One of the most important parts of my job is to help clients with their credit scores. With today's lending climate, good scores are a must. And your credit score is becoming a bigger part of your life everyday. From getting hired for a job, insurance quotes; the list is getting larger.
Here is an article from Liz Pulliam Weston of MSN Money that gives a great breakdown the highly misunderstood (and with good reason) world of credit scores
Five Ways to Kill Your Credit Scores
by Liz Pulliam Weston
One of the questions I'm asked most often about credit scores is exactly how much certain actions affect people's scores.
What good is a good credit score?Until now, the best I could do was say, "It depends." That's because the company that created the leading credit score, the FICO, has been wary about releasing specifics.
Fortunately, that just changed. At my request and for the first time, the company (also known as FICO) has released details about how specific actions, from maxing out a credit card to filing for bankruptcy, can affect people with different credit scores.
I asked the company to compute the results of those actions for two examples: a person with a 780 score, which is an excellent score on the 300-to-850 FICO scale, and someone with a 680 score. The results:
Effect on a 680 score Effect on a 780 score
Maxed-out card -25 to -45 -10 to -30
30-day late payment -90 to -110 -60 to -80
Debt settlement -105 to -125 -45 to -65
Foreclosure -140 to -160 -85 to -105
Bankruptcy -220 to -240 -130 to -150
Source: FICO
The results are given in a range because FICO is still a little nervous about revealing too much about its proprietary scoring. But the range is fairly tight, and we can clearly see the disparate impacts of the different actions
A guide, not a guarantee Before we go further, I have to make this clear: Your mileage may vary.
People with the same credit score can have very different credit profiles: more or fewer accounts, a different mix of accounts, a longer or shorter credit history, use of more or less of their available credit, etc.
Because of those differences, the same action -- maxing out a card, say -- can have different effects on people with the same score, depending on the details of their individual credit profiles.
For the sake of this exercise, FICO assumed both people had several active major credit cards as well as a mortgage, a car loan and student loans.
The person with the 780 score:
Has at least 10 credit accounts in total and a 15-year credit history.
Uses 15% to 25% of her credit card limits.
Has no late payments on her credit reports.
Has no collection accounts or other major negatives.
The person with the 680 score:
Has six credit accounts and an eight-year credit history.
Uses 40% to 50% of her credit card limits.
Was 90 days late on an account two years ago.
Was 30 days late on another account one year ago.
Here's what you need to know about each action and the effect it had:
Maxing out a credit card: Using 100% of your limit on any credit card puts you at risk of over-limit fees. It also takes a bite out of your credit score.
Our person with the 680 score might lose 10 to 30 points from this one action, while the 780 scorer could shed 25 to 45 points.
The difference points up an important fact: The higher your score, the more points you tend to lose from "bad" actions. That's because the scoring formula is sensitive to any sign you're getting in over your head. Maxing out a credit card is considered one of those signs.
You also should know that it typically doesn't matter to the formula if you carry a balance or pay off that maxed-out card as soon as you get your statement. What's usually reported to the credit bureaus is the balance on your last statement. Even if you pay the debt in full before the due date, the maxed-out card will hurt your score.
Skipping a payment: Mailing a payment a few days late normally won't hurt your score, although you may incur late fees and trigger higher interest rates. The big hurt comes when you miss a payment cycle entirely.
A 30-day-late report would shave 60 to 80 points from our lower-scoring person and 90 to 110 points from our higher scorer. In other words, one lapse of attention could plunge the 680-scorer into subprime credit territory, and our 780-scorer could find credit much harder to get and more expensive.
This is why it's so important to set up automatic payments to ensure your bills get paid on time, all the time. With credit cards, you can set up automatic payments that take the minimum payment out of your checking account to ward against a late payment. You can always make a second payment that reduces your debt or pays it off entirely. You can sign up for automatic payments on the Web site of your card issuer.
