Understanding Credit

Why Are Credit Scores Used?

Credit scores are a mathematical formulas used to determine how likely it is that someone will pay their debts as agreed. People with high credit scores find it easier to qualify for credit cards and loans and they enjoy lower interest rates. People with low credit  rates can find credit more difficult to get and creditors can charge them high interest rates or even deny credit altogether without ever worrying about being charged with discrimination.

Credit scores generally range from 350 to 850. Different industries use slightly different formulas to arrive at their scores. The credit card industry, for example, uses a slightly different scoring formula than the mortgage industry. Once your score has been established, here is what it means:

Credit Score Ranges

• 760: Exemplary Credit.  This is where you will get your best Conventional Mortgage Insurance rates.  
• 740: Excellent Credit.This is where you get your best Conventional Interest rates.  
• 720: Very Good. You get your best FHA and VA rates here.   
• 700: Good. Reasonable rates still available.  
• 680: Average. You will start to feel the pinch. You can still readily get Conventional financing but you will pay more.  For less than 20% down financing, FHA will likely be a better deal.  
• 660: Fair. You will pay higher rates and may have difficulty obtaining Conventional financing with less than 20% down.  FHA/VA will be a far cheaper for less than 20% down.  
• 620: Mediocre.  FHA and VA mortgages still readily available – although you will see definitively higher rates.
• Under 620:  Poor.  FHA will still be an option case-by case down to 580 albeit with much higher rates and loan costs.

What Hurts My Credit?

There are many factors that can hurt your credit score.  Note that mortgage Inquiries DO NOT affect credit scores. Here, listed from biggest impact down, are factors that do have an impact on your score.

Factors that will lower your credit score:

• Foreclosures and Short-Sales
• Bankruptcies
• Judgments
• Tax Liens
• Collections
• Late Payments (the more recent the worse)
• Balances on revolving credit that exceeds 50% of your credit limit
• Amount of revolving credit that is open and showing balances
• Newly opened revolving credit card debt
• Lack of recent revolving credit card history
• Credit History less than two years old
• More than 2 revolving credit inquiries within 30 days (this has a very minimal impact, however).

What Helps My Credit?

Now that we’ve seen what hurts credit, let’s take a look at what helps you improve your credit score, again listed from the biggest impact on down.

Factors that will help your credit score:

• No late payments, collections or judgments.
• Credit Cards that have been open for 2 years or longer (the longer the better) with zero balance.
• The more credit cards open with zero balances the better the score.
• Credit Cards with outstanding balances less than 25% of the credit limit/high credit amount.
• No new debt opened in the past year.
  
  

How Long Will Negative Factors Affect My Credit Score?

A collection can reduce a credit score by 30 to 100 points.

A collection is ANY debt that is sold to a service for the purpose of collecting on that debt. Once the Original Debtor “sells” the debt, they typically wash their hands of it and write the remaining balance as a loss. Once an item goes to collection, getting the problem resolved means you must deal with the collection agency.

Even if you pay a debt that has gone into collections, it can take up to three years — or longer — for a credit score to recover. The actual dollar amount of the collection has no bearing on the score. Outside of a Bankruptcy or Foreclosure, nothing can damage a good score as much as a simple collection.

Common Types of Collections:

• Medical (most common)
• Bounced Checks
• Parking Fines/Motor Vehicle Fines
• Utilities
• Cell Phones
• Municipal Fines (think overdue Library Book)

Credit Cards: A Blessing and a Curse

Credit Cards are a primary component of credit scores. Not having any credit cards will result in fair scores at best. However, having credit cards that are maxed-out (or multiple credit cards with balances over 50% of the credit limit) can damage your scores.

Some credit cards do not report credit limits (American Express and Capital One, for example). On these cards, the highest amount ever charged during a billing cycle is treated as the “limit”. The result is that folks using these types of cards for all their monthly expenses (chasing points/rewards) can appear to be maxedout even when they are paying off their balances in full every month.

Tips on Handling Credit Cards:

• The balance you see on your billing statement is what gets reported to the bureau. What you pay it down to is not reported.
• Anytime your reported credit card balance exceeds 50% of what the limit or high balance is, your score gets hurt.
• Revolving debt usage: keep overall revolving balances to less than 50% of the limits/high balances
• Whenever a new credit card is opened, your score is dropped anywhere from 15 to 30 points depending upon the new limit and balance ratio. Thus, chasing low introductory rates by doing a lot of balance transfers will lower your credit score. Closing an account immediately after opening doesn’t help and actually hurts.
• The longer a credit card is open, the better the bonuses to your credit score. Having one high-limit credit card that has been opened for several years can provide significant score bonuses.
• Raising limits on credit cards can help scores.
• Having multiple, unused, zero-balance cards can actually increase your score since the ratio of balances to limits remains low.
• Having credit cards with high balance-to-limit ratios will magnify any adverse actions like a missed payment or collection. A missed payment on its own may drop a score 15 points; a missed payment combined with a few maxed out credit cards can drop a score by 80 points.

How Do I Fix My Credit?

Look at your current credit standing. There are many free services you can use to look at your credit and monitor changes. These are two reliable companies:

• www.myfico.com
• www.freecreditreport.com

Check what’s being reported by all 3 credit bureaus. The Bureaus do not share information with one another. Thus, data reported by one Bureau can be different from another. If you find you have actual errors in your report (this is different than disagreeing with something in your report) the best and nearly only way to correct it is to get your report directly from each of the Credit Bureaus.  

• Experian              www.experian.com
• Equifax                www.equifax.com
• Trans Union          www.transunion.com

Resolve the issue. The fastest way is to pay for the report and then dispute the errors. The Bureaus, by law, will then write to the creditor to confirm the error. If the creditor does not respond within 30 days, the error must be corrected or removed. However, if the creditor responds to the contrary or responds after the 30 days the data will be edited to reflect to whatever the creditor provides. The bureaus do not engage is dispute resolution. Unfair as it is, the onus is on you to get the creditor to provide the correct data to the Bureau.

Avoid any company that charges a fee to “fix” your credit. Time and again, it has been shown that these companies are unreliable. Even more important, they have absolutely no power to force Credit  Bureaus change their data.

How Can You Get a Mortgage With Less-Than-Perfect Credit?

Call me! If the credit score is too low, debt is too high or there’s another problem, I can often find “work arounds” that will satisfy loan underwriters. If credit is such that qualifying for a loan now isn’t possible, I can advise on how to clear credit problems to secure a loan a little while down the road.

This kind of flexibility is only possible because I work with Intercoastal – a mortgage company with some very important differences from others in the field, including:

More direct control over the lending and underwriting process. 
Intercoastal is a direct mortgage lender, not a broker. Brokers have no control over underwriting or funding of loans – these functions are performed by a different company. Brokers have no face time with the underwriter. At Intercoastal, however, we do have direct control and decade-long personal relationships with the underwriters. So, if there is a problem with credit, we can discuss it directly with the underwriter right here in our Fairfax office and see what needs to change in order to get loan approval.

More options for finding mortgages for which you can qualify. 
VA and FHA loans, for example, can often be a better match if you face challenges with credit or coming up with a sizeable down payment. Unlike a bank that is locked into offering just its own mortgage products, Intercoastal can offer VA and FHA loans and shop conventional programs offered by a wide range of lenders.

We’re local. 
In our area, for instance, many people run all their monthly expenses through a card like American Express to build up rewards points and simplify recordkeeping of what’s being spent. We don’t necessarily view this as being “maxed out” on credit. But with brokers and even banks with local branches, the underwriting might not be done in this area – and that same practice might indeed be seen as being maxed out on credit and the loan would be denied.