Thank you, Kristina Mastrocola, writer, for the interview.
In case you can’t read the article here, it is on page 26, the August 22 issue, which is on newsstands now.
I hope these tips will help people understand that they can take control of their credit and create the score they desire. There is no need to be a victim when it comes to your credit profile.
What’s more, you are not required to have perfect credit in order to get a home loan. Recently, I helped a first-time home owner who had six open collection accounts close on a charming three-bedroom, ranch style home–and she did not have to pay off the petty collections (total under $2,000) in order to do so.
As always, thank you for subscribing to my blog. If you have a topic on mortgage, home buying, or credit that you’d like to see, please email me here.
FHA – Federal Housing Administration
(Often referred to as a first-time home buyer’s loan; although, you needn’t be a first time buyer to get it.)
580 to 620 (depending on the lender and other credit factors)
(Program designed for first-time buyers with average or below incomes.)
Conventional 3% down
VA – Veterans Administration
500 to 620 (depending on the lender and other credit factors)
USDA – U.S. Dept. of Agriculture
640 (most lenders)
No score required with sufficient down payment (Usually 30% to 40% down payment required. Interest rates from 8% to 12%.)
IMPORTANT TO KNOW
- Lenders use your mortgage credit score, not the consumer credit score you get from a free site.
- Lenders use the middle score of three. Scores are not averaged together.
- When there are two or more people on the loan, the score of the person with the lowest score is used.
- Credit score is only one factor in credit qualification. Other factors are public records (such as foreclosure, bankruptcy, judgements, liens), last 12 months’ pay history, etc.
BUY NOW OR WAIT FOR A HIGHER CREDIT SCORE?
Is it better to buy a home with a low score and higher interest rate, or does it make sense to wait until your credit has improved?
That depends, but in general, if you can raise your score in three
months, it is better to wait and take the lower interest rate. On the other hand, if it is going to take a year or longer to raise your score and if house pricing are rising in your neighborhood, then I would buy the house now and refinance in a year or two. That way, you can build wealth in equity while your credit is improving. Most people cannot save money as fast as prices are going up. That said, it is an individual situation that you should discuss with your loan officer.
Earlier this week while checking out at the supermarket, the clerk asked me, “Would you like to save 10% today by opening our store credit card?”
“No thank you. I have enough credit cards,” I replied.
How many credit cards is enough? At what point does having too much credit hurt your score and dock points?
If you plan to apply for a home or auto loan in the near future, these are very important questions, because credit cards play a major role in determining your score. And your score dictates whether or not you qualify for the best loan at the best interest rate.
Too Much Credit Lowers Your Credit Score
“I have 17 relationships,” said a woman who wanted to buy a home. I had asked about her credit and was dismayed to learn how over-extended she was. Not only did she carry too much debt, but her abundance of credit cards put her in a below-average credit rating.
There are two ways having too much credit harms your score:
- If your balance-to-limit ratio is even one dollar over 50 percent, you are losing credit points. If your balance is 80 percent or higher, you are losing even more points. On the other hand, if your balance is below 30 percent of the limit, you gain points.
- If you have too many open accounts, your score might suffer, because you have the potential to bury yourself in debt — especially if some of the accounts are newly opened. On the other hand, if you have had ten open accounts for ten years and you have managed them perfectly, then you can still have a top score.
Three open credit cards is good. Three is enough. You want at least two of those three to be a major card, such as Visa, MasterCard, or Discover. Individual store cards such as Target and Macy’s are not major cards; therefore, they are not weighted as heavily. When you have two major credit cards, you don’t need a wallet full of individual store cards.
If you have maintained perfect credit for over three years with five to ten cards, you should be fine. Do not close your longstanding major credit cards, because they are giving you valuable credit score points. On the other hand, if you have 17 “relationships,” close some of those store cards, and ask for it to be reported as “closed by consumer request.”
Too Little Credit is Bad for Getting a Mortgage
Whether you want to borrow half of a million dollars or less than a hundred thousand dollars, mortgage lenders want to see that you have a track record of managing credit. One credit card is not enough to establish a strong credit pattern.
FHA wants at least two credit accounts to obtain a mortgage. Conventional loans (the preferred loan) wants at least three credit accounts. These accounts need to be established for at least six months in order to count toward your score.
Debit cards do not establish credit or go on your credit report. Therefore, a debit card does not give you credit score points.
Get Smart About Your Credit!
Don’t be in the dark about your personal credit rating. Learn the rules so you can control your own credit score. If you have made mistakes in the past, you can start today in establishing perfect credit for your future. If your credit report contains errors, take action now and get it cleared up. Don’t procrastinate, because the credit bureaus have 30 days to investigate and respond to your request. And if they don’t get it right the first time, you might have to send a second letter.
