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Short Sale vs. Foreclosure and Your Credit

By | Mortgage

Financial trouble can be disastrous for American homeowners. After missing four to five mortgage payments, a lender will typically foreclose on your mortgage. This puts you out a home and results in a hefty bad debt showing on your credit file. Meanwhile, a short sale is an “exit strategy” that lets you pay off as much of the debt as possible.

Short Sale vs. Foreclosure

How a Short Sale Affects Your Credit

It is common knowledge that a foreclosure is bad for your credit score. But a short sale is an alternative that can reduce the amount you have to foreclose. Accomplishing this will require selling the home before the foreclosure takes place. When this is an option, it can result in much less bad debt showing on your credit report.

The short sale will still lower your credit score for a long time. This entry can stay on your credit report for up to seven years. You can lose anywhere from 85-160 points, depending on your current FICO score and the severity of your short close. The majority of your score drop will go away within two years if you sustain good credit otherwise.

No Late Payments on a Short Sale

Are you aware that you will be unable to pay for your mortgage in the near future? For example, you might be going through divorce procedures and realize that the home is too expensive for either party to uphold. It makes sense to do a short sale at this point, but what does it mean for your credit score if you avoid late payments?

The biggest benefit is that you will not have late payments on your credit report. Your first late mortgage payment can drop your FICO score by 90-110 points. The actual damage depends on your score before the late payment; for example, if your score is 730, this number could drop below 650 after your first missed payment.

Now, there are two problems that interfere with this happy ending:

  1. Sometimes You Need Late Payments

While not always the case, many lenders will require you to run late on your mortgage payments to qualify for a short sale. That requirement exists for FHA home loans, which need to be a minimum of 31 days late by the time the sale closes. Otherwise, FHA will not approve the transaction. This means you need to withstand the FICO score drop that comes with running late on a mortgage payment. Thankfully, this not a requirement if your mortgage is through Fannie Mae or Freddie Mac.

2. Your Home Has to Sell Pretty Fast

After 90 days or so, there will be more pressure to perform a “deed in foreclosure,” which works the same as a voluntary repossession. This entry factors into your credit report the same as a foreclosure, which means it is more harmful to your credit score than a short sale. Thus, your home needs to sell pretty fast or else the benefits of a short sale are minimal.

You can always take action to make the voluntary repo show better on your file. The main thing is to request the entry to show as “paid as agreed,” on your report. If the lender does not comply, you can then ask for it to be marked as “settled,” or “unrated.” These are all better entries than “foreclosure,” which is a reporting option for your lender.

How a Foreclosure Impacts Your Credit Score

A foreclosure is a more serious way of handling an unaffordable mortgage. You are giving up the debt and the lender must assume full liability. A short sale can let you capture on any real estate market gains to mitigate some of the losses. The remainder (“the deficiency”) is all you are left on the hook for, although some creditors will sue you in court for these funds.

But, with a foreclosure, you are effectively walking away from your mortgage in the most irresponsible way possible. There is no chance to determine the value of your home and the amount of bad debt becomes your entire mortgage balance. This means failing to short sell when running late on payments during a hot real estate market can be costly.

FICO Score Change from Foreclosing

You can expect your FICO score to drop by anywhere from 85-160 points depending on the specifics of your foreclosure. This typically happens when you run many months late, and by the time the debt closes, you will certainly have a 120-day late entry on your credit. This late payment entry holds longer than a single 30-day late payment; while a short sale will mostly age off after two years, a foreclosure will weigh your FICO score down for longer.

A foreclosure often comes with more serious financial struggles than a short sale, because short selling is pre-foreclosure and comes with foresight. Doing a short sale of your home can prevent you from going bankrupt at times. If your foreclosure pairs with a bankruptcy, your FICO score could drop by as much as 240 points.

Conclusion: Go for a Short Sale When Possible

The truth is that your score will suffer for at least two years, regardless of what you choose. The short sale will be less damaging, though, and it will not be as hard to keep building your credit as it would be after foreclosing on your home.

Remember that large FICO score drops occur from late payments, foreclosures and short sales alike. But it is the reporting terms that decide how severe the drop is and how long it takes to recover.

Sources:

https://blog.equifax.com/credit/can-one-late-payment-affect-my-credit-score/

http://homeguides.sfgate.com/fha-guidelines-short-sale-2478.html

https://www.thebalance.com/deficiency-judgements-after-foreclosure-1798478

http://homeguides.sfgate.com/much-credit-score-decrease-foreclosure-1417.html

https://www.thebalance.com/how-much-will-bankruptcy-hurt-

FICO vs. FAKO vs. VantageScore

By | Credit Scores

FICO vs. FAKO vs. VantageScore – Things can get confusing when you try to learn about your credit rating. You might get a free credit monitoring service and be happy to receive a free score. However, the number you get is not necessarily accurate — and sometimes it is off by 100 points or more.

To put it simply, your FICO score is the most accurate estimate of your credit rating. Your FAKO score is a non-FICO score. It is not as accurate, but it still gives you a good idea of your score. Your VantageScore is similar, except it stands a better chance of getting used by a prospective borrower.

Fico-Fako-VantageScore

Understanding FICO Scores

There are more than 50 FICO score versions that exist. The most common ones are the FICO Auto Score, Bankcard Score and FICO Score. The particular model which gets calculated is dependent on the type of loan you require. For instance, a mortgage would use a basic FICO Score version while a credit card could get applied for with your Bankcard Score.

The way your FICO score gets calculated is dependent on the version. Typically it will range from 300-850 points. The calculation breakdown is as follows:

  • 35 percent for payment history
  • 30 percent for credit utilization
  • 15 percent for average credit age
  • 10 percent for new accounts
  • 10 percent for credit diversity

Your FICO score will get calculated individually with each of the major credit bureaus. A borrow can have different information with each of their reports. A lender will also choose one of the bureau files to pull. Therefore, your qualification requirements and score can vary depending on the information you have with each file.

The vast majority of lenders determine your eligibility by looking at one of your FICO score calculations. This is the figure you should use when attempting to improve your credit, as well.

Why Your FICO Score is So Important

Nine out of 10 lenders in America are using a FICO scoring model to determine financing eligibility. The most common model is your basic FICO score, which uses the calculation algorithm listed above. However, the way your score calculates can slightly differ depending on the purpose of the financing.

Your Auto Score

This credit rating algorithm is all about making sure you can afford a new vehicle. It looks at your overall monthly affordability based on your current debt obligations. An auto lender will be able to overlook certain things that a credit card issuer might not put past them.

Your Bankcard Score

This particular credit rating model looks more at your credit card debt than anything else. It puts a greater amount of weight into your credit card repayment history than your installment loan repayment activity. This makes it a more effective scoring model for credit card issuers trying to vet you.



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Understanding Your FAKO Score

FAKO scores consist of any credit ratings that are not made up by FICO. The majority of these exist for credit score tracking purposes. You can look at the calculation from month-to-month and get an idea of how your score is progressing. Any positive or negative action will impact as such, but your rating won’t always line up with your FICO score.

