NJ First-Time Home Buyers

I feel like a broken record, but Inquiries are one of the most misunderstood factors of the credit scoring model. Inquiries count for 10% of your overall credit score.  An inquiry is a check on your credit.  There are two types of inquiries, soft and hard. 

• A soft inquiry is one that does not hurt your score.  Such examples are job credit checksinsurance checks, or credit card "pre-approved" offers.
• A hard inquiry is a credit check that does put a ding on your score.  Such an example would be a credit check by a mortgage lender, an auto dealer, or a credit card company in certain situations.

Now to let the cat out of the bag ...

You have 45 days to have a mortgage lender (or auto lender) check your credit and have it only count as one inquiry.  This is completely contrary to what many loan officers will tell you.  Why is that?  First off, many loan officers don't educate themselves as true professionals.  But that aside, they don't want you shopping them.  So they put fear in your mind that if you check with other lenders and have them run your credit, that "you may not qualify anymore". 

Now it is true that multiple credit checks will bring your score down.  But that scenario would be when you are doing things like shopping for a car, and opening credit cards, and other credit checks at the same time.  The 45-day window is understood in the credit scoring model since it "allows you" to shop for better terms without killing your credit score.

A credit inquiry on average hits your credit score for 5 points, however it can hit it for anywhere from 2 points to 50 points.  You heard me right.  Why is this?  The credit scoring model has 1,000's of profiles that it uses to judge and create a credit score from.  Based off of statistics, people who are getting their credit checked very often, are those in financial trouble.  Hence having credit checks often can bring your score down as you are viewed as high risk.

Other Notes

• Only the first 10 inquiries count each year
• After 10 inquiries, they will not affect your credit score
• Check out www.annualcreditreport.com to obtain a free copy of your credit report.  A PERSONAL check will not affect your score.

The topic of credit scores, the credit scoring model, and credit restoration always have a plethora of myths, misconceptions, and just a ton of questions. As you or someone you know comes across a situation that is confusing, or that you want to be certain that you handle right, just e-mail me.  I'll be happy to help out.  ~ Steve Kappre 

Credit Scoring – What Makes Up My Credit Score?

Credit Scoring – Payment History (2 of 6)

Credit Scoring – Balances (3 of 6)

Credit Scoring – History (4 of 6)

Credit Scoring – Mix of Accounts (5 of 6)

Credit Scoring - Inquiries

One of the 5 main catagories in the credit scoring model is the mix of credit accounts.  The mix refers to different accounts such as mortgages, auto loans, installment loans, and credit cards.  A person's mix of accounts represents 10% of their overall score.   

It is preferable to have a mix of accounts such as installment loans and 3-5 credit cards.

Having more than 3-5 credit cards is fine.  Technically you could have as many as you want.  One thing you have to keep in mind though with having so many cards is the effect it has on your credit history and inquiries (see post 4 and 6 of this series for more information).  If you constantly have new credit cards, and your older cards are inactive, then your history is shallow and this could lower your score. 

Having a major credit card like a VISA or MasterCard is better for your credit then, for instance, a department store card like a Target or Home Depot card. Why is that? The credit scoring model takes into account 1,000's of consumer profiles.  Although such stores offer special incentives like 0% financing for 12 months, in the past stats have shown that individuals that utilize such a card are consumers that weren't able to obtain a major credit card.  Likewise a consumer with only an HSBC card for instance, may not have as high a rating as someone with a major credit card.  This is because such a company has lax guidelines in comparison (and higher rates) and is often associated with consumers that carry more risk. 

In my personal opinon, from what I have seen, I see nothing wrong with taking advantage of 0% financing options.  However, one major issue that arises is that many such financing options carry all of that interest and if the loan isn't paid off in the "12 months", and you find yourself at 12 months and one day, then you get smashed with a year's worth of interest.  TOO LATE!!  And certainly too bad. I've seen them add several $1,000 to accounts. 

One other tip ... a Home Equity Line of Credit (HELOC) should be greater then $40,000 or it may report as a revolving account versus a mortgage.  This is important because as mentioned in the article, "Credit Scoring - Balances", even though the HELOC is a mortgage, if it is maxed out and viewed as a revolving account (i.e., credit card), then your balance ratio being so high could lower your credit score.

