Opening and closing credit & how it impacts your credit scores.

September 14th, 2009

One of the very confusing issues that people constantly ask about is how closing credit affects them. The question often posed “If I close an account is it less of an impact to the scores than if the credit grantor closes the account?”

Recently I spoke at a school to a group of very concerned and intelligent women. They were full of questions and unafraid to share their personal concerns about their credit with the group. After a long discussion about how credit works, and expressing that CLOSING and OPENING credit hurts the credit score for about a year, the question came up again and again. It made me wonder if others were confused as well.

It does not matter whether you close the account or the credit grantor closes the account on you. Either situation your score will be affected negatively.

There are a few reasons why scores drop when accounts are closed or new credit is opened.

1. The Fico score sees various red flags that warn it when the possibility of defaulting on credit exists. Whether it makes sense to us logically, or not, studies have shown that when consumers close and open accounts the chances of default are greater. Because of this the Fico score will automatically decrease when this scenario plays out on your credit profile.

2. Having different types of open active credit helps the score to see how you manage your credit as a whole. You become more transparent to the scoring formula. If your credit consists of an installment loan (car and student), 1 or 2 credit cards, and a mortgage. If you have paid your last payment on either the car or the mortgage and the account closes your scores can go down dramatically. The reason is you are no longer managing as many types of credit (your credit portfolio has reduced) and the score has less accounts to use for evaluating your payment patterns. This is why it is important to have more credit and many different types. From my experience looking at 1000’s of credit reports over the last 20 years, having 8-15 accounts (varying types but more revolving), gives you the best chance of keeping your scores high. If your score is an 850 and you close an account your score will drop 60 points but you will still have a great score at 790. If your score is a 720 and you close an account your new score of a 670 will put you into a much lower category of score. This reduction of score will make the cost of money you borrow higher. The same goes for opening credit as well.

3. The scoring Fico formula has found that when consumers open credit chances of default are higher. The score also views the new credit as “NEW” and prefers it to be seasoned. “Seasoned” credit is credit that is over a year or 2 old. Once your credit is seasoned it begins to play positively on the score. Seasoned credit is very good for the credit score since it shows a history of you being a consumer who pays well. The older the credit the better it is for the score. This is another reason NOT to close accounts if you can help it. Once you close an account it can be removed within 2 years of inactivity by the credit grantor. If you close a 15 year old Visa Card and it drops off your report (2 years later) it can reduce your score up to 70 points depending on your credit portfolio.

It doesn’t matter whether you have 7 -15 years of impeccable credit or not. The scoring systems are not human beings and they don’t take into consideration your personal explanations. They just follow the formula that was created to spit out your risk level to whomever is evaluating your credit profile. The Fico scores are most concerned with who you are TODAY. It is very important that when you open or close credit you make sure your timing is strategically planned so you do not hurt your chances of getting the best financing available. Remember, following the direction I have given you in this article will not insure your scores are high if you are late on payments or have high balances. Late payments and high balances can reduce your scores 100’s of points no matter how many open active accounts you have.

“Great credit brings great opportunity”

Tracy Becker, President

North Shore Advisory, Inc.

Credit Education/Restoration Company

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Posted in Credit Repair, Mortgage | 7,767 Comments »

Fico Scores for the general public – are they different than the mortgage Fico Score?

August 17th, 2009

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Writen By:  Tracey Becker
North Shore Advisory-
155 White Plains Rd
Tarrytown, NY 10591
Phone: 914-524-8300

Most people think that all credit scores are the same but if you read my last post you can see this is not true.  This week I want to focus on Fico Scores but it should be clear that Fico Scores sold to the consumer at www.myfico.com are different from the scores that you would get from a mortgage “lender”, even though they are both called Fico Scores.

After doing a study of inquiries and getting different information from many sources this is what I learned.   The 3rd party pulling services, that provide scores to Mortgage Bankers from Fico, explained that each lender picks a model attached to their scores.  This model varies the outcome of the score because some models use a older 14 day window for inquiries, some use a 30 day window, and others use a  45 day window.

Here are some examples of the mortgage Fico Score explained by pulling services.  This should help clarify this information (keep in mind each inquiry reduces the score 2-4 points) :

1.  A Bank picks a model with a 14 day window for inquiries.   This means if you start shopping for a loan on day 1 (mortgages, car loan or lease, student loan) and the loan closes after having 7 lenders pull your credit by day 13 your score would drop as if you had 1 inquiry.  If your score was a 755 it could be at most a 753 after the 14 day window.  All of those inquiries would count as a 2 point reduction.

2.  Another bank picks a model with a 30 day window for inquiries.  This means if you start shopping for a loan day 1 and you have 10 bankers pull your credit score by day 30 that counts as one inquiry.  At day 32-50 you have 10 more bankers pull your credit score.  Your credit is pulled again on day 60 for the final bank you want to use to close your loan.  If you started at a 755 the score is now a 731.   It has dropped 24 points (2 points for the 1st 10 inquiries within the 30 day window + 22 points for the 11 inquiries within the last 32-60 days).  If you started at a 689 your score would have dropped to a 665.

