Debt Advizor

A credit score is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person. Credit worthiness is typically defined as the likelihood that an individual is going to pay their accounts, preferably on time. So lower your score, the more risk you pose to a lender, the more likely you are going to get a less favorable interest rate on a loan.

A credit score is primarily based on credit report information, sourced from credit bureaus (Experian, Transunion, and Equifax). While there are different ways of calculating a credit score, the most widely accepted method was developed by the Fair Isaac Corporation. If you plan on buying a home, you should be most interested in the FICO score. The three major credit bureaus also have their own scoring model that they have developed which are called Score Power, Plus Score, and Vantage Score. Since the bureaus have their own scoring model, your credit score varies somewhat across all three bureaus. They also tend to differ on what information they have on your report. For example, an error might show up on two reports but not the third. If a mortgage broker chooses to view these scores, they will always choose to base your rate on the middle of the three scores.

Did you know that as an American citizen, you are entitled to a free annual credit report by law?
The three credit bureaus run a website called www.annualcreditreport.com where you can obtain the report but not your score. This allows you access to your financial identity that lenders use to set interest rates. This free access to your report is not based on a FICO score.

Not buying a home? Your credit score follows you to other places too!
Your credit score is used in some of the most unlikely places. Your score is not just used for credit cards, auto loans, and home mortgages. If you want a mobile phone, good insurance rates and even a job, it would benefit you greatly to have a favorable credit score.

Credit Score Breakdown:

• payment history (35%)
• amounts owed (30%)
• length of credit history (15%)
• new credit (10%)
• types of credit used (10%)

35 percent of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how promptly) you pay your bills. The score is affected by how many accounts have been paid late, how many were sent out for collection and any bankruptcies. When this activity occurs also comes into play when defining credit history. The more recent the negative activity, the worse it will be for your overall score.

A great way to establish good credit history going forward is to setup autopay or automatic withdraw. Most places that bill you offer services that will automatically pull the amount due from a credit card or bank account. Just remember that if you use a credit card for autopay that you also setup autopay on your credit card account too to make sure that nothing is being paid late.

30 percent of the score is based on outstanding debt. If you currently own a home, car, and have credit cards, you most likely have some debt. Never max out credit cards or leave them open with no activity. The rule of thumb is to keep your card balances at 25 percent or less of their limits. A great way to see immediate raises in your credit score is to take care of credit cards first. Choose to pay down the credit card with the highest interest rate or the cards that you are late on payments. Another great financial tactic is to pay one extra house payment a year to your lender. On a typical 30 year loan, you will shave 8 years off the total and end up paying your home off in 22 rather than 30.

15 percent of the score is based on the length of time you’ve had credit. If you’ve just graduated from college, you most likely have a short credit history and are more risky to loan money. The longer you have established credit, the more likely a lender will loan you the money you need. This is based on open accounts and your credit score will not be able to take in account for anything that has been closed. Just remember that while you may have a longer credit history, if that history was full of negative things like late payments and collections it won’t matter how long of a credit history you have.

10 percent of the score is based on new credit. Typically your score will go down for awhile after you have opened up a new line of credit. The major factor of this percentage comes from inquiries. There are two types of inquiries; soft and hard. A soft inquiry does not affect the credit score and usually involves a quick glance at your score. A hard inquiry does lower your credit score and typically is a result of actions initiated by you in an effort to obtain credit. If you open 2 new credit card accounts, take out a private bank loan, and attempt to buy a new car, your score will go down…the good thing is that your score will rebound from these inquiries.

10 percent of the score is based on the types of credit you currently have. This category consists of 4 types of accounts:

• revolving (credit cards, lines of credit, HELOC)
• loans
• public records (bankruptcy, liens)
• collections

Some types of accounts can really help you score as long as you are paying them on time such as a student loan, car loan, mortgage, and credit cards. If you have ever had a public records such as a bankruptcy, tax lien, or a collection, your credit score is going to be negatively affected. Beware of companies that claim that they can remove a bankruptcy or a collection off your credit report. These items will eventually not be detrimental to your credit score so time often is the best answer for dealing with these actions in your credit history.

New research shows borrowers with a weaker credit rating may now have to choose between six personal loans with rates of between 14 and 24 per cent and five loans charging between 50 and 70 per cent interest. Hugo Shaw, of the independent financial advisers Bestinvest, advised borrowers to protect their credit ratings. “If you need to borrow some money and you have anything other than a near perfect credit history it’s going to be expensive,” he said.