There is one more article in this series.  I hope that you have found these articles helpful, and as always, if you have any questions, or would like your own credit reviewed to maximize your credit score, don't hesitate to contact me.  Making little changes and working together over time will save $1,000's, even $10,000's.  ~ Steve Kappre

Credit Scoring – What Makes Up My Credit Score? (1 of 6)

Credit Scoring – Payment History (2 of 6)

Credit Scoring – Balances (3 of 6)

Credit Scoring – History (4 of 6)

Credit Scoring - Mix of Accounts (5 of 6)

Your credit history accounts for 15% of your total credit score.  History does not refer to payment history.  History is the evaluation of the timeframe that your accounts have been open and active, as in how many months or years.

Longer Credit History = Higher Credit Score

Long Credit History Paid As Agreed=Positive Impact To Credit Score

TIPS

Why you should never close a credit account ... 

Never close a credit account, especially if it has a long payment history.  This can negatively impact your credit score because the history aspect of your credit profile will be made shorter. 

Authorized User Accounts

A fairly well known "trick" to raise a credit score is to become an authorized user on an existing account.  Some laugh at me when I say this in my credit seminars, because their first thought is, "Why would I give someone with bad credit or no credit my credit card?"  Well the fact is you don't give them your credit card.  You add them as an authorized user, and when the card comes in the mail, it comes to the account holder.  Adding someone as an authorized user benefits them a few ways;

1. It gives the authorized user "instant history" as spoken about above
2. It gives the authorized user higher credit limits on their credit profile (see Credit Scoring - Balances)
3. It gives them great payment history.

The above three benefits are assuming the authorized user is added to an account with a long history, a high credit limit, and the account is paid on time.  Adding someone to a "bad" account wouldn't make sense.

Be sure to catch all the credit scoring articles in this series.  Keep in mind, credit reports can be complex and confusing.  Please contact me if you have specific questions. While I applaud the effort people make to maximize their credit score, we must be certain we are taking the right steps and don't end up creating more harm than good.  ~ Steve Kappre 

Credit Scoring – What Makes Up My Credit Score? (1 of 6)

Credit Scoring – Payment History (2 of 6)

Credit Scoring – Balances (3 of 6)

Credit Scoring – History (4 of 6)

One of the most misunderstood areas of a credit score is the "balances" part of scoring.  I say that it is misunderstood not because it is complicated, but because people tend to have no idea why their credit score is low, when in fact they are carrying very high balances on their credit lines, a common factor in a low credit score.

I've seen credit reports where people were never late on a payment, yet their scores were in the 580's.  That isn't exactly a score to get excited about.  The credit scoring model views such a person as a higher risk, and grades them accordingly.

Your balance-to-credit limit ratio makes up 30% of your credit score, only second to that of payment history. Here is an example to understand how your balance is calculated: You have a $1,000 limit on your VISA card, and your current balance is $500, so you are at a 50% ratio.  The higher your balance is to the limit, the more it affects your credit score. It is even possible to go above your credit limit, which can really hurt your credit score. 

PRICELESS TIP ... Assuming you have two credit cards with a $10,000 limit for each card; It is better to have a $10,000 balance divied up between twoo credit cards, having a $5,000 balance each, then it is to have the same $10,000 in debt on one credit card (leaving the other card with a $0 balance). Use this system to maximize your credit score.     

CAN WE FIX IT?

 YES WE CAN! - Some fix-its for some common problems.

You can transfer balances from one card to another to "balance out" your debt ratio per card.  Depending on the scenario, this could improve a score by 50+ points. 

On occasion, a creditor will not report your credit limit.  Therefore whenever you have any balance on that account, your score is calculated as having credit accounts over the credit limit, negatively impacting your credit score.  What can you do to remedy?  Ask for your creditor to report your limit to the credit bureaus. This should usually work.  Another option is to max out your card and immediately pay it off.  When you do this your credit limit will be reported at the dollar amount you just used your credit card up to, and your balance ratio will then be accurate. If utilized this second way, your "new limit" should show for about 13 months.  NOTE: Do not max out your card if you do not have the money to immediately pay it off.  This will do far more harm than good. 

