|
Your Credit
and how it effects you
Why is your credit important?
The question really is, "Why is "Good" Credit Imperative?"
Brought to you by Rick Ripma
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.
-
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.
*North
Campus Carmel IN *South Campus, Trafalgar
IN *Florida Campus coming 2007 |
