Questions About Your Credit You Should Know the Answers To

What is a good credit score? Lenders see the FICO score as an indicator of risk. The higher the score, the odds are favorable that loan repayment will take place. As the score gets lower, the odds decrease that payments will be made on time. Right now, most financial institutions are looking for a FICO score of 740. This is rather high when you consider the score tops out at around 850. Prior to 2007, lenders were accepting a 680 FICO score as A- credit. Those who had a 680 then were able to access good rates and terms for their consumer and home loans. Regrettably, in the recession, people with a 680 FICO score were facing trouble with adjustable rate home loans, over-extended credit obligations, and even job losses. Many people with a good FICO score were obliged to put off payments on credit cards due to job losses. Many suffered through foreclosures on homes that had interest rates that adjusted up while the home’s value adjusted downward. As the economy improves and the job markets get better, we should see the “good” FICO score come down a bit from 740. Will we see 680 as the “good” score again? Maybe, but not for awhile.

What is your credit score? CreditKarma.com is a good site to get your FICO and Consumer Vantage scores for free. There are a lot of sales offers there, but the score info is worth it. Knowing your score and checking it at least a few times a year can help you manage your credit. If your score is low, you can look for ways to improve it such as paying down debt or settling collections. If your score is good, continue to utilize practices that maintain it like making all your payments on time and not acquiring unnecessary credit lines and credit inquiries that might negatively affect your score.

Often, a low score could be related to a delinquency, collection, or bad information. It’s a good idea for someone to view the details of the credit score to understand the steps they can take to help improve the score.

Do you know what is in your Credit Report? AnnualCreditReport.com was begun in 2002 when Congress passed the FACT Act. The Act says the FTC and the three credit bureaus shall provide U.S. consumers with a copy of their credit report from all three bureaus for no charge on an annual basis. I recommend everyone access this site every year. I hit it on or about my birthday to check my report and verify the info on there is accurate and it all belongs to me. It is a simple identity theft protection tool to which every American has access. Knowledge is power and understanding your credit report is one of the most powerful pieces of financial knowledge.

How much do I owe? This is a no brainer that people should always know. They should know what they owe in credit debt, meaning any loans and credit cards that are outstanding. They should also be aware of any Debt Collections they may have. Too many people have no idea what debts they owe. .

More importantly, I would ask the question:

How long will it take me to pay off my debt? This is the more relevant question. What resources do you have to pay your debt? Can you concentrate a greater amount of money on them from your budget to get them paid sooner? Paying down your debt improves your FICO score. Incurring high balances or maxing out cards diminishes your score. Paying down these balances props up your score and shows creditors that you are a “good risk.”

What rates are you paying on outstanding balances? Lower rates mean you can pay off your debt faster, and save money on interest payments. You should examine your loan and credit card interest rates regularly; like the same time you check your credit report. If the report is good and your score is fine, you may want to consider transferring your card balances to lower rate cards and cancelling your higher rate cards. Another option is to contact your card holder and request a lower interest rate. Closing old cards we have had for years is not always a good option as the positive history of the card usage helps our FICO score. If they will not lower your interest rate, as a consumer you have the option of moving your money should you choose. But keep in mind that some of the low rate offers may only be introductory. Know what the rate will be after that “intro-rate” expires.

How do inquiries affect my credit?  It is important to know that multiple inquiries from different creditors can be trouble for your score. Applying for multiple credit cards at once is not a good idea. Each inquiry will take a few points off your score. It’s not a lot, maybe 8-14 pts depending on your credit standing and they only last a year against your score. But, multiple inquiries from various creditors can generate negative effects your FICO score and then you have to wait for them to drop off for your score to improve. Multiple inquiries from auto and home lenders in a short amount of time can be combined into one inquiry. You were not shopping for five cars at five auto dealers! You were shopping for one car and one loan at multiple dealers. The same holds true for multiple real estate loan inquiries while loan shopping. Lesson; know what credit you want to apply for before applying.

