Mortgage Refinancing Can Lower Credit Score

I recently decided to refinance my mortgage. It was on a 5/1 ARM from over a decade ago. I decided not to refinance once it started to reset each year because, simply, the rate kept getting reduced year after year.

This year, as the economy has recently appeared to stabilize and with my rate going up a bit last year, I thought this would be a good time to re-finance. I found a highly recommended loan officer, received a rate I was happy with, and peace of mind knowing that my monthly mortgage payments would be more predictable. The closing went smoothly and my first thoughts were of relief knowing that I finally got it done.

However, with all the peace of mind came a shock as well. I get a free FICO score each month through one of my credit cards. The score had been just above 800 for many months, up until my mortgage re-finance was closed. It dropped almost 50 points! I had no idea what happened. I immediately thought it was identity theft. So, I ran my free annual credit report at Annual Credit Report. Nothing seemed out of the ordinary there. I ran another a few weeks later just in case there was a delay. But still, everything looked normal.

It wasn’t until recently where my FICO report stated the reasons for my credit score:

Proportion of loan balances to loan amounts is too high

FICO® Scores weigh the balances of mortgage and non-mortgage installment loans (such as auto or student loans) against the original loan amounts shown on a person’s credit report. Your score was impacted because your proportion of installment loan balances to the original loan amounts is too high.

It then all made sense. One major impact on your Credit Score is how much credit you have available. After more than a decade, I put a nice dent in my original mortgage, which frees up a lot of available credit. When I decided to refinance my mortgage, I pretty much reset the amount of available credit I had back to zero, which greatly impacted my score.

It’ll gradually improve of course, as long as I follow the rules of how to raise my credit score. If I had known of this prior to refinancing, I would honestly still go through with it because I like my monthly payments being more predictable and at an acceptable interest rate. But I really would have liked to know what to expect in terms of my credit score impact too. So, hopefully I have helped shed some light on this situation for you today.


HOLD REL MEM CR

This is typically a code used by Chase Bank (possibly others) indicating that they are pending a credit to your account. The credit amount associated with the “HOLD REL MEM CR” status is usually associated with recent a large deposit.


How to Calculate Average Daily Balance

The average daily balance (or daily average balance) is calculated by adding the ending balances of each day for a defined number of days (usually 30 days for credit card calculations) and dividing it by that total number of days.

For example:

  • Ending balance for Day 1: $1000.00
  • Ending balance for Day 15: $2000.00 (because you bought some things worth $1000 on this day)
  • Ending balance for Day 20: $1500.00 (because you paid off $500 on this day)

The above example would really look like this:

DayBalance
1$1000.00
2$1000.00
3$1000.00
4$1000.00
5$1000.00
6$1000.00
7$1000.00
8$1000.00
9$1000.00
10$1000.00
11$1000.00
12$1000.00
13$1000.00
14$1000.00
15$2000.00
16$2000.00
17$2000.00
18$2000.00
19$2000.00
20$1500.00
21$1500.00
22$1500.00
23$1500.00
24$1500.00
25$1500.00
26$1500.00
27$1500.00
28$1500.00
29$1500.00
30$1500.00
Total$40,500.00

Now divide the total ($40,500.00) by the total number of days (30) and you get an average daily balance of $1,350.00 which is what your credit card company will calculate your credit card interest against.

To make your life easier, I have created an average daily balance calculator.


Can Employers Check Your Employment History: Why Employers Check Your Credit

"With the job market becoming more competitive as the economy drops, it’s more important than ever to have an edge over the next person."

Lets say you’ve received the job interview of your dreams and aced it. On top of that, the interviewer(s) think you’re a great fit and are anticipating giving you an offer. Before you pop out the champagne and celebrate, you may want to wait for your credit report check to clear first. Most people don’t know this, but unless you’re applying for a position in Washington or Hawaii, most companies will perform a credit report check before giving an offer to a new employee.

You may be wondering why employers perform credit report checks. It comes down to these three reasons:

  • Your credit report lists your previous employers. With this information the employer should be able to confirm your employment history and identity.
  • Depending on the position that you’re applying for, your credit history will, unfortunately, define how well you can be trusted with valuables. Again, this specific reason would be if you’re applying for a position that requires handling large sums of money or is susceptible to theft/bribery, such as diamond appraisers or financial executives.
  • Overall, studies show employers believe there is correlation with how responsible a person is with their personal finances and their work ethic. If you’re sloppy with how you manages your funds, the employers will believe the quality of a your work will be sub-par as well.

