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 Why
is your credit important?
The question really is, "Why is "Good" Credit Imperative?"
By Linda Ferrari
President, Credit Resource Corp.
Good
credit is imperative because it is your golden ticket to financial freedom
for right NOW and it prepares the foundation for financial security
LATER. Isn't that what we all seek?
In
planning for tomorrow by improving your situation today, you can eliminate
the risk of limited financial security for your retirement years. You
don't want to work forever, and you shouldn't have to. You can take
immediate action that will enable you to set yourself up for a more
secure future by simply being wiser about how you manage your credit,
your debts and your finances.
So
what is the single first step we can take toward planning for a more
secure future and retirement? It begins with ensuring that we put ourselves
in a position in which we derive the very best value from every financial
commitment we make. The best value means NOT spending hundreds or thousands
of dollars on high interest rates for credit cards, auto loans and mortgages.
You can literally save hundreds of dollars each and every month, from
this day forward, by simply achieving and maintaining a credit score
in the 700's. Take for instance a $300,000 30-year fixed home loan.
Today, if your credit scores are below 700, you could be paying an additional
$659 a month in nothing but interest. That is what the price of less
than great credit costs you-an extra $7,908 a year, and a whopping $237,138
over the life of the loan. Wouldn't you rather put that money into your
retirement nest egg?
So,
now we know that less than perfect credit costs us huge sums of money,
let's look at how we can position ourselves to get the best value from
our financial commitments? Simple. We make sure that our Credit Scores
are in the 700's at all times.
A
quick education on the credit score.
Here's
a little primer on how credit scores evolved. Developed in the 1950's
by Fair Isaac & Co., credit scores hit mainstream use in the 1980's
when three major credit bureaus, Experian, Equifax and TransUnion negotiated
an agreement to create an objective and fair scoring system that would
analyze all of your data, compare it with the way thousands of people
pay their bills, and come up with a three digit number between 350 and
850 that indicates whether or not you are a good credit risk. As you
probably guessed, the higher the number, the better your chances are
of getting the loan at the best interest rate.
Today,
credit scores are the No. 1 piece of data on which people are judged
to determine whether or not they get approved for loans and how much
interest they will pay for those loans. The good news is loan approval
now only takes a few minutes. The bad news is that the credit score
is now becoming widely used by not only the lending industry, but also
by employers, utility companies, insurance companies and cell phone
companies, and the list is growing every day.
A good
score opens doors that will lead to abundant opportunities both for
now and for a more secure future, and by having a complete understanding
of what makes up a good score, you can start right now on the path to
a higher credit score and a better financial life.
Some
facts you should know.
What
Is a "Good" Credit Score? Scores generally range between
350 and 850. A score of 720 or better is considered "Very Good"
credit.
Why
do the scores from the three credit bureaus vary? The three major
credit bureaus, Experian, Equifax and TransUnion are for profit businesses,
not government agencies. Their main business is collecting data about
YOU from creditors and then reselling that data to lenders, employers,
insurance companies, utility companies, and most recently to YOU, the
consumer. Since these three companies are competitors, and DO NOT share
data with one another, it is very common that the data they house in
your file will differ because not all creditors report to all three
bureaus. That explains the variance in the scores as each line item
affects the score either up or down.
How many scores do I really have? When you go to apply for a loan,
the scores the lender will pull will not be the same scores that you
would receive from the bureaus. The reason for this is that lenders
DO NOT buy their scores directly from the bureaus, but instead take
the DATA ONLY from each bureau, enter it into their own scoring software
and calculate their own scores based on the criteria they feel better
evaluates whether or not you will be a good credit risk for their program.
So all lenders calculate your scores using the same data from
the three bureaus, but all lenders DO NOT use the same software
to evaluate that data.
The
potential for varying scores is great. You want to properly manage your
credit to ensure that your scores are favorable under all scoring software
models.
Do
lenders use all three scores?
Mortgage lenders use the middle of the three scores. All other creditors
can use any one of the three. That is why it is important to keep all
three scores maintained.
How
fast can your credit score change? Your credit score can change
whenever your credit report changes. And the good news is that once
it changes, there is no memory of yesterday's score in the system. You
don't have to worry about looking back as you move forward with improving
your credit. Just remember, negative items will lower your score fast,
but improving your score takes time. That is why it is important to
check your scores all the time so that you will be prepared for the
next opportunity.
What
Goes Into Your Score? There
are five factors that make up your credit score, and each factor weighs
differently on your score. Here's the breakdown:
- 35% of
your score is based on Payment History: The biggest chunk
of your credit score, payment history tells lenders how you have
been paying your bills. Late payments, collections, past due accounts,
and public records such as bankruptcies can seriously hurt your
score. It is very important to not incur late payments on Mortgage
Accounts. One 30-day late can cost you 50-75 points.
- 30% of
the score is based on Amounts Owed: The second biggest factor
affecting your credit score, this factor takes into account how
much is owed on all your accounts, how many accounts you have that
carry a balance, and what percentage of your available credit are
you using. Keep credit card balances under 50% of the available
limit at all times, and when preparing to make a large purchase,
bring those balances down to under 30% at least 3 months before
applying for the loan.
