Two disclaimers on today’s Friday Fun Video:

1. I don’t actually recommend freecreditreport.com. Instead, I recommend that you use annualcreditreport.com. And then for the other times during the year that you check your credit report, consider buying a triple report. They are usually less than $40 (and around $50 if you want your FICO score thrown in).
2. I enjoy a good trip to the Renaissance Fair as much as the next person. You get to dress up and eat junk food. Plus, I like to look at (and possibly purchase) weaponry.

Happy Friday!

With the passage yesterday of the Credit CARD Act of 2009, it is little surprise that the subject of credit is on my mind. And one of the most interesting and informative books on the subject of credit and credit scoring is Your Credit Score: Your Money & What’s At Stake by Liz Pulliam Weston. It’s an update of an earlier book, written in 2004. This newer version goes in depth into this important number, and offers the facts about what you can do to improve your credit — and includes information on the new FICO 08, as well as practical advice for getting through tough financial times.

Pulliam starts out by explaining why your credit score matters, and continues with a history lesson, describing how credit scoring came to be, and why it is so prevalent now in every aspect of our financial lives — from jobs to securing insurance to getting a home loan. She also takes some time to describe how the credit scoring system works, as well as addressing VantageScore, a new competitor to FICO.

The bulk of the book, however, is concerned with the practical application of techniques, financial habits and practices that can help you improve your credit score. Your Credit Score even devotes a section to building a credit score when you don’t have credit. Pulliam offers step-by-step information that can help you resolve a number of credit issues, from mistakes on your credit report to reporting identity theft. She also tackles common credit myth that are continually perpetuated. This is, without a doubt, one of the most useful personal finance handbooks I have read recently.

I like Pulliam’s levelheaded approach to credit. She points this out: “You don’t have to live in debt to get a decent score, but you do need to use credit.” I enjoy her middle of the road view of credit. Pulliam doesn’t represent extremes. She simply offers you solid information and the knowledge you require to make a plan to improve your credit score and then keep it healthy.

Have you read Your Credit Score? Did you like it?

In the current economic climate, it is becoming more difficult to get a loan. Personal loans and debt consolidation loans are harder to come by as lenders tighten their standards, even for those with good credit. This is why social lending — or P2P lending — is becoming so popular. It is possible to get loans from others, without the hassles of going through more traditional lending.

One company, Pertuity Direct, offers a rather interesting version of social lending. Recently, I spoke with Pertuity’s CEO Kim Muhota, as well as Charlie Schliebs, who is on the board for the associated National Retail Fund.The explained that Pertuity’s model is one of underwriting loans, and then packaging them into funds that investors can then earn a return with.

“With other person-to-person social lending, it can be tiring to go through all the profiles and decide who you should lend to,” Muhota says. “It puts the consumer in the place of a creditor. We actually take care of the lending part of things and the investor can choose to invest in a pool of loans.” He also touts the more secure nature of Pertuity’s system: “Your personal information is not made available to the investor. It is all taken care of with our backend loan writing and pricing structure.”

For those who are concerned about investing in funds comprised of pooled personal loans, Schliebs has this assurance: “Our loans are aimed at prime borrowers. There are two retail funds, one that has only borrowers with a credit score of above 720, and the other for a credit score of between 660 and 720. Additionally, these are regulated funds that work simply and transparently.”

Muhota says that the company is looking to expand its loan offerings — especially with regard to loan term length. For now, all loans to consumers are three year loans. “We also offer them at a fixed rate. For budget planning, especially from a debt management standpoint, this is very useful. You know that in three years you will be done, and you can budget the same amount for the entire term.” He also says that there are no prepayment penalties, so if you can pay off your loan sooner, you are not penalized.

Schliebs shares some of the fee structure for the retail funds — something that investors worry about. “Right now, total fees end up being a little under 2%. The funds are professionally managed by Gemini. However, as the funds grow, we expect the fees to decrease. There is also a loan servicing fee of about 1%.”

Finally, Muhota offers some insight into one of the more intersting aspects of this social lending structure. “You don’t have to look at profiles,” he says, “but you can if you want. We allow investors Pertuity bucks that they can “award” to borrowers whose stories they find compelling. These bucks translate into real money that the borrowers can use to lower the principal of their loans.”

At first glance, Pertuity Direct looks like it might be promising. I like the idea of being able to invest in funds with quality borrowers — as well as the fact that I don’t have to try and figure out who to give a loan to.

