The Equal Credit Opportunity Act

Before 1975, when the Equal Credit Opportunity Act became effective, a considerable number of Americans — women, older people and minority group members — often had difficulty in obtaining loans and credit. Since then, discrimination on these bases has been forbidden by law. Prospective lenders no longer have the right even to ask borrowers about their race, religion or nationality — except, for monitoring purposes, in the case of real estate loans, and even in this case, the borrower is under no obligation to respond. Older people cannot be rejected on the grounds that their age prevents them from obtaining credit insurance and in determining their financial status, prospective lenders must take into account such various sources of income as Social Security, annuities and pension payments.

Perhaps most dramatic are the changes the law has brought about in the treatment of women. In the past, married women often could not get credit unless their husbands acted as co-signers; unmarried women were often held to much more rigid credit tests than men; young married women without children were often turned down on the grounds that when — and if — they became mothers, they would no longer be acceptable credit risks. Under the provisions of the Equal Credit Opportunity Act, all these forms of discrimination are outlawed. Specifically, the law provides that:

• A lender may not reject a female applicant for credit because of her sex or marital status, and any woman whose application is denied has the right, within 60 days, to ask for the reasons in writing. A lender who refuses to supply this information is subject to court suit and could be forced to pay the plaintiff’s actual charges plus punitive damages, attorney fees and court costs.
• In applying for credit, married women may use their maiden names, if they choose.
• Divorced or legally separated women are not obliged to list such sources of income as child support and alimony when applying for credit. But those who believe that mention of these resources will improve their chances of getting the money can do so, and although prospective lenders are entitled to determine if these sources of income are reliable, they must be taken into consideration when making a decision.
• A lender may not ask a woman whether she intends to have children.
• A lender can ask a woman’s husband to co-sign a loan only when it is clear that her income alone is insufficient or when property jointly held is to be used as collateral.
• Lenders may not ask women about their marital status except in states with community property laws — specifically, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington — where the spouse can use the account or will be contractually liable for it, or where the spouse’s income is used to help qualify for the loan.

Lenders who violate the Equal Credit Opportunity Act are subject to severe penalties, including actual damage, up to $10,000 in punitive damages along with attorney fees and court costs.

Violation of the law can be difficult to prove, especially in cases where the applicant’s credit-worthiness can be considered marginal, whether because of a relatively low income or a short period of employment or residence in the community. Under the terms of the law, applicants who are rejected for credit must be given the reasons for this action in writing. If, after you have examined the lender’s statement, you remain convinced that you are the victim of discrimination, the next step is to write a letter describing the situation in full. Your complaints about commercial banks should go to the nearest regional office of the Federal Reserve System.

• Complaints about federally insured savings and loan associations should go to: General Counsel, Federal Home Loan Bank Board, 1700 G Street, NW, Washington, D.C. 20552.
• Complaints about credit unions should go to: National Credit Union Administration, 1776 G Street, NW, Washington, D.C. 20456.
• Complaints about credit card companies, finance companies and retail stores should go to: Federal Trade Commission, Equal Opportunity Division, Washington , D.C. 20580 .
• Or, if you prefer, you can send your complaints — no matter what kind of lending agency is involved — to your state’s consumer protection office or attorney general’s office.

How To Successfully Qualify For A Bank Loan?

Before applying for any kind of loan, it is prudent to analyze just how much money you need and precisely how long you need it for. Then compare the rates and conditions you will have to abide by for the use of someone else’s cash.

Financial institutions offer many types of loans under many different names. In addition to auto loans and home mortgages, there are, for example, home improvement loans, used for financing repairs, remodeling, additions or other improvements to a house; small business loans, made to individuals who own their own companies to finance operations or buy new equipment; special short-term loans for a variety of purposes; “demand loans” or “time notes” that can be used to tide a person over a number of months or until a specified date when expected funds will have come in and the loan can be paid in full; “swing” or “bridge” loans to enable a house buyer to close on the contract for a new home while waiting for the money due on the purchase of his or her old one.

