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Hot Six for the Summer: The Magic Number

25 Jun
Hot Six for the Summer: The Magic Number

Written by the in-house credit analyst Jay Turner. Need more info email us @ fashionfoodfred@gmail.com.

Summer is in full swing and things are definitely heating up.  Guys and girls have spent the last couple of months hitting the gym and eating right to shed those remaining few holiday pounds to fit into bicep-hugging Tees or torso-flattering bikinis.  I’ve been amazed watching friends, family, and colleagues slimming down and toning up for summer, especially my brother who lost an amazing 30 pounds in eight weeks to join the Navy.  The dedication that people often display in their weight loss goals is indeed inspiring, and I completely understand the drive that keeps people on track.  When you’re sculpting your body, you give yourself a goal, you develop a routine, you stick the plan, and BAM!  Anyone can transform into a sexy beast.

However, I’ve observed that sometimes the psychology of transforming your body does not necessarily translate into transforming your credit profile.  I believe there are several reasons for this, but the biggest one in my opinion is the state of ignorance or denial that folks often have about their credit.  So while you’re jogging off that last bit of water weight or getting the final striations on those calf muscles, I want to challenge you to take a critical look in the money mirror to see if your credit profile is as banging as your body for the summer. 

Over the next two months, I’ll be providing you with a primer on improving your credit called Hot Six for the Summer.  Each week I’ll pose a core question that will invite you to become more aware of your credit and take steps toward whipping it into shape if it’s not already.  Alright, let’s play…

Question one: What’s your credit score?

If you’re looking to upgrade your ride, get a mortgage on that sweat deal of a house, take out a student loan for fall semester, or grabbing a new credit card, it is imperative that you know your FICO score, the magic number that lenders rely heavily upon to approve or deny you credit.  Not only does your FICO score affect if you will be extended credit from a lender, but it also determines your interest rate and how much you can borrow.  According to Steve Ely, president of North American Personal Solutions at Equifax.com, with today’s skin-tight lending standards, you need a score of 720 to be considered as having good credit.  You’ll need better than 760 to get into the excellent tier of loan products.

This is somewhat a trick question, since you will most likely have three different FICO scores — one from each of the three credit reporting bureaus: Equifax, Experian, and Transunion.  Since lenders report differently to the three bureaus, you will find that information contained in your credit reports, and subsequently your scores, can vary from one report to the next.  I remember several years ago having a FICO score in the low 500s on my Equifax report and in the high 500s on my Transunion report.  The reason for the large discrepancy was that I had a collection for an unpaid utility bill on the Equifax report that was not being reported to Transunion.

The takeaway here is that you should check your credit scores across all three bureaus before applying for a major loan (car, house, student loan, etc).  Your lenders will often have access to all three scores and will use the middle score in their decision-making.  Also keep in mind that your credit score is calculated by a variety of criteria and can rise and fall in bounds or increments. 

With that said, you must be careful about where you purchase your FICO scores.  Only myFICO.com and Equifax.com sell Equifax and Transunion FICO scores to average Joes like you and me.  Experian FICO scores are no longer available to consumers.  Purchasing your credit score from any other source, including scores sold directly by Experian and Transunion, will result in you obtaining what I jokingly call “FAKO” scores.  These fake FICO scores are based on proprietary scoring models and are usually not used by lenders to make lending decisions.  FAKO scores might be cheaper, but you get what you pay for.   

I also highly recommend enrolling in a credit score monitoring service, like Score Watch through MyFICO, so that you always have a pulse of on your credit standing.  For $12.95 a month (or $9.95 a month if you purchase a yearly subscription), you can follow changes in your score over time, which will keep you informed of how potential lenders view you.

All journeys great and small begin with the initial step of knowing where you are.  Learning your FICO score at the beginning of your summer credit workout is like hopping on the scale before beginning a diet.  You have a clear idea of where you’re starting and can set a realistic goal for what you’d like to achieve.  The path to better credit is not easy, but it is doable if you understand the rules of the game. 

What’s your target credit score?

Just one of ‘fatboyfavs’

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2 Comments

Posted by on June 25, 2012 in Social Awareness

 

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2 responses to “Hot Six for the Summer: The Magic Number

  1. Tiffany Fulton

    June 25, 2012 at 4:13 pm

    I really like this article and am interested in following along with the information about cleaning up my credit report. So, my next question is, I’m considering filing bankruptcy, in which I know will clear up everything except my student loans. Will this potentially harm or help me?