How does cosigning for my kid’s loan affect my credit? When you cosign a loan it goes on your credit report as if you were the main responsible party. Do you know why? It is because you ARE THE MAIN RESPONSIBLE PARTY! You are the one with a credit score. You are the one with a history of repayment. The entire loan depends on your child or whomever you co-signed the loan with, making proper repayments. If they don’t, the financial institution will look to you to make the loan good. The balances incurred by both parties on the loan will have an effect on your overall balances owed to creditors as if it were your loan. If you cosign for a credit card and the balance is used to maximum limit, that high balance could and most likely will have a negative effect on your FICO score. If co-signing for a family member or friend, think twice. Parents, things get better when your children can apply for credit on their own without your help. 

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Your FICO Score-Mystery no More!

 

Is your FICO score a mystery to you? Don’t feel bad, most American consumers don’t know their FICO score much less how it is determined. Generally, your FICO score can vary from 300 at the lowest to a high of 900. People ask me, “Hey, Credit Union Guy, what’s a good credit score?” Today, a good score would be in the neighborhood of 740. At this level you can access good rates on car loans, home financing, and credit cards. Go below 740 and you may find yourself paying higher rates of interest on your loans and credit cards.

“What is a FICO?” FICO is an acronym for the Fair Isaac Company; the company that invented the calculations that result in a measurement of credit risk. The score is determined by an algorithm. In a sense, it is a highly complex algebra problem that takes into account your payment history, the ratio of your loan and card balances vs. your available balances, the length of your credit history, your credit request inquiries and the types of credit you are managing. The formula for exactly how the score is calculated is proprietary information and owned by Fair Isaac.

“Why does the FICO score exist?” In the old days of lending, loan managers looked at the physical credit report for a person and made a judgment call on the risk involved with making a loan to that person. Back then, two loan underwriters might look at the same report and have very different opinions on the applicant’s payment history. Credit Scoring took the judgment call out of the process. A person either scored well or they didn’t. Another reason for FICO score is volume. As our population grew and more people started using banks and credit unions, the loan volume increased significantly. In order to speed the loan process, the FICO score was used. Loan processors can input a minimum of data and get a score for a credit decision rather than reviewing the entire credit report.

Here is an approximate breakdown of how it is determined:

·   35 percent of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how timely) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall score.

·   30 percent of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have that have maxed out lines, the lower your score will be. The rule of thumb is to keep your card balances at 30% or less of their limits.

·   15 percent of the score is based on the length of time you've had credit. The longer you've had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.

·   10 percent of the score is based on the number of inquiries on your report. If you've applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven't used the cards or gotten the loans). The more recent these inquiries are the worse for your credit score. FICO scores only count inquiries from the past year.

·   10 percent of the score is based on the types of credit you have. The number of loans and available credit from credit cards you have makes a difference; installment loans vs. revolving lines of credit. There is no magic number or combination of types of accounts that you shouldn't have. These actually come more into play if there isn't as much other information on your credit report on which to base the credit decision.

Questions? Ask the Meriwest Credit Union Guy at gmeyer@meriwest.com.

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The next Meriwest Credit Union Financial Education Workshop will be our Reality Based Budgets Workshop for teens and college students on Wednesday, Nov. 28th at our Monta Loma Financial Center in Mountain View. This workshop takes through a post college money management simulation where they are given a salary, rent, car payments, and other bills and build their living budget. 

Our Monta Loma Financial Center is located at the corner of Rengstorff and Middlefield  Road in the Monta Loma Shopping Center. The program begins at 6pm. We hope you can join us. Please RSVP at our Events Link.

 

Benjamin Franklin's Legacy of Money Management

Benjamin Franklin is probably the Founding Father who was most financially aware. I have assembled some of his more memorable lines here and added my own explanation to them. As you read these quips, remember the age in which these were written. Back in the late 1700’s, it was frowned upon when one borrowed. Both Shakespeare and the churches warned people against lending and borrowing money.

Let’s keep in mind, in 1785 there were no consumer lending laws to protect us from predatory lenders. As more than two hundred years have passed since Ben was publishing his thoughts on financial education, there have been numerous changes in how we borrow and how lenders work with us. Today, borrowing to purchase a home or a car is fully acceptable. When credit is granted, it is done through a very careful approval process where a borrower’s income and past credit management is put under scrutiny.

