Credit Scores

How to Improve your Credit Score

Let’s talk credit. It’s very important! It can determine whether you get approved for a home loan or not, and can save you a lot of money on the rate you’re going to pay if your credit score is good. Of course, you want to make your payments on time, but how can you actually improve your credit score? What can you do? Here’s a couple of little known secrets: First, keep the balance you owe on any of those accounts below 30% of the credit line. For example, if you have a credit card with $1,000 limit on it, keep your balance to $300 or less. Second, what if your balance is higher than that and you can’t bring it down? You can go to that credit card issuer and ask them if they’re willing to give you a higher limit. By bringing the limit up, the amount you owe becomes a smaller percentage of your limit. That will help increase your score. Lastly, don’t close off any credit lines that you have from the past. This is good history that you’ve built up, you want to keep that good history. It’s like getting straight A’s in high school and not wanting to show the report card. Keeping good history will help your credit score. These are only a few quick tips for you, and I hope they help! If you need any more information, give me a call, I’d love to review your situation and help you formulate a plan to improve your credit so you can get in a home. 801.206.4343
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Recent FICO Credit Score Changes Help Borrowers

main-image-FICO-standardThe Fair Isaac Corp., better known as FICO, is the most widely recognized and used credit score in the nation. They have recently adjusted their metrics in a way that helps borrowers qualify for loans much easier than in the past, since the recession. This action should help Salt Lake City Realtors sell more property, as mortgage money will be more available and more buyers will qualify. The Primary FICO Changes FICO carefully protects its algorithms and formulas to thwart people from "beating the system." However, the major changes announced recently are more straightforward and clear than the consistent "tweaking" that FICO typically makes in its calculation formula. The significant changes center on two issues that have been debated for eons, it seems.
  • FICO will no longer consider paid collections in their credit score calculations. Consumer credit scores have historically been hurt by collections even after these collections were paid in full.
  • FICO will now apply less weight to unpaid medical bills that have been given to collection agencies. In the past, FICO penalized consumers for even the smallest unpaid medical bills.
For decades, consumer supporters and experts have argued these points with anyone or entity that would listen. They have maintained that penalizing consumers for unpaid medical bills of a few hundred dollars, often just the patients' health insurance deductibles, the same as having a delinquent $40,000 auto loan or a six figure home mortgage loan, was unfair. Similarly, penalizing borrowers settling their debts, whether in full or for less than the full outstanding balance, was equally unfair and excessive. It appears that lenders and the CFPB agreed with this position. FICO either will no longer penalize consumers, in the event of paid collection debts, or greatly reduce score penalties on the over 64 million Americans that have one or more medical collection accounts on their credit report, or the over 100 million consumers that have a collection account on their report, if the collection has been paid or settled. These enhancements help lenders because they result in greater precision. At the same time, the median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points. This is good news for people trying to get a loan. They will either receive better interest rates or now they will qualify when they didn't qualify before. Effect of FICO Changes These changes should elevate the credit scores of millions of prospective borrowers, allowing them to qualify for loans and mortgages previously unavailable since the recession. You won't be surprised that critics of the new features are exercising their dissension. At least one critic chacterized these changes as something like a "sharp knife--if you don't know how to use it, you can cut yourself." Most critics fear that more consumers, inexperienced or uneducated in managing debt, will only dig deeper holes in their debt profile, making them less able to handle credit. However, most consumers will sleep more soundly knowing that, even if their credit reports formerly had some warts, they may now qualify for financing for autos, homes and other financing. The minimization of settled collection accounts, which formerly negatively counted as much as home foreclosures, from credit score calculations will help many borrowers meet lender qualifications. Supporters of these changes foresee no significant increase in risk for lenders using the changes wisely and liberally. It appears they are correct, as the elimination of medical collections and the penalty minimization of paid collection accounts should not increase the repayment risk to unacceptable levels. Lenders and Consumer Financial Protection Bureau (CFPB) The FICO change culminates months of discussion and debate between some top lenders and the CFPB. Their joint goal was to fuel more lending without increasing lender credit risk. During and after the recent recession, most lenders have made loans only to the best quality borrowers having blemish-free credit reports. Consumer lending, including home mortgages, has suffered greatly. Many borrowers, previously shut out by lenders, may now qualify for the loans they want. Instead of facing rejection or, at best, higher than market interest rates, these borrowers may now receive approvals because of the agreement between lenders and the CFPB. These changes should enhance all banks' ability to make loans to previously unqualified borrowers since credit standards were severely tightened during and after the recession. The key FICO changes in their score calculations should ensure that millions of borrowers will now qualify for bank loans, without forcing the lenders to dramatically loosen their credit standards. sources: http://online.wsj.com/articles/fico-recalibrates-its-credit-scores-1407443549?mod=_newsreel_4 http://www.myfico.com/products/ficoone/  
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How to Qualify for a Mortgage After Chapter 7 Bankruptcy

mortgage after bankruptcyWhen you file for chapter 7 bankruptcy, otherwise known as liquidation, a creditor seizes all but certain exempt assets and forgives most of your debt in return. Bankruptcy is a legal acknowledgement that you were unable to meet your financial obligations. Thus, your credit rating takes a big hit -- usually a 100 points or more. A bankruptcy also remains on your credit report for 10 years. Bankruptcy affects your ability to qualify for a home mortgage in the following ways:
  • You need to wait four years before a lender will qualify you for a conventional mortgage loan with market rates.
  • Two years is the waiting period for Federal Housing Administration (FHA) loans.
It is possible to get a mortgage loan from a hard money lender as soon as six months after bankruptcy, but these loans require a down payment of at least 30 percent, and the interest rates are high. While you are waiting, there are some steps you can take to improve your chances of receiving favorable loan terms once you do qualify for a mortgage.

Check for Discrepancies in Your Credit Report

As soon as the bankruptcy has been discharged, you need to get organized. Order a credit report from each of the major agencies -- Equifax, Experian and TransUnion -- and look over the information carefully. You can dispute any errors online on the agency's website, and this process lets you know where you stand. Awareness is an essential first step in financial responsibility.

Repair Your Credit 

You then need to focus on repairing the hit to your credit. An important thing to keep in mind is that, while the bankruptcy itself remains on your report for a long period of time, most negative information goes away after three years. Thus, your goal should be to make the bankruptcy look like a solitary event rather than part of a general disqualifying pattern. Here are some ways to repair your credit:
  • Limit the amount of credit applications you make even if you qualify. Each time you apply for credit, the lender runs a check, and that itself lowers your score.
  • Use a secured credit card that reports directly to the credit bureaus, and always pay your bill on time.
  • Use installment loans with retailers to demonstrate that you are capable of making regular payments.

Cover Your Bases

While important, your credit score is not the only thing lenders look at. After a bankruptcy, you want to project stability.  Paying above the monthly minimum on installment debts and sticking to the same job throughout the waiting period both reassure lenders. Finally, keep in mind that the more money have to put on a down payment for the new mortgage, the better your negotiating position will be. Saving money is one of the most important ways you can qualify for competitive mortgage terms after a bankruptcy.  
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