Chapter 11
CREDIT EDUCATION AND SCORES
The 5 Biggest Credit Mistakes & How You Can Avoid Them:
Imagine spending a third of a million dollars more than someone else just
because your credit score wasn’t as high as theirs. Unfortunately, it
happens all the time. Consumers feel like they get backed into a corner to
pay more because their credit score falls within a range that is not high
enough to qualify for the best loans. Here are some examples of what you
would pay for a $300,000 loan if you had the following scores:
The
table shows that if your credit scores are below 720, you could pay as
much as $988 more per month in your mortgage payment. That pencils out to
an extra $11,856 a year and a whopping $355,779 over the life of the loan.
Wouldn't you rather have that money available for retirement, or improving
your overall situation in the way of lifestyle, education or investing?
It's a lot of money. It's enough money to really change your life for the
better, and it's worth fighting for. Even if your scores are low right
now, you don't have to give up on your dream of homeownership. There are
many options that will allow you to get into a loan now, spend the next
6-12 months working to improve your scores, and refinance for a better
rate. Your mortgage professional can assist you in this important process.
Then, you can take proactive steps to improve your credit scores to get
the best loan possible. As you can see above, there are 355,779 good
reasons to start right now!
Some
background facts you should know:
Here
are some quick facts to get you started on your credit awareness and
improvement campaign:
A
"Good" Credit Score: Scores generally range between 350 and 850. A score
of 720 or better is considered "Very Good" credit.
Scores
from the three credit bureaus are all a little different: The
three major credit bureaus, Experian, Equifax and TransUnion are
businesses that make money by collecting data about YOU from creditors and
then reselling the data to lenders, employers, insurance companies, and
utility companies. 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.
Many
Different Scores: Because different lenders analyze the data with an
eye toward their own unique interest, emphasizing different aspects of the
score and the history, your credit score can be very different to
different lenders. For example, if you are applying for a car loan, the
lender will analyze the data with an eye toward car payment history. A
mortgage lender would heavily weight your history of mortgage payment, or
even rent payment. 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.
Credit
Scoring Factors: 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.
- 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.
- 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.
- 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.
- 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.
The
5 Biggest Credit Mistakes and How You Can Avoid Them
Now
that you have a working knowledge of how the credit system works, let’s
look at the most common mistakes consumers make regarding their credit
scores and how you can avoid them:
Mistake
Number 1: Neglecting Your Credit Scores
You
know what they say, “Life happens.” We all get very busy with our
daily routines. Work, managing a household, family, recreation, etc., they
all seem to take up more time than we think they will, and none of us
seems to have enough time in the day to get everything done. As a result,
most consumers do not actively monitor their credit, so when it comes time
to apply for a loan, they are not credit ready, and that's a shame because
as you can see above, a low credit score can be financially devastating,
not to mention, may cause denial altogether.
Here
are some facts that will help you understand why it is so important to
monitor your credit.
In
the last 90 days:
- 80% of
all consumer credit reports contain errors that could be affecting
your credit scores from 5-100 points.
- 25% of
all credit reports contain errors serious enough to cause consumers to
be denied for credit completely.
- 10
million Americans were victims of Identity Theft in the past year. 25%
were children.
- The
average amount of time that it takes the credit bureaus to fix their
own mistakes in response to consumer complaints is 23 weeks,
nearly six months! This means that in order to be “credit ready”
for a loan, you must check your credit at least 6-months before you
apply.
Making
sure that your credit reports are accurate and reflective of your activity
will help you maintain a good credit score and will help you avoid
attempts of identity theft. And the first step is to have a complete
picture of your current credit situation by ordering your credit report
and score for all three national credit bureaus, TransUnion, Equifax and
Experian. You should get your score from all three bureaus for two
reasons. First, each bureau may have slightly different information about
you depending on which companies have reported to them on your accounts.
Second, many lenders, especially mortgage lenders, look at all three of
your FICO scores to determine whether to grant credit – for everything
from a car loan to a home loan to a credit card to a cell phone. Do not
have a creditor pull your reports because you will lose points for a hard
inquiry. However, you can receive one free copy of your report each year
from every bureau by requesting it at www.annualcreditreport.com. This
request gives you access to your report, but not your score. You will have
to pay a fee for each score, or you can give me a call.
Mistake
Number 2: Late Payments
Making
a payment late is a big “no-no” if you want to achieve and maintain
the best credit score.
Most
consumers have no idea of how much a 30 day late payment can affect their
credit score. According to Fair Isaac & Co., the creator of the credit
scoring system, one 30-day late can cost you 50-75 points immediately,
even if you have a 720 score, and it takes months, sometimes years, to
gain back those 75 points. The credit scoring system doesn’t care why
you are late with your payments. It could be due to a job loss, a medical
crisis, you were out of town; it doesn't matter. It will be assumed that
you are a high risk borrower and your credit score will reflect the
penalty immediately.
