New Credit Accounts for 10% of Your Total Credit Score

With Halloween behind us, retailers are in the Holiday Spirit. Businesses know that consumers spent a median $556 on holiday gifts last year and they want this year to be just as strong.

That’s why it’s barely November and, already, Black Friday ads clog our mailboxes and the airwaves. Retailers want our dollars and they’re offering great deals to early shoppers.

There’s one discount a smart shopper should think twice, however — the ever-present ”Open A Charge Card Today And Save 15%” promotion. In the short-term, deals like this will save money.

Over the long-term, however, opening a charge card could cost you much, much more — especially if you plan to refinance your home or buy a new one.

Applying for a charge card can lower your credit score up to 85 points.

According to the myFICO.com website, as a category, “New Credit” accounts for 10% of your 850 possible credit points, comprising the following credit traits :

• Your number of recently opened accounts
• Your number of recent credit inquiries
• Time elapsed since your recent credit inquiries
• Your proportion of new accounts to all accounts

High Credit Scores are Worth Protecting

Each trait is a negative in the FICO-scoring credit algorithm which means that, with each in-store charge card application, your credit score is likely to fall. How far your score will fall depends on the rest of your credit profile.

Meanwhile, low FICO scores correlate to higher loan fees.

Using a real-life example, assuming 20% equity in a home, for either purchase or refinance, look how loan fees for a $200,000 conforming mortgage change by FICO score :

• 740 FICO : There will be no added loan costs
• 720 FICO : You’ll have a 0.250% increase in loan costs, or $500
• 700 FICO : You’ll have a 0.750% increase in loan costs, or $1,500
• 680 FICO : You’ll have a 1.500% increase in loan costs, or $3,000
• 660 FICO : You’ll have a 2.500% increase in loan costs, or $5,000

You can see first-hand how expensive low credit score can be — much more costly than the 15% saved at the mall. That’s why people planning to refinance to today’s low rates and soon-to-be Ankeny homeowners, shouldn’t rush to save 15% at the register.

SURPRISE!!! Be Aware of How Credit Scores Work!

Black Friday is just a couple of days away. It’s the official start of the 2010 Holiday Shopping Season.  I used to be in the retail world as a young lad and the idea of people rushing through the doors makes me glad I’m in the (much more fun) mortgage business!

This year in the retail world, sales are expected to top $111 billion and, already, businesses are vying for shoppers and their dollars. Newspaper circulars are getting larger, and in-store discounting is more common.

But one discount that shoppers should think twice about is the popular “Open A Charge Card, Save 20%” promotion. The short-term savings may be tempting, but the long-term costs may be huge.  Seriously, they could be.

According to myFICO.com, “new credit” accounts for 85 out of 850 possible credit scoring points, with new credit defined by such traits as:

• Number of recently opened accounts
• Number of recent credit inquiries
• Time since recent credit inquiries
• Proportion of new accounts to all accounts

These traits are negatives against a FICO score so with each new, in-store credit card application, a person’s credit score will fall. The fall will be especially pronounced for persons lacking credit “depth”, or who have made a disproportionately large number of new credit applications recently.

Your Credit Score is Vital

For soon-to-be homeowners, or would-be refinancers in Ankeny, credit scores are worth keeping high. This is because credit scores change the mortgage rates and/or loan fees for which an applicant is eligible.

As an illustration, assuming 20% equity on a $200,000 conforming loan:

• 740 FICO : No added loan costs
• 720 FICO : 0.250% increase in loan costs, or $500
• 700 FICO : 0.750% increase in loan costs, or $1,500
• 680 FICO : 1.500% increase in loan costs, or $3,000
• 660 FICO : 2.500% increase in loan costs, or $5,000

It’s expensive to have a low credit score — more expensive than the money saved by opening a card at the mall, anyway.  Pretty interesting prospective, right?

With that said, if you know you won’t need your credit for a mortgage within the next 6 months, the risk of applying for in-store credit cards is likely small. But if you’ll need your FICO soon, consider paying for your gifts full price.  You’ll be really glad you did.

If you’re currently needing a loan or know someone that is, I’d be happy to help you crunch the numbers!  As it turns out, I am now in the mortgage business and not the retail world!

How Important is a Credit Score Anyway?

As mortgage lenders continue tightening approval standards in Iowa and nationwide, the importance of a good credit score is extremely high.  Credit scores not only make the difference between a mortgage approval and mortgage turn-down, but they also play a large role in determining your actual mortgage note rate.  Seriously, this advice could save you thousands of dollars over the life of your new loan.

