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RISMEDIA, August 30, 2007-(MCT)-If you’ve ever applied for credit or insurance, chances are the lender or insurance company checked your credit score. For years, creditors have been using credit scoring systems to determine if you’d be a good risk for credit cards, auto loans, and mortgages. Credit scores are also often used by employers and utilities.

So what is credit scoring? It’s a system creditors use to help determine whether to give you credit. It also may be used to help decide the terms you are offered or the rate you will pay for the loan.

Lenders can use one of many different credit-scoring models to determine if you are creditworthy. Different models can produce different scores.

However, lenders use some scoring models more than others. The FICO score is one such popular scoring method.

The FICO scale runs from 300 to 850. Generally, the higher your score, the better rates you’ll be offered. Those with a score of 720 or higher will get the most favorable interest rates on a mortgage, according to data from Fair Isaac Corp., a California-based company that developed the first credit score as well as the FICO score.

According to Fair Isaac, 58% of Americans have a FICO score of 700 or higher.

The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months.

To order your free annual report from one or all the national consumer reporting companies, and to purchase your credit score, visit www.annualcreditreport.com, call toll-free 877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P. O. Box 105281, Atlanta, GA 30348-5281.
Only one Web site is authorized to fill orders for the free annual credit report you are entitled to under law — annualcreditreport.com. Other Web sites that claim to offer “free credit reports,” “free credit scores,” or “free credit monitoring” are not part of the legally mandated free annual credit report program. In some cases, the “free” product comes with strings attached.

For example, some sites sign you up for a supposedly “free” service that converts to one you have to pay for after a trial period. If you don’t cancel during the trial period, you may be unwittingly agreeing to let the company start charging fees to your credit card.
FCRA also gives you the right to get your credit score from the national consumer reporting companies. They are allowed to charge a reasonable fee, generally around $8, for the score. When you buy your score, often you get information on how you can improve it.

Typically, your credit score is most influenced by two factors: how you pay your debts and how much debt you owe. For example, late payments on loans, a past bankruptcy, debt collections or a court judgment ordering you to pay money as a result of a lawsuit will negatively affect your credit score.

Lenders want to be sure that the debt you owe is manageable. One example: Lenders get concerned if you have a significant amount of debt compared to your income — say, if what you owe each month on all loans and credit cards exceeds one-third of your monthly income.

Other factors that can affect your credit score include how long you’ve used credit, how often you’ve applied for new credit and whether you’ve taken on new debt.

While federal law requires lenders and other companies providing information to credit bureaus to give accurate information, mistakes do happen. So, when you look at your report:

–Make sure it accurately reflects how you have paid your bills. If you always pay your credit card and other loans on time, but your credit report erroneously shows late payments, you’ll want to correct that.
–Verify that all the accounts listed are yours, especially if you have a common name or you share a name with a relative (such as John Doe, Jr.).
–You also want to be careful that an identity thief hasn’t opened new accounts in your name to commit financial fraud.
–Look for accounts you don’t use and may have forgotten. You may be able to raise your credit score by closing unnecessary credit card accounts.

SOURCES: Bankrate.com, Federal Trade Commission, Federal Deposit Insurance Corporation

Copyright © 2007, Daily Press, Newport News, Va.
Distributed by McClatchy-Tribune Information Services.

Here is some important information regarding APR's that I thought you should know before you start looking for your new home and mortgage.

I trust that this information will assist you as you sort through the mortgage process.

Frank Smith

APR - What They Don't Want You to Know

The annual percentage rates (APR) is mandated by the Congress of the United States to be given us, the borrowers, in our disclosure documents prior to and upon closing of a mortgage loan. Yet, even the most astute mortgage professionals have only a cursory knowledge of this important measuring device. The industry, as a whole, knows little about how the mathematics of this measure actually works or how a higher interest rate with less in fees could actually be the better loan.

Annual Percentage Rate, Why Ask?

The first question that should be asked of a lending source, whether you are dealing with a mortgage broker or a mortgage lender, should be "What is the annual percentage rate?" and not "What is the interest rate".

APR Cost Disclosure

Let's discuss what APR was meant to disclose and how it should be used. Let's start with a hypothetical mortgage of a 7.00% - 30 year mortgage of $100,000 that has an origination fee (commission) of 1&1/2 points (1&1/2% of the loan amount or in this example $1,500) and other fees of $2,500. Sound pretty good? The APR is 7.409%. What happened to the 7.00%?

APR Math Explained

You are paying $4,000 to borrow $100,000. In effect you are only getting $96,000, but will pay back the full $100,000 with interest.

Another way to look at understanding the annual percentage rate is: The $4,000 of fees in the above example divided by 30 years is $133.33 per year of additional interest. What happens if we pay this loan off in 5 years? The APR jumps to 7.998%. The fees we pay are spread over fewer years, increasing the costs per year. The $4,000 in fees divided by 5 years sky rockets to $800 per year of additional interest.

See if you can guess which is the lowest cost loan:

Example # 1 - 30 year fixed rate loan at 6.875% with 2 & 1/2 points origination fee and additional fees of $2,443

Example # 2 - 30 year fixed rate loan at 7.000% with 2 points and additional fees of $1,943

Example # 3 - 30 year fixed rate loan at 7.125% with 1 & 1/2 points and additional fees of $2,143

The correct answer is Example # 1 with an APR of 7.381%. Example # 2 and Example # 3 had APRs of 7.403 and 7.500 respectively.

Now let's apply some reality to the above examples. Fewer than 5% of all 30 year mortgages are kept 30 years. What if this loan is paid off in 5 years?.

Give up? Example # 2 with an APR of 7.984% #1 had an APR of 8.113% and #3 with an APR of 8.035%.

When you next shop for a mortgage, what is the first question you should ask? And if THEY can't answer, before hanging up, tell THEM that "the APR is the measure of all of the costs of a mortgage expressed as an annual percentage rate".