Two reasons why you shouldn’t borrow from your 401(k)

  1. If you get laid off before you have completely repaid the money, that loan becomes completely due and payable.  You will probably only have a few weeks to pay off the outstanding balance.  If you can’t, that amount becomes classified as an early withdrawal and is subject to a 10% penalty – unless you are 59 ½.  It  also becomes taxable income in the year it is classified as an early withdrawal.
  1. If you borrow from your account, and you had originally funded it with pre-tax dollars, you are DOUBLE taxed on this amount.  You will have to re-pay the loan with after tax dollars and then will be taxed on future distributions

FICO Scores — The basics

There are three national credit bureaus:

  1. Equifax
  2. Experian
  3. Trans Union

There are many different credit scores available to lenders, but the vast majority of lenders use the following scores developed by Fair Isaac, Corp:

  1. Equifax – Beacon
  2. Experian – FICO
  3. Trans Union – Empirica

This section teaches you about these three FICO credit scores.  Interestingly, if you look at all three of your FICO scores on the same day they will usually vary between 0 and 50 points because not all lenders and collection agencies report their information to all three credit bureaus.

The purpose of FICO credit scores is to assist a lender in making a credit decision and to predict the likelihood of 90+day delinquency over the next two years.  FICO scores range from 300 to 850.  The higher the score the better (i.e. a lender views you as lower risk).

REASONS WHY YOU WANT A GOOD (I.E. HIGH) CREDIT SCORE

  1. A good credit score significantly increases your chance of a lender approving your loan request.  A majority of banks and some credit unions deny loan requests when the borrower has a credit score less than 600.  If you cannot get approved for a loan at a credit union (or bank), your loan options get real ugly, real fast.
  2. Most lenders today use a credit score to price   their loans.  PWCU currently does not use risk based lending – however the majority of lenders do employ this method.  If you have a high credit score you are statistically proven to be lower risk and so you will receive lower interest rates on your approved loans.  If your credit score is mid-range or lower, your interest rate will be considerably higher.
  3. Many of the large, national credit card issuers now have a “Universal Default Clause” that will cause your interest rate to go up dramatically if your credit score falls significantly.
  4. Insurance companies use credit scores to evaluate the risk you represent and to set premium rates.  They have determined that people that have high credit scores are more likely to take care of their homes and their autos.
  5. Employers look at credit reports and credit scores in making hiring decisions.

SCORING ELEMENTS

Payment History

  • Information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
  • Adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items) and number of them
  • How long past due and amount past due
  • Number of accounts paid

Amounts owed

  • Amount owing on accounts
  • Amount owing on specific types of accounts
  • Number of accounts with balances
  • Percentage of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
  • Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)  Looks at balance versus limit

Length of Credit History

  • Time since accounts opened.
  • Time since accounts opened, by specific
    type of account.
  • Time since account activity.  Account has to have been updated within last 6 to 24 months to be used.
  • The longer your credit payment history is, the more points it contributes to your score!

New Credit

  • Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
  • Number of recent credit inquiries
  • Time since recent account opening(s), by type of account
  • Time since credit inquiry(s)
  • Re-establishment of positive credit history following past payment problems

Types of Credit Used

  • Number of various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.
  • Accounts with finance companies (ie. Household Finance, HSBC, etc.) will decrease your score.

SCORE COMPOSITION

Payment History 35%
Amount you Owe (Capacity) 30%
Length of Credit History 15%
Types of Credit 10%
New Credit 10%

Total

100%

Here are some other references to help you learn about credit scoring:


IDENTITY THEFT…..

If you or someone you know is a victim of identity theft, please visit www.consumer.gov/idtheft.  The information you enter there becomes part of a secure database that’s used by law enforcement officials across the nation to help stop identity thieves.  The site also has links to useful information from other federal agencies, states and consumer organizations.

You should call one of the three credit bureaus and put a Fraud Alert on your credit record.  This can help prevent an identity thief from opening additional accounts in your name.  As soon as the credit bureau confirms your fraud alert, the other two credit bureaus will automatically be notified to place fraud alerts on your credit report.  All three credit reports will be sent to you free of charge.

EQUIFAX – 1-800-525-6285 and write P O Box 740241, Atlanta GA  30374-0241

EXPERIAN – 1-888-397-3742 and write:  P O Box 9532, Allen, TX   75013

TRANSUNION – 1-800-680-7289 and write:  Fraud Victims Assistance Division, P.O. Box 6790, Fullerton,  CA    92834-6790

Once you receive your reports, review them carefully.  Look for inquiries you didn’t initiate, accounts you didn’t open and unexplained increases on current accounts.

You also may want to call 1-877-IDTHEFT, the Federal Trade Commission’s toll-free ID Theft Hotline.  Counselors are available to help consumers who want or need more information about dealing with the consequences of identity theft.