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Don t Let Past Delinquencies Ruin Your Chances for Low by rockman11


									             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
                                                 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- 599       10.5%       $4573,70     $1,146,522      year fixed rate
                                                             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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