The YOUR HOME Credit Guide

Credit is one of the most important tools in the arsenal of your
financial health. Here’s how to keep it sharp.

As a homeowner, you already know the importance of good credit. But no matter how
hard you try, you may not be able to maintain perfect credit year after year. Your
circumstance may change, priorities could shift, and despite good intentions, you could
end up damaging your credit rating.
If you think this is happening to you, what should you do? First, understand that you
are not alone. Millions of Americans every year discover that their credit “score,” the
numerical calculation lenders use to gauge a borrower’s creditworthiness, has fallen.
Second, educate yourself. Though mysterious on the surface, the logic behind credit
scores—how they are determined, how they are used by lenders—is pretty simple, and
there are a few steps you can follow to improve your credit standing.
What’s in a Score?
The three main credit reporting agencies, Experian, Trans Union and Equifax, collect
data on consumers and their borrowing history and share this information with lenders
nationwide. A fourth company, Fair Isaac Company has designed a simple way of
interpreting this data, known as a credit score. Lenders use this score to make quick and fair decisions when offering credit.
Credit scores can range from 350 on the low end to 850 at the top, with the low 600s
representing the generally accepted cut-off for “good”credit. Lenders, such as your
mortgage company or auto dealer, often set numerical guidelines based on credit scores to help them determine whom to offer credit and on what terms. According to Costa Mesa, California-based Experian, the average nationwide credit score as of May 2007,was 692.
Your credit score isn’t the sole determinant of whether or not you are able to secure
credit—and at what interest rate—but it is a factor. Some lenders may set a floor (or
lowest acceptable credit score) beyond which they will not offer credit, while other
lenders may simply assign different interest rates or payment terms to borrowers with
lower scores.
Credit Culprit: Identity Theft
One of the biggest single threats to a homeowner’s credit today is identity theft.While you may not be responsible for the debt if fraud was proven to be the culprit, it could take months or even years to clean up the mess. And during that time, you may have trouble refinancing or getting other credit.
Tracking your credit use is the best method for detecting identity theft. Each of the three credit agencies provides a service (for about $50 annually) that will alert you to unauthorized use of your credit.
Certain financial institutions offer similar types of services, such as e-alerts, which will automatically notify you of any suspicious activity on your account. Many times these services are free.


The Right Mix
Credit scores are influenced by a number of factors, some of
which go beyond the simple standard of whether all your bills
have been paid on time. According to Fair Isaac, the weight of
any one factor depends on the overall information in your
credit report(s).
The biggest determinant (35 percent) of a credit score is your
payment history—how timely and fully you’ve made your
payments. In this regard, every additional month you fall
behind on a payment can lower your score further, while long
stretches of on-time payments are viewed favorably. The
second most important determinant (30 percent) is the total
outstanding amount that you owe, particularly in relation to
your income. Lenders perceive every additional line of credit
(from any source) as a potential barrier to your ability to pay
your bills on time, particularly if your yearly income remains
the same. As a rule, experts suggest carrying no more than 50
percent of your total available credit. In other words, if you
have $20,000 available on all of your credit cards, you should
try to restrict your amount owed to less than $10,000 at any
one time. A common misconception is that closing some
credit card accounts will boost your score. In reality, your
score will only rise if you’re paying down the outstanding debt
on those cards as you’re closing them.
Another factor is the amount of time you’ve had available
credit, particularly revolving credit lines like credit cards or
home equity loans. A credit report with mostly new accounts
is not as favorable as one with accounts that hold a long credit
history. It may be useful to consider any accounts under a year
old as “new.”The type of credit matters, too. A borrower who
has a mortgage, a home equity loan, credit cards and an
education loan, for example, has a healthier mix of credit
products than just holding credit cards. A final significant
factor in determining your credit score is the number
of “inquiries,” or times that a potential lender reviews your
credit report. Even though all credit inquiries received
within a 14-day period is seen as a single inquiry, shopping
for credit numerous times throughout the year can raise a
red flag. This doesn’t include the unsolicited, preapproved
credit card offers you receive in the mail.
Get a Better Score
So what do you do if you discover that your credit score is
lower than desired? Here are a few simple rules to follow
that can help boost your score.
• Pay down your revolving debt. Don’t move debt
around between credit cards.
• Get current on bills and stay current. If paying your
bills is an issue, consider using online bill paying or
other automatic ways to pay your bills. You’ll set it up
once and not only pay your bills but build your score
automatically
• Don’t open a lot of new accounts. Instead, hang onto
and maintain your older accounts.
• If you are having trouble making ends meet, contact
your creditors or see a legitimate, non-profit credit counselor.
Believe it or not, creditors (mortgage or otherwise)
would rather work out a payment schedule than see you
fall delinquent and not pay at all. Good credit can be a
homeowner’s most valuable possession. Use it wisely and
guard it well!

By Robert Irwin


More than just real estate.