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An Interview with Patrick Ritchie, Author of “The Credit Roadmap”

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An Interview with Patrick Ritchie, Author of “The Credit Roadmap”

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    Patrick Ritchie is the author of The Credit Road Map, an in-depth look into how the credit world works. He is a certified instructor with the Arizona Department of Real Estate. Patrick is a guest lecturer for The Ohio State University and Arizona State University MBA programs. His book is approved by the National Association of REALTORS® and is required reading in finance and real estate classes at major universities. He and the author worked together at Winding Hollow Country Club in New Albany, Ohio in the mid-1990s.

    On Credit

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      1. Why is a good credit rating so important, and how can people improve their credit ratings?

      The main reasons are to borrow money or to seek employment. Obviously lenders look at credit reports and scores in making lending decisions. Employers, more and more, are looking at credit reports as a judge of character in the hiring process. There was a student in the Personal Finance class I guest lecture in at Ohio State who was offered a job and then had it rescinded when HR ran a credit report on him. In a tighter job market it literally can pay to have a better credit report than the next applicant.

      As far as improving one’s credit, the single most important aspect is to understand what is going on in the credit report. Having an understanding of what is contained in the credit report and what is not, FICO® scores consider five factors in calculating a score:

      1. Payment History: 35%
      2. Balances 30%
      3. Inquiries and New Debt: 10%
      4. Types of Credit: 10%
      5. Length of History: 15%

      With these set of factors the ideal account would be a credit card that I have always paid on-time (Payment 35%), with a balance under 50% of my available limit (Balances 30%), it is a major credit card (Types of Credit 10%) and I have had it open for over seven years (Length of History 15%). This is just an example of how the factors apply. There are many things that do not have a role in credit, such as income, assets, down payment amount, interest rates; these items do not influence our credit. Since income and assets play no role, we are all essentially on a level playing field from the standpoint that our credit will be based on our management of our given resources rather than the amount or lack of resources.

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      The best example of this would be two past clients of mine. I like this example because the two clients were the same age, but were in two entirely different worlds when it came to career and finances. The first client played for an NFL team, his income was $2,000,000 annually. The second client was a school teacher; her income was $40,000 annually. Obviously there is no comparison in regards to their resources. However, the credit playing field was completely level and the school teacher excelled, she had close to an 800 score, a fantastic credit score. The wealthy athlete did not manage his financial affairs well; his score was less than 580, an awful credit score. Where did he go wrong? His first mistake was co-signing with friends and family on vehicles, the payments were not made on-time and his credit suffered. Co-signing gives you equal responsibility, and equal demise when the payments are not made on-time, my advice is to never co-sign, ever ( I had a client who co-signed for her son on a house, he stopped making payments and ultimately forced his own mother into bankruptcy, if you can’t trust your own kid who can you trust)? His other issue was the accumulation of about 5 to 8 small collections, most under $200. He had the money to take care of them, but he never knew they existed. Overall, poor management and attention is what caused the low credit scores; it was not for a lack of money.

      What did the school teacher do right to achieve high credit scores? She paid things on-time, never compromised her good record by co-signing with people (Why do people ask you to co-sing? Because they don’t qualify, keep that in mind the next time someone asks you to co-sign), had no collections, had well aged credit cards, did not let mistakes linger on her credit report. She just practiced good management of her credit affairs, and gave her credit some attention to make sure it was in line.

      The first step in making achieving the best credit scores is to give the report an assessment to make sure everything is correct. This is the starting point. Make sure you understand what is on there, why it is on there, and most importantly should it be on there?

      2. What rules do people need to know in the world of credit?

      What people need to know is that there are two main rules, the first being the credit scores and how they are calculated, the second being the Fair Credit Reporting Act, which gives us our rights as consumers in relation to credit reports. These two separate sets of parameters are what shape our credit lives. The Fair Credit Reporting Act, like most statutes is boring to read, so I dissected it into easy to understand language any consumer will understand. I tried to only focus on the points that pertain to consumer rights, the actual aspects that impact credit. If there is one thing that everyone should know about the Fair Credit Reporting Act it is that the consumer must initiate their protections under the Act. If there is something incorrect on my credit report it will not magically fix itself, I must discover it, dispute it, and follow-up to make sure it does not reappear.

      The FICO® credit scoring factors are fairly straight forward. In the book I apply them to numerous examples, similar to how a law book would apply a legal concept to a real court case. By showing how the factors impact people in real life and displaying the potential pitfalls it gives readers a better grasp of how the factors apply to various circumstances. In my classes I always say “there is never a blanket answer to an individual’s credit scenario.” The reason for this is that there are numerous variables in each of our individual credit reports; the same event will impact our credit scores to a different degree. For example, if we have two people who both incur a 30 day late payment in the same month will they be equally impacted? If person A has 10 positive accounts, and person B has only 2 positive accounts, who do you think will suffer a greater drop on their credit scores?