There are very few lenders that qualify you based on your FAKO score. It can be a method for pre-approving prospective borrowers. However, the majority are going to request one of your FICO scores from a major bureau. So, you should not put too much weight into your FAKO score.

Some of the more popular credit-based services/websites to offer a FAKO score include:

  • Credit Karma
  • Credit Sesame
  • Quizzle

Each of these companies offer both free and premium credit monitoring services. They serve as an indicator of your credit-building progress. However, it is not enough to go on when determining whether you qualify for a major loan. You should always stick with your FICO score calculations when buying a car or home. Not to mention, the scoring zone (in points) differs and does not always follow FICO’s path.

The Problem With FAKO Scores

There are many different FAKO scores out there and there is not a universal way to calculate yours. In fact, a FAKO score could vary by hundreds of points depending on the algorithm that the calculating company uses. Any sudden changes to your credit report can have a major impact, as well.

Any prospective lender will not generally use your FAKO score. However, a bureau-based score might come into play when trying to pre-approve you for new credit. This means a FAKO score could be an initial screener and sometimes it can be used to bypass a hard inquiry. With a soft pull and a score estimate, some lenders have enough to go on to make their decision.

Here are some other issues with using FAKO scores:

  • No lenders actually use it when screening new applicants
  • The score you see could be very different elsewhere
  • Any single missing entry can severely skew your score
  • Missing a negative item could severely disfigure your perception

Basically, following your FAKO score can send you down a troubling road. It just takes one negative instance to send your FICO score dropping. However, this might or might not happen with your FAKO score calculation. You could be lead to believe your credit is still running strong — when that is not actually the case.

Credit Score

Which Credit Score Are You Getting?

The services above are all very popular and more than one-third of Americans have an account with at least one site. So it is a good idea to know the difference in credit-scoring between each of them.

  • Credit Karma offers your Equifax and TransUnion scores
  • Credit Sesame includes your Experian National Equivalency score
  • Quizzle provides you with your Vantage Score rating

You should research and choose a credit monitoring service with care. The difference in the effectiveness of your credit score estimates will follow.

Typically, your VantageScore rating will be a more accurate guess of your FICO score. But you have to take into consideration the unique information found on your file at each of the credit bureaus. Any missing positive items will hold your credit rating down on a particular report.

Understanding Your VantageScore Rating

Once upon a time, your VantageScore would make up for approximately 10 percent of your loan qualifications. It is now not so dominant, but there are still quite a few lenders that consider this score.

Your VantageScore 3.0 rating will fall in the 300-850 point range. The main calculation factors are as follows: your payment history, credit age, type, utilization, available credit, total balances and debts, and recent credit behavior.

The main difference with your Vantage Score is that you put more weight in your average credit age. This is less of a factor than your utilization rate with your FICO score, but that is not the case with your VantageScore calculation.

Here is why your VantageScore rating still matters:

  • Nearly 10 percent of lenders use it
  • Works well for ongoing credit risk analysis
  • Provides a fair calculation even without 2 years of payment history
  • Any score changes are systematically calculated with each new entry

Furthermore, there are approximately 30 million more Americans with calculable credit scores using this model over any other. This means that even thin file borrowers and people in credit despair can benefit from following their VantageScore rating.

Conclusion

There are three different sets of credit scores that exist — FICO, FAKO and VantageScore. Each are useful in their own right, but only your FICO scores will truly matter in the end. You should not get caught up in tracking the others as anything more than a general indication of your progress from month-to-month.

It is understandable that you cannot pull your report and get a proper calculation every single month. Instead, all you can do is track your report changes monthly and estimate the score impact.

Sources:

http://myfico.custhelp.com/app/answers/detail/a_id/469/~/fico%C2%AE-score-versions-included-in-your-credit-report

http://www.doctorofcredit.com/credit-scores/fako-score/

https://www.vantagescore.com/images/resources/VantageScore3-0_WhitePaper.pdf

https://www.quizzle.com/resource-center/credit-q-and-a/how-is-my-vantagescore-credit-score-calculated

http://www.myfico.com/crediteducation/how-lenders-use-fico-scores.aspx

https://blog.smartcredit.com/2010/05/01/what-is-an-auto-credit-score/

Understanding Your Credit – Score, Reports and Bureaus

By | Credit Reports

Understanding Your Credit

Most Americans do not realize how credit scores, reports and bureaus actually work. In fact, 42 percent believe the myth that lenders must report to all three major credit bureaus. This is wrong and causes a huge headache at times. The truth is that your score could vary by as many as hundreds of points between your files at each of the bureaus.

This is just one of many examples of credit misinformation. When you research how credit works, there is a web of knowledge to uncover. It all helps you become a better borrower, as you can pay your debts and manage new credit more efficiently.

Credit Scores & FICO Explained

Your credit score, or “FICO score,” is something you need to mentally master. It is a single output that significantly impacts your borrowing abilities and creditworthiness. All credit score factors matter to you – therefore, it is essential to have a solid understanding of how they work.

The Types of Credit Scores

While there are many types of credit-scoring algorithms, the majority are a type of FICO score. This is why the term “FICO” goes hand-in-hand with “credit score” so often. If you hear the term “FAKO score,” it just means anything but a FICO score.

Here are some different credit-scoring models that exist:

  • BEACON
  • CE
  • Empirica
  • FICO
  • VantageScore 3.0

At least nine of 10 lenders use a FICO score to screen applicants.

 

(Source wwww.myfico.com)

How Does FICO Calculate Your Credit Score?

  • Payment History = 35%
  • Amounts Owed = 30%
  • Length of Credit History = 15%
  • New Credit = 10%
  • Credit Mix = 10%

Of course, each type of credit rating will have a slightly different algorithm. But, you should hold these rating factors as the most important variables. Focus on avoiding delinquencies or worse, and start bringing your total debt down.

Hint: pay revolving debt first. Your installment debts (such as student loans) do not count toward your utilization ratio.

Which Credit or FICO Scores Do Lenders Use?

FICO offers 28 main score versions to each of the three major credit bureaus. It provides a scoring algorithm for these bureaus to determine a FICO score to assign to each file. With the help of FICO, every credit bureau also has an in-house scoring model. They are as follows: BEACON (Equifax), FICO Risk Score (Experian) and Empirica (TransUnion).

A lender will decide on which credit bureau to pull your file from. That bureau will dictate the score that is provided – based on the type of account you wish to open. This means your score could vary for a car loan, home mortgage and so on.

Auto Score vs. Bankcard Score vs. FICO Score

There is an appropriate time for a lender to use each type of score. FICO Score 8 is the most generally accepted model between borrowers and lenders. Older FICO score versions are regularly used and more common in the mortgage market. FICO Auto Score is the go-to score when qualifying an applicant for an auto loan, and Bankcard Score is used to measure the worthiness of credit card applicants.

