Ever wonder just how far-reaching your credit score really is? The short answer: very. Your FICO credit score affects nearly all of your financial dealings, from the annual percentage rate that you pay on your credit card to whether you are able to purchase a cell phone.
Your credit score is of particular interest to lending institutions. Nearly 75 percent of all lenders assess your credit score when determining whether to grant a loan. If you plan on ever buying a house and car, or purchasing car or homeowner’s insurance, expect lenders to examine your credit score very carefully. A bad credit score will make most lenders think twice—they don’t want to lend to individuals who appear to be a risky proposition. A bad credit score could keep you from getting that dream house or purchasing a new car, and could even threaten the possibility of getting a job. So what’s the easiest way to ensure that you’ll be approved for a loan? Become familiar with your credit report and score. The more you learn about your credit score, the less likely you’ll be of becoming a risky proposition.
Why all the fuss over a simple three-digit number? Examining how your FICO credit score is calculated may provide insight into why some lenders may choose to deny your loan application. Your FICO score (FICO, by the way, stands for Fair Isaac Company—the institution that created and compiles the score) is calculated using several data pulled from your financial records. These include: the number and types of credit cards you use, your payment history, the amount of money you owe, the number of years you’ve had a history on file, and whether you have any new credit.
Which of these things carries the most weight in determining your credit score? Approximately 35% of your credit score is determined by your payment history. Your payment history refers to a number of factors, including the different types of payments you regularly make (examples of payments include standard major credit cards, department store credit cards, mortgages, and car loans), and whether you have missed or paid late on any payments. Included in your payment history is information regarding any bankruptcies, liens, judgments, foreclosures, wage garnishments, or law suits that have been recorded. If your payment history reflects that you don’t have much debt and usually pay your bills on time, you can expect your credit score to reach into the upper brackets. Conversely, if your payment history reflects a pattern of missed or late payments, and you have a significant amount of outstanding debt, you can expect your credit score to be much lower.
Another large chunk of your credit score is determined by the total amount of debt you carry. This includes all the amounts you owe on different credit card accounts, as well as installment payments such as car or student loans. Also of importance is the different kind of debt you carry, such as credit card debt versus mortgage and car loan payments. If you carry a lot of debt on a high-interest, long-standing credit card account, you can expect this scenario to hurt your credit score significantly. Another scenario, however, could have a much different effect on your credit score. For instance, an individual who pays a lot, mostly due to their mortgage payment, will likely have a higher credit score than a person who pays a lot because of debt on their credit card.
Now that you have a better idea of how your credit score is calculated, you can understand why lending institutions may be wary in lending to individuals or small business with a low credit score. Lenders can interpret a low credit score to mean that you have a high amount of outstanding debt and a history of missing payments (or both). Unfortunately, even if you are approved for a loan, chances are that a low credit score will saddle you with very high interest rates. Before you approach a lender, be certain you know your credit score. This gives you the opportunity to clear up any discrepancies or inaccuracies that may be on your credit report before your score is scrutinized by lenders.
Wednesday, May 17, 2006
Pay them off - The advantages of paying
Your mortgage off early
One niggling question that perhaps gnaws at everyone’s peace of mind at some point of time or other is: Should you pay off your home loan or invest the money? You’ll be amazed by the variety of answers this question can elicit, and from this alone you can realize that there’s no one answer for everyone. Though theoretically, the concept is simple: If you think of extra mortgage payments as an investment and your return as the interest on the loan, you need to now consider if you can get higher returns elsewhere? “Yes?” Then, keep the mortgage and invest the money securely.
Having said that, it’s a matter that requires great thought whether you should pay off your mortgage payments or carry them for longer. It depends on several factors such as your tax bracket, how your cash-flow picture looks and what you think about carrying a big loan on your head. Your decision really depends on your mental make-up and your situation in life.
For instance, if you are at the peak of your career, you should hold on to your mortgage. No, don’t consider paying off an early mortgage just yet. If you are in the high income bracket, it means higher income tax too. The good news is that your mortgage interest is just one more income tax deduction you can claim to pay a lower tax. This is the happy side to your loan and you never realized it, did you?
Now, you can even get the most out of your mortgage-interest deduction if you pay off the greater part of your interest early on in your loan term. You can do this by paying one or two more installments during the year. Now to balance your budget, take care to save for a rainy day, for your children’s education, etc.
If mortgage rates are low, invest your money in schemes that give you better returns. But when mortgage rates are higher, invest it in to your home since this guarantees you a higher rate of interest. If for example, you have a 14% mortgage, you can get a 14% rate of interest if you pay it off. Then, before you know it, you will be loan-free.
