Review Your Credit Report

Review Your Credit Report

Check Your Credit Score When Preparing to Apply for a Mortgage

When applying for a substantial amount of money such as a mortgage, the first step anyone should take should be to make sure all your credit scores are the highest they can be.

Your credit report is primarily based on your trade-line and payment history, debt levels, and other information gathered by the three credit bureaus (Experian, Equifax and TransUnion). From that they calculate your credit score and assign a number between 300 and 850. 850 is the best.

Lenders use that score to determine whether to accept a loan application and the rate they will charge. That’s why it’s important to make sure your information is correct. You’re entitled to a free credit report once a year from each of the three credit bureaus.

Breakdown of Credit Scores and What They May Mean to You

700+ Credit Score – Excellent

A credit score over 700 means excellent or very good credit. Basically, the higher the score the lower your rate because you’re considered less risk to the lender. Your credit is or near flawless!

680 – 699 Credit Score – Good
A score in this range means good credit. You should be able to qualify for most loans but you may be paying a slighter higher rate than those offered to borrowers with excellent credit. You may benefit from a professional credit analysis.

620 – 679 Credit Score – Fair
Although a credit score in this range is still considered okay by many lenders, you may not get approved as easily as a borrower with a higher score. You probably won’t qualify for the best rates either. Your credit may benefit from credit repair.

580 – 619 Credit Score – Poor
Scores in this range are below average (subprime) and you’ll have a tough time getting a loan or even a credit card. If you score in this range you should work to improve your credit score because you’ll be paying higher interest rates just to get credit approval. Your credit is in need of repair.

500 – 579 Credit Score – Damaged
A credit score in this range usually means you’ve had a collection, charge-off, a foreclosure or a bankruptcy. Your credit is in need of repair.

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FICO Changes = Higher Credit Scores for Consumers

FICO Changes = Higher Credit Scores for Consumers

Fair Isaac Corp. will soon change their FICO scoring algorithm used in determining a person’s credit scores. It should result in higher credit scores for many consumers. FICO calls their new scoring method FICO Score 9. This method will no longer grade medical collections as harshly and it will not factor in any paid or settled consumer collection accounts in credit scores at all.

What is FICO?

FICO is the credit scoring algorithm created by Fair Issac Corp. It only uses information reported to the three major credit bureaus to grade a consumers credit worthiness. According to myfico.com, a FICO Score estimates the “level of future credit risk” of a consumer.

Consumers have three FICO Credit Scores – one for each of the three main credit bureaus (Equifax, Experian, and TransUnion). Each bureau uses the information reported to them when determining their FICO score. So while each bureau uses the same FICO scoring algorithm, the scores can differ because not every creditor or lender reports to all three bureaus.

FICO Score 9, once released, should result in higher scores for many consumers thanks to two major changes in how they will grade collection accounts.

Medical Collections

Open medical collections will no longer negatively affect your credit score as much as they do now. They will no longer be counted the same as other open consumer collection accounts.

Most major lenders have long overlooked medical collections, knowing that they do not give a true indication of a consumer’s ability to re-pay debt. An applicant who is ill-prepared to pay for a sudden major medical debt, for example, should not be graded as harshly as one that walked away from consumer debt that they had promised to pay.

Still, these collections can have a major negative impact on credit scores. And lenders are still very credit score driven. Lower scores due to medical collections can lead to higher rates, higher fees, and even loan denials.

The upcoming changes in FICO scoring will finally acknowledge what lenders have known for years; that medical collections do not represent a borrowers true ability to re-pay debt. Thankfully, credit scores will no longer suffer once these changes take effect. In fact, FICO claims that consumers can see as much as a 25 point increase in their score!

Paid/Settled Consumer Collections

As of right now, if you have older collection accounts that have been paid in full or satisfied, they can still negatively affect your credit scores for years, even though they report as being satisfied or paid.

But after FICO Score 9 takes effect, these paid/satisfied collection accounts will be dropped from your credit report altogether. They will no longer have a negative impact on your FICO scores. In other words, the new FICO scoring method will continue to count open or unpaid collections against a consumer’s score, but it will reward them by removing the collection account once it is paid or settled.

