What kind of cake is your credit report? (Photo Credit: CC BY-SA/Alex Gorzen/Flickr)

If you’ve had a bankruptcy, foreclosure or lots of missed bill payments, you know that your credit score was diminished. But do you know about the smaller things that lead lenders to believe you’re a credit risk? A few FICO foibles can cause credit card issuers and lenders to view you with less favor and lead them to either deny you credit or charge higher interest rates.

Too much credit is a bad sign

While it may be a fact that people who max out their credit cards tend to apply for more credit cards, such behavior does not speak well to potential creditors. Too many credit applications in too short a time raise red flags. Norm Magnuson of Consumer Data Industry Association told Bankrate that banks have “shrunk the window” of frequency in which applications for credit audits are performed.

“It used to be months and months. Now you find companies doing account monitoring monthly or every other month,” he said. “That would raise some questions.”

A short sale isn’t magic

When you’re upside down on your mortgage, the specter of foreclosure may not be far away. Lenders will sometimes tell you that a short sale is the way to go. Even though you’re taking a loss, at least you’re avoiding foreclosure. Yet, how a lender reports a short sale to the credit bureaus can be just as damaging. Experian’s Vice President of Public Relations Maxine Sweet says even though the account is technically settled, the short sale ends up hurting your credit score as much as a foreclosure.

The best thing to do, advises SmartCredit.com President of Consumer Education John Ulzheimer, is to negotiate with your lender so that the difference between what’s left on the mortgage and the amount repaid isn’t reported as balanced owed.

Co-sign at your peril

Whether it’s an auto loan, student loan or any other large scale loan, if you’re a co-signer and the primary borrower defaults, you’re on the hook. Hopefully, you keep in touch with the person for whom you co-signed. Otherwise, you may not know the damage being done to your credit until it’s too late.

Minimum effort, maximum worry

It may seem easy to settle for the minimum payment on your credit cards each month, but there’s nothing easy about what that does to you in the eyes of prospective creditors.

“It suggests you’re under financial stress,” says Nessa Feddis of the American Bankers Association. “You may be defaulting.”

A busy report can indicate trouble

The more inquiries for credit that appear on a credit report, the more tiny nibbles that are taken out of your FICO score. If you know you’ll be applying for big loans – home, auto, education – try to do it all within a two-week window. This will minimize the inquiry impact, as they will be treated as a single unit. The same does not apply to credit card applications, however.

Disputing credit report mistakes

Sources

American Chronicle

Bankrate

MSN Money

Applying for a loan will cause a credit score to take a hit. Photo: TrinityCreditServices/Flickr/CC-BY

The point of a credit score is so companies can project whether a person is a risk to extend to credit to. However, a person’s credit score takes a hit every installment loan or mortgage lenders ask to see it, meaning a person looks like more of a credit risk for trying to use credit.

Lose credit to use credit

Anyone who applies to get a loan of any kind, whether it’s a simple installment loan for personal use or a larger loan like a mortgage, is subject to a credit check. A lender gets applicants’ credit scores from one of a number of agencies. Unfortunately, the manner in which the score is requested can hurt a person’s credit rating. It’s called a “hard pull,” according to AOL News. When a lender requests a credit score from a credit rating agency with the intention of possibly lending to the applicant, a couple of points are taken off the top of the credit score.

Two-week window

One of the main incentives of maintaining a good credit score is to be able to get the best possible interest rates. Ironically, a good credit score can be negatively affected when a person applies for a loan that they worked hard to be able to get the best rate on. However, there is way to loan shop and avoid a precipitous drop. Shop for loans within a 14-day period. If all “hard pulls” are done within two weeks, all inquiries count as one. After that, don’t apply for any more loans until your credit score climbs back up.

Rating agencies not in the business of making it easy

Though credit rating agencies Experian, EquiFax and TransUnion are in the business of providing information to other businesses — not to consumers — they have come under fire for keeping so-called VIP lists, according to the New York Times. The three main credit rating bureaus have been accused of treating information for the wealthy and high-profile people in a more preferential manner and the Federal Trade Commission is currently investigating the allegations. The credit bureaus, according to Fox, deny that any such considerations are made.