      If I have 10 positives to outweigh a negative versus 2 positives it is apparent the person with more positive accounts is likely to suffer less of a drop to their credit score from a 30 day late payment. Based on this knowledge it shows us that having more, well managed accounts, is better than fewer accounts because in the face of adversity we will have greater protection by being surrounded with positive accounts. However, we always hear that having too many accounts is a bad thing. Based on what? There has to be a test to measure this, so how would I measure if I have too many accounts, or let’s say too many credit cards specifically? Wouldn’t it be based on my income or assets, my ability to repay what I borrow or could potentially borrow? That sounds like the test, but our income and assets play no part in our credit, so it is impossible to test how much is too much. The exception to this is that in applying for a loan the lender would know my income and it would play a role in the decision, but it still plays no role in my credit, since income and assets are absent.

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      In the absence of income, the credit relies on management, how am I managing my obligations? This is the critical item many people miss, it doesn’t matter how much or little income you have, credit is formed by your actions, not your checkbook. Obviously the size of the checkbook can make this easier or more difficult. Reflecting whether or not someone is living above their means and having trouble making payments on-time, or the flip side to that, the person has the funds, but just doesn’t make a great effort to pay debts on-time.

      What if my credit report tells me I have too many open active unsecured lines of credit (i.e. credit cards)? Reason codes tell you why your credit is not perfect, the important thing to realize is that your credit will never be perfect, if you are 740 or higher you have reached the upper echelon, getting to 800 is great, you will never hit 850 on the Classic FICO® model used by banks. Keep in mind there are knockoff credit scores out there being sold to consumers that may give you a higher credit score, but if banks don’t use those credit scores then neither should consumers. I hear all the time about consumers getting a “DisadVantage Score” online and thinking they have a great score, only to find out their FICO® Score is 100 points lower when they go to a lender to apply for a loan. If the real-world uses FICO® so should consumers. Whenever I say credit scores I am referring to FICO®. Back to the reason codes, if you have good credit already, ignore the reason codes. If the reason codes tell me I am not perfect because I have too many credit cards, then I close the credit cards (which I really should never do if I care about my credit scores being the highest they can be), the next time I check my credit report guess what the reason codes are going to tell me? “Too few open active unsecured lines of credit” or “Too many new accounts”, closing the well established accounts results in a lower credit score, ignore the reason codes, they are like the GPS system that tells you driving over the cliff is the quickest route to your destination.

      3. What is the highest credit score you’ve ever seen, and how was it attained?

      The highest I have seen was 841 on the max 850 scale. This score was attained by someone who was 70+ years old, the he had credit cards dating back to the 1960’s that were still open and active. What this illustrates is the importance of keeping credit cards open and active in order to constantly feed positive information into the credit report. Do I need accounts that are 50 years old? No, once a credit card has become 7 years or older it is a well established account. It is common to see people with 800 credit scores when they have credit card accounts over 7 years old. How could an 18 year old accomplish this? Ask mom and dad to add you on as an “authorized user” to their credit cards. In my book it talks about a 22 year who did this, he had no score because he had no credit, nothing good, and nothing bad. His mom added him as an authorized user to an ideal account she had (open for 10 years, balance was 5% of the available credit line, and it had always been paid on-time). Sixty days later when the account appeared on his credit report it generated an 817 credit score, simply because of the positive nature of that account. If he had opened his own account he probably would have a 620-range score for the first 12 months of the account existence. The authorized user account is a very powerful method to boost a credit score, and a great way for relatives to help each other. This came under major scrutiny and public outcry in the summer of 2007, so much so that Fair Isaac, Co. was going to remove it from the scoring model. The outrage has tempered and as it stands, the authorized user account cannot be excluded from the scoring model under the Equal Credit Opportunity Act, so it is a here to stay.

      4. Can you hire someone to fix your credit?

      You can, however, the purpose of my book is to give the reader an overall education about credit so they can fix their credit on their own, if it needs correcting. As far as hiring someone to do it for you, it is like hiring someone to clean your house, you could do it yourself, but maybe you want to have someone else to do it because you think they can do a better job. Consumers just need to keep in mind there really isn’t anything they can’t do themselves, although they may procrastinate and never get around to doing it. There are a lot of rip-offs out there, the Federal Trade Commission warns consumers about this. The best way to test a credit repair service is to ask what it is they will correct. If the service states they can remove everything negative regardless of whether it is correct or not, this is a red flag and they are likely to just take the money and run. Accurate negative information cannot be legally removed. It would compare to a tax preparer telling me they can get me out of paying any taxes whether I owe them or not.

      For people with extremely complex issues they may want to consult a consumer law attorney.