In all loans — particularly the most common ones, “consumer” or “personal” loans that are ordinarily paid back in monthly installments — bankers are mainly interested in two things: the purpose of the loan and the borrower’s ability to repay it. They are usually less willing to lend $5,000 for an extended vacation in Europe than to lend the same amount for the payment of medical bills or the installation of a brand new heating system for the home.

As a practical matter, a loan officer may have a hard time knowing what the money actually went for; your ability to repay is the primary concern. Though the figures vary, most banks do not like to lend you a sum that exceeds 20 or 25 percent of your gross income — $6,000 to $7,500 on a salary of $30,000, for example — or an amount that would make your total monthly payments larger than a week’s salary, including your debts (and in the case of mortgages, including payments towards taxes and insurance on your home). But, again, banks don’t make a fetish of verifying people’s stated incomes. They are likely to pursue the matter in detail only if the loan is for a large amount and the collateral or security interest is inadequate or shaky. Moreover, if they have any misgivings about you, they can scrutinize your credit history to see how well you have handled credit in the past.

The Three C’s Of Your Credit Rating

In the days before computers and credit cards, loan officers usually sized up applicants on the Three C’s of Credit:

• Character (a moral commitment to pay the money back),
• Capacity (the means to do so) and
• Collateral (property that could be seized and resold in the event repayment was not made).

The Three C’s are still important in securing loans, but creditors today are more apt to rely primarily on computer models and statistical graphs that rate by points the typical characteristics of people who do, and don’t, repay their debts.

According to a California firm that develops such systems for banks and other creditors, only about 20 to 30 percent of all credit applicants get enough points to be approved. While each institution has its own system, Consumers Union, publisher of the magazine Consumer Reports, analyzed some common denominators and came up with the hypothetical scoring test shown below.

Generally, the older you are the better credit risk you are in a lender’s eyes. The points, however, drop noticeably for people in their mid-30’s, a group that often faces the unforeseen expenses of young children, divorce or other causes of financial stress.

The longer you have lived in one place the more lenders see you as a “stable” person, and if you own rather than rent your home, you score extra points. People with cars rate higher than those without, and the newer the car the more points you are apt to get.

Another consideration is how long you have held the same job. What kind of job you have — an executive rates higher than a cab driver — and your income, of course, make a difference.

Having a savings account is better than having a checking account, and you are considerably more desirable if you have both. If you have taken out an installment loan from your bank, and are repaying promptly, you will get a few more points.

People who already have one or more credit cards in good standing are considered better risks than those with none. Department store charge cards, travel and entertainment cards and oil company cards rate somewhat lower, and off-the-cuff credit with, for instance, the local drug store, which is not punched into a national credit-reporting system, ranks even lower than that.

If you have been desperate enough to have borrowed recently at high interest from a small-loan or finance company, you will probably be docked a number of points. If you have applied and been turned down for credit more than once in the last six months, and that fact appears on your computerized record with a credit-reporting agency, you may have difficulty getting new credit, as you may if your record indicates that you have not been prompt in paying your bills.

If you have gone through bankruptcy in the last few years, you may have to forget credit completely, unless you have solid evidence that you are back on your financial feet.

Read here How to Calculate Your Credit Rating?

Tags: Credit+Rating

Credit Rating Test

The “test” given here can indicate only your relative credit-worthiness. It cannot tell you whether you will actually get credit from particular lenders, whose policies may vary widely according to their experiences, profit targets and tolerance of risk under different economic conditions at different times. One lender, for example, might sign you up if you scored a total of 75 or more points, while another might approve you only if you exceeded 125 points.

Before applying for credit, especially a major loan, it is a good idea to see for yourself just what your credit history is. You have the right under law to ask the lender for the name of the credit reporting agency the institution uses, and to obtain a copy of your record from that agency so you can weigh your chances, correct any errors or append your side of the story. Then discuss your prospects with an officer of the institution where you hope to get a loan.

