Credit Scores were first developed over fifty years ago when Fair Isaacs Corp Developed the first credit scoring system. Today, the Fair Isaacs Corp Credit Score, which is called a FICO score, is the industry standard and used by lenders to evaluate whether to offer an individual a line of credit or a new home mortgage.
Credit scores are based upon information in a persons credit report and based on a numerical scale between 300 and 850. 850 is considered a perfect credit score, but anything above 760 is considered a very solid credit rating. While the amount of debt a person has plays an important role in determining their credit score, this typically only makes up about 30% of the credit score. The rest of the credit score is based off of the way an individual has paid off their debts, as well as the number of delinquent payments, the length of the credit history, and the types of loans offered.
Since a big part of a credit score is not how much debt you have, but how well you manage this debt, it is possible to maintain a healthy credit score even with a high level of debt. However, most loan administrators suggest maintaining a 30% to 50% debt to credit limit ratio.
One of the most important things that you can do to maintain a healthy credit score is to pay all bills off on time. Today, most banks offer free electronic payments, which can be a quick and easy way to ensure that all bills get paid on time. If a payment is missed, it should be paid off as quickly as possible.
Another important step in maintaining a healthy credit score is to pay off the debts that have the highest interest first, without a great deal of debt transfers. Many people, especially those who are having credit problems, also like to apply for any semi-attractive credit card offer they get, but too many credit inquires reduces your credit score, so this should be avoided. Instead, it is suggested to only apply for new credit once a year and to research potential credit offers before actually applying. Once a good credit offer is found, the credit inquire process should be completed in as short of a time frame as possible.
One big factor that goes into a credit score is the length of a persons credit history, so it is not usually advised to cancel a credit line, even if there is no credit balance. Instead, you can simply cut up the credit card, but leave the account open. This helps provide a longer credit history, even if you are not using it.
Using a debit card instead of a credit card can also be a good idea. These can be used in the same way a credit card would be and are accepted at all major retailers, but do not draw money from a credit line, but instead directly from a persons checking account. Some people even find that when they use cash, they are less likely to spend money, so it may be a good idea to do a little experimenting to get in the habit of efficiently managing money.
While credit reports and credit scores are arguably a very controversial device, if you wish to borrow money, having a high credit score is essential.
Real estate can be an excellent investment, but since most do not have the money to purchase a home up front, it is usually necessary to use a mortgage. Mortgages are a long term loan and, like any loan, there are sometimes when it may be in your best interest to refinance the mortgage.
Refinancing a mortgage simply means taking the total amount owed and transferring it to a new mortgage and possibly a new lender. While there can be many advantages to this, it is important to determine if refinancing is right for you, as it is necessary to pay closing costs, similar to those paid when the home was purchased.
There are many different reasons to refinance a home, but the most common reason is to change the term or rate.
Refinancing to change the rate involves taking out a new mortgage that has a lower interest rate. Refinancing to change the term means taking out a new mortgage, which has a lower length than the previous mortgage. Often, people will do both and refinance to change the term and rate. Knowing when to refinance the term or rate involves identifying your break even point.
Refinancing a mortgage to cash out is the process of taking out a loan and using it to remove the equity from the loan. Equity is the amount of money you have put towards the principal of the loan.
So, for example on a $100,000 mortgage, after 10 years, the total owed to the bank is $85,000. This means there is $15,000 in equity in the home. A Cash out loan will give the borrower $15,000 in cash, but they will start over owing the lender $100,000.
In practice, however, cashing out a loan usually also includes the appreciation of the home. For example, in the above example, say that in those 10 years, the value of the home increased by $20,000. Now, even though the homeowner has only paid $15,000 in equity, technically, they have $35,000. This is the amount of actual equity plus the value of the appreciation.
This means that instead of only receiving $15,000 the homeowner could take out a $120,000 mortgage on their home.
Consolidating Debt works similarly, but involves bringing other debts, such as medical bills, credit card bills, or school costs into the loan. So, for example if the borrower owed $20,000 in student loans, they could add this to their mortgage and spread out the payments over the life of the mortgage.
These types of loans are the most heavily advertised, as they are the most profitable for the lender. However, it is not always in the best interest of the homeowner, because ultimately you are taking a big step backwards. With that said, cash out loans and consolidating debt can be a great way to pay off other lines of credit and bring them together under one large loan.
