Archive for December, 2006

Monthly Archive

Sun 31 Dec 2006

Why is My Credit Score Off?

Posted by lizweston under Credit Cards, Q&A with Liz, The Basics
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Dear Liz: I’m slightly confused on FICO scores. I’ve been paying for a service from one of the credit bureaus, Experian, that tracks my credit score. Two of my credit cards provide updates on my credit scores from the other two bureaus, TransUnion and Equifax. I thought, based on the information provided from these three sources, that I had improved my scores sufficiently to apply for a mortgage. Wrong! My credit union says my FICO credit scores are on average 50 points lower than the numbers I’ve been looking at. Why is there such a disparity? I have heard since that the scores you pay for aren’t the ones lenders use. How can this be??

 

Answer: Of the bureaus you mentioned, only one, Equifax, typically provides FICO credit scores to users. (FICO is the leading credit scoring formula, created by Fair Isaac Corp.) Experian and TransUnion typically sell consumer education scores, which aren’t widely used by lenders. Experian and TransUnion reason that because there are more than 100 credit scoring formulas in use, and you can’t predict which one a lender will use, consumer education scores are a reasonable proxy.

 

Perhaps. But FICO credit scores are the ones used in most mortgage lending decisions, so if you’re in the market for a home loan, you’ll probably want to buy FICO scores so you’ll know where you stand with lenders. One Web site sells FICO scores from all three bureaus: MyFico.com.

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Mon 18 Dec 2006

Buying Home with No Down Payment a Bad Idea

Posted by lizweston under Budgeting, Q&A with Liz, Real Estate, Retirement
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 Dear Liz: A reader recently asked where she should put her money while she saved up for a down payment. You recommended using an online bank or certificates of deposit to generate more interest. If I had even $1,500 to set aside, I would buy a house now with nothing down rather than wait two years (as she planned to do). The market is great right now for buyers, don’t you think?

Answer: Anyone who buys a house with less than a 5% down payment is immediately “upside down” on her purchase. That means she owes more on her mortgage than she could net from selling the house because the costs of selling a home typically eat up at least 5% of its value.

Being upside down wasn’t a big deal when home prices were soaring and quickly building equity for us. Now that prices are dropping in many markets, however, those with little or no equity can be in a world of hurt if they can’t make the payments or need to sell. Today’s rising delinquency and foreclosure rates are testament to that.

Another downside of buying a home on a shoestring is that you may not have the resources to cope with the inevitable stuff that goes wrong: the furnace that breaks down, the roof that needs replacing or utility bills that suddenly soar. First-time home buyers are particularly vulnerable because they often have little idea of how much it costs to maintain and repair a home.

That’s why it’s a good idea for all home buyers, particularly novice ones, to have at least three months’ worth of mortgage payments in the bank after accounting for a 5% down payment and closing costs. That may mean waiting longer to buy a house, but you’ll increase the odds of being able to keep the home once you get it.

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Mon 11 Dec 2006

Does Amortization Loans Affect FICO Scores?

Posted by lizweston under Credit Scoring, Q&A with Liz, Real Estate
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Dear Liz: Are credit scores negatively affected by so-called negative amortization loans? I’m talking about the mortgages that allow you to pay less than the minimum interest due on your loan. Any unpaid interest is added to your principal so that your mortgage grows rather than shrinks. Would this rising balance hurt your scores?

Answer: The short answer is no. Negative amortization by itself won’t damage your credit scores, even if your balance goes above the original balance shown on your credit reports.

If the increase in the amount owed “is permitted by the way the loan was structured and the borrower is meeting all her loan payment obligations, then the FICO score won’t be affected by the higher balance,” said Craig Watts, spokesman for Fair Isaac Corp., which created the FICO score, the leading consumer credit gauge.

If, however, your balance is rising because you’ve missed payments and you’re accumulating overdue interest and penalties, then your FICO score almost certainly will drop, Watts said.

Clearly, the FICO scoring system treats installment loans like mortgages quite differently from revolving accounts such as credit cards. If your credit card balance rises higher than your credit limit (or even comes close), your FICO scores will indeed suffer.