Regardless
of whether or not you have lots of money in the bank and plenty of unused
credit, your payment history indicates how much control you seize to
properly manage your situation and the level of care and responsibility
you exercise to maintain your existing accounts. And since your payment
history is the largest consideration in your credit report and score, you
want to make sure that you pay your bills on time.
Mistake
Number 3: Going Over 50% of Your Credit Limit
Consumers
tend to use credit cards for all of their needs, running up big balances.
It is crucial to keep credit card balances below 50% of the available
limit at all times to maintain your score. And the rules are even tighter
if you are looking to get a loan. For the 3-6 months prior to applying for
a loan, keep those balances below 30% or less of your limit so you can
increase the score as much as possible--the lower the balance, the better.
Never
max out or go over the limit! Fair Isaac & Co. says that you can lose
up to 80 points by maxing out on a credit card, even when you pay the
balance down, you only get 40 of those points back immediately. It will be
months before you get the other 40 points back. If you have to max out a
credit card to make a purchase, make sure to pay the balance down BEFORE
the statement date so that the maxed out balance does not get reported to
the bureaus.
If
you cannot pay down your credit card balances to 30% of the available
limit prior to applying for a loan, try calling your credit card companies
to ask for a temporary limit increase without pulling your credit. Tell
them you are in the process of wanting to purchase a home and that your
balances are affecting your score. Some creditors will oblige if you have
maintained a good payment history on the account.
This
aspect of your credit score is part of the Amounts Owed factor which
accounts for 30% of your credit scores.
Mistake
Number 4: Shop ‘til Your Score Drops
Shopping
for loans can be a fast way to bring down your credit score. Why? Because
when you apply for a loan, they pull your credit. This is a hard inquiry
that automatically whacks anywhere from 2-30 points off your score. The
good news is that Fair Isaac realized that consumer's shouldn't be
penalized for something as logical as shopping around for the best
interest rates before making buying a car or home, so they came up with
something called De-Duplication. What it means is this.... Consumers can
have their credit pulled by as many mortgage or auto lenders as they want
within a 14 day period, and it will only be counted as one hard inquiry
against their score. And even better news is that the new scoring model
released by FICO has expanded the 14-day period to 45 days. Note: Not all
lenders are using the new model yet, so it is best to be safe and do your
shopping in a 14-day period.
Mistake
Number 5: Opening Accounts You Don’t Need
Just
say “Thanks, but no thanks” when it comes to new offers for credit,
don’t open accounts you don't need. Just because credit is offered to
you, does not mean that you should accept it. When you receive one of
those pre-approved credit card letters in the mail, your credit report has
not been pulled yet, so you are NOT approved for the account. Once you
pick up the phone to call the creditor, they will pull your report and you
will be penalized immediately for the hard inquiry. Remember, one hard
inquiry can cost you anywhere from 2-30+ points from your score, depending
on other elements in your report. And, the lower your score, the more
points you will be penalized. So, it is best to avoid these types of
special offer credit cards (including Department Store offers of
"Open an account today to save 15% off of your purchase.") The
scoring system frowns upon 3rd party finance cards.
4
Steps to Start Improving Your Score
You
don’t have to just take bad credit lying down. Here are four steps to
help you get started today:
- Get
Educated and Stay Informed: There is an abundance of information out there on credit education.
By learning what to do to proactively monitor and protect your credit,
you can get a good score and keep it that way. There are no quick
credit fixes, but you can make dramatic improvements over time.
- Monitor
your credit quarterly: This way, you will be able to see what’s on
the report to determine what you can clean up, what doesn’t belong
there, what isn’t there that should be, and make any adjustments to
realign your credit reports so that you are credit ready at all times.
- Verify
that the data affecting your payment history is being reported
accurately.
Check all accounts for late pays. Were you late? If yes, is the late
being reported in the correct month? If not, by law it should be
removed. Check for collections. There are so many nationwide
collection scams going on that it is now necessary to check our
reports quarterly (at a minimum) to make sure that we are not victims.
Per Sec. 1692g. of the Fair Debt Collections Act, the burden of proof
is on the collector not you, and if you ask them for it, they have to
provide you with the following information:
- Date
they purchased the debt
- Amount
they paid for said debt
- Date
of last payment/activity, if any
- Original
creditors full name and address
- All
records pertaining to actual debt to prove validity
If they cannot provide you with this information,
then the account must be deleted from your credit report.
- Hire a
professional service to help. If you feel that the credit challenges you are facing are too much,
or you don’t have enough time to do the work necessary to remediate
your own credit, don’t lose hope and give up. Consider using a
professional service to help you reach your credit scoring goals. If
you are interested in receiving a free credit consultation, please
contact me via email or telephone.
Your good credit is well worth the effort it takes
to both achieve it and preserve it. If you have good credit, keep it that
way. In doing so, you will continue to enable yourself to enjoy the best
loans for the lowest possible rate of interest. If you are seeking to
improve your credit, understand that your efforts will be paid off in
spades.
Remember, with your good credit, the brightest
financial future awaits you!
“Do
Better Business…. The Carroll Way!”
without
Consult with your mortgage loan officer for updated information.