Settling a credit card debt: All the advertisements about "settling your debt for pennies on the dollar" make debt settlement sound like a great solution. But failing to pay what you owe a creditor will take a serious toll on your score.
Video: How to fix your FICO score
The 680 scorer would lose 45 to 65 points with this maneuver, while the 780 scorer would shed 105 to 125 points.
Our scenario assumed that our borrowers would miss one payment before settling the debt with their credit card companies. In reality, debt settlement negotiations can drag on much longer, with each missed payment taking another chunk out of your score.
Settling a debt with a collection agency would hurt less, probably much less, because the FICO formula is set up to weigh more heavily what the original creditor says about you than what a collection agency reports. But if our borrowers were settling with a collection agency instead, their scores would be lower to begin with, because they would have collection accounts on their records.
Also, you should know that the amount of debt your creditor "forgives" in a debt settlement solution is typically added to your taxable income. So you may save some money by settling a debt, but you'll give some of it back to Uncle Sam in higher taxes.
Losing a property to foreclosure: Foreclosure deals a severe blow to your credit score: 85 to 105 points for our person with the 680 score and 140 to 160 points for the one with the 780 score.
Foreclosures have implications for your future ability to get a mortgage as well. Although your score may start to improve as soon as the house is gone, mortgage lenders may not be willing to extend you another home loan until two to four years have elapsed.
In an attempt to protect their credit, many people attempt short sales, selling their houses for less than what's owed, with the lenders' permission. Unfortunately, these transactions, even if successful, are often reported as settlements. And a settlement, as you've seen, is pretty bad for credit scores. To lenders, a short sale isn’t quite as bad as a foreclosure, though, and it may be easier to get another mortgage once you’ve rebuilt your credit.
Filing for bankruptcy FICO spokesman Craig Watts once called bankruptcy the nuclear bomb of credit actions. Filing for bankruptcy would shave 130 to 150 points from the 680 score and 220 to 240 points from the 780 score.
This is different from the other black marks, where the higher scorer was still left with better numbers than the lower scorer. In this case, both would wind up near the bottom of the credit barrel. Getting new credit, particularly in the current credit-crunch environment, would be extremely tough.
Sometimes, of course, bankruptcy is the best of bad options. (See "Quiz: Should you file for bankruptcy?") But if you can't pay your bills, you should at least explore the other possibilities: forbearance, credit counseling or even debt settlement.
Finally, if you have any of these five black marks on your record, remember two things: The impact on your score may differ from what's shown above, and regardless of how many points you lost, you can rebuild your FICO score over time.
You can start by using a free FICO score estimator, such as this one at Bankrate.com, or MSN Money's credit score estimator, which similarly models a score on Experian's 330-to-830 range, to see where you stand.
Or you can sign up for free credit scores from sites such as Quizzle, Credit.com and Credit Karma, which use the actual information on file about you with the credit bureaus. But the scores you get still may not be the ones lenders actually see.
Or you can buy your Equifax or TransUnion FICO score from MyFICO.com. (Experian no longer sells FICO scores to consumers, although it continues to sell the scores to lenders.) With paid scores, you'll get specific advice about how to improve your numbers. In general, when you're trying to build a credit score, you should:
Pay your bills on time, all the time.
Reduce your credit utilization; below 30% is good, below 10% is better.
Have a mix of credit on your reports, including installment loans (mortgages, auto loans and personal loans) and revolving accounts (credit cards and lines of credit).
Refrain from closing accounts.
Apply for new credit sparingly.
Great article Liz!
If you have any comments on this article, I would love to hear what you have to say!
Feel free to comment below.Thanks for reading!
Dan Tenchall
Great Lakes Mortgage Funding
For FREE Mortgage tips, Mortgage Calculators,must have articles and much more please visit my website!
Michigan Mortgage Rates
(586) 532-0600
dan@glmf.com
Tuesday, November 17, 2009
Wednesday, November 11, 2009
Going Back In Time
I was sent this article from 2005. It is really interesting reading when you consider what the housing market was like back then and what it has become since then. It is amazing to listen what people were talking about back in the good old days.
