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Archive for Credit Scores

5 Ways To Improve Your Credit Score – Lesson 5

Over 40% of all credit reports have some form of inaccurate information on them.  Do you know what yours looks like?

Inaccuracies on credit reports are as old as credit reporting itself.  But, in today’s world, it is much worse than it has ever been in the past.  Identity theft is the fastest growing crime in America, and the average victim spends 100 hours fixing the problem.  Not only is this incredibly irritating, but it can cost you time from lost work, money from expenses associated with correcting the problem, and it can cost you even more money in interest rates should you decide to do nothing about it.  And the icing on the cake, less than 25% of these crimes are prosecuted.

More than 70% of all identity theft is committed by a family member or trusted “friend”.  I use the term friend loosely because someone that would open credit accounts in your name is a criminal, not a friend.  Even though I believe that these parasites on society should be hung in front of the courthouse, that type of judgment is not going to happen.  Until then, the responsibility is on you to fix it or prevent it.

The first step is to pull a copy of your credit report.  You can do this at AnnualCreditReport.com.  It is free to get access to your credit report once per year through this website, and I highly suggest you do at least that.  In addition, I believe that you should check your credit every 6 months.  For the second report that you will have to pay for, I recommend going to FreeCreditReport.com.  While this service is not completely free as the web address might imply, they will give you a copy of your credit report if you sign up for their credit monitoring service.  If you are not satisfied, you can cancel at any time.

Once you have pulled your credit report, go through each section line by line to search for inaccuracies.  This could be as simple as a misspelled address, or as complicated as identity theft.  Once you have identified the information that needs to be corrected, compile a letter to each credit reporting agency (Equifax, Experian and TransUnion) describing the items that need corrected and send them to the bureaus by certified mail to confirm that they received them.  You can get a sample credit dispute letter by doing a google search for “credit dispute letter”.  There are hundreds available online, just choose one that fits your needs.

There are also a number of identity theft protection services.  But. by far the best one is LifeLock.  They offer a $1 million guarantee to protect your identity, and fix the problems up to $1 million if someone gets through on your identity.  They also work extensively with law enforcement to prosecute the offenders (that’s my favorite part).

I hope you have found this series of blogs to be informative and helpful.  I will be adding more useful information next week.


LifeLock Take Control

5 Ways To Improve Your Credit Score – Lesson 4

How does the number of open accounts affect your overall credit?

This topic is more subjective than scientific.  I wish I could give you the equation for the perfect credit profile, but I don’t know that one even exists.  What I can tell you based on experience, is that the habits of individuals are predictable based on their credit score.  Or maybe it is the other way around.  Either way, consistently, the highest credit score borrowers that I see all have one thing in common…simplicity.

Of the thousands of credit reports I have seen, I can count on 2 hands the number of reports that have had a score in excess of 800 (850 is the highest score allowable in the system).  What all of those individuals had in common is an overwhelming sense of responsibility when it comes to credit.  I suppose that is an obvious answer, but not everyone cares that much about their credit, and it shows.  Almost everyone in that category had 1 mortgage (usually for many years), 1 car loan (with at least a years worth of perfect payment history), and no more than 3 other active accounts.  Most of the them had at least one credit card that they have used for more than 10 years.

Virtually anyone with a score over 740 would be considered platinum credit by most standards.  But, by any standard, a score over 800 can call their own shots when it comes to borrowing money.

In the mortgage industry, there are few loan programs that require you to have a score higher than 720.  In fact, most people can qualify for a mortgage loan with scores as low as 600 (580 in some rural areas of the country).  But with Fannie Mae’s recent implenentation of tiered rates based on credit scores, your low score will lead to higher rates, more fees, or both.  The difference can add up to hundreds more per year in loan costs, and thousands over the life of the loan.  With this in mind, your credit score is more than just a status symbol, it can affect your wallet in a significant way.

Here is a fun game.  Take out a financial calculator and look at the affect in real dollars.  If your credit score creates a situation where you have to pay $50 more per month on your mortgage than someone with perfect credit would pay, it might cost you $100,000 more than your good credit counter part over the life of the loan.

For instance: $50 per month equals $600 per year; That $600 per year spread out over the length of a 30 year mortgage is $18,000.  That is assuming you just used the cash, but what if you took that $50 per month and put it into a money market account yielding 3.5% (there are a number of places where you can get that kind of return on your money in a liquid account)?  After 30 years at $50 per month, you would have $31,770.63.  That is great, but what if you decided to invest the money?  In a mutual fund yielding 10% average annual return (again this is easy to find in any number of mutual funds), you would have $113,024.39 and a paid for home in 30 years.  I could also make the argument that you would not even have to suffer in lifestyle to get to that point.

Based on that equation, you can see in real dollars why banks have marble floors and wood paneling.  The next time you are jealous of someone with more money than you, be reminded that the only difference could be the choices that you made.

Lesson 5 – Credit Disputes

5 Ways To Improve Your Credit Score – Lesson 1

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