It seems like such a simple equation. If you want the best mortgage interest rate, be sure that your credit score is as high as possible. And for once, this deceptively easy to understand formula actually is true. You really can get better interest rates if you can boost and keep your credit score as close to the maximum of 850 and steer it clear of the low end of 300.
According to a recent story by mortgage and credit expert, Dan Green, there are some easy ways to get that all important credit score up to where it will really do a potential homebuyer some good. “Anyone can raise their credit score to “Excellent.” This is because credit scores are based on a formula and parts of the formula are well documented and described,” writes Green on the website, The Mortgage Reports.
So what does Green suggest? First of all, it’s important to understand what scores actually matter. While there are many credit reporting companies in the market, he says that only three matter when it comes to mortgages: Equifax, Experian and TransUnion. Not only are those the only three credit reporting outfits that matter, Green says that anyone considering buying a home needs to realize that only specific reports issued by these companies are used by mortgage lenders. They are:
The Equifax Beacon 5.0 report
The Experian/Fair Isaac Risk Model v2 report
The TransUnion Fico Risk Score 04
This is important to know because these are the reports mortgage lenders analyze when they’re considering your application for a home loan. “Your lender then takes the median of the three scores (i.e. the one in the middle), and calls it your credit score,” writes Green.
One benefit of applying for a mortgage is that a lender will supply you with a copy of your credit score for free. Green suggests you take advantage of this access to a free credit score and also pay heed to the notes that accompany them, which provide a road map to improving your score. Tips will include the obvious, like always paying your bills on time, and the less clear cut, such as keeping older credit cards open and using them from time to time.
Another bit of advice Green offers is to note how close you are to the credit limit on any of your cards. If you’re near the limit, that is a black mark against you in a lender’s eyes – the ideal is to have a balance of less than 30 percent of your credit limit. If you can’t pay down the limit, Green suggests asking the credit card issuer to up your card’s limit to get it below that 30 percent threshold. Paying close to attention to credit scoring details, insists Green, can up your score by 100 points in no time.
The horror stories about credit cards are real. Far too many people have used them irresponsibly and dug themselves a deep, deep financial hole that takes years or decades to get out of. But those unfortunate tales shouldn’t overshadow the very real fact that credit cards have revolutionized how we live, arguably doing for commerce what the automobile did for travel and what the mobile phone has done for communications. Just imagine the pre-credit card days when travel, shopping or going to a restaurant meant carrying around a wallet full of cash or traveler’s checks.
These days, in the wake of the financial crisis – which both spawned tougher regulations and prompted banks to be circumspect about extending credit – many people simply can’t get a credit card. While that is probably a good thing overall, it means that people who have a poor credit history or are simply too young to have established a credit history cannot take advantage of the many real benefits of having a credit card in their wallet. That is, unless they opt to obtain a credit building card, aka as a secured credit card, and begin a journey to obtaining a full-fledged credit card.
What’s ‘Secured’ About It?
A secured credit card comes with a string attached, a fairly big string. To get a secured card, you have to put up some money.
This protects the bank or credit union that issues the card. Fair or not, if you have shaky credit, you’re considered a high-risk customer. To reduce that risk, the bank requires you to deposit a certain amount of money for security. If you can’t repay what you owe on the card, the bank can take money out of that account to cover itself.
The Payoff Down the Road
A secured credit card is like training wheels on a bicycle. It’s meant to get you to a place where you no longer need it. The goal is for your secured card to evolve into a regular credit card, cutting the string and eliminating the need for the security deposit.
When you have a secured card, you’re under a microscope. Think of it like getting a try-out on a baseball team; the coaches want to see how you perform before giving you a slot on the roster. In the same way, the bank keeps track of how you handle your account, and so do the three major credit bureaus, which are Equifax, TransUnion and Experian (not all secured cards report to the bureaus). While you get some of the albeit limited benefits of a full-on credit card, you’re able to show that you pay off your bill on-time.
Beverly Harzog, an independent credit card expert and author of the forthcoming book “Confessions of a Credit Junkie,” says a secured card “is a great way to rebuild or establish credit.” But she adds: “The key is to use the card responsibly.”
Plastic Look-alikes
Because you have to deposit money before you can use a secured credit card, it may sound to some like a debit card, especially a prepaid debit card. But it’s very different.
A debit card draws money directly from the user’s bank account to make purchases. Using one is like writing a paper check. There’s no credit involved. A prepaid debit card takes this one step further, letting you access funds without even having a bank account. The customer “loads” and “reloads” the card with money (there are various ways to do this) and spends as needed.
If you simply want the speed and convenience of paying with plastic, debit cards are handy. But because they don’t involve credit, they do nothing to build your credit score. The secured credit card has that niche pretty much to itself.
How to Apply
Because banks face limited risk, they’re fairly receptive to an applicant for a secured credit card, assuming the person has money to deposit. Still, not every application gets a green light. For instance, a recent bankruptcy may limit a person’s eligibility and an especially reckless use of credit in the past may scare banks off.