In the 3-minute piece, the NBC Today Show talks about seven ways that homebuyers goof up their credit — sometimes on accident!  Some of the highlighted mistakes include:

• Closing open credit cards
• Making appliance buys on credit prior to closing
• Asking creditors to lower credit balances prior to closing

Generally speaking, a 740 FICO will insulate a borrower from the higher costs and/or interest rates associated with low credit scores.  Below 740, though, every 20 points adds to the fees and/or rate.  Watch this video and apply what you can to your own situation.  The more you know, the more you can save.

If you’re currently considering getting a loan, and wondering where your rate will fall, give us a call!  We’d love to help you out.  Give us a call at 515-257-6729 or email me.  I LOVE this stuff.

What Makes Up Your Credit Score?

Since 2007, mortgage lenders have clamped down in many areas of underwriting, but none more so than in the area of credit scoring.

Minimum FICO levels are up 120 points or more and conforming mortgage lenders now levy large fees on borrowers whose scores are below 740.

Keeping your credit scores high is a worthwhile goal, but it’s not always easy to do – especially when you don’t know the ins-and-out of how the credit scoring system works.

The Wall Street Journal wrote a terrific piece on credit scoring this week. It’s full of helpful, relevant tips for home buyers, homeowners, and everyone else.

Having Good Credit Will Save You Money

Aside from covering the five basic components of a credit score — shown at right – the piece provides insightful advice on credit-related topics including:

• The difference between a “hard inquiry” and a “soft inquiry”
• Why paying for your credit report is a foolish use of funds
• Why it doesn’t matter if you have an 800 FICO

The article also talks about the optimal balance a person should carry on their credit cards to get the biggest FICO boost.

Credit scores determine your mortgage rate.  Therefore, do what you can to keep your scores high. Follow the tips in the Wall Street Journal article and lean on public resources like myFICO.com.

Having good credit can be a real money-saver.  Month after month after month.

The Big Question

“Would You Like to Save 15 percent with today’s purchase? It will only take 60 seconds.”

Holiday shopping is now in season. Have you heard this phrase yet? More importantly, do you realize how these small store credit cards impact your credit score?

As a mortgage professional, I think about this all of the time. But let me share the dirty truth about this tricky little promotion. That 15 percent off of today’s purchase could cost you thousands of dollars in the future, and we’re not just talking about the 18 percent annual percentage rate they charge you. That’s just icing on the cake.

Your Credit Score

Your credit score is made up of five parts:

The decision to open up a store card impacts two of these categories directly, and will affect the other three in the future.

Immediate Impact

As soon as you open a store credit card, you are changing the “new credit” and “length of credit history.” That’s 25 percent of your credit score that you’re impacting with your 15 percent savings on TODAY’S PURCHASE. Effectively, you’re bringing down the average age of your accounts and looking like you’re hard up for credit – especially if you are applying for numerous credit card offers.

Do the math: Save 15 percent on today’s purchase for a 25 percent impact on your credit score. I wish I could tell you the exact impact your actual credit score, but since credit scoring is a ninja art, I cannot. What I can tell you is that it will likely impact you more than 20 points. That’s a lot.

When Your Bad Decision REALLY Hits Your Pocketbook

Let’s say you sign up for that credit card in the store to save the whopping 15 percent. Two months later, you decide you want to take advantage of this killer $7,500 tax credit that is available for first-time home buyers. Since your credit score fell, your interest rate on the mortgage is slightly higher (let’s say .25 percent). The $200,000 loan you’re getting now costs you $32 more each month. That might not seem like much until you figure out that is $11,520 over 30 years. Chump change, right?

Next time someone offers you a store credit card with some sweet discounts, think about it. It’s not as sweet as you think. No matter how much you want that big Christmas sweater for your party.

Who Cares?
It’s not just banks and lenders that rely on credit scores to help make important credit decisions. Nowadays landlords, employers, insurance companies, and even cell phone and other utility companies all reportedly utilize credit scores to decide how they treat relationships with potential customers.

This means that your credit is the most important component of your entire financial portfolio. Because of this, monitoring and managing your FICO score is super important, especially if you’re looking to buy or refinance a home anytime in the near future.

What’s a FICO Score?
The FICO scoring system was created in the 1960s by Fair Isaac Corporation and has been the standard for lenders since the 1980s. FICO credit scores typically range between a low score of 350 and a high score of 850. Under the FICO system, securing credit becomes less expensive for borrowers with higher scores (people who are a lower risk) and more expensive for borrowers with lower scores (people with a higher risk).

