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Show Your Business PAGE B4 MONDAY, MARCH 14, 2005 The Who What and Whys of your credit score Essentially, your credit score is a number used to predict how likely you are to repay a loan and repay it when it's due. Things that influence your credit score include: the number and type of accounts you have, how long those accounts have been open, your debt to income ratio, bill-paying history, the number/severity of late payments, and any collections actions. Under the Equal Credit Opportunity Act, factors such as race, sex, marital status, national origin, or religion may not be used to influence your credit score. Which parts of your credit history affect your score the most? The following is an approximate weight various categories contribute to your final score: Payment History -35% 1. Number of accounts paid as agreed 2. Delinquent accounts a. Severity of delinquency (how long the account has been past-due) b. Number of past due items on file c. Length of time since you had a past-due payment 3. Any negative public records such as bankruptcy, judgments, suits, liens, and wage attachments and how recent they are 4. Collections items (if any) 5. Account information on specific types of accounts Amounts owed- 30% 1. How much you owe on different accounts and what types of accounts you carry a balance on 2. Proportion of credit lines used 3. Amounts owed on loan accounts compared to original balance 4. Number of zero-balance accounts 5. Re-establishment of positive credit history following past problems Three credit reporting All personal credit agencies base their reports on a model from the Fair Isaac Company (FICO), a California-based company which created soft- Length of history -15% 1. Time since accounts opened 2. Length of time since account had activity Types of credit used -10% 1. Number of different types of accounts and recent information on each NewCredit-10% 1. Number of recently opened accounts 2. Number of recent credit inquiries 3. Length of time since recent accounts were opened 4. Time since credit inquiry(s) agencies called Equifax, Trans Union, and Experian combine these categories to evaluate your credit worthiness. These agencies receive payment history and personal information from your creditors. Because the three agencies are completely independent of one another, records often differ. Consequently, you must contact each of the three agencies individually when updating or correcting your file. ware used to calculate credit scores. This is why credit scores are often referred to as FICO scores. Keep ,\n mind that your FICO score,only factors in information from your credit report. Creditors often look at many other things when making a credit decision such as your current income, how long you have been employed at your job, and the type of credit you are requesting. Creditors collect information on your financial activi- ties through your credit application and your current credit report and then use a statistical program to compare your information to the credit performance of consumers with similar profiles. Points are then awarded for each factor that helps predict who is most likely to repay a debt. The total number of points is your credit score. Creditors can either use their own scoring model or a standard scoring model developed by a credit reporting company. Companies may also use different scoring systems for different types of credit. What information is on your credit report and how does it get there? Personal Information This is usually information you give to creditors yourself and is not used to evaluate your credit history. • Birth date • Current address • Previous addresses • Place of employment and employment history • Driver's license number Public records and collections data: This data is obtained through the court system and collection agencies. • Bankruptcies • Foreclosures • Accounts in collections Credit History Your creditors report this information. • Types of accounts • Age of accounts • Account balances and credit limits • Account payment history • Overdrawn checking accounts and unpaid child support Credit Inquiries • Inquires made by you when you are trying to obtain new credit. If you have too many of these, it will affect your credit score negatively. • Inquiries made by your current creditors or informational inquiries made by you. These types of inquires don't hurt your credit score. • Full name • Social Security number Are you ready for a house? Weigh the options Advantages Disadvantages 1. Tax Deductions Any interest on your mortgage is tax deductible. This is a significant savings as the vast majority of your first few years' payments are interest. Property taxes, which are generally built into your mortgage payment, can also be deducted. You might actually save money by paying a $650 mortgage payment instead of $550 in rent. 1. Commitment Feel like a job in Cali? See a great deal on a nicer home? Have a new neighbor who fancies his front yard a car lot? You are stuck. The average home takes about two months to sell with a realtor, and even longer on your own. Certainly this time can be shortened, but rarely without a price. Tack on over a month for buyer financing and you've got enough bondage to make any transient quiver. 2. Rent Increases Death, Taxes, Rent Hikes: Resistance is futile. Owning a home ensures the only person who can raise your monthly housing payment is you. 3. Possible Appreciation Ask your parents what they paid for their first home; Then, figure out what that house is worth today. Not bad, eh? This upside is magnified because, though you paid for only small fraction of your house with cash, appreciation is figured on the total value of the property. For example, if Jane Public bought a home with 3% down, and that home appreciates 1 % in a year, Jane actually made a 33% return on the money that was actually hers. 4. Equity Money spent on a mortgage pays off your loan, not your landlord's. 5. Freedom Want to get rid of that green shag? Paint the walls? Get a puppy? You have only yourself to ask. 6. No Landlord We've already been through some of the joys of renting. Add cleaning checks, "lost" deposits, and a general feeling of helplessness to the mix and you've summed up the very nice people who make very nice profits off encapsulating students. 2. Inconvenience Buying, selling, and closing a home can be about as comfortable as a bicuspid renovation. Moving ain't a peach either. Essentially, the decision to buy or rent should be based on three things: how long you'll be in the area, what loan package you qualify for, and your ability to consistently make mortgage payments. While the final decision will ultimately boil down to personal preference, you should consider buying if you'll be in the area more than two years or if you find a house .with a mortgage payment less than a quarter of your monthly income, and can live with the rates your credit will afford. If you happen to be lacking in funds or credit, take heart; there are hundreds of compa- nies who specialize in high loan to income and damaged credit mortgages. If you are still uncomfortable with your financial position, save pennies and pay off your credit cards. Getting your own home isn't as hard or as far away as it's made out to be. 3. Minor Maintenance Skis glide across slightly cool water on a perfect Saturday in June. But they're not your skis. Your skis are hanging in your open garage quietly smiling as you roast like a skewered pig trying to battle your sprinkler system's best impression of Yellowstone. 4. Major Maintenance Ever had your roof wear out? Seen a furnace explode? You will. And they will likely be in the same week. 5. Possible Depreciation Companies relocate. Bad neighbors move in. Depreciation is a very real possibility that can leave you owing more on your home than it's worth. 6. Transaction Costs Realtors, loan officers, and title insurers all expect to be paid, by you. Standard closing costs, fees that don't pay off you mortgage, usually amount to 3% of the purchase price when buying a home and 1% when selling. Realtors generally charge a«6% commission for the privilege of listing with them. Even if you package these costs so they don't immediately hit the bank, you pay them. |