A strong credit score can help you score a lower rate on a mortgage

Transcription

1 NET GAIN Scoring points for your financial future AS SEEN IN USA TODAY S MONEY SECTION, JULY 3, 2007 A strong credit score can elp you score a lower rate on a mortgage By Sandra Block Sales of existing omes fell to a fouryear low last mont, and te supply of omes for sale was up, wic is appy news for ouse unters. But unless you're sitting on a mountain of cas, you'll need a mortgage, and tat's no longer a sure ting. In response to a sarp rise in foreclosures, mortgage lenders ave tigtened teir standards, leading to an increase in rejected applications. Wat counts toward your FICO credit score Payment istory 35% New credit 10% Types of credit you re using 10% Amount you owe 30% Lengt of credit istory 15% Source: Fair Isaac By Veronica Salazar, USA TODAY Score and payments How your credit score can affect your montly payments, based on a 30-year fixed-rate mortgage for a $300,000 ome loan: FICO score Interest Montly rate payment % $1, % $1, % $1, % $2, % $2,399 Source: Fair Isaac In addition, interest rates ave been rising in recent weeks, so even if you qualify for a mortgage, you'll probably pay more for it. Tat means it's more important tan ever to make sure your credit score is in good sape. A credit score is a matematical model tat analyzes information in your credit report. Lenders use credit scores to gauge te likeliood tat you'll repay your debts. A good credit score can save you tousands of dollars in interest over te life of your loan (see box). If you plan to buy a ome witin a few monts, ere are steps you can take to improve your score: *Order all tree of your credit reports and your scores from You're entitled to one free credit report every year from eac of te tree credit reporting agencies. You'll ave to pay extra to get your credit scores, but it's wort it, says Jon Ulzeimer, president of educational services for Credit.com, a website focusing on consumer credit. "You've got to know wat your scores are before you can start doing anyting to cange tem." Wic is wy Ulzeimer recommends ordering a credit score from eac of te tree credit bureaus: TransUnion, Equifax and Experian. You can buy your credit scores wen you request your free credit reports. Te cost for eac score ranges from $5.95 to $7.95. Because some lenders don't report information about borrowers to all tree credit bureaus, your credit scores will vary. For tat reason, you sould get all tree scores before applying for a mortgage, Ulzeimer says. Mortgage lenders, e says, usually base teir decisions on your middle score. Reprinted wit permission. All rigts reser ved.

2 AS SEEN IN USA TODAY S MONEY SECTION, JULY 3, 2007 u Dispute errors. Scrutinize your credit reports for mistakes tat could urt your credit score, suc as an account wrongly reported as delinquent, or credit information for someone wose name is similar to yours. Credit bureaus are required by law to investigate disputed items, usually witin 30 days, according to te Federal Trade Commission. Wit any luck, te credit reporting agency will agree wit you and remove te disputed item from te report. But consumer advocates say tat correcting credit report errors is often a long and frustrating process. Credit reporting agencies will typically contact te bank, credit card issuer or oter lender tat reported te information, Ulzeimer says. If te creditor claims te information is correct, te credit bureau usually closes te case, e says. Wat to do if you're stonewalled by a credit bureau? Contact te creditor tat reported te wrong information. Look for documents tat support your case, suc as receipts or canceled cecks. And if tat doesn't work, te federal Fair Credit Reporting Act gives you te rigt to sue te credit bureau. You can find names of attorneys wo specialize in Fair Credit Reporting Act cases at te website for te National Association of Consumer Advocates, "Te minute an attorney gets involved, te credit bureaus take your dispute muc more seriously," Ulzeimer says. upay off credit card balances. Tis is one of te most effective steps you can take to boost your credit score, says Jon Lamb, co-autor of Solve Your Money Troubles. Here's wy: One of te factors used to calculate your score is "credit utilization" your total debt, relative to te total amount of credit available to you. If, for example, your balances total $10,000, and te credit limits on all your cards total $20,000, your credit utilization is 50%. Reducing your credit utilization will improve your credit score, says Ron Totaro, vice president of Global Scoring Solutions for Fair Isaac, wic developed te widely used FICO score. udon't close unused accounts. If you're seeking to avoid temptation, cut up your credit cards, but don't close te accounts. Closing accounts will reduce te amount of credit you ave available, tus increasing your credit utilization. udon't open new accounts. Toug tis could improve your credit utilization ratio, it will urt your score more tan it elps. Opening new accounts is viewed as a sign tat "you're in financial trouble and looking for credit," Lamb says. In addition, opening new credit cards will lower te average age of te accounts in your credit report, Ulzeimer says. Tat could reduce te portion of your score tat calculates ow long you've been using credit. upay your bills on time. Your payment istory makes up more tan one-tird of your score, and te credit-scoring system assigns more weigt to your recent payments, Lamb says. A late payment witin te past six monts will urt your score more tan a late payment from a couple of years ago Reprinted wit permission. All rigts reser ved. Page 2

