Understanding Credit

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Information about Understanding Credit
Business-Finance

Published on November 21, 2008

Author: sherryconnor

Source: authorstream.com

Understanding Credit : Understanding Credit The Importance of the Score : Credit scoring has a very wide impact on a person’s financial picture in this country. Their credit score affects every person out there, and in all types of financial endeavors. It has an impact on your credit cards, your ability to get auto loans, and most importantly, your ability to get a good interest rate on a home loan, and whether you even qualify at all. The Importance of the Score Defining the Score : Defining the Score 850 = Highest 720 = Outstanding 680 = Good 620 = Needs Work 500 = Danger Defining the Score : Defining the Score 850 = Highest 720 = Outstanding 680 = Good 620 = Needs Work 500 = Danger The highest credit score any of us can receive is 850. Anything over 720 is outstanding. You can’t really do any better than 720. If you have a 721 score or an 821 score, there will be no difference between the two in terms of interest rate you qualify for and the type of loan you can get. Defining the Score: Interest Rates : Defining the Score: Interest Rates 850 = Highest 720 = Outstanding 680 = Good 620 = Needs Work 500 = Danger If you have a 721 credit score vs. a 718 credit score, it could mean the difference between you qualifying for an interest-only loan on your jumbo mortgage versus not qualifying at all. You may be able to increase the score above 720 so you can take advantage of some of the best programs in the business. The bottom line is that 720 is that first magical number. Anything above that gets you the best interest rates; if you are below that, you might be paying some penalties. Defining the Score: Interest Rates : Defining the Score: Interest Rates 850 = Highest 720 = Outstanding 680 = Good 620 = Needs Work 500 = Danger The next significant tier is 680. Between 680 and 720, you’ll still get a very attractive interest rate, and you will probably have access to all of the different programs in the marketplace. However, there may be some restrictions, especially if you need to go with a stated income type of loan. Stated income means a type of loan for which you don’t need to prove your income. If you have above a 720 credit score, you don’t have to provide tax returns to prove income. If you are between 680 and 720, you may be required to provide this information. This penalty can have an impact on whether the client qualifies to buy a particular home. Defining the Score: Interest Rates : Defining the Score: Interest Rates 850 = Highest 720 = Outstanding 680 = Good 620 = Needs Work 500 = Danger EXAMPLE: A buyer wants to purchase a home listed at $1 million. This person wants to put down 20%. He wants a 30-year fixed mortgage. He is self-employed. He needs to do a stated income loan on a 30-year loan for this purchase, rather than showing tax returns. Then his credit score comes in at 695. A 695 credit score will not allow an $800,000 stated income purchase loan with an aggressive rate of interest in a 30-year mortgage. However, if he has a credit score over 720, he will qualify for the premium-vanilla interest rate without having to provide any proof of income. He won’t need PMI or any of those other penalties. As long as he puts 20% down, he will qualify for the same interest rate as someone who provided their tax returns. In this way, he is being rewarded for his credit score. Defining the Score : Defining the Score 850 = Highest 720 = Outstanding 680 = Good 620 = Needs Work 500 = Danger The next tier down is 620. If you drop below 620 on your credit score, you are deemed a subprime borrower. This means you are going to have an inferior interest rate. Defining the Score : Defining the Score 850 = Highest 720 = Outstanding 680 = Good 620 = Needs Work 500 = Danger When we get into the 500’s, the interest rates get very unattractive. Defining the Score : Defining the Score 850 = Highest 720 = Outstanding 680 = Good 620 = Needs Work 500 = Danger Loosely defined, a credit score is simply a snapshot of a person’s credit at a given time. It’s important to understand that the computer doesn’t have any memory. Yesterday's credit score has nothing to do with today's. A score can go up or down significantly in the space of one week. The Credit Bureaus : The Credit Bureaus Experian TransUnion Equifax The Credit Bureaus : The Credit Bureaus Experian TransUnion Equifax Each of these credit scoring models is produced by one of the three credit scoring bureaus. When a lender runs a report for the mortgage business, they run a “Tri-merge” credit report. This merges all three types of reports into one. Then they will take the top and bottom scores and throw them out. They take the middle score. This is why it is important to have three. The Credit Scoring Model : The Credit Scoring Model WHY IT WAS ADOPTED: What the credit scoring model seeks to quantify is how likely the customer is to more than 90 days late with payment at any point in the future. The higher the score, the lower the odds of a default. A score can go up or down by as much as a hundred points in one day, depending on what is showing on the credit report. Only 1 out of 1300 people in the US has a credit score above 800. Conversely, 1 out of every 8 people has a low score between 500 and 600. One out of every eight prospective homebuyers is faced with the reality that they might not qualify for a loan they can afford. In this situation, it’s very important to work with a lender who knows how to work with the score and who understands how to explain what is happening. Keeping Score : Keeping Score 35% = Credit History 30% = Debt Ratio 15% = Credit Length 10% = Credit Type 10% = Inquiries Keeping Score : Keeping Score 35% = Credit History 30% = Debt Ratio 15% = Credit Length 10% = Credit Type 10% = Inquiries 35% of the score is based upon payment history. The more recent the late payment, the more negative effect it has. Missing low payments is better than missing high payments. So, if you missed a $40 per month payment, it won’t have as negative an effect as if you missed your car payment of $650. Keeping Score : Keeping Score 35% = Credit History 30% = Debt Ratio 15% = Credit Length 10% = Credit Type 10% = Inquiries The second category measures the balances out on the account. This is a tricky area. Ideally, you want to keep your balances below 10% of the available credit limit. Therefore, you are better off spreading your balance over a few cards than having it all on one card. Keeping Score : Keeping Score 35% = Credit History 30% = Debt Ratio 15% = Credit Length 10% = Credit Type 10% = Inquiries Comprising 15% of the credit score is the length of credit history. This means you want to hold on to old credit cards, even if the rate is not good. You are rewarded for having long-term credit card debt. Keeping Score : Keeping Score 35% = Credit History 30% = Debt Ratio 15% = Credit Length 10% = Credit Type 10% = Inquiries A good mix is always best—an auto loan, a mortgage payment, a few credit cards, etc. Three to five revolving credit accounts (credit cards or lines of credit) is the optimal number that the score really rewards. Anything less than that means you haven’t established enough credit. Anything more than that and you’ll be penalized because there will be concern that you are a heavy credit user. Keeping Score : Keeping Score 35% = Credit History 30% = Debt Ratio 15% = Credit Length 10% = Credit Type 10% = Inquiries Multiple mortgage and auto inquiries are treated as one as long as they are within a 14-day period of time. In other words, if you go to four different auto lots and three different mortgage brokers in one day, and they all run your credit, this will only be treated as one inquiry. If you shop over an extended period of time, that will bring your score down. Inquiries will affect your score for up to one full year. Questions and Comments : Questions and Comments Sherry Connor Cell: 704.617.9686 Fax: 866.236.4885 E-Mail: SConnor@ftloan.com

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