- 10% of
the score is based on New Credit: This factor includes the
number of recently opened accounts, the number of credit inquiries,
and the time since each account was opened. This portion of the
score also looks at how often you apply for credit. It is best when
applying for a mortgage that you do not open or apply for new credit
accounts. When shopping for a new mortgage or auto loan, it pays
to plan ahead so that you do all of your shopping within a focused
period of time. You can have your credit report pulled as many times
as you want within a 14-day period when shopping for a mortgage
or auto loan and it will only count as ONE hard inquiry.
- 15% of
the score is based on Length of Credit History: This factor
scores you on how long you have had credit, the time since you opened
an account and the time since recent account activity. While applying
for a mortgage, consumers will want to leave open accounts they
have had for a long time as it will help boost this portion of the
score.
-
10%
of the score is based on Types of Credit Used: A mix of
credit is the best way to develop a good score. The most important
consideration is to be picky about the type of credit you apply
for because that will really help your score. For instance, to
the scoring system, third party financed credit cards (i.e. department
store credit cards) are considered to be particularly low quality
credit as the holder of such cards can appear desperate for credit.
However, there is one exception to this rule, and that is that
the scoring system considers Sears credit cards as a positive.
What
Is Not In Your Score? Your
race, color, religion, national origin, sex and marital status, age,
salary, occupation, title, employment history, where you live, interest
rates, child/family support obligations, rental agreements, soft inquiries,
whether or not you are involved in a credit counseling program.
Can
I Improve My Score?
Yes,
there are specific and strategic steps you can take right now to start
repairing your credit problems.
- Start with
the basics. Order all three of your credit reports and all three
of your credit scores. You are entitled under the law to a free
copy of your credit report-from all three credit bureaus-each year
when you order it from Annual Credit Report Request Service. To
order, visit www.annualcreditreport.com, call toll-free 877-322-8228,
or complete the Annual Credit Report Request Form and mail it to:
Annual Credit Report Request Service, P. O. Box 105281, Atlanta,
GA 30348-5281. You will have to pay an additional fee for the credit
score from each bureau. Scan your report for any errors. Is there
an account on there that you didn't apply for? Is there a company
reporting a debt that is inaccurate? Are all of your credit card
limits reporting? Are your balances up-to-date? Are your name, birth
date and Social Security Number correct? If there are any errors
on your report, no matter how small, they can lead to big problems
and inhibit you from obtaining credit and even keep you from getting
the interest rate you deserve on your mortgage or refinance.
- Start improving
what you can immediately.
Late payments and delinquent accounts will affect your score negatively,
so take care of them-the sooner, the better. If you have a good
relationship with your creditor, call them to see if they'll work
with you on removing a late payment. They do it all the time. If
you have past due accounts, call your creditors to see if you can
negotiate a better interest rate, lower payments or make other arrangements
to pay off your debt sooner. Also, don't carry high balances on
your credit cards. If you carry more than 30% of your limit every
month, this reflects negatively in your score. Don't charge what
you can't pay off within 90 days, and don't max out your cards.
- Disputing
errors on your report. Errors can appear on your credit report.
These can be human error in reporting information from a creditor
or one of the credit bureaus. They could even be unauthorized accounts
set up in your name by an identity thief. Before you apply for a
loan, you should verify the information in your credit report. If
you find errors, you should correct them immediately. Here are the
rules in sending dispute letters to the credit bureaus:
Rule
1: Make sure that you only send the letter to the bureau(s)
that is reporting the derogatory information. Not all creditors
report to all bureaus. If you send a dispute letter to one of
the three bureaus that is NOT reporting the information, you
take the risk of having the derogatory information added to
that bureau, and your score will go down.
Rule
2: Make sure that you send everything certified so that
you can prove delivery.
Rule
3: Include copies of any supporting documentation you may
have to support your claim.
Rule
4: Keeping a log of activities is very important for successful
credit repair. Click
Here for an example of a log you can use.
Rule
5: Mail disputes to bureaus at their different addresses.
Each bureau has several addresses. If your first dispute comes
back without change, send it to another address for that bureau.
Click
Here to print a list of credit bureau addresses.
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If
the credit challenges are too much. If you feel that the credit
challenges you are facing are too much, or if you don't have the
time or stamina to do the homework necessary to get the ball rolling,
then it's time to consider using a professional service to help
you reach your goals. Credit Resource Corp. is a consulting firm
that primarily works with consumers who are in the process of purchasing
a new home or refinancing their existing loan. If you decide this
is the path you would like to take, give me a call and I will set
up a free credit consultation for you. Feel free to visit their
website at www.creditresourcecorp.com
for some great tips on how to maintain and manage a good credit
score.
All the Best,
Linda Ferrari,
President, Credit Resource Corp.
Please
feel free to send your questions to info@creditresourcecorp.com.
Linda Ferrari
also does live presentations for consumers and loan officers. Call us
to schedule Linda for your next consumer event or loan officer training. CLICK
HERE to download Linda's seminar outline.
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