Credit information you need

August 19, 2008 Credit No Comments

How to use credit and how that effects your credit score is very important. But most of us know very little  about this and often we have incorrect information.

So I started scouring the internet to find sources of information that are free and trustworthy regarding this.  The best that I have found is the myfico.com forums.  This site was created by and is run by Fair Isaac. They are the company that set up the analytical aspects of the credit system.  So they know what they are talking about.

I encourage all of my customers to read Credit Scoring 101 (http://ficoforums.myfico.com/fico/board/message?board.id=ficoscoring&thread.id=2654).  It is written in plain English and is very easy to understand.

Below are some key quotes from this site.

What is the range of FICO scores?

FICO (aka Classic or BEACON) scores can range from 300 to 850, but the majority of scores usually fall within the 600s and 700s.

How is my score calculated?

-35% affects Payment History. Meaning any lates; collections; charge offs; bankruptcies; judgments; liens or the such will hurt the score. All is time based, the older the information the less it is contributing to the scores.

-30% affects Utilization. It is best to have several accounts with low balances distributed then it is to have fewer accounts maxed out. To figure utilization: Balance (divided) by Credit Limit = percentage. Lower than 10% recommended per account, this is one of the fastest means for increasing the over all credit score.

-15% affects Established History. The longer you maintain open accounts with creditors the better. When first starting out of course this is not easy; but this is where getting added as an Authorized User to another persons established credit comes in best. Remember that the contributor must have an account that has long history; clean payment record; high credit limit; and low balance. Also need to check with the creditor to insure that they have a policy to report authorized user accounts to all three major credit reporting agencies.

-10% affects Inquiries. Don’t apply for credit unless you know you can get it or that you need to get it; unnecessary credit inquiries are going to hurt the scores - especially if your over all credit file is small to begin with.

Tip: When applying for credit pull your own credit report first (this is a soft hit and won’t drop your scores). With credit report in hand go visit your local banks or credit unions. Show them the reports; and don’t allow them to pull a credit report of their own unless they can say for sure that you will be approved, this way you save your self unnecessary pulls on your credit report if they decline you. If they say yes, you are approved, then they will need to pull credit report to seal the deal.

Mortgage & Auto industry has special rules for inquiries: all applications for credit resulting in pulled credit reports within a 14 day period of time will only count as one inquiry & will be suppressed from affecting credit scores for 30 days.

-10% affects Mix of Credit. Use different types of credit (revolving; installment; auto; mortgage…) evenly.

How can I improve my score?

It takes time and there is no quick fix. In fact, quick fix efforts can backfire. Scores reflect credit payment patterns over time with more emphasis on recent information. The best advice is to manage your credit responsibly over time.

Scores automatically improve, as one’s overall credit picture gets better. That means showing a historical pattern of paying your bills on time and using credit conservatively.

Here are some suggested tips to follow:

DO:

1. Pay your bills on time. Delinquent payments and collections can have a major negative impact on your score.

2. If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.

3. If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This will not improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

4. Keep balances low (1-9% util) on credit cards and other revolving credit. High outstanding debt can affect a score.

5. Pay off debt rather than move it around.

6. Re-establish your credit history if you have had problems.

7. Opening new accounts responsibly and paying them off on time will raise your score in the long term.

8. Note that it is OK to request and check your own credit file. This will not affect your score, as long as you order your credit file directly from the credit reporting agency or through an organization authorized to provide credit files to consumers (such as myFICO).

9. Apply for and open new credit accounts only as needed.

10. Have credit cards but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.

DON’T:

1. Close unused credit cards as a short-term strategy to raise your score. NEVER close an open account unless it is costing you money!

2. Open a number of new credit cards that you do not need, just to increase your available credit. This approach could backfire and actually lower your score.

3. If you have been managing credit for a short time, do not open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you do not have a lot of other credit information. Also, rapid account build-up can look risky if you are a new credit user. Do your rate shopping for a given loan within a focused period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.

How to I dispute inaccurate info?

I recommend you dispute online. Remember to print a copy of the confirmation page.

Equifax:

https://www.econsumer.equifax.com/consumer/sitepage.ehtml?forward=online_dispute

Take the time to read through this.  It won’t take too long but what you will gain could save you years of struggle.

Feel free to call if you have any questions.

All the best,

Jason Peatz

Fixed vs Variable Interest Rate Mortgages

August 15, 2008 Interest Rates, Mortgages Over Malts No Comments

On Wednesday night at my bi-weekly Mortgages Over Malts I was asked a question about whether the Fixed Interest Rate Mortgage was better than the Variable Interest Rate Mortgage.  Good question.  The answer is that both have their own advantages and disadvantages, it just depends on what you are looking for.  Read on to find out more.

The Fixed Interest Rate mortgage defines the interest rate for the entire term of the mortgage from the outset.  This creates a situation that you will know exactly what your mortgage payment will be for the entire term of your mortgage (1, 2, 3, 4, 5 or 10 years).  For some people this is great.  They can set up their monthly budget with certainty.

The Variable Interest Rate mortgage defines its interest rate in relation to the lender’s prime lending rate.  So you may have a rate where your interest is for example 0.6% below prime.  The prime lending rate for all lender’s  fluctuates.  So one month your payment maybe $1000 but the next month is can go up to $1025 if prime goes up by 0.25%.  But the prime lending rate may also go down, so you may see your payment be reduced by $25 as well.

So what is the advantage of the Variable Interest Rate Mortgage?  The advantage is that typically the variable rate is lower than the fixed rate and could save you money over the entire term of the mortgage if you can handle the potential fluctuations in payments.

One important thing to note is that with the Variable Interest Rate Mortgage you can fix your interest rate at any time to the best fixed rate mortgage available through that lender.  So if you don’t like where the prime lending rate is going you may fix your interest rate.

So does the stress of your payments potentially going up justify the cost savings?  If yes then go for the variable otherwise the fixed is probably right for you.

Call me and I would be glad to answer any questions you may have.

All the best,

Jason