Offers for secured cards are everywhere. The important things for consumers are to find one that is issued by a reputable lending institution (an FDIC-insured bank or NCUA-insured credit union), choose an affordable sum to deposit, and to compare secured card offers.
Deposits for secured cards range from the low hundreds of dollars to more than $5,000. A card’s credit limit is tied to the size of the deposit.
The deposit amount and credit limit are not always the same, though. In a few instances, the deposit is more than the credit line. And there are a few “partially secured credit cards” that offer a higher limit than the amount deposited. “This is a little riskier for the issuer,” Harzog notes. Banks will provide more leeway to applicants it deems to be less of a financial risk.
Fees, Interest and the Finish Line
As is the case with any financial product, shoppers considering a secured credit card should look for ones that have fees that are as few and as low as possible. While annual fees are common with secured cards, a good secured card will not have an annual fee in excess of $35 or so.
Even the best deal on fees (no fees at all) will do you little good if you’re stuck with an outrageous interest rate. You have to balance the two factors, look at the big picture and do the math. That being said, a good secured credit card should not charge more than 19 percent annual interest.
For most applicants, the important part of having a secured credit card is the end game. When will their card become a regular credit card? Harzog, the credit card expert, cites 12 to 18 months as the average period, “if [the card is] used responsibly.” But she adds the caveat: “The specifics of each person’s credit file will be a factor.”
A Helpful Tool
Being shut out of the credit market is a difficult situation. But getting a secured credit card shows lenders that you’re a serious person, willing to bet your own money that you can handle your obligations. And it allows you to prove yourself month by month. This financial tool has helped millions of people to establish or rebuild their credit and, in so doing, helped them get on the path to financial freedom.
Who among us hasn’t needed a second chance? Or a first opportunity? For the millions of Americans who were battered by the Great Recession and came out of it with a tattered credit score, plus the legions of young people who haven’t had a chance to earn and spend money wisely, these are not abstract questions.
Even though the emergence of financial products like prepaid debit cards have made it easier to get some of the ease and benefits of plastic, solid credit still matters. Try to buy a house or a car and you’ll quickly learn how important it is. If you have bad or no credit, you’ll be turned down for a loan or offered an ugly interest rate.
This is where secured credit cards come in. Secured cards are a bit like a bicycle with training wheels – a tool to practice on and demonstrate your capacity to operate something bigger, faster and potentially more dangerous. Unlike unsecured credit cards, the secured variety typically requires a cash deposit in order to establish a credit line. If you put down a $500 deposit, you’ll have a credit limit of $500 (keep in mind that the money you put upfront is not used to pay off monthly charges). This initial deposit is the bank’s way of insuring that it doesn’t get burned if you do not pay your bills.
The best thing about secured credit cards is that, in most cases, the issuer reports your repayment behavior to the three main credit bureaus – TransUnion, Experian and Equifax. Translated, this means that paying your bill on time and following the terms and conditions of the card can, over time, boost your credit score. This makes a secured credit card an extremely valuable tool if, and this can’t be emphasized strongly enough, you are timely and consistent in paying your bill.
Still, there are red flags to watch out for with secured cards. Start by making sure that any secured card you consider will, in fact, report to the three main credit bureaus. If they do not, and your goal is to establish good credit, you’re wasting your time. Like any financial product, it is important to know that not all secured cards are equal when it comes to fees. Shop around. While secured cards generally have higher fees than unsecured ones, there can be big differences in the interest rates, activation charges and account maintenance fees. It’s also smart to know the card issuer’s policy regarding returning your initial deposit when you close the account. Sometimes it can take a few days to get your money back.
Be careful to avoid any secured credit cards that do not have a payment grace period. If it does not, that means you will pay interest on any charge you make from the moment your card is swiped. “With no grace period, there is no way to avoid paying interest,” says Amber Stubbs, editor of CardRatings.com. “With regular credit cards you can avoid interest altogether if you pay your statement in full.” Fortunately, the lack of a grace period is a rarity, although the Horizon Gold Card is one that does this. Also watch out for limitations on how you can use the card. The Horizon card, for instance, can only be used to make purchases on a Horizon outlet store website.
None of these cautions are meant to scare you away from using a secured credit card to rebuild your credit. But being aware of some of the potential problems will allow you to safely ride your training wheel equipped bike without falling into potholes or getting run off the road.
True, it’s just a number, but maintaining a good credit score is key to getting the best rates for your mortgage and car loans
We all have numbers that, for better or worse, define us. Age is an obvious numerical marker, but so too are the ones that your doctor hectors you about – weight, cholesterol and blood pressure. In the realm of personal finance, the number that arguably matters as much as any other is your credit score. While the figure that is attached to you – be it 567, 680 or 750 – may not instinctually resonate, make no mistake that your credit score has big and very meaningful implications. Why? In the most basic terms, it’s because a good credit score (and higher is better) means that when you have to borrow money to buy a car or a boat or a house, a lender will not only be willing to fork over the money but they’ll do so at a better interest rate. In other words, a good credit score can significantly reduce the cost of borrowed money over the life of a loan.