Sources

AOL News

New York Times

Fox

A guaranteed loan is good to keep you from bouncing checks. Image from Wikimedia Commons.

The functions of personal finance and high corporate finance are different, but believe it or not, the two are not completely dissimilar. The companies which need some guaranteed loans at some time, or at least a line of credit in case they need a short term loan are some of the biggest names out there. The Ford Motor Co. needed guaranteed loans from the government. Ford is getting out of debt in double quick time. Meanwhile, Freddie Mac and Fannie Mae need more guaranteed loans to stay afloat.

Guaranteed loans for Ford

During the worst of the recession, the Ford Motor Co. borrowed $23.5 billion to stay afloat and keep Ford from having to file bankruptcy and ask for bailout money. During the car bailout, Ford didn’t need any auto loans, but merely asked for lines of credit as a contingency. It turned out not that asking for emergency loans from the government at that moment panned out. While Chrysler and General Motors were figuring things out, Ford’s sales went up 22 percent, according to the Wall Street Journal. Sometimes just knowing you can borrow can give a boost of confidence; some people like knowing they can get a loan until payday if they really need it.

More guarantees needed for mortgage giants

Meanwhile, Fannie Mae and Freddie Mac need more guaranteed loans from the government in order to stay solvent. According to ABC, Freddie has lost about $6 billion for the second quarter of this year alone. The money hemorrhaging firm is asking for another $1.8 billion from taxpayers.The twin mortgage giants are struggling, and both have less than two years to get their affairs in order. That’s when Treasury Secretary Tim Geithner isn’t going to cut any more checks.

Fortune 500 companies have credit scores too

One of the motivations for Ford is that the credit rating for the agency improves as they pay off debt. Just like paying off a credit card improves your credit score, it works for big companies too.

Further Reading

Wall Street Journal

ABC

Eurozone countries, some facing "junk" debt ratings, are trying to find ways to finance emergency loans. Image from Flickr.

A company set up specifically to guarantee Eurozone emergency loans will ensure that creditors are paid. This “special purpose vehicle” – SPV – will guarantee up to 120 percent of the amount of loans or bonds that will be issued by Eurozone countries. This is an effort to secure an AAA rating for Eurozone debt, which will hopefully make these emergency loans more attractive to investors and help settle skittish investors.

The shape of Eurozone emergency loans

Eurozone emergency loans are the end result of severe debt in some European countries, such as Greece. In order to stabilize the financial future of countries that participate in the Euro currency, countries are creating a special purpose vehicle corporation. The SPV will be known as the European Financial Stability Facility, or EFSF. This company will basically act as a single entity, supported by several different countries, that will have the authority to take on debt.

Emergency loans to be taken on by the EFSF

The EFSF, as a limited liability corporation (LLC), will have the authority to take out or guarantee emergency loans. By selling bonds that the participating countries guarantee, this company will provide emergency loans to those guaranteeing countries. Mildly complicated, but in the end, the company is a go-between in financial markets for these governments. The bonds sold by the EFSF will be called “Eurobonds.”

What the EFSF will look like to investors

The reason many Eurozone countries are teaming up to create the EFSF for their emergency loans is in order to get a better credit rating. With Greece and other Eurozone countries being downgraded, they simply could not attract investors. By creating a larger entity, the countries hope that the general credit rating for the debt issued will rise. If the rating is upgraded, then investors ranging from other countries to mutual funds may be willing to float these needed emergency loans. The countries behind the EFSF will be promising to pay up to 120 percent of the value of these loans – so it should be a relatively stable investment.

The credit rating agency Fitch dropped the rating of Greece. Image from Flickr.

This morning, international credit rating agency Fitch downgraded the credit rating of Greece to BBB-. One of the lowest rating scores available, the opinion of Fitch is that Greece’s economy is quickly failing. The European Union has, in principle, agreed to give Greece emergency cash loans. The reality may be much more complicated, though.

