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How Are Credit-Score Points Earned?

FICO ScoresHow Are Credit-Score Points Earned?

The official FICO scoring model runs from 300 to 850 points.  But your score will very based on the type of credit you are applying for.  There are differing score-models for each type of inquiry:

(in order of risk preference)

  1. Credit request for a mortgage – BEST
  2. Credit request for a car loan
  3. Credit request for a credit card account
  4. Credit request for a store credit card or consumer loan – Worst

Mortgage and Auto Loans are considered more positive because the debt they create will reduce as monthly payments are applied.

Credit requests for credit card loans usually hit the scores the hardest.  This is because the debt balance is expected to go up every month until there is enough account history to show otherwise.

Once a negative condition hits your credit report, the damage is done. Paying a collection account will not regain the points you have lost.

Credit Score Breakdown

65% is tied to 2 things

  1. Payment History
  2. Credit Utilization
  • The amount of money you are borrowing and whether you are paying your creditors back is the primary source of high credit scores

15% is tied to the amount of time you’ve had credit in your name

  • The more time you have spent managing good credit the higher your score will be
  • First time borrowers bring an added layer of risk

10% is scored on the type of credit used

  • Auto loans and mortgage loans are scored as a positive.
  • Credit Cards are negative.
  • Pay Day loans almost ensure credit score deficiency.

10% is scored on a category deemed “new credit”

  • This is an assessment of the most recently opened accounts and the types of credit that have been applied for.
  • It also scores on how long it has been since you opened an account.
  • At the maximum this category is worth 85 points to your FICO.

A mortgage credit inquiry will lower your credit score by 5 points.  You can have as many mortgage credit score inquiries as you want for 14 days and you will only receive one reduction for 5 points.

Posted in: Condos, Credit, First Time Home Buyers, For Buyers, Household Finances

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Household Budget Detox

Household Budget Detox

Budget

The other day, while reviewing a mortgage application, I was told by the applicant about their 30 day juice diet.  My client had bought a $400 juicer and everday had 3 huge glasses of vegetables and fruit – mostly kale, carrots and apples – and that’s it; they ate nothing.

Why would anyone ever do this?

“To detoxify and loose a bunch of excess weight”, they replied.

Ok, that sounds like a good reason, but as their mortgage advisor I wanted them to take a similiar approach toward their spending habits and household finances.

So how would you detoxify your household finanances and loose a bunch of excess expenditures?

Click here for an simple to use spreadsheet.

Work Within a Budget – We all have probably made one before, but have you ever “worked within one” by reviewing and updating it consistently?  This means simply having a spreadsheet that you record into and review at a steady pace.  You don’t have to track every detail.

Start with a flow chart to classify expenses:

  1. Necessity – fixed payments and not flexible.  Examples are housing payment and car payment.
  2. Necessity but Flexible – can be adjusted.  Examples are utilities and food.
  3. Discretionary – expenses you want to make.  Examples are haircuts, supplies, dry cleaning and entertainment.

Now the hard part:  start slashing items in column three and search for ways to trim column two.

Use automated tools to execute your budget.

  • Use your bank’s bill pay service
  • Set up automatic payments
  • Use bank’s transfer service to put money into savings
  • Pay with debit card so you can track expenditures
  • If you get cash divide the money into envelopes and write the purpose on the envelope

Use the 10/10/10 Savings Rule on every paycheck.

  • 10% saved for short term needs – vacation, birthday/holiday gift giving
  • 10% saved for intermediate needs or emergencies – car trouble, loss of job
  • 10% saved for retirement or real estate investment

Have an accountability partner.  Accountability is in direct proportion with effectiveness and success. Use a family member, close friend or partner to back you up and help you stay on track.  If your finances are more complicated, use a software program, Certified Public Accountant and/or Financial Planner.

A budget can get you there.  The key to these ideas is to have a reasonable budget to begin with, sticking to the process and reviewing results.  If your money problems are too serious to fit your budget seek professional help immediately by contacting a non-profit credit counselor (a church or United Way).

If the article doesn’t answer all of your questions, please don’t hesitate to drop a question in the comments, or for direct communication, please call me at 918-949-7248.

Posted in: Company News, First Time Home Buyers, Household Finances

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