Who Benefits?

These two major changes in the FICO scoring method should open doors for a lot of consumers who will realize higher credit scores as a result. It can equate to lower rates, lower fees, and even loan approvals instead of denials. It also benefits lenders by providing a more accurate assessment of a consumer’s ability to re-pay debt.

There is no exact date for the FICO 9 Score release, but rumor has it that it will happen sometime in the Fall, 2014.

Please do not hesitate to call one of our Personal Advisers for more information. We look forward to hearing from you soon.

PLUS Score versus FICO Score — Why Lenders Ignore the Former (Part 2)

PLUS Score versus FICO Score – Why Lenders Ignore the Former

Part One of this post (Why You Don’t Need to Pay for Your Credit Score) covers why you should be wary of using a site such as FreeCreditReport.com to obtain your credit report or credit score.

In this post, you’ll learn why the credit scores you pay for are meaningless.

Experian’s PLUS Score

Let’s again use FreeCreditReport.com.

If you look at the screenshot below from the company’s home page, you’ll see a red box around the verbiage stating it uses the PLUS score.

The PLUS score is NOT the same as the FICO score. Experian developed the PLUS score.

The FICO Score

Fair, Isaac Corporation developed the FICO score for lenders and businesses offering credit. The original FICO scale went from about 350 to 850; Fair, Isaac has developed a newer scale that goes up to 950.

Scores are calculated using information from your credit report but how the credit scores are developed depend on how Fair, Isaac and Experian input the data variables.

The FICO Score is calculated using: payment history, amounts owed, length of credit history, new credit, and types of credit used. You can see the breakdown in the chart (courtesy of MyFICO.com).

It’s very important that you understand the difference between the PLUS Score and the FICO Score. Why?

Banks and mortgage companies will not lend based on a PLUS Score, they work only with the Experian FICO™, Equifax Beacon Score™ and the Trans Union Classic Score™.

Obtaining a PLUS Score from a free website won’t help you avoid credit pulls when shopping around for a mortgage because the PLUS Score is virtually meaningless. Lenders will insist on pulling their own reports.

Should you know your credit score before shopping for a mortgage?

It’s impossible to “know your score” before you shop around, mainly because your score is always changing, and secondly because it really doesn’t matter what the score is on the report you hold in your hand.

The only thing that matters to the lender is the score on the report they hold in their hand – the one they pulled. No bank or lender will determine loan worthiness based on someone else’s credit report, ever.

You could, however, authorize one lender to pull your credit report and then request that the report be emailed to you the same day. You could then use that report (and the official scores contained within) to call around for mortgage quotes.

Beware though: getting quotes off another lender’s report, even with the official scores, doesn’t assure you anything. The lenders “quoting” you rates and fees will eventually have to pull their own reports and the quotes may well change at that time, negating any benefit to managing this process yourself.

Save your money: deal with lenders you trust instead

The best route to take, however, is to simply stop all the games with the credit reports, and instead call two or three banks and mortgage companies you can trust and let them do their thing.

Given my experience, most customers know where they stand with their credit. If your score is just a few points below a certain threshold we can help you get those five or 10 points back in just a day or two.

Will it negatively impact your credit score if you have multiple pulls? No. Five mortgage inquiries in a given 30-day period are collectively viewed as one single inquiry by the credit bureaus, so feel free to have your report pulled a few times.

Just don’t go overboard because your credit report will be pulled several times during the actual loan processing with the company you choose to do business with. You don’t want your scores to drop in underwriting – bad news!

If you have questions about your credit report or your credit score – or you’re considering purchasing a home or refinancing the one you have, give us a call. One of our Loan Officers will be glad to help you determine the best loan package for you.

Why You Don’t Need to Pay for Your Credit Score (Part I)

Why You Don’t Need to Pay for Your Credit Score (Part I)

Maybe you’ve seen some of the news reports, such as the one broadcast by KUTV in Salt Lake City, Utah, about companies “scamming” people with regard to their credit scores.