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Mon 11 Dec 2006

Does Amortization Loans Affect FICO Scores?

Posted by lizweston under Credit Cards, Q&A with Liz
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Dear Liz: Are credit scores negatively affected by so-called negative amortization loans? I’m talking about the mortgages that allow you to pay less than the minimum interest due on your loan. Any unpaid interest is added to your principal so that your mortgage grows rather than shrinks. Would this rising balance hurt your scores?

 

Answer: The short answer is no. Negative amortization by itself won’t damage your credit scores, even if your balance goes above the original balance shown on your credit reports.

 

If the increase in the amount owed “is permitted by the way the loan was structured and the borrower is meeting all her loan payment obligations, then the FICO score won’t be affected by the higher balance,” said Craig Watts, spokesman for Fair Isaac Corp., which created the FICO score, the leading consumer credit gauge.

 

If, however, your balance is rising because you’ve missed payments and you’re accumulating overdue interest and penalties, then your FICO score almost certainly will drop, Watts said.

 

Clearly, the FICO scoring system treats installment loans like mortgages quite differently from revolving accounts such as credit cards. If your credit card balance rises higher than your credit limit (or even comes close), your FICO scores will indeed suffer.

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Mon 4 Dec 2006

Employers’ Retirement Seminar May Be a Wise Time Investment

Posted by lizweston under Q&A with Liz, Retirement, Saving Money, Taxes
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Dear Liz: No question here, just a suggestion. I think you should emphasize to your readers that they should avail themselves of retirement and financial planning seminars that may be offered by their employers early on in their careers.

That way, they’ll have the maximum time possible to make the right decisions and allow their investments to grow.

I finally went to one of my employer’s retirement seminars at age 40, after working for the company for 16 years. Although I found out that I was not too far off track, there were definitely things I could have done differently to maximize my retirement benefits. As you know, timing is everything in investing.

Answer: Actually, “time” is everything in investing. The earlier you start and the longer you stay invested, the better as you now know.

Your point about attending employers’ education seminars is well taken. Many people put off investing for retirement or aren’t comfortable making decisions about how to invest, and those seminars can help them get over those barriers. A few hours invested in one of those seminars can pay huge dividends.

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Mon 4 Dec 2006

How to Buy Stocks for Children

Posted by lizweston under Investing, Kids & Money, Q&A with Liz, Saving Money
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Dear Liz: I’d like to buy my children shares of stock to get them interested in investing. How do I go about this?

Answer: It’s not as easy as you might think.

Children under 18 generally are not allowed to own investments in their own names. As a result, you must decide first how to hold the shares: in a custodial account, in a joint account with them or in your own account.

Keeping them in your own name may be the best option if you’re concerned about future college financial aid, because the other two choices could count heavily against them in the federal aid formulas.

You also have many alternatives when it comes to buying the shares  always with a variety of fees, charges and options to watch.

You can buy your shares through a brokerage, but you may face commissions, minimum account balance requirements and account fees.

If this is a one-shot investment or you’re able to commit only small amounts of money at a time, a better option might be ShareBuilder Corp., a low-cost online broker, which has no minimum balance requirements or account fees.

ShareBuilder charges $15.95 for single trades or as little as $1 per trade in its automatic investing program.

You also might consider buying directly from the company that issues the shares.

Hundreds of companies  including many your kids would know, such as Coca-Cola Co., Mattel Inc., McDonald’s Corp. and Sony Corp.  sell shares directly to investors. Again, minimum purchase requirements, account fees and commissions may apply.

DirectInvesting.com, a website that provides direct investment enrollment services for hundreds of companies, can get you started.

All these options are electronic, so you won’t get a stock certificate you can wrap for holiday gift giving. If that’s what you’re after, you might check out the options at OneShare.com, a site that specializes in selling single shares of stock as gifts.

OneShare.com sells shares from about 130 companies; you pay the cost of the stock, plus transfer fees and framing that add about $90 to the cost of each share.

It’s not exactly a frugal option, but your kids will get real stock certificates to hang on the wall. They’ll also get annual reports, proxy statements and all the other paperwork that comes with being an investor.

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