Why is your credit
important?
The question really is, "Why is "Good"
Credit Imperative?"
Brought to you by Robert
Ashby
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.
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.
-
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.
In
Conclusion
Your credit
score is so important to your current financial well-being and the
stability of your financial future. In fact, your credit score is really
the key that can either open doors for you or lock them shut for several
years. I am very committed to my effort to help you learn more about both
the importance of the score as well as repairing, improving and
maintaining your credit score. I am dedicating the next five monthly
newsletters to in-depth descriptions of the 5 factors that affect your
credit and to show you how you can take charge of those factors to get a
better credit score and keep it. Until then.
Solid Rock Mortgage |
19451 Sheridan St., #291 |
Pembroke Pines, FL 33332 |
Tel:(954) 432-3450 Fax: (954)
432-3407 |
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Florida Mortgage Solutions - Solid Rock Mortgage