Truth is, when it comes to a mortgage – a lower credit score could easily cost a consumer hundreds of thousands of dollars more in interest throughout the life of the loan, compared to the same loan with a higher score.

The Dollars and Cents
Below is an example of credit scores and the higher cost of borrowing money on a home.  The following example on a 30 year mortgage (originally compared on MyFico.com).

The above comparison shows the relationship between higher FICO scores and lower interest rates and monthly mortgage payments.  Experian®, one of the three main credit bureaus in the US says, FICO scores also accurately reflect “the likelihood of a borrower becoming delinquent on a loan or credit obligation in the future.”  In my language, the FICO scoring model looks at the past to “predict” the future risks of a borrower to a bank or lender, and then prices the loan accordingly.

Changing Times and Loan Level Price Adjustments
Not long ago, a FICO score of 680 was respectable. In a tough credit market like today’s, however, a 680 could be devastating to the bottom line of consumers looking to buy or refinance a home. In fact, thanks to Loan Level Price Adjustments (LLPA) from Fannie Mae and Freddie Mac, having less than a 720 in today’s credit environment will cost you big: up to 2% in points or up to a 1% increase in your interest rate!

LLPAs are mandatory surcharges based strictly on credit scores. They are additional fees paid to Fannie Mae or Freddie Mac, not your mortgage professional. Analysts suggest that imposing these “penalties” is a blatant effort to recoup – and to help lessen further losses – on foreclosures. The surcharge could mean thousands of dollars for borrowers who do not monitor and maintain a good credit rating.

The Sales Pitch
If you’re thinking about buying, selling, or refinancing a home, you have to be credit ready. Give me a call today for a free credit consultation. I’ll pull your credit and see where you stand. Remember, effective credit repair, if necessary, could take up to 3-6 months, so act now and be credit ready in no time.

Not a Reader?… Want to Watch a Video on This Topic?
For more information, here’s a video on the different impacts credit scoring might have on you!

Photo Kudos. 

Here’s where it gets sick… For about $25 to $100 or more! Not only is your name and certain specifics about your credit report, but your address, phone number, mortgage history, and even your FICO score range are sold to call centers that consider themself mortgage companies. They then hound you for your transaction. Notice I put emphasis on transaction. These people aren’t in the relationship business. They just want to get one more deal in their pipeline. Purely numbers (obviously).

This trigger lead results in numerous unwanted phone calls and junk mail offers which are in no way associated with your real estate agent or loan professional. But expect it. It happens. It’s a sick sad world. It’s an income generating process that was conceived by the credit bureaus.

Why hasn’t the government stepped in?
Unfortunately, no legislation presently exists to prevent the credit bureaus from profiting at your expense.  As a trigger lead, you are simply at the mercy of any number of too-good-to-be-true offers designed specifically to try and discredit the mortgage professionals you know and trust (yea, I’m a little bias).

In Closing
Ultimately, there are only a limited number of sources where lenders may turn to obtain mortgage money, and it’s unlikely that you will find an unbelievably low rate without an unbelievably high cost. That’s why, prior to taking an application for any loan program, I always encourage my clients to opt−out of credit bureau solicitations by visiting www.optoutprescreen.com. For new home buyers, this is the simplest way to avoid the problem altogether.

As you start on what could be the largest financial transaction of your life, it’s important to have a professional mortgage specialist on your team who has your best interests at heart.

It’s super stereotypical that car salespeople are shady.  I wish after a weekend of looking at new vehicles for my girlfriend, that I could say that I had an opinion changing experience.  Unfortunately – I did not.  In fact, I left the dealership more frustrated than I was going there in the first place.  After reading this, you’ll get a quick education on terms, calculations and most importantly some things to know when negotiating.

After my experience on Saturday my question is.. HOW is it possible, that a person that has been in the car business for 15 years doesn’t know things like how a lease payment is calculated?  How a credit score is compiled? Or.. my favorite, what the term ‘holdback’ is.  Don’t worry, I’ll define these terms after I get off my soapbox!

Wouldn’t it be great to walk into a place to do business and have everything you asked explained in detail, where you are left with no questions.  I think it is standard when you’re shopping around for something (cars, mortgages, real estate), you ask questions to become educated.  You want to know you’re working with someone you can trust.  You want to work with someone that knows that product BETTER than YOU do.  I didn’t have that experience whatsoever on Saturday.

