Tracy Becker Credit Expert and Author

What you should know about credit and scores.

Start the New Year off right. Here are some general tips to help you understand credit and scores a bit more. Feel free to share these tips!

- Credit scores are formulated based on what appears on credit bureaus in the moment credit is pulled by the bank. Making sure credit is updated prior to the bank evaluating your credit report and scores can help the mortgage application process.

- Balances on revolving credit accounts (credit cards, overdraft on checking, and some lines of credit) weigh heavily on scores as they increase and get closer to aggregate limits. Keeping balances at 7-10% of limits can help scores. Once consumers pay balances down they should be kept low for at least two months prior to loan application to insure credit stays updated and reflects the lowered balance to limit ratios on this debt. Creditors and credit bureaus don’t usually update changes immediately.

- When ordering credit scores online consumers must be sure they are ordering similar scores used by banks to evaluate risk. These scores can be purchased at www.myfico.com. Other scores can have very different ranges and cause consumers to believe their credit is higher than the Fico score reflects.

- Consumers should buy the Equifax and Trans Union standard Fico scores. If both of these scores are over a 740 it is considered excellent credit.

- Since opening and closing credit can hurt scores please do not take this action

Get more information on our website and connect with us on all social media at www.northshoreadvisory.com.

Credit Question

Q: How does owing money on a credit card affect credit scores and how long does it take for the bad credit to clear from your history?

A: There are many factors that can lower your credit scores. One major factor is a high debt-to-limit ratio—owing too much money on credit cards can dramatically decrease your credit scores. If your balances are more than 7% of the card’s limit, your scores will start to drop. The closer the balance inches up to the limit, the more your score will drop. Credit scores are sensitive to individual balance-to-limit ratios, but even more sensitive to aggregate balance-to-limit ratios. Your scores will continue to drop until your balance comes down. The rate at which your credit bounces back is dependant on a number of factors. If you would like information that is more specific to your personal credit report, you can get in touch with my office: www.northshoreadvisory.com.

Leave a comment or send your credit questions to info@northshoreadvisory.com

Debt Factors Used in Determining Fico Scores

Since credit scores have such a great impact on the success of a purchase or refinance it is essential to understand how they work. Today we will address how debt affects the Fico Score. Not all debt has an equal effect on credit scores.

There are different categories of credit:

1. Revolving
2. Mortgages
3. Public records (court records)
4. Installment

Revolving credit includes overdraft on checking accounts, lines of credit, credit cards, and some home equity lines. Since revolving credit is the type that consumers have the most control over, the balances have a greater affect on credit scores. The higher the balances inch up to the aggregate limit the more the scores drops. Also, the individual balance to limit ratios of each account can affect the score negatively. If there is no limit listed on the credit report, automatically, the highest balance becomes the limit.

Here is an example:

Jim, who needed a bank loan for a mortgage, had to have a 740 plus credit score to get it. His credit score was 710, too low to qualify for the loan.

Jim had several credit cards:

-Amex: Balance is $12,000. Limit is $15,000.

-Capital One: Balance is $19,000. Limit is $22,000.

-Discover: Balance is $13,000. Limit is $15,000.

-Citibank: Balance is $450. No credit limit has been established. Jim never charges over $650.

-A second Amex: Balance is $1,000. Card must be paid off each month. Jim never charges over $1,500.

Overall, Jim’s balance to limit ratio on revolving credit is at 85% of his credit limit. This brought his credit score down 70 points. Paying the cards down to 7% of his credit limits could, after the new balances are updated on the report, get him above a 740 as needed for the better rate loan. To have the best scores, using the weight of balance to limit ratios on revolving credit, a consumer should keep balances no greater than 7% of the limits.

To show the difference in scores and how it affects the cost of a loan here is what Jim would be facing with a 710 Fico score vs. a 740 plus Fico score:

Jim was applying for a $600,000 Fannie Mae loan. At the 710 Fico score he would either have to pay almost $17,000 upfront in points (points are 1% of the loan amount) to get the lower 4% interest rate or if he didn’t have the funds to pay at closing he would have to settle for a 5% interest rate. At the higher interest rate he would be paying $1,159,540 over the life of his loan.

At the 740 plus Fico score he would be paying the lower interest rate and the total cost of the loan term would be $1,031,223.

His savings for 30 plus points on his Fico score would be $128,317.

