There is nothing more important in you financial life than your credit score.  And it seems no greater mystery.

In the following pages we will be exploring the "five" factors that control your credit scores and take the mystery out of those three little numbers and put you in Total control!

Your Credit Score

What It Means to You as a Prospective Home Buyer

Introduction

The subject of credit scoring has become an increasingly hot topic, and for good reason. For many years, the general public only associated the concept of credit scoring with the need to purchase high-ticket items such as a new car or a home. Today, credit scoring goes much further. Your credit score can affect your ability to get a good rate on commodities such as car insurance, cell phones, or even determine whether or not you get the job that you want. Indeed, the financial snapshot provided by the credit score has also become a gauge for many employers, especially those who seek to place employees in a position of financial responsibility.

The credit score system used today has evolved since the 1960s. It was originally designed to provide lenders with financial profiles on consumers who wished to borrow money. The lenders' biggest concern was whether or not an individual had the ability to repay a loan, and establish what percentage of risk might be involved.

Congress passed the Fair Credit Reporting Act in 1971 to establish guidelines for fair practices in regard to the use of credit scoring. This law was designed to promote accuracy in reporting and protect the privacy of consumers. In light of the increased use of credit scoring and a growing fear of identity theft, recent legislation has been passed to further protect Americans and improve consumer awareness. The Fair and Accurate Credit Transactions Act of 2003

(sometimes referred to as The FACT ACT or FACTA) was signed by President George W. Bush on December 4, 2003. This amended the Fair Credit Reporting Act, enabling each American to obtain one free credit report every 12 months from each of the three main credit reporting agencies (CRAs);

Equifax, Experian and TransUnion. Those bureaus have created a central web site, www.annualcreditreport.com, to accommodate Americans who wish to obtain copies of their credit report.

The credit scoring model seeks to quantify the likelihood of a

consumer to pay off debt without being more than 90 days late

at any time in the future. Credit scores can range between a

low score of 350 and a high score of 850. The higher the

score, the better it is for the consumer, because a high credit

score translates into a low interest rate. This can save literally

thousands of dollars in financing fees over the life of the loan.

Only one out of 1,300 people in the United States have a

credit score above 800. These are people with a stellar credit

rating that get the best interest rates. On the other hand, one

out of every eight prospective home buyers is faced with the

possibility that they may not qualify for the home loan they

want because they have a score falling between 500 and 600.

The following chart illustrates how an underwriter interprets

the credit score in terms of risk, and how the interest rate is

affected as a result. Mortgage lenders consider a score of 700

or above to be very good.

Credit scores are comprised of five factors. Points are

awarded for each component, and a high score is most

favorable. The factors are listed below in order of importance.

1. Paying debt on time and in full has the greatest

positive impact on your credit score. Late payments,

judgments and charge-offs all have a negative

impact. Missing a high payment will have a more

severe impact than missing a low payment, and

delinquencies that have occurred in the last two

years carry more weight than older items.

2. This factor marks the ratio between the outstanding

balance and available credit. Ideally, the consumer

should make an effort to keep balances as close to

zero as possible, and definitely below 30% of the

available credit limit when trying to purchase a home.

CREDIT HISTORY - 15% IMPACT

3. This portion of the credit score indicates the length of

time since a particular credit line was established. A

seasoned borrower will always be stronger in this

area.

TYPE OF CREDIT - 10% IMPACT

4. A mix of auto loans, credit cards and mortgages is

more positive than a concentration of debt from credit

cards only.

INQUIRIES - 10% IMPACT

5. This percentage of the credit score quantifies the

number of inquiries made on a consumer's credit

within a six-month period. Each hard inquiry can cost

from two to 25 points on a credit score, but the

maximum number of inquiries that will reduce the

score is ten. In other words, 11 or more inquiries

within a six-month period will have no further impact

on the borrower's credit score. Note that if you run a

credit report on yourself, it will have no affect on your

score.