I’m an extremely trusting person.  However, when I’m dealing with a dealership for the first time, I tend to have questions when I have no idea how this monthly payment is being calculated on a lease (he pushed the lease BIG TIME from the start).  I know we may spend time going back and forth on price, but if the ‘money factor’ changes, I have no idea.  FYI: Dealerships aren’t required to disclose anything but the monthly ‘rent’ expense on a lease.

Here’s the terms you need to calculate: (so you can save yourself from being taken at your local dealership):

Depreciation Fee:   Depreciation Fee = ( Net Cap Cost  – Residual ) ÷ Term

Finance Fee:  Finance Fee = ( Net Cap Cost + Residual ) × Money Factor

Total Payment:   Total Monthly Payment = Depreciation Fee + Finance Fee

Lease calculation figures are broken down further here.  Without this website, I would have been lost and unable to protect myself as a consumer.  I have forwarded the site to my veteran car salesman, so he can be a responsible professional instead of replying ‘You’ll have to talk to my finance guy, he can probably explain how it works.’

Another concern of mine was the confusion of how a credit score was calculated.  For a quick summary, here is my post.  The WORST thing that was said, was that the lease payment wouldn’t effect a debt to income ratio when buying a home.  That is complete misinformation, I quickly corrected him.  I’m sure he loved me at this point in our conversations.

Lastly, he acted as if he didn’t know what ‘dealer holdback’ was. 

Holdback: Money the manufacturer pays back the dealership for each new vehicle sold, usually 2%-3% of the MSRP or invoice (depending on the manufacturer), to reimburse the dealership for certain expenses (salesperson commission, interest accrued on vehicle loan, etc). This tactic inflates the invoice price and lowers salespeople’s commission. This is not the same as rebates, which are openly advertised reimbursements.

Holdback now seems like a crazy thing to act like you don’t know what it is, right?

I know that all car salesman aren’t this way, I specifically know some folks that are not. I’m just truly disappointed that this was my experience.  At Four Legacies Mortgage, we make it a point to educate every client that we work with.  They understand their options, terms and most importantly how I get paid.  We’ve got to keep raising the bar and asking the right questions!

That’s really all there is to the story for now (It’s a work in progress)  But If you’re in looking at buying or leasing a car in the near future, take a look at these negotiating tips!

Have you ever received a credit card offer in the mail? 

“You’re Pre-Approved!  0% for 18 Months, Transfer Your Balances Today! No Closing Cost Refinance! “

Perhaps the question should be how many of these offers do you recieve each day?  You better believe that you’re not the only one with this problem!

I’m sure you’ve heard of the ‘Do Not Call List’, but have you heard of the ‘Opt-Out Prescreen’?

Just as you put a stop to all of those convenient dinner time calls, you can also put a stop to these annoying pre-screened credit offers.

Simply go to https://www.optoutprescreen.com and you have three options. 

1. If you’re crazy, you can ‘Opt-In’ on the solicitations.
2. You can electronically opt-out for 5 years.
3. You can permanently opt out by mail.

All you need to do get on the list is your name, address, social security number and birth date.  This is a one stop opt-out shop.  Your action will be relayed to all four credit reporting agencies.

Want to hear the super cool part?  By opting out, the credit bureau’s will see you as a lower risk and your credit score will improve!   Think about it, if you’re less likely to apply for credit, aren’t you a lower risk?

So, what are you waiting for?  Opt-Out today!  Your credit score will thank you later.

As always, if you have questions or need help – PLEASE give me a call or shoot me an e-mail!

It’s been established that your credit score is a very important component to your personal profile.  To refresh your memory, your credit score influences the following (and more):

• Employment
• Insurance
• Interest Rates on Debt
• Qualifying for Loans
• Renting an Apartment
• Opening a Checking/Savings Account

It’s extremely important to understand what the breakdown of that three digit score between 300-850 is.  Here is the breakdown as it currently sits (Image courtesy of myfico.com):

Your credit score is used to predict the likelihood of a person missing a payment in the next three months.  As you may assume, the best way to predict that type of behavior is to take a look at the recent history.  This is why the largest percentage (35%) of your credit score is based on strictly payment history!

Are you currently late on any bills?  Get current!  Statistics (and common sense) say if you’re late now, you’ll be late next month.   If you get things back on track, it will just be a hiccup that you overcame in the past.

If you have specific questions related to credit, please e-mail me and I’ll address them!  We’ll try to cover more credit related topics in the future.  There’s simply too much to write in one post.