Secrets of the 800 score credit club
By AIME DUNSTANCox News Service
Wednesday, April 09, 2008
WEST PALM BEACH, Fla. — WEST PALM BEACH, Fla. — With a slumping housing market, increased insurance premiums and high fuel costs - not to mention depressing 401(k) statements - the financial picture of many South Floridians isn't pretty.
If you are struggling to make ends meet and bills are starting to slip through the cracks, local experts say the damage to your credit score could make for an even dimmer financial future.
"The current market environment will unavoidably be challenging for many," says Tommy Mayes, senior vice president at Wachovia's Calibre office on Palm Beach. "Clearly a lot of people were afforded the opportunity to buy homes and other consumer goods (in recent years) due to abundant credit that would not otherwise have been possible."
Mayes says a substantial increase in the cost of living is making it difficult for borrowers to pay off debt amassed during the real estate boom.
"It only takes one delinquent payment to seriously harm your score," says Mayes.
Credit scoring, which gives each person a numeric score between 350 and 850, is a snapshot of your payment history and account balances at the time your score is requested, says Michael Law, a broker at Integrity Mortgage and Financial Services Inc. in Lake Worth.
"Credit scores used to affect your major purchases: homes, cars," says Law, whose company doled out $30 million in loans last year. "Now, your life is affected by your credit score: Car insurance, cellphones, even as far as employment opportunities."
The credit-rating company Experian's "National Score Index" shows that residents of Florida's South Atlantic Region from West Palm Beach to Fort Pierce have an average score of 692, which matches the national average.
When issuing a credit rating, Law says agencies like Experian, TransUnion and Equifax consider five factors: payment history, outstanding balances, credit history, type of credit and number of inquiries into your credit profile.
Late payment activity takes seven years to clear up, Law says, but it is possible to turn your financial picture around.
"In college, there were booths that were just giving away credit cards, and I think because I wasn't making any money you rack up these bills," says Kim Miller, 42, a customer satisfaction consultant in Lake Worth. "I think early on in my 20s I learned my lesson and I've really tried to stick to that and try to remember that if there's something I want and I really can't afford it, I really think twice about it."
Miller now owns a home and two cars and carries a credit score of 800.
"People with 800 scores are one in 1,300," says Law. "To get to that level of credit, consistency is the biggest thing. Credit agencies like borrowers that keep their credit cards for a long time, keep balances low and make payments on time. They have a few cards that they use on a regular basis and pay off or way down. They typically have a mortgage and a few other items on their accounts."
Mayes says trying times tend to make people pay more attention to their financial behavior and learn from mistakes.
"Consumers absolutely need to take advantage of this difficult time to establish good financial behaviors such as personal budgeting, disciplined savings, and reduced debt. Said another way, that impulsive purchase of the flat screen TV at Best Buy on credit should be a thing of the past!"
Kim Miller, 42, of Lake Worth, Fla.
— Profession: Customer Satisfaction Consultant, General Motors
— Her Secret: Can't afford it? Don't buy it. "Even though I work for GM I'm not running out and buying a new car. I could lease a car and have a $500 car payment every month, but I would rather that $500 go as an extra payment toward my mortgage or if I need a new refrigerator, then I have that extra money in my bank account."
— Miller owns two cars, and both are paid off. She has two credit cards, which she pays in full every month, and a $475,000 interest-only mortgage, toward which she makes extra payments each month.
— Credit comeback: "I actually had credit problems. Almost 15-20 years ago I had to go to a consumer credit counseling service because I got in over my head," Miller says of $5,000 in credit card debt she racked up in college. "I had my loans consolidated and I didn't have to pay any interest on them. I think it screwed up my credit for a little while but it worked out."
— Lesson learned: "If I can't pay off my credit cards every month, I don't use them."
— The payback: "I got a lower rate on my home (equity) loan through my mortgage broker. It helped make everything smoother. I'm sure I got a much lower rate and it made the approval go by very fast," Miller says of the $50,000 she borrowed for home improvements. "Because my credit rating was so high, they were willing to give me this great interest rate. And even with my home's value decreasing, it didn't really affect what they could give me."
