MoneyCafe.com

For today’s borrowers, having good credit is essential.   Having a poor credit history can make it difficult to get loans with good rates, or any loan at all.  People with good and excellent credit are in the best position now to take advantage of the current low rates and reduce their monthly payments.  This is a brief overview of credit scores and what they mean to you.

The most widely used credit scores are “FICO Scores,” which are named after the company that runs the predominant scoring system, the Fair Isaac Corporation.    They have a site for consumers called myFICO.com which offers a Free FICO Score Estimator.  They also offer a number of paid products including Score Watch® and FICO® Quarterly Monitoring.  Other credit reporting and scoring services can be found in our MoneyCafe.com Credit Reports Section.

FICO scores range from 300 to 850.  Higher scores are better, with the average score being around 720.  They keep it a secret exactly how they come up with your score, but say they take into account your payment history, amounts owed, length of credit history, new credit and the types of credit used.  For more detailed information there are two excellent brochures at http://www.myfico.com/Downloads/Files/myFICO_UYFS_Booklet.pdf and http://www.myfico.com/Downloads/Files/myFICO_YCS_Booklet.pdf.

It’s a good idea to know your credit score before you shop for a loan or other credit.  You would be surprised by the difference a good score can make.  On home loans it can translate into savings of a couple of hundred dollars per month or thousands of dollars in additional loan origination fees.   And many people only miss an excellent credit score by a few points.  Check with several lenders to see what scores they use for cutoffs.  Many provide their best rates to borrowers with scores above 740.  Others use 730 or 720 as a baseline to be considered an excellent credit risk.

If you have a low score you may be able to get your score up by making a few adjustments to your credit practices.  A number of things can negatively impact your score – having a maxed out credit card (even if you pay on time), closing old credit accounts and opening new credit accounts.  Often times erroneous information on credit reports is a culprit. 

For an example, let’s say two twins (Jack & Jill) live next door to each other and have identical financial lives.  They have the same jobs, the same amount of credit card debt, and the same amount on their home loans.  They both have the same payment histories.  Jack decides to be smart and take action to simplify his life.  He consolidates all of his credit card debt on to one card which takes up his entire credit limit.  Now he only has one payment.  He closes all of his old credit card accounts and credit lines that he doesn’t need.  While doing some house renovations he opens up store credit cards at Home Depot and Ikea to take advantage of 10% discount offers.  Jill decides to be lazy with this stuff and doesn’t do anything.  She keeps her credit card debt spread out over several cards and is not close to her credit limits.  She leaves open all of her old credit cards and credit lines.  She uses coupons to get discounts and doesn’t open new store cards, but puts the purchases on an unused credit card.  A couple of months later they both go to refinance and discover that Jack’s credit score is lower than Jill’s.  In reality they are the same credit risk; but the credit scoring system will see it differently.  What if, in addition to Jack’s recent changes, he had an erroneous entry in his credit report that was derogatory?  Jack will wind up paying much more for his refinance loan.  The moral of the story – it’s important to pay attention to your credit score and know what’s in your credit report.

You may also want to check out our previous item regarding Free Credit Reports.

Quicken Online announced a new and interesting feature yesterday.  Quicken Online now has a forward looking paycheck and spending forecaster.  This allows people to now track their spending ahead of time and is another feature that helps look for ways to save.   With this feature, Intuit says you can “see all of your spending, what bills are coming, and how much money you’ll have left over. It makes staying on top of your money easier than ever before.”  It provides you a graph showing how your finances will look over the next few pay periods, anticipating income and bills over the next 30 days.  It shows where you might be spending between now and your next paycheck.  

In addition to helping with budgeting and giving a clearer view of upcoming spending, we think it can help reduce bank fees from overdrafts.  They also have an “alert” feature where Quicken Online sends notices to your cell phone or other device when it looks like you may be overdrawing your account or exceeding your credit limit.  Combining these features should help everybody eliminate unecessary bank fees.  It’s free, so it’s definitely worth the money; saving on fees makes it definitely worth your time.

There is really no reason not to give it a try.  If Quicken Online doesn’t work for you, try Mint.com as they have many useful features as well through a free solution for managing your money online.

This is a look at some of the best interest rates for deposits and loans from national banks and lenders. (Surveyed Saturday.)