FICO Scores Used by Auto Lenders

FICO Auto Score is most common, but the version each bureau uses will differ. Equifax typically supplies FICO Auto Score 5 or 8. Experian uses Auto Score 2 or 8. Meanwhile, TransUnion falls to Auto Score 4 and 8. Since the FICO Auto Score 9 recently came into being, it might start gaining traction with any or all of the credit bureaus soon.

FICO Scores Used by Credit Card Issuers

FICO Bankcard Score 2 and 8, and FICO Score 3, are all sometimes pulled for the purpose of making credit card lending decisions. FICO Bankcard Score 9 also now exists but is not yet commonplace. The Bankcard Score focuses more on your credit card history and less on your medical debts, utility bills and any one-off missed payments.

FICO Scores Used by Home Loan Providers

A mortgage broker or private lender will typically use a dated FICO Score. This is because the underwriting rules for the U.S. mortgage industry require the use of older versions. As such, Equifax uses FICO Score 2, Experian uses FICO Score 5, and TransUnion uses FICO Score 4 to qualify mortgage applicants.

Even after reading about scores here, you no doubt have some questions. A good way to gain more knowledge is by reading the informative content on myFICO.com’s website. This will give you a better idea on how the credit rankers run things, too.

Credit Report Mystery

Reading and Understanding Your Credit Report

Confusion forms when you first look at your credit report. It is hard to know what is there, what is not and how things got there in the first place. But, this foggy way of thinking clears up once you get a good grasp of basic credit report terms. Below are some things you might find in your file:

Default

After you fail to pay, it will say you are in default on your debt. This happens after you fail to repay as scheduled. With credit cards, a default is usually reported after you go 90 days without making any payments. The default status will stay on your credit report for six years before it drops off.

Derogatory

A derogatory mark means only that the item is a negative one. It usually implies a late payment, charge-off or court judgment against you. It serves as a warning from a scorned lender and symbolizes a lack of creditworthiness. The derogatory status can stay on your report for up to seven years.

Satisfied

A satisfied item is anything that went into dispute with a creditor but is now fully resolved. As with all public record documents, a court judgment will stay in your file for seven years from the date you satisfy the debt.

Settled

A settled item is a debt that was in arrears but no longer exists because a settlement agreement was made between you and the creditor. This is a payoff that allows you to settle for less than what you actually owe – it is common when dealing with debt collectors since they pay pennies on the dollar to own the debt and will typically negotiate. Not paying the total amount back can harm your score, and the damage will stay on your file for seven years.

If you are a responsible borrower, the positive terms you might see include “Pays As Agreed” or “Paid/Closed Never Late.” Additionally, when you start running late on your payments, you might see 60 Days Past Due or 120 Days Past Due on your report.

What Else Your Credit Report Tells You

Your credit report contains many other pieces of information aside from the current account status for each debt. Take a look below to better understand what all is on your credit report and how to read it.

Personal Information

Your credit report will provide personal information, including your full name, where you live, your place of employment and your Social Security number. This data is gathered from the various accounts you hold that are being reported to the credit bureaus. A credit report will get an update to its information any time an account is updated. It can mix up information at times if your accounts are not up-to-date, so keep that in mind.

Soft / Hard Inquiries

Any time a lender pulls your file, it will result in an inquiry. This inquiry can be either soft or hard, with the latter having a short-term negative impact on your score. Soft inquiries mostly occur when employers run a background check for employment purposes. Many lenders will also perform a soft pull of your credit report to see if you pre-qualify for one of their offers before sending it to you.

Hard inquiries occur when lenders determine your creditworthiness at your request. A hard pull can drop your score a few points but will drop off of your report two years after it posts.

Public Record and Collections

Your credit report will include any public records in your name, such as bankruptcies, court judgments, foreclosures, lawsuits, wage garnishments and tax liens. The length of time these entries stay on your reports is variable. A civil judgment will last for seven years. Meanwhile, tax liens are very dangerous – they drop off seven years after the paid date, but leaving them unpaid can plague your file for 15 long years.

Credit Errors

 

Tackling Your Credit Report – and the Errors!

You have a credit report on file at Equifax, Experian and TransUnion. Each bureau accepts information from credit reporting companies. The creditors submit details to one, two or all of the major bureaus. Thus, it is possible for your reports to contain inconsistent information.

Some lenders will pull from one credit bureau only. This means your chance to qualify for credit comes down to which bureau they choose. So, it is important to make sure your information is accurate. You also need to make sure that all your accounts show up on each of your reports.

Boost Your Score by Fixing Credit Report Errors

Did you know that the FTC’s 2015 follow-up study on credit report accuracy found that roughly 20 percent of subjects saw a credit score increase after fixing errors found on their reports? This news came after discovering that 20 percent of credit reports contain at least one inaccuracy.

These errors are often little details that get mixed up. This typically happens when lenders only report to one of the credit bureaus. The missing pieces of your payment history can make or break your credit score. Furthermore, having only part of your debt in each file will result in an inaccurate calculation of your credit utilization rate – for better or worse.

Credit Report Errors Worth Disputing

The hardest thing to decide is whether you should report an error or not. It is not wise to ignore anything that is incorrect, but many issues will not impact your score. Little discrepancies in your personal information, for example, will not lead to a points boost.

The best time to report an error is when you see a major issue. If something is literally holding your score down, then you should report it. Even as little as 25 points can influence how you are able to build your credit. Imagine a few unjust rejections as you apply for loans and credit cards – these further drop your score. Ultimately, you look like a less reliable borrower than you really are.

Here are the errors that can impact your FICO score the most:

  • Letting an account enter Collections status = up to 100 points
  • 30 days delinquent on a bank card debt = up to 100 points lost
  • Missing a single credit account = up to 100 points difference by file

Understand that if you have an error causing a 100-point difference, it is severely holding you back. Going from a 780 to 680 score alone can result in more than $450 annually spent on extra interest. Take advantage of the chance to improve your score whenever you can. However, make sure not to fabricate errors or exaggerate issues to get bad debts removed.

How to Find Errors on Your Credit Report

First, simultaneously obtain current copies of your credit reports from the big three credit agencies. Then, you can compare the data and determine where any inconsistencies lie. This will be effective for picking up on most or all errors, but further review may still be still necessary.

One thing to watch for is debt that gets sold and resold. The information can change with time, and even the amount owing might be different. Any discrepancies may be grounds for removal of the entry.

This can bring your score up, but, how much will it increase? Four in every 1,000 reports with errors will see a change of as many as 100 points. This is a staggering statistic, but you should look at the stats affecting the majority. Five percent of erroneous credit reports contain inaccuracies of 25 points or more.

It is free to dispute credit reporting errors. Do this if you find anything in your file to be unfair or unjustified. Your credit score will improve after the errors are removed. However, make sure to only report true inaccuracies; if the debt reappears, your score boost will reverse itself fast.

