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5 Credit Score Killers

by Mark Rieger, Duke Warner Realty

I read this on CNN Money last week and thought it was an interesting read. On a side note, don't forget that the home buyer tax credit deadline is coming soon. If you are looking to Buy or Sell any real estate in Central Oregon, please let me know ASAP. I am happy to help.

Thanks. Enjoy the article below.

5 credit score killers

By Blake Ellis, staff reporter March 23, 2010: 8:17 AM ET

NEW YORK (CNNMoney.com) -- As banks shy away from making risky consumer loans, a mediocre credit history just won't cut it anymore. To get the best rates on mortgages, credit cards and auto loans, you need a killer score.

Your FICO score is a numerical measure of your creditworthiness that ranges from 300 to 850. While there are a few different credit scoring systems available, it's the FICO score, created by the Fair Isaac Corporation, that most lenders look at when they check your credit.

Lenders have already raised their standards by about 20 to 40 points this year, according to Barry Paperno, consumer operations manager at FICO. So while a score in the 720 to 740 range would have gotten you the best rates on a mortgage in the past, you now need a score of at least 760 to snag the best loans.

"Requirements are higher than in the past so you're going to have to be more diligent this year," said Paperno.

FICO focuses on five categories when calculating your score: How much debt you have, your payment history, your debt utilization ratio (how much you owe in relation to your credit limits), how far back your credit history goes and your mix of various types of credit.

Here are a few things that can wreak havoc on your score and wreck your chances of getting an affordable loan:

1. Making late payments

A single late payment on a credit card or other loan could ding your score by as much as 110 points if you already had a great score and 80 points for someone with an average score. So the best thing you can do to improve your score is make payments on time.

"This continues to be the number one reason scores are lower," said Paperno. "In addition to being a heavily weighted part of your score, if you're late on a payment, it's going to continue to appear on your credit report for about seven years."

If you've made mistakes in the past, you can't change them, but you can outlive them. The longer it's been since you were late on a payment, the less of an impact it will have on your score, but "your history does follow you," said Paperno.

Since payment history accounts for about 35% of your total score, it's really important to start paying on time.

2. Carrying a big balance

Your debt utilization ratio accounts for almost 30% of your score. So carrying too much debt will not only cost you a fortune in interest, it can also destroy your credit rating.

"The best thing to do is pay your bills on time and pay as much of the balance as possible to try to keep your debt utilization ratio down and raise your credit score," said Bill Hardekopf of Lowcards.com.

As part of the CARD Act that went into effect last month, credit card issuers must now include a chart with your bills that shows how long it will take to pay off your balance if you only make the minimum payments. The chart will also display how much you need to pay each billing cycle in order to completely pay off your balance in three years.

Hardekopf thinks the new information will be a huge wake-up call for most consumers, and even he was alarmed by the calculations on his own statement.

"It was shocking," he said. "This is going to have a dramatic effect on how much people are paying when they see it in black and white, and will be a positive move for their credit score."

3. Closing a credit line

As credit card companies jack up interest rates and add inactivity fees to compensate for lost revenues, it's tempting to just close your accounts.

But closing a line of credit could impact your debt to utilization ratio, said Hardekopf.

For example, if you have two credit cards with a limit of $1,000 each and a $400 balance on one card, closing the other account will immediately double your debt to utilization ratio from 20% to 40%.

But the negative effect varies greatly. Closing one card could have a very small impact if you have lots of other high-limit cards.

You can also counteract some of the impact by opening up a new line of credit. But beware: that can also impact your score.

4. Opening a credit line

"When you open a new account, you'll knock some points off your score," said Paperno. "The reason why is that the people who open new accounts tend to be of a higher risk level immediately after opening a new account."

In order to open a new account, a credit card company will need to check your credit, and a typical "hard" inquiry like this will lower your score by about five points, plus the cost of opening a new line of credit typically ranges from five to 15 points.

But the temporary ding only lasts about six months, so if you're in a stable financial situation, the score reduction could be worth it, said Paperno.

"You can look at it as a long-term strategy and go in with the idea that you might lose a few points now but in the long run you might be better off because you'll have more credit available," he said.

5. Defaulting

Defaulting on a loan is the single worst thing you can do for your credit, said Rex Johnson, founder of credit union consulting firm Lending Solutions Consulting. And given the down economy, more people are damaging their credit scores through foreclosures, credit card charge offs and bankruptcies.

A home foreclosure, for example, might dock about 200 points off your score and a short sale could cost you around 80 to 90 points, said Johnson. Declaring bankruptcy could lower a good score of 750 by up to about 250 points, Johnson said.

While most negative information stays on your report for seven years (bankruptcies can stay on for 10 years), it's never too late to start rebuilding your credit.

"People have been hit hard by the economy and those who had really good scores now have scores in the 500s and want to just give up," Johnson said.

But certain good behaviors like making on-time payments, taking out a small loan and paying it off and keeping a low balance, can get your score back up in the mid-600s or low 700s in a little over 2 years, said Johnson.