August
29, 2008
Correcting Credit
Report Errors
The following information relating to credit
report errors was provided by the Federal Trade Commission (FTC). Additional information may be obtained by visiting their
web site at:
www.ftc.gov
Under
the Fair Credit Reporting Act, both the credit reporting agency (CRA) and
the organization that provided the information to the CRA, such as a bank
or credit card company, have responsibilities for correcting inaccurate or
incomplete information in your report.
To protect all your rights under the law,
contact both the CRA and the information provider.
First,
tell the CRA in writing what information you believe is inaccurate.
Include copies (NOT originals) of documents that support your position. In addition to
providing your complete name and address, your letter should clearly
identify each item in your report you dispute, state the facts and explain
why you dispute the information,
and request deletion or correction. You
may want to enclose a copy of your report with the items in question
circled. Your
letter may look something like the Sample Dispute Letter, which may
be found at the end of this Chapter. Send your letter by certified mail,
return receipt requested, so you can document what the CRA received. Keep
copies of your dispute letter and enclosures. CRAs must reinvestigate the
items in question-usually within 30 days--unless
they consider your dispute frivolous.
They also must forward all relevant data you
provide about the dispute to the information provider. After
the information provider receives notice of a dispute from the CRA, it
must investigate, review all relevant information provided by the CRA, and
report the results to the CRA. If the information provider finds the disputed
information to be inaccurate,
it must notify all nationwide CRA’s so
they can correct this information in your file.
Disputed information that cannot be verified
must be deleted from your file.
·
If
your report contains erroneous information, the CRA must correct it.
·
If
an item is incomplete, the CRA must complete it. For
example, if your file
showed that you were late making payments, but failed to show that
you were no longer delinquent, the CRA must show that you are current.
·
If
your file shows an account
that belongs only to another person,
the CRA must delete it.
·
When
the reinvestigation is complete,
the CRA must give you the written result and
a free copy of your report if the dispute results in a change. If an item
is changed or removed, the CRA cannot put the disputed information back in
your file unless the information provider verifies its accuracy and
completeness, and the CRA gives you a written notice that includes the
name, address and phone number of the provider.
Also, if you request, the
CRA must send notices of corrections to anyone who
received your report in the past six months. Job
applicants can have a corrected copy of their report sent to anyone who
received a copy during the past two years for employment purposes.
If a reinvestigation does not resolve your dispute, ask the CRA to include
your statement of the dispute in your file and in future reports.
Second,
in addition to writing to the CRA, tell
the creditor or other information provider in writing that you dispute an
item. Again, include copies (NOT originals) of documents
that support your position. Many providers specify an address for
disputes. If the provider then reports the item to any CRA, it must
include a notice of your dispute. In addition, if
you are correct-that is, if the disputed information is not
accurate-the information provider may not use it
again. '
Accurate Negative Information
When
negative information in your report is accurate, only
the passage of time can assure its removal. Accurate
negative information can generally stay on your report for seven years. There
are certain exceptions:
·
Information
about criminal convictions may be reported without any time limitation.
·
Bankruptcy
information may be reported for 10 years.
·
Credit
information reported in response to an application for a job with a salary
of more than $75,000 has no time limit.
·
Credit
information reported because of an application for more than, $150,000
worth of credit or life insurance has no time limit.
·
Information
about a lawsuit or an unpaid judgment against you can be reported for
seven years or until the statute of limitations runs out, whichever is
longer.
Adding Accounts to Your Credit Report
File
Your credit file may not reflect all your
credit accounts. Although most national department store and all-purpose
bank credit card accounts will be included in your file, not
all creditors supply information to CRAs. Some travel,
entertainment, gasoline card companies, local
retailers and credit unions are among those creditors that don't. If
you've been told you were 'denied credit because of an
"insufficient credit file"
or "no credit file" and you have
accounts with creditors that don't appear in your credit file, ask the CRA
to add this information to future reports.
Although they are not required to do so, many
CRAs will add verifiable accounts for a fee. You
should, however, understand that if these creditors do not report to the
CRA on a regular basis, these added items will not be updated in your file.
SAMPLE DISPUTE LETTER
Date
Your
name
Your
address
Your
City, State, Zip Code
Complaint Department
Name
of Credit Reporting Agency
Address
City,
State, Zip Code
Dear Sir
or Madam:
I am writing to dispute the
following information in my file. The
items I dispute are also encircled on the attached copy of the report I
received. (Identify item (s)
disputed by name of source such as creditors or tax court, and identify
type of item, such as credit account, judgment, etc.)
This item is (inaccurate
or incomplete) because (describe
what is inaccurate or incomplete and why).
I am requesting that the item be deleted (or
request another specific change) to correct the information.
Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation,
such as payment records, court documents) supporting my position.
Please investigate this (these)
matter (s) and (delete or correct)
the disputed item (s) by thirty
(30) days.
Sincerely,
Your
Name
Enclosures: (List
what you are enclosing)
*Remember
to make copies of what you send. It
is also a good item to send your letter certified so you know when it was
received and when to expect a response.