Remember that the credit score is a computerized calculation.

Personal factors are not taken into consideration when a creditreport is generated. It is merely a snapshot of today's creditprofile for any given borrower, and it can fluctuate dramaticallywithin the course of a week.

Lenders estimate your ability to pay back

money based on your credit score. The

risk factor they take on is built-in to your

i n t e r e s t r a t e a s a f i n a n c i n g f e e .

Therefore, a low credit score results in a

higher interest rate, higher monthly fees,

and a higher amount of interest being

paid over the total life of the loan.

Referring back to our chart, a borrower

with a credit score of 620 would be questionable to an

underwriter. While the lender may agree to provide financing,

the increased interest rate is factored into the monthly

payment. The following chart illustrates the difference in the

amount of interest paid over the life of the same loan with

three different credit score scenarios.

A borrower who increases his or her credit score from 620 to

720+ can potentially save $601 per month on mortgage

payments, $7,214 per year, and approximately $216,432 over

the life of the 30-year loan.

FICO SCORE APR

MONTHLY

PAYMENT

INTEREST PAID

Above 720 5.71% $1,453 $272,928

620 to 719

5.796% to

7.84%

$1,466 to $1,807

$277,845 to

$400,381

Below 620

8.452% to

9.234%

$1,914 to $2,054

$438,957 to

$489,365

SOURCE: Credit Resource Corp., How Much Does a Low Score Cost

You? http://www.creditresourcecorp.com

If you are considering a home

purchase, it is in your best

interest to make every effort to

increase your credit score,

especially if you know you have issues you should be dealing

with. It is often the case that

people are not aware of bad

marks on their credit record until they apply for financing for a

major purchase, such as a home.

As part of the loan process, we run a credit report for you. But

you can take advantage of the opportunity to get a free credit

report from each of the three main CRAs: Equifax, Experian

and TransUnion. As a sidebar, you can choose to get the free

report from all three bureaus at the same time, so you are

aware of what information each bureau has collected. Another

option is to pull your credit report from one agency, and

reserve the right to get your free reports from the other two

CRAs as you work on improving your credit standing.

We believe it is best to have the full overview up front.

Different CRAs have different methods of calculating these

scores, and may also have different information contained

within their findings. Consider the adage, "Why jump over

nickels to pick up pennies?" If additional reports are needed

within a 12-month period from any of the three CRAs, the cost

is extremely minimal compared to the potential savings that

can be realized by an improved credit score, and if you run a

credit report on yourself it will not affect your own score as an

inquiry.

The underwriter who is making the decision as to whether or

not you should get the loan you are asking for will generally

look at the scores generated from all three CRAs. Typically,

the score will not be the same from all three reports, and the

underwriter will consider the middle score as a barometer.

If you are in the process of reviewing your

credit reports, the first thing to do is make

sure that the information contained within

the reports is correct. In June 2004, The

U.S. Public Interest Research Group

published the results of a survey it

conducted involving 200 adults in 30

states to test the validity of credit reporting.

Their findings were as follows:

Twenty-five percent (25%) of the credit reports

contained errors serious enough to result in the

denial of credit;

Seventy-nine percent (79%) of the credit reports

contained mistakes of some kind;

Fifty-four percent (54%) of the credit reports

contained personal demographic information that was

misspelled, long-outdated, belonged to a stranger, or

was otherwise incorrect;

Thirty percent (30%) of the credit reports contained

credit accounts that had been closed by the

consumer but incorrectly remained listed as open.

SOURCE: U.S. Public Interest Group Research; One In Four Credit

Consumers, US PIRG Press release, 06/17/04

http://uspirg.org/uspirgnewsroom.asp?id2=13650om

If you find that you have errors on your credit report, follow this

procedure to correct those errors.

Make a copy of the report and circle the items you

are questioning. Keep your original copy for your own

records.

1.