“The disparity between the direction of base rates and interest rates on unsecured loans makes clear companies are preying on those people whose finances are not in tip top condition. “

But before you apply for a mortgage, credit card or personal loan there are steps you can take to improve your credit status and encourage lenders to look more favourably at your application. Even those who consider that they have a good credit history should request a copy of their credit file to ensure that all information held on you is both accurate and up to date. Credit files are available for free from the credit agency Equifax, and should be checked regularly. There is another reason why borrowers should check their credit file regularly: to ensure that their details are not being used by a third party for identity theft. If you do spot discrepancies, alert the lenders concerned at the earliest opportunity.

The following tips should help.

• 1. Assert your right to vote If you aren’t registered to vote, or haven’t updated your details after moving house, lenders are likely to give you a wide berth. They use this register to protect themselves against fraud and check that you are who you say you are.
• 2. Sever old relationships When you apply for credit, it isn’t just your details the potential lender will scour. It will also check the credit history of your spouse or anyone else with whom you have a joint bank account or loan. In some cases lenders make mistakes and also check the history of those who live at the same address, or may have in the past. This is why it is important to get a copy of your file to ensure that no one else’s poor credit history is dragging your score downwards. If you are divorced or separated, make sure your ex’s details are expunged as soon as possible.
• 3. Cancel out of date credit cards Many people switch cards frequently but fail to cancel old agreements even if they no longer use the card. But these lines of credit will still appear on your file, which can make lenders wary about the potential size of your total debt – some may fear that you will “max out” these cards and then struggle to meet repayments. Make sure the arrangements are terminated and that this is logged on the file. Likewise, if you do not need the full credit limit given on a card, ask your lender to reduce it. It may make you look a better risk when you come to remortgage.
• 4. Get yourself a reputation Lenders want to see that you have a record of managing credit sensibly. So if you are a first-time buyer consider taking out a credit card six months before making your mortgage application. Of course, you’ll need to make sure that you pay off the balance in full each month, and on time, to avoid interest payments.
• 5. Scour the small print Ensure that you take a close look at all the information on your file to ensure it accurately reflects your current circumstances. Lenders may not always inform agencies of any changes straight away, so if you notice information is outdated ask your lender to inform Equifax immediately - or contact them yourself. Keep a watchful eye for rogue accounts or charges caused by identity theft or fraud and for duplicate entries of your unpaid balances.
• 6. Never miss a mortgage payment This is a cardinal sin as far as lenders are concerned, and viewed more seriously than missed credit card or loan repayments. If you are struggling to make a mortgage payment, talk to your mortgage lender as early as possible; they may be able to switch you to an interest-only loan or lengthen the mortgage term to lower the monthly payment (although this will mean you pay more interest in total).
• 7. Ensure details are the whole truth and nothing but the truth Make sure that information you provide on applications is accurate and truthful. Inconsistencies can have a negative effect on your credit score and may be considered fraudulent.
• 8. Enquire without a trace When you’re just researching loans, credit cards or mortgages, make sure that you don’t unwittingly allow lenders to make an application and search your credit report. Some websites will allow you to compare loan prices, for example, without conducting a full credit check. Lenders should not access your credit history until you expressly request them to, and when they do it will leave a trace on your report. Lenders can get nervous if they see too many of these “footprints” on your file and may refuse credit as a result. This is because they can interpret multiple credit checks as evidence that you are desperate for as much credit as possible, or that fraudulent activity is being planned.
• 9. Settle old debts If you have defaulted on credit or had a court judgement against you, it will be noted on your Equifax credit file. Even once “settled”, some lenders restrict their lending to those who have had a Judgement in the past 12 months. Therefore it is important that, as soon as the status becomes settled, you ensure that your lenders inform the credit reference agencies and that your credit report is updated accordingly.
• 10. Include additional information where necessary, add further information about previous credit problems. If such problems were after redundancy or divorce, for example, and your financial situation has since improved, you can add a note explaining this. Likewise, if you have been a victim of identity fraud in the past, make sure that any credit problems caused by this are removed from your Equifax file. If they are not your fault, they should not be there. Remember that your Equifax credit file changes constantly, so it’s important to check regularly that it is still accurate and that no one else is running up debt in your name.

Diane Shackle found it gut-wrenching to walk away from a mortgage she took out in times that were better for both her and the U.S. economy. But the reality was undeniable: While she was keeping up with the monthly payments, she said she could no longer afford to buy food for herself or even kitty litter for her two cats. So the 44-year-old cocktail waitress walked away from her two-bedroom condo in Southern California last July, turning her back on a debt of nearly $200,000.

