720 Credit Guru

Paying Off Account Balances

2008-12-21T10:00:00.000-07:00

Less could be more in the credit scoring system. To have less, means having fewer accounts with a reporting loan balance, not lessening the number of accounts you have overall, unless necessary.

When you have an excessive number of loans with balances, whether they have a $10,000 or $10 balance, they all can count towards your credit score. Look to consolidate accounts when you can, and pay off those accounts with small balances.

However, it is crucial not to start closing accounts once you have paid them off. Keep them open and use them occasionally so they won't go dormant.

Recognizing Critical Credit Ratios

2008-12-20T10:00:00.005-07:00

The credit scoring system measures your reported credit limits, on lines of credit such as credit cards and merchant accounts, to the balances that you currently have. Except Capital One – or CapOne, or Capone as they are known in the industry.

Capital One reports your high balance as your credit limit!!! That means if you have a credit balance of $500 on a $10,000 limit card, but they are reporting that you only have a credit balance of $500 – it appears as though you are maxed out on your card. Be very cautious of this!

The system also looks at how much you have paid down on your loan balances in relationship to the initial loan amount. Lowering the ratios is critical to raising your credit scores. If possible, pay extra to lower your balances on credit cards and your installment loans each month.

Paying Obligations On Time - A No Brainer!!!

2008-12-19T10:00:00.000-07:00

This is the most important factor of the Five Factors to Credit Scoring – Making your payments on time.

Most consumers think that just making timely payments is the sole reason a credit score increases, which is not the case. The credit scoring system is much more complicated than just making payments on time.

However, making timely payments on all your loans and credit cards is the master key to raising your credit score. Without it, the other strategies are less meaningful.

If you have a perfect record, great job! Keep on track.

If you have had issues in the past, address them now, and make every effort to make payments on time going forward.

Establishing Cash Reserves To Preserve Your Credit

2008-12-18T10:00:00.001-07:00

Before you take out any loan - especially a mortgage, you should have a cash reserve already established. Most lenders require a 2 to 6 month reserve.

No one knows when there may be an accident, a loss of a job - especially in today's economy, health issues, or another unfortunate event. You need to establish a cushion so that you can offset any decline in income should it happen.

If you are taking out a new loan to cover your expenses until the next pay check, like a pay day loan, you are in serious trouble. Before you incur any debt, set aside a sufficient cushion that can be readily accessed in case trouble arises.

If you start missing payments on your mortgage, car loan, or credit cards, you can watch your credit score tank faster than the Titanic.

Creating Depth With Your Credit Score

2008-12-17T10:00:00.001-07:00

Everything goes back to the Five Factors of Credit Scoring.

Depth, or length, is created by how long our accounts have been open. Depth with your accounts determines how high your credit scores can go. Review your credit file and identify how long your accounts have been open. Higher scores will be realized when most of your accounts have been open for at least four years.

THE OLDER THE BETTER!

Opeing New Accounts

2008-12-16T10:00:00.000-07:00

Once you have an established credit profile, try to avoid opening new accounts at every opportunity. Opening multiple accounts within a 12-month period can be extremely detrimental to credit scores for two reasons.

The first is applying for new credit will show inquiries on your credit report. Secondly, a new loan will add risk and could lower your credit scores.

You should pay particular attention to the number of loans you have opened in the last year. Try to space new accounts out to avoid sudden declines in your credit scores.

Two factors of new accounts are determined by the Five Factors of Credit Scoring.

Establishing Quality Loans on Your Credit Report

2008-12-15T10:05:00.001-07:00

Some loans are considered more valuable than others, such as a mortgage. This type of loan usually shows that a person is more responsible. The credit scoring system requires a minimum amount of activity on these accounts for revolving – such as a credit card – and installment loans – like a mortgage or an auto loan.

The activity on a mortgage or auto loan is not as critical as a revolving account because you make those payments regardless every month versus a credit card that can be put into a drawer and not used for months and months. In order to keep your credit card accounts active you should use them at least every 6 months so they won’t go unrated or become an inactive account.

You should have some payment activity from both types of loans – it is critical to raising credit scores.

This tip goes back to the Five Factors of Credit Scoring.

Holiday Shopping Alert!

2008-12-14T17:34:00.008-07:00

CONSUMERS: SHOPPING SPREE OR SHOPPING ALERT

I will get back to the Top 10 Credit Building Tips on the next post. There is a Holiday Shopping Alert you should be aware of:

Buying on credit. Financial experts say that those who shop with credit cards tend to spend as much as 30% more than if they'd shopped with cash.

The reason: When you shop with cash, you're more aware of how much you spend and how much you have left because you can touch it. And once the money's gone, it's gone. The best thing you can do is set a holiday budget.

Plus, if you have to put the purchase on your credit card or sign up for the store's financing, you simply cannot afford it and it could damage your credit without you even knowing it! Any good deal you thought you were getting will be eroded by the interest you'll accrue and the time you'll spend as a debt hostage. About 12 million Americans are still paying off last holiday's bills, according to Consumer Reports.

Quality Lenders and Your Credit

2008-12-14T12:57:00.002-07:00

Did you know that lenders are scored differently on you credit report?

Many consumers fail to realize that credit scores give differing values for different types of lenders. Banks and national credit card companies are on one end while finance companies and payday lenders are on the other end.

Most can identify a bank, but many fail to recognize finance companies. Such lenders usually finance many auto loans and merchant purchases offering “Same-as-Cash” options or "No Payments 'Til 2020.

Many finance companies are even owned by banks; but, they are considered high-risk lenders and create a drag for credit scores because of their willingness to charge high interest rates and lend to less than credit worthy consumers.

If you have good credit, utilizing one of these lenders to save money on interest can be a good decision. The choice is up to you, and the result to your credit report is up to the bureaus.

Golden Accounts

2008-12-11T13:48:00.007-07:00

1)This is the second tip (The First Tip) from the news report. I find this one a little obvious but needed to touch on it and give some more information on how to create a “Golden Account.” This post is going to be filled with links as I have touched on all of this before.

A Golden Account is any account you have that remains open for many years (ten or more) and can drive credit scores to higher levels. This basically goes back to the Five Factors that make up a credit score.

The only way to create a “Golden Account” is to open one up and then wait. And wait. And wait some more. OR…

You can piggyback off of someone else’s “Golden Account.” FICO ’08 will only partially eliminate an authorized user, or piggybacking.

Once such accounts are identified, leave them open and periodically use them. NEVER EVER NO MATTER WHAT ANYONE TELLS YOU – CLOSE AN ACCOUNT.

You need to use an account such as a credit card at least once every 6 months so the card doesn’t become inactive or go dormant.

Know Your True Credit Scores

2008-12-10T12:25:00.002-07:00

I recently saw a news report on a lady who raised her credit score over 100 points in less than 3 months. I wanted to address what the news was telling people to do - as they usually get things WRONG and mislead us all into doing what we shouldn't do.

This news station actually got things right for once!!! They had a Top 10 list and so I will address each item in a different post. The first will be...

Know Your True Credit Scores and Reason Codes.

There are really only two ways to know what your actual credit scores are. The first, is to have a lender pull your credit which will show up as an inquiry on your credit report. And the second, is to go to myfico.com and pay to get your credit scores.

Keep in mind that the scores from myfico.com and the ones pulled from a lender will not be the same, but should be pretty close. Consumer credit scores pulled online are considered educational and are different from those used by lenders.

The reason codes provide valuable information by which you can identify problems affecting your credit score. They are the road map to improving your credit.

Mortgage lenders are required to give you a copy of your credit scores and usually the reason codes that go with them. Myfico.com only provides generic explanations of problems impacting your credit scores.

Free Credit Scoring eBook

2008-12-07T11:55:00.008-07:00

Could Black Friday = Lower Credit Scores

2008-12-01T11:42:00.015-07:00

The day has come...and now it is gone. Black Friday is over and we should know what impact it will have on consumer confidence in the next few days.

Dubbed "Black Friday" in reference to red ink representing loss and black ink representing gain, today's start to the Holiday Shopping season is believed to be the day that retailer balance sheets finally cross over to profitability.

Here is what we know already. Black Friday is of special significance this year because consumer spending accounts for two-thirds of the U.S. economy. Spending was up 7% this year over last year with the average consumer spending $372.

Americans are shopping in full force, and we can expect economic optimism and a mild rebound in the stock market. Unfortunately for home buyers, this should also lead mortgage rates higher.

By contrast, if sales figures are weaker than predicted, we can expect talks of a recession to grow.

So what does this mean for you?

If you went out and bought gifts with you credit card you could be paying off those Black Friday deals well into the next holiday season.

Here's an eye opening example...

If you were the average consumer and spent $347 on your credit card, at a national average interest rate of 12.82%, and made only the minimum monthly payments...IT WILL TAKE YOU OVER 3 YEARS TO PAY OFF THAT DEBT!

What does this mean for your credit score?

In order for this example not to affect your credit score - you would need a available credit balance of $3,100 so you stay below the 10% mark. Calculate your debt to credit ratio by dividing your current balance by your available credit limit.

Anything over 10% could mean trouble for your credit score.

Black Friday and Cyber Monday

2008-11-26T10:27:00.008-07:00

It has come to that time of year again...

Black Friday is only two days away and just after that is Cyber Monday.

Before you go out and blow your bank account on "deals" - there are a few things you should consider.

Having a game plan is an excellent idea before you get to the malls at 4 a.m. Here are the most important things to consider...

Who are you buying for? Don't load up on gifts for people not on your list just because you think you are getting a great deal.

What are you buying them? The worst idea is to go not knowing what you are going to get them. You will have a tendency to buy them something more expensive.

What stores do you need to go to? If you think you are going to get great deals then "get in and get them and then get the heck outta Dodge."

How much are you going to spend for the entire holiday season? Create a budget for this holiday shopping season and stick to it. Don't rush out and blow your entire budget on Black Friday if you aren't buying for everyone on that day.

The newest craze to many shoppers this holiday season is Cyber Monday. It is the online version of Black Friday. You need to use the same logic and have a similar plan when sitting behind your computer as you would if you were going out to battle the other die hard shoppers at 4 a.m.

There are also a few more things to consider when shopping online...

Most of us know not to give our credit card information on an unsecured website - http:// - but the point needs to be reinforced. Only give your personal information on secured websites - https://.

Print out receipts or save them to your computer and always check the return policy of the store you are doing business with.

If you are uneasy about using your credit card online, I have the best solution ever! Go to your local bank or a store that sells VISA gift cards. They work just like a regular credit card but have a limit that you can set. It is highly unlikely that the card number could be stolen online but if by chance it is, the dirty thief will only be able to use the remaining balance.

Hopefully you will take these ideas to heart and use common sense this holiday season when shopping the old fashion way on Black Friday and the new wave of shopping hysteria on Cyber Monday.

Debt Collectors Getting Nasty & Tough - Consumers Fight Back

2008-11-13T09:59:00.006-07:00

NEW YORK (AP) - After several years in which Americans were buying stuff on credit they couldn't afford, a rapidly increasing number are complaining about getting harassed and abused by bill collectors.

Nearly 71,000 people filed such complaints with the Federal Trade Commission last year, roughly double the number in 2003. In addition, more than 14,000 complained to the Better Business Bureau. Thousands more lodged grievances with state and city officials.

"And it is going to get worse," warned David Polino, a Better Business Bureau expert on collection agencies and president of the BBB chapter in upstate New York. "With the recession, with the horrible credit problems, this is going to be off the charts."

See Full Article...

The Day Is Finally Here

2008-11-04T09:50:00.004-07:00

The day is finally here for all Americans to exercise their right to vote.

The Times ARE Changing

2008-11-04T09:24:00.004-07:00

From the election to the release of FICO '08 in January...

The Times ARE Changing!

FICO 08 Is Scheduled For Release - Prepare Yourself NOW!

2008-10-28T10:02:00.014-07:00

Fair Isaac Corporation is scheduling FICO '08 for release on
January 10, 2008.

The primary reason for the planned switch to FICO '08 has to do with the forecasting powers of the new model. Fair Isaac believes that FICO '08 will do a better job at predicting the likelihood of default on a loan by making two changes to its existing model:

Authorized Users - An authorized user is a person that is permitted by another account holder to use their account. Normally, this situation applies to a family member who is trying to manage credit for the first time, such as a college student. The new scoring model eliminates "piggybacking" which allowed individuals with bad credit to leverage the payment histories of "stronger" credit card holders by becoming an authorized user on their accounts.

HOWEVER...I have heard from an industry expert that "piggybacking" was the problem with FICO '08. Fair Isaac needed to reconfigure the scoring model and deal with the issues it had with "piggybacking."

Here is what I was told. Fair Isaac is going to eliminate "piggybacking" for those accounts that show different addresses. Accounts with the same address will not be affected.

Here's an example.

Parents have a student going off to college who is on their credit cards. If the student changes their primary address they will not have the benefit of their parents account. If the student keeps their primary address the same as their parents, they will still have that account show up on their credit report and receive all of the benefits of that account.

Delinquencies - The second change in the scoring model has to do with payment patterns - especially those that are greater than 90 days late in making a payment. The FICO '08 model will be more forgiving to consumers that are in arrears in one area, but have a number of other accounts that are in good standing.

Your FICO score is determined by a number of factors. Mainly they are 1) Payment History, 2) Credit to Debt Ratio, 3) Credit Length, 4) Types of Credit, and 5) Number of Inquiries.

Operation Clean Sweep Video

2008-10-27T15:47:00.003-07:00

Here is a link to an interview with John Ulzheimer, credit expert, and CNBC's Carmen Wong Ulrich.

Operation Clean Sweep

2008-10-27T14:56:00.008-07:00

The Federal Trade Commission (FTC) is reacting to thousands of complaints across the country by consumers about credit repair companies. As a result, the FTC (along with 24 state agencies in 22 states) launched Operation Clean Sweep.

The FTC is charging 33 companies with violating the FTC Act and the Credit Repair Organizations Act (CROA). The FTC states that these companies made false claims they could remove accurate information from their credit reports. The agency also alleged that the defendants violated the CROA by charging an advance fee for credit repair services.

Here is the list of 33 companies that are being charged with violating the CROA.

