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Thursday, January 24, 2008

720 FICO and Beyond

Given that Mortgage, Auto and Credit Card Rate are coming down it is getting to be time to think about refinancing...but only on two conditions.

1. It is to swap higher loans for lower ones
2. It is not used to clear credit so you can charge again

If you are planning to clear the card and not chop them up, then pay the higher rate you are now, go off somewhere and really think if you really want to get out of debt.

If you do, then to get those sub-6% rate we are all hearing about (and maybe lower) you are going to have to have a FICO score above 720, and 750 might be the new 720 soon thanks to tighter credit restrictions and FICO 08.

First, go check your FICO score. I use www.truecredit .com because you can track your report from all three major bureaus; Trans Union, Experian and Equifax. It is important to check all three as they can be vastly different from each other. (This is NOT a pay per post, I really use them)

Now that you know where you are, if your scoresare generally over 720, or even better,750, you can go shopping for refinancing, if not,it is time to get serious about your score.

A note of warning: The Debt Snowball that Dave Ramsey and I advocate (OK he advocates and I agree!) can slow your progress in raising your Credit Score. That system advocated paying one debt off at a time then applying the balance to the next debt. The problem with FICO it looks at your debt utilization per card. So while you may have 100% paid off CC 1,2,3,4 and numbers 5 and 6 being maxed, or just higher then the optimum 30%, it will still hurt you.

Here is what your score is currently made up from:

  • 35% - Payment History - On Time - Even 30-days late once can kill ya
  • 30% - Amount owed - Back to utilization again
  • 15% - Length of History - Longer is better
  • 10% - New Credit -How much and what kind
  • 10%- Types Used - Looking for a balance

So using this info from myFico, you have 850 points tops, if your payment history is bad the best you could get would be 600...if everything else was perfect!

So here are the tips per type:
  • Payment History - PAY YOUR BILLS ON TIME :) pay them a bit early if it ensures they get there on time. Even one 30 day late can flip you from Good to Fair credit, costing you thousands. So what if you did, how can you fix it..."I will go to that ad that says they can erase it!" Not gonna happen, they just flood the banks with denials and hope they won't reply. It is an old tactic and doesn't really work anymore.
  • Amount Owed - Less then 30% per card is the Best. Smacks against Ramsey, but is you have to get a house loan or refinance, you may have to "Gazelle" them down to this level.
  • Length of History - This is the one that good meaning people hose themselves on everyday. They pay off the Credit Card then cancel it...hurting their FICO number two ways. First if this was an older card your length of history just shrunk...you guessed it lowering your score. Second, your utilization was hurt in that you had a card that had 0% used...now you don't. You irresponsible, little... :)
  • New Credit - Do not (if possible) do anything to get a "Hard Pull." This means they run a check on your report. To many of these (more than (2-3 a year) and it looks to them like you are trying to load up on credit. Danger sign!
  • Types Used - They like to see a responsible mix. Revolving (Credit cards) Mortgages, and store credit.

Time is your friend. I have seen people (me!) with sub 520 scores work their way up by just making their payments. If anyone tells you they can take a 500 score and make it a 700 right away, they are lying, scamming, monkey dogs...Run Forest!

I am NOT a financial analyst, just a guy who has done wrong and now rides a pale horse to towns to bring help...oh... Sorry, that was Clint Eastwood. But really read for yourself, your score is really important.

That being said, I would NOT abandon your Debt Snowball to jack your scores, just because. Only if you are going to need credit in the next 3-6 months would I change tactics.

Follow this advice and you'll have great credit in no time!


Fiscal Musings said...

The interesting thing about refinancing is that the people who will actually use it responsibly are the ones who wouldn't get the most out of it.

If you're responsible when it comes to debt, you probably don't have high credit card balances and the like already. Just a thought.

RacerX said...

True, but those are the ones that probably have a FICO score already over 720!

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