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When
it comes to credit scores, much information about how they work has
been kept secret. Many professionals and consumers are left in
the dark as to how they can keep their credit scores high, giving
them better opportunity and quality of life. Every two weeks I
like to write about a topic that will give individuals insight into
what affects, builds, and produces a well rounded credit
portfolio.
There are different
categories of credit that are listed on credit profiles which affect
scores in a variety of ways. Revolving
credit includes credit cards, overdraft on a checking account, lines
of credit, and most home equity lines. Installment
credit includes student loans, auto loans, and auto leases. The
mortgage category uniquely only includes mortgage
loans.
Since mortgages (as
we all know) are difficult to get and consumers must go through a
demanding process to qualify for, they are viewed by credit scores
differently than any other credit category. Mortgages, as they
age and become seasoned, have a greater positive effect on credit
scores. They also can have a greater negative effect on
credit scores if they are delinquent.
Example
1:
John and Donna are in
their early twenties and have relatively young credit. They
bought a condo in NYC about three years ago when they got
married. Since John was the income earner and Donna was
planning on being a stay at home mom the mortgage was placed in
John's name only. Donna was still half owner since her name was
on the deed. When John first applied for the mortgage he was 22
and had only had credit of his own since he turned 20. He had
two credit cards, a joint account with his mom, and he
was also an authorized user on his older sister's Amex
card. He qualified for the mortgage at the time but was
unable to get the best rate since his score was not the highest due
to a limited and young credit history. He had been approved for
a $600,000 mortgage and his rate was
6%.
Since his mortgage is
now three years old and he has now become a consumer with a seasoned
mortgage, John was thrilled to find out his score had gone up 40
points. Between the mortgage and his other credit aging, his
new Fico score was a 745. He was now able to refinance the loan
at 4.75% interest and save a substantial amount of money.
His current rate of
6% has a monthly payment of $3,597 costing him about $1,295,026 over
the 30 year loan.
His new score is
affording him a rate of 4.75% with a monthly payment of $3,129
costing him $1,126,764 over the life of the loan.
This comes to a
savings of over $400 a month and $168,262 over the life of the
loan! Now that could be college funding for his children.
Example
2:
On the other side of
the coin, a mortgage can also do great damage if it is not managed
correctly.
Let's take Stan and
Linda. They are both in their late forties and have always had
fantastic credit. Stan lost his job as an executive in a
printing company two years ago. He has had great difficulty
earning a living and has been unable to pay his mortgage on time for
the last three months. Stan has a 90 day late payment on his
current mortgage. Before the late payment Stan had a 780 Fico
score. Today he has a score of 650 and it will take him seven years
for his score to naturally recover. That is if he does not hire
a credit restoration company. Chances are slim that most credit
repair companies will be able to help. Our success ratio with
changing mortgage late payments depends on what we find when we
review the whole credit profile.
If you have any
questions about credit and scores or would like us to review a credit
report, feel free to call us.
"Great Credit Brings
Great Opportunity"
Definition of Seasoned credit (although not a separate category listed on
credit profiles) is any account on the credit profile that is over
1-2 years old. As credit ages it adds more points on to
the credit scores, since old credit shows a consumer has more
experience managing it.
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