What the Fitch Greece ruling means

When the ruling was made by Fitch, Greece was officially downgraded to a “bad investment.” Traditionally, large countries have been considered very good investments. Greece’s economy was at one point the twenty-seventh largest in the world. In 2004, the statistical arm of the European Commission found that the debt of Greece had been significantly under reported. In the first quarter of 2009, Greece’s budget deficit was 4.34 billion Euros, or 12.9% of the gross domestic product of Greece. When Fitch downgraded the credit rating of Greece, the agency was basically saying the buying any of Greece’s for-sale bonds would be a very dangerous investment. Basically, Fitch believes Greece won’t be able to pay up on its debt.

Why Fitch Greece rating was dropped

In February, Greece’s economy saw inflation jump to 3.9 percent while industrial output has fallen to 9.2 percent. In other words, without borrowing money, Greece’s economy is in very real danger of failing. However, just like loans for people with bad credit, loans for countries with bad credit can be very difficult.

Fitch Greece rating encourages EU action

Last month, in a summit of the European Union, a “financial safety net” was agreed upon by EU members.The European Union has said that they will step in with instant payday loans for Greece. When the EU will step in, and with how much help, though, is still under discussion. Angela Merkel, the German Chancellor, has insisted that Greece be loaned money at the market rate. With a low Fitch Greece rating, though, that may be a rate Greece simply cannot pay off.

The outlook for Greece

While the Fitch Greece downgrading is a very significant move, the likelihood that Greece’s economy will fail is very low. Greece is a member of the Eurozone, an economic zone headed by the European Union. While Greece will definitely have a difficult few years, there will be some solution. Greece is also looking for internal solutions to the Fitch Greece downgrading, including cutting wages and increasing taxes to decrease the deficit. The International Monetary Fund, a lender that usually specializes in third-world countries, is also considering lending a hand to the economy in Greece.

Sources:

Business Week
Guardian
Wikipedia

A secured credit card is a good way to reestablish credit. Even for those who do not have a bad credit history, a secured credit card can be a safe way to control spending and avoid bad debt. Knowing exactly what these cards are and how they work helps people make sound financial decisions about their credit.

What is a secured credit card?

Some credit card companies actually exist to help people repair bad credit and control spending. They do so by offering people an opportunity to make a cash deposit in exchange for a credit card that will be secured by that deposit. The credit limit offered generally ranges up to 120 percent of the original deposit. This deposit also earns interest as long as the account is in good standing. Timely payments are reported to the credit bureaus, which can help people seeking to reestablish a good credit rating. Also, the credit bureau’s are never told that the credit card is secured and, therefore, it is featured on one’s credit report as any other credit card would be.

What happens if I default on the payments?

The reason that secured credit cards are considered safe is that defaulted payments are covered by the initial deposit. Late payments are also reported to the credit bureaus, which further damages a poor credit rating. Even with a deposit, people using a secured credit card must be responsible about paying their credit card bill every month on time.

How can I increase the limit on a secured credit card?

As discussed above, a person’s spending limit is set on a secured credit card in relation to the initial deposit. There are two ways to increase one’s credit limit, however. The first way involves adding to the deposit amount. Or a person can patiently await a second option, which involves an increase after accomplishing a good payment history during a set period of time, which is generally one year.

Interest rates and fees

Consumers with bad credit will most likely encounter higher than average fees with a secured credit card. Most also require an upfront processing fee and the annual percentage rate for a cash advance or for balances can also be high. However, the price for reestablishing good credit is usually worth the additional costs for people who use secured credit cards.

Cost, convenience, credit

While a secured credit card is more costly than a regular credit card, its reward is something that cannot be obtained in too many other ways. Those who have bad credit generally appreciate that such offers exist and many have made good use of them as credit recovery tools. The fact that they are not represented to others as a secured credit card is also a convincing factor to people, as they are able to rent cars, reserve hotel rooms and use them just as any other credit card as long as the spending limits are adhered to.
Because they require a deposit and credit limits are restrained by that deposit, some people find them to be inconvenient. Another way to view them, however, is to consider that a credit line that is limited, or secured, by a deposit helps to decrease the risk of overspending. As much as reestablishing credit, this simple fact makes a secured credit card an attractive choice for those who have had poor spending habits and a history of collecting bad credit card debt.