Also, this process takes away some of the guesswork from borrowers, who may be concerned that they don’t end up with full funding. With Pertuity, you are either approved for the loan, or you aren’t. Of course, the downside to that is that you won’t get even partial funding. And, of course, you have to have at least a FICO score of 660 to qualify.

With any investment — including (and maybe especially) social lending — it is important to recognize the risks. No matter how solid something may seem, you always run the risk of loss.

What do you think of the idea behind Pertuity Direct? Have you tried other social lending sites?

Right now, many people are thinking about their finances and trying to figure out how they can improve upon the situation they find themselves in. At the very least, the current economy has many wondering how they can prepare for the future — just in case.

Happily, there are a number of online financial planning tools that can help you figure out what you need to do to move forward on the path to financial freedom. Here are some of my favorite places to go when I need help making a personal finance plan:

• Bankrate.com calculators: If you are looking for calculators, this is the place to go. You can find out whether it is worth it to refinance, how long it will take to pay down debt and figure out how you can save more money.
• DebtGoal personalized debt reduction: I really like how this site helps you figure out a way to pay down debt. Create a personalized debt reduction plan, and see how quickly you can pay off debt in different scenarios.
• Instant Budget Make at CNN Money: This is a great way to figure out how you stack up with others in similar categories, and help you analyze your spending. I also really like the budget planning tools available at Mint.com.
• Vanguard financial planning tools: If you want help with creating an investing plan, or if you are trying to create a retirement plan or prepare for college, there are some great tools at Vanguard. I also really like this handy investment risk tolerance quiz that you can take at Rutgers. A must if you are planning to put together an investment portfolio that works for you.
• Life Happens insurance calculator: Figure out how much life insurance you are likely to need with this handy calculator. It comes from a non-profit together by a number of life insurance organizations.
• CreditKarma.com: Keep track of your credit score for free with help from Credit Karma. Also includes a neat Credit Card Simulator that can help you determine how certain financial decisions can affect your credit score.

Do you have any favorite online financial planning tools?

FICO is the most well-known name in credit scores. So it is big news when FICO prepares an overhaul of this magnitude. The company has tinkered with its credit scoring system in the past, but in 2009 FICO prepares for the largest change to its formula ever. So be prepared. The new FICO score may have a big impact on you.

Biggest FICO credit score change: Fine shadings

The change that will have the biggest effect on your credit score is likely to be the fact that the FICO score formula will now take into account degrees of your habits and credit history. One missed or late payment will be graded differently than if you have three missed payments. This change will likely boost many FICO scores.

However, there is an issue with what FICO will be considering. Will the company — with the availability of technology to better track habits — begin to include the types of purchases you make in your overall credit score? That remains to be seen.

Keep an eye on your credit score, though. There are estimates by FICO that between 40% and 50% of consumers could see their credit scores change by 20 points, in either direction.

Improving a credit score through piggybacking

Piggybacking (the practice of being an “authorized user” on someone else’s account) is also being affected by the new FICO score formula. It will look at who is piggybacking (children, spouses), and also make it harder to improve one’s credit score through piggybacking. This, according to Credit.com, is most likely to affect a large amount of women, whose credit scores are partially dependent on their husbands’ scores.

What do you think of the changes to the FICO score?

In 2008 alone, reports CNN Money, personal bankruptcies are approaching the one million mark, up more than 28 percent over last year. As you might guess, even the law passed in 2005, making it more difficult to file for bankruptcy, has not done much in recent months to stymie bankruptcy filings. Mainly because the debt people have now can basically not be paid off. With HELOCs being frozen, limiting access to home equity, and with job loss and inflation causing strain on household budgets, it is no surprise that people are cracking under the strain.

Indeed, personal bankruptcies are expected to increase through next year — up to as many as 1.2 million (or more). This is not surprising in light of expected credit card defaults and increasing foreclosures. The signs are all there.

Bankruptcy as a last resort

It is important to remember, though, that bankruptcy should be your last resort. Bankruptcy destroys your credit rating, and remains on your report for between seven and ten years. This can make it more difficult for you to get a mortgage loan in the future, as well as auto loans and other types of consumer loans. But that’s not all. Your trashed credit score can also affect:

• Job prospects
• Getting a rental
• Insurance premiums

In some cases, personal bankruptcy may be necessary to get you a fresh start. But make sure that there is absolutely nothing else you can do. Lynette DeNike offers some great insight on whether or not you should consider bankruptcy.