Due to federal law, the (potential) employer is required to provide you a copy of your report, which agency generated your report, and told they have the right to dispute. You will most likely never hear this reason given to you because most employers would rather make the process less complicated for themselves. So, simply saying you weren’t the right fit or that they found someone more qualified is the typical excuse.

Now, you do have rights based on the Fair Credit Report Act (FCRA). Before an employer can run a credit check, you must authorize it by providing written consent. If the whole credit report check ordeal makes you uncomfortable, then you have the option of rejecting the request to run it. If you decide to not authorize the credit report check, just be aware that you will most likely have no chance of getting the job offer.


Credit Inquiry – Hard Pull vs. Soft Pull

Have you heard that whenever your credit report gets accessed, your credit score will get lower as well? This is a bit terrifying and unbelievable, right? Well, I’ve got some news for you. It’s PARTLY true. Now, before you start refusing to protect your identity by regularly check your credit score or get your credit report, let me explain.

There are two types of credit inquiries. One is called a “hard inquiry” or “hard pull”. And the other is called a “soft inquiry” or “soft pull”. Only a hard inquiry will cause your credit score to be lowered – based on the credit score formula breakdown.

What’s the Difference Between a Hard Inquiry and Soft Inquiry?

Hard Inquiry/Pull

First, as I mentioned above, a hard inquiry will affect your credit score, while a soft inquiry will not. Hard inquiries are typically well in your control, where you need to provide explicit consent to having someone run it against your social security number. So if you’re applying for a credit card or a loan, you can be sure it’ll be a hard inquiry/pull.

Though one hard inquiry may only affect your score minimally, multiple hard pulls can dramatically cause your score to drop. So make sure you only approve hard pulls once in a while.

Soft Inquiry/Pull

A soft inquiry is usually done without your knowledge, unless you monitor your credit report regularly. Soft inquiries are still visible on your credit report. They just don’t hurt your score.

Employers doing background checks and companies who want to provide you with some credit related offer typically run these. You know that “pre-approved” letters your get? Yep, that company most likely did a soft pull on your before sending out that offer.

And don’t worry; running a credit check on yourself is considered a soft pull. This makes sense because it’s known that securing your identity is extremely important. Credit agencies want you to check your credit report/score regularly. This can help you protect yourself from any mistakes or fraudulent activity.

A Related Story

When I was a freshman in college, I was sucked into applying for a lot of credit cards. I was approved for all the cards I applied for, until maybe my fifth card. After that I started receiving letters that said I was denied because of “too many credit inquiries”. I didn’t think much of why, until now. I was young and only cared about my free t-shirt. A few, I admit, I still use. They keep surprisingly well. If I had known about the ways to improve your credit score, I would have definitely been less inclined to apply for so many at once. Good news is that it didn’t cripple my credit and I’m still in the green of the credit score range.


5 Best Ways To Raise Credit Score

"Be Better Prepared and Learn the Top Five Sure Fire Ways to Raise Your Credit Score! Based Off Of the Credit Score Breakdown."

Ways To Improve Your Credit Score: Part 4 of 4

« Read Part 3: Credit Score Breakdown

Based on what we know and can reasonably assume on the FICO credit score formula, follow these simple guidelines and you’ll be well on your way to improving your credit score:

  1. Always pay your bills on time. This means ALL your bills, not just credit cards, but your utilities, rent, etc. The way credit reporting companies know that you’ve been late is when your creditors submit it to them. So make sure your creditors are happy by not paying anything late. Whenever I have accidentally missed a payment, I call my biller to confirm they haven’t reported it any credit agencies.

    If you do have late payments on your record, then you’ll just need to make sure you pay your bills on time going forward and wait for the older entries to be removed.

  2. Have a high credit limit on your cards, but use very little of it! The best scenario would be to limit the number of credit cards you have (a good number is four maximum) and just make sure each of them has a high credit limit. Of course, ultimately, you just want to make sure you only use a small fraction of your credit limit, whether it is a high or low limit.

