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May 2008 |
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One of the Most
Important Numbers in your Life: Your Credit Score Greetings Fellow Investors, We can all agree that credit scores play a substantial role in our financial profile. And having an understanding of how credit works is of great value to investors and consumers alike. So, how is credit graded and what can you do to improve your credit; thus improving your buying power? In this newsletter, I would like to share with you the intricacies of that essential three digit number, your credit score. Let’s first touch on what 90% of the largest U.S. lenders use when evaluating consumers, your FICO credit score. If you are obtaining your credit score and it isn’t the FICO credit score, then you’re not obtaining the score that is industry standard. You have three FICO scores, one from each of the three credit reporting bureaus – Equifax, Experian and TransUnion. FICO scores are your credit rating and range between 300-850 (median FICO score in the U.S. is 723). The higher the score, the better and will result in more favorable lending terms including obtaining a lower interest rate. This can save you hundreds of thousands of dollars in your life time: 30 year fixed mortgage, loan amount for residential home: $250,000
Actual example using National Averages as of May 2008 As you can see, paying $1,451/month compared to $2,155/month is a difference of $704/month, $8,448/year and $253,440 for the life of the loan! Did you have any idea credit affects you so severely? There are many steps you can take to improve and maintain your credit score. We will touch more on this later. So, how is your credit score calculated? The exact methodology
is kept a secret primarily to prevent fraudulent meddling with credit scores.
However, there are five known key factors that make up your score: Your credit score is
calculated on your rating in each of the following five categories: In addition to your credit score, it is vital that you make sure your credit profile is accurate and reflects so on your credit report. Similar to your credit score, you have three credit reports, one from each bureau. Although each bureau has its own format and reports this information differently, the basic elements of your credit report are made up of the following: · Identifying information (does not affect scoring) – your name, social security number, date of birth, address and employment information · Trade Lines / Credit Accounts – lenders report type of account (credit card, car loan, mortgage, etc), date account opened, credit limit or loan amount, account balance and payment history · Credit Inquiries – this section lists everyone who has accessed your credit report in the last two years · Public Record & Collection Items – information obtained from state and county courts (bankruptcies, foreclosures, lawsuits, wage attachments, liens and judgments) and information obtained from collection agencies In 2004, the Fair and Accurate Credit Transactions Act was put into effect. The result is that you can now obtain one free credit report per year from each bureau (additional fee for credit score). You can visit the official site http://www.annualcreditreport.com or call (877) 322-8228 for more information on obtaining your report. You can also obtain your FICO credit scores and credit reports through the three credit bureaus individually or through a company that offers this and other credit services for a fee. How can you improve your credit? What can you do to maintain good credit? There are many steps you can take to improve your credit. Some include: · Limit the amount of credit inquiries made. It is accepted that from time to time you will pull your credit report for review (I review at least once per year). And it is also not unusual to have your credit checked by a lender when applying for a credit card, buying a car or purchasing a home. However, understand that inquiries do affect your score and that multiple inquiries in a short time span (1-3 months) will cause your score to decrease. Lenders see it as a risk if an individual just received 3 new credit cards and has already started to rack up a balance in a short period of time. o Note when buying a home or shopping the best rate for a car loan: if you are shopping rates- checking multiple lenders to find the best rate, therefore resulting in multiple credit inquiries on your report in a short time period- then the rule of FICO is that all the inquiries within a 14-day time period will be counted as one inquiry. The newer versions of the FICO calculation allow a 30-45 day “shopping” window, however it depends on which method is being used. If you notice that the multiple inquiries on your report are negatively affecting your score and fall within this rule, you can write a letter to the credit reporting bureaus to have this corrected. I will share more on challenging negative credit items later. o Inquiries remain on your credit report for two years and only affect your credit score for one year. · Do not close older accounts / your oldest account. An important factor of your credit is the length of time you’ve had an account (credit card, etc) open. The longer you’ve had an account paid on time/current the better. Closing some of your oldest accounts can actually hurt your score. When feasible, instead of canceling that credit card, cut it in half and put it away. That way you will not be using it to rack up a balance, but will be using it to maintain/improve your profile. · Keep balances less than 30% of limit. In other words, if you have a credit card limit of $10,000, then keep the balance at $3,000 or less. This plays a major factor in determining your credit score. You can also consider consolidating or transferring some of your smaller balances on low limits onto larger limit accounts. · Pay your bills on time! This is the most important factor. At the very least, make sure you are paying the minimum amount due each month. o If you are having difficulty with this, you may want to consider a debt consolidation loan (secured or un-secured), debt management plan or perhaps the assistance of a reputable credit counseling agency. Some credit counseling or debt negotiation companies will actually recommend you stop making all payments on debt for a period of time, and then the agency will step in to settle with the creditor. I do not recommend this method, as it will be very costly to your credit profile and your debt can double or triple with penalties, fees and interest. It is common for lenders (especially lines of credit), cell phone and utility companies to only report when a negative item occurs- late payment are usually reported to the bureaus if you are over 30 days late. However, if you are making payments on time and are in good standing, you can request that the creditor record the positives to the bureaus as well. Negative items can remain on your credit report for up to 10 years. This negative information will affect your score until the items drop off your report. In some cases, creditors and reporting agencies do not follow through on having these items removed within the appropriate time frame. It is important that you stay aware of what is on your report and what your rights are. You have rights when it comes to your credit. Two acts I recommend becoming familiar with are the Fair Credit Reporting Act (FCRA) and the Fair Debt Collections Practices Act (FDCPA). When violations of these acts occur, you should report it to your regional attorney general and Federal Trade Commission office. Repair your Credit and Improve Your Credit Score! Did you know that 79% of consumer credit reports contain some kind of error or mistake? You have the right to challenge the accuracy of the items in your credit report. You can also challenge the reporting procedure that the creditor or agency followed when they added the negative item to your credit report. If a negative item is not reported in accordance with the many sections and amendments of the law (FCRA) or if the bureau does not reply to your dispute in a timely manner; then the negative items need to come off your report. So what do you do if you are not an expert on credit restoration or you do not want to read through the 86 pages of the FCRA? Can you hire a company to restore and improve your credit for you? Yes, absolutely, most companies will charge between $700 - $3,000 (depending on the number of negative items on the credit report and the severity of the case) for credit restoration services. I found a company that works with individuals for a flat rate of $499. I’ve had incredible success with United Credit Education Services, a division of VR-Tech Marketing Group, LLC. They recently helped a good friend of mine improve his credit score 87 points in 45-days! VR-Tech has a team of credit analysts that perform a thorough review of all items on your credit profile that affect you negatively. They will tailor a plan for you to improve your credit and provide customized dispute letters for you to review, sign and send in to the three bureaus. VR-Tech also provides an online tool that allows you to monitor the progress of the challenge cycles and the improvements made. They offer a six-month money back guarantee and can also help those with good credit, work towards achieving perfect credit. You can learn more about Credit Education at www.rogueinvestorcrediteducation.com or call (800) 584-9394. How beneficial would it be to add credit education and restoration to your tool belt? My company, JTI Real Estate, is a distributor of VR-Tech’s Credit Restoration service. I personally offer this service to all families that I help avoid foreclosure; I also have provided this service to real estate brokers/agents, mortgage brokers, attorneys and investors. After sharing information about credit education and about what VR-Tech can do for people, Michael Williams (co-founder of Rogue Investor), has also enrolled as a distributor. There is an incredible passive income opportunity available with VR-Tech, where you can create an additional avenue of cash flow while empowering others (business owners and consumers alike). I encourage you to apply what you have learned today and I trust that this information will be of great benefit to your portfolio. |