Step-by-Step Credit Report Error Guide

So, have you come to the decision that reporting your errors is the right thing to do? It can make a major difference and aid you in your journey to rebuild your FICO score. With that said, you will only get good results if you follow the proper protocols.

Here’s how you can go about reporting errors in your credit file:

Contact the Credit Bureau

Reach out to the credit bureau to report your claim with a dispute letter. Be respectful, and provide all evidence you have to back up the fact that an item should be removed. If the information is inaccurate with all three bureaus, make sure to report the problem to each.

Wait to Hear Back

The company that reported the debt will have a short period to dispute your claim. This is when any information against you can come into play. After that, the dispute can go into mediation for a final judgment. Typically, you will hear back from the creditor within 30 days.

Usually, the judgment will be completed within this short time frame. In difficult situations, though, it can run on for a few months or longer. Once all is over, your score will recalculate. However, it is important to note that the entries might drop off temporarily and return after evidence against you is found. So, if you report factually accurate entries, it could end up leaving you in a worse position later.

What if You’re the Victim of Identity Theft?

This is an entirely different situation, but the process for handling identity theft is somewhat similar to reporting other issues. You must contact the credit bureau(s) with your claim. However, to be better prepared, a copy of your FTC Affidavit should be supplied. You can also use this to obtain a police report at your local police station.

Supplying all this information, along with your proof, will be adequate. From there, you will wait for a reply and see if any further documents are needed. Identity theft entries can damage your score drastically, and they should be reported as soon as you notice them.

Furthermore, it is important to watch out for identity theft all the time. This issue hurts many Americans every year, and there are endless ways for fraudsters to target you. There are many free identity theft protection services that work wonders.

If you believe you are the victim of identity theft and have contacted the credit bureau, you will also receive a fraud alert on your credit report. This lets lenders know to be careful when dealing with someone who connects to your file.

Read the FTC’s Disputing Errors on Credit Reports to learn the entire process.

Credit-Related FAQs

You should have a clearer view now of how credit works, but here’s extra info (and reminders) to help you out!

1. Do Lenders Report to ALL Credit Bureaus?

A lender can post information to one or all of the major credit bureaus, which are Equifax, Experian and TransUnion. This data will calculate into your FICO score. Eventually, a lender will use your credit rating to determine your loan eligibility. Your reports can get mixed up and have varying scores, which can result in unjust denials of credit.

2. How Do Credit Bureaus Collect Personal Data?

Information like your current employer and physical address can come from your credit card issuer, your loan provider or your utility provider. These data points are put in your file on a somewhat regular basis – monthly, quarterly, etc. This gives the bureaus what they need to try and keep your personal information up-to-date.

3. How Do You Get a Copy of Your Credit Report?

Go to www.AnnualCreditReport.com to make a request online. This is a service that allows U.S. citizens to request a free credit report from Equifax, Experian and TransUnion. You can pull your reports once a year, and per the FACT Act, it is your legal entitlement. You may view the reports online or request that printed copies be mailed to you. However, keep in mind that this will only get you copies of your reports – and not the associated credit scores.

4. How Often Should You Check Your Credit Report?

You should always stay up-to-date with what posts to your credit report at each of the major credit bureaus. Spread things out, and check one of your files every four months. Alternatively, a free or affordable credit monitoring service can help you keep tabs on things.

5. Can You Find Out Which Score a Lender Will Use?

Thanks to the FCRA Act, a lender must include “the range of possible credit scores under the model used to generate the credit score.” This means you will know whichever credit ratings a prospective lender receives. Not only that, but you will also be told the type (version) of FICO score that was pulled for your application.

6. How Long Does Stuff Last on Your Credit Report?

  • Unpaid tax liens: Up to 15 years from the filing date
  • Bankruptcies: 10 years – possibly seven years if you get a Chapter 13 discharge
  • Tax liens: Seven years from the filing date
  • Collection accounts: Seven years + 180 days from the first month’s missed payment
  • Foreclosure: Seven years after the date of your foreclosure
  • Late payments: Seven years after the date of the payment delinquency
  • Charge-offs: Seven years after the date your debt is written off as a loss
  • Soft inquiries: Two years from the date of the inquiry
  • Hard inquiries: One year from the date of the inquiry

Sources:

https://blog.creditkarma.com/personal-finance/how-much-do-americans-really-know-about-credit/

http://www.myfico.com/crediteducation/credit-score.aspx

http://www.myfico.com/

https://www.ftc.gov/news-events/press-releases/2015/01/ftc-issues-follow-study-credit-report-accuracy

https://www.ftc.gov/news-events/press-releases/2013/02/ftc-study-five-percent-consumers-had-errors-their-credit-reports

https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports

Student Loan or Credit Card Debt Which Is Worse?

By | Debt, Uncategorized

Credit cards and student loans are two major debt lines plaguing American households today. It’s said that the average American family carries $16,061 in credit card debt and a whopping $49,042 in student loan debt.

The latter statistic is worth looking into further.

Student Loan and Credit Card Debt

How Your Student Loan Impacts Your Credit

Your student loan is as real as any credit card or loan on your credit file. It’s not anymore “forgiving” than any other type of installment debt. This means every delinquency will hurt your credit score.

The worst case scenario comes from defaulting on your student loan debts. This is something you absolutely want to avoid. It can send even the strongest credit scores down 100s of points. The road to recovery will be long, and the damage will stay on your credit report for seven years.

You can usually negotiate with your student loan provider. If you’re in financial distress, try to work out a payment plan for the near future. Even avoiding a delinquency entry on your file can save you an 80-point drop after your first 30 days of being delinquent.

Your student loan reports both good and bad. However, it’s the bad that does the most to your credit rating, while good efforts have little reward. You need to avoid the penalties to your FICO score to have a chance to repair your credit effectively.

How Credit Cards Differ from Student Loans

Credit cards are a type of “revolving” debt, which means there’s an open credit line at all times. You will be able to borrow up to your max amount so long as the minimum monthly interest payments are paid.

It’s imperative to stay up to date on your credit card debts. Defaulting will cause extensive damage to your credit. You can typically pay a very small payment to keep your card alive. Meanwhile, the minimum payment for your student loan might be a bit more difficult to sustain.

Your credit score’s second-biggest factor is your utilization rate. This is the amount of debt you carry versus the amount you’re able to borrow. The higher it is the worse it says about you as a borrower. You want to keep it low (below 30 percent) for as long as possible; your payment history is another calculation variable and it considers your previous utilization levels.

Pay Credit Cards or Student Loan First?

It’s quite the dilemma. Paying your student loan helps with offing a major outstanding debt. However, paying off your student loan will not impact your credit utilization rate for the better in any way.

If you have a substantial amount of credit card debt, it makes sense to tackle that first. Each $1,000 you knock down will have a bigger impact on our credit rating, but keep in mind if your student loan runs into default it will be all for nothing.