3.  The last lender picks a model with a 45 day window for inquiries.  This means if you start shopping on day 1 and have 35 lenders pull your credit within a 45 day window and 1 lender pulls it on day 48 your score would be, at the most, a 751 (your first 35 inquiries count as 2 points and the last inquiry on day 48 reduces the score 2 points as well).  Starting at the same 755 score you would lose 4 points.

The key is after the lenders window expires (depending on the model chosen by lender) each inquiry is counted as a 2-4 point reduction on the score.  The score has the potential to reduce dramatically.  Once your score reduces below a 740, and then below a 720, your interest rate on the mortgage you are applying for will increase. You become a higher risk.  You can also be denied funding if your score decreases further or if the type of loan you are applying for will not take less then a certain score.

Now let’s talk about Consumer Fico Scores.   According to myfico.com their scores are much more forgiving.  If you shopped for a loan 4 times in a year, and had 10 inquiries in 4 different bundles of 30 day periods, each bundle would be counted as one inquiry or a 2-4 point reduction.

I decided since there is so much different info it would be best to speak directly with a Fico specialist to get confirmation of what I read on the fico site and what the pulling service experts had to say.    The Fico Expert told me that the Mortgage Scores given to lenders by the pulling services follow this same model used by the Consumer Fico Scores.  His description of this score was very different from what the Fico site said.   According to him each 30 day period of inquiry bundles (for auto and mortgage inquiries only) is considered no point reduction.  He stated that there is also a 15 day extention after the 30 day period, called a “de-duplication period” that all inquiries occuring at this time only count as 1 inquiry or 2-4 point reduction.   An example of this would be on day 1 -30 you have 12 lenders pull your credit score there would be no point reduction.  After the 30 day period ends you have 5 more lenders pull your credit score within a 15 day period.  This 15 day period of inquiries would only count as 1 inquiry.  Your points would reduce by 2-4 points.   He did say that depending on the model the lender uses: 14, 30, or 45 days, the score can vary.  When I asked the Fico expert why his definition was so different from the rest he said “it is so complicated that most people don’t understand it and wind up giving false information and creating misconceptions”.

What the expert said was clearly denied by the pulling services that provide the Mortgage Lenders with Scores.  The 4-5 different pulling services I spoke with were adamant about the fact that after the window ends each inquiry is viewed separately and bundles are not considered for past windows.   Each inquiry would reduce the scores 2-4 points after the current window expires.  So if you have 25 inquiries after the window expires your score can go down over 50 points.

Okay, so this is quite a bit of conflicting information and which expert do we believe?  The one thing that is very clear is your lenders Fico score will be different from the Fico Consumer site score.

Even if the pulling services are wrong about each inquiry counting as a 2 point reduction (after the window expires) it doesn’t change the fact that different models are used (14, 30 &45 day windows).  This will alter the consistency of the Fico consumer and Fico mortgage scores.  From our experience Fico Consumer and Fico Mortgage Scores are usually different.    If Fico uses a 30 day window, and your Mortgage Bank uses a 14 day window, the difference could be substantial depending on how many inquiries happened after day 14.  It should be noted that any other inquiries, besides mortgage and auto, will not be viewed in batches and will reduce your score individually 2-4 points.

Finally, your best plan is to insure your scores are always MUCH higher than necessary by learning the rules and being diligent about following them.

More score insight to come!!

Posted in Credit Repair | 64,399 Comments »

SHORT SALES

August 17th, 2009

455 Central Park Avenue Suite 202 Scarsdale, NY 10583

Law Offices of Michael Lease PC., 455 Central Park Avenue Suite 202 Scarsdale, NY 10583, 914-723-7373

A short sale is when a borrower sells his or her home for less than is owed on the underlying mortgage.

A short sale is pre approved by the lending institution and the numbers submitted for the approval process are critical to both the approval and a smooth closing.

The first step after a buyer is found for property and the seller wants to work out a short sale, is to contact the lending institution(s).  The easiest situtation exists if there is one underlying mortgage.  The seller then has a HUD generated by his or her attorney.  The HUD must show the purchase price, any broker commission (usually capped at 5% for a short sale), any attorney fees for closing, any adjustments and any other closing costs (including transfer tax) that the seller has.

The seller is not entitled to receive any funds at the closing.

After the HUD is transmitted, the lending institution will either accept the figures or indicate any changes that need to be made.  Once accepted, the lending institution will issue a letter indicating the funds that must be received by them.  In the event the net funds to the lender are going to change, the lender must and should be notified as early as possible.  The lender is not prepared to amend the amount they are to receive at the closing.  For example, the seller has a water bill for $2500.00 that remains unpaid and must be paid at closing; that figure must be paid by seller and will be an expense of the closing.  That should be disclosed to the bank; waiting until the closing to give the bank these figures will result in three situations that do not help the buyer or seller; the bank will adjourn and consider the request; the bank will not consider the request and the buyer will have to come out of pocket or the deal will not be closed.  Preparing for a short sale and putting together all of the requiste numbers is critical.

A short sale is a way to protect your credit.  Please speak with an accountant and your lending institution to make sure that a 1099 will not be issued for any forgiven principal.  That could result in a tax impact to the seller.   The issues invovled in a short sale should be discussed with your attorney and accountant before you decide to proceed.

Posted in Shortsale & Foreclosure | 49,928 Comments »