Real estate agent and home tips provided as a
service by Sandra Conley, Broker of
HB Land and Homes, Palmdale, California.
Home buyers and sellers - please visit www.real-estate-palmdale.com or call 1-877-SCONLEY for more
information on buying or selling a home ANYWHERE in the Antelope Valley and
surrounding areas!
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Valley - Canyon Country - Juniper Hills - Lake Elizabeth - Lake Hughes - Lake Los Angeles
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Rancho Vista - Santa Clarita - Shadow Acres - White Fence Farms - Barrel Springs -
Rosamond
Please visit www.real-estate-palmdale.com
for more information or take a look at our new
homes page
The Importance of Credit Scores
Have you ever wondered how it is possible to go online and get credit approval in seconds?
Or get pre-qualified to purchase a car without having a face-to-face conversation
with a salesman at the car dealership? The answer is credit scoring or, more
specifically, YOUR credit score.
Your credit score is a number generated by a mathematical algorithm which uses information
found in your TRW, Experian or Equifax credit files, and then comparing that information
to millions of other people. The resulting number is your credit score and that number is
deemed to be a highly accurate prediction of how likely it is that you'll pay your bills.
Credit scores are used extensively by potential employers, money lenders and credit
granters alike, and if, for example, you have a mortgage, the interest rate you were
offered by your lender is in direct relation to your credit score. The higher the
number, the better you look to lenders. It's a fact that people with the highest scores
get the lowest interest rates.
Scoring categories
The scale runs from 300 to 850. Most people will have scores between 600 and 800. A
score of 720 or higher will get you the most favorable interest rates on a mortgage,
according to data from Fair Isaac Corp., a California-based company that developed the
credit score. (Its own score is called the FICO score.)
Fair Isaac reports that the American public's credit scores fall into the following
ranges:
Credit score Percentage
499 and below 1 percent
500-549 5 percent
550-599 7 percent
600-649 11 percent
650-699 16 percent
700-749 20 percent
749-799 29 percent
800 and above 11 percent
The difference in the interest rates offered to a person with a score of 520 and a person
with a 720 score is 3.45 percentage points, according to Fair Isaac's Web site - that adds
up to a lot of extra interest. On a $100,000, 30-year mortgage, that difference
would cost more than $85,000 extra in interest charges, with the difference in the monthly
payment being about $235.
If you applied to rent an apartment, bought cell phone service, applied for a job that
involved handling a lot of money, needed to get utilities connected, or applied for a car
loan, there's a very high possibility that your credit score was retrieved.
Consumers' rights
Until recently, many Americans didn't know that a "credit score" number existed
because it was a closely guarded secret in the lending industry. In fact, lenders were
prohibited from telling borrowers their credit score, reason being that the "average
person would not understand" the result of such complex data. It was also
believed that, if people knew their score, they might be able to change their behavior to
manipulate the score and throw off the whole model, rendering it useless.
The control that banks and lenders had over who saw their credit score and who didn't
began to be challenged when consumers found out about the score and demanded to see it.
The resulting public outcry on the possibility of people being denied credit based on bad
information in credit reports led to several pieces of legislation and a much more open
attitude about credit scores. These days, consumers can buy their score online from
any number of sources, including Fair Isaac itself.
Key factors of your score
Just what goes into the score? The model looks at more than 20 factors in five
categories.
1. How you pay your bills (35 percent of the score)
The most important factor is how you've paid your bills in the past, placing the most
emphasis on recent activity. Paying all your bills on time is good. Paying them late on a
consistent basis is bad. Having accounts that were sent to collections is worse. Declaring
bankruptcy should be avoided at all costs.
2. Amount of money you owe and the amount of available credit (30 percent)
The second most important area is your outstanding debt. A mortgage lender, for
example, will look at your credit report and figure how much money you owe on credit
cards, car loans, mortgages, home equity lines, etc. Also considered is the total amount
of credit you have available that you have not yet used. If you have 10 credit cards that
each have $10,000 credit limits, that's $100,000 of available credit. Statistically,
people who have a lot of credit available tend to use it, which makes them a higher credit
risk. People who consistently max out their balances are perceived as riskier.
People who never use their credit don't have a track history. People with the highest
scores use credit sparingly and keep their balances low.
3. Length of credit history (15 percent)
The third factor is the length of your credit history. The longer you've had credit,
particularly if it's with the same credit issuers, the more points you get.
4. Mix of credit (10 percent)
The best scores will have a mix of both revolving credit, such as credit cards, and
installment credit, such as mortgages and car loans. Statistically, consumers with a
variety of credit are better credit risks.
5. New credit applications (10 percent)
The final category is your interest in new credit - how many credit applications you're
filling out. The model compensates for people who are rate shopping for the best mortgage
or car loan rates. The only time shopping really hurts your score is when you have
previous recent credit stumbles, such as late payments or bills sent to collections.
Then, looking for new credit will be seen as an alarm because statistically, before
people declare bankruptcy and default on everything, they look for a way out. Also,
if you have a very young credit file, an inquiry can count for more than if you've had
credit for a long time. A lender may also consider the factors shown below when
deciding whether to approve a loan application, but they aren't part of how a FICO score
is calculated:
age
race
job or length of employment at your job
income
education
marital status
whether or not you've been turned down for credit
length of time at your current address
whether you own a home or rent
Credit scores are not perfect
The major drawback to credit scoring is that it depends upon information in your credit
report, which may contain errors. That's why it's important that you check your credit
reports annually, or at the very least three to six months before planning to buy a house
or a car. That will give you sufficient time to correct any errors before a lender
retrieves your score.
The need for accuracy in credit files is one reason why it's good for consumers to learn
and know about credit scores. If consumers are more aware about what is being
reported about them, they will do more to correct errors and provide a more accurate
picture of their financial behavior.
SANDRA CONLEY, BROKER of HB LAND AND HOMES, PALMDALE,
CALIFORNIA. PLEASE CALL 1-877-SCONLEY FOR FURTHER ASSISTANCE.
Serving Palmdale - Rancho Vista - Quartz Hill - East Lancaster - West Lancaster - Ana
Verde - Rosamond - Acton - Leona Valley - Littlerock - Canyon Country - Aqua Dulce - Sand
Canyon - Antelope Acres - Antelope Valley - Bouquet Canyon - Green Valley - Lake Elizabeth
- Lake Hughes - Santa Clarita and the surrounding communities of AV & Los Angeles
County.
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