Average FICO score getting higher for approved mortgages

by kpanchuk on 11/19/12

 

Mortgage lending keeps getting tighter.

Case in point, the average FICO score on closed, first-lien loans hit 750 in October, which is up from 741 last August, Ellie Mae said.

Ellie Mae analyzes data on loan applications that pass through its Encompass360 mortgage software. While that data only accounts for 20% of all originations, it gives a snapshot of what types of loans are being accepted and closed, as well as denied.

Furthermore, the credit score on denied applications also rose from a year ago, suggesting credit standards actually tightened during the same period.

The average FICO on denied applications hit 706 in October of 2012, which is up from 700 in October of 2011 and 697 in September of 2011.

The loan-to-value ratio on average closed loans hovered at 78 last month, up from 76 in October of last year.

On denied applications, the average LTV hit 87 in October, up from 82 in August of 2011.

The closing rate, on the other hand, seemed to improve over the same period, hitting 54.5% in October, up from 47.1% in November of 2011.

The idea that lending is now overly restrictive and only available to the highest quality borrowers is certainly not new to the marketplace. In recent public statements, Federal Reserve Board Chairman Ben Bernanke indicated that an overcorrection is now taking place.

kpanchuk@housingwire.com

 

4 essential types of credit cards

9/18/2012

By Jeanine Skowronski, CardRatings.com

 

Unless you’re prone to overspending, in which case you should limit the amount of plastic you pack in your wallet, there are advantages to having more than one credit card at your disposal. To take advantage of the many features and benefits of credit cards, it can be worthwhile to carry four distinct types of cards for each free credit card processing service.

For one thing, when used responsibly, multiple lines of credit can help boost your credit scores.

“If you only have one card you’re managing responsibly, that’s not nearly as positive as managing several cards responsibly,” says Maxine Sweet, the vice president of public education for Experian.

Moreover, different categories of credit cards are tailored to meet specific needs. Here are the four types of cards you should slowly add to your payment arsenal in order to earn more rewards, spend less on interest and build solid credit scores.

 

1. A rewards card (or two) in an area where you already spend money

Debit card rewards are largely defunct, thanks to legislation limiting the amount of money issuers can charge merchants who accept the payment method. Credit card rewards programs, on the other hand, are thriving as companies try to woo back credit-shy consumers.

While the earning potential means it quite literally pays to have a great rewards card in your wallet, you shouldn’t grab every swanky rewards card your credit scores qualify you for. Instead, choose one solid card featuring high rewards on a purchase category you spend a lot of money on anyway. Remember, the idea is to earn rewards on spending, so you shouldn’t spend just to earn rewards.

“The card has to fit your lifestyle,” says Bruce McClary, the director of media relations for ClearPoint Credit Counseling Solutions. Foodies might opt for a card that provides the most cash back at restaurants, while commuters may want to go with a great gas rebate card.

If you travel a lot, it may be a good idea to add a travel rewards card to your collection. These cards can be used to maximize points or miles on airfare and hotel accommodations, while a general rewards card can be used for everyday purchases.

2. A credit card from the same bank that issues your debit card

Rewards cards are great for getting something back on your purchases, but they’re only worth it if you plan to pay off the monthly balances in full.

“There’s going to be a higher cost associated with these cards,” McClary says. This generally includes higher annual percentage rates (APRs) and lofty annual fees.

To ensure you don’t wind up with a big balance at the end of the month, consider paying off purchases as you make them or weekly using a linked debit card account.

“That’s how you’re able to leverage rewards on everyday spending,” says Laura Creamer, a financial education specialist with nonprofit credit counseling organization CredAbility.

You can usually use any debit card to pay off a credit card. However, having both cards from the same issuer can expedite payments and make it easier to track your spending, because you can log into one website to view and adjust both accounts.

3. A low-interest credit card

Despite your best intentions, there may come a time when you wind up with a balance you can’t pay off in full. Your car may need unexpected repairs or your washing machine may stop working. In these instances, it’s great to have a credit card with a low, fixed APR on hand.

“I have a low-interest card that I use on large purchases,” Creamer says. This option will cost you less in interest as you pay down the balance. Low-interest rate cards typically carry an APR from 8% to 10%.

4. Your oldest credit card

Even if it duplicates one or more of the above categories, you should hold on to the student credit card you impulsively opened during Welcome Week at college. Closing cards with long histories can damage your credit scores, as can reducing your available credit.

According to Sweet, closing an account can raise your credit utilization ratio — the amount of credit you use as a percentage of your overall available credit — to levels that damage your scores. A credit utilization ratio greater than 20% to 30% can push down your FICO score, limiting your ability to qualify for the best credit cards and loan terms.

Closing the account can also ultimately affect the age of your credit report, as closed accounts are completely removed from a person’s credit file after 10 years. So hold on to that old card, and remember to break it out every now and then for a small purchase to keep the account active.

“After the economy crashed, (lenders) became much more careful about looking at their portfolios and closing accounts that were costing them money,” Sweet says. Using that old card every so often can avoid maintenance fees, or worse, having the credit line dry up.