Another common reason for refinancing a mortgage is to remove someones name from the deed. Often this is after a divorce, but it could be a friend, relative, or business partner who simply wants to move in a different direction.
Whenever there are multiple people on the deed of a home, each person is considered to have an interest in the home. It is not even truly necessary for the person to be on the deed, because, as is the case with certain gifts, warranty deeds are often issued. Warranty Deeds indicate that others have an interest in the property and even though their name may not appear on the deed itself, if anyone buys the home, they will need to have all parties removed.
Since there are a number of instances where there is a need to remove someones name from a deed, often refinancing is the quickest and easiest way to remove the name. This can be especially tricky in cases of divorce, because even though a court may assign ownership of a home to one person or the other, this ruling is not honored by the lender.
Private Mortgage Insurance(PMI) is sometimes required on mortgages with less than 20% down. It is a type of insurance that covers the risk to the lender. It does not cover the entire cost of the home, but instead only the 20% down-payment.
In some cases, the PMI may be tax deductible, so there is little incentive to remove it, however if it is not and the homeowner has at least 80% equity in the home, refinancing to remove the PMI may be a good idea. It is important to note that it is the homeowners obligation to remove PMI and typically the bank will make no effort to have it removed.
Typically, the foreclosure process begins when the homeowner misses three consecutive payments, however recent legislation has made it a little bit more difficult for lenders to foreclose in some cases. Even once a home has entered into the foreclosure process, it is almost always possible to reverse it, providing the missed payments are made up.
There are several loans, often called Foreclosure Bailouts, which are designed to allow the homeowner to refinance the home, any missed payments, and any fees owed to collections agencies. However, it is very important to be careful when accepting foreclosure bailouts, as they are a type of subprime mortgage.
Initially, they offer relief, but over time it ends up costing the homeowner much more. Of course, when facing foreclosure, often subprime mortgages are the only option.
There are a number of other reasons why refinancing a home may be a good idea. For example, if the home has liens on it, it is sometimes possible to refinance and remove the liens, absorbing them into the total loan amount.
It is also becoming common to refinance a home and take out additional funds for remodeling. For example, if the home needs a new roof, but the homeowner can not afford to pay for it, it is sometimes possible to refinance to include the cost of the renovations.
For each reason to refinance, there is a reason not to. Many of the offers most homeowners receive to refinance are from subprime lenders and while they may seem like a good offer at first, will end up costing the homeowner much more in fees.
It is always important to explore all of your options and make sure you calculate the break even point, which is the number of months it will take for the closing costs associated with refinancing to be offset by the saving of refinancing. There is no set rule, but it is generally not recommended to refinance if the break even point is greater than 48 months.
Refinancing a home loan can offer a number of advantages in certain situations, but it can also be risky and it is possible to loose money if you are not careful. It is also not free, as it is necessary to pay closing costs, similar to those paid when the mortgage was first taken out. Knowing when to refinance and when not to is therefore extremely important.
Typically, the golden rule in the real estate industry is that you should wait until the interest rate is at least 2% lower than your current rate before refinancing. It was often referred to as the 2% rule and was touted by most financial professionals, with the belief that this was the point where the savings outweigh the costs of refinancing.
However, today, most financial advisors will not recommend that you follow the 2% rule, primarily because the math simply does not add up. It certainly works well for the lenders, but it does not help the consumer.
Instead of only focusing on interest rates, it is instead essential to take into account the closing costs associated with the loan. This includes not only whatever points you are paying the lender and their application fee, but also an appraisal, credit report, title insurance, and attorney fees.
As an example of how to evaluate whether refinancing lets say that under the new loan, your interest rate would be $50 less a month and the closing costs would be $9,000.
To determine if you should refinance, divide the closing costs by the amount saved in monthly payments. This will tell you the break even point, or when you will recoup your closing costs.
$9,000 / $50 = 180
So, in 180 months or 15 years, you would break even. This makes it easy to see that refinancing is not such a good idea.
Now, lets say that your closing costs are only $4000 and you save $100 a month.
$4,000 / 100 = 40.