The impact of your credit score goes well beyond getting a good interest rate on a loan. Although potential employers do not check the credit scores of job applicants, they may review a credit report, believing that a poor financial history could be an indication of irresponsibility, or may somehow impact job performance. But, back to the score issue, it gets worse. According to Kiplinger.com, some insurance companies charge customers with poor credit scores higher premiums because they are convinced that the way consumers manage their personal finances is a predictor of the number of claims they will file. Indeed, according to a 2004 Texas Department of Insurance study, more than half of insurance policyholders with high credit scores enjoy lower premiums.
All of this may seem terribly unfair. But the truth is that your credit score, also known as a FICO score, is simply a quick way for lenders to understand how risky it is to lend you money; or, more accurately, how likely it is they will get paid back. To come up with a score – which range between 300 and 850, with 680 the minimum to be considered credit worthy – the company that calculates it looks at 5 factors. Most important is your payment history, which is another way of saying whether you pay your bills in full and on time. Also highly important is how much money you owe; maxing out your credit card limits can indicate to lenders that you are in a precarious financial position and more likely to miss or make late payments. Also factoring in, though to a lesser extent, is the length of your credit history, how many new lines of credit you have requested recently as well as the mix of loans you have. The company that comes up with FICO scores, Fair Issac Corp., then throws all this information into a blender and comes up with a number.
Ignorance is Not Bliss
If you have read this far, the obvious question is this: do you know your credit score? Whether you do or don’t, you can be absolutely sure that any company considering lending you money sure does. And if you want to be a smart consumer, you should know it, too. Why? Knowing what potential lenders will see well before you actually ask them for a loan will not only give you a good idea of what sort of deal they will offer you, it will also give you a chance to change your score. In some cases, the score Fair Issac calculates for you is flat out wrong, the result of mistaken identity or erroneous information about your repayment of debts.
To find out whether that is the case, it’s best to contact one of the nation’s 3 credit reporting bureaus – Equifax, Experian and TransUnion – and request a copy of your credit report, which includes the granular information used to come up with your FICO score. Fortunately, the credit bureaus are required by law to provide a free copy of your credit report upon request each year (you can mark your calendar and request a report from a different bureau every four months). Be careful of lookalike websites that charge for free credit reports. Some websites will provide a credit report and/or score for free or for a small processing fee and then sign you up for a free seven-day membership. But the trick with these sites is that they automatically begin charging a monthly fee after that initial seven-day period unless you cancel it. To cancel the service, you have to call a designated number, and you may not be able to cancel online. In other words, it is a hassle to cancel.
To avoid that hassle, use this convenient link to request your (truly) free copy now. Unfortunately, getting your score is not free, but it’s probably worth the money to take a gander at the all-important number that lenders see. To do that, go to MyFico.com. While it is true that other credit scores are out there, the FICO score is the one used by the vast majority of lenders.
5 Tips for Raising Credit Scores and Lowering Your Interest Rates
People who have bad credit scores should take heart in the fact that they can be improved. Even if you’ve been tardy paying your credit card bills in the past but have since shaped up, time is on your side. All the negative information that led to the bad score in the first place will drop off your record in 7 to 10 years (assuming there is no additional negative information in that time). However, if you want to repair your credit a bit faster, here’s how to do it:
1. Make your payments on time. Timely payments are the single best way to improve a credit score.
2. Make amends. Get in touch with past creditors and agree to pay what you owe in full in exchange for them reporting your good deed to all the credit bureaus. Not only does this eliminate debt, it erases that black mark from your history. Be sure to get the creditor to put their promise in writing before you pay.
3. Don’t cut up your cards. It’s tempting to get out the scissors once you’ve paid off the balance of an account that has harmed your credit. Don’t do it. The lower the amount of debt you carry compared to your total allowable credit, the better off you are. For example, if you have $100,000 of credit available and you currently have a balance of $12,000 on your credit cards, department store cards, etc., you will have used 12% of your available credit. Shooting for 16% or less is a good goal.
4. Raise a stink. Dispute errors on your credit report. Find out which reporting agency is reporting the error and contact it. The credit-reporting agencies to contact are Experian, TransUnion and Equifax. Each maintains its own report. It is possible that an error is on one report but not another.
5. Take out a “credit builder” loan. One way to show lenders that you are low risk is to, well, show them by paying off another loan. Some credit unions offer a credit builder loan to their members. The money is actually placed in a savings account, which serves as collateral until the loan is repaid in full — then the payments and interest become yours.
You may also look into applying for a second credit card. Where prepaid or debit cards do not build your credit score, a secured credit card can help you build your credit score. We offer a selection of secured credit cards at BestPrepaidDebitCards.com. Compare their offers, but pay close attention to the interest rate. It is advised to try to go no higher than 18%, if possible.
Resources Below are some resources that may be helpful while researching your credit report and score. Remember that you can get a free copy of your credit report, but you must pay to receive your credit score, and MyFico.com offers the credit score most utilized by lenders.