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      5. How badly do late payments hurt?

      Payments account for 35% of the score, so a late payment can be a considerable blow to the credit scores. One late payment is not going to completely wreck the credit score. The impact will be based on how much positive credit the person already has. In my book I wrote about a method called “re-aging” which can remove late payments. It exists in the Uniform Policy manual which is put out by the Federal Financial Institutions Examination Council. “Re-aging” can be a great tool, but its use is at the discretion of the lender.

      6. What about bankruptcies?

      I would call bankruptcy the worst case scenario for credit, but it is necessary sometimes. It is better to get closure and recover than to let a bad situation continue. Many people who go through a bankruptcy will recover in 2 to 3 years. A bankruptcy comes off the credit report entirely after 10 years based on the Fair Credit Reporting Act. The more time that passes the less impact a bankruptcy will have. Bankruptcy is not the end of the world, it is actually a means to get a new start and for some people is their best option. It provides the best closure other than just paying the debt back. If someone doesn’t have the money to repay debt they should consult a bankruptcy attorney.

      7. How can we avoid identity theft?

      For someone who fears identity theft I suggest “freezing” the credit report. To do this, go to each of the three credit bureaus websites (www.experian.com, www.transunion.com, and www.equifax.com) and search for “security freeze”. The instructions are on each site, the cost is minimal, no more than a one-time $10 fee, for victims with a police report it is free. By freezing the credit report it makes the credit report inaccessible and therefore a thief could not gain fraudulent credit from a lender if the lender cannot access the credit report. This is the best method of prevention. Simply monitoring the credit report puts a consumer in the position of responding to the act not preventing it. A fraud alert can be added to the credit report at no cost; however, it is not as efficient as freezing the credit report. With a frozen credit report a consumer can still apply for credit by requesting a pin code so that a specific lender can access the credit report. Identity theft is a lengthy subject and certainly pertains to credit, so I have an entire chapter dedicated to it.

      8. A lot of people are facing foreclosure. Is there an alternative to foreclosure that would be better for credit?

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      A short sale (the lender accepts less than what is owed) may be a better means for some people if the lender is willing to do it. The benefit to a short sale is to reduce the number of months of delinquency versus a foreclosure. If someone wants to keep their home they should request a loan modification from the mortgage company or a temporary forbearance if they are searching for employment. This is a complex issue; I have a three hour class about this specific topic. Individual circumstances vary, but the starting point is to always ask “do you want to stay in this house?” If the answer is no then a short sale, deed-in-lieu of foreclosure, or foreclosure are the likely companions to this. If the answer is yes, they would like to stay, then a loan modification, forbearance, among other options are worth pursuing. A homeowner should call the lender first to see what options are available to them. Any organization approaching them and asking for money to assist in preventing foreclosure is likely to do nothing and just take the money. To find a local HUD approved counseling agency go to www.hud.gov and find your state page, most of the HUD approved housing counseling agencies are top notch people. Like with anything, if you have a gut feeling someone is not looking out for your best interests then walk away.

      Productivity

      1. Describe an average day in the life of Patrick Ritchie.

      My day goes from 7 am until I go to bed, which is generally 11 pm. I am still actively doing loans (mortgages), always writing about something, outlining a new book (just finished the second one), creating a new CE class for professional license renewal, teaching my classes, or consulting with someone about their credit. I teach my classes around Arizona, but I also travel the country when someone wants to bring me in to teach about credit. Some days I may be in Lincoln, NE, other times I might be in Maui, HI, wherever I am hired to speak. Currently I am promoting The Credit Road Map as a useful supplemental text for Personal Finance and Real Estate Finance classes at colleges. In between all of this I am attending Law School at Arizona State University, only 2 more semesters to go. I have a wonderful son who is about to turn 5 years old, so all of my non-work time is spent with him.

      2. How do you keep it all together?

      I have no clue how I keep my sanity, but it involves a lot of coffee, lists of everything I need to complete, and simply moving forward constantly. The speaking and travel schedule requires a carefully planned calendar. My laptop is my most important business tool, it goes almost everywhere I go because then I can work from anywhere. Some of my best writing happens on airplanes.

      3. What are the most important things you’ve learned about productivity in the last few years?

      Write everything down and cross it off when completed. Try not to do the same thing twice, think about your procedures so there is uniformity, like a franchise. Never be afraid to take a 15 minute nap to recharge the brain. Most importantly, enjoy what you do and it won’t seem like work. I truly enjoy what I do, educating people about credit is a worthwhile pursuit.

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      Art Carden

      Art Carden is an Assistant Professor of Economics and Business at Rhodes College in Memphis, Tennessee.

