Improve Your Credit

Why Your Credit Score Matters

Tue, 11 Mar 2008 10:00:00 EST

Why Your Credit Score Matters Your credit score impacts all areas of your financial life. Here's what you need to know about it.

Your credit score is a calculation used by lenders, insurers, utility companies, landlords and sometimes even employers to evaluate your financial responsibility. Their main interest: how likely are you to pay what you owe?

A higher score saves you money
Credit scores range from 300 to 850. The higher your score, the less risk you represent to a lender, and the lower an interest rate they can give you on a loan. The lower your interest rate, the more you save.

Take this example from www.MyFICO.com. A person with a score between 760 and 850 might pay a rate of 5.840 percent for a $300,000 30-year fixed rate mortgage (as of 3/5/08) with a monthly payment of $1,798. A person with a score of 580 to 619 might pay an interest rate of 9.205 percent and a monthly payment of $2,458. The person with the lower score would therefore pay $7,920 more a year for the same mortgage.

A low score can restrict your options.
It's a painful fact that the worse your credit the fewer options available to you to improve your financial situation. Bad credit can prevent you from refinancing your high payment mortgage, or from obtaining a loan for a car, or from transferring high credit card balances to lower interest rate cards. You may have difficulty finding a landlord who is willing to rent to you without a co-signer or a high security deposit; utility companies may be reluctant to hook up your service.

How to keep your score high, or improve it.
The bad news is bad financial decisions can stay on your report for years. The good news is you can start improving your score right now. The first step is to check your credit report for errors. (You can get a free report from www.annualcreditreport.com. You'll have to pay a fee to get your actual score.) Then be sure to make all your payments on time, no matter what. Keep your credit cards open, but don't max them out. In fact, to avoid temptation, you may want to hide your cards in a drawer or a safe. If you have high balances, or are close to your credit limits, make paying them down your first priority.

Understanding Your Credit Score

Fri, 18 Jan 2008 10:00:00 EST

Understanding Your Credit Score Your credit score is a crucial factor when lenders evaluate your loan application. Learn what your credit score means and what goes into it.

Your credit score is a crucial factor when lenders evaluate your loan application. Learn what your credit score means and what goes into it.

What is a credit score?
Your credit score is a number that lenders use to predict how risky it is to lend you money. Sometimes called a FICO® score (which stands for Fair Isaac Corporation, the company that developed the formula) the score is used to determine your credit risk. The higher the score the lower your risk - and the better a loan candidate you're seen as.

How is it calculated?
A credit score is obtained from information on your credit report. There are a lot of variables that go into calculating your score (depending on the lender and the length of your credit history for instance), but generally speaking the components that go into your score are:

1. How well you pay your bills. This represents about 35% of your score and includes your account payment history on accounts like credit cards, installment loans, mortgages, etc. It also includes the number of past due payments and total amount past due for each account, how long any accounts have been past due, how long since the last late payment, any bankruptcies or collection items and how old they are, and the number of accounts that you've paid as agreed.

2. How much you owe and how much available credit you have. About 30% of your score, this component includes the number of accounts with outstanding balances and calculates that amount as a proportion of your total available credit. Being very close to your credit limits is seen as a red flag.

3. Length of your credit history. About 15 percent of your score, this component lists the time since each account was opened and how long since the last activity on the account. The longer your credit history the better.

4. How much new credit you've applied for. About 10 percent of your score, this component looks at recently opened accounts and if you've applied for multiple types of credit in a short period of time. Periodically applying for new credit is fine, as is shopping around for a single loan. But if there are multiple inquires on your account for many new credit lines, than it can be a red flag.

What does Subprime Mean?

Tue, 4 Dec 2007 17:09:00 EST

What does Subprime Mean? A definition of the term subprime.

How do I know if I'm a subprime borrower? Every lender defines subprime a little differently, but generally speaking, if your credit score is lower than 660, you may be considered subprime.

What causes my score to be low? The subprime distinction has very little to do with wealth or income and everything to do with credit history. There are many factors that go into calculating your credit score: number of credit lines, length of time open, amount of available credit and how much of it you use. And any of the following in the last few years will have a major negative impact:

Two or more 30-day late payments in the last year
A foreclosure
A bankruptcy

What does being subprime mean to me? If your credit score falls into subprime territory, you may still be able to get a loan, but you may pay quite a bit more than consumers with better credit. Think about whether or not it makes sense to wait to apply for a loan until you've improved your credit (a score of 700 is a good goal). It could be worth the wait.