Advantage Credit Repair, LLC
Nationwide Credit Services, Inc.
Clean Credit Report Services, Inc.
Successful Credit Service Corporation
Hargrave & Associates Financial Solutions
American Credit Experts
RCA Credit Services, LLC
Good Credit Company
Payneless Credit Repair, LLC
Lee Harrison Credit Restoration
Sherrye Mance and Tiffany Morris
Absolute/Advanced Credit Services
Credit Advisors
Executive Financial Credit Services
Federal Debt Relief Systems
Financial Link Services
7 Steps to a 720 Credit Score - NOT THE 720 CREDIT GURU!!!
Integrity Credit Fix, Inc.
My Purchase Power, LLC
Enterprise Technology Group, Inc. doing business as Ameritrust Financial Card
New Leaf Associates, LLC
Financial Freedom Resources, Inc.
American Credit
Credit Counseling of the First Coast
United Credit Adjusters, Inc.
i3 Solutions
Warren and Associates
Bigger & Better Business Solutions
Affordable Computer Mobile Repair
Clean Credit Report Services, Inc.
Life Changing Credit Repair Services
The Credit Physician
Creditmax Financial, LLC

Operation Clean Sweep also includes three FTC cases announced earlier this year: Home Buyers Consulting Network, Inc., Payneless Credit Repair, LLC, and Lee Harrison Credit Restoration.

How can you avoid turning credit repair into credit despair? Here are a few suggestions from the FTC:

Avoid any company that wants you to pay for credit repair services before they provide any services. It is against the law.
Avoid any credit repair company that will not tell you your legal rights and what you can do, yourself, for free.
Avoid any credit repair company that tells you not to contact a credit reporting company directly.
Avoid any credit repair company that advises you to dispute all of the information in your credit report.
Avoid any company that suggests creating a 'new' credit identity - and then, a new credit report - by applying for an Employer Identification Number to use instead of your Social Security number. That is against the law.

If you follow illegal advice and commit fraud, you also may be subject to prosecution.

Will Closing A Credit Card Account Help My FICO Score?

2008-10-20T13:39:00.005-07:00

I recently read a blog post that suggested that you should close credit card accounts if they are old and you don’t use them anymore. BIGGEST CREDIT MISTAKE #1. I went out and did some research on the matter and found this article from MyFICO.com.

The Question is: Will closing a credit card account help my FICO score? The short answer is no. We never recommend closing a credit card for the sole purpose of raising your FICO® score.

This may sound a bit counter-intuitive; after all, cleaning up your credit profile by getting rid of old or unused credit cards sounds like a good idea – and it may be from an overall credit management perspective. If you are tempted to charge more than you should just because you have more availability to credit, then getting rid of that temptation by closing some credit cards might be your best course of action.

However, your FICO score takes into consideration something called a "credit utilization ratio". This ratio basically looks at your total used credit in relation to your total available credit; the higher this ratio is, the more it can negatively affect your FICO score. So, by closing an old or unused card, you are essentially wiping away some of your available credit and there by increasing your credit utilization ratio.

It's a bit tricky, so here's an example:

Say you have 3 credit cards. Credit card 1 has a $500 balance and a $2000 credit limit. Credit card 2 is an unused card with a zero balance and a $3000 limit. Credit card 3 has a $1,500 balance and a $1,500 limit. In this scenario your credit utilization ratio looks like this:

Total balances = $2,000 ($500 + $1,500)
Total available credit = $6,500 ($2,000 + $3,000 + $1,500)
Credit utilization ratio = 30% (2,000 divided by 6,500)

Now, if you decide to close credit card 2 because it's an old card that you never use, your credit utilization ratio looks like this:

Total balances = $2,000 ($500 + $1,500)
Total available credit = $3,500 ($2,000 + $1,500)
Credit utilization ratio = 57% (2,000 divided by 3,500)

You can see that your utilization ratio rose from 30% to 57% by closing the unused credit cards.

Read the full article here…

Consumer Alert: Countrywide Credit Scandal

2008-09-19T22:22:00.010-07:00

On September 10th, 2008 it was released that two million people who had home loans with Countrywide learned that they may have been the victim of Identity Theft.

Why - because their personal information may have been sold.

Countrywide admitted that a former employee sold unauthorized personal information to a third party over a two year period for more than $200,000.

The information included names, addresses, social security numbers and application information.

Thankfully the FBI found and arrested the employee, and reports as many as two million people may have had their data stolen. Countrywide is offering affected customers two years of free credit monitoring service.

If you have a loan with Countywide you are highly encouraged to contact them for the free credit monitoring service they are offering if they have not already contacted you.

Now the shocking news…Countrywide is only offering this service to primary borrowers on the loan!

Co-borrowers have not been notified that their information may have been sold and could be in jeopardy. Co-borrowers have not been offered the free credit monitoring service for the two year period.

If you are a co-borrower on a Countrywide loan your information is at just as much risk as primary borrowers and you need to contact them immediately and demand them to start monitoring your credit for the next two years for free.

Here is the information to contact Countrywide.

countrywidecredit.com

Countrywide Home Loans 1-800-763-1255.

creditguardhelp@experiandirect.com

Experian 1-866-369-0422

Experian Customer Care Team
PO Box 19729
Irvine, CA 92623-9729

If you do not receive prompt and courteous service from a Countrywide representative you are encouraged to contact Consumer Affairs.

Authorized-User Credit Card Plans Can Be Useful, and Abused

2008-08-18T12:00:00.000-07:00

Written by Sandra Block
USA Today

In the world of credit reports, an "authorized user" is someone who is allowed to use another individual's credit card without being responsible for the bill.

When a credit card holder designates a child, spouse or other individual as an authorized user, the card holder's payment history appears on the authorized user's credit report. If the card holder has stellar credit, it will boost the authorized user's credit score. More than 50 million consumers are listed as authorized users on another person's credit card, according to Fair Isaac.

But in recent years, some credit-repair outfits have exploited authorized-user accounts in ways that Fair Isaac never intended. These companies arrange for people with good credit to "rent" their histories to strangers with tarnished credit.

"Some consumers were paying thousands of dollars to be added to someone's account to get a short-term increase in their credit rating," says Tom Quinn, vice president of scoring solutions for Fair Isaac. Fair Isaac officials were concerned that the practice, known as piggybacking, allowed consumers with bad credit to artificially inflate their scores.

In an effort to stop this practice, Fair Isaac announced last year that its new scoring formula, known as FICO 08, wouldn't recognize authorized-user accounts. Critics said the change would lower credit scores for millions of consumers, forcing them to pay more for everything from mortgages to car loans.

About 1% of consumers would no longer have enough of a credit history to get a score at all, according to a survey by Credit.com, a consumer website. Without a credit score, it's very difficult to qualify for a loan.

Lenders, meanwhile, raised a regulatory concern. They told Fair Isaac that they used FICO scores to comply with the Equal Credit Opportunity Act, which requires lenders to consider a spouse's credit history when weighing a potential borrower's credit risk. If Fair Isaac stopped recognizing authorized users, lenders said they wouldn't be able to use FICO scores to meet that requirement.

In response, Fair Isaac sent its scoring model back to the laboratory. Company analysts came up with a new version of FICO 08 that will continue to recognize authorized-user accounts but make it more difficult for credit-repair agencies to manipulate credit scores, Quinn says. Fair Isaac declined to provide details on how its new formula will close the piggybacking loophole. The company says it's working with the three credit-reporting agencies to get FICO 08 adopted as quickly as possible.

"This is great news," says John Ulzheimer, president of educational services for Credit.com, an outspoken critic of the original proposal. "I'm thrilled with Fair Isaac's willingness to take a second look at this."

A Credit-Building Tool

Ulzheimer believes the authorized-user designation offers a valuable way for parents to help children learn how to manage credit without giving them their own credit card. "It's like a credit card with training wheels," he says.

There's no downside for the child, because an authorized user has no liability for the account, Ulzheimer says. If the parent falls behind on payments, the child can ask to have the authorized-user designation removed from his or her credit report.

"When you have someone as an authorized user on a credit card, you give them an escape route," Ulzheimer says. "If you lose your job or get into a horrible financial mess, you're not dragging them down with you."

view full article

What Should We Do?

2008-08-17T12:00:00.002-07:00

Courtesy of Warner Home Video.

Credit Information Reflects Responsible Financial Behavior

2008-08-16T12:00:00.001-07:00

Most people have good credit. The average credit score is 682 according to Fair Issac.

Experience has shown that fiscally responsible consumers with good credit scores have fewer losses than individuals with poor financial track records.

Credit information provides an indication as to how a person manages their financial obligations. Research shows that people who manage their financial responsibilities also manage other important aspects of their life. Careful behavior leads to fewer accidents. The Texas Department of Insurance found that the average loss for people with the worst credit history is DOUBLE that of people with the best credit. Drivers with the best credit are involved in 40% fewer accidents than those with the worst credit.

In addition, homeowners insurance losses for people with the worst credit are triple that of people with the best credit.

How Are Insurance Score Used?

2008-08-15T12:00:00.002-07:00

Insurance Scores Provide More Data...

Credit information provides insurers with additional predictive information that is distinct from other rating variables. By combining this information with other familiar rating factors used for homeowners and auto insurance, insurers are able to develop a more complete picture of an individual's risk of loss.

Insurance Scores Make Insurance Pricing More Accurate and Individualized...

Credit information significantly improves insurers' ability to make accurate predictions on which consumers are most likely to experience a claim. By including credit information in the insurance pricing formula, premiums more accurately reflect the risk of the individual rather than a larger group.

As a result, low risk consumers with better credit scores pay less for insurance.

Connections Between Credit History and Insurance Losses

2008-08-14T14:39:00.003-07:00

Several independent studies have proven a strong connection between credit history and the likelihood of an individual filing a claim.

According to the Texas Department of Insurance there is a clear and conclusive relationship between a consumer's credit history and the probability they will file insurance claims.

The department of insurance found that the use of credit information makes pricing more accurate and results in the majority of the population paying less for auto and homeowners insurance policies. These findings were supported by previous studies conducted by independent researchers that have demonstrated that credit information is among the three most important variables used by insurance companies.

Introduction to Insurance and Credit

2008-08-13T16:35:00.009-07:00

An insurance credit score provides an assessment of your insurance risk. It is calculated based on the information in your credit file such as collections, bankruptcies, charge-offs to name a few.

Keep in mind, insurers are no different than other institutions in the fact that they are only interested in how well you handle your assets rather than how much money you make or whom you owe.

Several key points that insurance companies use your credit for are...

· It lowers costs for the majority of consumers.

· It is a predictor of future claim filing.

· It fairly allocates the cost of coverage based on a consumer’s claim potential.

· It provides an objective tool for decision making.

· It increases the availability and afford ability of insurance for consumers.

· It allows insurers to underwrite some consumers who would not receive coverage using more traditional underwriting criteria.

Sound financial management is more important today than ever before. Banks, employers, and even cell phone companies use credit information. Maintaining good credit offers many benefits, and getting a better price from some insurance companies is one of them.

My next three posts will be dedicated to how and why insurance companies use your credit score.

I will also talk about the 5^th credit reporting agency that most people don’t even know about.

Image courtesy of Google.com.

Credit Alert!

2008-08-06T19:44:00.005-07:00

August 4th, 2008

by Edward Jamison, Esq.

Most people have never checked their credit score. They have always used credit wisely and have probably never been denied a loan. Long story short, they have never really had a good reason to worry about their credit score.

They do now.

Why? Because banks are systematically lowering credit limits on credit cards and HELOCS, even for borrowers with spotless credit records.

So when they receive notification from their bank of a drop in their available credit, they usually don't think too much about it at first. They say to themselves that they had no plans to max out their credit cards anyway. And besides, they just got their HELOC as a financial safety net or they only used it to finance a new car at better rates with a nice tax deduction.
But what the banks aren't telling them is the negative impact lowering their credit limits will have on their credit score.

As soon as a borrower's credit limit is lowered, it changes their Credit Utilization Rate, (CUR), which is a major component of their credit score. Credit Utilization Rates are calculated by dividing outstanding loan balances by the amount of credit available.

For example, if a borrower has $10,000 in credit card debt with an available credit limit of $40,000, their Credit Utilization Rate is 25%. But if their credit limit drops to $10,000, their CUR leaps to 100%.

The same thing happens when a bank freezes a HELOC.

As a result, millions of people who have never worried about their credit scores and who have spotless records are getting a rude surprise the next time they apply for a loan.

That's what Michael Isroff believes happened to him. He had a mortgage on his condominium in Chicago, plus a home equity line of credit with a balance of $12,000. This spring, National City froze his HELOC which had a credit limit of $100,000. National City wrote in a letter that Isroff wouldn't be allowed to borrow any more against his home's equity, and he would have to pay off the balance over time. In effect, his credit limit was reduced from $100,000 to the $12,000 that he owed.

Like most people, he didn't think too much about it at the time because he didn't really need it, it was just nice to have.

But when he went to refinance, his mortgage broker told him there was a problem. The best programs and rates were only available to borrowers with a credit score above 720 and he was two points short. He didn't know it then, but his credit score dropped overnight from 760 to 718.

And he's not alone.

There are millions of borrower's just like him who are going to need help repairing their credit to purchase a home, rent a decent apartment, buy a new car, get insurance, buy a cell phone or even just get a good job.

Biggest Credit Mistakes Countdown...#1

2008-07-16T11:25:00.001-07:00

And finally...The #1 Credit Mistake...

Credit Mistake #1: Closing Credit Cards Accounts

This, without a doubt, is THE Biggest Credit Mistake that consumers make. What you may find surprising is that closing credit card accounts can hurt your credit score almost as badly as missing a payment.

Not only is this the number one on the top five credit scoring mistakes, it's also number one on the list of credit myths.

Ironically, most consumers make this mistake based on poor advice from a mortgage lender as a strategy for improving their credit scores. A word of advice people, when you're dealing with something as sensitive as your credit and credit scores, make sure you do your homework before trusting some of these so called 'industry experts' before following through with their advice.

There are two important reasons why you should not close credit card accounts:

1. Eventually, the accounts will fall off of your credit reports - The information in your credit reports are subject to certain rules in regards to how long it can remain in the report. In most cases, credit information will remain in your credit reports for seven years from the account's Date of Last Activity (DLA).

When an account is open, the DLA will continue to update each month and the open account will never reach that seven-year mark.

If you close the account, the DLA will stop updating and the clock will start ticking. Eventually the account will be completely removed from your credit reports.

Why would this be a bad thing?

It's simple - you never want to get rid of old, positive information in your credit reports. This information actually helps your credit scores.

Credit scores want to see this positive account information. They want to see your long, perfect history of making your payments on time because this information significantly helps your credit scores.