So, in 40 months or 3.3 years, you would break even. This is much more acceptable, because this means that after three years, you will have saved more than your closing costs and will end up dramatically reducing the amount of interest you pay.
There is no set limit of when the break even point is right and when it is wrong. A great deal of this depends on the income, assets, and personal situation of the lender. However, usually if the break even point is less than 4 years(48 months) it is generally a good investment.
The above examples described when to refinance the interest rate, but sometimes it is a good idea to refinance the term. The term refers to the total length of the loan and is usually 30 or 15 years, although lenders offer mortgages of almost any term.
Generally, shorter terms mean a lower monthly mortgage payment and longer terms means a lower monthly payment. However, even though you are paying more each month with a shorter term, the amount of interest paid is almost always lower.
For example, consider a home that is $100,000. If you were to take out a 30 year fixed rate mortgage at 4.5%, your monthly payments would be $506 and you would pay $82,406 in interest over the course of the 30 years.
If, on the other hand, you took out a 15 year loan with that same interest rate, the monthly payment would be $764, but the interest would be only $37,698.
As a result of the dramatic effect lowering the length of your term can have on the total amount of interest paid over the course of the loan, it is sometimes a very prudent investment.
Often, many people will refinance their loan after about 5 or 10 years, to a shorter term, thereby saving a great deal of money.
Businesses and creditors have for years kept information about the people who use their business, using this information to determine whether to continue offering an individual services. Until the advent of modern technology making it easier to reliably send information across long distances, these records were usually only used internally or in specific locations.
However, beginning in the eighteenth and nineteenth centuries, businesses began sharing these records with each other on a much larger scale, which is the basis for the modern credit report.
As is often the case, with no oversight banks, mortgage lenders, and other creditors were quick to abuse this system. They began storing all sorts of personal information in credit reports, including race, gender, religion, and sexual preference. Worse, the lenders would then use this information to deny or approve a loan.
To help address this problem, the Fair Credit Reporting Act was passed in 1970. Since then, the law has been changed many times, but its premise, to regulate the credit reporting industry, remains the same.
The Fair Credit Reporting Act helps to regulate both credit reporting agencies, as well as who can provide information to these agencies.
There are three main credit reporting agencies, Equifax, TransUnion, and Experian. These agencies compile information about how a person uses their credit lines, including tracking payment history.
As part of the Fair Credit Reporting Act, these agencies are required to ensure that there is a way for consumers to address errors on their credit report and that these errors are removed in a timely manner. They are also not allowed to keep information indefinitely and in most cases can only cover the last 7 years, although bankruptcies can be kept on a credit report for up to 10 years.
Only recently, consumers were given the right to see a copy of their credit report for free and purchase a copy for a fair price.
While a big part of the Fair Credit Reporting Act is aimed at regulating credit reporting agencies, it also deals with who can report information to these agencies and what type of information can be added to a credit report.
As part of the Fair Credit Reporting Act, agencies that report information to credit reporting agencies must:
The Fair Credit Reporting Act also puts limits on who can report information to credit reporting agencies, which is usually limited to banks, credit unions, and other creditors. It also put regulations on how credit reports can be used for background checks by employers.
While the Fair Credit Reporting Act took steps to help make the credit reporting industry more transparent and less discriminatory, it still has a long way to go and it would require a number of other laws to bring the credit industry under better control.
A Credit Score is a numerical value between 300 and 850 that is used by lenders to determine the risk offering someone a loan. Credit scores are based off of a number of factors, including the number of different lines of credit a person has, their payment history, and how long they have had credit. When applying for a mortgage, credit scores are one factor that are considered by mortgage lenders, so it is important to understand the relationship between credit scores and mortgages.
Credit scores are not exactly new and have been around for many years. The FICO credit score is the most common type used, but there are others as well, specifically those offered by the three credit reporting agencies. However, up until relatively recently, the average consumer was not able to see their credit score. This changed in 2003 with the passage of the Fair Credit Reporting Act, which required credit reporting agencies to provide consumers with their credit score for a reasonable fee.
There are many factors that goes into a credit score and a persons debt level is actually not what the credit score is predominantly based upon. Instead, only about 30% of the credit score is based off of a persons current debt, with more weight being placed upon how the person handles debt, as well as their credit history and payment history.