If you are reaching retirement age, you perhaps want to expedite the repayment of your loans so that you are debt-free when you hang up your boots. Ensure that paying off your mortgage payments in a rush doesn’t actually become counter-productive.
So suppose you decide to refinance your mortgage so that your term is shortened to 15 years and you have a zero balance on your home loan by the time you’re 65 years old. Due to this, your principal and interest payment stand at $950 a month instead of $750 a month. When you reach pay-off day, you can now invest that $950 in a fund that gives you 9% interest. Give yourself another 15 years and you’ll have a tidy sum of $360,000.
Now let us suppose you’ve been retired for a few years now. Considering this, you’re sure to have been paying off more principal than mortgage interest. If this is so, paying off the mortgage loan becomes your prime interest in life, besides also proving to be a cash flow problem. If you know that post-retirement your cash flow will be largely restricted, it would be wiser for you to concentrate on paying off your mortgage. But if you have a few assets or none, it might be a better idea for you to diversify your investments. You could consider saving in either a savings or money market account which would give you healthier returns than the interest you are paying out on your mortgage.
If you’ve just sold a big house and are cash-rich, taking out a mortgage makes complete sense, just so long as your investment returns are larger than your mortgage interest. If you don’t tie up all your cash in real estate, you can take full advantage of tax deduction, invest in other schemes and have greater liquidity at your command. Not only will your loan be paid off, but you will have peace of mind in your sunset years.
One niggling question that perhaps gnaws at everyone’s peace of mind at some point of time or other is: Should you pay off your home loan or invest the money? You’ll be amazed by the variety of answers this question can elicit, and from this alone you can realize that there’s no one answer for everyone. Though theoretically, the concept is simple: If you think of extra mortgage payments as an investment and your return as the interest on the loan, you need to now consider if you can get higher returns elsewhere? “Yes?” Then, keep the mortgage and invest the money securely.
Having said that, it’s a matter that requires great thought whether you should pay off your mortgage payments or carry them for longer. It depends on several factors such as your tax bracket, how your cash-flow picture looks and what you think about carrying a big loan on your head. Your decision really depends on your mental make-up and your situation in life.
For instance, if you are at the peak of your career, you should hold on to your mortgage. No, don’t consider paying off an early mortgage just yet. If you are in the high income bracket, it means higher income tax too. The good news is that your mortgage interest is just one more income tax deduction you can claim to pay a lower tax. This is the happy side to your loan and you never realized it, did you?
Now, you can even get the most out of your mortgage-interest deduction if you pay off the greater part of your interest early on in your loan term. You can do this by paying one or two more installments during the year. Now to balance your budget, take care to save for a rainy day, for your children’s education, etc.
If mortgage rates are low, invest your money in schemes that give you better returns. But when mortgage rates are higher, invest it in to your home since this guarantees you a higher rate of interest. If for example, you have a 14% mortgage, you can get a 14% rate of interest if you pay it off. Then, before you know it, you will be loan-free.
If you are reaching retirement age, you perhaps want to expedite the repayment of your loans so that you are debt-free when you hang up your boots. Ensure that paying off your mortgage payments in a rush doesn’t actually become counter-productive.
So suppose you decide to refinance your mortgage so that your term is shortened to 15 years and you have a zero balance on your home loan by the time you’re 65 years old. Due to this, your principal and interest payment stand at $950 a month instead of $750 a month. When you reach pay-off day, you can now invest that $950 in a fund that gives you 9% interest. Give yourself another 15 years and you’ll have a tidy sum of $360,000.
Now let us suppose you’ve been retired for a few years now. Considering this, you’re sure to have been paying off more principal than mortgage interest. If this is so, paying off the mortgage loan becomes your prime interest in life, besides also proving to be a cash flow problem. If you know that post-retirement your cash flow will be largely restricted, it would be wiser for you to concentrate on paying off your mortgage. But if you have a few assets or none, it might be a better idea for you to diversify your investments. You could consider saving in either a savings or money market account which would give you healthier returns than the interest you are paying out on your mortgage.
If you’ve just sold a big house and are cash-rich, taking out a mortgage makes complete sense, just so long as your investment returns are larger than your mortgage interest. If you don’t tie up all your cash in real estate, you can take full advantage of tax deduction, invest in other schemes and have greater liquidity at your command. Not only will your loan be paid off, but you will have peace of mind in your sunset years.
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