This information significantly helps your credit scores so why would you ever want that history to disappear? You wouldn't! Here's an analogy for you: let's say you made straight A's in high school. What if the record of that perfect scholastic accomplishment were permanently deleted seven years after you graduated? Would you ever want that history deleted? Of course you wouldn't. The same is true for the credit reporting environment.

So, what should you do with old credit cards that you don't use any longer?

What you don't want to do is to let the account become inactive. When this happens, the credit card companies aren't generating any revenue for your account.

Eventually they'll close the unused account because you're more of a liability than an asset. You can prevent this from happening by using the card every few months for low dollar purchases like dinner or a tank of gas.

When the bill comes in, just pay it in full. If you do this, it will ensure that the account will never be closed and you'll always get credit for your good payment history.

2. You could cause a spike in your revolving utilization and tank your scores - The percentage of your available credit in comparison to the debt you owe is a very important factor in calculating your credit scores.

This is often called "revolving utilization," or your debt-to-limit ratio.

For example, if you have an open credit card with a $1,000 credit limit and a $500 balance then you are using 50% of your available credit. This means that you are 50% utilized on this particular credit card.

Now lets add a second credit card to the mix.

Let's say you have another open, but unused credit card account with a $1,000 limit and a $0 balance. This would put your total revolving utilization at 25% because you have $2,000 in available credit limits and $500 in total balances.

If you divide your total balances by your total credit limits, you'll get your total aggregate revolving utilization: $500 divided by $2000 equals .25 or 25%.

So how will closing unused credit cards hurt your credit score? When you close an account, the amount of available credit decreases, which could result in a higher revolving utilization and lower your score.

Let's use the example from above and close the second unused credit card account. When you close the account, you remove it from any utilization calculation and now you're stuck with one open credit card account with a $1,000 limit and a $500 balance.

This caused your utilization to go from 25% to 50%.

Remember, you divide the total balance by the total available limit so $500 divided by $1,000 is .50 or 50%. As this percentage increases, your credit score decreases.

When you're talking about several unused credit cards with high limits, you can just imagine what closing credit card accounts could do. I've seen consumers go from a 10% utilization to almost 100% utilization because they closed all of their credit card accounts except the one they were currently using.

Biggest Credit Mistake!

Biggest Credit Mistakes Countdown...#2

2008-07-15T11:25:00.001-07:00

It doesn't take a credit scoring expert to tell you that missing payments is a bad thing. The only reason I made missing payments second to is because this one is a "no brainer!"

Credit Mistake #2: Missing Payments

It shouldn't take a credit expert to tell you that missing payments is bad. Common sense should tell you that missing payments is bad. Credit scores are designed to predict how likely you are to miss payments in the future.

This means that they look at your credit history to view how you've managed all of your credit obligations.

Missed payments are the most powerful predictor of future late payments. The FICO score evaluates previous late payments in three different layers:

How Severe - How severe is the late payment? It doesn't take a statistician to tell you that a 30-day late isn't as bad as a 90-day late. The more severe the late payment, the more damaging it is going to be to your credit scores.

Consumers who have missed payments by a few weeks and then bring their accounts current score much better than consumers that have gone 90+ days past due. In fact, a 90-day past due is the threshold that will wreak havoc on your scores.

If you are unable to avoid a late payment, the next best option is to get those accounts current as quickly as you can.

How Recent - How long ago did the late payment occur?

If you've read some of my previous articles on credit scoring, you'll know that the last 24 months of your credit history are critical because the FICO Score places more emphasis on your recent credit patterns.

This means that a late payment 6 months ago is going to carry much more weight than a late payment from 4 years ago. To recover from late payments it's important that you get current and stay current.

How Frequent - How often have the late payments occurred? Consumers that miss payments frequently are penalized much more severely than those that have missed a payment here or there in their past.

If you have a tendency to make late payments your credit scores will reflect your bad habits. Make your payments on time and you'll never have to worry about losing points in this category.

Stay tuned for the #1 Credit Mistake of all time!

Biggest Credit Mistakes Countdown...#3

2008-07-14T11:25:00.001-07:00

Credit Mistake #3: Settling Accounts

One of the most common mistakes consumers make is assuming that “settling” with a lender is a great way to save a little cash.

Unfortunately, they don't realize what that a 'settled' indicator in their credit reports is actually derogatory.

"Settling" is a term used in the consumer credit industry that means accepting less than the amount you owe on an account. For example, if you owe a credit card company $5,000 but you can't pay them the full amount then they will likely make you a deal for less than that full amount. They have "settled" for less than the full amount, which is likely much less than you contractually owe them.

This may seem like a good idea because you save quite a bit of money but as far as the credit scoring models are concerned, this is just as negative as other severe late payments.

The only way to avoid the damage to your credit scores is to arrange a deal with the lender to report the account as “paid in full” as opposed to 'settled'. If they don't agree then it's in your best interest to figure out how to pay them in full or else be prepared to suffer the damage to your credit for the next 7 years.

It's also important to understand that if the account has already made it to the collection phase, the damage is already severe and settling won't really make a difference. Settling is only an option if the account has already made it to a severe delinquency state.

Stay tuned for #2.

Biggest Credit Mistakes Countdown...#4

2008-07-13T11:25:00.003-07:00

Credit Mistake #4: High Revolving Utilization on Your Credit Cards

Most consumers believe that making your payments on time is all it takes to have good credit and earn great credit scores.

What they don't realize is that almost a third of your score is determined by how much you owe on your credit card accounts. If you have high balances on your credit card accounts, you're credit scores could be severely impacted by your revolving utilization.

In order to score the most possible points in this category, I advise keeping your revolving utilization at 10% or less.

Don't be fooled when you hear some of these celebrity experts telling you that 50%, 30% or even 25% is best.

While 30% is considerably better than 50%, 10% or less is ideal. The lower the utilization percentage, the better your score will be.

Stayed tuned for #3.

Biggest Credit Mistakes Countdown...#5

2008-07-12T11:29:00.014-07:00

It's surprising how many consumers make the same credit scoring mistakes over and over again. In an effort to educate consumers on credit and credit scoring, I’ve compiled the Biggest Credit Mistake Countdown! 5 common credit scoring mistakes into a list that defines each mistake and explains why they are bad and how to avoid them.

Whenever you apply for credit your application gives the lender permission to access your credit reports. When they pull your credit reports, it automatically posts an inquiry in your credit record. This inquiry is a record of who pulled your credit report and the date it occurred.

Credit Mistake #5: Excessively Applying for Credit

Credit scoring models use inquires to determine if and when you shop for credit. Statistics show that consumers who have more inquiries are higher credit risks than those with fewer inquiries.

It is for this reason that the more inquiries you have, the more points you lose in the credit score calculation.

The exact point value of inquiries is a much argued topic and is impossible to give an exact point value because it really depends on all of the other information included in your individual credit file.

The best strategy would be to only apply for credit when you absolutely need to.

This means that you should avoid those in store offers of "10% off" in exchange for applying for a store credit card. This may sound like a great idea but the reality is that while you may save a few bucks on your purchase, those inquiries could end up costing you a lower credit score which could result in higher interest rates on auto or mortgage loans in the future.

Stayed tuned for #4.

Collections 101

2008-06-25T16:13:00.005-07:00

With the recent mortgage debacle and the subsequent tightening of available credit - it's no wonder that more and more lenders, hospitals, and landlords are turning their focus to collections in an effort to recoup some of their losses.

In the past twelve months we've seen a drastic spike in consumer complaints about collection agencies and their strong-arm tactics. Unfortunately, with the current economic downswing and the constant murmurs of a recession looming ahead, it's only going to get worse. You need to know how to avoid collections before they happen - and how to deal with them if they do.

Collections will have a serious negative impact on your credit reports and credit scores. They are never good and should be avoided at all costs because they are next to impossible to get removed.

Let's clarify what a collection is and how the system works. A collection is an action taken by a lender (or service provider) in an attempt to collect an unpaid or delinquent debt. Some lenders will use their own internal collection departments while others will outsource debts to a 3rd party collection agency.

Either way, the collector's primary task is to convince debtors to pay up.

Collection agencies work with lenders and service providers in two different ways. The first way is for the agency to buy the bad debt so that they own it outright. In all cases collection agencies purchase these debts for much less than the amount owed - usually pennies on the dollar. Another option is for the lender to consign the account to the collection agency. With this option, the lender agrees to pay the agency a percentage of whatever amount their collectors are able to recover. This percentage can vary, of course, but I've seen as high as 50% in some cases.

Once the collection agency takes over the account, they give financial incentives to their agents by rewarding them with bonuses if they are able to collect most - or all - of the outstanding debt. The more the agent is able to collect, the more money they get to put in their own pockets. Unfortunately, this can lead to some pretty ruthless and unethical collection practices.

Avoiding collections before they happen:

The easiest way to avoid a collection is for you to pay your bills - and pay them on time. Sometimes this may mean laying aside your pride and paying a bill that you don't necessarily agree with just to avoid it going into collections.

If you don't agree with a charge or feel that you have been treated unfairly by a provider - utility company, cell phone company, doctor, dentist, etc. - withholding payment isn't a wise option. Eventually the service provider will turn the account over to a collector and when they report it in your credit report; it will negatively impact your credit for up to seven years.

I can't tell you how many times I've heard from disgruntled people that refused to pay a bill "on principle" and then ended up with a $72 collection on their credit reports. It's just not worth the damage it causes. In the long run it's just better for you if you bite the bullet and pay the bill.

When a collection is unavoidable:

We all know that life can throw you a curve ball when you least expect it - a job loss, death in the family, unforeseen illness, etc. In these cases, it may be impossible to avoid a collection. If you already have a collection, here are some very important things you should know about:

1. Fair Debt Collection Practices Act. Know your rights as outlined in the Fair Debt Collection Practices Act. If you have a collection and have been contacted by a collection agency, you only have 30 days to dispute the debt or to request the collector to validate the debt. You also have rights that protect you from harassing and unethical collectors. To read a summary of your rights, go to http://www.ftc.gov/os/statutes/fdcpajump.shtm.

2. Statute of Limitations. A lot of consumers confuse the credit reporting statute of limitations with the statute of limitations to collect a debt. In many cases the statue of limitations to sue for contract debt can be much longer than the debt can legally be reported to the credit bureaus. The debts are certainly still collectable, just not reportable. If you have a collection that is close to being removed because of the statute of limitations - 7 years - and you are able to pay it or settle it, do so. Collectors are suing to collect their funds more than ever and as I mentioned earlier, it's only going to get worse.

3. Don't ignore the collection! Recently I heard a very well known and highly respected consumer advocate celebrity advising people to ignore collectors if they don't have the money to pay. This is probably the worst advice to follow when dealing with collections. Communication is vital. Avoiding collections does not make the collection or the bill collectors go away. In fact, the collection agency will most likely end up suing you if you owe them over $1,500, and possibly garnishing your wages or filing suit against you. Ignoring them won't stop the process; it will only make it much worse and more expensive in the long run.

4. Paying "In Full" vs. Settling. I always advise people to pay a collection, or at the very least to try settling with the collector. Remember, the collection agencies pay pennies on the dollar for these accounts. You should try to negotiate and settle the debt for as little as possible. You can start by suggesting 20% of what they are asking and go up from there. Keep in mind that you are dealing with professional collectors. They're going to push for you to pay it all up front rather than a payment plan because they want to get their commission sooner rather than later. Don't let them push you into something they can't do - structure a deal that works for you, not for them. When you do come to an agreement, get it in writing before you make the payment. But always remember they are not lenders. They don't have to set you up with a payment plan. Their attitude is "hey, you already had your chance to make payments to the creditor and you screwed that up. So why should I trust you?"

5. Pay for removal. Some shady collectors will tell you whatever you want to hear if they think it will help them get them to pay the debt. If they offer to remove the collection from your credit reports in exchange for payment, you shouldn't believe it unless you get it in writing first.

The credit bureaus have strict policies regarding collections. The only way a collection will be removed is if it is an error or if the statute of limitations for reporting has expired. Think about it this way, if the credit bureaus removed a collection just because it was paid, how accurate would their reporting system be? Did the collection exist? Absolutely! If they were to remove the collection it would dilute the value of their credit reports. This is why the credit bureaus will not honor those "pay for removal deals." Don't let yourself fall for it unless you have it in writing to back it up if the collector tries to renege on the deal.

To Summarize:

Your best option is to avoid collections all together. However, if a collection is unavoidable, the next best thing is to minimize the damage by paying it or settle it as quickly as possible. Be sure to get everything in writing, including a receipt, and make sure that the collection agency updates the account as "paid" in their credit reports.

Why Free Credit Reports Are Worth What They Cost

2008-05-30T10:00:00.003-07:00

Free credit reports are useful for identifying identity theft and reviewing active accounts but do very little to help a potential creditor gauge your creditworthiness.

The ubiquity of "free" credit reporting services like FreeCreditReport.com, TrueCredit.com, and AnnualCreditReport.com have helped breed a new generation of credit-aware Americans.

Because credit ratings have more importance to everyday life than in years past, this is a welcome development. For example:

* Lenders use credit ratings to determine borrowing rates
* Insurers use credit ratings to determine premiums
* Employers use credit ratings to make hiring decision

Unfortunately for Americans, though, not all credit reports are created equal. And when it comes to actually applying for credit in the form of a new credit card or mortgage, the free reports are worth precisely what they cost.

This is one reason why home buyers should have their credit reviewed by a mortgage lender as soon as possible in the home buying process -- the free reports offered by the major credit bureaus may be misleading and incomplete.

Free credit reports are useful for identifying identity theft and reviewing active accounts but do very little to help a potential creditor gauge your creditworthiness.

As the chart shows us, each industry's creditors has a way they like to do business and that way is the "standard" way.

(Image courtesy: The Wall Street Journal)

Ways To Improve Your Credit

2008-05-27T11:30:00.001-07:00

Your Credit Score is Costing You More Than You May Think

2008-05-16T12:11:00.005-07:00

Credit scores are the best predictor of how a homeowner will pay on a mortgage, so it's no surprise that credit scores are playing a bigger role in mortgage financing in 2008.

For loans closing after March 1, 2008, Fannie Mae and Freddie Mac will subject the bulk of their mortgage products hefty fees when the loan-to-value exceeds 70%.

Credit scores will determine the amount of the rate adjustment.

Credit scores over 680: no adjustment to loan size in fees
Credit scores between 660-679: 0.750% of loan size in fees
Credit scores between 640-659: 1.250% of loan size in fees
Credit scores between 620-639: 1.750% of loan size in fees
Credit scores below 620: 2.000% of loan size in fees

For example, a person with a $250,000 mortgage rate would face a "credit-based fee" of $1,875 just because their credit score is 679 and not 680. On that same mortgage, a "credit-based fee" of $3,125 will be added if they carry a 650 credit score. It would jump to $4,375 for a 635 credit score.

