Deep in Debt? Focus on Repayment, Not Credit Scores

Fox Business, Nov 24, 2010

Dear __,

I am a full-time student and full-time worker living on my own. I am only 24, but I have about $13,000 in credit card debt. I make the minimum payments -- and more, if possible -- but I don't really make enough money to pay a lot. I have recently gotten my credit score checked, and it is 870. So my questions are: Why do I keep getting denied a consolidated credit card? And with my credit score being what it is, does that give me a better chance of maybe getting a loan to pay off my debt? -- Anonymous

Dear Anonymous,

That 870 number you're quoting is rather mysterious. You see, the range of a FICO score -- by far the credit score lenders use most in lending decisions -- is between 300 and 850, with higher numbers indicating less risk to a lender. My guess is that you are not looking at FICO, but instead a different credit assessing model. There are plenty of others, such as VantageScore (which tops out at 900) and others that banks themselves develop.

I believe your actual FICO score is lower than you think. This is not to say you haven't been a good credit customer in some ways. It appears you've been making larger-than-required payments steadily. This is fabulous because you've satisfied the most heavily weighted section of the FICO score -- payment history. That slice makes up 35 percent of the credit scoring pie. The next most important factor, though, is outstanding debt. That's 30 percent of the equation. If you're maxed out, your score will decline. So unless you have very high limits, your balance is, well, out of balance.

While it's smart to keep excellent scores, I'd like you just to concentrate on repaying the debt right now. By reducing that obligation, your score -- no matter which mathematical model is used -- is bound to increase. Also, stop applying for consolidation loans or lines of credit. Such inquiries comprise only 10 percent of a FICO score, but an abundance of them will have a negative effect.

So that more of your payment goes to the principal rather than finance charges, you'll want to have the lowest interest rate possible. Appeal to your current credit card companies and request they lower your rates. Since you've demonstrated responsibility, they may give you a break with just a phone call.

Another option: Check out a credit counseling agency. These nonprofit organizations will help you develop a budget to free up the maximum amount of cash that you can apply to the debt. They'll also discuss their debt management plan (DMP). With these arrangements, you pay them once a month and they distribute the funds to your creditors. The advantage is their prenegotiated interest rate reductions. Some creditors even waive all finance charges while you're on the plan. DMPs are set up for a payoff time frame of three to five years, but you are encouraged to pay it off faster, if you can.

There is much confusion about how DMPs affect credit reports and credit scores. To clear it up, know that a notation of participation may show up on a report, but a DMP has no impact whatsoever on a score. It's simply not a factor. That said, someone who views your report and notices that you're using a service may formulate an opinion -- which can be negative or positive.

Does this mean credit counseling is your best bet? No! You can create your own DMP. Here's how:

* Figure out what you can pay each month and never send less than that amount.
* Prioritize accounts by APR. Send more to the one with the highest rate, then work your way down.
* Send extra cash whenever possible.
* Don't charge another penny during your plan.

Use a credit card debt payoff calculator to see how much you can pay and how long it will take to become debt free. Some sample numbers: If you paid $643 each month and your average APR is 17 percent, it would take two years.

Finally, consider how you got so over your head in the first place. It's all well and good to pay the debt down, but chances are it will creep up again if you don't solve underlying spending issues.

For more helpful tips and valuable information, try CreditCards.com.

The Long Process of Foreclosure Gets Longer

Daily Real Estate News, November 18, 2010

The foreclosure process is getting longer and longer. According to statistics from LPS Applied Analytics:

· Delinquent loans in five judicial-process states spend more than 500 days in the foreclosure pipeline with the average time in process at 358 days, a week short of a full year.

· In the case of loans where the borrower is delinquent for 90 days or more, on average no payments have been made for 16 months.

· States that take the longest time to process delinquent loans are Florida and New York among the judicial process states, and Maryland, California, Virginia, Nevada, Massachusetts, Rhode Island, and Arizona, among the non-judicial states.

Source: Bankrate.com, Marcie Geffner (11/17/2010)

Credit Score Requirements Stifling Borrowers

Daily Real Estate News, November 18, 2010

Despite record-low interest rates, an increasing number of Americans can’t afford to buy a house.

The nation’s two largest mortgage lenders, Wells Fargo & Co. and Bank of America Corp., have raised the minimum required credit score on FHA-insured loans to 640 from 620.

Requiring a 640 credit score excludes about 15 percent of FHA borrowers, FHA commissioner David Stevens said.

Such a high limit will further delay a recovery in the real estate market, says Ron Phipps, president of the National Association of REALTORS®.

Source: Bloomberg, Jody Shenn and John Gittelsohn (11/17/2010)

Mortgage Rates Continue Record Slide

Daily Real Estate News, November 12, 2010

Freddie Mac reports that rates on fixed mortgages again fell to their lowest levels in decades this past week, with the average interest on 15-year loans dipping to 3.57 percent from 3.63 percent a week earlier, and the average interest for 30-year loans sliding to 4.17 percent from 4.24 percent. That is the lowest since 1971.

The impact of the favorable borrowing costs is being muted somewhat, however, by a high rate of joblessness, foreclosures, and tight credit.

Source: Boston Globe (11/12/10)

Jumbo Loans Come Out of Hiding

Daily Real Estate News, November 12, 2010

Jumbo mortgages are more readily available than they have been for the last two years. Both small and regional banks are beginning to offer them again.

In the second quarter of this year, jumbo lending rose 30 percent compared to the first quarter, according to Inside Mortgage Finance Publication, which provides industry data.

J.P. Morgan Chase home lending unit has increased jumbo lending by 146 percent in the first six months of this year. Wells Fargo’s jumbo lending is up 47.5 percent in the same time period.

Securing these loans continues to be difficult. Borrowers need excellent credit scores, verification of income and a down payment of somewhere between 20 percent and 40 percent. Some borrowers report that approval time can be faster at smaller banks.

Source: The Wall Street Journal, M.P. McQueen (11/06/2010)