But, just like in Ben Franklin’s time, it is not a good idea to go too far into debt

Let’s consider some of his sayings:

When you run in debt; you give to another power over your liberty. -  And  - The borrower is a slave to the lender, and the debtor to the creditor.

Meaning that when we are in debt, those who hold our debt control us and take away our freedom to a certain extent. While in debt, we are slaves to the monthly payment!

Rather go to bed supperless than rise in debt.

Franklin had a great disdain for being in debt. In those days, if you were in debt, the whole town knew it. He would rather be hungry than owe money.

Tis easier to suppress the first desire than to satisfy all that follow it.

This relates directly to “Wants vs. Needs.” Essentially he is saying, fight the urges to spend money. As you fight those urges, it will be come easier and easier to suppress the desire to spend.

For age and want, save while you may; No morning sun lasts a whole day. 

Save for your retirement and for the things you want. Start now, start early. There is no time like the present to begin. You have a limited amount of time to make a good return on your retirement funds.

Get what you can, and what you get hold; ’Tis the stone that will turn all your lead into gold.  

It seems that Ben Franklin also understood time and money. Saving your money in an appropriate investment can turn a few dollars into many or “what you hold into gold!”

Beware of little expenses; a small leak will sink a great ship.

Little things add up. It’s like two sodas from the coke machine everyday. .75 cents per coke, twice a day, five days a week, for fifty two weeks = $360! Could we find a better way to spend or save $360?

Buy what thou hast no need of, and before long thou shalt sell thy necessaries.

If you buy the stuff you want you may eventually have to sell the important things you need to pay for the stuff you want.

All of these things are as true today as they were 230+ years ago. It is not a good idea to go into debt. It is still a good idea to save. It is still a good idea to invest. It is a good idea to have a budget and adhere to it. This is timeless advice that we can all use.

But let’s also remember that not all debt is bad! There is debt that can help us. A loan on a home allows us to write off the interest that is paid annually, thus saving families thousands of dollars in hosing costs making that home more affordable for them. A car is a personal asset that gets us to work on time. So, a car loan can be considered part of an investment in our personal economic development. 

And for all of you out there looking for our next financial education workshops, your summer wait is over. Our next workshop will be "Reality Based Budgets for Teens" at our Milpitas Financial Center at 6PM on Aug. 22nd. 

Our next "Credit Myths and Repair Workshop" will take place at our Milpitas Financial Center on Aug. 29th at 6PM. 

I hope I will meet you at one of our seminars! Have a great week!

How do I Increase my FICO Score?

We all want a higher credit or FICO score. It helps to get additional credit, usually at better rates. How do we raise our personal FICO score? That’s a question I get every week in my workshops. Here are some of the best strategies for raising your FICO score:

• The two simplest strategies are making your payments on time and paying down any outstanding balances. Each time you make a payment on time your score goes up. Don’t let any credit debt get near 30 days late. Also, whenever a balance is paid down, especially on credit cards, your ratio of used vs. available credit goes down, thus, raising your FICO score. Keeping your cards’ outstanding balances at less than 30% of the available balances on each will maximize your FICO Score.

• Another tip is not to close old credit cards. If it does not have a balance, consider using the card for a small transaction once or twice a year and pay it off immediately. This will help your credit payment history and the lack of an outstanding balance on the card will improve your capacity to borrow. This relates directly to your ratio of used vs. available credit. The higher the amount of available credit, the higher your score.

• Two things happen when we close old cards, the history they built for us over the years goes away after a short time and the available balance is removed from our overall available credit, limiting our current borrowing capacity and reducing our FICO score. Close old credit cards at your own risk.

• Avoid too many new credit inquiries. If you are trying to increase your FICO score, avoid applying for new credit cards or loans too often, especially those at a department store. Each application you sign means a hit on your score. Multiple applications mean multiple hits. Many businesses will offer you a discount for applying for their particular card. Your credit score will benefit if you just say No!