In times past, getting a home mortgage was a much more personal process. The loan officer took the time to get to know the person and made a subjective decision based upon the information available to them. Today, however, much of this personal touch has been lost, replaced by mathematical formulas that are processed by computers. These formulas take into account the persons credit history, their credit report, and their credit score, determining mathematically the risk of offering the prospective lender a home mortgage.
Since so much of the mortgage approval process has been automated, it is essential to have a good credit report and as high of a credit score as possible. Studies have been shown that the higher a credit score is, the lower the mortgage rate offered will be.
For example, according to myfico.com, in 2007, a person with a credit score between 760 and 850, which is considered to be very good, received an average interest rate of 6.3%. A person with a credit score between 500 and 579, on the other hand, received a interest rate of 9.9%. This shows the importance of having a high credit score before applying for a home mortgage.
Since having a high credit score is such an important factor when applying for a mortgage, it is a good idea to spend time fixing any areas and maintaining a healthy credit score before applying for a mortgage.
One of the most important steps of maintaining a healthy credit score is taking care of any errors on your credit report, which even though they may simply be a mistake, such as a creditor not reporting a payment. Even though the mistake is not your fault, it still affects your credit score the same, so finding and fixing errors on your credit report is essential.
Paying bills on time is also extremely important to help maintain a healthy credit score and is one of the main factors prospective mortgage lenders consider when considering a mortgage application. If you have missed a payment, always make sure all of your payments are up to date before applying for a mortgage or other type of loan.
It is also important to pay down your credit lines based upon the amount owed and interest rates of the credit line. For instance, it is important to pay down those credit lines with higher interest rates sooner, rather than later, which not only helps your credit score, but also helps you save money.
Credit scores are a numerical value between 300 and 850 that is based upon a persons credit report. The credit score is intended to provide prospective lenders with a way to evaluate a persons creditworthiness, with credit scores between 760 and 850 being classified as the best. Credit scores are used by many different types of lenders, with the mortgage industry usually relying very heavily upon credit scores. Having a high credit score can be very important when applying for a mortgage and getting a good interest rate, especially in today’s market where lenders are much more careful about who they lend too.
There are several companies that offer credit scores, including each of the three different credit reporting agencies, but the credit score compiled by Fair Isaacs Corp, called a FICO score, is the standard in the lending industry.
While credit scores have been around for over fifty years, it was not until 2003 that the average consumer could easily and inexpensively view their credit score. This came as part of the Fair Credit Reporting Act of 2003, which required all credit reporting agencies to provide individuals their credit reporting score at a fair price. Now, credit scores are available for between $6 and $16.
Credit scores are based upon the information in a persons credit report, so it is not possible to directly change your credit score if there is a problem. Instead, it is necessary to fix problems with your credit report, which will in turn raise your credit score. This is why it is so important to regularly check your credit report for errors and fix them as soon as possible.
As a consumer, it is also important to pay all bills on time and not max out your credit lines. This is because credit scoring agencies place more emphasis on your payment history than they do on your level of debt. Late payments, especially those sent to a collection agency, can have a very negative impact on a credit score.
Requesting new lines of credit too frequently can reduce your credit score, so instead it is better to try to limit your requests for new credit to as short of a time period as possible. This is especially important when trying to repair bad credit, because many people will begin applying for each credit card offer they get, but this actually lowers a persons credit score.
It is also important to balance your debt in a smart and efficient manner. In another words, pay off debts that have higher interest rates or less favorable terms first and try to avoid transferring debt among credit lines too often.
Since a big part of having a good credit score involves using your credit responsibly, most loan officers suggest using your credit, but not exceeding 30% to 50% of your credit limit. Of course, this should be taken with a grain of salt, because it is in their best interest for you to use credit.
Another factor that goes into a credit report is the length of your credit history. Rather than canceling credit cards you are not using, it is typically better to simply destroy the credit card so you can not use it, but keep the account open. This way you can extend your credit history, without actually using it. Instead, begin using debit cards, which offer the same functionality as a credit card would, without the extra fees.
Having a high credit score can mean the difference between getting a good interest rate and getting a great interest rate. A low credit score can quite literally cost you a great deal of money, so it is important to take measures to improve and maintain a healthy credit score.