Alternatively, this fee can be "financed" into the mortgage instead of paid as cash. So you have the decision to pay thousands of dollars up front or thousands and thousands of dollars over the life of the loan. The decision is up to you.

If you are planning to purchase a home it would be prudent to have your credit scores checked as soon as possible. If your scores are below 680, or teetering on the edge, take ownership of your credit and start working to improve your score immediately.

Finding Errors On Your Credit Report

2008-05-02T14:49:00.005-07:00

Finding errors in your credit report can be a painstaking and time consuming process, and is worth every tedious second!

If you start getting credit when you are 18 years old and live to be 80, credit will affect 78% of you life.

First and foremost, get a copy of your credit report. Knowing what is in your credit report puts you in control and tells you what needs to be corrected.

You can obtain a copy of your credit report from any of the tree major credit reporting agencies: Equifax, Trans Union, and Experian. It is a good idea to get a copy from all three agencies or obtain a consolidated credit report, especially if you are thinking of buying a house or refinancing. Mortgage companies will use data obtained from all three agencies when reviewing your credit history.

Review your credit report thoroughly; make sure to correct any errors and incomplete information. By doing this, you are making sure that your credit history is accurate and that your credit score is correct when requested.

According to Fair Isaac, the wrong ZIP CODE can decrease your score by 5 to 10 points because of the Geographical Code used.

When reviewing your credit report, pay particular attention to the reason codes, so that you can improve them. Your credit score might be accompanied by a maximum of four reason codes which are alphanumeric codes set by FICO to understand how and why you received a particular score. Learning these codes is fundamental in the improvement of your score later on.

Personal information is the next area to concentrate your focus on. If the incorrect Zip Code can decrease your score, imagine what impact the incorrect spelling of your name will have.

Lastly, verify all of your accounts. Always verify account information in writing. Keep meticulous records of all correspondence so you have a paper trail and proof of the verification of information.

According to the Fair Credit Reporting Act, creditors have 30 days to verify all information they report on in your file, and if they can’t the information needs to be removed.

Listed below are just a few common mistakes I have personally found on credit reports.

· Incomplete or wrong name, address or phone number

· Wrong social security number or birth date

· Missing, wrong, or outdated employment information

· Incorrect marital status – showing single when married or vice versa

· Bankruptcies older than 10 years or not identified by the specific chapter of the bankruptcy code

· Judgments or lawsuits older than seven years

· Delinquent account older than seven years or that omits the date of the delinquency

· Paid tax liens older than seven years

· Credit applications older than two years

· Credit histories for someone with the same name or similar social security number

· Premarital debts of your current spouse attributed to you

· Lawsuits you were not involved in

· Wrong account histories, such as a debt shown as past due when it was discharged in bankruptcy or a late payment note when you paid on time

· Paid judgment, tax or other liens listed as unpaid

· Closed accounts still listed as open

· Accounts closed by you, that don’t indicate “closed by consumer”

Now you know what to look for. Read through my past posts to know what to do once you have found inaccurate information.

Banks Suspending Home Equity Lines of Credit

2008-04-29T10:42:00.006-07:00

By Aleksandra Todorova

April 24, 2008

TERI GRUBAR, a 46-year-old small-business owner in Minneapolis, isn't the type to pay a bill late or bounce a check. So when the owner of the tree service she had hired to spruce up her yard rang her bell earlier this month, angrily waiving a letter stating that her $3,000 check had bounced, she knew something was wrong.

A call to Citibank threw her into further disbelief: Her home equity line of credit, or HELOC, which had $20,000 in it for the occasional home repair or cash emergency, had been closed. It wasn't her fault. As the bank explained in a notice she received a few days later, her account was suspended because her home value had "significantly declined."

"This has affected me financially and emotionally," she says. "I'm self-employed and sometimes it can be a couple of months before I receive payments. Now I've got nothing to fall back on."

With house values plunging across the country, hundreds of thousands of homeowners find themselves in Grubar's situation. Many large banks, including Bank of America (BAC1), Citigroup's (C2) Citibank, J.P. Morgan Chase (JPM3), Countrywide (CFC4) and Washington Mutual (WM5), have confirmed that they're reviewing HELOCs and are either decreasing available lines or closing them altogether. To determine which HELOCs to suspend, lenders are using monitoring systems that flag accounts in areas where home values have dropped significantly. Citibank and Washington Mutual say they may also consider individual borrowers' payment history and credit.

Driving this trend is the increased risk lenders face as home prices plummet and delinquencies rise, says Keith Gumbinger, vice president of mortgage research firm HSH Associates. "When you lend money to someone against the equity in their home, you are doing so on a secured basis," he explains. "If they owe in excess of the value of the home, you could never recover what you're owed in the event of a default."

This new risk-management measure, however, is hurting consumers in unexpected ways. Barbara Clark, a 57-year-old homeowner in Fort Pierce, Fla., was shocked to discover that shortly after Citibank suspended her $80,000 Citibank HELOC, her credit reports from bureaus Equifax and TransUnion listed the account as "derogatory." Clark, who monitors her credit religiously since she's about to start shopping for a new mortgage, immediately disputed the item. Equifax corrected the error, but things have only gotten worse with TransUnion, which changed the account status to "collection/chargeoff."

"I've been working really hard trying to resolve this, and the longer I've worked the worse it's gotten," Clark says.

In a written statement, TransUnion said the credit reporting companies collect information furnished by lenders and if a lender reports the account in a "manner that is derogatory in nature, then that, in turn, is how the item will appear on the report." Citibank declined to comment on specific customer accounts, citing privacy concerns, but said that "as we report it, the change is not a derogatory item." The bank advises customers to use the original notification letter in the event the bureaus misinterpret the information.

While there's nothing you can do to prevent a HELOC suspension, there are ways to avoid such disastrous consequences. Here's how to face one well-prepared.

Monitor your credit

If reported to the credit bureaus correctly, closing or decreasing a HELOC should have no effect on your credit score whatsoever, says John Ulzheimer, president of Credit.com Educational Services. Unlike credit cards, HELOCs aren't included in your overall credit utilization ratio, which is based on the percentage of the total available credit that you've used. However, if the account is reported incorrectly, things get a lot more complicated.

The problem is that credit-monitoring services may interpret the data they receive from lenders differently. When Clark initially pulled her credit report through TrueCredit.com, the account was listed as "derogatory." But when she pulled her reports from MyFico.com — the consumer-service arm of Fair Isaac, which calculates FICO scores — the account was listed in good standing. According to Steven Katz, a spokesman for TransUnion, which owns TrueCredit.com, the information in credit reports should be the same across all services. But, according to Ulzheimer, the "derogatory" listing in Clark's report is possibly the way TrueCredit initially interpreted the information from Citibank. Now that TransUnion has changed Clark's account's status to "collection/chargeoff," it will likely impact her Fair Isaac credit reports, significantly impacting her ability to secure loans, explains Ulzheimer.

To avoid such confusion, buy your credit reports and scores from Fair Isaac6 directly or use AnnualCreditReport.com7, which gives you one free credit report per year (but not a score) from each bureau. Should you discover any errors, correcting them could be a mighty battle8, as the credit bureaus and lenders keep passing the blame to each other. If you suffer monetary damages because of such mistakes, seek the help of an attorney, says Sam Glover, a consumer attorney in Minneapolis. (He doesn't handle such cases.) Find one in your area through the National Association of Consumer Attorneys9 (NACA).

Appeal the freeze

A lender's assumption that your home's value has fallen isn't always correct. "Remember, lenders are painting new risk-management criteria with a very broad brush," Gumbinger says. "Your home may be in a ZIP code that's been tremendously challenged, but that doesn't mean that your home is challenged."

You can appeal your lender's decision, but it will cost you since you'll have to submit a home appraisal from a service approved by the lender, which can cost as much as $300 or $350.

Shop around

If you've been cut off, you can try to find another lender, Gumbinger says. Look locally — there might be smaller banks and credit unions still promoting HELOCs. "You're trying to borrow your own money, so don't leave a stone unturned," Gumbinger says. Just be realistic: If your HELOC extended you to owing 100% of your home's value, don't expect to find another one in this environment.

Tap the line now

If you're worried that your lender may close your HELOC and you know that you'll need the money, it may make sense to tap the line now and deposit the cash in a high-yield savings account. Just keep in mind that most savings account yields have dropped dramatically so that money won't grow by very much while in the account10. Also, don't forget that you're putting your home up as collateral, says Gerri Detweiler, a credit educator and author of "The Ultimate Credit Handbook." So you should only do this if you're certain you won't suffer a loss in income that may prevent you from making loan payments.

Why Bad Credit Could Cost You Your Next Job

2008-04-01T09:38:00.004-07:00

If you are in the job market, your resume and experience may not be enough. More and more companies are looking at your credit score before hiring.

In the past, banks and financial service companies routinely ran credit checks as part of the screening process. Top sales executives and those requiring security clearances had their credit reports examined annually so that their employers felt comfortable with their money and debt management.

But now 35% of all companies are making credit checks a mandatory part of the application process. A bad credit score can send an otherwise well qualified job applicant straight to the unemployment line.

Why? For many reasons.

Credit scores have become the de facto "GPA" for all aspects of modern life. Companies are using credit checks as a general measure of your responsibility and organizational skills. If you can't manage your finances, how are you going to act and manage others?

Companies are also relying on credit scores because past employers, fearful of libel suits, are no longer as candid about the performance of former workers.

A credit report also contains a lot of information that may not be on a resume. For example, it contains a full legal name that employers can use to see if an applicant has changed their name to escape a checkered past. It also lists former employers who might not be named on a resume.

The prevailing view among many employers is that people with bad credit are irresponsible deadbeats. Even though they know there can be many contributing reasons such as identity theft, medical bills, or a layoff that was beyond their control, they still place the ultimate responsibility on applicants.

To make matters worse, 42% of people 18 and older have never even checked their score. They have no idea if it's good, or bad, or what's in their file.

All of this is making it harder for people who are laid off, newly divorced or saddled with student loans to find good, well-paying full-time jobs.

The truth is there are a lot of people who are just one paycheck away from financial disaster.

You're Hired, if your credit is good enough!

Creating a Monthly Budget

2008-03-31T12:15:00.007-07:00

With a little guidance, creating a monthly budget is very easy to do. The biggest obstacle people begin with is starting. There are hundreds of ways to keep track of your monthly spending. Start a list on a plain sheet of paper, copy one from someone else, or use your computer and a program that is designed specifically for this purpose and does all the work for you.

Before you start a budget for your household, make sure that all members are on the same page. If decision makers disagree as to how money should be spent, everyone’s efforts will be for nothing. The key is to work together and communicate your individual wants and needs, as well as the needs of the household as a whole. Compromise is an essential element to success. Having a clear financial plan that everyone can agree to will minimize conflict and maximize results.

Tracking your spending is the first step to a successful budget program. Start with the known items or fixed costs you have each month. This includes your retirement, housing expense, utilities, car payments and insurance, groceries and clothing.

The best way to predict future spending is to look to the past.

Your first priority (or bill you should pay) is your retirement. Here are some eye opening statistics about retirement.

More than 3 out of every 5 Americans (61%) believe they will need at least $500,000 in accumulated assets in order to retire (Retirement Corporation of America, USA Today).

35% of retirees believe they would deplete 100% of their savings and nothing left to pass onto their heirs at death if they were to live 5 years longer than they expect to live (Society of Actuaries).

A 30 year old saving $100 at the beginning of every month and earning 7% in a tax-deferred account until the age of 60 will accumulate nearly 4 times as much money as that of a 45 year old saving the same amount of money and earning the same interest (BTN Research).

The median 401(K) account balance for a person nearing retirement (i.e. a baby boomer) is only $60,000 (Center for Retirement Research).

After monthly household and fixed expenses are paid, you should start saving for an emergency. Three main causes for foreclosures are loss of job, divorce, and medical emergencies. Having at least 3 months in reserves is recommended by experts.

Finally, save money for entertainment costs and for non household purchases. Instead of putting that new TV on your credit card, save up for a few months and pay cash. Or do you really need a new TV?

The most important thing to do is be flexible. If your budget doesn’t work the first month, adjust it accordingly and try again in month two, or three, or even month four.

As I said in a previous post (Habits Not Numbers) it is not about the dollar amount but rather the habits. As time goes on you will need to make less and less changes and will be able to better predict future expenses.

Rebuilding Credit

2008-03-13T11:10:00.005-07:00

It is true that negative credit items can remain on your credit report for up to 7 years (up to 10 years for public records, such as a bankruptcy, tax lien or judgment). But this doesn't mean that you have to wait 7 to 10 years to begin reestablishing a good credit rating. Because credit scoring models typically lend more weight to your recent activity than to the mistakes you have made in the past, you can change your habits right now and begin reestablishing yourself as a good credit risk for a purchase or refinance loan 6 to 12 months down the road.

The following are a few Do’s and Don’ts when it comes to rebuilding your credit.

Three months prior to securing your mortgage, DON'T apply for, close, or pay off any collections, charge-offs, loans, or other kinds of credit without speaking to a professional first. Any one of these actions, as innocent as they might seem, could seriously affect your credit score, adding significant costs to your mortgage should your score suddenly drop.

If you have any credit card accounts with excellent credit histories, DO use them. But use them strategically. Keep your balances below 30% of their limits for 3-6 months prior to entering into a loan transaction, and use them only for small purchases that you can easily pay off completely at the end of the month. Remember, creditors like to see evidence of stability, so the goal is to keep the good reports coming month to month without falling into the same financial traps that led to credit challenges in the past.

If you don't have a credit card, DO get a secured card immediately. This is a great way to rebuild or establish credit quickly. Because this account is secured by funds that you deposit (typically between $100 and $400) you're not seen as a great risk to the card issuer because of your initial investment. Again, use this card strategically to build a strong credit history. Pay your bill on time every month, and it won't be long before you qualify for an unsecured credit account. Click on the stack of credit cards to see a list of which cards to apply for.

For some, opening a credit account with a co-signer could be a better alternative, but it's important to note that both you and your co-signer are equally responsible for any activity on this type of account, good or bad, so this strategy could backfire in the end if you or your co-signer makes poor decisions. DON'T mistake authorized user for a co-signed account. While, in the past, becoming an authorized user on an account in good standing would benefit everyone on the account, the credit bureaus have reconsidered this practice, and new credit models have all but eliminated piggybacking your way to good credit.