Paul Oster appears on the Wall Street Journal’s Daily Wrap Show

Paul Oster, CEO of Better Qualified, appears on the Wall Street Journal’s Daily Wrap Show hosted by Michael Castner. The show is heard on over 100-radio stations coast to coast. In this informative interview Paul talks about improving, protecting and monitoring your credit score on a regular basis as well as the secrecy behind how your credit scores are determined.

What are the Different Credit Score Ranges? Bad to Excellent and Everything In Between

by Mike on November 5, 2012

Your credit score is important. Very important. That three-digit figure is so influential that it determines your eligibility for credit cards, home and auto loans, student loans, apartment rentals and even some jobs. It’s vital to know your credit score range so you can decide which loans to apply for, know when you’re settling for less than you could get and, if necessary, take steps to rehabilitate your FICO score.

Your credit score gives lenders an idea of whether they can rely on you to pay back your debts. It follows that your credit history, past and present, is among the data that credit bureaus use to calculate your score. If you’d like to get a grip on your score’s implications, read on: the nerds will clarify the finer points.

Lower score, higher interest

More than determining your eligibility for a loan, your score affects the cost to you, too. In fact, the score and the interest you pay are inversely proportional, roughly at a one-to-one ratio. So, as you boost your score, your monthly payments will generally decrease at the same rate.

Let’s say you want to get some new wheels. To finance your slick new ride, you take out a 60-month fixed-rate auto loan of $15,000.  If your score is in the gutter, say a 610, you’d pay $357 a month, according to myFICO.com. The guy next to you in the lot, with the Ray Bans on, has a superb score of 800. His score is about 30% better than yours—31.15% better, to be precise—as his monthly payment, at just $277, a 28.88% markdown.

It’s clear that you’d rather be that other guy, who pays on time and keeps his debts low.  Because once you start digging yourself a hole with late payments, it becomes harder to climb out, with the high rates weighing you down.

Understand your FICO score

The breakdown of credit score ranges is as follows:

<630: Bad credit

You likely landed her because of bankruptcy, or because you’ve missed payments consistently—or, as is often the case with younger folks, you have no credit history at all. You’ll face higher interest rates and fees, and your choice of credit card is restricted. If you find yourself in this bracket and still want a credit card, a secured card is likely your best bet.

630-689: Fair (average) credit

Your score is average, and it’s probably because you have too much “bad” debt. If you’re holding onto some credit card debt or if your balance often grazes your credit limit, bureaus won’t trust you, and therefore lenders won’t either.

690-719: Good credit

Your rates are low, and you can choose from most cards, including those that earn rewards.

720-850: Excellent

If you’re in this bracket, take a look at cards with great fringe benefits. American Express, for example, offers premium cards that better accommodate the ritzy life.

Although these four categories are the standard, credit scores are still somewhat fluid, especially since the recession began. Since 2007, scores’ effect on consumers has become more severe, too, according to Paul Oster, the CEO of Better Qualified, LLC, which specializes in business and consumer credit services. “The impact of scores has changed dramatically,” Oster wrote in an e-mail. “Consumer’s credit scores can cost or save them hundreds of dollars a month.  The ‘magic number’ has been increasing since the ‘R’ [the recession].

I know that 5 years ago 620 was a good benchmark, then it went to 640, 680, 720, and now 740. The average credit score is around a 685. Remember that scores are fluid and changing all the time. Studies show that individuals with an average credit score would reduce card finance charges by $76 annually if they raised their score by 30 points.”

For more detail on each bracket and more information about credit reports and safe credit practices, check out another of our articles.

3) The future of your score: the Consumer Financial Protection Bureau and you

Although scores generally follow the pattern above, the system can be a bit more complicated. The reason being that there isn’t one federal standard for a score.  Rather, credit scores are a business, and FICO is simply the biggest in the field. “The credit bureaus are privately held, for profit companies, that are loosely regulated by the FTC,” Oster said.

It follows that your credit score is sometimes tough to pin down. Although lenders will most often work with FICO, they may also use scores by Vantage, CreditPlus, and more. Some of these scores even break from the standard 300-850 scale. The VantageScore, for example, uses a range of 501 to 900.  Your score might be different from one bureau to another not only because of a unique range but also because each agency uses a unique model for each credit product. Some agencies may weigh one variable more heavily than others.

This variability and the lack of transparency provoked the federal government to act. Last year, the Consumer Financial Protection Bureau opened its doors to make credit less opaque to consumers.

Lately, the Bureau has been conducting a study of the range and variability of different credit scores. The group is concerned that a consumer might apply for a loan he or she reasonably expects to receive—given one particular credit score—and then be denied—because of another score—therefore wasting time and money in the process.

The Dodd-Frank Act of 2010, too, is doing its best to make credit scores more transparent. The Act requires that lenders provide scores to consumers whenever they use a risk-based pricing model—the model that determines your interest or insurance rate.

Still, for most, there’s no need to panic. The variability, while there, likely affects a very particular group of consumers, those who generally straddle two brackets. Regardless of the scoring system, the same general principles apply: pay on time and keep your balances low.