Don’t make the colossal error of ordering your credit online. Write that down and remember it. You give up important rights when you order online. Attorneys and certified credit repair specialists do not order online, and neither must you.
Your credit score is vitally important. Not only does it dictate whether or not you can buy a home of your own, it also influences your auto insurance premium, your fire insurance premium, auto financing, and more.
Listen Up! Credit cards are not your friends. Do not collect them like you’re collecting buddies. Credit cards are like razor sharp tools that have the ability to help or hurt.
There is much more to be said about credit, and I will continue to write posts. In the meantime, please help me educate good folks by posting to Facebook, Twitter, and passing on the website address http://www.AskCarolynWarren.com.
Thank you and use credit wisely!
I checked my credit score today using the free site, Credit Sesame. More about what that means in a moment. But first, I was pleased–but not surprised–to see that my score today is 815. Here is how I earned the coveted score of over 800.
Payment History = 35% of the credit score
I have zero late payments on my report. (It wasn’t always that way. More about that later.)
Credit Utilization = 30% of the credit score
If your credit cards are maxed out, you get docked a lot of points, even if all payments are made on time. If your credit cards are over 50 percent of the limit, you get docked points. My credit utilization is only 6%; so because it is under 10 percent, I gain points.
Age of Credit History = 15% of the credit score
My oldest active account is 18 years, 1 month old. If I close that account, I will lose points, so I don’t want to do that.
My newest account is 8 months old, because I opened a credit card within the last year. Once an account is open for six months, it is considered old enough to be included in your credit rating. Also, at 8 months, it has aged enough that it is no longer docking me points for “unknown usage,” meaning they don’t know if I will max it out or pay on time when first opened. This is why you don’t want to open a new account right before applying for an auto loan or mortgage.
Account Mix = 10% of the credit score
The credit bureaus prefer a mix of credit cards, installment loan (such as auto or student loan), and mortgage loan. However, you can still get a score of over 800 without a mix; as is my own case. I have five open credit accounts.
Credit Inquiries = 10% of the credit score
I have zero inquires in the past 12 months, according to Credit Sesame. That seems odd since I opened a credit card just eight months ago. Either Credit Sesame is incorrect or the card didn’t result in a hard credit inquiry. I will have to look into that.
Is Credit Sesame Accurate?
Credit Sesame provides one score obtained from the Experian National Credit Equivalency, which means it is one bureau’s consumer credit score. The consumer score is more lenient than the mortgage score, because it is less risky to give someone a credit card than it is to give them a mortgage. The score from Credit Sesame varies from the actual Experian score by an average of 33 points, according to a study conducted by Doctor of Credit.
Using Credit Sesame is free, gives a good ballpark estimate of your score from one of the three bureaus, and will not hurt your score or show as an inquiry on your credit report.
If You Need to Repair Your Credit (Like I Did)
There was a time when I did not have an 800 score. I unknowingly made some mistakes, including letting a department store credit card payment slide for a month. On top of that, someone else’s late auto payment was showing up on my report. When I purchased my first home as a young, single woman, I had to take an FHA loan, because my score didn’t qualify for a conventional loan.
I took charge of my situation and raced to the top of the chart. You can do the same!
Certified credit repair specialists and experienced attorneys are one way to go. But if you don’t mind taking the time to do the work yourself, you can save $500 to $2,000 in professional fees. Instructions on how the professionals restore your credit and good name are in my book, which is getting great reader reviews on Amazon, and many more emails to me from folks who don’t post reviews. Feel free to check it out here.
Here are four things you should know about how credit cards affect your FICO score:
1) If you carry a balance that is over 50 percent of the limit, you will lose credit points.
To remedy, either call your creditor and ask to have the limit raised, or spread out your spending over an additional card. I am assuming, of course, that you are not overspending for your income and budget. That is another topic altogether!
2) If you pay off your balance in full each month, you will be rewarded with additional credit points.
The credit system recognizes the proper use of credit and adds points to your FICO score when you don’t carry a balance from month-to-month. Moreover, you don’t waste your money paying interest that is non-tax deductible.
3) If your total use of credit is below 50 percent of your total available credit, you will gain points.*
Not only does the system look at your individual credit card balance-to-limit ratio, but it also looks at the total of all your available credit cards. So if you are maxing out all your cards, your score will receive a double whammy in point subtraction.
4) Any payment that is 30 days late will dock your score. If you’re 60 days late, it gets worse, and ditto for 90 days.
