Don’t Let Past Delinquencies Ruin Your Chances for Low Interest Rate Loans FICO scores are important to every investor, mortgage broker and lender. They are used to determine the likeliness of a consumer being 90 days late or more on a particular loan obligation. There are five components that make up a credit score. In this article, I will go over the component that carries the most weight – Past Delinquencies, 35% of a score. Delinquencies are one of the Past Delinquencies… most common causes of bad credit and therefore a big key in making or breaking a score. They coincide with how punctual a 35% person is on making payments. If someone is over 30 days late on a of payment, it will damage his or Credit Score her credit score and ultimately the overall credit worthiness of that person. It is always better to not be late on payments, but 19 we make mistakes. Here are a few factors to consider for preventing bad credit or further delinquencies: Timing: The more recent the delinquency, the more it negatively affects your credit score. Let’s say in the last four years you were 30 days delinquent on a loan payment three times – in 2003, 2005 and today. The delinquency today will hurt your credit score a lot more than the one in 2005 which hurts your score more than the one in 2003. Level: Severity of delinquency also makes a difference in your credit score. The level or order of going from bad to worse is as follows: 30 days late is better than 60, which is better than 90 days late. Then the progression goes from 90 days to a charge-off and collections, then repossession, foreclosure and finally bankruptcy. A charge-off is when the credit card company takes the amount owed to them off their books, typically 180 days after the last late payment, but the borrower still has a debt to pay. Going down the ladder, the lenders can repossess cars or other material possessions and even foreclose on homes. Thus, the level of the delinquency can affect both credit score and livelihood. Past Due Notices: Past due notices have been known to destroy credit scores. Most people believe that they have a grace period when it comes to making payments. For example, if a couple’s mortgage is due on the 10th of every month and it says that there will be a $200 penalty after the 25th, they can still be overdue without being 30 days late. If they pay anytime after the 10th, they are past due. Some mortgage companies are starting to report past due notices to credit bureaus if the payment is received after the due date. It’s very important to make sure all bills are paid on time so this does not happen, especially if you’re in the process of purchasing a home. You do not want a drop in credit score preventing you from closing. Missed Payments (Low vs. High): Penalties are stronger for missed high payments than for lower ones. What Fair Isaac found out is that people who miss high payments are more apt to become 90 days delinquent or more compared to people who miss low payments. For example if someone was 30 days late on a mortgage payment, he or she would be more likely to be 60 or 90 days late because of a lack of money. Whereas people miss small payments to a creditor more often because it got lost mail or they forgot to pay not because they do not sufficient funds. These discrepancies are not as much a derogatory risk to go 90 days late as missing high payments are. However, any missed payment can still hurt your credit. Lenders use your credit report and score to assess the risk in lending you money. If you have a low FICO score, you run the risk of receiving high interest rates from lenders or not have the ability to acquire a loan at all. The more delinquencies you have, the lower your credit score and the higher your interest rates will be. The chart below, it demonstrates the differences between different FICO scores and interest rates. A high FICO score, between 720 and 850, will generally allow a person to obtain low interest rates and therefore lower monthly payments. The lower the FICO score, A Low Credit Score Can Cost You BIG! the more you will be Compare 30 yr fixed rates on a paying. When I put $500,000 home this chart together, Monthly the average APR for a FICO Score APR Rate Interest Paid Payment $500,000 30-year 720- 850 720- 6.5% $3160,34 $637,722 fixed rate mortgage for a person with a 700- 719 6.875% $3284,64 $682,470 720 FICO score was 680- 699 680- 7.25% $3410,88 $729,916 6.5%. Monthly payments for a person 620- 679 8.25% $3756,33 $852,278 with a score of 740 560- 619 9.5% $4204,27 $1,013,539 for a $500,000 30- 500- 500- 599 10.5% $4573,70 $1,146,522 year fixed rate 2 mortgage loan would Cop yri gh ted b y F ina nc ial S olut ion Se rvic e, Inc . 2 00 7. All r igh ts re ser ve d. be $3,160.34. A person who has a score of 600 would be paying $4,204.27. That’s a $1,043.93 difference each month and $375,817 more over the course of the entire loan. Your FICO score can save or cost you tens to hundreds of thousands of dollars over your financial lifetime. This is a great chart, showing you the different amounts of interest that someone can pay over the length of a 30 year fixed rate $500,000 mortgage all based on a FICO score. This chart does not take into consideration the amount of money that you can save, or waste, on credit card interest and auto and home owners insurance based on your FICO score and credit-worthiness. Credit-worthiness can even affect whether someone gets hired for a dream job. Many employers nowadays are using credit checks as part of their pre-employment screening process. In fact, it is reported that between 36% and 41% of all employers now conduct credit checks before hiring an applicant. The number increases to almost 100% for government jobs. Resource: Dr. Alan Rosenthal Dr. Alan Rosenthal from Thousand Oaks, California is a credit expert and educator. He writes and conducts weekly credit workshops to teach investors, mortgage brokers, realtors and consumers on how to improve FICO scores and credit-worthiness.
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