Your payment history still remains the number-one factor in your FICO score calculation. Thus, it’s a good idea to see how you can improve it. This would mean maintaining payments on your student loan while reducing other debts.

You want to use any extra cash to tackle your overall credit card debt. The goal is to bring your utilization rates down as much as you can. This can be done from accepting credit limit increases too – so long as you avoid using the newly available funds.

Using Tax Refunds to Pay Off Student Loans

You will not want to make the mistake of using your tax refund as a way to pay off your student loan. Everyone thinks it is hard to take care of, so using your taxes is a sensible way to get the debt under control.

The truth is, your student loan will not hurt your score if the debt remains on your balance sheet. Trouble only arises when you run delinquent or if you default the loan. This means you can leave this particular installment loan for last while focusing on paying off higher-interest debts.

You are endangering your creditworthiness by putting your tax refund to use to pay off your student loan. The large lump sum can go toward your credit cards and have a much greater impact. Remember, credit cards accrue interest month after month as you fail to pay them off; it won’t take long for your debts to pile up if these are left unchecked.

Conclusion

At the end of the day, the worst type of debt to carry is the one you fail to pay off. It’s important to prove you are a good, trustworthy borrow in every sense of the term. Therefore, you must maintain positive status with your accounts (including your student loan) even if you only pay the minimum.

If you ever feel unable to pay your student loan payments, consider one of the three payment plans they offer. You can arrange to pay as you earn, based on your income or contingent on a certain amount of generated income.

If you fail to come to a deal then missing your payment will result in a late payment entry on your credit report. The damage will be irreversible; now that you know what’s at stake, make sure you sort your debt repayments accordingly.

Sources:

http://www.myfico.com/credit-education/whats-in-your-credit-score/

https://www.nerdwallet.com/blog/average-credit-card-debt-household/

blog.ed.gov/2015/06/3-options-to-consider-if-you-cant-afford-your-student-loan-payment/

Taxes and Your Credit – Are you ready?

By | Your Credit

Your taxes are due by April 17 this year. There’s a lot of preparation that goes into being ready to submit your return. From assessing your current debts to avoiding tax offsets, it’s important to know everything about how your credit plays into your taxes.

Are you ready for the 2017 tax season?

It’s right around the corner, and you’ll want to prepare yourself now!

Taxes and Your Credit

Filing Your Taxes

You need to file your taxes. It’s also important to keep good on anything you owe to the IRS, as leaving an unpaid debt can result in serious damage to your credit score. This is because the federal government will opt to place it on your credit report.

Tax liens are no laughing matter. You can see your FICO score drop by more than 100 points. It can destroy even the best of borrowers; thankfully, you can submit a removal request to get the lien off your credit report.

There’s no guarantee your credit rating will improve after the lien is taken off your report. It can still weigh on your score calculation for up to seven years. Your best bet is to plan ahead of time if you expect to owe the IRS money. It’s usually possible to set up a repayment plan and avoid the credit-damaging implications altogether.

Before You File

Go over your credit report and all your outstanding debts. Figure out if you have any debts that could be taken via tax refund garnishments. Further, make sure you don’t have any judgments against you with bank levy approval. It will put all your funds at risk of seizure and, unfortunately, creditors tend to target your tax refund deposit.

Here are five quick questions to ask yourself before filing:

  1. Do you owe the IRS anything? If so, read up on the IRS’s Payment & Installation Agreements to avoid losing a large lump sump out of your refund.
  2. Do you have other federal or state debts? If so, negotiate a repayment plan to avoid wage garnishment — check your state’s laws first.
  3. Did you default on student loan recently? If so, it can lead to a student loan tax offset, which means a smaller refund for you.
  4. Did you avoid paying any fines or tickets? If so, the result varies by state, but some cities go as far as adding it onto property tax bills.
  5. Are you planning to file for Chapter 7 bankruptcy? If so, you might want to do it now — you’ll get your 2016 tax year refund, but nothing next year.

This is just the premise of what you should consider before you do your taxes. A more complex approach will be necessary if you answered “YES” to any of these questions.

Warning: Your spouse’s financial safety can be put at risk if you owe. If no settlement is made on your debts with the IRS and you filed together, the right to garnish tax refunds and wages will apply for your partner also. Things will get even more confusing if you live in one of the common-law states, but that’s a whole different topic.

Your Tax Refund

In 2015, the IRS reported that 83 percent of American taxpayers received a tax refund. Some did not, due to making too much through the year. However, it’s fair to conclude that the typical average credit borrower did receive at least some money back.

A lump of cash is the perfect kickstart toward your credit recovery goals. If you receive anywhere near the average tax refund amount ($2,701 in 2015), it will make a huge difference.

How Does Debt Impact Your Tax Refund?

Any bad debts, such as accounts in collections, can cause you significant financial troubles. In some cases the creditors might succeed at garnishing part of your wages. A creditor can even go as far as emptying your bank account if the court approves a bank levy request.

The creditor has the right to remove up to 100 percent of the amount owing.

Before filing your taxes, make sure any debt disputes are in order. Collection agencies look at tax season as “go time” for planning and executing wage garnishments.. If you have anything in your bank account, a court-approved levy could take it all.

What You Don’t Have to Worry About …

Do you have an annoying creditor that wants you to pay off a debt now?

Are discussions about repayment plans not leading anywhere?

If so, a typical creditor needs to take you to court and get a judgment against you. This will take a while, and chances are you’ll receive your tax refund before it’s done.

The majority of tax refund garnishments occur because of back taxes, child support and other legal judgments. Wage garnishments are a bit less complicated than bank levies, but they still require court approval first.

Take Advantage of Your Tax Breaks

It’s important to educate yourself on all the ways you can reduce what you owe and increase what you get back on your taxes. Not every tax break will help you, and sometimes what seems like a fair claim won’t get approved.

Regardless, below are some tax breaks and deductions worth noting:

To see more potential tax deductions, check the IRS’s Miscellaneous Deductions for the 2016 tax year. This covers the lucrative savings that many Americans fail to notice. If you want to run through the basic deductions, read the IRS’s page on Credits & Deductions for Individuals.

A Note for Homeowners

Things get more interesting if you’re a homeowner.

You’ll need to be careful when managing Private Mortgage Insurance (PMI). It’s essential if you don’t have at least 20 percent to put down on a purchase or refinance. When you reach at least 20 percent equity in your home, it’s no longer needed.

You might be underestimating the expensiveness of PMI premiums. It doesn’t just add a cost but rather, it takes away from affording other expenses. Hundreds, if not thousands of dollars, can be wasted. Your goal should be to remove the insurance as soon as you meet the equity requirement.

You may have the right to deduct your mortgage insurance premiums. Tens of millions of Americans can, and yet very few homeowners do. The biggest requirement for claiming a PMI tax deduction is having an adjusted growth income (AGI) of less than $100,000 for the 2016 tax year.