Rates are APY (Annual Percentage Yield)

Rates are APR (Annual Percentage Rate)
Assumptions:  $320,000 conforming loan, 20% down, excellent credit, documented income,
California property  (Rates Survey between Friday and Monday)

There has been a lot of talk in the last 36 hours about a supposed plan by the Treasury Department to create a market for 4.50% 30 year fixed rate mortgages.  They need to either come out with details this morning or say that no such plan will be forthcoming.  Having a rumor out there like this is adversely affecting the market for loans and homes.  I eagerly awaited details yesterday, but none were made public.  It seems like a kooky idea on so many levels.  

Artificially pushing more money into residential real estate comes at a great cost and only prolongs our problems and brings uncertainty to the market.  No one will know the true bottom for a while longer; which needs to be found so people will start investing again.  Left on its own, the market will bottom and start to build a base.  This is the only healthy sustainable course to take.

Underwriting is very tight these days, so new loans are only going to people with good credit and stable employment.  These aren’t the people that are going to need help in the coming year.  These people can get loans at 5.00% right now to buy homes.  And they will buy them when there is a few months stability in home prices that would suggest a bottom. 

If the plan allows for refinancing, there would be lines around the block to lock in these rates for the next 30 years.  But the only people in line would be the ones that aren’t in trouble right now and whose houses aren’t at risk of foreclosure.  And people would get as high of a loan as they possibly could.

The Treasury is in complete control of our financial services system at this point.  Price controls on interest rates would be disastrous.  These rates necessarily and continually fluctuate.  When I was a kid, you had to wait in line for price controlled gasoline.  Price controls on mortgage rates would create similar shortages.  Another government induced money shortage is not what we need.

By the way, I think mortgage rates will come down to 4.50% all on their own.  If they do, it will be a very good thing.  If they don’t go that low, it’s going to better for all of us if the Treasury focuses on facilitating a better mortgage market instead of controlling a lousy one.

Last week I wrote that banks were really starting to limit the origination of new consumer loans and credit cards.  This week we are hearing that more and more existing customers are getting their credit lines and credit card limits reduced.   A story broadcast on Yahoo has some more information.  See http://www.yahoo.com/s/996641.  You really need to be aware of this so you don’t go over your credit limit.  Exceeding your credit limit puts you in a position where you think you are financing something only to find out you need to pay cash for it at the end of the month.  This can also result in higher interest rates, as well as adversely affecting your credit score. 

Do not assume you will be notified first.  I am personally aware of instances where customers were notified after the credit line and credit card limit were cut.  Also, do not assume that your credit card transaction will not be authorized if it goes over your limit.  Many cards allow you to exceed your limit as long as you pay down the card upon receipt of your statement.  Further, do not assume you will be unaffected because you have good credit and pay on time.

Basically, banks are trying to limit the amount of credit they have outstanding to their customers.  So they are cutting back everywhere on all types of credit products.  The first wave of this started 6 months ago when lenders started cutting back and freezing home equity credit lines.  They were cut severely and swiftly without regard to credit history or original loan to value ratios.  Lenders were highly motivated to do this by the rise in foreclosures.  Small and large businesses have seen similar treatment due to the downturn in sales.  Now it is really starting to kick-in for the consumer.  The recent unemployment numbers foretell massive defaults on consumer loans and credit cards.  Banks are therefore very motivated, so expect swift cuts.

Personally, I would approach larger purchases this way.  Pay cash or don’t buy.  If you absolutely need to purchase on credit, make sure the financing is available.  It may not be tomorrow.

Updates to the Wachovia Cost of Savings Index (COSI) (formerly known as the World Savings COSI) are no longer being provided to the public by Wachovia.  Wachovia loan representatives don’t even have the COSI numbers, because they are no longer originating COSI loans.  Wachovia will provide its COSI loan customers the current rate on their monthly statements.  This may only be relevant to borrowers who have World Savings/Wachovia adjustable mortgage loans using the COSI as an index; but there are a lot of these loans out there. 

Wachovia will soon be acquired by Wells Fargo Bank.  We anticipate they would try to get rid of this index altogether and come up with a substitute index.  This has precedence and is usually allowed in the terms of the loan documents.  The index was changed when Wachovia acquired Golden West.  Also, when Fannie Mae stopped publishing LIBOR rates, many loans that were tied to the Fannie Mae LIBOR were changed to a different LIBOR rate index.

Since we won’t have a source for the data, we will no longer be able to consistently publish the COSI rate.  We suggest current customers use the comments section of this post to keep each other updated as to the current rate.  The rate for the previous month is usually calculated by the 15th of the current month.