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Timing is Everything

One of the many perks of my job is the smallish educational bits and pieces we can attend from time to time.  Most are directly work related, though not all.  That title up above this entry?  That whole “Timing is Everything”?  Very apropos.  Today’s mini-course covered the subject of managing credit.  Given that we’re still plodding toward buying a house, it’s a subject near and dear to my heart.  (Heck, it’s always been a subject near and dear to my heart.)  It was free and I got paid to attend during work hours.  Win-win situation in a nutshell.

I thought I would recount here some of the bits of wisdom dispensed in the course, because it’s valuable and because so much of the financial information online is presented by someone looking so far down their noses at you it’s hard to know if there’s a person up there somewhere or not.  Today is the only time I’ve ever had a financial expert explain to me how a FICO score is calculated and I thought it might be of interest to somebody besides me, too.

Yes, boys and girls, there’s more to a credit score than some banker pulling a random number out of his or her ass.

For example, did you know that right now, making just one mortgage payment 30 days late drops your FICO score by 100 points or more?  A late car or credit card payment that’s in 30 day delinquency takes you into a 50 point slide (each)?  If you bring everything current tuit suite and keep it there you can bounce back reasonably fast, but if not, be prepared for a prolonged climb from the tar pits of credit life.  The saddest part is that this is a lot tougher now than just a couple of years ago.  These rules kicked in when the country’s money systems took a header into swampland in Florida.  Everybody’s hurting, and the new rules are out for blood.  They’re also a lot more realistic than old rules were because frankly the old rules were the reason we’re in a financial mess in the first place.

Worse yet, for all the people who opted for foreclosure or short sale and are breathing sighs of relief thinking they’re out from under the debt, they need to rethink.  When you walk out on money you can’t pay and it’s 100% money from the original home purchase, for the moment you’re reasonably safe.  There’s a forgiveness clause in effect through 2012 only.  When I say the ORIGINAL home loan, I mean it.  If you refinanced and still defaulted or sold in a short sale, the difference between the original sales price and the refinance or short sale price is taxable income.  You might not see the 1099c form this year or next – but it is money for which you can be sued, and after all collections attempts are exhausted, banks can send out those aforementioned little 1099c tax forms.  At that point you no longer deal with the banks, you deal with the IRS for the money you couldn’t pay in the first place.

Are you scared yet?  Are you ready to join the Occupy movement?

It definitely gave me the shivers.  I had a rough few years and once despaired of ever owning a home.  Now I’m thanking God I didn’t pay $250K for a place I could now buy for $75K or less, losing it to foreclosure and STILL being stuck with the bill.  Garth Brooks may not be my all-time favorite singer but he hit the nail on the head with one of his songs: Unanswered Prayers.  Look up the lyrics.  You’ll understand.

So… about the FICO score.

Quick lesson in credit.  Lenders look for the five C’s:  Character (payment history); Capacity (to pay); Collateral; Credit (proportionate to income); and Conditions (reason you’re asking for credit, i.e., a student loan vs. a credit card for general shopping).  They break down as follows.

Generally speaking, your FICO score is determined along these lines.

  1. 35% of the score is based on your 36-month credit history.  Have you paid on time or early?  Have you maxed out your credit every month?
  2. 30% is on the amount you owe as compared with your income.  The general guidelines are that your mortgage payment shouldn’t exceed 28% of your gross monthly income, and all types of credit combined shouldn’t exceed 48%.
  3. 10% of the FICO score is based on what kind of credit you have.  A regular Mastercard, Visa or Amex is the expectation, with the ideal two cards in good standing.  On top of charging you higher interest, store credit cards actually hurt you. (Perfect comeback the next time some cashier entices you with 15% off to apply.)  The credit agencies treat store credit lines as just a step above sub-prime. Home loans and car loans are likewise positive as long as they’re in good standing.  Obviously no credit is good once it hits the collection agency; however, the payday loans and their stepchildren car title loans normally show up only if they hit collection agencies.
  4. The next 10% of your FICO score is based on the amount of new credit you’re accruing.  If you’re opening fifteen new credit cards, obviously it’s not a good thing.  If you’re looking to buy a house or a car, however, it’s expected that you’ll have your credit run several times close together.  A flurry of credit requests in a two week period is generally considered to be a single request.  However, if your credit is being pulled every couple of months for a while it looks bad, which is logical.  That generally indicates you’re being declined and trying again.  Not your best moments.
  5. The final 15% of your credit score is the length of your credit history.  Preference is given to long-term accounts in good standing.  Newer accounts don’t necessarily hurt you.  However, an account only six months old doesn’t have the same positive influences as one six years old.

Everyone can request one free credit report a year.  No big secret, right?  But did you know you can pull your credit once a year from each one of the credit agencies?  Equifax, TransUnion and Experian?  And don’t fall for the ads on TV and the Internet – FreeCreditReport.com ain’t free.  There IS, however, a free option: annualcreditreport.com.  The advisor today recommended since you can check each of the agencies for free once a year, alternate them so you check one every four months.  It makes it more likely you’ll catch errors sooner and hopefully be able to remedy them more quickly.

I would be remiss not to mention the agency behind today’s workshop.  They’re a nonprofit called Arizona Saves.  The folks there were financial experts who do this as volunteers, for which I think they deserve double props.  In a financial world where banks are known for robo-signing, it’s really nice to know there are some folks in the business who legitimately care about their community.

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