Does Refinancing Affect Your Credit Score?

Refinancing is the act of paying off a current loan by taking out a new one. You might choose to refinance if you think it’ll help you get a lower monthly rate, or else pay less interest in the long term. Refinancing can be a useful tool for anyone paying off a long-term loan, such as a home, car, or student loan, especially as your financial circumstances change and you find you are able to afford to pay more or less per month. But does refinancing affect your credit score? And if so, does it improve it, or hurt it?

The effect of hard inquiries

Applying for refinance loans, as with applying for any loans, involves creditors running your credit report, creating new “hard inquiries.” These inquiries typically lower your credit score by a few points. Although the effect of one inquiry is negligible, the refinancing process usually leads to several such inquiries.

If you want to minimize the harm that these hard inquiries do to your credit score, there are steps you can take.

Be sure to get all your applications in during a short time period: fourteen to forty-five days. Additionally, keep your inquiries consistent in terms of your requested loan and what kind of companies you are applying to. Some credit score models will consider all inquiries made during a short period of time to be just one inquiry, especially if all the requests seem to be similar. It’s better to apply for twelve credit cards over the course of a month than to apply for six over the course of a year.

The effect of closing accounts

Refinancing involves closing an old account (the old loan, that you are paying off through the refinancing process), and opening a new account (the new loan, which you are taking out in lieu of the old one). Closing your account will not affect your credit score immediately. Since the old account is immediately replaced with a new one, the amount of money made available to you will not change, meaning that your credit will not be jeopardized by your spending ratio.
However, in the long run, it can have an effect because it will likely lower your mean account age. Successfully holding loans for multiple years, while paying regularly, looks a lot more impressive on a credit report than paying money to a loan that you have only had out for a short while. This change will not be immediately noticeable, because closed, paid-off accounts remain in your credit for ten years after being closed. For those ten years you will have the benefits of an old account being factored into your credit. After that time, however, the old account will go away, and your credit will likely drop as a result.

On the plus side

That said, if refinancing a loan looks like a good decision, then it probably is. While your credit score will likely drop, the damage will be slight and clear up over time, especially if you take the proper steps. Additionally, getting a good deal on a loan can help your credit if it puts you in a position where the ratio of your monthly pay to the amount of money you are paying off in loans is good.

The takeaway

It’s never a bad idea to think about your credit and how your actions might affect it. That said, there are other important factors that weigh on your finances, and one of those factors is how much money you are paying in loans. If refinancing is going to help you save money, or if it will make it easier for you to pay off those loans, then it is a worthwhile choice to make.

Freddie Mac and Fannie Mae: Analyzing the Bill That Would Put an End to the FICO Monopoly

Recently, three senators Ed Royce (R-Calif), Kyrsten Sinema (D-AZ), and Terri Sewell (D-AL) from the House have introduced a new piece of legislation that would basically allow the government sponsored enterprise to keep alternative credit score models in mind. In other words, this would put pressure to use alternatives other than the FICO credit score model the GSE’s use at the moment.

Sewell had said in a statement that she finds this fight critical partially because she strongly believes that these credit score models are not only outdated, but also fail to take certain factors into account (i.e., if borrowers were able to pay their rent on time). Essentially, the reps want to move away from the Fico’s monopoly credit score models.

In turn, this legislation would open the market for responsible, qualified potential homeowners who are actually qualified to buy a home. This could be a step in the right direction in terms of rectifying the issue in an effective way and allowing homeownership to become more of an attainable dream for different Americans across the country.

If this would pass, it would allow for more competition and open opportunities to other credit score companies that currently are unable to change the status quo. One company that is excited for the possible change is Vantagescore Solutions, which would definitely benefit from the increased market competition.

In a statement, the CEO of Vantagescore Solutions Barrett Burns said that “From the beginning our ask has always been to allow lenders to choose among today’s more predictive models that score more creditworthy consumers without lowering credit standards.”

 

Tips to Maintain Your Credit Score During the Holidays

credit cards

Most of us aren’t thinking about credit scores during the holiday season. But not paying attention to credit now may result in problems down the road. The following are 5 tips to help you maintain your credit score during the holiday season.

1. Protect Your Credit from Scammers

Credit card fraud is rampant during the holiday season. If a scammer gets any of your personal information they could potentially open new credit card accounts using your name. Once phony accounts have been opened, the late charges will be reported the following month and eventually collections will start in your name. You may not even realize you are a victim of identity theft unless the collection notices come to your address or your credit score drops significantly.