Update on Loan Mods - Principal Reductions

by Mark Rieger, Duke Warner Realty

The following article was written by Mandelman on Wednesday March 24, 2010 about Bank of America's plans to start principal reductions for underwater homeowners. These actions may offer some homeowners a way to not lose their homes to short sale or foreclosure. It looks like we are at least heading in the right direction. Feel free to forward this blog post to anyone you feel that could benefit by reading this information.

As Pressure Mounts, Bank of America Plans Principal Reductions for Underwater Homeowners

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This morning, Reuters has reported that Bank of America has announced a program that will offer what the bank is calling an “earned principal forgiveness” of up to 30 percent for homeowners owing more than 120 percent of the value of their homes.

Bank of America says the plan will be available to homeowners nationwide beginning in May of this year.  It is certainly the first program of its kind to be announced by such a large financial institution in the sense that it takes a “systematic approach to reducing mortgage principal in an effort to tackle the thorny issue of preventing foreclosures when home values drop well below the amount owed”.

Here’s how the program will work, according to the bank:

  • Forgiveness of principal will be offered in two stages for the riskiest loans, including sub-prime loans and loans which offered borrowers multiple options for how much to pay each month. 30-year fixed rate loans will NOT be eligible for the program.
  • Bank of America will offer qualified homeowners an interest-free forbearance of principal that the homeowner can turn into forgiven principal annually over five years, provided they stay current on their mortgage payments.  Over the five-year period, homeowner can bring their loan values back down to 100 percent of the home’s market value.

According to Barbara Desoer, who is the president of Bank of America Home Loans, said the following:

“At the same time earned principal forgiveness helps homeowners, it also recognizes and addresses the interests of mortgage investors by ensuring that forgiveness is tied to the homeowner’s performance, reducing the probability of a future default under the modified terms, and adjusting the total amount to be forgiven in light of any gains in property values that might occur in an economic recovery.”

I think what that means in reality is that the bank is finally admitting that property values have fallen, well… for good.  No, not forever… but for a long, long time.  Sure, they’re still allowing for the possibility of home price appreciation in the next five years, but they’re hedging their bets just in case that doesn’t happen.

You see, that’s what the phrase “re-default risk,” when used in conjunction with a loan modification, is all about.  Re-default risk isn’t about a homeowner not being able to pay the modified payment in future years, it’s about the homeowner coming to their senses in future years and walking away from an underwater mortgage.

Of course, it’s worth mentioning that Bank of America’s new principal reduction program has not come as a result of the bank simply seeing the light on its own.  The pressure has been mounting and undoubtedly will continue to increase.  U.S. lawmakers and housing advocates continue to be increasingly vocal about the need for principal write-downs in order to stop the housing carnage on a national scale.

According to Reuters:

“Amid stubbornly high unemployment, homeowners are seen as more likely to simply abandon an unaffordable mortgage when they have no equity or are deep ‘underwater’ on the loan.”

Two days ago, Washington state residents filed a lawsuit against Bank of America for reneging on a promise the mega-bank made to modify mortgages when it took $25 billion in taxpayer bailout money.  According to Reuters, the lawsuit alleges that Bank of America has “seriously strung out, delayed and otherwise hindered” loan modifications because it had financial incentives to do so.

And today, Massachusetts Attorney General Martha Coakley obtained a $3 billion settlement from Countrywide/Bank of America that is to provide loan forgiveness to approximately 45,000 Massachusetts homeowners.  And that, is they say, is only the tip of the iceberg, in terms of pressures being brought to bear on Bank of America in addition to numerous other financial institutions.

Will it work?  Will Bank of America’s best laid plans turn out as planned?

I have no idea, and certainly this is not a bank in which my personal confidence in their competence, shall we say, overflows.  In fact, as a good friend of mine said on his first day at work, after accepting a fairly senior level position with Bank of America this past year… in response to my asking how he liked his new job: “There’s no adult supervision and the left hand doesn’t know what the right hand is doing.”

Reuters closed its story announcing the new Bank of America program with the following:

“A $75 billion Obama administration program aimed at helping struggling homeowners avoid foreclosure was sharply criticized on Tuesday by a watchdog, which said the program has been oversold and is likely to be a failure when it wraps up in 2012.”

Likely to be a failure in 2012?  Ya’ think?  These guys should write for Leno.

Tax Credits for Remodeling? Learn How

by Mark Rieger, Duke Warner Realty

Take advantage of improved tax credits available for a number of energy-efficient home improvements. Click on the link below to an article provided by the National Association of Home Builders to see how you can get paid to improve your home.

http://www.nahb.org/generic.aspx?genericContentID=113316

As always if you or anyone you know is looking to Buy or Sell real estate in the Central Oregon area, please let me know.

Program To Pay Homeowners For Short Sales

by Mark Rieger, Duke Warner Realty

This is an interesting article about a payment to Homeowners for doing a short sale, rather than a foreclosure. Maybe it will speed up the short sales process. I just wanted to pass it on. Click on the link below. Enjoy your day!

 http://www.cnbc.com/id/35762827

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