If you are 31 days late for the first time and call your creditor immediately, they might give you grace and not report you as late, especially if you are a long-time, perfect-paying customer.
If your one-off late payment has already reported, then you should take steps to get that removed from your credit report. The law gives you the right to dispute the late payment, and many creditors are happy to remove the late payment when you send the right type of letter through the good old-fashioned USPS mail system. Why? Because it is a good business practice for them, and it is within their legal right to do so. As the creditor, they own your credit information.
When you understand how the system works, you are in control of your own credit score.
* If you reduce the 50% credit usage to 30%, you gain even more points.
Having a score of 740+ puts you in the top tier for a conventional mortgage loan. If your score is 800 or higher, you gain respect, bragging rights, and may qualify for slightly better terms, depending on the lender and loan program.
Learn what the credit professionals know that you don’t about restoring credit and your good name. I received an email from a gentleman who read this book and has been following the steps for do-it-yourself credit repair. “Three negative accounts gone, three to go,” he wrote. Yes, credit repair does work when it is done properly.
Unless you’re as cute as a cat or have just won the lottery and plan to pay cash for everything for the rest of your life, you need excellent credit and a high FICO score in order to obtain the best financing, the cheapest insurance premiums, and save money.
By boosting your credit score to top tier, you will qualify for more money at the lowest possible rate and with the best terms.
Take control of your own credit rating. Don’t believe the old line, you just have to wait for time to pass, because that is not true. Others have taken control of their credit and raised their scores–and if they can do it, so can you.
You Have Two Choices
To restore your credit and good name, you have two choices. You can hire a professional service, or you can do it yourself.
If you choose to hire a professional service, you want only the best. Personally, I would avoid those law firms that specialize in credit, because the truth is that they set you up with data entry clerks that do nothing special, certainly nothing you couldn’t do yourself for a fraction of the cost. The law firm is merely the image for marketing purposes. In reality, you get better service and better results going with a certified credit specialist.
In addition, I would avoid services that set you up on a monthly fee, because it is to their advantage to work slowly, drawing out the process over as many months as they can in order to collect more monthly fees. If you would like my professional recommendation for two top credit repair services, shoot me an email here.
If you don’t mind taking the time to do your own credit restoration work, you can save yourself the cost. But in order to avoid spinning your wheels sending out letters that will get rejected, you need to follow the same steps that the top certified credit specialists use.
In addition, take care to read the directions first, so that you avoid making mistakes that cannot be undone. For example, none of the effective credit repair specialists order their clients’ credit reports online, and neither should you, because doing so will shoot yourself in the foot–meaning cripple your ability to get derogatory items deleted before seven long years.
When people claim that derogatory credit cannot be deleted and that credit repair doesn’t work, it is because they are going about it the WRONG WAY!
All of the information you need to repair your credit is in my brand new, updated book, now available on Amazon at a low introductory price. Please see here for details, and please pass on this information to other good folks who want to improve their credit in 2015, so that they can make their financing dreams come true.
If you don’t have perfect credit, if you’ve had a delinquency in the past, and if your score is below “A credit,” then new lower credit score requirements by some lenders might be just the luck you need to buy a house.
The executives at the Fair Isaac Corporation have the results in from new research on credit scores and lending risk. It shows that borrowers with a credit score down to 600 should be an acceptable risk to mortgage lenders. Interestingly, this is a change from previous statistics; and the reason for the change is that consumer spending habits evolve over time.
Credit scores range from about 300 to 850. In the early 2000s, people with a scores of 640 to 680 defaulted on their loans more often than expected. As a result, many lenders raised their credit score requirement for a conventional loan up to 720 or 740. But now things have changed.
Current studies show that consumers with scores in the low to mid 600s are paying their mortgages on time more often than before. So the risk to lend to these good folks has gone down.
One thing you should know about the mortgage industry is that lenders watch what’s going on with other lenders. They watch their underwriting rules and their profitability. When they see a lender making more money, they copy what that lender is doing. (Isn’t that the way it is with most businesses?)
So now that mortgage giant Wells Fargo has lowered their credit score requirements, we can expect other lenders to jump on board the leniency train when they see Wells Fargo raking in significantly more business — business that proves profitable.
Not only that, but small lenders and brokers who have a correspondent lending relationship with Wells Fargo can also get folks with lower credit scores approved now. (Or, you can go directly to Wells Fargo.)
I am excited about Wells Fargo’s announcement that they will approve a conventional loan for a borrower with a 620 score. That is a full 100 points lower than many lenders! And for FHA (the 3.5% down payment loan), they’ll go down to a 600 score.