Before a person decides to cosign a loan, it is important to consider the risks involved. Many who haven’t done so have come to regret it. Often, their decisions have resulted in bad credit ratings and the need for emergency cash to bail themselves out of someone else’s debt. Simply put, when a cosigner is required for a loan, it is because the person attempting the purchase is a poor credit risk. Therefore, if the lender, after studying a person’s income and spending habits, isn’t willing to take a chance on lending money, why should anyone else? This may sound harsh and cruel, but it is a reality that mustn’t be overlooked if a person hopes to maintain their own good credit rating.

Emotions and money

Unfortunately, most people make the decision to cosign a loan based upon emotions. After all, the person asking is usually a relative, or a very close friend, who approaches during a time of need. This person has the money for a down payment and the only thing stopping them from finalizing their purchase is their own shaky credit or lack of adequate income. They are told that they can seal the deal, so to speak, if they can find someone else with good credit to sign on the dotted line and claim responsibility for the loan if they default. Most people find it hard to resist a loved one who approaches them to cosign a loan. This isn’t because they want to obligate themselves to someone else’s debt, but because they feel an emotional need to help.

Learning to say ‘No’

It can be difficult to say no to a loved one in need, but it is sometimes necessary to do exactly that. A good credit rating takes time and discipline to build. Having good credit destroyed by someone else’s misfortune or lack of discipline is not something that people look forward to. Therefore, it is important that people learn to say no when appropriate.

Saying ‘Yes’

Of course, there are some who will believe in a person’s ability to pay off a loan despite professional calculations to the contrary. Sometimes this works out for all parties involved and sometimes it doesn’t. Therefore, when one has agreed to cosign a loan on another’s behalf, there are a few things that they should be prepared for.

With car loans and home mortgages, especially, if payments are missed, lenders do not typically contact a cosigner until the car or home has been repossessed. By this time, the damage is done and the repossession has been added to the cosigner’s credit report. A cosigner also may be contacted again to pay any remaining difference between the original loan amount and the below market price that repossessed cars and homes are sometimes sold for.

So, before agreeing to cosign a loan, people with good credit should weigh their decisions very carefully. They must be clear on whether they are feeling led to cosign by their emotions and whether they can afford the risk involved. Being firm and honest about one’s decision to not cosign a loan can be tough, but the result of not doing so can be even harder to bear.

The primary reason to know and understand how your credit rating is calculated is to help you learn what actions to take or avoid in order to keep your rating as high as possible. If your credit rating is low, understanding how the score is calculated can help you determine what problems can and should be corrected to improve your score. Understanding how your score is calculated also helps with your financial planning by allowing you to take in account the effects of any given action on your credit rating.

FICO

In the United States, FICO is the leader of the credit-rating industry and each of the “Big Three” credit reporting agencies – Equifax, Experian, and TransUnion – use various FICO-developed systems to calculate credit scores. The exact formula used by each of the Big Thee is a closely guarded proprietary secret; however, FICO has provided the public with a basic outline of what factors are taken into consideration and what importance they have in the calculation.

Payment history

The most important factor in calculating your credit score is your payment history. This is the record of your payments to creditors.   Your payment history shows whether or not payments were timely. Defaulting on outstanding debts, missing payments, and making payments late are all part of your payment history. In general, this element constitutes 35% of your credit score, which means that having a bad payment history is the worst thing that can happen to your credit rating. Most notations related to payment history remain on your credit report for seven years, regardless of whether the debt has been paid or settled.