The Mortgage Trap
By Dean Foust, with Peter Coy in New York, Sarah Lacy in San Mateo, Rishi Chhatwal in Atlanta, and bureau reportsBusinessWeek Online
Lenders are cranking out an ever-growing array of financing schemes and lowering standards to keep the housing boom going
Nicki Randolph, a San Francisco real estate agent, hasn't been scared off by talk of a housing bubble. Although she already owns both a home and a condo in Palm Springs, Calif., Randolph just closed on a third property -- dropping more than $1 million on a 1,400-square-foot loft in the heart of San Francisco. How does she juggle so many properties in the overheated California market? Lots of leverage, thanks to banks all too willing to provide ever more.
To finance her loft purchase, Randolph took out a mortgage that lets her pay only interest for the first five years -- a tactic that helps her ease into the hefty monthly payments. "Fears that the market is going to crash are way overstated," she says confidently. "It's a seven-mile-by-seven-mile city and a premier place people want to live. You have to be more aggressive here because the prices are so high."
PRESSURE KEEPS BUILDING.
Randolph's story is a familiar one -- and it shows the lengths to which buyers are willing to go to snatch up real estate as well as the extremes lenders will stretch to accommodate them. As prices continue to skyrocket in much of the country, banks and lenders are cranking out an ever-growing array of products ranging from no-money-down or interest-only mortgages, to special "Payment Power" loans that allow homeowners to defer monthly payments altogether twice a year.
Such creative financing is letting even marginal buyers purchase houses with price tags that used to appeal only to the rich and famous. In the process, banks and mortgage companies appear to be taking on more risk than ever before -- and if rates rise sharply or prices tumble, many of their customers could find themselves in deep trouble, too.
All those innovative mortgage products are a sure sign that lenders are doing everything they can to keep the housing boom going and to capitalize on yet another round of falling interest rates that no one expected. There are plenty of other signs of frenzy as well. Home appraisers complain that mortgage originators are demanding the optimistic appraisals needed to close on loans. "They started warning me to 'be a team player' and to 'hit the number' they needed to seal the deal," says Robert Burnitt, an appraiser in Midlothian, Tex.
SUPPORTING A STRETCH.
Enticed by juicy commissions from all those deals, others are jumping into the mortgage biz. Among them are John Switzer, an 18-year-old high school grad from New Bern, N.C., who put off college so he could start work as a mortgage rep for Houston-based Franklin Bank Corp. (NasdaqNM:FBTX - News). "Right now, mortgages are a little more interesting" than college studies, he says.
Yet nothing screams "frenzy" louder than the huge popularity of innovative -- and risky -- mortgage products that allow buyers to stretch for those million-dollar studios and multimillion-dollar suburban colonials. With interest-only mortgages now offered by everyone from ditech.com to Washington Mutual (NYSE:WM - News), such loans now account for 20% of all new mortgages, up from under 5% two years ago.
Option adjustable-rate mortgages, or "option ARMs," have also become all the rage in superheated markets such as California and Washington, D.C. With an option ARM, borrowers can choose among three different payment plans each month, continually changing what they fork over as their budgets shift. The options: a regular payment of both principal and interest, just the interest, or one that may not even cover the interest -- so the overall balance owed on the mortgage could continue to grow.
TREND TOWARD RISK.
The question is, will the proliferation of interest-only and option ARM mortgages leave many buyers strapped down the road, causing higher default rates? David Liu, a mortgage strategist for UBS in New York, notes that after similar products were introduced in the red-hot California market in the late 1980s, they ultimately incurred a default rate that was three times as high as conventional mortgages when the local economy went into recession in the early '90s.
Already there are signs that current option ARM borrowers are straining to make their monthly payment: Liu notes that among a bundle of mortgages originated by Washington Mutual and scrutinized into the secondary market last year, fully 60% of borrowers made only the minimum payment this past March. "That's definitely a sign that people are stretching,"says Liu.