• Another strategy is to move your revolving debt to installment debt; essentially going from a variable account to a fixed rate/fixed payment account. You would be changing your variable revolving credit account to a fixed payment personal loan. The highest scores include both revolving and installment debt. This is what takes place when someone does a bill consolidation, changing variable interest debt to fixed rate fixed payment debt.

• One of the easiest and most direct ways to raise your score and your credit history is to get a secured loan from a credit union that will report your loan payments to the credit bureau. These are often referred to as share loans. As you are borrowing your own money, a high FICO score is not required. Not all CU’s report to the credit bureau on these types of loans, so you have to shop for them. Essentially, one opens a savings account and takes out a loan on their money in the account. As they pay back their own money, they will build their credit score. This can also be done with a secured credit card account with your CU. Mismanage either of these programs and you will lose your deposit and possibly do damage to your credit score.

• Banks offer savings account loans but, generally, they will not report your payment history to the credit bureau as credit unions do.

Finally, the key, the thing that will make the biggest difference for you in building your credit score -  is Time! Utilize these strategies and be patient. Rome was not built in a day, neither is your credit score. Your personal history of proper credit usage is important so take the time to do things right and make your payments on time, pay down balances, and utilize your old cards as you should to maintain them. Proper maintenance of your credit over time will result in a nice fat credit file and a high score.

Tips to understanding your FICO score

http://www.myfico.com/downloads/files/myfico_uyfs_booklet.pdf

Auto Sale at Meriwest Credit Union – Main Office

May 19th - 9AM to 5PM
May 20th - 10AM to 6PM
5615 Chesbro Ave, San Jose CA 95123

Get special dealer pricing and financing deals.

To get pre-approved for financing, call Meriwest Credit Union at 877-MERIWEST or online at Meriwest Credit Union Auto Loans.

Credit Inquiries: How do they effect your credit?

How does this application affect my score?

Inquiries are not a big part of our credit scores. They only comprise 10% of the overall credit calculation of our FICO score. But they do play an important role in how financial institutions grant credit. There are different kinds of inquiries; some affect our credit score and some inquiries don’t.

• Promotional Inquiries A promotional inquiry is an inquiry made by a lender on an entire neighborhood or larger region. ABC Credit Union may want to advertise their new low rate credit card so they will contact a credit bureau and ask for all the people in a certain Zip Code with a credit score of 600 or better. Then, the bureau does a mass inquiry to create a mailing list. These sorts of inquiries do not affect your credit. They appear on your report for two years, but do not affect your score at all. 

• Employment Inquiries Checking your credit history for employment purposes will not affect your credit scores. According to Experian Credit Bureau, when your credit report is requested for employment purposes it generates an inquiry. However, that inquiry is shown only to you on your personal credit report. It is not shared with lenders or other businesses and is not included in credit score calculations.

• Credit Inquiries for Borrowing (HARD Inquiries) These inquiries will effect your credit score as they are known as a “Hard Hit” inquiry; meaning they were initiated by you when you signed an application applying for a rental property, a credit card or some other type of financial lending product. Whenever we apply for credit; whether it is a personal loan, car loan, home loan, line of credit, credit card, or a business loan, you will have a “hard hit” credit inquiry on your report. The inquiry will appear on your credit report for two years but will affect your credit score for only one year.

Have you ever been to a store where they offer you a 10-15% discount on your purchase for completing a credit application? I bet you have. Recently, I was in Kohl’s Department Store and Target and was asked by clerks in both stores if I was interested in completing their credit app for a discount on my purchase. All around me there were people filling out their applications for the store card to get their discount. I have heard people say they do it all the time to get the discount. As mistakes are known in the internet world, that is a FAIL.

Multiple inquires create multiple hits on your credit report and score. It is not a good idea to complete a credit application for a purchase discount. It takes points from your score and may cause you to have your credit application for something you really need, like a home or a car, be declined as your credit score was low due to multiple inquiries.

Remember, a hard hit inquiry can take 10 or more points off your credit score. It all depends on the strength of your credit report and score.

Interested in learning more about credit? Attend our Credit Myths and Facts Workshop next Wednesday at our Monta Loma Financial Center in Mountain View.


 

Wednesday, April 25 at 6:00 p.m.
Credit Myths, Facts and Credit Repair