It is a priority to educate buyers and clients who may be refinancing as to how much their balances impact credit scores. Consumers should pay down revolving credit 2-3 months before applying for a loan since it can take that long for the credit reporting agencies to reflect the change.

Feel free to call us with any questions or feedback 914-524-8300.

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Credit Question

Q:
I was listening to your radio show and heard Tracy (Credit Expert) talk about different types of credit. Can you tell me what they are?

A:
Sure!

Revolving credit – is usually credit that you can choose to pay a minimal amount and decide how much you are going to charge (up to the limit). This includes credit cards, overdraft on a checking account, lines of credit, and some home equity lines.

Installment credit- accounts that require a set payment every month (does not include mortgages). These accounts include student loans and car leases or loans.

Mortgages – are loans used for purchasing real estate

Public records – include tax liens, judgments, and bankruptcies

Leave me a message here or email me at ask@northshoreadvisory.com if you have a credit question. Be sure to follow @tracybecker for credit tips and become a fan of the North Shore Advisory, Inc. facebook page as well.

Mass Refinancing Programs

Mass Refinancing Programs: What does it mean for credit and scores??

Since information on soon to come mass refinancing programs is so recent and general, it is hard to say how credit and scores will affect approvals. What I have been hearing is that most will have to be current for at least 6-12 months on their active mortgage loans. Unfortunately, in the recent past many consumers attempting to get loan modifications were told they must be late on payments before being approved. The majority of these consumers found they were rejected for the loan modification only to be left with dramatic decreases in their credit scores due to the recent late payments.

These consumers must be made aware of their current credit and score situation to access how it can be improved, (www.myfico.com) affording them more choices once these programs become clear. Mortgage professionals can also inform their customer base to buy their Fico scores early on. Weighing the damage and getting the help they need
(www.northshoreadvisory.com) can result in possible changes for their credit. Keeping referral sources, customer base, and future refinancing applicants educated can make the difference in potential loan approvals and increased referrals down the road.

Some tips for consumers who have had late payments in the last year.

1. If you know you were late on a mortgage in the past 12 months do not call the lender and try to convince them to remove the late payments with no knowledge of consequence or what should and should not be said.

2. Speaking with a credit expert to evaluate the potential success of removing late payments from credit can give great insight into what the best next step should be.

3. Do not open or close any credit without understanding your short and long term finance goals first.

4. Credit activity must be used with strategy for attaining future goals.

5. No credit situation is hopeless since credit will improve as time goes by no matter what the current state may be.

6. Credit law states that creditors have the right to keep negative credit on profiles for 7-10 years but that does not mean that they MUST!

Credit Question

Q: I ordered all three of my credit reports from Experian, Trans Union, and Equifax and I paid to buy my scores as well. Please tell me why two of the three scores might be so different from the third? Experian was a 740, Trans Union a 620, and Equifax was a 625?

A: Without seeing your credit report, it is hard for me to say exactly what is causing this large difference in scores, but I can make a very good guess. Collection agencies represent lenders, creditors, and service providers that have not been paid, and are hired to collect bad debts that consumers owe to the original creditor. Sometimes, these smaller agencies try to save costs by reporting to only two of the three credit bureaus. By reporting to even a few bureaus, they are able to damage a consumer’s credit enough, while saving money. As a consumer, as long as your middle score is low, it will affect your ability to get financing and credit approvals. Your best bet is to send me a copy of your credit report tracy@northshoreadvisory.com so I can give you a definitive answer.

If anyone has any credit questions leave me a message or send me an email at ask@northshoreadvisory.com.

Having the Right Professionals

In today’s economy it is of great importance to understand that the best choice for one may be the worst choice for another. Having the right professionals around to guide a consumer to make the best decision could mean a successful outcome, huge savings, or both.

Take the following situation for example:

Dan is planning on buying a Co-op in NYC and within a few months he will begin the process of working with a realtor. He decides to call Susan, a realtor who was referred to him by a friend to see if there is anything he should be doing to prepare for their first appointment. The realtor is happy to hear from him and they discuss what kind of property Dan is looking for. Susan casually asks Dan how he thinks his credit score is and if he has decided what bank he will use when applying for a loan. Dan replies that he really hasn’t spoken to anyone yet and that he is pretty sure both he and his fiance have excellent credit. The realtor responds by agreeing to speak again in a couple months and sets up an appointment to look for a property.