There's plenty of other evidence suggesting that homebuyers and their lenders are climbing out on a limb. According to a survey of homebuyers released last November by the National Association of Realtors, 25% of those polled were able to get a mortgage with no money down, vs. 18% in early 2003 and virtually none in the late 1990s -- a trend that could leave many of these new homeowners under water if home prices take even a small dip.
"FROTH" SPILLS OVER.
At the same time, lenders are extending far more loans to borrowers who have had credit problems in the past. According to the Mortgage Bankers Assn., the share of new loans made to so-called subprime borrowers -- usually lower-income individuals with spotty credit histories -- rose to 28% in the second half of 2004, a sharp jump from the less than 5% of all lending that subprime represented back in 1994.
"I think there are going to be some blowups," says Bert Ely, a bank consultant based in Alexandria, Va. "These are people who are most vulnerable to job loss."
If the housing market swoons and homeowners get into trouble, the mortgage industry won't be far behind, many critics worry. "I'm very nervous about the risk of higher foreclosures down the road," says Stuart A. Feldstein, president of SMR Research Corp., a mortgage research firm in Hackettstown, N.J.
And on June 9, Federal Reserve Chairman Alan Greenspan revealed his unease when he warned Congress that "the apparent froth in housing markets may have spilled over into mortgage markets." He noted that the increasing use of interest-only and other "relatively exotic" mortgages are "of particular concern."
TOUTING SAFEGUARDS.
Lenders insist that worries about their standards are overblown. They maintain that, thanks to the advent of automated underwriting during the 1990s, their ability to analyze statistical trends in lending is far better than before, enabling them to better price loans according to risk.
"Underwriting is still more of an art than a science, but we're making it far more of a science," says Joe Anderson, a senior managing director at Countrywide Financial Corp. (NYSE:CFC - News), a Calabasas (Calif.) mortgage lender.
And lenders note that they've instituted more safeguards since the last housing boom in the 1980s, such as requiring that borrowers have several months of liquid assets to assure that they can keep paying their mortgages in the event of a job loss. "On a scale of 1 to 10 -- with 10 being the worst-case scenario -- my concern level is only around a 2 right now," says D.C. Aiken, senior vice-president for pricing and products at HomeBanc Mortgage Corp. (NYSE:HMB - News), a large lender in Atlanta.
Still, regulators are redoubling their efforts to make sure the banks are right. The Federal Reserve and other bank regulators recently ordered lenders making home-equity loans and lines of credit to do a more in-depth analysis of borrowers' income and debt levels and their ability to repay loans -- instead of relying heavily on credit scores, as many lenders have been doing. And regulators say they're busily drafting similar guidelines for mortgage lending as well.
DEPENDENT ON A ROSY SCRIPT.
State regulators are also starting to rein in hyper-aggressive lenders. In Illinois, legislators passed a bill that would give a state agency the power to review mortgage applications in lower-income areas to determine whether borrowers should be required to attend loan counseling -- paid for by the loan originator -- before receiving the loan. That, lawmakers figure, will discourage brokers from extending loans to high-risk borrowers who have a high probability of ending up in foreclosure.
Of course, Nicki Randolph and many more like her who have used lenders' aggressive mortgage offers to expand their fledgling real estate empires aren't normally thought of as high-risk borrowers. But if interest rates and housing prices don't follow the rosy script that Randolph and so many others are banking on, a whole lot of homeowners could be caught in a painful trap.
If only we knew then what we know now. I'm sure we still wouldn't have believed it.
If you have any comments on this article, I would love to hear what you have to say!
Feel free to comment below.
Thanks for reading!
Dan Tenchall
Great Lakes Mortgage Funding
For FREE Mortgage tips, Mortgage Calculators,must have articles and much more please visit my website!
