I’m Confused About Credit Scores. – Barbara

“Dear Steve,

Age 62, single never married no dependents. Like many leading edge Boomers, I am dealing with trying to maintain a modest lifestyle based on a modest income that has severely declined due to unemployment / underemployment intersecting with approaching retirement age.

Similar to the southern plantation owners in “Gone With the Wind”, my former lifestyle based on being a full-time wage earner with full benefits is . . . Gone With the Wind.

I plan to submit another more detailed question in the near future; right now I am curious about the usefulness of credit scores.

Steve, thank you for the straight shooting information and help you provide to those struggling with financial issues, and thank you for reading my question.

Please provide general information about credit scores (not credit reports):

1) What are they?

2) How do they differ from credit reports?

3) Who provides them?

4) Of the multiple organizations that provide them, which one is the most valuable / meaningful to a consumer seeking to manage his/her credit? Or, like credit reports, is it helpful to purchase multiple credit scores?

5) What is a fair price to pay only for a credit score? (I have already received my 3 free credit reports from www.annualcreditreports.com and just need the score)

6) Due to massive changes during the last 2+ in the economy and financial / credit industries, in your opinion, has the meaningfulness of credit scores as a credit management tool for consumers changed, and if so, how?

Gosh, this all sounds like a college blue book test, doesn’t it?

I have searched your website for this info but was only able to find how to raise a low credit score.

I have read the credit score article on Wikipedia, which is helpful to a point.

What I’m seeking is your particularly unique insight into how helpful credit scores really are as a tool for consumers to use in today’s economy.

See also  Can My Wife and I Independently Go Into a Debt Relief Program? - Paul

Barbara”

Dear Barbara,

Let me tackle your numbered questions first.

1. See Credit Scoring: How it Works and How You Can Improve Your Score and Inside Information on Credit Reports and Credit Scores.

2. A credit score is a number that is calculated using a secret formula that is designed to help creditors instantly identify consumers that would generate them the most profit at the least risk. Most people think a credit score is a calculation of how great you manage your money. It’s actually not.

3. The grandfather of credit scores is Fair, Isaac & Company. This is typically know as the FICO score. You can order your FICO score through MyFico.com. However, any credit bureau can create their own score formula. There is no national standard on this but FICO is probably the one most commonly used.

4. See above about MyFico. You can also get a free credit score through CreditKarma.com. While the credit score through CreditKarma.com is not a FICO score, it is a TransUnion credit score and can at least get you in the ballpark for free. Your scores from all three credit bureaus will typically be +/-30 from the middle score.

5. Around $16 for one score.

6. I think it is a meaningless number in the face of financial problems. The goal should not be to fix the score but fix the underlying problem. If doing that drops the score, it can always be easy rebuilt with some effort and time.

If you want to learn tons of information about credit scores, click here. I never realized how much stuff I’ve actually written about credit scores. Wow!

Thanks for the compliment. You rock!

Please update me on your progress by

You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

Damon Day - Pro Debt Coach

4 thoughts on “I’m Confused About Credit Scores. – Barbara”

  1. Barbara,

    You really should discuss the timing of this with your bankruptcy attorney. It may be viewed unfavorably by the court since it would occur so close to your bankruptcy. However, since this is a loan modification program it may not matter.

    If cash flow moving forward is a concern you might want to consider refinancing for a longer period of time even though it may be at a higher interest rate. Doing this will lower your monthly minimum payment even further but you could prepay it at the rate you would have paid for the shorter term. The advantage is that in case you ran into any cash flow problem in the future you would be able to drop back to the lower payment temporarily rather than defaulting.

    Steve

    Reply
  2. Hi Steve,
    Thanks for the useful info about credit scores, and I did use the link you provided to search for all articles on your website about credit scores. I thought I had read them all before I asked my question, but had clearly missed many of them!

    I signed up right away for CreditKarma and, as of July 2, 2010, have a CreditKarma score of 766. My credit reports from all 3 credit bureaus are excellent, with no late payments, no overlimits, no defaults on my federal or private student loans.

    I am well aware that I look good only on paper, because, unless I can immediately double my income (not very likely), my financial situation is a house of cards that is going to fall in the not too distant future.

    Because of extended unemployment / severe underemployment at age 62, I have had more money going out than coming in. The strategy I have chosen to use was to make up part of the shortage by using credit cards for medical expenses, gas, emergency auto repairs on my 13 year old Honda Civic (150,000 miles), food (I was denied food stamps because my income was just over the cutoff), and emergency home repairs (fix broken hot water heater, etc).

    By using my available credit on the credit cards, I was able to stay current on payments for my mortgage, condo maintenance fee, utilities, insurance, a private student student loan (the federal student loan has been on deferment and I am now on IBR with a $0 payment) and my credit card minimum payments, even while making up the shortfall by using the credit cards for an average of $500 per month for the last 22 months (that adds up to over $11K more debt).

    I have always lived a modest, frugal lifestyle, but have further cut my expenses to the bone when I became un- / underemployed (including denying myself some, but not all, routine medical care). The one bright note is that I started collecting early social security in July 2010, and am now attempting to dig myself out of the $11,000 credit card debt down the balance only, not incurring any new charges.

    My strategy is to file bankruptcy, and I have already moved my checking and savings accounts to a new financial institution not connected with the bank that holds the credit cards.

    My question related to credit score / credit reports (thanks for your willingness to do the financial advisory work you do) is this:

    Since I have remained in good standing on my mortgage with my credit union, I now have the opportunity to refinance to a lower interest rate and lower monthly payment.