     
    • Jay Turner

      June 26, 2012 at 2:02 pm

      This is always a tricky question, as the answer can vary significantly between individuals. Usually when people fall into deep debt and want to fix their circumstances, their options are usually threefold in my opinion: try to negotiate with creditors themselves; enlist the help of a credit counseling agency; or file for bankruptcy. Depending on the severity of your debt issues, I would try options one and two, in that order, before deciding on option three. Here’s why:
      1. Negotiate with creditors yourself: No one has your personal financial interests at heart more than you do. When you negotiate with your creditors, you can be very specific about the concessions you request from them in return for you bringing your account payments up to date. You might be asking for waived late fees, a reduction in the amount you owe, or requesting that late payments be shown as current on your credit report. Few, if any, credit counselors or bankruptcy attorneys have the time, interest, or inclination to do this level of negotiation on your behalf. Also, when you enroll in credit counseling or bankruptcy, this information can be noted on your credit report and adversely affect your chances of receiving new credit. Negotiating with your creditors takes skill and knowledge, but it is nothing that you cannot learn on your own. I’ll even be posting tips for how to do this on a later Money Monday.
      2. Enlist the help of a credit counseling agency: If you are unsuccessful in negotiating with your creditors or don’t feel up to the task for whatever reason, this is the next route to explore. Do be aware that not all credit counselors are created equally. These are shark infested waters, and I know people who have been ripped off. I highly recommend Credability.org (formerly CCCS Atlanta). Regardless of the agency you choose, a reputable credit counselor will review your finances with you, work with your creditors to get your interest rates and late/over limit fees under control, and get you enrolled in a debt management plan that requires that you make one payment per month to the credit counseling agency, who disburses the funds to your creditors. Although credit counseling agencies do not necessarily report to the credit bureaus that you are enrolled in credit counseling, each creditor deals with you being in credit counseling differently. In my own case, I had several creditors make a note on my credit reports that my debts were being managed by CCCS. In the future if you need a loan that requires manual underwriting (a loan in which a loan officer actually looks at your credit report rather just relying on your credit score), that notation can affect whether or not you get the loan, or your interest rate.
      3. File for bankruptcy: Bankruptcy is a viable option for regaining control of your finances, if your situation genuinely merits it. From the description of your situation, I assume you plan to file for a Chapter 7. How can you tell if personal bankruptcy is even an option? Take this means test by NOLO.
      Even if you can file, it doesn’t necessarily mean that you should, although it is particularly appealing to do so since you can pretty much start over with your finances. You really need to consider the opportunity costs of a Chapter 7, something that a pre-bankruptcy counseling session with a not-for-profit credit counselor will provide. They should be able to tell you specifically for your situation what you stand to gain and lose — and lose you will in a Chapter 7. Chapter 7 is a liquidation bankruptcy where your bankruptcy appointee will liquidate any non-exempt assets to help you settle up with your debtors. It is possible to lose your house, car, and other assets in exchange for your blank slate.
      Without knowing your situation, I can safely say that you do need to be aware that bankruptcy stays on your credit report for 10 years and, regardless of what a bankruptcy attorney tells you, you will face adversity in rebuilding your credit over the first few years after the bankruptcy is discharge. You will likely be able to obtain credit after filing(paying sky-high interest rates, ungodly annual fees, and requirements of for higher down payments on secured loans), but it definitely will not be prime credit. Also keep in mind that all kinds of agencies are reviewing your credit. You might also find it hard to rent/purchase a home, obtain auto insurance, or get a good job, especially one that requires a high degree of decision making… the list goes on, but you get the point.
      Also the biggest downside I’ve observed in the bankruptcy situations of friends and family is that often the person filed bankruptcy is right back in the same situation in a few years time. The tabula rasa that a 7 can provide doesn’t always teach people the financial lessons they need to grow forward.
      I hope the information above gives you some food for thought as you consider the pros and cons of bankruptcy. Thank you for sharing your situation with us, and I applaud you for proactively addressing your finances. Feel free to ask more questions here — I know this is a lot to take in — but I’m here to be a resource as you rebuild.

       

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