Michigan Mortgage Rates
(586) 532-0600
dan@glmf.com
The Mortgage Trap
By Dean Foust, with Peter Coy in New York, Sarah Lacy in San Mateo, Rishi Chhatwal in Atlanta, and bureau reportsBusinessWeek Online
Lenders are cranking out an ever-growing array of financing schemes and lowering standards to keep the housing boom going
Nicki Randolph, a San Francisco real estate agent, hasn't been scared off by talk of a housing bubble. Although she already owns both a home and a condo in Palm Springs, Calif., Randolph just closed on a third property -- dropping more than $1 million on a 1,400-square-foot loft in the heart of San Francisco. How does she juggle so many properties in the overheated California market? Lots of leverage, thanks to banks all too willing to provide ever more.
To finance her loft purchase, Randolph took out a mortgage that lets her pay only interest for the first five years -- a tactic that helps her ease into the hefty monthly payments. "Fears that the market is going to crash are way overstated," she says confidently. "It's a seven-mile-by-seven-mile city and a premier place people want to live. You have to be more aggressive here because the prices are so high."
PRESSURE KEEPS BUILDING.
Randolph's story is a familiar one -- and it shows the lengths to which buyers are willing to go to snatch up real estate as well as the extremes lenders will stretch to accommodate them. As prices continue to skyrocket in much of the country, banks and lenders are cranking out an ever-growing array of products ranging from no-money-down or interest-only mortgages, to special "Payment Power" loans that allow homeowners to defer monthly payments altogether twice a year.
Such creative financing is letting even marginal buyers purchase houses with price tags that used to appeal only to the rich and famous. In the process, banks and mortgage companies appear to be taking on more risk than ever before -- and if rates rise sharply or prices tumble, many of their customers could find themselves in deep trouble, too.
All those innovative mortgage products are a sure sign that lenders are doing everything they can to keep the housing boom going and to capitalize on yet another round of falling interest rates that no one expected. There are plenty of other signs of frenzy as well. Home appraisers complain that mortgage originators are demanding the optimistic appraisals needed to close on loans. "They started warning me to 'be a team player' and to 'hit the number' they needed to seal the deal," says Robert Burnitt, an appraiser in Midlothian, Tex.
SUPPORTING A STRETCH.
Enticed by juicy commissions from all those deals, others are jumping into the mortgage biz. Among them are John Switzer, an 18-year-old high school grad from New Bern, N.C., who put off college so he could start work as a mortgage rep for Houston-based Franklin Bank Corp. (NasdaqNM:FBTX - News). "Right now, mortgages are a little more interesting" than college studies, he says.
Yet nothing screams "frenzy" louder than the huge popularity of innovative -- and risky -- mortgage products that allow buyers to stretch for those million-dollar studios and multimillion-dollar suburban colonials. With interest-only mortgages now offered by everyone from ditech.com to Washington Mutual (NYSE:WM - News), such loans now account for 20% of all new mortgages, up from under 5% two years ago.
Option adjustable-rate mortgages, or "option ARMs," have also become all the rage in superheated markets such as California and Washington, D.C. With an option ARM, borrowers can choose among three different payment plans each month, continually changing what they fork over as their budgets shift. The options: a regular payment of both principal and interest, just the interest, or one that may not even cover the interest -- so the overall balance owed on the mortgage could continue to grow.
TREND TOWARD RISK.
The question is, will the proliferation of interest-only and option ARM mortgages leave many buyers strapped down the road, causing higher default rates? David Liu, a mortgage strategist for UBS in New York, notes that after similar products were introduced in the red-hot California market in the late 1980s, they ultimately incurred a default rate that was three times as high as conventional mortgages when the local economy went into recession in the early '90s.
Already there are signs that current option ARM borrowers are straining to make their monthly payment: Liu notes that among a bundle of mortgages originated by Washington Mutual and scrutinized into the secondary market last year, fully 60% of borrowers made only the minimum payment this past March. "That's definitely a sign that people are stretching,"says Liu.