2. Don’t Apply for New Credit Just for the Holidays

Stores will offer plenty of promotions this time of year to get you to spend more money. Opening a new card, however, may cause your credit score to temporarily drop. Whenever you open a new account inquiries are made into your credit, and when that happens your credit score goes down. If you must, make sure to only open one new account. If possible, wait until a few months after the holidays to open any new accounts.

3. Do Ask for a Limit Increase

This may seem counterproductive, but most experts will tell you to never go over 30 percent of your limit. That means if your limit is $1,000, you should never carry more than $300 on the balance. If you do go over that amount your credit score will decrease. If you plan to use your card for several purchases it may be a good idea to ask for an increase. This will give you wiggle room to spend a little more without messing with your credit score.

4. Don’t Over Spend

The previous section was advice on how to be able to spend a little more without ruining your credit score. However, this should be done with caution. Overspending will lead to a larger minimum payment you may have trouble making the next month. Not missing any payments is the cardinal rule for maintaining a good credit score.

5. Don’t Miss a Payment

Missing even one payment can dramatically affect your overall credit score. FICO reports that payment history makes up 35 percent of your overall FICO score.

It’s important to make sure you have enough money set aside after the Christmas holiday to make at least your minimum payment. Finally, if you have more than one card make sure to pay off the one with the highest rates.

Tips on How to Boost Your Credit Score

credit score

Your credit score is like a report card on how you manage your finances, and just as it is important to have A’s and B’s on your report card, it’s important to have a good credit score. Not only can your score play a role in whether you can get a loan, it also may affect what you pay for insurance and the amount of deposit you have to put down on an apartment. If your credit score is lower than it should be, you can follow these tips to give it a boost.

Bring past-due accounts current

One of the best and easiest ways to boost your credit score is to get current on any past-due accounts. If you are applying for a mortgage to check with the mortgage company first before paying any collections or charge offs. These accounts may not need to be paid before the loan is done and paying off old collections or charge offs will bring your scores down temporarily, or until they show some history of being paid and could cause a problem with getting the loan.

Accounts that haven’t been paid on time can greatly reduce your credit score, because your payment history accounts for more than one-third of your total score. If you have any accounts that are in collections, pay those off first and make sure the collections agency notifies that credit bureaus that you are now current. Then concentrate on bringing other accounts up to current status. One key thing to focus on, however, is that you want to make sure you don’t let any new accounts become past due while you are catching up on accounts that are already behind.

Pay down debt

Once you have worked to get all your credit accounts current, your next focus should be on paying down debt. The amount you owe makes up 30 percent of your credit score, and if you owe a lot relative to how much credit you have available, then it will affect your score. A general rule of thumb is your debt should be less than 30 percent of the amount of credit you have available. So if you have $10,000 worth of available credit, you should owe less than $3,000. This rule applies only to revolving credit accounts like credit cards, not to installment loans such as a car loan.

Don’t close accounts

If you pay off an account, you may be tempted to close it, but that can hurt your score, especially if the account has been open for a long time. The length of your credit history accounts for 15 percent of your credit score, so if you cancel accounts you have had for a long time, it can shorten your history and hurt your score. Keeping accounts open, even after they are paid off, will help boost your score.

Don’t open new accounts

The more credit cards you have, the more it can lower your score, especially if you have opened a lot of accounts recently. Opening a lot of accounts in a short time looks risky to lenders and can hurt your score. Doing so also can shorten your credit history, which can reduce your score as well.

Dispute Investigation 101

mark teta finance

In any industry where financial transactions take place, there is a chance that a consumer will want to dispute a charge. When dealing with financial institutions (lenders), there are specific protocols that need to be followed and compliance deliverables that need to be met. The type of follow up that is required will depend on the type of financial dispute that is taking place. If there is a dispute in the realm of open-end credit accounts, it will fall under Regulation Z (which has its own required steps for resolution). Other disputes are handled a bit differently.

With any dispute there are few universal steps that financial institutions have to take to remain compliant.

  • The nature of the dispute needs to be assessed
  • Once the nature of the dispute is assessed, the financial institution must decide whether investigation is required (if it falls under Regulation Z, an investigation is mandatory)
  • If it is determined that an investigation is required, then the institution must then make sure that all procedures are followed (timing, notices, etc.)

When a dispute DOES fall under Regulation Z…

Transactions (and subsequently their related disputes) that revolve around home equity lines of credit, overdrafts related to credit, credit cards, and other transactions of that nature carry specific rules about their investigations and resolutions.