You know how important your credit score is. And with lenders reluctant to offer good loan terms to any but those with with the best scores, it is vital that you do what you can to improve your credit score. Credit Karma offers you a way to simulate the effects your actions have on your credit score.

A few months ago, I wrote about how Credit Karma offers great education tools — as well as free access to your credit score. Now, Credit Karma has added a practical tool that can help you figure out how you can improve your credit score. It also provides a handy guide to what might happen if you take on more debt, open a new credit line or even apply for an auto loan or home mortgage loan.

As I tinkered with the program, lowering and increasing my credit score, I found that one of the most effective ways to increase your score is to pay off debt. Paying off debt and having a good payment history largely erased the ickiness that I had gotten my simulation into by opening new credit card accounts, paying late and getting a car loan. And, of course, that bankruptcy I simulated didn’t help much, either.

Ken Lin, founder and CEO of Credit Karma, sent me this in an email regarding the credit score simulator:

We hope that consumers will be better able to manage their credit if they understand how their everyday financial behavior affects their credit score.

Overall, I think this a great tool. Before I make another credit and debt related decision, I’ll probably head over to Credit Karma to get a look at what it will do to my score.

images source: Screenshots from Credit Karma

In August, the Wall Street Journal Online reports, consumer credit dropped. (Hat tip: Miki at Leadership Turn for putting me on to this.) Outstanding debt decreased in August for the first time in ten years. I think the current economic troubles are starting to wake people up to the dangers of excessive consumer debt. People are scaling back and making hard decisions.

Or, it could be that they just can’t get any credit. With the credit market freeze, it’s actually getting increasingly difficult to borrow. The banks are wary of lending. Turns out lending to anyone hasn’t been working out all that well. As a result, though, even people with good credit are having a hard time getting credit or loans.

Credit limits are dropping

Another personal finance issue emerging from the current economic crisis is the fact that credit limits are actually dropping. Over at Gail’s Blog, I read this interesting tidbit:

Of the 20% of American Express clients who saw their limits reviewed as a part of normal operating procedure, FIFTY PERCENT saw their limits go DOWN. That means that to maintain a healthy credit ratio (remember, no more than 60% of you limit should be used) a lot of people are going to have to find the money somewhere, or reconcile themselves to watching their scores plunge. Someone with a $2,500 balance on a card with a $5,000 limit is using 50% of their credit line. But if that limit drops to $2,500, they’re now using 100% of their available credit, which is the biggest of no-nos.

You can see how this is a Big Problem. Not just from the standpoint of having debt (because, really, perhaps it means that we’ll start changing the way we do things), but from a credit score standpoint.

If you have been somewhat responsible and have been trying to get out of debt and fix your credit, this is a big step backward for some people. It means that now — in terms of credit — you have to essentially start from pretty close to scratch because your score is going to drop.

Another area of credit getting hit: The HELOC. If you have a HELOC, be aware that your limit might be decreasing, or that an outright freeze may be placed on it. Be watching the mail for that letter…

image credit: sxc.hu

While it is possible for you to get a free credit report once a year from each of the three major credit bureaus, you often have to pay for your credit score (creditkarma.com offers a free credit score), and for any additional views. (Exception to that is when you are denied credit, in which case the agency used must provide you with your credit report if you ask within 60 days.)

Now, however, it is possible to check your credit report and your score from TransUnion, as much as you want, for six months. The reason? Apparently a clas action lawsuit settlement resulting from TransUnion’s practice of selling consumer profiles to third parties. At any rate, you can go to listclassaction.com to sign up.

Hat tip for this story: My Two Dollars.

One of the classic ways that students have been able to improve their credit scores has been through the “authorized user” loophole. In this scenario, you are added as an “authorized user” to someone else’s credit card. Preferably someone who has good credit (traditionally your parents ). This boosts your score almost instantly.

As you might guess, it didn’t take long until someone figured out that you could make money doing this. Want to improve your credit score before buying a house? Lay down your money and get paired up with someone else who is willing to let you “piggyback” on their account. The person with good credit gets paid, and you — even though you never actually use (or even see) the credit card account on which you are an “authorized user” — get the score you need to get the loan you want.

Closing — and reopening — the “authorized user” loophole

Last year, FICO, the leading credit score provider, decided that it was time to close the authorized user loophole. The company announced that it would no longer count “authorized user” accounts. The idea was to prevent people from buying their way to a falsely improved credit score.

Now, though, FICO is changing its tune on “authorized user.”

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