This tax break is meant for struggling families that own homes. It’s a small savings, but everything helps. The U.S. housing market is going up, and this is freeing more equity for the average homeowner. Keep an eye on your situation, because removing the PMI premium could be possible if the market increases the equity in your home.

Credit Repair and Taxes FAQ

1. Can the IRS Garnish My Wages/Tax Refund?

The IRS, within federal guidelines, has the right to garnish your tax refunds and wages to recuperate funds owing from previous years. Most of the time you can set up a payment plan to alleviate the situation before it escalates.

2. Can Child Support Debt Impact Your Tax Refund?

The state government can garnish any remaining funds on your tax return to cover what’s owed on your child support bill. This can continue until it’s paid off; likewise, there’s a risk of wage garnishment when you deal with child support debt.

3. How Will a Student Loan Affect Your Tax Refund?

The only real risk exists if you have defaulted on a student loan debt. This gives the federal government the power to garnish funds via a tax offset. Your significant other, if you filed together, could also have funds taken from their tax return.

4. Will a Tax Lien Hurt Your Credit Score?

Yes. As mentioned earlier, you can see your score drop by more than 100 points if there’s a lien against you. The only fix for this is to request its removal once you pay what’s owed, but it will continue to impact your credit for up to seven years.

5. Are Credit Repair Services Tax Deductible?

This is one of the tax deductions that slips by most Americans. If you get credit repair assistance, there are some components that will be tax deductible. The main write-offs are for attorneys, such as when dealing with bankruptcy or identity theft.

Sources:

https://www.irs.gov/uac/tax-refund-withholdings-and-offsets

https://www.irs.gov/pub/irs-pdf/f12277.pdf

https://www.irs.gov/individuals/payment-plans-installment-agreements

https://www.garnishmentlaws.org/

https://www.irs.gov/uac/newsroom/tax-refunds-reach-almost-125-billion-mark-irs-gov-available-for-tax-help

http://www.cpapracticeadvisor.com/news/12116556/average-income-tax-refund-for-2015-increased-to-2701-irs-caught-908-million-in-fraudulent-refunds

http://www.bankrate.com/finance/debt/3-ways-to-fight-a-creditor-s-account-levy.aspx

https://www.irs.gov/uac/credit-and-debit-card-fees-related-to-tax-payment-are-deductible

https://www.irs.gov/taxtopics/tc456.html

https://www.irs.gov/taxtopics/tc456.html

https://www.irs.gov/taxtopics/tc453.html

http://www.forbes.com/sites/robertwood/2015/03/19/which-legal-fees-can-you-deduct-on-your-taxes/

https://www.irs.gov/pub/irs-pdf/p529.pdf

https://www.irs.gov/credits-deductions/individuals

https://www.irs.gov/publications/p936/ar02.html

https://turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/Federal-Guidelines-for-Garnishment/INF14841.html

High Mortgage Payment? Check Your Credit Score

By | Mortgage

Did you calculate the cost and find out your mortgage payments will be high? If so, your credit score could be to blame.

Buying a Home With Average Credit

You need a FICO score of 620 or more to be taken seriously by most traditional lenders. With FHA financing a score of 580 or more is needed, but FHA loans come with other requirements.

The thing is, you don’t want to just have a “good” credit score. There’s a big difference when you’re buying a house. It’s too big of a loan to approach when you’re not an optimal borrower.

The Difference in Monthly Payment Costs

The biggest comparison to make is a $200,000 loan over 30 years. With a FICO score of 620 to 639, you’re looking at a 4.79 percent APR rate. This comes with a $1,048 monthly payment. A borrower with a FICO score between 700 and 759 will pay $890 a month.

As a result, improving your FICO score before financing a $200,000 mortgage can save you $150 a month. There are other poor terms that come with a low-grade home loan. You might effectively lose as much as $250 a month as a result of not qualifying for a better mortgage.

The Cost of Buying a Home by FICO Score

It’s common knowledge that your credit rating affects your interest rate. However, not many realize how much of an impact it will have on the overall cost of your new home. So it’s interesting to see what you can expect to spend when buying a home — based on your FICO score.

Take a look below for a rough run-down with an analysis for a home buyer with a FICO score in the 620 to 659 range. This information comes from the Loan Savings Calculator on myFICO’s website.

Interest Cost Differences

In this score range, you can expect an APR between 4.244 and 4.79 percent. Say you’re borrowing $80,000 toward a home and you plan to pay it off in 15 years.

This averages out to between $574 and $596 a month for mortgage premiums. It also means $23,340 to $27,253 in total interest paid over the 15-year term.

How Much Can You Save on a $200,000 Mortgage Loan?

This scenario gets even more interesting when you look at the purchase of a $200,000 home loan. Borrowing that amount requires having a sizable down payment or income.

This loan will cost a lot more if you take it on while you have only average credit. You might find yourself opting for a 30-year term to avoid the high monthly payments. In this case, the interest difference can “blow your mind” when you discover it.

A low 600s credit rating would mean approximately $150,000 to $175,000 in interest paid over 30 years on a $200,000 loan.

Borrowers with FICO scores in the low 700s can expect to receive $40,000 to $60,000 in interest savings.

Other Benefits of a Better FICO Score

With a strong FICO score, you can bully around lenders. When buying a home, this means you have the power to negotiate the best APR rate possible.

This means you can save a lot on your interest payments. This results in a lower monthly payment too. You could save as much as a few hundred dollars a month.

Being able to pick and choose between lenders is a good thing for other reasons, too. You can gain access to terms like “early buyouts without penalties,” which is hard to find.

This is especially beneficial if you inherit a lot of money or win the lottery. The loan term will make it so you can pay off your last month of interest and buy out the rest of the loan.

Don’t Forget About the Refinancing Dilemma

Next, you need a strong FICO score to qualify to refinance your mortgage. Having the bare minimum is not good enough if the borrowing requirements change over time.

It’s also not helpful if you end up with another blemish that pushes your score below the minimum. When your loan term is up, you might find yourself selling the house or foreclosing if your credit score is low.

The same is true if you’re using a co-signer to qualify for the mortgage. If this person cannot qualify anymore, you might not be able to pull the weight when you attempt to refinance. Since you only gain considerable equity in the later years (due to more interest paid upfront) this is a serious disadvantage.

Remember What Happens Next

When you first take on a new loan, your credit score drops before it ages a bit. The negative effects of the new debt become less month by month. In the end, your good repayment history and strong utilization rate will result in a higher FICO score.

However, in the near term your credit rating will suffer. The large home loan will make you seem like a bad borrower. So you might struggle in financing for even smaller things (like store cards) in the first six months after you finance your home.

Conclusion

If you take in anything from reading this, it should be the fact that a better FICO score means a better loan. This is true whether you’re buying a car or a house. It’s even true when you’re trying to take out a second mortgage.

We went as far as to cover a piece listing four reasons your credit score matters during retirement. You can read that blog post and find even more reasons why you’ll want to build your score before it’s too late.

