May 08 2008
May Flowers and Credit Scores
When it comes to your credit score, don’t be caught by surprise!
April showers may bring May flowers but those storms may not be over yet. The key is to protect you from the possible damage that may come from an unexpected storm. Protecting your credit is somewhat the same.
Up until now lenders have always considered a 680 credit score as “A” paper. If you had a score above 720 you were practically gold. This is all about to change. Fannie Mae and Freddie Mac have recently announced some major changes.
Imagine having to pay 2.75% in points and you’ve never had a late payment on anything! As of June 1st on loans with LTV’s about 70% Fannie Mae will penalize borrowers by 50 basis points for a score below 720. And Freddie Mac will penalize borrowers 30 basis points for a score below 740. This is on top of the loan level pricing they have both implemented for borrowers with scores below 680.
What does this mean? It means borrowers could pay hundreds of dollars more each month or thousands more at closing. For example – on a $250000 loan, if a borrower has a score below 620 they would pay a 2.75% delivery fee at a cost of $6875. More then ever it is important for borrowers to get their scores as high as possible.
There are many myths floating around out there regarding things you can do to help your credit scores. The truth of the matter is they are just that, myths. In this day it is imperative to be as smart about credit as you can be. So let’s debunk some of these myths.
Myth #1 – Opting out will immediately raise your score 10-30 points. The truth is that opting out does not have any direct affect on your credit score. It is a very smart action to take, as it will eliminate a lot of junk mail you receive and it will keep you from being put on trigger lists where your personal information is sold by the bureaus to other companies. But it won’t help your credit score. You can learn more about opting out by visiting www.optoutprescreen.com.
Myth #2 – Lowering your credit limits will help your score. Years ago the FICO scoring models used to look at a lot of available credit as a temptation. You could potentially utilize that and then not have enough money to pay your mortgage. The models used today do not look at it that way. They want to see a lot of available credit because it makes the consumer look as thought they can handle their debt well. If you lower your credit limits it could also raise your balance to high credit ratio, which could have a very negative affect on your credit score. So if your credit card company wants to raise your limit, let them.
Myth # 3 – Checking your own credit report will hurt your score. Not so. When you order a copy of your own credit report you generate what’s called a “soft” inquiry. So it will have no affect on your score. Remember though that when you order a copy of your credit report, if you choose to buy the score, what you are seeing is a personal score, not a mortgage score. Every industry has their own scoring models and a personal score is not used by any industry. It is there more as a warm and fuzzy to make us feel good. It is usually higher then any other scoring model. So while it is a very good idea to order a copy of your credit report annually it is not necessary to order the score. You can get a copy of your credit report every year, for free, at www.annualcreditreport.com.
Myth # 4 – Closing accounts can help your score. Once you close an account it will eventually fall off your credit report and you will lose all the history that card carried. It will also make your credit history look younger then it really is which can have a very negative affect on your credit score. So that old JC Penny account you have and never use – go out and buy a pair of socks every once in a while with it. But don’t close it out. You want to keep as much history as possible on your report.
Myth # 5- Credit card offers are hurting my score. They may be annoying, but they’re not affecting your score. Not unless you respond to them and actually open an account. This is another good reason to opt out though as it will eliminate a lot of these offers.
If someone gives you advice about your credit, before you take any action, be sure what you are being told is correct. Otherwise you could end up doing something that could actually hurt your credit score. Don’t let a surprise storm get you into trouble. There are several good websites you can leverage in improving your scores: www.myfico.com, www.truecredit.com, www.consumerinfo.com. All of these websites contain reliable and up to date information regarding credit scores.
Remember, when your hear something about credit scores or quick ways to raise them that may sound questionable, it probably is.