Prepare a letter to the CRA that provided you with the

report in question, and request to have the erroneous

item(s) removed. If you have proof of payment for an

i t e m i n q u e s t i o n , i n c l u d e a c o p y o f t h a t

documentation.

2.

Prepare a letter to the creditor reporting the problem,

especially if you feel you are a victim of fraud or

identity theft. Inform the creditor that you are

disputing an error reported to the CRA, state why the

claim is inaccurate, and include any relevant

documentation to prove your point.

3.  Send your correspondence via certified mail.

You should receive a response from the CRA within 30 to 45

days. If the error has been corrected, they will send you a

fresh copy of your credit report at no charge to show you that

the item has been removed. They will also send a corrected

report to any entity that received a report that contained errors

within the last six months. If you cannot have a disputed item

removed, you have the right to include your side of the story

on the credit report. Your statement should be a concise

explanation (100 words or less) as to why you are challenging

the item in question. From that point on, this notation will be

included in your credit report as long as the item in question

remains on your report.

A borrower will sometimes not have

enough credit references to obtain the

loan they wish to secure. In this case,

start by opening small lines of credit

that report to one of the three major

CRAs, and make purchases that can

be paid off easily.

If you do not already have a checking or savings account,

open one. Your bank or credit union may be able to provide

you with a credit card account once you have established a

history with them as a customer.

Ask your family or spouse to add you to their credit card

account. By adding your name to an established line of credit,

you can ride on their coattails, so to speak, and gain points by

using that person's credit history.

It is also wise to start saving money for the down payment on

your home. The lender will look at your application more

favorably when you are able to come to the table with a 20%

down payment. Bear in mind, there are certain loan programs

available that permit a percentage of gift money for down

payment, which can come from a relative, or even the person

selling the home.

Unfortunately, a person with a bad credit

score is often in this position because he or

she lacks the discipline to pay bills on time.

Of course, there are exceptions where

unforeseen circumstances come into play,

such as health complications, or loss of

employment.

There are a few things that may be able to bring your score up

so that you can secure a better interest rate on your mortgage

loan.

Our borrower, Mr. Jones, has a credit score of 664. He has

five credit cards, but his Visa account is almost maxed out. His

other four credit cards have relatively low balances. Mr. Jones

moves the part of the debt from the Visa account to the other

major credit card accounts, thus distributing the debt more

evenly over the five cards. This changes the ratio of debt to

available credit (which has a 30% impact on the overall credit

score), and Mr. Jones successfully raises his credit score by

20 points with very little effort.

accounts. Our borrower, Mr. Smith, has only two credit cards,

but both are pushing the limit of available credit. Mr. Smith

opens two new credit card accounts, each with a credit limit of

$5,000. He transfers part of his existing balances to the new

accounts. While he has acquired two new cards that have no

established history, the greater impact is the change in the

ratio of debt to available credit.

Ultimately, experts say that it is best to have two to five credit

cards, and no more than that. You should keep your balances

as low as possible. If you have a credit account with a zero

balance, do not close the account.

Instead, make a small purchase so the card shows up as an

active account on your credit report, and you will be awarded

points for your long-term credit history.

These are just a few tips to consider as you seek to obtain mortgage financing. But you should always know that as your loan originator, my job is just beginning when you close your loan with me.

As soon as you begin to make mortgage payments on time and in full, your credit standing will begin to improve. My team and I will continue to monitor rates on your behalf and alert you to the opportunity to refinance into a loan program with a lower interest rate as soon as possible. Our ong-term goal is to help you build a strong financial future.

When you fill out a credit appli-

cation, we run a credit report for the

underwriter. Each lender and each

loan program has different guidelines

they must follow. You should not do

anything that will have an adverse

affect on your credit score while your

loan is in process. We know it's

tempting...If you're moving into a new

home, you might be thinking about

purchasing new appliances or furniture, but this is really not

the right time to go shopping with your credit cards. You'll want

to remain in a stable position until the loan closes and give us

the opportunity to help you lock in the best interest rate we can

possibly get for you.