Be leery of outside organizations that claim they can help you get credit or “fix” your credit report. For a fee, often a substantial one, such operators usually just tell yon what your rights are in investigating and amending your report — something you can do yourself at little cost.

A Hypothetical Credit-Scoring Scheme

1 Do not include loans from automobile-finance companies such as GMAC.

2 In filling out an application form, a certain number of credit references are required.

If you have to use small stores without an organized credit-reporting system, you’ll lose points.

Scorecard

Tags: Credit+Rating+Test, Credit+Rating

What Is A Bank Credit Card?

Credit cards, whether issued by banks or other institutions, are another form of revolving credit. These cards entitle their holders to a predetermined maximum against which they may borrow, and the principal repaid is automatically restored to the credit line.

You can use a credit card to pay for goods and services from participating stores, restaurants, airlines and the like and can also borrow cash against it. Interest rates on bank-card purchases tend to be high, and the rates for cash advances even higher. Business institutions that accept credit cards pay a fee to the issuer — the bank, for example — to help defray the cost of credit card transactions, while on a cash advance the customer must bear the entire cost.

Thousands of banks around the country offer major credit cards and until recently, most of them were issued without charge. Many customers made use of their cards to purchase goods and services and then, by paying in full during the first billing period, avoided all interest charges. In effect, these people were taking out short-term, interest-free loans.

As this practice defeated the banks’ purpose in issuing credit cards — to encourage purchases on credit so that the bank could earn interest — many institutions began charging membership fees of $15, $20 or more a year for the use of their cards. Some banks have waived fees in order to attract new customers, and others offer cards free of charge to those who maintain accounts with the bank. Because the interest rates on credit card purchases may vary from one institution to another, it is a good idea to check with a number of banks before deciding to sign up for a credit card.

Tags: Credit+Card, Credit+Cards

Types of Bank Loans

Bank credit for consumers falls into two general categories, closed-ended and open-ended. A mortgage, for example, is considered a closed-ended loan because it is for a specific amount and must be paid off over a specified period. A bank credit card provides an open-ended loan: it gives the cardholder a specific amount of credit against which he or she may draw in making purchases.

Installment Loans

These are closed-ended credit agreements. The borrower receives a certain amount of money and agrees to repay it over a stated period, usually month by month, at a predetermined rate of interest that will neither rise nor fall during the period of the loan. Because the loan is amortized, the borrower has the full use of the funds only for the first month.

The interest charged on installment loans varies from bank to bank and with the purpose for which the loan is to be used, so consumers should shop around for the lowest rate. Higher rates are usually charged for personal loans that have no particular purpose specified and that are “unsecured” — i.e. have no collateral in the form of property, such as an automobile or a boat, that the bank can take over in case of default. In contrast, a loan that is specifically written for the purchase of an automobile, in which the car itself serves as the security or collateral, can usually be obtained at a point or two lower interest. The lowest rates of all are generally offered on government-subsidized loans, such as those taken out by students for their college or postgraduate education.

Lines of Credit

These are open-ended loans, often given names like “Credit-Line Checking.” Whatever they are called, the bank provides the customer with a stated amount of credit that may be called upon, in whole or in part, at any time. Most loans of this type are linked to the customer’s checking account. To use the credit the customer writes a check. If there are insufficient funds to cover the withdrawal, funds from the credit line are automatically transferred to the checking account. If you use a line of credit, you are billed each month for the credit you have used and are required to make payments monthly against the principal and accrued interest charges. As the principal is reduced by a given amount, that amount is restored to your credit line. The interest on this “revolving credit” is usually higher than the interest on installment loans, but you can often arrange with the bank to have a specific sum taken from your checking or savings account each month to pay off the obligation.

Passbook Loans

The least expensive form of credit available at banks is usually a passbook loan which uses the borrower’s savings at a bank as collateral. Most passbook loans are written as installment loans and specify a repayment schedule.

Tags: Credit, Loans