Video: Buying Your Dream Home

Part of the series of 10 personal finance videos I made with public television station KLRN – This one focuses on home buying.

There’s the same content, but in podcast form if you prefer…

And, of course, if you like text, we’ve got that too.

Linked to here on the KLRN site.

Please see related posts:

The Rent vs. Buy Debate, resolved

On Home-ownership Part I

Home-ownership Part II

Home-ownership Part III

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Ask An Ex-Banker: FICOs Score and Monthly Balances

credit_cardsNote: See Part I on FICO Scores, which inspired this question from a reader.

Dear Banker,

I’ve been getting copies of my 3 credit reports annually since 2005.

I’m concerned about a change in the reported information from Capital One and Chase. My reports used to reflect
1) amount billed
2) scheduled (minimum) payment
3) actual payment

The latest reports from Transunion and Experian no longer reflect the “actual payment” amount, so although my reports show all payments made on time, it doesn’t reflect the full balance being paid monthly as opposed to the minimum payment.

I feel like I have to alternate credit cards in order to have a zero balance every other month so it doesn’t appear that I’m making minimum payments and carrying an unpaid balance.

I’ve contacted Capital One and Chase to ask them to report the actual payment amount as they used to, but all I get is a standard response “we’re correctly reporting your account” to the credit bureaus.

Am I wrong in thinking that if they report amounts in addition to whether or not the account is “paid on time”, they should include actual amount paid as well as amount billed?

Thank you
Bette in SA

credit_report

Dear Bette,

Thanks for reading, and for your good question.

The most important element for FICO scoring (35%) is whether bills are paid ‘on time,’ so if you’re consistently doing that, your score will reflect that, and the fact that there’s a balance on your report is (mostly) irrelevant.

The FICO algorithm doesn’t care whether you make minimum monthly payments or full-balance payments. As long as payments are being made ‘as agreed’ according to the fine print you signed with your credit card company, your FICO score can’t distinguish between people who carry a balance and people who pay off their balance every month. What I mean is your score won’t be hurt by minimum monthly payments, nor can you really boost your score by making maximum/full balance payments. There is (almost) no distinction between them, for scoring purposes.

Small caveat: One small part of your score reflects your ‘usage amount,’ meaning what proportion of your available credit balances are used at the time of the score. Meaning, if you had a total of $10,000 in available credit among all your cards, and you were using $9,750 of that with a credit card balance, that could slightly lower your score. Not much, but a little.
Conversely, If you had a total of $10,000 available credit, but only showed up with a monthly balance of say $300 (leaving you with $9,700 available unused credit), that would slightly raise your score. Not much, but a little.

credit_score_auto_loans
A useful graphic linking credit scores and auto-loan rates

That would be the only sense you could be concerned about the monthly reported balance as you described. However, if you have many thousands in available credit and only hundreds in reported balances, those reported balances are basically irrelevant for your score.

As for you question to Chase and Capital One – I’m sure they won’t change their reporting methods. They just do an automated snapshot on a monthly basis to send to the credit bureaus. On any given day of that snapshot, we (the consumer) may have an outstanding balance on our card, even if we don’t carry any balance month-to-month.

My strong advice – don’t try to alternate card usage, and don’t worry about it, it’s not hurting your credit.

Michael

 

Please see related Posts

FICO Part I – What’s in the Score?

FICO Part II – Ignoring FICO and also why FICO is awesome

 

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FICO Scores Change – Is Nothing Sacred?

fico_changesFar be it for me to stand in the way of progress, but did a little part of you die when you read this morning that Fair Isaac Corp will slightly alter its FICO score formula to make it easier for people to get loans?

Is nothing sacred?

Decline of Western Civilization?

My immediate thought was that deflated feeling I got when I heard, in 1995, that the College Board would recenter the SAT to 500, because average scores kept dropping. Ugh. How would I know whether my SAT scores are higher than my kids’ scores? We can’t even compare now.

How will kids develop a competitive drive if they don’t know how their old man did on the SAT?

I remember when not every kid would get a shiny ribbons for “participation.” Instead, we would only get the giant trophy if you WON, and pummeled your youthful opponent into abject submission.

I mean, I remember when I used to walk all the way to school, uphill both ways, in a driving blizzard. And back for lunch.

And we loved it.

FICO scores

Anyway…back to FICO. According to the WSJ this morning, the makers of FICO will drop ‘settled’ delinquent accounts from their formula for calculating their key number used by practically every US lender in consumer credit decision-making. The result is that for people who had made late payments or let debts go to collections – but later paid or settled the accounts – the negative mark on their credit will drop off quickly.

The second change in the FICO formula is to de-emphasize the negative effect of delinquent medical bills.

Since FICO scores have traditionally been quite sensitive to a history of delinquent payments, the result is that millions of people could see their scores rise as a result of the formula change. Higher scores theoretically means that more people will have access to credit.

The point of the FICO score – for lenders – is to offer a snapshot of the probability of future consumer loan defaults. Fair Isaac says they studied whether the history of delinquent – but paid – accounts mattered to calculating these probabilities. Following the study, they said they could reliably drop the paid collection accounts, as well as lower the impact of medical delinquency and still maintain the same predicative power in the score.

A caveat

Although this change made the front page of the WSJ this morning, the real impact could be completely unrealized. Deep in the article Fair Isaac Corp says they will implement this more forgiving FICO formula via a new score called “FICO 9,” which makes it sound like this is just a supplemental score that banks could decide to pay attention to, or not.

Lenders make their own decision about what FICO score to buy, and they may not choose to shift from traditional FICO to FICO 9.

Like a college deciding to review the ACT rather than the SAT. So we’ll have to see whether banks adopt the new score or just ignore it.

 

 

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