Ask for a credit limit increase every 6 months.  If you have paid your accounts on time, and a creditor hasn't automatically raised your credit limit, you can call and ask that they do so.  Sometimes they will automatically do it, and sometimes they will say that they have to pull your credit.  I would suggest you don't have them pull your credit, as it would hurt your score. 

Doing a balance transfer to a business credit card that is not reported on your personal credit profile is one way to raise their score.  Often business credit is not on one's personal credit profile. 

This article is number 3 in a series of 6.  Don't miss the other important factors in the credit scoring model, including many other ways to inrease your credit score.

Many scenarios are delicate and very specific action should be taken.  Incorrect action can have a negative affect on your score. Contact me directly to discuss your options and next action steps to improve your score or to qualify for your new loan.  ~  Steve Kappre

Credit Scoring - What Makes Up My Credit Score? (1 of 6)

Credit Scoring - Payment History (2 of 6)

Credit Scoring – Balances (3 of 6)

Credit Scoring - History (4 of 6)

The most important factor regarding your credit score is your payment history.  Your ability to pay your accounts on time reflects 35% of your credit scores.  The credit scoring model certainly wants to know that you are paying your accounts as agreed.  The last 6 months are the most important time frame.  As time goes on older accounts and reportings have less weight to your score.  Although many factors come into play, a very recent hit to your credit could drop a score 50+ points

A credit report will usually show at minimum these catagories; 

• Past Due
• 30-days late
• 60-days late
• 90-days late
• Collections
• Public Records, such as Judgments, Bankruptcy, Tax liens

Past due accounts are accounts that are 1 day past due.  They will negatively affect your credit score while the account shows "past due".  If the account reports as paid before hitting the 30-day mark, then the past due amount will not show past due, and you won't have a long term credit hit as you would for a 30+ day late.

Credit reports have no "memory".  It is snapshot of what appears at the time the report is requested. 

30-day lates and greater are more permanent dings to your credit score. The worse the late period the more damage it does to your score.  For example, a 90-day late is worse than a 30-day late.  Accounts that go beyond 90+ days may eventually show up as collections or judgments.

Collections are among the worst for a credit score.  If you are looking to maximize your credit score, here is a rule of thumb.  Collections less than 2 years old pay off, as it should benefit your credit score.  Collections 2 years or older,  leave alone until you can pay them off at settlement (assuming you are buying a home).  Very Important - paying a collection over 2 years old will negatively hurt your credit score.  Essentially what happens is the account is brought to a current status, and as stated above, the more current the derrogatory mark, the more it hurts your score. In all cases, be certain to obtain proof of the account's pay-off in case it is needed in the future.

A few more notes regarding payment history ...

The highest weight is attributed to the highest pay account.  For example, a 30-day late on a mortgage for $2,000/month is worse for your credit score than a 30-day late on a JC Penney card for $10/month.  

Judgements, bankruptices, and tax liens do not keep you from purchasing a home.  Even someone in a bankruptcy chapter 13 can, with permission from the trustee, obtain a home mortgage.  For more information regarding judgments, bankruptcies, tax liens, and anything else regarding credit just call or e-mail me.  I have great respect for people who take the time to restore their credit, and I will do my best to help.  And if you are working hard to make it better, work equally hard to make sure you are doing it RIGHT! ~ Steve Kappre

If you missed the other installments on credit check out "Credit Scoring -What Makes Up My Credit Score?"

 Credit Scoring - What Makes Up My Credit Score? (1 of 6)

Credit Scoring – Payment History (2 of 6)

Credit Scoring - Balances (3 of 6)

Credit Scoring - History (4 of 6)

I've worked with clients all across the board.  Some who had "perfect" credit, and some who upon seeing their credit report, found themselves a second job (fixing their credit).  I'll help you understand what makes up a great credit score, and how to alter any situation to improve the credit scores.

Let's lay some ground-work. 

Three bureaus evaluate your credit scores

1. Equifax
2. Trans Union
3. Experian

Credit scores will be different among the three bureaus because not all creditors report your data to all three bureaus.  Even if your data was reported exactly the same to each, the three credit bureaus don't use the same model to evaluate your score.  Typically your three scores range within 50-60 points from high to low.  On some occasions you will see a score drastically higher or lower than the other two.  For this reason, many creditors will pull all three scores and use your middle score for qualifying purposes. The middle score is assumed throughout these articles when we talk about one's credit score

Credit scores range from 350 - 850.  The higher the score the better.  What is a great credit score?  In today's market you want to have a 720 or better.  Even higher is better for qualifying purposes, although it probably won't get you a better rate.