Don’t mistake this for sub-prime lending. Back in the days of easy money, sub-prime lenders were going down into the 500 score range, even for no money down. I don’t see that extreme leniency coming back.
Please feel free to share this with others who might find this news interesting or helpful. Comments are welcome. (You’ll see the comment click at the top of this post.) Thank you for stopping by.
Heads up! Lenders are jacking up the interest rate or raising points–even after it is locked in. If you have a loan in progress, you need to know what’s going on so you can prevent it happening to you.
Today I received this email from T. Smith:
“I have a GFE (Good Faith Estimate) dated 13 September. Trying to close this week and they say our credit report has expired and want to increase the cost of our points. Is that legal?”
Yes, credit reports have a limited life; but moreover, a lender has the right to re-pull a credit report at any time, regardless of the date of the original report. Now more than ever before, lenders are re-pulling credit right at the end of the process in order to make sure no new negative information has popped. “Negative information” could include a new line of credit or an increase to a credit card balance.
If you purchased a car, opened a new line of credit for appliances or furniture for your new home, opened a new credit card, or increased the balance-to-limit ratio on a current card, then any one of those things could easily lower your credit score. And a lower score could place you smack dab in the middle of a higher risk category as a borrower.
Additionally, a new late payment would lower your score.
If a lender discovers that a borrower has a lower score than what they were previously approved at, then yes, they do have the right to raise your interest rate or increase your points in order to compensate for the higher risk they perceive you to be. (Increasing points is another way of charging more in interest. Points are interest paid up front in the form of a fee.)
This is why I have been warning people not to make any changes whatsoever–and not to purchase anything on credit at all–during the loan process. Patience is the name of the game while you have a loan in process. There will be plenty of time to shop after your new mortgage is funded and closed.
If you know someone who is refinancing or buying a house, please pass on this timely warning to them.
Like David winning against Goliath, Julie Miller of Oregon won $18.6 million in a lawsuit against the giant credit bureau Equifax.
Julie tried eight times to get the credit company to fix inaccurate, derogatory information from 2009 to 2011, but the bureau was unresponsive. According to the Fair Credit Reporting Act, it is illegal to report negative information that is untrue.
Equifax reported collection accounts that were false, the wrong social security number, and the wrote birthdate. Thanks to this bad information and resulting poor score, she was unable to get a loan she needed to care for her disabled brother.
Finally, she filed lawsuit for “damage to her reputation, a breach of her privacy, and lost opportunity to seek credit.” She won $18.6 million, an amount sufficient to turn her life around.
Tragically, Miller is not alone. As many as 21 percent of citizens have at least one error on their credit report, according to a recent study by the Federal Trade Commission. Moreover, five percent of these errors are significant enough to cause people to be denied the credit they deserve.
It is your legal right to receive one free credit report per year to check for credit inaccuracies. The only website I recommend for ordering your credit report is the one owned by the credit bureaus: www.annualcreditreport.com. Ordering your report from any other site is likely to give you an inaccurate score, possibly incomplete information, and thus would be a waste of your time and energy.
For more information about doing your own credit restoration or getting a derogatory, inaccurate account removed see here. The information is still current now in 2013.
Q: “Can keeping my credit cards at a zero balance hurt my score? My score seems to fluctuate with no real changes to my profile.”
A: There are several elements that go into answering your question, Kenya.
First, it does not hurt your credit score to pay off your balance in full every month. It would be unfair to force people to carry a balance from month-to-month and waste money on interest in order to get the best score. The proper use of credit is paying off the balance every month.
However, if you do not use a credit card for more than six months, you will not receive any points for that card. So technically, not using a card doesn’t give a negative hit to your score like a late payment does, but you won’t receive a reward for using that card either. Therefore, for max. credit points, you want to use the card every once in a while. Buying something you’d buy anyway–such as toothpaste and a tank of gas–is sufficient. Having a small balance-to-limit ratio is best for maximum points.
The most common reason for seeing a fluctuation in scores for no apparent reason is using a credit monitoring service. This is because those services are not using the actual scoring algorithm used by the credit bureaus for mortgage lenders. While those scores might be somewhat helpful, they are not to be relied on. In the mortgage business, we don’t consider them to be your real scores.
I doubt that you are having your credit report pulled by a mortgage company every few months; and if you were, I would tell you to stop doing that as it is harmful to your credit.
The bottom line is that you should take those scores with a grain of salt. When your mortgage lender pulls your credit report, your actual scores will be different anyway.
For people who need to restore or repair their credit, take a look here. The information is as relevant today as it was in 2010.