According to the February 4, 2014 KUTV news report, consumers have been complaining that they’ve paid for their credit score, but when they go to buy a house or a car, they learn the score they have doesn’t match the score used by the lender.

Consumers have filed complaints because they’re being denied loans or being charged higher rates.

In Part I of this two-part post, you’ll learn some basic facts behind FreeCreditReport.com – a site that offers credit reports and credit scores – and why the site is a little misleading. In Part Two, you’ll learn why lenders view credit scores from these sites as meaningless.

How FreeCreditReport.com works

Owned by Experian, FreeCreditReport.com offers consumers a way to get their credit reports and credit scores.

When you arrive at the site’s home page, you’re offered two options: You can get your free credit report by filling out a form, or you can purchase your credit report and credit score for $1.00.

Don’t ignore that disclaimer!

If you go straight to these two options, which most people would do since the calls-to-action are so prominent, you completely miss the disclaimer at the top of the page.

The disclaimer explains that when you purchase the $1.00 option, you’re signing up for a membership. If you don’t cancel your membership within seven days, you’ll then be charged $12.99 a month – indefinitely!

You shouldn’t be paying for credit reports

Interestingly enough, the disclaimer includes a link to annualcreditreport.com – a website authorized by the new Consumer Financial Protection Bureau as being the “official” website from which to order your free credit reports.

To be clear, as a consumer you are guaranteed access to a free copy of your credit report, from each of the reporting bureaus, once a year.

You can obtain your three free reports every 12 months (say every January or June) or you can request a report from a bureau once every four months – like this:

  • Experian in January
  • Equifax in June
  • TransUnion in September

This type of schedule ensures you’re constantly monitoring your credit.

You also get a free copy of your credit report when you apply for a mortgage. Lenders are required to send you copies of your credit reports. Your lender will usually tell you your credit score, too. If your lender doesn’t – ask. Your credit score isn’t confidential information.

(Be sure to see our post on how to determine what your credit score means.)

Stay far away from sites like this

Speaking as a mortgage broker, I recommend that you stay far away from freecreditreport.com and other sites like it. The marketplace is full of noise about identity theft and mistrusting mortgage lenders.

Sites like freecreditreport.com are fanning the flames of fear to generate additional profits for the credit bureaus backing them.

In Part Two of this post, you’ll learn the difference between the various types of credit scores and why lenders only rely on the scores of reports they’ve pulled themselves.

In the meantime, if you’re in the market for a home loan or have been considering a refi, give us a call. We’re here for you.

Do’s and Don’ts While Your Loan is Being Underwritten

Do’s and Don’ts While Your Loan is Being Underwritten

Have you ever wondered how much debt you can accumulate – so much debt that you can never get out of debt?

Actually, this is the wrong question to ask. The question you should ask yourself is, “Do I have the disposable income to make more than the minimum payments on my existing debt?

The key to getting out of debt is to pay more than the minimum payment each month – and to do this, you need unallocated disposable income.

Income allocation – what it means

No matter how much your household income, you can find general guidelines on how to allocate it. These allocations are based on percentages – meaning, you can easily apply them no matter how much you earn.

The bullet points below shows a simple income allocation based on three basic categories. For this chart, allocation is assumed based on net, or after tax, income:

  • Essentials – In this category is shelter (rent or mortgage), food, transportation (gas, public transportation, etc.), and utilities (gas, water, electricity). Because these are essentials, they get the bulk of your income allocation or 50%.
  • Necessary – In this category are those items that are necessary, but not essential, such as insurance (home, auto, medical, etc.), savings, loan payments (i.e. vehicle, short-term loans), and childcare. For this category, allocation is 30% of after-tax income.
  • Disposable – In this category are those things that can seem essential, but are really “nice to haves” and thus are considered part of the “disposable income” allocation, including, clothing, phone plans, gym memberships, Internet and cable, eating out, vacations, home improvements, etc. For this category, allocate 20%.

As you can see, more than half your income is already spoken for with regard to the “essential” and “necessary” items of life. Which brings us to the “disposable income” category – where you have the most play.

It’s here that the question, “Do I have too much debt?” can be answered. Let’s look at two scenarios.