Better Credit Score Means Cheaper Car Insurance

By | Credit Scores, Insurance

Car-Insurance-Credit-Score-Ovation-Credit

There are many benefits to having a better credit score. If you’re buying a house, it will be obvious you need excellent credit first. The difference in your interest payments could run $50,000 or more if you don’t bother.

The same situation exists when you’re getting car insurance.

That’s right, even your car insurance premiums are influenced by your FICO score. So improving your credit rating can save you money every month — and not just on your debts.

Meet the Credit-Based Insurance Score

There’s a credit rating for insurers to use that’s provided by FICO. It’s a credit-based insurance score, and most car and home insurance companies use it.

Home insurance rates can go up quite a bit if your score drops and a claim is made. This is because the risk of a fraudulent claim is higher if you’re struggling to afford the payments.

Car insurance companies are also known for jacking up premiums after claims are made. This is why many choose to pay off the cost of repairing the other person’s vehicle after a minor accident.

In reality, a poor credit score can result in a huge increase in your premiums. One incident can cost you $5,000 to $10,000 or more in the course of a year. The difference is an additional $400 to $800 out of your pocket every month to stay on the road.

How Does the FICO Auto Insurance Score Work?

Here’s how FICO calculates your auto insurance score:

  • Payment history (40 percent),
  • Outstanding debt (30 percent),
  • Credit history length (15 percent),
  • Pursuit of new credit (10 percent) and
  • Credit mix (5 percent).

This is only a little different than the traditional FICO score breakdown. You see 5 percent more importance on your payment history in the credit-based insurance score. This difference comes from a reduced emphasis on your credit diversity.

Remember: The Laws Vary by State

Not all states allow car insurance providers to use credit-based FICO scores. You can find your state’s department website and see how things stand where you live.

If you’re lucky, your state is one of the few that doesn’t allow insurers to use your credit score. This will prevent your bad borrower status from potentially costing you a lot of money due to your premiums going up. In one example on ConsumerReports.com, you can see more than $1,300 added to your monthly cost.

This instance is based on a single moving violation by a lone driver in Kansas. You can only imagine how much it would cost if you ran into multiple issues. You might even fail to qualify for insurance through certain strict insurers. It’s possible you’ll end up having to pay for a year upfront too.

The Problem With Credit Scores and Insurance

You might find your monthly costs getting higher all the time. A single moving violation could mean the difference in being able to pay your debts. This means you might be digging yourself further into debt even though the matter is out of your control.

All you can do is prepare for the worst. If your insurance premiums go up, you want the infraction to have minimal financial impact.

You can expect your premium to rise $100 or more per month from a single moving violation. Still, this is better than paying an extra $1,000 each month to stay on the road.

You can improve your credit rating and save money on car insurance. Since this is a cost factor, you can renegotiate on your monthly premiums when your FICO score is high. If the insurer refuses to negotiate — another insurance company may be eager to give you a better rate.

Does Your Insurance Affect Your Credit?

One saving grace is that this is a one-way relationship. Your FICO score impacts your car insurance costs, but your insurance won’t impact your credit score.

Since it’s not an inverse relationship, failing to pay your car insurance on time (or at all) will not hurt your credit. You won’t see a reduction in your FICO score — even if you end up in a financial disagreement with your insurer.

How to Save With a Better Credit Score

You can actually reduce your monthly payment amount by renegotiating your insurance terms. Wait until your FICO score goes up quite a bit before you do this. That way, you’ll be able to command a much better rate.

If you’ve had any increases to your auto insurance premiums, this might get reversed. Your decreased risk as a result of your better borrowing status could balance out the damage. Therefore, your monthly insurance costs could go down.

Conclusion

You want to better your credit rating and have access to quality financing opportunities. Whether you plan to start a small business or buy your dream home — your credit rating can make or break your dream.

With poor credit, not only will you get rejected for credit cards and loans more often, but your debts will cost you more. Even your car insurance — a recurring monthly expense — can go up as a result of poor credit.

In closing, it is clear that a strong FICO score comes with many rewards.

Improve Your Credit Score with Debt Consolidation

By | Credit Cards, Debt

Debt Consolidate Credit repair

Debt consolidation isn’t something that many people know about, but it can be a great way to improve your credit score and help you improve your overall credit profile. Why should you consider debt consolidation? The best reason is to better manage your credit, which can improve your credit score. For example, you may have a number of credit cards that are nearly maxed out. Having to manage multiple credit cards can cause stress and negatively impact your credit score.

How Debt Impacts Your Credit Score

According to FICO, a key element of your credit score is the amount that you owe to creditors. FICO says that 30 percent of your credit score is made up of amounts owed. Credit reporting agencies look at credit utilization as a factor in the amount that you owe. For example, using most of the credit line that you have available can reflect negatively on your credit score. If you have multiple cards that are near their limit, your credit utilization is high, and this can further deflate your credit score.

Ways to Consolidate Debt

You can consolidate debt in a few ways.

  • Balance Transfers – One option is to move balances from one or more credit cards to one that offers a zero percent interest rate or a low interest rate on transfers. You can quickly go from having multiple credit cards with high interest rates to a single card with a low interest rate.
  • Home Equity Loans – Over time, as you pay your mortgage and as the value of your home increases, you build equity. A home equity loan allows you to borrow against this equity and take out a lump sum that you can use to pay off high-interest credit cards.
  • Debt Consolidation Loans – These are loans from banks and specialty lenders and are designed specifically for the purpose of debt consolidation. Interest rates are generally lower than what you pay on credit cards, so your monthly payment may decrease.

The most important thing to remember when using any of these options is that you still owe this money, but you’re consolidating it with a single loan. The idea is to lower your interest rate, reduce your credit utilization, and get out from under the weight of managing multiple lines of credit.

Debt Consolidation, Not Settlement

Be wary of companies that offer “debt settlement” services, which differ from credit repair services. The Consumer Financial Protection warns against paying upfront fees to companies that offer to settle your debts. Debt settlement firms may request that you stop paying your creditors as a way to negotiate with lenders. This can have an immediate and detrimental impact on your credit score. A better option is to use a firm that specializes in credit score repair and works with you to fix your credit score. Ovation Credit Services provides tools to dispute inaccuracies on your credit report as well as education and advice on how to improve your score.


 

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Maintain Good Credit Habits

A debt consolidation loan means some of those previously maxed out credit cards now have credit available. After working so hard to repair your credit score, the worst thing that you can do is to start relying on these credit cards too heavily. You’ll find yourself back where you started – or perhaps worse off – if you aren’t careful about managing your money. Once again, a good credit repair service will provide education and advice on how to maintain a healthy credit score.

Ultimately, debt consolidation is a good way to remove some of the challenges and stresses of managing multiple lines of credit. It can also lower your monthly payments. Consider debt consolidation as a way to improve your credit score and your overall credit health.