Finally, DO monitor your credit. Ask your mortgage professional to refer you to a professional credit education company you can trust, like Credit Education Resources, LLC. Having an experienced professional on your side will allow you to focus on your long-term credit goals without having to make reestablishing your credit a second career.

Send me an email or click on the Call Me link if you have any quesitons or want a professional analysis of your credit. I will be glad to review your credit and see what needs to be done to help you meet your financial goals and needs.

Credit Cards Are Playing Hard To Get

2008-03-13T10:52:00.006-07:00

The credit crunch is starting to hit consumers where it hurts-in their wallets. As lenders tighten credit standards, many consumers have faced greater difficulty getting a mortgage or a home-equity loan or line of credit. Now, some are beginning to feel the squeeze on their credit cards, despite the dramatic cuts the Federal Reserve.

Amid rising losses, credit-card issuers are tightening standards. Here's how to avoid getting squeezed:

• Boost your credit score, as issuers are raising minimum score requirements.
• Aim to pay down balances and limit applications for new credit cards.
• Maintain several cards with high limits, so if one issuer raises fees, you have other options.

Big card issuers such as Citigroup Inc. are requiring higher credit scores before issuing new cards, particularly in states that have been hit hard by the housing downturn, including California, Arizona and Florida. Some lenders, including Bank of America Corp., are offering lower initial credit lines. Other lenders, such as Capital One Financial Corp., are limiting credit-line increases or reducing credit lines for existing customers if they see signs that they are suddenly applying for more credit or are having trouble paying down their balances. And many card issuers are raising late fees and other charges to help offset what they see as higher risk.

The stricter lending standards come as many banks recently reported earnings and disclosed surprisingly large losses from their consumer businesses. Among the problems: higher credit-card delinquencies and losses. The banks expect the problems to get worse as the economy slows.

Consumers who expect to apply for a new card should take a fresh look at their credit scores and make sure that the information in their credit reports is accurate. You can order a free annual report from each of the three major credit-reporting bureaus, Experian Group Ltd., TransUnion LLC and Equifax Inc., online at AnnualCreditReport.com, or by calling 877-322-8228. If you stagger your requests for free reports throughout the year, you'll be reviewing one of your reports every four months.

To avoid dinging your score, you should pay your bills on time and aim to use less than 20% or 30% of your available credit. It's also a good idea to limit your applications for new credit cards.

One strategy: Maintain several credit cards with high credit limits – $10,000 to $20,000 or more per card is optimal. If an issuer raises fees or changes the terms, you have some flexibility and don't have to continue using those cards and can transfer your balances to another lower-rate card

Having cards with high limits can also help protect your credit score if the issuer cuts your available credit since it won't look as if you are suddenly maxing out on your credit, he says.

Excerpts taken from an article published in the Wall Street Journal February 5, 2008, written by Jane J. Kim.

Credit Freeze VS Fraud Alert

2008-03-10T11:50:00.007-07:00

When I was conducting some research over the weekend I found this article and knew right away I should share it with my readers.

What is the difference between a credit freeze and a fraud alert?

You can place an initial fraud alert on your credit report if you worry that you have been, or could be, the victim of identity theft. This is a good idea if you see any suspicious activity on your report or bills, if your wallet or other information has been stolen, if you've been a victim of a security breach, or even if you're concerned that you've revealed too much personal information online or over the phone.

A fraud alert means that lenders must take extra precautions to verify your identity before granting credit in your name. It also entitles you to a free credit report from each of the bureaus.

Anyone can place a 90-day initial fraud alert in their credit report, which can be renewed in 90-day intervals indefinitely. Contact one of the three credit bureaus (Experian, Equifax or TransUnion), which will notify the others.

You can get an extended fraud alert, which stays on your credit report for seven years, if you can provide a police report or other official record showing that you've been the victim of identity theft. You'll get two free credit reports from each of the credit bureaus every 12 months, in addition to the free copies everyone can get every 12 months.

Fraud alerts, however, aren't foolproof. If you'd like extra protection, you can get a credit freeze.

When you freeze your credit record, you prevent lenders from seeing your credit report unless you specifically grant them access. This can prevent identity thieves from taking out new credit in your name, even if they have your Social Security number and other personal information.

Your current creditors are exempt from the freeze, and you can use a PIN or password to open your file for certain lenders or for a certain time period if you plan to apply for credit.

A credit freeze may be a new option for you. In the past, only certain states allowed residents to freeze their reports. But the freeze became available nationwide on November 1, 2007.

To be effective, you need to freeze your record at all three credit bureaus. The costs vary by state, but you generally have to pay $10 to freeze your account at each bureau and another $10 to lift it -– even temporarily. The charge may be waived if you've been a victim of identity theft. Some states offer free freezes to residents over age 65.

It can take as little as 15 minutes or as long as three days to lift the freeze, depending on the state. Because of the time and money, a freeze may not be worth it if you're about to take out new credit. But it can offer strong protection for someone who worries a lot about identity theft, especially for seniors who can't check their records regularly and people whose information has been stolen in a security breach.

This article was written by Kimberly Lankford for Kiplinger.com on March 6, 2008.

The Mortgage Professor on Credit

2008-03-03T13:01:00.012-07:00

Jack M. Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, and founder of GHR Systems, Inc., a mortgage technology company. Click here for more infomation from The Mortgage Professor.

A credit report is a report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual's credit history.

A typical credit report includes the following:

Personal information. This is to identify the individual, hopefully distinguishing him or her from every other individual on the planet. It includes social security number, current and past addresses, and current employment.

Information from public records (states and counties). This includes liens, garnishments, foreclosures, bankruptcies, law-suits and judgments.

Information from collection agencies. This consists of past due debts that have been given to collection agencies to collect.

Information from creditors. This includes the identity of the creditor, the date the relationship began, the current status of each account including the amount outstanding, the maximum line if any, current status of the account, and past delinquencies.

Information about inquiries. This identifies companies that have requested the individual’s file within the last two years, distinguishing those authorized by the consumer and those not so authorized. Only the former affect credit scores.

There are three major repositories of credit information: Equifax, Experian and Trans Union. The information provided by the three is not exactly the same because not all credit grantors report information to all three.

At one time, underwriters with responsibility for determining whether or not a mortgage applicant was "credit worthy" spent much of their time studying and interpreting credit reports. Increasingly, however, this judgment is being based on credit scores, which are derived mechanically from information in the credit reports. Credit scores are discussed later.

Errors in Credit Reports

The credit reporting system is imperfect. Credit grantors, which are the source of much of the information that goes to the three credit bureaus, make mistakes. Some are due to sloppiness, some to confusion over names, and some are intentional. Some lenders deliberately withhold information on timely payments and maximum credit lines to prevent a customer’s credit score from rising, because it might result in losing the customer.

The credit bureaus also make mistakes. They have no financial interest in keeping anyone’s credit score low, but they do have a financial interest in managing their enormous databases at the lowest possible cost. The more common is your name, the higher is the probability that your file contains information pertaining to someone else with the same name – and that information about you has been inserted into someone else’s file.

Errors from credit grantors and credit bureaus are of both omission and commission. An error of omission is a piece of information which should be in your file but isn’t. An error of commission is the placing of information in your file that doesn’t belong there. Whatever the source, errors can adversely affect your credit report. The last section is a guide on how to remove errors.

What Is a Credit Score?

A credit score is a measure of your credit worthiness. The most common credit score is called the FICO score because it was developed by the Fair Isaac Company. The higher the FICO score, the greater the likelihood that the debts of the borrower will be repaid on time.

FICO scores range from 350 to 850. According to Fair Isaac, the median score over the entire population is about 715, with 20% above 780 and 20% below 620. The minimum score required to qualify for the lowest mortgage rate is about 740, but it varies from lender to lender, and often depends on other characteristics of the transaction.

Credit scores have speeded up the process of making loan decisions, and have largely eliminated personal bias and subjectivity in the decision process. The major downside is the possibility of data error. FICO scores are based entirely on information taken from credit reports. If the credit report is contaminated by erroneous or incomplete information, the FICO score will also be contaminated.

In 2006, Equifax, Experian and Trans Union set up a rival credit scoring system, VantageScore, in competition with Fair Isaac's FICO. Vantage Score uses a scale that ranges up to 1,000, with 900-1,000 representing an "A" credit, 800-900 a "B" and so on. This type of ranking is akin to that used in academic tests, which may make it intuitively more appealing to users. On the other hand, having two different scaling systems could result in confusion. A score of 750 is an "A" with FICO but only a "C" with VantageScore.

Will the Passage of Time Improve Your Credit Score?

The Federal Fair Credit Reporting Act puts father time on your side by setting limits on how long negative information can appear in consumer credit records. Once a piece of information has been on a consumer’s record for the prescribed period, it is supposed to drop off. Once off, it will no longer affect your credit score.

The prescribed periods are as follows: inquiries about you from credit grantors, 2 years; late payments, mortgage foreclosure, collection accounts and chapter 13 bankruptcy, 7 years; chapter 7 bankruptcy, 10 years; unpaid tax liens, forever.

Even before negative information drops off a credit report, credit scoring will give it lower weight as it ages. However, this doesn’t do borrowers any good unless they generate new positive credit information. Old bad stuff plus recent good stuff generates a rising credit score. Old bad stuff followed by no credit activity results in a continued low score.

Will Paying Off Delinquent Accounts Improve Your Credit Score?

No. Delinquencies reduce your credit score because they are viewed as evidence of a weak commitment toward meeting your obligations. This evidence of your attitude toward debt is not wiped away when you repay the delinquent loans. They stay on your record for 7 years. However, their weight in your credit score gradually declines with the passage of time, provided your recent payment record is better.

Do Credit Inquiries Hurt Your Credit Score?

Credit inquiries reduce credit scores because credit scorers have found that multiple inquiries are associated with high risk of default. Distressed borrowers often contact many lenders hoping to find one who will approve them.

But multiple inquiries can also result from applicants shopping for the best deal. To avoid catching shoppers in their net, credit scorers ignore auto and mortgage inquiries that occur within 30 days of a score date. To avoid biasing the credit score from earlier shopping episodes, the scorers treat all auto and mortgage inquiries that occur within a 14-day period as a single inquiry.

The upshot is that credit inquiries will not significantly impact your credit rating if you do all your shopping in a short period. Since the market can change from day to day, this is the only effective way to shop anyway.

Consumers should not be concerned about inquiries they make, such as ordering a credit report. Self inquiries don't affect the credit score. Neither do inquiries from your existing creditors, potential employers, or businesses considering whether or not to solicit you. The only inquiries that affect credit score are those by new credit grantors who you have explicitly authorized to check your credit.

How Much Debt Is Too Much?

The two major components of a credit score, which on average account for 2/3 of the total score, are payment history and amounts owed. Where the first is a record of how well you have met your obligations over the years, the second is a snapshot of your indebtedness right now. If your credit history is short, your current indebtedness can be the most important factor determining your credit score.

The approach that FICO credit scorers use to determine whether you are living beyond your means is to compare the outstanding debt on each of your accounts with the maximum amount of debt that the credit grantor has set for you on that account. This generates a set of "utilization rates" for each of your accounts.

For example, if you have two credit cards with maximum balances of $4,000 and $5,000, and if the actual balances are $3,000 on both as of the most recent date of record, the utilization rates are 75% and 60%.

Other things the same, the higher the utilization rates, the lower the FICO score.
[Note: Don't run out tomorrow to open some more lines, so your balances can be spread over a larger number of accounts. The FICO genie has a strong distaste for multiple new accounts in a short period of time, which can be an indicator of financial distress.]

Consumers should be aware of potential problems in connection with the utilization rates that affect their credit score. The data on debt balances as reported by credit grantors isn’t always correct. Furthermore, for various reasons, credit grantors do not report maximums on all revolving accounts. Where no maximum is reported, the largest balance ever to be reported on the account is used in its stead. Since the highest balance is below the maximum, often substantially below it, this necessarily results in higher utilization rates for such accounts.

Before going into the market, it is a good idea for consumers to check their balances and their credit limits. If an account has no reported limit, you can either ask the credit grantor to report the limit, or terminate the relationship. In the unlikely event that the credit grantor won’t report the limit but you want to maintain the relationship anyway, you can shift all your balances into this account temporarily so that the highest balance comes closer to the unreported maximum, then quickly reduce them.

What Is a Delinquent Payment?

A delinquent payment is one that is 30 days or more past due. This is not the same as a late payment, which is one received beyond the grace period granted by the lender. If a mortgage payment due on the first of the month is received on the 20th, for example, it is late and will incur a late charge, but it is not delinquent and will not appear as such on the credit report.

Don’t Try to Skip a Mortgage Payment

A single skipped mortgage payment can mushroom into a cascade of delinquencies if you don’t cure it immediately.

Under the accounting rules used for amortized mortgages, lenders always credit a payment against the earliest unpaid obligation. If you skip your payment in April, you will record one delinquency. If you make your payment in May, it will be applied to April, making you delinquent for May as well. When you make your payment in June, it is applied to May, making you delinquent for June. The delinquencies accumulate until the skipped payment is made good.

Fair Isaac’s Credit Scoring Change Will Affect MILLIONS

2008-02-29T09:37:00.005-07:00

I wanted to share this article I read written by credit attorney, Edward Jamison Esq. Please enjoy.

Edward Jamison Esq.–I have been forecasting for quite some time that Fair Isaac would eliminate the loophole that allows people to quickly increase their credit score by being added as an authorized user on someone else’s established credit card.

Marketers Make Loophole Too Prominent to Ignore

For the most part, this loophole has stayed under the radar until recently when a few companies came out of the woodwork with a marketable service that catered to consumers who will benefit from this practice. These companies recruit people from all over the country who have older credit cards with low debt ratios and offer them $100-$300 for each person they add to their credit card as an authorized user. Then, they market to consumers with limited credit histories and/or high revolving debt ratios and offer to have them added as an authorized user on a seasoned trade line for around $1500 per credit card and pocket the difference. As this practice became more popular, it wasn't long before the over exposure of this loophole shed light on the flaws of Fair Isaac’s software.

New Software Will Eliminate the Loophole

Under pressure from lenders, Fair Isaac made the decision to invest the money into correcting this loophole. The correction is fairly simple: When Fair Isaac takes that snapshot of somebody's credit file, they are going to look at one extra field that they previously had not looked at when generating the score. That field is the one that says who is responsible for that account.