Scenario #1: $150K Household Income

For a couple earning $150K a year, $15K in debt might not be that big of a deal. Because it’s easy to work with round numbers, let’s break down their income this way:

Monthly income after tax: $9,000
($150,000/12 = $12,500 x 28% tax bracket = $3500 in taxes)

And, let’s say they have a $2,500 a month mortgage and $15,270 in debt, which is the average household amount, according to data found on Nerd Wallet.

Plugging these numbers into MSN Money’s Debt Calculator shows that their debt payments, not including mortgage, represent $305 or 3.4% of their disposable income.

The Debt Calculator deems this debt scenario “reasonable.”

In fact, by paying more than double on their debt, or $750 each month, this couple can pay off that debt in 24 months – according to MSN Money’s handy Debt Payoff Calculator.

We can conclude then, that if this couple doesn’t add to their debt, they have savings, and they continue working, their $15K in debt isn’t “too much” for them to handle.

Scenario #2: $51,371 Household Income

The U.S. median household income for 2010, according to the Census Bureau, was $51,371. Using this income, plus the same formula from Scenario #1, we get:

Monthly income after tax: $3,638
($51,371/12 = $4,280 x 15% tax bracket = $642 in taxes)

Let’s say this couple has a mortgage of $1500 a month and they have the average $15,270 in debt.

As the Debt Calculator shows, this couple’s debt payments of $305 a month are 8.4% of their disposable income. Coupled with their mortgage, this couple may have trouble meeting their financial obligations.

If they pay only the minimum payments, it will take this couple five years to pay off their credit card debt – assuming they don’t add to it – according to the Debt Payoff Calculator.

Amount of unallocated disposable income is key to paying off debt

While both of these calculators are good at helping you do the math with regard to debt, what they don’t do is help you see why having too much debt can tip you over the edge of a deep dark financial hole.

When you begin allocating more and more of your disposable income to finance credit card debt, you then begin cutting back on the “Necessary” and “Essential” categories in order to meet expenses.

Savings usually is the first to go. When you stop saving, you lose the ability to meet unexpected financial obligations with cash.

For example, if your car breaks down, you don’t have the cash to pay for this expense – so you put it on your credit card. Or, you just had a really hard day: your boss yelled at you and traffic was bad and by the time you get home, you’re dead tired so you call out for pizza – which goes right on your credit card because you lack cash.

These expenses add to your debt, which increases your monthly payment, which decreases the amount of disposable cash you have each month – and the vicious cycle repeats.

Over time, you have so much debt you have no way of paying it off. The hole just keeps getting deeper and deeper.

If you must carry a credit card balance, my advice is to ensure your debt, excluding mortgage, is no more than 10% to 15% of your after-tax income.
If you believe like you have too much debt, you can get help from American Consumer Credit Card Counseling, a non-profit organization that works with consumers to manage and pay off debt.

Or, if you you’ve been considering a refi in order to free up cash, give us a call. One of our loan officers will be happy to discuss your options with you.

How to Repair Your Credit Rating Without Getting Scammed

How to Repair Your Credit Rating Without Getting Scammed

Unfortunately, credit reporting errors aren’t unusual. Almost every week, we find instances of inaccurate credit reporting. For example, it’s not unusual for a father’s credit history to get mixed up with his son’s when they share the same name. According to a recent
60 Minutes report
, not only are errors in credit reporting common, they can also be difficult to correct.

Not surprisingly then, the financial marketplace has a plethora of agencies specializing in credit repair. Some claim they can boost your credit score in a short period of time or erase your bad credit history altogether.

When you need to fix your credit history – to secure a loan, qualify for low interest rates or other reasons – it’s tempting to believe these claims. But the truth is that some credit repair agencies make false claims about what they can do. Some even run elaborate schemes to take advantage of desperate consumers.

Beware of credit repair scams

While credit reporting mistakes happen, no credit repair agency can legitimately claim to remove accurate and timely credit history from your report.

Some credit repair agencies will take your money up front and then do nothing further. Others have more sophisticated methods: the FBI recently convicted two individuals of wire fraud after selling a software program that they claimed could erase negative information from consumer credit reports.

