer loan marketplace in the United States. They have been online since May 26th - just six weeks. I have not signed up as a lender or borrower yet, but I've been watching their blog pretty close. I've been very impressed with their communication with their community through the blog.
Of course they have the normal things you would expect on a corporate blog such as Lending Club announcements, but they also make a genuine effort to educate users on sound financial principles (mostly the perils of credit card debt). The posts are not overly technical or complicated. Most seem to be written for the average college age person. Someone who might be applying for their first credit card or taking out their first loan. They are clearly attempting to target the Facebook demographic. Here's a quick wrap up of the Lending Club Blog from the last six weeks along with some brief notes from me:
Education
Good Credit Part 1 - The importance of good credit - aimed at college students; housing, job, car
Good Credit Part 2 - FICO Review - what is credit; also see Components that make up a FICO score
Good Credit Part 3 - How to maintain good credit
Investment Mistake 1 - Procrastination
Investment Mistake 2 - Money Ignorance
Financial Independence - develop financial plan, start now
P2P Lending 101: The C's of Credit - character, capacity to pay, capital, collateral
Beware of the credit card access check - don't use the blank checks that credit cards send you without reading all the fine print
Know where your money goes - basic budgeting
Keeping tabs on your credit - one free copy of your credit report per year
Three financial ships - work, investment, charity (receiving, not giving)
Students: Don't be afraid of student loans - difference between 'bad' credit card debt and 'good' student loan debt
Primer on debt reduction - pay of highest interest rate debt first, consolidate debt
What banks don't want you to know - explains the practice of "universal default"; how banks can change your rates if you are late with a payment on another account
Credit Card debt is not simple - minimum payment on a $1,000 credit card debt can be a 22 year commitment
How much profit do credit card issuers generate - $16 for every $100 in outstanding credit balance
Is FICO score a reliable indicator of credit-worthiness - broaches topic of social credit scoring, how someone is more likely to pay their debt on time when they borrow from a community of people they know
Read the fine print - how credit card companies deliberately deceive card holders; the make a pledge "Lending Club does not operate with small print"
Double-cycle billing. Say what? - double cycle billing is used by 1/3 of credit card issuers and significantly increases interest
Grace Period - difference between effective annual rate (ERA) and APR and credit card grace periods
Jargon Watch: Defining DTI - percentage of a consumer’s monthly gross income that goes toward paying debts
Jargon Watch: Defining FICO - stands for Fair Isaac Corporation and is the standard credit scoring system used today; Lending Club's minimum FICO for borrowers is 640
Lending Club Promotion
Why a personal loan from Lending Club makes the most sense - interest rate, fixed payments/term, unsecure loan
Lending Club: an alternative to credit cards
Lending Club News
Close rate: 71% - a sharp increase from the original reports that only 1/3 of loans were closing
LendingMatch: Diversification and Matching - Lending Club's technology that helps lenders build their portfolio with respect to their risk/reward profile and their social connections through Facebook; also read this about LendingMatch
One week on Facebook - the report from their first week (4,000 users signed up in the first week; they are at just over 10,000 now)
Lending Club: How do we make money? How are we different than a bank? - financial comparisons between Lending Club’s operating model and bank’s models are difficult
From all early indications, Lending Club clearly has the best blog among peer to peer loan networks. By providing good, common sense financial advice they will attract an audience that will likely turn into borrowers and lenders.
Of course they have the normal things you would expect on a corporate blog such as Lending Club announcements, but they also make a genuine effort to educate users on sound financial principles (mostly the perils of credit card debt). The posts are not overly technical or complicated. Most seem to be written for the average college age person. Someone who might be applying for their first credit card or taking out their first loan. They are clearly attempting to target the Facebook demographic. Here's a quick wrap up of the Lending Club Blog from the last six weeks along with some brief notes from me:
Education
Good Credit Part 1 - The importance of good credit - aimed at college students; housing, job, car
Good Credit Part 2 - FICO Review - what is credit; also see Components that make up a FICO score
Good Credit Part 3 - How to maintain good credit
Investment Mistake 1 - Procrastination
Investment Mistake 2 - Money Ignorance
Financial Independence - develop financial plan, start now
P2P Lending 101: The C's of Credit - character, capacity to pay, capital, collateral
Beware of the credit card access check - don't use the blank checks that credit cards send you without reading all the fine print
Know where your money goes - basic budgeting
Keeping tabs on your credit - one free copy of your credit report per year
Three financial ships - work, investment, charity (receiving, not giving)
Students: Don't be afraid of student loans - difference between 'bad' credit card debt and 'good' student loan debt
Primer on debt reduction - pay of highest interest rate debt first, consolidate debt
What banks don't want you to know - explains the practice of "universal default"; how banks can change your rates if you are late with a payment on another account
Credit Card debt is not simple - minimum payment on a $1,000 credit card debt can be a 22 year commitment
How much profit do credit card issuers generate - $16 for every $100 in outstanding credit balance
Is FICO score a reliable indicator of credit-worthiness - broaches topic of social credit scoring, how someone is more likely to pay their debt on time when they borrow from a community of people they know
Read the fine print - how credit card companies deliberately deceive card holders; the make a pledge "Lending Club does not operate with small print"
Double-cycle billing. Say what? - double cycle billing is used by 1/3 of credit card issuers and significantly increases interest
Grace Period - difference between effective annual rate (ERA) and APR and credit card grace periods
Jargon Watch: Defining DTI - percentage of a consumer’s monthly gross income that goes toward paying debts
Jargon Watch: Defining FICO - stands for Fair Isaac Corporation and is the standard credit scoring system used today; Lending Club's minimum FICO for borrowers is 640
Lending Club Promotion
Why a personal loan from Lending Club makes the most sense - interest rate, fixed payments/term, unsecure loan
Lending Club: an alternative to credit cards
Lending Club News
Close rate: 71% - a sharp increase from the original reports that only 1/3 of loans were closing
LendingMatch: Diversification and Matching - Lending Club's technology that helps lenders build their portfolio with respect to their risk/reward profile and their social connections through Facebook; also read this about LendingMatch
One week on Facebook - the report from their first week (4,000 users signed up in the first week; they are at just over 10,000 now)
Lending Club: How do we make money? How are we different than a bank? - financial comparisons between Lending Club’s operating model and bank’s models are difficult
From all early indications, Lending Club clearly has the best blog among peer to peer loan networks. By providing good, common sense financial advice they will attract an audience that will likely turn into borrowers and lenders.
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