    If you are maxing out your credit cards, then make sure you’re paying more than just the minimum payments and work towards freeing up your debt.

  3. Start your credit history immediately! If you can get a credit card under your name now, then do it. Of course, use it responsibly per my last point. If you’re a parent of a child younger than 18 and you trust him/her to be responsible, then I recommend opening an account for them as a co-signer. This will give them a jumpstart at having a credit history. Though each year impacts their overall score minimally, it will add up.

    There isn’t much you can do to improve this except wait for your points to slowly increase as your credit history ages.

  4. Don’t just stick with credit cards! If you can afford it and are approved, get a mortgage or car loan. Don’t be too quick to pay it all off at once either, since the mix of credit types will help your credit score and this displays an ability to get and pay a variety of loans plus how responsible you are. Do your best to avoid the consumer finance loans though!

    If you’ve only been relying on only one type of credit, then diversify. For example, if you’re used to buying your car with a single payment then it may be wise to go for a car loan with a reasonable rate instead. It’s bit counter-intuitive, but it may be worth it for those few extra points.

  5. Limit the number of times you apply for a credit card. As I mentioned earlier, a good number of credit cards to have would be four (4). Anymore and you’re really hurting your score with these “hard inquiries”. Applying for a mortgage, having your employer check your credit, or even checking your own score/report are “soft inquiries” and will not hurt your score.

    If you want to increase your score, then simply don’t apply for any new lines of credit that will require a hard inquiry. Hold off on applying for any new credit cards.

That’s it! Follow those five suggestions and you should be on your way to a higher credit score. Though it may not be easy. It’ll ultimately require a lot of discipline and responsibility on your part to make sure your credit score is good. Based on the FICO credit scale, a good score is between 660 to 720 points. It is said the median score in America is 723. How does your credit score compare?


credit score breakdown

"Figure Out How the FICO Credit Score is Calculated And Use That Towards Your Advantage To Improve Your Credit Score or Simply To Keep It Up!"

Ways To Improve Your Credit Score: Part 3 of 4

« Read Part 2: Credit Score Meaning

The FICO Score formula, created by the Fair Isaac Corporation, is proprietary information, so it’s not unveiled to the public. But it’s not a complete secret. This article was written based on a variety of information found online. So, some of the values may be a bit different from what’s actually used, but they are reasonable guesses and will help you to get an idea of how the FICO score is calculated.

By knowing what’s factored into your FICO score, you are another step closer to knowing how to improve your credit score. And at the very least it’ll help you take measures to make sure it doesn’t get lower.

The basic formula provided by FICO is broken down into five parts and how much they weigh towards your score:

  • Payment History – 35%
  • Credit Utilization – 30%
  • Length of Credit History – 15%
  • Types of Credit Used – 10%
  • Recent Search for Credit – 10%

Keep in mind the range of the FICO score is 300 to 850. This means you can’t get a FICO score lower than a 300 and the highest score credit score would be 850. So, you’re really working with a range of 550 points (850 – 300 = 550).

From this point on, these are all just reasonable assumptions.

  • Payment History – In a nutshell, this is the record of how good or bad you’ve been at paying your bills on time. Since this is 35% of your total points, you can get a maximum of about 192 points. It won’t make sense to give a person all these points from the start, if it wasn’t earned. It also wouldn’t be fair to start at zero. So this calculation will start in the middle, around 96 points. For payments made on time, you will gain points, while each late payment will cause your score to drop; the more recent, the harder the hit. The exact points that can be added or subtracted aren’t known.
  • Credit Utilization – Keep in mind this part is worth 30%, so the most you can get is 165 points. This is a simple ratio of how much credit you have available versus how much credit you have been provided multiplied by the maximum amount of points. For example, if you have a total of four (4) credit cards that has a credit limit of $2,500 each, that means you have a total credit line of $10,000 (4 x $2,500). If you only use $1,000 across all your cards, then you’re only utilizing 10 percent of your credit limit, which also means you still have 90% ($9,000/$10,000) left. Using this example, you would get about 149 points (165 x .90).

    This is why it’s best not to close your old unused credit card accounts. Because if you do, then it will decrease your total credit line and lower your utilization percentage.

