Credit Cures Revealed!

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Credit Cures

A lot of homeowners have the mind set that making payments on time automatically equates to good credit and credit scores.

Unfortunately, this couldn’t be further from the truth.

While paying your bills on time accounts for a large portion of your credit score, there’s still a lot more to it. In fact, paying your bills on time only drives 1/3rd of the points in your credit score, which means that 2/3rds of your score has nothing to do with making on time payments.

Five main categories go into making up your overall credit score calculation. Let’s briefly review each category and how much they count:

1. Payment History – The Most Important Category
This category is pretty self-explanatory. It doesn’t take a rocket scientist to figure out that if you pay your bills on time, you’ll do well in this category. Likewise, if you have a history of late payments, collections, chargeoffs, public records, etc. – you’re not going to do so well in this category.

In addition, the number of negative items on your credit reports is important. The more incidents of credit transgressions, the more your score will suffer. And if you have recent negative information that will punish your scores more than if they are several years old.

2. Debt – A Very Close Second
The most important non-payment category in your credit score is, by far, the amount of debt that you carry. And while your installment debt (auto loans and mortgages) are factored into your scores, it’s really your credit card debt that’s most important.

This includes anything from Visa, MasterCard, Discover, American Express, gas cards and/or retail credit cards like Macy’s or Target. The balances that you carry on your credit cards can affect your scores almost as much as whether or not you make your payments on time.

This category calculates the proportion of balances to credit limits on your revolving credit card accounts – also referred to as ‘revolving utilization’. Simply put, the higher your revolving utilization percentage, the fewer points you will earn in this category.

So what is revolving utilization and how is it calculated?

To determine your revolving utilization, you’ll need to add
up all of your current balances and all of your current credit
limits on your open revolving credit accounts (except for Home Equity Lines of Credit). This will give you a total balance and a total credit limit. Divide the total balances by the total credit limit and then multiply that number by 100. This will give you your total revolving utilization percentage.

See the example provided below:
Remember, the lower your utilization percentage, the more points you’ll earn and the higher your credit score will be. To earn the most possible points in this category, you should try to keep your revolving utilization at 10% or less. If you can’t reach 10%, just remember that the lower the better. While 50% is better than 60%, 40% is better than 50% and so on.

How you pay your bills and your revolving utilization are by far the most important factors used to determine your credit scores. They account for 2/3rd of the points in your score. That’s a hefty chunk! Needless to say, if you don’t do well in both of these categories, your scores aren’t going to be very good regardless of how you do in the remaining categories.

While the remaining categories are worth fewer points, they are still very important for consumers who want to earn the highest scores possible, certainly a requirement in today’s difficult credit environment:

3. The Age of Your Credit History –
Secondary Category
Don’t confuse this with your age. It’s the age of your credit reports. Basically, the score is looking to see if you have a lengthy history of managing your credit obligations. The age of your credit history is determined by the “date opened” on the oldest account listed on your credit report. The older your credit report, the more points you will earn in this category.

There’s really not much you can do in this category except wait it out. As your reports get older, you will gradually earn
more points. This means that you should never try and get old, good accounts removed from your credit reports.

You want the history!

4. New Credit/Inquiries – Secondary Category
When you apply for credit you are giving the lender permission to pull your credit reports and credit scores. Each time this happens, your credit report will reflect what’s called an “inquiry.” To perform well in this category, you should really only apply for credit when you need it.

5. Credit Mix – Secondary Category
What types of accounts do you have? You will do well in this category if you have a nice diverse list of different types of accounts in your credit report. This includes mortgages, auto loans, installment loans, credit cards, etc.

If your credit report is dominated by one type of account (or lack of others), this could negatively affect the number of points that you earn from this category.

That pretty much covers the factors that are used in determining your credit scores. Let’s do a quick recap:

1. How you pay your bills – on time is good, late     is bad
2. How much you owe your creditors – keep     your credit card debt low (10% utilization is     optimal)
3. How long you’ve had credit – the longer the     better
4. How often you apply for credit – apply only     when you really need it
5. Account mix – diversity is good

If you can stick by these five key principles, you should be
well on your way to healthy credit and credit scores.