Credit usage ratio

Your credit usage ratio is a comparison of the amount of credit you have immediately available to the amount of credit you have actually used. The more unused credit you have available, the higher the score. This is a somewhat tricky metric because it only takes into account your open credit accounts, so sometimes paying off an account and closing it can hurt this part of your score. Having a lot of open credit accounts, but keeping them paid down, generally boosts this portion of your score. Your credit usage ratio is usually weighted at about 30% of your score.

Length of credit history

The third factor, the length of your credit history, counts for about 15% of your credit score. The purpose of a credit score is to give lenders a clear view of your debt-paying habits, so the longer your credit history, the more information there is for lenders to consider. This is one factor that the consumer cannot really affect in any meaningful way, but it does suggest that it is to your benefit to begin establishing credit as soon as possible. The less history there is, the less value your credit score has to potential lenders.

Types of credit used

The various types of credit a persons uses are also taken into consideration, with diversity of credit being viewed favorably. If you have had only one type of loan, such as a revolving credit card account, this portion of your score will be lower. Having several different types of debt – credit card debt, non-revolving bank loans, a mortgage, a car loan, and so on – will increase this part of the score because it indicates to lenders that you understand how to manage different types of loans. The types of credit you have used constitute about 10% of your score.

Recent credit inquiries

Although credit scores are used for other purposes than applying for new loans, the FICO system generally assumes that recent credit checks mean you are actively applying for credit.  If there are several recent inquiries, it is assumed that you have been trying to borrow from multiple lenders and this is viewed negatively. The more recent inquiries you have, the lower this part of your score. This factor is weighed at roughly 10% of your credit score.

How does this information help you?

By understanding how your credit score is calculated, you can make more prudent financial decisions that can help improve your score. For example, since your credit usage ratio is so important, when you pay off a credit card account, it may be a good idea to keep the account open and not use it, rather than close it.  Likewise, when you’re presented with the choice of applying for an additional loan to keep other obligations current, or missing payments on an existing loan, understanding how the score is calculated can help you make a better decision about the right course to take.

Auto and mortgage loans require some homework before you apply. There are numerous secured and unsecured loan options out there. (Photo: picasaweb.google.com)

A review of credit scores must be done by the consumers planning to apply for either a mortgage loan or an auto loan. The credit scores of an individual are among the primary factors that decide the eligibility for the loan. While a good credit score can get you the loan easily, a bad score can either mean loans with exorbitant interest rates or even denial. A person can apply for a free credit report annually from any of the three main credit agencies. The report thus obtained will show the credit worthiness of the individual.

Types of Loans

Once the credit rating is determined, the next step is to decide on the type of loan to opt for. When it comes to mortgage loans, the consumers can choose from either a fixed rate mortgage loan or adjustable rate mortgage loan. Secured loans and unsecured loans are the two options that consumers have when it comes to auto loans. There is also the aspect of indirect and direct financing that needs to be considered. With so many options available, a thorough groundwork is needed to find a loan that best suits your budget and needs.

Budget Carefully

Consumers who are buying a house for the first time should especially keep this point in mind while making their decision. The monthly payment for the mortgage loan or auto loan should not exceed 30 percent of total monthly income. This will help provide a cushion during unforeseen circumstances. While there are loans programs that cap the limit at 31 percent, there are many others that allow consumers to go beyond this point. Hence, considering this carefully before making a final choice is a must.

Set Realistic Expectations

Setting sky-high expectations for the car and home under consideration is another common mistake that is made by many buyers who are purchasing these items for the first time. Most of them end up choosing houses in an expensive neighborhood and are willing to pay through the nose to own it. Though these might seem well within reach initially, you will begin to realize the pinch in a few months. This is the reason most financial analysts recommend chalking out expectations from your house or car and then comparing it against the budget allotted for it. In addition to this, take the eligibility limit into account too. Considering these factors beforehand will also help avoid disappointments.

Compare the Details

Consumers applying for mortgage or auto loans should get quotes from more than one financial institution. Since these loans are the biggest loans one might ever borrow in the lifetime, comparing these quotes with each other allows them to weigh the pros and cons of each quote carefully before arriving at a decision.

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