  • Length of Credit History -This part can get you a maximum of about 83 (550 x .15) points. This is a simple one. It’s how long you’ve had credit history. I’ve heard you can’t really get the full points until 40 years (or more) from the first day you start your line of credit. It may even be longer. But overall, this tells you that you should establish a line of credit as soon as possible, but be responsible! This part of the formula is also why it’s nearly impossible to get a perfect credit score.
  • Types of Credit Used – Total points you can get here is 55 (550 x .10) points. Lenders like to know that you have a good mix of credit types. This displays responsibility as well as money management. But keep in mind there are differences between good and bad types of credit. An example of a good credit type would be a mortgage from someone like Quicken Loans. While an example of bad credit types are consumer finance loans, such as from 100DayLoans. This is not to say that consumer finance loans are bad, but the interest rates tend to be higher. And realistically, sometimes it’s what you need to stay afloat or out of trouble.
  • Recent Search for Credit – Like the “Types of Credit Used,” you can get a max of 55 points here as well. You would start with your full 55 points, but each “hard inquiry” (versus a “soft inquiry”) on your credit report will cause your points to be subtracted. An example of a “hard inquiry” would be the check done when you apply for a new credit card. Put your nerves at some ease though, I’ve heard that inquires for mortgages and car loans don’t have much of an impact.

So there you have it. This is the shortest explanation I can provide that has the most depth. I hope you found it helpful.

As you can see, getting a perfect credit score is (nearly) impossible. If you have a perfect credit score, then I would love to hear from you. If you don’t know your credit score, then I highly recommend getting your credit score as soon as possible. You may be surprised at what you discover. Tip: there are free credit score offers available.

Read Part 4: 5 Best Ways to Raise Credit Score »


Credit Score Meaning

"Credit Scores Go Beyond Banks and Loans, They Affect Many Parts of Your Life. Learn What A Credit Score Means"

Ways To Improve Your Credit Score: Part 2 of 4

« Read Part 1: Ways To Improve Your Credit Score

Are you trying to figure out what your credit score means to you? Are you wondering if your credit score can help you:

  • Receive a better job offer
  • Qualify for a nicer credit card
  • Get a better insurance rate
  • Obtain a better rate on your loan

Wondering if getting your score gives you any of these benefits or at least a small step towards being financially smarter? Do any of these questions sound familiar? If so, then this article is for YOU! And you should scroll down and read this entire article.

It’s Smart to Be in the Know

There’s really no other way to say it. People who have their financial ducks in a row do MUCH better than those who don’t. Even people who have worse credit than the ones with good credit! Confused? Let me explain.

The numbers we usually have on our minds are our age, cholesterol level, salary, or even sports scores. The simple truth is that your credit score is probably the most important set of numbers attached to your identity that you don’t know, BUT SHOULD.

Though a bit strange, the simple truth is that your credit score can affect:

  • The educational options available to you and your family
  • The neighborhood you live in
  • The life insurance you own
  • The job you are offered

You should know your credit score BEFORE you apply for a loan or make a major financial decision because it will improve your options.

Not knowing your score leaves you vulnerable. This can lead you to be a victim like so many we’ve read about in the housing, banking and job market fall out of the past few years.

Lessons Learned

Yes, we run into hard times and mistakes are made. We have difficulty paying back our credit cards or loans at times. It’s not unusual and it can happen to anyone. But being PREPARED and making sure you are RESPONSIBLE enough to check and monitor your credit score, is a decision that each of us has instant control over.

You need to be proactive, smart, and savvy with your credit in order to guarantee you get the greatest opportunities available and don’t become a victim!

Stay tuned for our next major artilce that discusses the FICO Credit Score Breakdown. Coming soon!

Read Part 3: Credit Score Breakdown »


Ways To Improve Your Credit Score

Learn What A Credit Score Means To You, How A Credit Score is Calculated, and Some Quick Tips on Improving Your Credit Score!

With the recent financial hardships millions of Americans are facing, it’s more important than ever to make sure you’re protecting and taking steps to improve your credit score.