What else makes a good loan candidate? Your credit score is a major factor in getting a home loan, but not the only one. If you have a score of 700 or higher, if you can put at least 10 percent down and if you can document your income, you improve your chances of being considered a good loan candidate.

Refinancing With a Low Credit Score

Tue, 28 Aug 2007 16:00:00 EST

Refinancing With a Low Credit Score Borrowers with lower credit scores often pay higher interest rates. Before you jump into refinancing, consider your options carefully.

Borrowers with lower credit scores often pay higher interest rates, so consider the options carefully before you decide to refinance.

First, consider why you want to refinance
Are you trying to lower your monthly payment? Or, do you have equity in your home and are interested in a cash-out refinance in order to consolidate debt?

Refinancing to lower your payment
This may be difficult with a low credit score. Usually what drives a lower payment is a lower interest rate, and typically the lowest interest rates are given to those with the best credit.

You may still be able to lower your payment by lengthening the term of the loan (from 30 to 40 years, for instance).

Paying more interest in the long term may not make sense financially, especially considering the up-front costs of refinancing.

Before you decide to refinance, take a good look at your budget and monthly expenditures and see where else you can save.

Cash-out refinancing to pay off debt
You may still pay a higher interest rate than customers with better credit, but cash-out refinancing may be a smart start to repairing your credit.

Use cash from your home to pay off creditors and decrease your total monthly debt payment.

A lower total monthly debt payment may help you avoid late payments which can ding your credit rating.

Commit to making your new mortgage payment on time, every time. The stakes are higher now - if you fail to make your house payments, you could lose your home.

Make sure you cut your spending - and don't rack up more charges on your credit cards. Remember, if you get in over your head and can't afford your mortgage payments, your home could be on the line.

Crunch the numbers
Use the GetSmart refinance calculators to see what refinancing will really save you. And since you know your credit score is low, over-estimate when you enter the interest rates - this will help give you a realistic picture of your situation.

Raise your score
It's never too soon to kick bad financial habits like over-spending. Create a budget and stick to it. Make more than the minimum payments on your credit cards and make those payments on time. If you have a lot of debt, see our GetSmart article on how to get out of debt.

A Credit Score Primer

Thu, 2 Aug 2007 10:00:11 EST

A Credit Score Primer A borrower's credit score is one of the most important factors a lender considers when determining the interest rate they'll offer.

A borrower's credit score is one of the most important factors a lender considers when determining the interest rate they'll offer. These scores represent an overall valuation of how a specific consumer handles credit and helps a lender determine the risk level associated with extending that consumer more credit.

Credit scores - often called FICO scores - are calculated using all the data from your credit report. The three main credit bureaus - Experian® Trans Union® and Equifax® - may not use the same credit scoring software, so your scores from these three bureaus may be different. Some lenders use one of these scores, while other lenders take the middle score.

Some of the credit report data that goes into analyzing a credit score are: the number of late payments, the length of time credit has been established, the amount of available credit, the amount of debt, and any negative credit issues such as bankruptcies and collections.

Generally speaking, your credit score is determined by a mix of these factors. Depending on your credit history, a certain factor may be more or less important than another. In addition, as your credit history changes with time, the relative importance of a factor may change too.

Credit scores normally range from 340 to 850. People with higher credit scores are thought to be better financial risks, and are often offered better interest rates. Due to the great number of loan products available, however, even if your credit score is low, you may still be able to obtain a mortgage loan.

If a consumer's credit score is low, there are steps they can take to prepare for future loan requests. By making timely bill payments, not applying for credit too frequently, and reducing their credit card balances, a consumer may see an improvement in their score over time.

Since credit scores are directly linked to the information on a consumer's credit report, it's important to review these reports for errors. To obtain a copy of a report, a consumer should contact the individual credit bureaus (Experian®, Equifax® and Trans Union®) directly. You can find contact information for these companies by visiting their Web sites at:

Experian: www.experian.com
Equifax: www.equifax.com
Trans Union: www.transunion.com

GetSmart® offers a TrueCredit® service for consumers who wish to obtain copies of their credit reports and credit scores from all three credit bureaus. Learn more by visiting:

http://www.getsmart.com/creditreports.asp

For a fee, consumers may also obtain a copy of their FICO score by visiting www.myfico.com. FICO stands for Fair Isaac Corporation, the company that invented the credit risk score that many lenders use.