According to Regulation Z, a billing error is,

“a reflection on or with a periodic statement for an extension of credit that exhibits some type of error, ”

which can come in many forms.  An error can be anything from an unauthorized transaction to an improperly credited payment. If a consumer files a complaint about an error within the allotted 60 day time frame, there are three steps that will take places.

  1. Written acknowledgement of the receipt of the billing error dispute must be sent back the consumer within 30 days. The creditor must then follow all Regulation Z procedures.
  2. The consumer is not required to pay the disputed amount while the investigation takes place. The creditor is not allowed to make any negative actions against the consumer, and no delinquency is allowed to be reported.
  3. At the conclusion of the investigation, if there was no billing error, then the creditor must inform the consumer, in writing, that the disputed issue was in fact compliant. If it is determined that an error did occur, then the creditor in question must correct the error and send written notice of the correction to the consumer.

If the dispute DOES NOT fall under Regulation Z…

There are several potential billing disputes that do not involve open-credit accounts. In those situations, the creditor/lender is still responsible to carry out the “consumer complaint process” as part of the Compliance Management System.

All complaints must be documented, investigated, and resolved in accordance to the Compliance Management System (CMS).

 

Divorce & Credit: Here’s What You Need to Know

mark teta divorce

Divorce is always an unpleasant subject to broach, but it is important to understand all of the ways that divorce will affect your life moving forward. When going through divorce proceedings, finances are always discussed, but individuals may forget to take their credit into account.

The important thing to note is that a divorce filing will not directly affect your credit score. However, it is possible for a divorce to indirectly impact your credit score. There are a few things you need to keep your eye out for.

 

Make Sure Your Spouse Pays Joint Debts

It’s likely that during the course of your marriage, you created joint accounts with your ex-spouse. The most common joint debt are mortgages and credit cards. Once you receive your divorce decree, you’ll know exactly what your spouse is responsible for paying. It is likely that the ruling will require your ex spouse to take over entire payments for debts that your name will still be on. It will be on you to make sure that the debts that are actually being paid. No matter who is supposed to be making the payments, a missed payment on any account that is attached to your name will have a direct hit on your credit score.

In a best case scenario, the relationship between you and your ex will be amicable enough to ensure that you don’t have to worry about (intentional) missed payments. However, if that is not the case, you should take on the responsibility of the payments in order to save your own credit.

 

Watch Out For Your Credit Accounts

In the unfortunate scenario that the relationship with your ex-spouse it not a healthy one, you should be actively watching any joint credit accounts that exist between the two of you. If your ex was an authorized user on any of the credit cards that you share, they can quite literally rack up all of your credit cards without any legal repercussions. This would be self-sabotage on their end, but it would hurt your credit score all the same.

 

There is not much that can be done to remove each other from accounts that were open together. But, remove your ex spouse from any individual accounts that you have where they were added on as an authorized user as soon as possible.

For more information, see the following resources: NerdWallet & Experian.

 

Determining Tenant Worthiness

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As a landlord, deciding who will be a good tenant for your property can prove to be and extremely challenging process. There are several key factors in making a tenant decision, but the most important one is determining whether or not the potential renter will be able to consistently pay their rent in a timely fashion.  There are several determination factors to consider when making this final decision (the most important one being their credit score).

 

What is your applicant’s age?

FICO scores vary based on the consumer’s age. When you’re considering younger applicants as renters, it’s important to keep in mind that they may not have enough credit history to possess a higher score.

 

What has impacted the applicant’s score?

Take the time to review the credit report. Some factors that might have negatively impacted a score might not be relevant to you as a landlord (ie: the number of credit inquiries they’ve had.)

 

Is there a guarantor willing to cosign?

Maybe you feel the applicant would be a great fit but their previous credit history isn’t ideal.  Considering a cosigner for the lease, which will provide a backup source of payment if your tenant does not follow through on their payments.

 

Whether you’re a landlord looking to rent your property, or a tenant searching for your next apartment, a person’s credit score is vital to any rental agreement. A landlord will likely infer the worthiness of a potential tenant through their credit score, which shows someone’s financial stability. Ideally, as stated in homeguides.com, a FICO score of 660 and up is the optimal credit score for a potential tenant to a property but can vary based on landlord preference. In a situation where an applicant has poor credit, a landlord might suggest a month to month lease agreement, a higher rental payment, or automatic payments.