If the scoring software sees that the person is the primary on the account, then it will score the report just like it had done before and no change to the credit score will take place between the old and the new scoring model. This will also hold true if it says that the account is a joint account. But if they see that the responsibility on that account is as an authorized user designation, they will completely ignore that entire account when calculating the credit score. It doesn't matter if the authorized user was added five years ago or yesterday; they will instantly lose the benefits created, if any, from that account being shown on their credit report.

Advising Clients Going Forward

Due to the fact that the scoring model is changing in a few months coupled with the fact that lenders are denying applications in some instances if an authorized user account is present, I would advise that people refrain from getting added as an authorized user immediately since the benefit will soon be gone and taking advantage of that benefit before it leaves may leave a person with no loan at all due to rejection from the lender.

Written by Edward Jamison Esq.

Renters Have Much to Gain by Pursuing Home Ownership

2008-02-24T13:19:00.009-07:00

The current housing market here in the Valley is truly a BUYER’S market. I wanted to get off of the subject of credit for a post and talk about the advantages of homeownership. But as you will read, everything comes back to your credit capabilities.

Buying a home vs. renting is a big decision that takes careful consideration, as most mortgage consultants will agree. But the rewards of home ownership are great. For many years, purchasing real estate has been considered an extremely profitable investment. It is an achievement that offers a sense of pride, financial stability and potential tax advantages.

Yes, there are certain responsibilities associated with owning a home. Landlords will often argue the benefits of renting, and for obvious reason. If you are renting, you’re helping them make their mortgage payment.

The numbers are staggering if you look at it this way. If you are paying $1,000 per month for an apartment, and you know your rent will increase 5% every year, then over the next five years you will pay your landlord $66,309. If you are currently renting a house, you may be paying much more than that each month. Either way, you gain no equity by shelling out this monthly housing expense and you certainly won’t benefit when the property value goes up!

However, if you were to purchase your own home or condominium, you would be well on your way toward building equity within that same five-year period. By choosing a fixed-rate loan program, you can have the comfort of knowing that your monthly mortgage payment will never go up. In fact, you would have the option of refinancing to a lower interest rate at some point in the future should interest rates drop, and this would cause your monthly mortgage commitment to go down.

In addition to building equity, there are tax advantages that come into play with home ownership. Depending on your tax bracket, owning a home is often less expensive than renting after taxes. Interest payments on a mortgage below $1 million are tax-deductible, and your mortgage consultant should help you evaluate the tax advantages of various loan scenarios, and share this information with your tax consultant to glean feedback on your behalf.

To find the loan program that is right for you, your mortgage consultant will need to evaluate your monthly household income, current assets and savings, as well as any monthly obligations you may have for credit card payments, car payments, child support, etc. These prequalification factors, along with the report of your credit score, will determine how much house you can afford and what interest rate you will pay for financing. It is also important to let your mortgage consultant know what your future goals are, because this will help narrow down which loan option is the best fit for your long-term needs.

There are many different types of loan programs available, including “low” and “no” down payment mortgage programs. These types of programs require the borrower to provide less than 3% of the loan amount as down payment. FHA lenders rule that the mortgage payment, including principal, interest, taxes and insurance (PITI) should not exceed 31% of your gross income, and the PITI plus other long-term debt (car payments, etc.) should not exceed 43% of your gross income.

The lease-purchase offers homeownership opportunities to consumers with little cash and/or poor credit, who are prepared to bet on themselves. The bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option. During the option period, they have the opportunity to rebuild their credit and accumulate equity while living in the house.

The development of the sub-prime market, in which consumers with poor credit or no cash can obtain loans, does not seem to have lessened interest in lease-purchase. It is very likely that those who succeed in exercising their option under a lease-purchase do better than if they had financed a conventional purchase in the sub-prime market. The savings in finance costs will more than offset a higher price on the house. But those who can’t exercise their option will lose their bets.

Consumers who need to rebuild their credit rating during the option period should understand that paying their rent on time won’t do it. Rent payment information is not used in compiling credit scores. While Fair Isaac, the company that developed credit scoring, has recently unveiled an “expansion” score based on “non-traditional credit data,” it does not yet include rent payment information from individual home owners. Lease-purchase buyers who need a higher credit score must focus on their credit cards and loans.

Housing is an expense that takes a big bite out of the monthly budget. If you are a renter and feel that “home” is more than just someplace to hang your hat, think about the advantages of purchasing real estate. It may be time to take the step into building your personal net worth as a home owner.

The Loan Process: Credit Myths, Mistakes, and Misconceptions

2008-02-24T12:18:00.012-07:00

Good credit is well worth the effort it takes to both achieve and preserve it. If you have good credit, the following tips will help you keep it that way. If you are looking to improve your credit, however, now is the time to get started. Send me an email. We will review your credit and find out exactly where you stand.

It has come to my attention that there is still some confusion as to what you SHOULD NOT DO during the loan process. If you plan on entering into a loan transaction in the next 6 to 12 months, you simply cannot afford to make these credit mistakes.

Don’t fall behind on existing accounts. This includes your mortgage and car payments. One 30-day late can cost you anywhere from 30-75 points.

Don’t pay off old collections or charge-offs during the loan process. Paying collections will decrease your credit score immediately due to the date of last activity. If you want to pay off old accounts, do it through closing, and make sure that 1) you validate that the debt is yours, and 2) the creditor agrees to give you a letter of deletion.

Don’t close credit card accounts. If you close a credit card account, it will appear to FICO that your debt ratio has gone up. Also, closing a card will affect other factors in the score such as length of credit history. If you have to close a credit card account, do it after closing, and make sure that it is an account you have opened more recently.

Don’t max out or overcharge your credit accounts. This is the fastest way to bring about an immediate drop of 50-100 points in your credit score. Try to keep your credit card balances below 30% of their available limit at all times during the loan process. If you decide to pay down balances, do it across the board. Meaning, make extra payments on all of your cards at the same time, not only one.

Don’t consolidate your debt onto 1 or 2 credit cards. It seems like it would be the smart thing to do; however, when you consolidate all of your debt onto one card, it appears that you are maxed out on that card, and the system will penalize you as mentioned above. If you want to save money on credit card interest rates, wait until after closing.

Don’t do anything that will cause a red flag to be raised by the scoring system. This would include adding new accounts, co-signing on a loan, or changing your name or address with the bureaus. The less activity you have on your reports during the loan process, the better.

Don’t do it alone. If you feel that the credit challenges you're facing are too much, or you don’t have enough time to do the work necessary to improve your own credit, don't lose hope and give up. Give us a call. We can help. In many cases, small changes to your credit profile could yield big results that could save you thousands of dollars on your mortgage.

DO!!! Contact a professional credit education specialist if you are unsure what should or should not be done, it is the smartest move you can make to improve your financial future.

Life After Bankruptcy

2008-02-21T10:09:00.003-07:00

Bankruptcy is an uncomfortable subject for a variety of reasons. The most obvious is the potential havoc it can wreak on your finances. Running a close second is the negative stigma which is often attached to the process. This negativity is important to mention because strong emotions can sometimes lead to unsound financial decisions with devastating results.

Bankruptcy becomes a viable option for someone who is “upside down” in terms of cash flow. In other words, when a person has more money going out each month than coming in, bankruptcy should be considered if no reversal of this negative cash flow is within sight. The longer someone waits to explore the various options available, the more serious his or her situation may become.

One of the worst things people can do in this situation is to borrow more money to try and pay off their debts. On paper, this is clearly an unwise financial decision. In the real world, however, it is very common for individuals to pursue this strategy in an attempt to buy time and hold off on filing for bankruptcy. On the surface, this is certainly a noble notion; however it can often compound the problem and serves only to delay the inevitable.

For many homeowners in the midst of this upside down cash flow, speaking to a qualified mortgage professional is a much better option. An experienced loan officer can objectively look at your finances and help you determine if restructuring your mortgage would not only help, but possibly even alleviate any need for bankruptcy.

If bankruptcy is the only option, seek out a reputable bankruptcy attorney and credit counselor. A qualified mortgage specialist can provide references for you as well, as he or she works with these professionals on a regular basis. Reliable references are essential in this case because experienced professionals greatly increase the odds of a successful bankruptcy experience. It’s that simple.

When filing for bankruptcy, be completely honest and accurate regarding every aspect of your financial situation. This includes any changes to your income which may occur throughout the process. Bankruptcy is a federal procedure, adjudicated by real judges, and scrutinized by representatives who coordinate with the Department of Justice, the FBI, and the IRS.

Here are some additional steps you can take to make the bankruptcy process as painless as possible:

· Save all paperwork regarding your bankruptcy, and keep it organized. This will prove beneficial after your bankruptcy as you now have all of the pertinent information in one place. Also, be sure to write down your discharge date. It’s surprising how many people forget to do this.

· Establish a household budget. This can be accomplished in many ways, but there are several inexpensive computer programs available which do an excellent job.

· Throughout the bankruptcy, do your best to not only live below your means, but to save as much cash as possible. You never know what you may need it for once the process is completed.

· Be prepared for a barrage of junk mail. There will be sharks on the loose who are hoping to capitalize on your need for credit.

Tips for Rebuilding Credit:

· If you must buy a car, focus on transportation as opposed to style. Buy an inexpensive, used car, and try to get a loan for it. It’s a good idea to figure out what your budget allows in terms of a dollar amount first. This means obtaining financing prior to looking for a car.

· Get a secured credit card. Secured credit cards allow for the cardholder to deposit a said amount of money into an account, thus establishing the spending limit of the card. Missed payments result in deductions from the account. Some of these cards will reward responsible borrowers by upping the limit without an additional deposit. Some will even convert the account into a traditional credit card. (Be wary of offers of “easy credit” or any card which asks you to call a 900 number. You will be charged for the call.)

· Meet with a credit education specialist. Not only can they help you clean up the damage to your credit report, they can advise you on specific ways to rebuild the credit you lost as well.

While it does take time, there is definitely life (and credit) after bankruptcy. Some mortgage lenders will even lend to you within a year or so after a bankruptcy. If you’re in serious financial trouble, the trick is to get the help and advice you need from professionals you trust.

Protecting Your Credit During Divorce

2008-02-20T09:56:00.001-07:00

When a marriage ends in divorce, the lives of those involved are changed forever. During this time of upheaval, one thing that shouldn’t have to change is the credit status you’ve worked so hard to achieve.

Unfortunately, for many, the experience is the exact opposite. Unfulfilled promises to pay bills, the maxing out of credit cards and a total breakdown in communication frequently lead to the annihilation of at least one spouse’s credit. Depending upon how finances are structured, it can sometimes have a negative impact on both parties.

The good news is it doesn’t have to be this way. By taking a proactive approach and creating a specific plan to maintain one’s credit status, anyone can ensure that “starting over” doesn’t have to mean rebuilding credit.

The first step for anyone going through a divorce is to obtain copies of your credit report from the 3 major agencies: Equifax, Experian, and TransUnion. It’s impossible to formulate a plan without having a complete understanding of the situation.

Once you’ve gathered the facts, you can begin to address what’s most important. Create a spreadsheet, and list all of the accounts that are currently open. For each entry, fill in columns with the following information: creditor name, contact number, the account number, type of account (e.g. credit card, car loan, etc.), account status (e.g. current, past due), account balance, minimum monthly payment amount, and who is vested in the account (joint/individual/authorized signer).

Now that you have this information at your fingertips, it’s time to make a plan.

There are two types of credit accounts, and each is handled differently during a divorce. The first type is a secured account, meaning it’s attached to an asset. The most common secured accounts are car loans and home mortgages. The second type is an unsecured account. These accounts are typically credit cards and charge cards, and they have no assets attached.

When it comes to a secured account, your best option is to sell the asset. This way the loan is paid off and your name is no longer attached. The next best option is to refinance the loan. In other words, one spouse buys out the other. This only works, however, if the purchasing spouse can qualify for a loan by themself and can assume payments on their own. Your last option is to keep your name on the loan. This is the most risky option because if you’re not the one making the payment, your credit is truly vulnerable. If you decide to keep your name on the loan, make sure your name is also kept on the title. The worst case scenario is being stuck paying for something that you do not legally own.

In the case of a mortgage, enlisting the aid of a qualified mortgage professional is extremely important. This individual will review your existing home loan along with the equity you’ve built up and help you to determine the best course of action.

When it comes to unsecured accounts, you will need to act quickly. It’s important to know which spouse (if not both) is vested. If you are merely a signer on the account, have your name removed immediately. If you are the vested party and your spouse is a signer, have their name removed. Any joint accounts (both parties vested) that do not carry a balance should be closed immediately.

If there are jointly vested accounts which carry a balance, your best option is to have them frozen. This will ensure that no future charges can be made to the accounts. When an account is frozen, however, it is frozen for both parties. If you do not have any credit cards in your name, it is recommended you obtain one before freezing all of your jointly vested accounts. By having a card in your own name, you now have the option of transferring any joint balances into your account, guaranteeing they’ll get paid.

Ensuring payment on a debt which carries your name is paramount when it comes to preserving credit. Keep in mind that one 30-day late payment can drop your credit score as much as 75 points. It is also important to know that a divorce decree does not override any agreement you have with a creditor. So, regardless of which spouse is ordered to pay by the judge, not doing so will affect the credit score of both parties. The message here is to not only eliminate all joint accounts, but to do it quickly.

Divorce is difficult for everyone involved. By taking these steps, you can ensure that your credit remains intact.

More Understanding of Credit Scoring and Credit Repair

2008-02-19T09:33:00.005-07:00

Credit remediation is a subject consumers often face with fear and trepidation, and for good reason. With the exception of recognizing that the best score wins, the average home shopper knows very little about the whole credit scoring process. Sub-prime borrowers who are eager to move into A-Paper territory often find themselves at a loss when trying to find ways to upgrade their credit history. The good news is there are ways to improve less-than-perfect credit scores and obtain a loan for the home you really want.

The first step in the process is making sure that you have a current copy of your credit report. Congress recently amended the Fair Credit Reporting Act so that consumers may now receive one free credit report annually. There are three major credit bureaus: Equifax, Experian, and TransUnion. Since entries can vary across bureaus, you’ll want to request a free report from each of the three companies.

It's also important to know just what a good credit score is. Most A-Paper scores generally begin around 680, although this number may differ slightly among lenders. Don't despair if you come up shy, there is always room for improvement. Increasing your score just 5 points can save a significant amount of money. For example, if your score is 698 and you increase it to 703, then you could save yourself thousands of dollars over time as a result of a slight improvement to your loan’s interest rate.