Sources:

http://www.myfico.com/crediteducation/whatsinyourscore.aspx

http://www.myfico.com/CreditEducation/Amounts-Owed.aspx

http://www.consumerfinance.gov/askcfpb/1449/whats-difference-between-credit-counselor-and-debt-settlement-company.html

How Credit Scores Impact Mortgage Loans

By | Credit Repair, Credit Scores, Home Buying, Loan, Mortgage, Your Credit

Credit Scores Impact Mortgage Loans

Are you working towards financing a home? You probably know how your credit rating will impact your loan qualification. You pretty much need the minimum credit rating for FHA home loans, which is a 580 FICO score. If you cannot qualify for FHA insurance, you will be hard-pressed to find any lender until you fix your credit.

There are many implications that your credit rating can have on your prospective home loan, such as whether you actually qualify for the mortgage, how low of an interest rate you will get and what type of lender will work with you.
Now, there’s also an unspoken factor: how much your mortgage will cost in total.

How Your Mortgage Could Cost More

When you apply for home financing with a bad credit score, it is unlikely that a major bank will approve you. Since it is the major banks that get the best borrowing rates in the first place, your alternatives will be more costly. In the worst case scenario, only a private lender would consider you.

You might be somewhere in the middle and can get a home loan through a financial institution that accommodates bad credit borrowers. There are many reputable lenders in this area, but you still face the issue of a higher interest rate. This is because the banks know you are a higher risk.

Tip: Get your mortgage through a highly legitimate financial institute that works with bad credit borrowers while also offering traditional home loans. That way, you can repair your credit while holding the costlier loan and refinance under the same lender after your credit score improves.

Your credit score does not have to hold you back from a mortgage. You just need to make sure it’s not unexpectedly costing you extra.

What Will Your Credit Score Cost You?

When applying for a home loan, your decided interest rate is mainly calculated based on your credit score. So if you were to apply for a mortgage right now, what would this mean to you?

It all depends on where you live …

Let’s use Manhattan, New York as an example, seeing as how even a one-bedroom will easily set you back $400,000 or more.

Say you are buying an apartment for $400,000 and you give the minimum of 10 percent down. This leaves you with a $360,000 principal to finance through a mortgage provider. Let’s say the mortgage will run for 30 years and it’s a fixed-rate loan.

Below shows your total interest cost for the lifetime of the mortgage. These calculations come from MyFICO.com’s Loan Savings Calculator, which estimates your interest rate based on your FICO score range.

  • 620 to 639 FICO score: $319,418 total interest (4.793% APR)
  • 640 to 659 FICO score: $277,706 total interest (4.252% APR)
  • 660 to 679 FICO score: $245,727 total interest (3.825% APR)
  • 680 to 699 FICO score: $230,167 total interest (3.613% APR)
  • 700 to 759 FICO score: $217,414 total interest (3.437% APR)
  • 760 to 850 FICO score: $201,683 total interest (3.217% APR)

To put it into context, you are looking at saving $117,735 over 30 years by financing with perfect credit instead of below-average credit. From another perspective: your monthly payment will be about $327 less!

How to Make Your Mortgage Cost Less

There are some tricks that can help you qualify for a more affordable mortgage. Four simple ways to do this include:

1. Refinance Your Mortgage After You Buy

Your mortgage payments go through on time for half a decade, and suddenly the huge debt does not keep your credit score suppressed. The result could be seeing your credit rating go up by a considerable amount since when you first qualified for the mortgage. If this is the case, you could refinance the mortgage to lower your interest rate and ultimately make the rest of the mortgage term cheaper for you.

2. Rent-to-Own the Place First

If you are repairing your credit, but you want your new home now, you could try to buy through a rent-to-own agreement. You will be able to guarantee the seller gets the asking price as long as you follow through with financing at the end of the term. While the rent-to-own contract will set you back a little in equity, the much lower interest rate will create much more savings.

3. Wait a Little Before Buying

While this is not the most exciting solution, sometimes it makes a lot of sense. Say you have a bad debt in collections from six years ago. If that’s the case, waiting roughly a year will cause the negative item to leave your credit report and thus it will not hold back your FICO score. The end result could be a huge boost in your credit rating, or at least enough to score you a better interest rate.

4. Purchase Under Owner Financing

If you want your new home now, but rent-to-own will not work, you might be able to purchase via owner financing. This means the seller holds the mortgage for you for so long (usually 1 to 3 years), and then you can get your mortgage and make a balloon payment to buy it out. You can use the in-between time to repair your credit and this will help you secure a good interest rate. In the meantime, you will be paying on the home under the current mortgage conditions and your bad credit status will not cost you more.

Owner financing is really the only cost-effective and sound way to approach buying a home with bad credit. Otherwise, you could be throwing well over $100,000 out the window. That’s a lot of extra money to pay, especially if you are actually eyeing a one-bedroom apartment.

To conclude, get your credit repaired before applying for a mortgage because the cost of doing so is minuscule in comparison to what you will save on interest payments.

Sources:

  • http://www.fha.com/fha_credit_requirements
  • http://www.myfico.com/crediteducation/calculators/loanrates.aspx
  • http://www.investopedia.com/articles/mortgages-real-estate/10/should-you-use-seller-financing.asp

How Upcoming FICO Changes Could Improve Your Credit Score

By | Credit Scores

Based on recent research related to the effect of unpaid medical bills on one’s credit score, FICO is tweaking its credit score methodology in a significant way. Effective this fall, FICO will reduce the weight attributed to unpaid medical bills and bills settled with a collection agency; this is especially good news for the 18-35 age group.

FICO changes

FICO acknowledges that over half of the collections appearing on credit reports are related to medical bills. Previously, it had been assumed that borrowers with outstanding medical expenses were too risky to lend to—but FICO’s research has indicated that many of those collections may have been the result of miscommunication between consumers and their provider or insurance company.

To address this, and the resulting average credit score disadvantage of 25 points and tens of thousands of dollars in additional interest on home mortgages and car loans, FICO has decided to give less weight to unpaid medical bills and to not penalize the credit scores of consumers who have settled with a collections agency.

Whose credit score does this help?

As alluded to earlier, perhaps the biggest beneficiary of this new FICO adjustment will be the generation that came of buying and borrowing age during the Great Recession. Largely shut out of homeownership due to a lower average credit score (628), heavier student loan debt, and lower credit card balances than any other generation, their borrowing has also been severely restricted by higher interest rates.

It is hoped that FICO’s new methodology will encourage more positive credit behavior for this generation of consumers, ultimately resulting in great access to credit. In addition, FICO’s adjustment is good news to those who have been affected by red tape in the wake of costly medical bills.

The FICO adjustment is expected to have an incremental impact on borrowing, affecting car and credit loans earlier on, with the trickle-down effect eventually reaching the home mortgage industry. Overall, however, the change is expected to have a minimal impact on the economy, since household spending will not likely increase dramatically.

For more information on how FICO’s changes can improve your credit score, consider contacting a credit repair agency like Ovation. We offer free consultations.

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