Dos and Dont’s Of Credit Rebuilding

Rebuilding Credit

It’s true, negative credit items can remain on your credit report for up to 7 years (up to 10 years for a bankruptcy). 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 might’ve made in the past, you can change your habits right now and begin reestablishing yourself as a good credit risk for a home loan or mortgage refinance in just 6 to 12 months.

Dos and Dont’s Of Credit Rebuilding

1) Three months prior to securing your mortgage, DON’T apply for, close, or pay off any credit cards, loans, or other kinds of credit without speaking to your mortgage 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.

2) If you have a credit card account with an excellent credit history, DO use it – but use it strategically. In other words, use it 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 here 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.

3) If you don’t have a credit card, DO get a secured credit card. 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.

4) Finally, DO monitor your credit. Ask your mortgage professional to refer you to a professional credit repair company you can trust. 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.

If you or anyone you know has any questions about credit scores or what can be done to repair them, please don’t hesitate to call. We’ll be glad to review your credit and see what, if anything, needs to be done to help meet your financial goals and needs.

Credit Secrets Revealed Part 3-4-5

We talked about the big 2…here are the rest of the areas of credit you need to know about.

Credit History: 15% impact.

This marks the length of time since a particular credit line was established. A seasoned borrower is stronger in this area.

Type of Credit: 10% impact.

A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards alone.

Inquiries: 10% impact.

This quantifies the number of inquiries (or requests for credit) that have been made on a consumer’s credit history within a six month period. Each individual inquiry can cost from 2 to 50 points on a credit score, but the maximum number of inquiries that will reduce the score is 10. In other words, don’t start the loan process until you’re ready to act. Otherwise each individual credit inquiry could cost you. However, scoring models have now been adjusted to count multiple “hard” inquiries within a 14-day period as a single request. So, when you’re ready, your credit will be too.

Give me a call if you have questions at 651.210.9593.

Credit Scoring Secrets Revealed Part 2

Outstanding Credit Balances: 30% impact.

This factor marks the ratio between the outstanding balance and available credit. Ideally, consumers 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.

Got Questions, give me a call at 651.210.9593.

How important is my credit score and how does it affect my rate?

Information you need to find the best home and the best loan.

What if Good is not Good Enough?

A few years ago, a credit score of 620 or higher was good enough to buy a home.

But that was then. This is now.

In the past, any score of 700 or higher would get a double thumbs-up from credit experts. Now, rate adjustments begin kicking in at 740, with every 20-point drop adding another adjustment.

In other words, many people who were taking pride in their credit habits either must pay significantly higher or try to make quick changes to nudge their scores upward.

Taking action on your score
What can a homeowner who wants to refinance do with a good FICO score that’s not good enough? Virtually everyone can raise their scores by at least 10 to 20 points, sometimes significantly more in 30 days.

Here’s what you need to do:

1.       Find out what might have gone wrong. Applicants should know their credit score, understand what it means to their loan rates and ask their loan officers to use credit analysis on their behalf. Credit analysis tools are a simple way to identify key score influencers by scrutinizing the information contained in each of an individual’s three credit reports to look for inconsistencies, errors and omissions that may artificially depress the score.

2.       Correct any inaccuracies. Although consumers can improve scores on their own, credit agencies offer services to loan officers to help consumers raise their credit scores if something is reported inaccurately and there is proof of a discrepancy.

3.       Decrease the percentage of available credit used. This can be done by paying down balances or increasing credit limits. Ideally, this means keeping balances as close to zero as possible, and definitely below 30 percent of the available credit limit.

4.       Move things around. If one income can be used to qualify for the loan, transfer accounts to “park” the debt in the other party’s name, Guthrie says.

5.       Get a rapid rescore. A rapid rescore is done through your lender and a rescoring company and is the only way to find out fast if an attempt to improve a score was successful. This process takes about a week, but it can get the loan process back on track. The downside is it costs a few hundred dollars.

If you are contemplating a refinance or a new mortgage anytime within the next year or so, make sure to start working on getting the ideal credit score now.

If you would like more information about mortgages, please give me a call at 651.210.9593 or email me at jaydacey@gmail.com

Oh, By the Way…whenever you come across people who are thinking about buying, selling or refinancing a home  please forward their name and telephone number to me. I will gladly follow up and offer them the high-quality service you currently receive!