This all sounds good when you look at it on the surface but if you delve a little deeper there is a great missed opportunity!

Here is an example of how this situation could have been handled:

Q- Susan is there anything I should be doing before we meet in a couple months to get ready for this process?

A- Yes Dan, the first thing I would suggest is to order your Fico score from myfico.com as this is the score bankers use. You will have to pay a small fee to purchase the score but it will be well worth it to see exactly where you stand in case something needs to be addressed it can be done well in advance.

Remember Dan, having the best credit score (above a 740 Fico) may equate to saving hundreds or even thousands monthly, which can ultimately save you hundreds of thousands of dollars over the life of the loan. Ordering your credit from this site will not hurt your score. If you have any questions or if you just want more information about credit you can visit www.northshoreadvisory.com which is an excellent resource for credit information and help.

It is also a great idea to speak with a banker right away to find out when you should apply for a pre-approval letter (which can give us better leverage when making an offer and negotiating on a property) and what kind of documents and information will be needed for the loan application. Here is the name of a banker that has done great things for my clients, Bob Smith, give him a call if you would like.

The sooner you are aware of your current situation and what will be necessary to get the best loan, the greater your chances of success will be when we begin the process of finding you the right property. Keep in mind you will need a good real estate Attorney as well. If you would like a referral let me know. Although it is my job to bring you the best properties at the right prices for your budget, and educate you on market value, it is also important that you have the best help and guidance in all facets that impact the success of your purchase.

Based on Susan’s recommendation Dan and his fiance order their Fico scores. The scores are both in the low 700’s. Although these are not poor scores they can be improved which will give the couple the potential to get a better interest rate. Although Dan has no delinquencies and does not need credit repair after visiting our site he learns that if he pays down his revolving credit balances his scores will increase.

Dan is thrilled that he got such good information helping him to take the proper steps toward a better score and savings. He calls the recommended banker and shares his score status. The banker explains what will be needed for income qualification and suggests Dan pays down the revolving credit card balances two months prior to getting a pre-qualification letter. The banker wants to make sure the creditors update the new balance information once Dan pays so there will be no problem with the pre-qualify letter. The balance update usually takes 30-60 days to reflect on his credit. If he had some delinquencies on his credit profile we would have had the chance to fix them right away.

Dan walks away feeling he has really made a great choice calling the referred realtor and tells his friend how happy he is to have been given the referral. He feels he has made a great start to building his future on solid footing. The realtor has solidified her relationship with him and has a much greater chance of a successful sale and more referrals!

Feel free to call us if you have any credit questions or need feedback on a credit report.

Credit Frenzy

The economic crisis produced a dramatic increase in defaults causing banks to pull back the reins on qualifications for all types of financing. This crisis forced the credit scoring industry and atmosphere into a frenzy of competition, new score production, tons of credit tools and offers, and thousands of fly by night companies that promise to increase credit scores but fail to deliver. For consumers and professionals it has been a massive overload of credit information, including misinformation leading to a lot of confusion and panic.

We now have the Vantage score, Fico Scores, Plus Scores, Credit Karma Scores, Equifax Scores, and more. And while there are great credit repair companies available to help, there are more that will allow consumers to sign up for services online (accepting payment) without ever speaking to the consumer or reviewing their current credit and financial situation. Many just make promises that cannot be fulfilled or take years to improve scores. Credit monitoring products are also available to consumers (for protection) by credit card companies who in many cases are the ones that have jeopardized the consumers private information in the first place.

Should consumers have monitoring products they can use daily and pay for monthly, buy their credit every quarter on their own, or pull their free annualcreditreport.com reports once a year? How do they start to prepare their credit before buying, leasing, or refinancing a property and who can they look to for accurate guidance?

Lots to think about and if I were an average consumer I might just get in my car and take a long drive after pondering the first part of this article!

Back to the question at hand, how does one know which way to turn and what to choose?

Each consumer and situation is unique with varying individual factors, from different credit scores, income, assets, goals, desires, to the needs of the consumer. In today’s economy it is of great importance to understand that the best choice for one may be the worst choice for another. Having the right professionals around to guide a consumer to make the best decision could mean a successful outcome, huge savings, or both.

If you have a credit question or want your financial situation evaluated please feel free to visit our website at northshoreadvisory.com or give us a call at 914-524-8300.