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      Last Updated on January 5, 2022

      33 Painless Ways to Save Money Now

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      33 Painless Ways to Save Money Now

      In a difficult economy, most of us are looking for ways to put more money in our pockets, but we don’t want to feel like misers. We don’t want to drastically alter our lifestyles either. We want it fast and we want it easy. Small savings can add up and big savings can feel like winning the lottery, just without all of the taxes.

      Some easy ways to save money:

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      1. Online rebate sites. Many online sites offer cash back rebates and online coupons as well. MrRebates and Ebates are two I like, but there are many others.
      2. Sign up for customer rewards. Many of your favorite stores offer customer rewards on products you already buy. Take advantage.
      3. Switch to compact fluorescent bulbs. The extra cost up front is worth the energy savings later on.
      4. Turn off power strips and electronic devices when not in use.
      5. Buy a programmable thermostat. Set it to lower the heat or raise the AC when you’re not home.
      6. Make coffee at home. Those lattes and caramel macchiatos add up to quite a bit of dough over the year.
      7. Switch banks. Shop around for better interest rates, lower fees and better customer perks. Don’t forget to look for free online banking and ease of depositing and withdrawing money.
      8. Clip coupons: Saving a couple dollars here and there can start to add up. As long as you’re going to buy the products anyway, why not save money?
      9. Pack your lunch. Bring your lunch to work with you a few days a week, rather than buy it.
      10. Eat at home. We’re busier than ever, but cooking meals at home is healthier and much cheaper than take-out or going out. Plus, with all of the freezer and pre-made options, it’s almost as fast as drive-thru.
      11. Have leftovers night. Save your leftovers from a few meals and have a “leftover dinner.” It’s a free meal!
      12. Buy store brands: Many generic or store brands are actually just as good as name brands and considerably cheaper.
      13. Ditch bottled water. Drink tap water if it’s good quality, buy a filter if it’s not. Get 
          a reusable water bottle and refill it.
        • Avoid vending machines: The items are usually over-priced.
        • Take in a matinee. Afternoon movie showings are cheaper than evening times.
        • Re-examine your cable bill. Cancel extra cable or satellite channels you don’t watch. Watch the “on demand” movie purchases too.
        • Use online bill pay. Most banks offer free online bill paying. Save on stamps and checks, and avoid late fees by automating bill payment.
        • Buy frequently used items in bulk. You get a lower per item price and eliminate extra trips to the store later on.
        • Fully utilize the library. Borrowing books is much cheaper than buying them, but in addition to books, most local libraries now lend movies and games.
        • Cancel magazine/newspaper subscriptions: Re-evaluate your subscriptions. Cancel those you don’t read and consider reading some of the other publications online.
        • Get rid of your land-line. Do you really need a land-line anymore if everyone in the family has a cell phone? Alternatively, look into using VOIP or getting a cheaper plan.
        • Better fuel efficiency. Check the air pressure in your tires, keep up with proper auto maintenance, and slow down. Driving even 5MPH slower will result in better fuel mileage.
        • Increase your deductibles. Increasing the insurance deductibles on your homeowners and auto insurance policies lowers premiums significantly. Just make sure you choose a deductible that you can afford should an emergency happen.
        • Choose lunch over dinner. If you do want to dine out occasionally, go at lunchtime rather than dinnertime. Lunch prices are usually cheaper.
        • Buy used:  Whether it’s something small like a vintage dress or a video game or something big like a car or furniture, consider buying it used. You can often get “nearly new” for a fraction of the cost.
        • Stick to the list. Make a list before you go shopping and don’t buy anything that’s not on the list unless it’s a once in a lifetime, killer deal.
        • Tame the impulse. Use a self-enforced waiting period whenever you’re tempted to make an unplanned purchase. Wait for a week and see if you still want the item.
        • Don’t be afraid to ask. Ask to have fees waived, ask for a discount, ask for a lower interest rate on your credit card.
        • Repair rather than replace. You can find directions on how to fix almost anything on the internet. Do your homework, and then bring out your inner handyman.
        • Trade with your neighbors. Borrow tools or equipment that you use infrequently and swap things like babysitting with your neighbors.
        • Swap online. Use sites like PaperBack Swap to trade books, music, and movies with others online. Also, look for local community sites like Freecycle where people give away items they no longer need.
        • Cut back on the meat. Try eating a one or two meatless meals every week or cut back on the meat portions. Meat is usually the most expensive part of the meal.
        • Comparison shop: Get in the habit of checking prices before you buy. See if you can get a better price at another store or look online.

        Remember that saving money is not about being cheap or stingy; it’s about putting money into your bank account rather than giving it to someone else. There are many ways to save money, some you’ve never thought of, and some that won’t appeal or apply to you. Just pick a few of the ideas that sound doable and watch the savings add up. Save big, save small, but save wherever you can.

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        Featured photo credit: Damir Spanic via unsplash.com

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