    My current terms are:
    5.5% interest for a 20 year term (13.5 years remaining), $380 payment.

    Refinanced terms would be (if my credit report qualifies me for best rate possible):
    4.375% interest for the remaining 13.5 years, $353 payment.

    I was told that they will not need to reappraise the property or do any of the stuff they usually do the first time, they just pull my 3 credit reports (and perhaps my credit score?).

    Currently there is no processing fee, because this is a new “loan modification” program for this credit union, but I was told that a processing fee would start at some time in the near future, it would be approximately $200-300 and would have to be paid out of pocket (which would of course be a hardship for me).

    My bankruptcy is at least 3 – 5 months in the future. I will stop making minimum credit card payments and stop incurring new charges a minimum of 3 months prior to filing, which will of course reflect negatively on my credit reports and credit score. I plan to reaffirm my mortgage.

    Steve, I think I need to apply for this mortgage refinance program ASAP next week while my credit reports and credit score still look good on paper, and before the credit union starts charging the processing fee. I would lower my mortgage payment $27, pay less interest over the next 13.5 years, and not have to pay the $200-300 processing fee. If I somehow do not qualify for the best interest rate, I am no worse off because I would just continue with my current mortgage.

    Can you see any negative aspect of refinancing, related to my intended bankruptcy, or my standing with the credit union when I later reaffirm my mortgage? I don’t see any negatives, but then, I don’t work in the financial services industry.

    Thanks in advance for your help!
    Barbara

    Reply
  3. Hi Steve,
    Thanks for the useful info about credit scores, and I did use the link you provided to search for all articles on your website about credit scores. I thought I had read them all before I asked my question, but had clearly missed many of them!

    I signed up right away for CreditKarma and, as of July 2, 2010, have a CreditKarma score of 766. My credit reports from all 3 credit bureaus are excellent, with no late payments, no overlimits, no defaults on my federal or private student loans.

    I am well aware that I look good only on paper, because, unless I can immediately double my income (not very likely), my financial situation is a house of cards that is going to fall in the not too distant future.

    Because of extended unemployment / severe underemployment at age 62, I have had more money going out than coming in. The strategy I have chosen to use was to make up part of the shortage by using credit cards for medical expenses, gas, emergency auto repairs on my 13 year old Honda Civic (150,000 miles), food (I was denied food stamps because my income was just over the cutoff), and emergency home repairs (fix broken hot water heater, etc).

    By using my available credit on the credit cards, I was able to stay current on payments for my mortgage, condo maintenance fee, utilities, insurance, a private student student loan (the federal student loan has been on deferment and I am now on IBR with a $0 payment) and my credit card minimum payments, even while making up the shortfall by using the credit cards for an average of $500 per month for the last 22 months (that adds up to over $11K more debt).

    I have always lived a modest, frugal lifestyle, but have further cut my expenses to the bone when I became un- / underemployed (including denying myself some, but not all, routine medical care). The one bright note is that I started collecting early social security in July 2010, and am now attempting to dig myself out of the $11,000 credit card debt down the balance only, not incurring any new charges.

    My strategy is to file bankruptcy, and I have already moved my checking and savings accounts to a new financial institution not connected with the bank that holds the credit cards.

    My question related to credit score / credit reports (thanks for your willingness to do the financial advisory work you do) is this:

    Since I have remained in good standing on my mortgage with my credit union, I now have the opportunity to refinance to a lower interest rate and lower monthly payment.

    My current terms are:
    5.5% interest for a 20 year term (13.5 years remaining), $380 payment.

    Refinanced terms would be (if my credit report qualifies me for best rate possible):
    4.375% interest for the remaining 13.5 years, $353 payment.

    I was told that they will not need to reappraise the property or do any of the stuff they usually do the first time, they just pull my 3 credit reports (and perhaps my credit score?).

    Currently there is no processing fee, because this is a new “loan modification” program for this credit union, but I was told that a processing fee would start at some time in the near future, it would be approximately $200-300 and would have to be paid out of pocket (which would of course be a hardship for me).

    My bankruptcy is at least 3 – 5 months in the future. I will stop making minimum credit card payments and stop incurring new charges a minimum of 3 months prior to filing, which will of course reflect negatively on my credit reports and credit score. I plan to reaffirm my mortgage.

    Steve, I think I need to apply for this mortgage refinance program ASAP next week while my credit reports and credit score still look good on paper, and before the credit union starts charging the processing fee. I would lower my mortgage payment $27, pay less interest over the next 13.5 years, and not have to pay the $200-300 processing fee. If I somehow do not qualify for the best interest rate, I am no worse off because I would just continue with my current mortgage.

    Can you see any negative aspect of refinancing, related to my intended bankruptcy, or my standing with the credit union when I later reaffirm my mortgage? I don’t see any negatives, but then, I don’t work in the financial services industry.

    Thanks in advance for your help!
    Barbara

    Reply
    • Barbara,

      You really should discuss the timing of this with your bankruptcy attorney. It may be viewed unfavorably by the court since it would occur so close to your bankruptcy. However, since this is a loan modification program it may not matter.

      If cash flow moving forward is a concern you might want to consider refinancing for a longer period of time even though it may be at a higher interest rate. Doing this will lower your monthly minimum payment even further but you could prepay it at the rate you would have paid for the shorter term. The advantage is that in case you ran into any cash flow problem in the future you would be able to drop back to the lower payment temporarily rather than defaulting.

      Steve

      Reply

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