Jane and Dave Ochs, of Hobe Sound, Fla. She's 45; he's 43.
— Profession: He owns Aqua Safari Adventures, a scuba dive company, and she's a massage therapist
— Their secret: "Making sure that you get your bills paid on time and that you're saving reserves for unexpected expenses," says Jane. "Don't live above your means."
— Teamwork: "My credit score was always good, but jumped into the 800 range after she and I got married," says Dave. "I would get so busy with the business I would have a check written to a company but wouldn't get it in the mail so it would arrive late. It's the result of her staying on top of things and if I wasn't around, she got stuff paid."
— Jane says: "I have worked hard, not necessarily focusing on the credit score but always paying my bills in a timely basis," she says. "Maybe it's my upbringing - my parents were always pretty conservative with finances."
— The benefits: "When I go to apply for a loan for an automobile, that's less expensive because I'm not paying as high of an interest rate. I was able to get the best possible rates when I refinanced my first house on the mortgage," says Jane. "I get attractive credit card offers often - zero percent interest for 12 months, things like that. I know some of my friends who've had bankruptcies or other substantial bad things on their credit - they don't have those options available to them."
Todd Graham, 42, of Fort Lauderdale, Fla.
— Profession: Firefighter
— His secret: "I don't know any big secrets per se," says Graham. "I pay bills. I ran some credit cards high and I hit them hard and paid $1,000 every week or every two weeks."
— Nobody's perfect: "About 10 years ago I had some bad credit and I wrote a bunch of letters and stuff," says Graham, noting he had some outstanding utility bills that had gone to collection. He contacted the companies, offered to pay 70 percent of the balance owed, and the companies wiped his record clean.
— His advice: "Keep some cash on hand, run up the (credit card) bill and lower it. Use the card and make sure you can pay it off," says Graham, adding that he has three credit cards he uses regularly, making significant payments each month. "If I charged something, I knew I could pay it off. If I ran it up $6,000, I had $4,000 in the bank. I didn't run it up when I had no money or job."
DO's and DON'Ts when applying for a loan
If your score is less than perfect but you need a loan, Michael Law, a broker at Integrity Mortgage and Financial Services Inc. in Lake Worth, Fla., offers these tips:
1. Don't apply for a new credit during the process or make any big purchases.
2. Do stay current on existing accounts.
3. Don't pay off collections during the process. 'The immediate effect will be to lower your credit scores,' says Law. "The collection agencies will report the debt, which had been sitting unpaid and each month having less effect on the report, as a paid-off collection that has activity right now. So it is considered a negative on your immediate report even though it will be a positive for the long run. If you have items that you want to pay, pay them at closing. That does not have the negative effect on your report for your refinance or purchase of a home and allows your credit a chance to rebound before you have to use it again. Paying off collections is a good thing, but timing of the payoff could cost you a bit in interest rates if you do it at the wrong time."
4. Don't close credit cards or max out existing ones. Don't consolidate debt. "Don't raise red flags with the underwriter. No changing names or addresses. These things can all wait until after the loan has closed."
5. Do join a credit watch program. Banks, credit unions or credit card companies usually have free programs.
Top factors affecting your credit score
Length of credit history: Having accounts open for a minimum of two years will help, but the longer the better
On-time bill payment: Late payments take seven years to clear up.
Amount of debt: This especially matters on credit cards with balances more than 30 percent of the credit limit.
Errors: "Seventy-nine percent of credit reports contain errors of some type, 25 percent bad enough for credit denial," says Michael Law, a broker at Integrity Mortgage and Financial Services Inc. in Lake Worth, Fla. "If you find errors, report it to the agencies via certified mail. If you have proof of the error, include a copy. The agency will respond within 30 to 45 days. Keep the letters to the credit agencies concise and to the point."
Five factors credit rating agencies consider in factoring your credit score:
5-15 percent: payment history
30-40 percent: outstanding balances
15-20 percent: credit history
10-20 percent: type of credit
10-20 percent: number of inquiries
Aime Dunstan writes for The Palm Beach Post.