3 NET GAIN Scoring points for your financial future A strong credit score can elp you score a lower rate on a mortgage Objectives: Students will: Read te article A strong credit score can elp you score a lower rate on a mortgage. Understand te importance of a ig credit score. Identify strategies for improving and maintaining a ig credit score. Define terms related to annual percentage rates (APR). Analyze a sample credit card agreement/contract. Preparations: Eac student will need: A copy of te article A strong credit score can elp you score a lower rate on a mortgage. A copy of te lesson. Today s current prime rate (written on te calkboard/witeboard). Access to te Internet to compare two credit card offers. Evaluate wic credit card rates and conditions are most consumer-friendly. 25 minutes Read te article and discuss questions Wit a partner, read A strong credit score can elp you score a lower rate on a mortgage. Wen you are finised reading, answer te following questions (wit your partner or as a wole class). Wat is a credit score? How is a credit score calculated? (Hint: look at te cart accompanying te article for elp.) Wat are te names of te tree credit bureaus tat calculate your credit score? Wy is a good or ig credit score important? Look at te cart found in te article. How muc would you pay for a $300,000 ome over 30 years if you ad a credit score of 615? How muc would you pay for te same ome if your credit score was 768? How muc would you save over 30 years wit te iger credit score? As you begin to use credit cards, wat are some ways you can ensure your credit score stays ig. According to te article, wat is te biggest factor in calculating your credit (FICO) score? Many people receive numerous credit card applications in te mail eac week. If you already ave five credit cards wit outstanding debt, is applying for a lower interest or no interest credit card a good idea wen trying to get a ig credit score? Wy or wy not? Page 3

4 As a class, matc te term to te correct definition 15 minutes Activity: Matcing Terms A. Tiered APR B. APR C. A delayed APR D. An introductory APR E. A penalty APR 1. Some credit cards may ave multiple rates. For example, te APRs for cas advances and balance transfers often are iger tan te APR for purcases (for example, 14% for purcases, 18% for cas advances, and 19% for balance transfers). 2. Different rates are applied to different levels of te outstanding balance (for example, 16% on balances of $1 $500 and 17% on balances above $500). 3. Te APR may increase if you are late in making payments. For example, your card agreement may say, If your payment arrives more tan ten days late two times witin a six-mont period, te penalty rate will apply. 4. A different rate will apply after te introductory rate expires. 5. A different rate will apply in te future. For example, a card may advertise tat tere is no interest until next Marc. Look for te APR tat will be in effect after Marc. As a class, sare and discuss your answers. Source: Federal Reserve Page 4

5 20 minutes Activity: Analyzing te Credit Card Contract Below is a typical credit card contract. Wit a partner, use te information below to answer te questions tat follow: ABC Credit Card Annual percentage rate (APR) for purcaes 2.9% until 11/1/06. After tat, 14.9% Oter APRs Cas-advance APR: 15.9% Balance-transfer APR: 15.9% Penalty rate: 23.9% See explination below* Variable-rate information Grace period for repayment of balances for purcases Metod of computing te balance for purcases Annual fees Your APR for purcase transactions may vary. Te rate is determined montly be adding 5.9% to te Prime Rate.** 25 days on average Average daily balance (excluding new purcases) None Minimum finance carge $.50 Transaction fee for cas advances: 3% of te amount advanced Balance-transfer fee: 3% of te amount transferred Late-payment fee: $25 Over-te-credit-limit fee: $25 * Explanation of penalty. If your payment arrives more tan ten days late two times witing a sixmont period, te penalty rate will apply. ** Te Prime Rate used to determine your APR is te rate publised in te Wall Street Journal on te 10t day of te prior mont. Source: Federal Reserve 1. Wat is te introductory APR for tis credit card? 2. After te introductory period is over, wat will te interest rate be on tis card? 3. APR is te rate you will pay over 12 monts percent APR is an additional % of your balance you will pay eac mont on your balance. How muc would tat be for one mont on a balance of $3000? 4. A penalty rate can apply if you make late payments and te credit card company cooses to put a penalty rate into effect. Wat is te penalty rate on tis card? Divide tat rate by 12 (for 12 monts). Ten use tat number and multiply tat by te $3000 balance on te credit card. How muc would you pay in penalties on te balance for one mont wit te penalty rate? 5. An annual fee is an additional cost te credit card carges te card older for te privilege of using tat card. Wat is te annual fee on tis card? 6. If you wanted to transfer $2000 from anoter credit card to tis one, ow muc would you pay in additional transfer fees? (Once you transfer additional debt to tis credit card, interest will accrue on te wole balance.) 7. Does tis card ave a fixed rate or a variable rate? 8. How do you find te prime rate? 9. As of today, wat would te APR be on tis card? As a class, discuss your answers. Page 5

6 25 minutes Activity: Comparing and Contrasting Credit Card Offers Go to an Internet searc engine like Google. Type in credit card offers. Pick two credit cards to compare and contrast by using te grid below. Credit card one Credit card company: Credit card two Credit card company: Introductory rate How long does introductory rate last? APR after introductory rate Cas advance APR Transfer fee percentage Over limit fee Late fee Penalty rate Grace period Does te grace period include new purcases? Wat is te annual fee? Assume you will be transferring $2000 and making te minimum payments eac mont. Also assume you make all payments on time and do not make any additional purcases. How muc will credit card one cost you for one year? How muc will credit card two cost you for one year? Based on tis scenario, wic card would be te most cost-effective? Cost of credit card one: Cost of credit card two: Most cost-effective card: Page 6

7 15 minutes After Activity Discussion uwat numbers surprised you most regarding interest rates? uwat was te lowest/best rate on a credit card te class found? Wat was te igest/most expensive rate te class found on a credit card? udo tese interest rates seem reasonable to you? Wy or wy not? uafter one year, wat credit card carged te least for carrying a $2000 balance? uis using a credit card and carrying a balance a cost-effective way to make purcases? Wy or wy not? uif you ave a credit card (or wen you get a credit card), wat will you do differently based on tis information? uif you re going to apply for a credit card in te future, wat questions will you want answered before applying for a particular card? uwat are you doing now to create and/or improve your credit score? ulist five tings you will do as you get older to ensure tat you will ave a strong credit score. Page 7