While credit repair is necessary for some, it's not the only way to increase your credit score. Even if you have stellar credit, you can enhance your score through these steps:

· Evenly distribute your credit card debt to change the ratio of debt to available credit. Let's say you have a credit score of 665. If you have debt on only one card, and four additional credit cards with zero balances, evenly distributing the debt of the first card could move you closer, and possibly into, that ideal bracket.

· Keep your existing accounts open and active. The average consumer is usually anxious to close credit card accounts that have zero balances, but doing this can cause them to lose the benefits of a long-term credit history and increase their ratio of debt-to-available credit. The bottom line is don't close those old accounts!

· Keep credit inquiries to a minimum. Each inquiry into your credit history can impact your score anywhere from 2-50 points. When it comes to mortgage and auto loans, even though you're only looking for one loan, multiple lenders may request your credit report. To compensate for this, the score counts multiple auto or mortgage inquiries in any 14-day period as just one inquiry, so try and stay within that time frame.

Remember, credit scores don't change overnight. Improving them requires time and diligent effort on your part, so it's a good idea to get the ball rolling at least three to six months and even one year prior to submitting your application for home financing.

If credit education and optimization is what you need, you can either begin the process yourself or seek out a qualified professional. If you decide to make your own improvements, visit as many websites as possible to get information regarding credit laws and consumer rights. Diligently search through them and educate yourself to ensure that you don’t sustain any self-inflicted wounds. A good place to start would be the Federal Trade Commission's website, which contains a wealth of helpful literature.

If you’re facing severe or complicated credit issues, then you’ll probably want to enlist the assistance of a professional credit education company. Before you do, be sure to familiarize yourself with the FTC's regulations on credit repair. With over 1,100 credit repair companies to choose from, it's important to be certain you are dealing with a reputable firm. Examine the FTC's information on fraudulent practices to avoid falling prey to credit repair scams.

Addressing credit issues can be uncomfortable to say the least. But by taking these steps now, you’ll be that much closer to obtaining the home of your dreams.

Additional Resources:

To order your free credit report, go to:
www.annualcreditreport.com

To read the Fair Credit Reporting Act, go to:
www.ftc.gov/os/statutes/frca.htm

For the Federal Trade Commission's information on consumer credit, go to:
www.ftc.gov/bcp/conline/edcams/credit/index.html

Getting the Best Interest Rate on Your Home Loan?

2008-02-18T12:58:00.003-07:00

Consumers interested in purchasing or refinancing a home will pay an interest rate based on current market conditions and their ability to pay back the loan. The borrower’s income and debt ratios are taken into consideration by the lender, as well as the predictability factor provided by credit scoring. It’s important to have a professional in your corner that has a keen eye for solutions to improving credit scores in an effort to get the best interest rate possible.

Interest rates associated with various loan programs are broken down into schedules based on credit score ratings. While each lender has its own guidelines, it’s safe to assume that as the consumer’s credit score goes down, interest rates will go up.

A borrower with an outstanding credit rating will get what is called an A-paper loan. This type of borrower is rewarded with a lower interest rate because they have a proven track record of using credit sensibly and paying their bills on time.

Loans designed for consumers with less-than-perfect credit – sometimes referred to as “sub-prime” – can range anywhere from A-minus, B-paper, C-paper or D-paper loans.

If you have already taken out a mortgage loan with a higher interest rate because your credit score was a little under par, you will really appreciate the value in doing a little work to improve your credit score. Refinancing from a D-paper loan to a B-paper classification can save literally thousands of dollars in financing fees over time, even though the B-paper loan is still considered sub-prime.

A qualified credit optimization specialist can guide you through the nuances of the process of improving your credit score and save you money. First and foremost, we will want to review the terms of the existing mortgage loan to determine if you have a pre-payment penalty clause written into your contract. In general terms, that means that if you sell the home or try to refinance before the pre-payment penalty expires and you have not already paid off 20% of the original loan amount, you will most likely have to pay a 3% fee back to the lender to compensate for the high risk and high costs incurred to provide that financing.

Next, you should obtain free copies of your credit reports from www.annualcreditreport.com and start working on improving the credit score six months to one year prior to the expiration date on your existing pre-payment penalty.

There are five factors that make up the credit score and are listed in previous posts, my team and I can coach you through some basic strategies to improve your credit score immediately and educate you on long term credit success strategies. This means very conservative use of credit cards, paying off debt as much as possible and not applying for additional credit cards unless you will benefit from such action. You will want to verify that negative items you have paid off are being removed from your credit report, and that good credit history is being reported to all three bureaus. You’ll also want to dispute any errors that appear on your credit reports and seek to have those removed entirely.

Once your credit score improves, you are in a better position to refinance at a better interest rate. United Mortgage Financial Group, Inc. always tries to look for programs that carry no prepayment penalty so you can continue to refinance as your credit score increases. You can repeat this process until you reach A-paper status and secure the best interest rate available.

This is a strategy that also works well for first time home buyers who do not have enough credit history under their belt to get an A-paper loan at the time of purchase. The important thing is to work with a credit optimization specialist and a mortgage planning specialist who can give you a roadmap to follow and a strategy for success in building personal wealth.

The Truth About Credit Repair

2008-02-16T15:18:00.002-07:00

If you type “credit repair” into Google® your search will come back with 18,200,000 results. How can a person possibly make an educated choice with those results?

Most companies will say they can “remove” items by challenging the accuracy of legitimate items on the consumer’s credit report because under the Fair Credit Reporting Act if the item cannot be verified in 30 days, by law, it must be removed.

While these tactics may provide a temporary boost in score they don’t give an accurate or complete summary to the lender. All they do is masquerade the problem and give an elusion of your creditworthiness.

So if they give you good credit…Are you really better off than you were before?

You haven’t learned anything from your past mistakes that will help you in the future. Your spending habits haven’t changed, and if fact you are probably going to get into more debt and trouble than you were in before you started.

If you fail to learn from the past you are doomed to repeat it!

Credit repair companies that charge huge upfront fees and make outrageous claims to fixing your credit should make you turn around and run! And if you believe what they say, I have some ocean front property in here in Arizona that I would like to sell you.

Everything that credit repair companies say that they can do for you can do for yourself, IF you have the right tools and education.

Here is a good analogy. Let’s say you have a leaking faucet. You could certainly start to dismantle your sink and plumbing and pipes, but if you were using a sledgehammer to do the job would it work? Or if you had the proper wrenches, would you know that you need to shut off the water supply before loosening any of the pieces so you don’t flood your house?

Probably not, that is why we have plumbers to do the job right the first time. They have the education, hands on experience, and the right tools to assess the problem and fix it properly.

The same applies to a credit repair company. Truthfully, I despise the term credit repair. That is why Credit Education Resources is so named. We have the experience and resources to properly educate our clients and optimize their credit potential. We use sophisticated analysis to create a realistic plan for credit management. We also offer a variety of tools that will help you manage your own credit.

Our goal is to create credit optimization.

Charge Off vs. Collection Account

2008-02-15T14:49:00.002-07:00

A “charge off” and a “collection account” are almost one in the same. They are both debts that can be collected, and that you still legally owe despite what you may have heard.

A “charge off” is an accounting term that corporations use when they file a Profit and Loss statement with the IRS. Profits and loses, including bad debt, is essentially charged off as a business expense. Large corporations file these claims all the time and it is considered a part of doing business.

Although the amount in question is written off at the end of the tax year, it is still legally collectable. There is a good chance that a collection agency will buy the debt and harass the consumer for the money. They may be willing to settle for less on a specified amount because they buy the debt for as little as ten cents on the dollar.

One vital thing to note about charge off accounts is if you decide to pay it, don’t be surprised if it remains on your credit report seven years from the original date of delinquency per the Fair Credit Reporting Act.

If you do have a charge off on your account make sure you take abrupt action. Here are two possible courses of action.

Dispute the claim directly with the creditor. If they fail to budge, write a letter to all three of the credit bureaus describing in detail the dispute. If the creditor doesn’t respond within 30 days they will remove the item entirely from your credit report per the Fair Credit Reporting Act.

If the charge off is legitimate, try and work out a deal with the original creditor directly. Be extremely cautious, and better yet don’t try to negotiate a deal with a collection agency, as you’ll surely get burned. If you work directly with the creditor you may be able to get the charge off removed from your credit report by making a partial or full payment.

No matter what course of action you decide on, ensure you get everything in writing, and never take anyone’s word on anything! If you can’t get it in writing ask them if you can record the phone conversation for proof of the agreement. This won’t work if you are trying for a rapid rescore. However, it will be better than nothing at all!

When you become delinquent on a payment for anything such as a utility bill or a medical bill, the creditor will most likely place your account in “collections”. (These types of accounts have a tendency to go into collections because they are not considered big accounts; this is not always the case though.) The creditor may use a debt collector or collection agency to collect monies outstanding that they deem you owe.

A collection is a major derogatory and one you should avoid at all costs if you want to maintain a solid credit score. If a collection shows up on your credit report, your credit score could drop up to 50 points or more. At this point in time you need to make an intellectual choice. Pay the collection or dispute it?

Collection agencies cannot collect an amount greater than your actual debt unless your state law permits it. They may not use profane language, intimidate you violence, or state that you will be arrested if you don’t pay. If any of them do they are breaking the law and your rights have been violated, seek the advice from an attorney immediately.

The best way to handle a collection dispute is to contact the original creditor and work out a deal immediately. Always try and set up a contract whereby you will pay the amount due if they change the status of the account to “paid as agreed”.

Make sure you get this agreement in writing!!!

If they don’t agree to such an offer, and you know you owe the debt, you may want to pay it to avoid escalating the situation. If you know you don’t owe the debt, write a letter to the credit bureaus disputing that debt and ask them to remove it promptly. Remember, they have 30 days to respond to your request, so be patient.

If you have an old collection that is still unpaid and showing up on your credit report, you may want to hold off on paying it if you are applying for a home loan. We all know that paying it off is the right thing to do, however most likely it will drop your score in the short-term because it will change the last-active date to the latest month.

Keep in mind that lenders can still reject you credit if you have unpaid collections, even if your credit score is considered “good”, or higher than average. They may view unpaid debts in the past as an indication of future mistreatment of credit.

My Score Just Dropped: What Happened?

2008-02-11T09:49:00.000-07:00

So, you've been working really hard to increase your credit score. You've done everything you thought you were supposed to do to present yourself as a creditworthy individual. So, what happened to make your score suddenly drop?

This is a more common occurrence with many consumers then they thought. And 9 times out of 10, a situation that likely could've been avoided if you had only been working with a qualified credit improvement specialist from the beginning. Remember, there's no shame in seeking help with your credit. Just as you could do your taxes on your own, isn’t it better to seek the advice from a professional who does taxes day in and day out?

Credit scoring models are based on a number of factors that, when combined, add up to a formula that might not seem logical to those who don't deal with these kinds of issues on a daily basis.

The following are just a few examples of seemingly innocent actions that could cause your score to suddenly and dramatically drop.

I paid off my biggest credit card debt and closed the account, but my score dropped anyway. This is one of the most frustrating situations for many borrowers. You would think that paying off your biggest debt and closing your account would be a good thing, and it is. However, because of the five factors of credit we discussed in a previous post, this action could reflect poorly on your credit score because you chose to close the account. Depending on your situation, the account you closed could've been your oldest credit account with the highest credit limit, two major factors in calculating your score.

I maxed out my card, and even though I paid it off completely when I got my statement, my score still dropped. By maxing out your card, your overall credit ratios were adjusted. And even though you paid it off, your statement reflects your current status. In other words, your credit report shows that your account is maxed out, even if you pay it off the next day. The best thing you could've done here was to pay your bill before your statement arrived.

I was only one day late on my payment but I still received a 30−day late on my credit report. Unfortunately, your creditors do not distinguish the difference between one day and 30 days late. You must pay your monthly bills on time, every time, to avoid this penalty. Depending on which credit cards you have, you could suffer an additional penalty for being late on your credit card payments, even just one time. This is called the universal default clause, which could increase your interest rates on all your credit cards up to 38%, even if you're in good standing with your other accounts!

I paid off an old collection and my score dropped, significantly! While it might seem illogical or even unfair, sometimes paying off a collection account can actually cause more harm than good. A good thing to remember is that credit scoring models typically lend more weight to your recent activity than to the mistakes you might've made in the past. By paying off this old account, you may have inadvertently added more weight to this mistake from the past by making this item current.

Don't be shy about asking for help when it comes to your credit score, or taxes, or mortgages, or electrical and plumbing problems. Just because you know the basics doesn’t mean you could take on the IRS or install a new water heater.

Remember, your credit is the most valuable financial tool you have at your disposal, and having an expert on your side is always smarter than learning the hard way on your own.

Do's and Don'ts During The Loan Process

2008-02-08T15:49:00.000-07:00

When you fill out a mortgage application, United Mortgage Financial Group, Inc. will run a credit report to see what loan programs are available to you. Each lender and each loan program have different guidelines they must follow. You should not do anything that will have an adverse affect on your credit score while your loan is in process. I know it's tempting...If you're moving into a new home, you might be thinking about purchasing new appliances or furniture, but this is really not the right time to go shopping spree with your credit cards. You'll want to remain in a stable position until the loan closes and give us the opportunity to help you lock in the best interest rate I can possibly get for you.

This is a good list to follow when your loan is in the “processing phase.”

DON'T APPLY FOR NEW CREDIT OF ANY KIND
Everyday people receive “pre-approved” credit offers. What most people don’t know is that when you respond to those offers your credit is checked. The best thing to do is throw them away! At the same time, don’t apply for new credit for things like furniture and appliances. These companies also pull your credit which could decrease your score just enough to make you ineligible for a home loan.

DON'T PAY OFF COLLECTIONS OR CHARGE−OFFS
Once your loan application has been submitted, don't pay off collections unless the lender specifically asks you to in order to secure the loan. If the account is more than two years old it is not considered in the decision making process. Paying on these old accounts will reactivate them, which means the lender will look at them in the loan approval process.

DON'T CLOSE CREDIT CARD ACCOUNTS
If you close a credit card account, it can affect your ratio of debt to available credit. Only close accounts after you close on your mortgage loan.

DON'T MAX OUT OR OVER CHARGE EXISTING CREDIT CARDS
Running up your credit cards is the fastest way to bring your score down, and it could drop up to 100 points overnight. Once you are engaged in the loan process, try to keep your credit cards below 30% of the available credit limit.