Through this short series of articles, you will learn:

  • What the credit score meaning is and its affects on your life – Yes, your life! It’s amazing how much your credit score can affect where you live, your education options, and even which job you get. More people should be aware of this. Think of it as being a part of the game of life – your real life.
  • The credit score breakdown in detail – The first step to winning in the credit score game is to understand the rules. I will be discussing how the most commonly used credit score, the FICO Score, is broken down and calculated. Please note that since this is FICO’s bread and butter, their complete formula isn’t public. But the information provided does come through some sound research and are based on reasonable assumptions.
  • 5 best ways to raise credit score – Based on what is known about the FICO Credit Score formula, we can clearly figure out 5 ways to raise your score or keep it up. These tips will help you stay on top of the credit score game and make sure you continually optimize it.

Hopefully these articles will expose you to new information and help you find additional ways to improve your credit score. Please feel free to contact us with your feedback and questions.

Read Part 3: Credit Score Meaning »


10,000+ Baby Boomer Retiring in 2011 Problems

So CNN has just reported that there will be ten thousand (10,000) plus workers ready to file for retirement. Unfortunately, a majority of them are not prepared, mainly due to not having enough saved. Now, it’s not completely their fault, as our economy has hit some rough spots and their retirement funds didn’t profit as much as projected. However, I still can’t help but think it was also a lack of financial management education that held a majority of the baby boomers back.

Back in the day, people weren’t as aware of how the economy functioned. They probably weren’t aware of the idea of inflation or how to leverage compound interest. I also believe most baby boomers are more credit card adverse. If they were provided the right financial education upfront, then it would certainly lessen the stress the government/public is having now on how to handle the social security benefits.

I have already accepted the fact that when I retire, social security will be a memory of the past. It’s an ideal program in theory, but there are just so many permutations you can take into consideration when coming up with this program. And if history is any indicator, we know that grand ideal solutions never get executed as well as originally thought. This why I am such a huge proponent of teaching kids about money and financial responsibility.


Don’t Blame Credit Cards

It’s noticeable that credit cards have gotten a very bad reputation over time. Credit cards are typically associated with negative connotations, such as high debt, bankruptcy, and simply fear. It’s time to stop misdirecting the blame of these negative attributes to an inanimate object and start looking at ourselves, the consumers. With proper money management education, we can curb a lot of household financial distress.

It is said that the average credit card debt per credit card holder is figured to be about $8,000. Of course, this number is skewed because a majority of consumers could have zero credit card debt, while the remaining have massive debt. It’s figures like these that have driven people away from leveraging their credit cards more often. However, the numbers themselves do not speak the whole truth.

There is a difference between good debt and bad debt. Good debt is typically associated with investments that will help generate additional value in the long run (e.g. education, office equipment, advertising, etc). Bad debt is something we are more commonly aware of, which are purchases that are not necessary for survival nor generates/appreciates in value over time. These are also referred to as luxury items. Though the amount of credit card debt may be massive on one end of the spectrum, who is to say that it is not being used for good debt?

Aside from the “high average debt”, credit card companies are also perceived as vultures for targeting unassuming consumers. And though, it’s true, there are some companies that prey on consumers lack of due diligence (e.g. the Kardashian Kard), most do not. They only provide the applicant with what they calculate he/she can handle, especially since financial institutions are so adverse to extending credit nowadays. Just because financial institutions distribute the cards does not mean we should be condemning them either. It’s up to the consumer to ensure they understand the terms they are getting themselves into and the best option for them.

The real concern of credit card usage lays with the consumers that are not living within their means and are over consuming luxury items. Their finger should point to themselves for getting placed in this predicament. The question is then, how do we solve this? The answer: provide better and earlier education in financial/money management. Without proper education, the amount of bad debt consumers incur will continually grow, no accountability for their own actions will be taken, and the economy will be hurt even more.

The initiative to solve this problem is underway, such as the Ariel Elementary Community Academy mentioned in the article,teaching kids about money. And other resources, provided by CreditCard.com, allow consumers to determine which cards are available for them and and list of their terms and benefits.

As some of you may have noticed, a list of examples for luxury items was not provided, because there’s always a way to rationalize how it can be considered an investment. But let’s be honest with ourselves, we know what we need to survive, what truly generates value, and what we simply want because of the “cool factor”.