The credit dispute process

No matter how you go about fixing your credit history – whether through a credit repair agency or by yourself – all credit reporting disputes go through the same process, and these processes are set by the three credit bureaus.

Because the process is the same for everyone, many consumers find they can manage the credit repair dispute process themselves, and in less time and at less cost, than by going through an agency.

If you choose to fix your credit history yourself, start by reviewing the dispute process for each of the credit bureaus. Each credit bureau, including Equifax, TransUnion and Experian have dispute resolution procedures on their websites.

Find a reputable agency

If you choose to have an agency the dispute process for you, it’s important to find one that’s trustworthy.

At Meridian Home Mortgage, we offer our own in-house credit repair services and make referrals to outside agencies for consumers who’d like assistance with the dispute process. For more information about our credit repair services, visit our page on restoring damaged credit. If you have questions, do contact us.

We’re here to help you!

New Online Credit Management Tool: ReadyForZero

New Online Credit Management Tool: ReadyForZero

Credit card debt is still a big issue for many people. According to a detailed post on NerdWallet, the average amount of credit card debt carried by U.S. households is $15,185.

Many people want to get out of debt but can get overwhelmed trying to figure it out – especially with all the conflicting information available. Questions around debt reduction include questions such as:

  • Pay the card with the largest balance or the highest interest rate first?
  • Save money while paying down debt or take money out of savings and make a lump payment?
  • Consolidate debt or just pay off the cards one by one?
  • And, which is better? Biting the bullet and paying it all of as quickly as possible (and going into what some call deprivation mode) or setting aside a specific amount each month and paying it down slowly over time while enjoying your life?

That’s why we like this new tool: ReadyForZero.

Developed by people who actually had debt, ReadyForZero helps you manage debt, track your credit and change your attitudes about money.

Manage Debt

With the basic plan (free!), you can set up a personal profile that allows you to track your progress in paying off debt. Within your profile, you link your credit card accounts. The tool then tells you which credit card to pay first and charts show your progress.

You can also upgrade your account to the Plus plan ($75 per year) which gives you two cool features: automatic payments and your credit score. You can have the system make payments for you automatically on a bi-weekly basis (26 payments a year versus 12) based on when you get paid and have cash.

Making bi-weekly payments has a number of positive benefits.

  • One, as with weight loss, you see your debt being reduced much faster – which motivates you to try harder.
  • Two, by paying biweekly, you eliminate late charges which can lead to higher interest rates and a lower credit score.
  • Three, splitting your payment makes it less painful.
  • And four, by paying more over time, you lower the amount of interest paid.

Track Credit

The system also works with Experian, one of the credit reporting agencies. When you upgrade to the Plus Yearly plan, the system automatically tracks your credit score.

If you’re saving for a house or a new vehicle, knowing this information can help motivate you to clean up any credit issues and pay down debt – even a few points increase in your credit score can help you get a better interest rate.

Change your Attitude about Money

For many people, money is an emotional topic – one that we don’t like talking about – and this is especially true with regard to debt. Once people get into debt, they have a hard time getting out due to feeling shame and embarrassment.

In addition to offering tools for managing your debt, ReadyForZero’s staff (some of whom were in debt themselves) address the emotional issues surrounding debt. Instead of beating you up and telling you how awful you are (as some of the big name financial gurus do), they help you change your attitudes toward money and debt. By addressing these issues in a more positive way, you free yourself to reach your goal: paying off your debt.

What It Doesn’t Do

ReadyForZero doesn’t help you consolidate debt, work with creditors to reduce payments or interest rates, or remove faulty information from credit reports.

In addition, you may not be able to link all of your credit or student loan accounts. When we did a test run of the application, we were not able to link a credit card from a lesser-known bank. When we emailed ReadyForZero support, we received an email back the same day (from a real person!) stating that the company is aware of this issue and is working to resolve it.

We work with people every day in terms of helping them resolve credit issues so that they can refinance their home or purchase a new one. If you’ve got tough credit problems and/or an underwater mortgage – give us a call and let’s talk. We’re here to help you.