DON'T CONSOLIDATE DEBT TO ONE OR TWO CARDS
Once again, you don't want to change your ratio of debt to available credit.

DON'T RAISE RED FLAGS TO THE UNDERWRITER
Don't co-sign on another person's loan, or change your name or address. The less activity that occurs while your loan is in processing the better.

Here are some tips you SHOULD follow.

DO JOIN A CREDIT WATCH PROGRAM

Your bank, credit union or credit card company may be able to provide you with a free credit watch program that can alert you to any changes in your credit report. If you want the best of the best contact me and I will give you the information of the company I personally use.

DO STAY CURRENT ON EXISTING ACCOUNTS
One 30−day late payment can cost anywhere from 30 to 75 points on your credit score. Pay all of your obligations on time or you will pay for greatly.

DO CONTINUE TO USE YOUR CREDIT AS YOU NORMALLY WOULD

Red flags are easily raised within the scoring system. If it appears you are diverting from your normal spending patterns, it could cause your score to go down. For example, if you've had a monthly service for Internet access billed to the same credit card for the past three years, there's really no reason to drop it now. Again, make your changes after the loan funds.

DO CALL YOUR LOAN CONSULTANT

If you receive notification from a collection agency or creditor that could potentially have an adverse affect on your credit score, call us right away so we can try to direct you to the right resources and prevent any derogatory reporting to credit bureaus.

Budgets – Habits Not Numbers

2008-02-07T10:55:00.000-07:00

Establishing a budget is very easy to do. There are numerous budgets on the internet, some are free and some cost money. Even a blank sheet of paper can be used. The problem that most people have is living up to the expectations they set for themselves.

The use of a monthly budget can be very helpful when dealing with your credit. Finding out where you spend your money on a monthly basis can help when it comes to paying down credit cards and other loans.
The Cash Flow Management Model

Prioritize where your dollars go in a list.
1. Retirement *Here’s a TIP – Pay yourself first!!!
2. House payment
3. Car payment and insurance
4. So on and so forth…

Everyone’s list will have items in an order that is most important to them. Some lists may be 20 items long; the point is to get it onto to paper so you can see everything. The reason is to create a long term financial benefit for you and your family. Your financial list you resemble a pyramid. Similar to Maslow’s Hierarchy of Needs.

Cash Flow Model Definitions

1. Develop a Cash Cushion – Items such as car problems and medical bills pop up without warning. If you can use cash instead of credit you will be better off down the road. 3 to 6 months of living expenses.

2. Get out of Non Preferred Debt – Non Preferred Debt is considered debt that you can avoid. Large ticket items such as cars and homes are considered Preferred Debt because you need a loan for these items. The point is so when you get paid YOU decide where your money goes. By deciding where you spend your money you are not controlled by having to pay on credit cards.

3. Significant Savings or Liquidity – A good rule to follow is having 6 months to one year’s salary saved. When you achieve this you are able to pay for “good stuff” such as vacations and investments. You also have a cushion in case of “bad stuff” such as job loss or a major medical expense.

4. Become Debt Free or Freedom Point – You should have your mortgage and all other liabilities paid off on your balance sheet. So in the event you had to pay off all of your liabilities, you are in a position to do so.

5. Retirement – This is the ultimate goal, but you need to start earlier to get there. We all have our own definition of retirement. I think we all can agree for arguments sake it is the ability to do whatever you want, whenever you want.

Dealing With Credit Challenges

2008-01-30T12:14:00.000-07:00

Unfortunately, a person with a bad credit score is often in this position because he or she lacks the discipline to pay bills on time.

Of course, there are exceptions where unforeseen circumstances come into play, such as health complications, or loss of employment.

There are a few things that may be able to bring your score up so that you can secure a better interest rate on your mortgage loan.

Example 1: Distribute debt from revolving credit.

Our borrower, Mr. Bigfoot, has a credit score of 650. He has five credit cards, but his Visa account is almost maxed out to the available limit. His other four credit cards have relatively low balances. Mr. Bigfoot moves the part of the debt from the Visa account to the other major credit card accounts, thus distributing the debt more evenly over the five cards. This changes the ratio of debt to available credit (which if you read my earlier posts has a 30% impact on the overall credit score), and Mr. Bigfoot successfully raises his credit score by 20 points with very little effort.

Example 2: Transfer outstanding balances to new accounts.

Our borrower, Mr. Bigfoot, has only two credit cards, but both are pushing the limit of available credit. Mr. Bigfoot opens two new credit card accounts, each with a credit limit of $5,000. He transfers part of his existing balances to the new accounts. While he has acquired two new cards that have no established history, the greater impact is the change in the ratio of debt to available credit.

CAUTION: Mr. Bigfoot should be very careful when attempting this method. He has two cards that are almost to their limit, and if he starts to apply for more credit he may be viewed as a risk because it will show that he needs more money.

Ultimately, experts say that it is best to have two to five credit cards, and no more than that. You should keep your balances as low as possible. If you have a credit account with a zero balance, do not close the account.

Instead, make a small purchase so the card shows up as an active account on your credit report, and you will be awarded points for your long-term credit history.

What If I Have No Credit

2008-01-30T12:00:00.000-07:00

A borrower will sometimes not have enough credit references to obtain the loan they wish to secure. In this case, start by opening small lines of credit that report to one of the three major CRA’s, and make purchases that can be paid off easily. Be careful not to charge more than 30% of the available balance, doing so could actually affect your score in a negative way.

If you do not already have a checking or savings account, open one. Your bank or credit union may be able to provide you with a credit card account once you have established a history with them as a customer.

Open one to two secured credit cards. Use these cards for small purchases (ie; gas, lunch) and then pay off the balance a few days later. Once the payment shows up on your account, repeat the process. These payments can be made before you get a billing statement from the company. Remember the 30% rule.

One technique that worked in the past but is no longer available was to ask your family or spouse to add you to their credit card account. By adding your name to an established line of credit, you could ride on their coattails, so to speak, and gain points by using that person's credit history. The CRA’s have become wise to this technique and now flag consumer accounts that have this type of credit. They disregard this type of credit so it does not impact the credit score.

It is also wise to start saving money for the down payment on your home. The lender will look at your application more favorably when you are able to bring in anywhere from 5% to 20% of the total loan amount for a down payment.

Disputing Errors On The Credit Report

2008-01-30T11:55:00.001-07:00

The first thing to do when reviewing your credit report is to make sure that all the information contained in the report is correct. In June 2004, The U.S. Public Interest Research Group published the results of a survey it conducted involving 200 adults in 30 states to test the validity of credit reporting. Their findings were as follows:

· Twenty-five percent (25%) of the credit reports contained errors serious enough to result in the denial of credit

· Seventy-nine percent (79%) of the credit reports contained mistakes of some kind

· Fifty-four percent (54%) of the credit reports contained personal demographic information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect

· Thirty percent (30%) of the credit reports contained credit accounts that had been closed by the consumer but incorrectly remained listed as open

SOURCE: U.S. Public Interest Group Research; One In Four Credit Reports Contains Errors Serious Enough To Wreak Havoc For Consumers, US PIRG Press release, 06/17/04 http://uspirg.org/uspirgnewsroom.asp?id2=13650om

If you find that you have errors on your credit report, follow this procedure to correct those errors.

1. Make a copy of the report and circle the items you are questioning. Keep your original copy for your own records.

2. Prepare a letter to the CRA that provided you with the report in question, and request to have the erroneous item(s) removed. If you have proof of payment for an item in question, include a copy of that documentation.

3. Prepare a letter to the creditor reporting the problem, especially if you feel you are a victim of fraud or identity theft. Inform the creditor that you are disputing an error reported to the CRA, state why the claim is inaccurate, and include any relevant documentation to prove your point.

4. Send your correspondence via certified mail.

You should receive a response from the CRA within 30 to 45 days. If the error has been corrected, they will send you a fresh copy of your credit report at no charge to show you that the item has been removed. They will also send a corrected report to any entity that received a report that contained errors within the last six months. If you cannot have a disputed item removed, you have the right to include your side of the story on the credit report. Your statement should be a concise explanation (100 words or less) as to why you are challenging the item in question. From that point on, this notation will be included in your credit report as long as the item in question remains on your report.

How Does An Underwriter View My Score

2008-01-30T10:19:00.000-07:00

If you are now, or ever will be interested in purchasing a home in the near future, it is in your best interest to make every effort to increase your credit score. Especially if you have issues that you know you should deal with. It is often the case that people are not aware of bad marks on their credit record until they apply for financing for a major purchase, such as a home.

As I have said before, 79% of all credit reports contain inaccurate information.

During the loan process is not the time to find out that you have inaccuracies on your credit report that are affecting your score negatively. You can take advantage of the opportunity to get a free credit report from each of the three main Credit Reporting Agency’s (CRA’s): Equifax, Experian and TransUnion. (See past posts for information on how to receive your free credit report.)

As a sidebar, you can choose to get the free report from all three bureaus at the same time, so you are aware of what information each bureau has collected. Another option is to pull your credit report from one agency, and reserve the right to get your free reports from the other two CRA’s as you work on improving your credit standing.

I believe it is best to have the full overview up front. Different CRA’s have different methods of calculating these scores, and may also have different information contained within their findings. Consider the adage, "Why jump over nickels to pick up pennies?" If additional reports are needed within a 12−month period from any of the three CRA’s, the cost is extremely minimal compared to the potential savings that can be realized by an improved credit score, and if you run a credit report on yourself it will not affect your own score as an inquiry.

The underwriter who is making the decision as to whether or not you should get the loan you are asking for will generally look at the scores generated from all three CRA’s. Typically, the score will not be the same from all three reports, and the underwriter will consider the middle score as a barometer.

How Does A Low Credit Score Affect My Interest Rate

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Lenders estimate your ability to pay back the money you borrowed based on your credit score. The risk factor they assume is built-in to your interest rate as a financing fee. Therefore, a low credit score results in a higher interest rate, higher monthly fees, and a higher amount of interest to be paid over the total life of the loan.

Referring to the statistics below, a borrower with a credit score of 620 would be questionable to an underwriter. While the lender may agree to provide financing, the increased interest rate is factored into the monthly payment. The statistics illustrate the difference in the amount of interest paid over the life of the same loan with three different credit score scenarios.

A borrower who increases his or her credit score from 620 to 720+ can potentially save $601 per month on mortgage payments, $7,214 per year, and approximately $216,432 over the life of the 30−year loan.

30 – Year Fixed Rate with a Principal Loan Amount of $250,000

Fico Score of 720 or greater equals an APR of 5.71%, a Monthly Payment of $1,453, and equates to $272,928 of Interest Paid.

Fico Score between 620 & 719 equals an APR of 5.76%-7.84%, a Monthly Payment of $1,466-$1,807, and equates to $277,845-$400,381 of Interest Paid.

Fico Score of 620 or less equals an APR of 8.45%-9.23%, a Monthly Payment of $1,914-$2,054, and equates to $438,957-$489,365 of Interest Paid.

The Five Factors of Credit Scoring

2008-01-29T12:35:00.000-07:00

Points are awarded for each component of the credit scoring model, and a high score is most favorable. Opinions vary on how many factors are used to establish ones credit score. It has been argued that as many as ten factors are used to determine score, but for our purpose I have listed the top five in order of importance.

PAYMENT HISTORY − 35% IMPACT
Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments and charge offs all have a negative impact. Missing a high payment will have a more severe impact than missing a low payment, and delinquencies that have occurred in the last two years carry more weight than older items.

OUTSTANDING CREDIT BALANCES −30% IMPACT
This factor marks the ratio between the outstanding balance and available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home. Balances higher than 70% will actually have a negative impact on your credit score.

CREDIT HISTORY − 15% IMPACT
This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area.

TYPES OF CREDIT − 10% IMPACT
A mix of auto loans, credit cards and mortgages is more positive than a concentration of debt from credit cards only.

INQUIRIES − 10% IMPACT
This percentage of the credit score quantifies the number of inquiries made on a consumer's credit within a six-month period. Each hard inquiry can cost from two to 25 points on a credit score, but the maximum number of inquiries that will reduce the score is ten. In other words, 11 or more inquiries within a six-month period will have no further impact on the borrower's credit score.

Please note that when you run a credit report on yourself, it is called a “soft pull” and will have very little to no affect on your score. In fact, I encourage everyone to check their credit at least every three months for accuracy on open accounts. Check my past posts for a website that allows you to check your own credit once a year for FREE!

Why Your Credit Score is So Important

2008-01-29T12:13:00.000-07:00

The credit scoring model was designed to quantify the probability of a consumer to pay off the borrowed debt. It also seeks to find the likelihood that the borrower will not be 90 days late at any time in the future.

Credit scores range between a low score of 350 and a high score of 850. In terms of a mortgage, the higher the score the better because it equates to a lower interest rate. This can literally save thousands of dollars in interest charges over the life of the loan.

Only one out of 1,300 people in the United States have a credit score above 800. These are people with a stellar credit rating that get the best interest rates.

On the other hand, one out of every eight potential home buyers is faced with the possibility that they may not qualify for the home loan they want because they have a score falling between 500 and 600.

The following chart illustrates how an underwriter interprets the credit score in terms of risk, and how the interest rate is affected as a result.

Mortgage lenders consider a score of 700 or above to be very good.

History of the Credit Scoring System

2008-01-29T11:17:00.004-07:00

The credit scoring system that is used today has evolved a great deal since the 1960’s. One fact that remains the same is that it provides lenders with a financial profile on consumers who wish to borrow money. A lenders' biggest concern is whether or not an individual has the ability to repay the loan per the agreement. The credit scoring system establishes a percentage of risk that might be involved in repaying of that loan.

In 1971 Congress passed the “Fair Credit Reporting Act” to establish guidelines for fair practices in regard to the use of credit scoring. This law was designed to promote accuracy in reporting and protect the privacy of consumers. In light of the increased use of credit scoring and a growing fear of identity theft, recent legislation has been passed to further protect Americans and improve consumer awareness.

The “Fair and Accurate Credit Transactions Act of 2003” (sometimes referred to as The “FACT ACT” or “FACTA”) was signed by President George W. Bush on December 4, 2003. This amended the Fair Credit Reporting Act, enabling each American to obtain one free credit report every 12 months from each of the three main credit reporting agencies (CRA’s); Equifax, Experian and TransUnion.

Those bureaus have created a central web site, www.annualcreditreport.com, to accommodate Americans who wish to obtain copies of their credit report.

I encourage everyone to visit this website and view their credit report. 79% of credit reports contain inaccurate information which most likely affects your score negatively.