There's plenty of other evidence suggesting that homebuyers and their lenders are climbing out on a limb. According to a survey of homebuyers released last November by the National Association of Realtors, 25% of those polled were able to get a mortgage with no money down, vs. 18% in early 2003 and virtually none in the late 1990s -- a trend that could leave many of these new homeowners under water if home prices take even a small dip.
"FROTH" SPILLS OVER.
At the same time, lenders are extending far more loans to borrowers who have had credit problems in the past. According to the Mortgage Bankers Assn., the share of new loans made to so-called subprime borrowers -- usually lower-income individuals with spotty credit histories -- rose to 28% in the second half of 2004, a sharp jump from the less than 5% of all lending that subprime represented back in 1994.
"I think there are going to be some blowups," says Bert Ely, a bank consultant based in Alexandria, Va. "These are people who are most vulnerable to job loss."
If the housing market swoons and homeowners get into trouble, the mortgage industry won't be far behind, many critics worry. "I'm very nervous about the risk of higher foreclosures down the road," says Stuart A. Feldstein, president of SMR Research Corp., a mortgage research firm in Hackettstown, N.J.
And on June 9, Federal Reserve Chairman Alan Greenspan revealed his unease when he warned Congress that "the apparent froth in housing markets may have spilled over into mortgage markets." He noted that the increasing use of interest-only and other "relatively exotic" mortgages are "of particular concern."
TOUTING SAFEGUARDS.
Lenders insist that worries about their standards are overblown. They maintain that, thanks to the advent of automated underwriting during the 1990s, their ability to analyze statistical trends in lending is far better than before, enabling them to better price loans according to risk.
"Underwriting is still more of an art than a science, but we're making it far more of a science," says Joe Anderson, a senior managing director at Countrywide Financial Corp. (NYSE:CFC - News), a Calabasas (Calif.) mortgage lender.
And lenders note that they've instituted more safeguards since the last housing boom in the 1980s, such as requiring that borrowers have several months of liquid assets to assure that they can keep paying their mortgages in the event of a job loss. "On a scale of 1 to 10 -- with 10 being the worst-case scenario -- my concern level is only around a 2 right now," says D.C. Aiken, senior vice-president for pricing and products at HomeBanc Mortgage Corp. (NYSE:HMB - News), a large lender in Atlanta.
Still, regulators are redoubling their efforts to make sure the banks are right. The Federal Reserve and other bank regulators recently ordered lenders making home-equity loans and lines of credit to do a more in-depth analysis of borrowers' income and debt levels and their ability to repay loans -- instead of relying heavily on credit scores, as many lenders have been doing. And regulators say they're busily drafting similar guidelines for mortgage lending as well.
DEPENDENT ON A ROSY SCRIPT.
State regulators are also starting to rein in hyper-aggressive lenders. In Illinois, legislators passed a bill that would give a state agency the power to review mortgage applications in lower-income areas to determine whether borrowers should be required to attend loan counseling -- paid for by the loan originator -- before receiving the loan. That, lawmakers figure, will discourage brokers from extending loans to high-risk borrowers who have a high probability of ending up in foreclosure.
Of course, Nicki Randolph and many more like her who have used lenders' aggressive mortgage offers to expand their fledgling real estate empires aren't normally thought of as high-risk borrowers. But if interest rates and housing prices don't follow the rosy script that Randolph and so many others are banking on, a whole lot of homeowners could be caught in a painful trap.
If only we knew then what we know now. I'm sure we still wouldn't have believed it.
If you have any comments on this article, I would love to hear what you have to say!
Feel free to comment below.
Thanks for reading!
Dan Tenchall
Great Lakes Mortgage Funding
For FREE Mortgage tips, Mortgage Calculators,must have articles and much more please visit my website!
Michigan Mortgage Rates
(586) 532-0600
dan@glmf.com
Subscribe to:
Posts (Atom)