Here is a handy list of do's and don'ts that you should adhere

to after your loan application has been submitted to the

lender.*

DON'T APPLY FOR NEW CREDIT OF ANY KIND - If you

receive invitations to apply for new lines of credit, don't

respond. If you do, that company will pull your credit report

and this will have an adverse effect on your credit score.

Likewise, don't establish new lines of credit for furniture,

appliances, computers, etc.

DON'T PAY OFF COLLECTIONS OR CHARGE-OFFS -

Once your loan application has been submitted, don't pay off

collections unless the lender specifically asks you to in order

to secure the loan. Generally, paying off old collections causes

a drop in the credit score. The lender is only looking at the last

two years of activity.

DON'T CLOSE CREDIT CARD ACCOUNTS - If you close a

credit card account, it can affect your ratio of debt to available

credit which has a 30% impact on your credit score. If you

really want to close an account, do it after you close your

mortgage loan.

CARDS - Running up your credit

cards is the fastest way to bring your

score down, and it could drop up to

100 points overnight. Once you are

engaged in the loan process, try to

keep your credit cards below 30% of the available credit limit.

DON'T CONSOLIDATE DEBT TO ONE OR TWO CARDS -

Once again, we don't want you to change your ratio of debt to

available credit. Likewise, you want to keep beneficial credit

history on the books.

DON'T RAISE RED FLAGS TO THE UNDERWRITER - Don't

co-sign on another person's loan, or change your name and

address. The less activity that occurs while your loan is in

process, the better it is for you.

DO JOIN A CREDIT WATCH PROGRAM - Your bank, credit

union or credit card company may be able to provide you with

a free credit watch program that can alert you to any changes

in your credit report. This can be a safeguard to help you

intervene before the underwriter sees a problem.

DO STAY CURRENT ON EXISTING ACCOUNTS - Late

payments on your existing mortgage, car payment, or anything

else that can be reported to a CRA can cost you dearly. One

30-day late payment can cost anywhere from 30 to 75 points

on your credit score.

NORMALLY WOULD - Red flags are easily raised within the

scoring system. If it appears you are diverting from your

normal spending patterns, it could cause your score to go

down. For example, if you've had a monthly service for

Internet access billed to the same credit card for the past three

years, there's really no reason to drop it now. Again, make

your changes after the loan funds.

DO CALL YOUR LOAN CONSULTANT - If you receive

notification from a collection agency or creditor that could

potentially have an adverse affect on your credit score, call us

so we can try to direct you to the right resources and prevent

any derogatory reporting to credit bureaus.

* SOURCE: Based on The Top 10 Credit Do's and Don'ts During the

Loan Process, provided by Credit Resource Corp.

http://www.creditresourcecorp.com

If you feel you would prefer to work with a

credit repair service rather than try to

tackle credit repair issues on your own,

please give us a call so we can help you

sort through your options. We will do our

best to refer you to a reputable credit

remediation service and guide you in the

r i g h t d i r e c t i o n o n c e w e h a v e t h e

opportunity to review your credit report

with you.

The Federal Trade Commission (FTC) regulates credit repair

services and provides free information to help consumers

spot, stop and avoid doing business with credit repair

companies that are not reputable. Their web site is located at

http://www.ftc.gov.

You can also write to the FTC to request a copy of their free

brochure titled Credit Repair: Self Help May Be Best, which

includes information about credit clinics. The address to write

to is:

Federal Trade Commission

Sixth and Pennsylvania Avenues, NW

Washington, DC 20004

If you have any complaints regarding your credit report or

credit remediation services that you wish to report to the FTC,

contact them at:

Federal Trade Commission

Consumer Response Center, Room 130

600 Pennsylvania Avenue, NW

Washington, DC 20580

 Don davis and HighTechLending Home Page: www.htlnw.com

© 2007 LTB, II LLC. Distributed by LoanToolbox.com.