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Archive for Credit Scores
August 15, 2008 at 9:19 am · Filed under Credit Scores, Headlines
What do inquiries on your credit actually do?
Don’t over shop for a credit account! If you are looking for a mortgage, find someone that you trust and are comfortable with before you allow them to pull your credit. If you are shopping for a car, get your financing squared away at your bank before you even go to the car lot. If you are shopping for a credit card, well, you know.
It is widely reported by the credit bureaus that your score is not adversely affected by inquires within the same industry during a 14 day period. For instance, the credit reporting agencies report that if you have several inquiries from mortgage companies within 14 days of each other, your scores will not be affected because it is clear that you are “shopping” for a mortgage. Well, after 11 years in the business and reviewing thousands of credit reports, I can not tell you definatively that that is true. My advice is to exercise prudence and proceed with caution.
By far, the worst offenders of the excessive inquiries are the car dealerships. Of course, I can not lump all car dealers into this category any more than you can lump all mortgage brokers into one category. What I can say is that I have seen more damage done collectively from the financing department of a car dealership than all other service providers combined. Just last week, I had a customer that during the course of shopping for a car, she went to 3 different car lots and had a total of 17 inquiries on her credit because of it.
How does that happen? Well, the dealership will pull your credit. Then they will send your application to anywhere from 5 to 10 auto loan companies for underwriting, each of which will pull their own report. The car dealers number one priority is to sell you a car. They are not concerned about the long term affects of pulling multiple credit reports. In fact, many of them don’t know the long term affects.
Inquiries in and of themselves are not some atomic bomb on your credit report. But, your scores will reflect your propensity to acquire new credit accounts. If you are having more than 2 inquiries on your credit in a 90 day period, consistently, you should probably ask yourself if you are getting in over your head….I guarantee the lenders you are applying to are already thinking it.
Lesson 4 – Number of Open Accounts
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August 14, 2008 at 8:43 am · Filed under Credit Scores, Foreclosure Help, Headlines, The Mortgage Market
Making your payments on time may seem so elementary that it is ridiculous to even bring it up….or is it?
It is no secret that the most important aspect of your credit score is the timely re-payment of debt. For those who are rolling their eyes at me now, I assure you that some people don’t get it. There are millions of people who have never been taught about credit, both its uses and dangers. Most people get their first credit card on a college campus and feel so proud and grown up that a credit card company would choose them for the opportunity to get a first credit card. Grow Up!! It is not a privilege to have a credit card when thousands of pre-approved credit card offers are sent out every year to dead people and family pets. Is it because credit card companies are stupid? Well, sometimes, but mostly it is because credit card issuers are working on numbers. The more new accounts they get, the more people spend, and the more interest they receive. It is a best practice to not use credit cards at all. But, if you are one that would rather pay interest than earn it, here is how to make the best of it.
Always make your payments on time! Hidden deep in the fine print of the cardholder agreement that you sign when you get a credit card are the scary terms that no one talks about. Probably the most damaging is the acceleration clause. This means that not only will you receive a penalty for being late, but in most cases, your interest rate will be increased. Depending on the card issuer, this increase may be the maximum allowable by law in your state. If your payment is due on the first of the month, and you make the payment on the third, you very well may be triggering the acceleration clause and not even know it.
One of the tricks that they use is to not say anything to you about the change at all. If you are not paying attention to your monthly statement, you could have been paying a 24.99% rate for the last 6 months and not even know it. it is best to assume that when using credit cards, you are playing with snakes. If you take your eyes off of it, you very well might get bit.
Something else that may affect you on payments are the less obvious. Have you ever seen a collection account on your credit for a cell phone bill? I have, dozens of times. Sometimes the customer knew about it, and sometimes they didn’t. How about a gym membership that you cancelled after the New Year’s Resolution wore off? I seen that one dozens of times too. In fact, gyms count on it as a source of revenue.
Utilities are also a big one. Getting your power cut off for lack of payment is not where it ends. They will also (in most cities) report it to your credit. The one that may shock you though (it even shocked me) is the number of public libraries that are reporting excessive late fees to the credit bureau. Video rental stores, insurance companies, virtually any company where you have requested a service and not fullfilled your end of the bargain will now report it to the credit bureau. Most people don’t find this out until they are trying to make a major purchase, such as a home or car, and at that point you usually have to pay it or lose the purchase you were trying to make. It is best to stay on top of your credit at least twice a year to see what others see. Especially in an age where you are 25 times more likely to have your identity stolen than have your car stolen.
Lesson 3 – Credit Inquiries
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August 13, 2008 at 8:37 am · Filed under Credit Scores, The Mortgage Market, Uncategorized
In today’s lending environment, only the best credit risk borrowers will get a loan. Are you one of them?
Credit scoring has been used by banks and lending institutions for years. And for much of the last 10 years there were opportunities for any type of credit borrower…you just have worse terms for bad credit. It is really a simple concept – someone who has had credit issues or has not managed their finances well do not get the same deal that others get who have sacrificed to keep their credit in tact.
Whether you agree with this phylosophy or not, lenders do, and they call the shots if you want to borrow money. In this series I am going to address the most serious issues and how you can recognize and fix them to improve your credit rating, and ultimately save you money on interest and financing fees.
1) Debt Consolidation
Debt consolidation sounds like a good idea right? You take several debts that you have (assuming they have high rates) you find a new account that will allow you to roll all of them into one payment, usually at a lower rate or better terms, then you cancel the old cards and go about your happy financially responsible way. This would be a good idea if it ever worked that way….but it doesn’t.
What happens instead, to an overwhelming number of you, is that after “paying off” these other debts into a new consolidation loan, you now see a whole new realm of possibility at the mall or at the local car dealership. Seeing these credit cards that were maxed out for so long that you stopped carrying them suddenly becomes too tempting to pass up, and you are off to support more bad habits that got you into the previous mess to begin with.
I am about to tell you something that you will probably never hear from another mortgage banker, or anyone who makes a living from lending money. Are you ready? Wait for it………YOU CAN’T BORROW YOUR WAY OUT OF DEBT! I don’t know if I can be more clear than that.
When you consolidate debt, you are not paying it off, you are simply moving it from one account to another. i know that the term “eliminate debt” is thrown around in debt consolidation circles, but the only way to eliminate debt is to actually pay it off.
Now that I have beaten you up about it, let me tell you how to consolidate debt and make it work to your advantage.
Part of your credit score is based on your ratio of debt to available credit. It is considered to be a negative factor if you owe $5000 on an account that has a credit limit of $5000 for obvious reasons. If you are maxed out, you are seen as a risk that you can not manage debt well, and your score will be affected accordingly. Equally, it is considered to be a negative if you have $5000 available, and you always carry a $0 balance. Because a credit score is essentially a debt score, you are not seen favorably if you never carry debt. The idea behind this is that if you do go out and buy a big ticket item, you may have trouble adjusting to the new payment. (I don’t make the rules, I just report them).
It sounds like a losing proposition no matter what you do right? Wrong. The way around this is to not close the old accounts after you pay them off with a consolidation loan, but don’t go out shopping either. If you have 3 accounts with balances of $1000 each, the ideal scenario would be to get a new account with available credit of $7000, combine the $3000 leaving $4000 left on the new account, and $3000 on the accounts you just paid off. This would give you an available credit of $10,000 with outstanding balances of $3000. Since the credit bureaus like to see a ratio of around 30%, you have just killed two birds with one stone.
Lesson 2 – Payment History
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