"Good" Credit Scores.  You can still finance a home with a lower score, but it becomes more expensive either by way of a higher interest rate, or by way of higher fees (usually points*).  Stepping down from that 720 score, you will experience what is call Risked Base Pricing.  Each 20 points lower could cost you in rate or fees. Today Fannie Mae, Freddie Mac, and FHA all have some form of risked base pricing.  So literally one point in your credit score could be a huge savings to you.

"Poor" or Low Credit Scores.  Your options shrink real fast as you dip below 580.  Although many mortgage guidelines allow for scores below 580, many lenders/investors (as of this writing, 10/22/08) incorporate their own guidelines on top of these main guidelines. So in some instances, going to another lender that offers the same type of loan, for instance an FHA loan, may allow you to finance your purchase or refinance instead of being denied.

Now that we have a basic knowledge of credit scoring, look out for the next part of this series, Credit Scoring - Payment History (2 of 6) where we will start to talk about the reasons scores are what they are, and how to get your credit score higher and keep it there.

For questions or a personal credit review, contact Steve Kappre at  856.419.3561 or at www.stevekappre.com

* A point is equal to 1% of the loan amount. i.e. One point on a $100,000 loan is $1,000. 

Credit Scoring – What Makes Up My Credit Score? (1 of 6)

Credit Scoring – Payment History (2 of 6)

Credit Scoring – Balances (3 of 6)

Credit Scoring – History (4 of 6)

I just finished another one of my Credit Scoring Seminar classes tonight, and after countless times doing this, I still chuckle.  Where do people get their knowledge of credit scoring?  This specific class was great and intelligent so this isn't directed at them. But really, who ever told us that doing the following was good?  Especially while applying for financing ...

Pay Off Collections - NO NO NO!  This is almost always a bad move.  Paying off a collection account often brings down one's credit score.  Why?  Because it brings the collection "current" - which looks like you just had the collection put on your credit this month.  And the more recent the blemish, the worse your score.

Close Credit Cards - Nadda!  Closing credit card accounts, especially older ones, can hurt your "history" segment of the credit scoring model (History is 1 of 5 main catagories).  Closing all of your credit cards could be really bad depending on other factors.  How else can the credit agencies know your wonderful history if it isn't reported?  Just leave them open.  It's ok.  Really. 

Buy a New Car!!! - What?  Something triggers in people's minds when buying a home. To this day I don't know the scientific word for it - let's call it "The Crazies".  People have the strongest desire to buy a car while trying to buy a home.  If you are new at this, realize that just because you may be pre-approved, doesn't mean your loan is done with and ready to close.  Not only could the new car loan lower your FICO score, but more than likely the new, higher car payment could blow your loan ratios out of whack and therefore nullify your approval. 

Like so many successul relationships in life, it is all about communication.  Just be proactive and let your loan officer know what you are thinking of doing.  If he/she is worth a lick they'll be able to advise you correctly and save everyone a huge headache.  As always, if you have any questions regarding credit, credit restoration, or credit scoring, just drop a line or visit one of my classes.  I'm always happy to help. 

New Jersey First Time Home Buyer program rates have changed, again.  I hosted a very similiar message just over a week ago.  In the past these programs would only change every so many months.  Not only that, but these rates were usually lower than regular conventional and FHA/VA rates.  Well say good-bye to that, at least for now.  Hopefully when the market returns to normal, we'll again see the rates as beneficial to first-time buyers.  As a side note, a first-time buyer is also someone who hasn't owned a home in the last three years.  So if that is you, then you can take andvantage of the Smart Start down payment grant money, which is as high as 4% of the purchase price.

First Time Home Buyer 30 Year Term

7.000% - First Mortgage with no Smart Start assistance

7.375% - First Mortgage with 2% Smart Start assistance

7.500% - First Mortgage with 3% Smart Start assistance

7.750% - First Mortgage with 4% Smart Start assistance

The 40 year team requires an additional add-on of .125%

Home Plus

7.375 with 3 points

Purchase/Rehabilitation Mortgage Program

7.375 with 3 points