“It ripped me up to do it, but I was tired of worrying and I had no food in the house,” said Shackle. “I decided, you know what, I’m not living like this. I’ve got to quit before I kill myself.”

Walking away from a mortgage has always been a homeowner’s last resort —- it flies in the face of the American dream. And experts say it should remain a worst-case scenario. But with the deepening economic crisis fast adding to the 12 million mortgages already “underwater” —- the term for when a home’s debt exceeds its market value —- it’s an option more are likely to consider as home prices continue to fall.

Mortgage and financial experts hesitate to recommend a voluntary action that not only threatens to wreck your credit score for years but can result in authorities coming after other assets. But depending on state laws, they acknowledge it makes sense to at least look at it in certain situations. “You have to make the best decision for yourself, business-wise, which could be walking away from the house,” said Nicole Gelinas, a chartered financial analyst and senior fellow at the Manhattan Institute, a conservative think tank.

Mortgage walking surfaced as a phenomenon in the wake of plummeting housing prices. The practice also is known as “jingle mail,” referring to the borrower mailing the keys to the lender and surrendering the house. Bank of America Corp. brought the practice to light a year ago, reporting that a growing number of people who defaulted on their mortgages were current on their credit cards. This suggested that at least some saw bailing out on their houses as a way to gain control of their finances. Though statistics aren’t readily available on the number of mortgage walkers, a year later, Bank of America spokesman Terry Francisco acknowledges that the problem still exists and said it has been exacerbated by the housing market’s further decline.

“The billion-dollar question is, is it going to increase?” said Guy Cecala, publisher of the trade publication Inside Mortgage Finance, in Bethesda, Md. “We really don’t know the answer.”

Speculators who bought houses for investment purposes rather than to live in are the likeliest to do it, he suggested. Shackle doesn’t fit that category. The single, first-time home buyer bought a two-bedroom condo in Calimesa, Calif., in 2006 for $191,000. She wasn’t required to put any money down despite her limited income as a waitress, thanks to a lofty credit score of 788.

The financing consisted of two interest-only loans with initial rates of about 7 percent and 10 percent. Her monthly payment, including an escrow account for property taxes and insurance, was about $1,400 a month. That was manageable until she had serious problems with asthma and missed a lot of work.

Shackle was never late with a payment, she said. But after paying the bills she had no money left over to buy groceries, and lost nearly 50 pounds. Despite her pleas, she said she couldn’t get the lenders to refinance once the collapse of the housing market had slashed the home’s value to about $150,000. Suddenly it was no longer about an investment or the tax advantages of homeownership, it was about trying to survive the crush of bills.

“When you’re a homeowner you think, ‘OK, I’m going to go ahead and try to pay this off,’ ” she said. “But when I tried to get refinanced and everybody pretty much shut their door on me, I felt like I had no alternative.”

Rather than stop paying and wait to be foreclosed on, she sought help from You Walk Away, one of the companies that has emerged to address the growing number of underwater homeowners. The San Diego-based business counsels the homeowners to, as its Web site says, “take control of their financial future” by making a strategic decision to default if necessary.

Jon Maddux, principal and co-founder of You Walk Away, which charges $995 for consultations about a person’s rights regarding foreclosure, says his company doesn’t advocate jingle mail per se, but rather staying in the home as long as legally allowable until the bank takes it back. Underwater homeowners should exercise caution when signing up for any service that offers assistance, because consumer advocates say much of the advice can be found online or through non-profit agencies. Shackle moved out of the condo in July and rented an apartment for $750 a month. Foreclosure still hasn’t taken place. But without the burden of a mortgage gone bad, “I sleep a lot better,” she says.

About 1 in 6 of the nation’s 75 million homeowners are underwater, according to Moody’s Economy.com, and the total has doubled in a year. Their mortgage debt exceeds home equity by an average of $40,000. Half of these negative-equity homeowners owe more than 120 percent of their home’s value. Mortgage law experts say the incentive to walk away from a home loan is highest in states that have anti-deficiency statutes, which prohibit lenders from suing borrowers for additional funds after foreclosure.

“These anti-deficiency laws make a huge impact on foreclosure rates because they are basically ‘get out of jail free’ cards,” said Todd Zywicki, a law professor at George Mason University and senior scholar with the Mercatus Center think tank who’s writing a book on consumer bankruptcy and consumer credit.

This handful of non-recourse mortgage states includes the high-foreclosure states of California and Arizona, which not coincidentally also are leaders in the numbers of mortgage walkaways. The full list includes Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah and Washington.

Donald Lampe, a Charlotte-based mortgage lending attorney with Womble Carlyle Sandridge & Rice, said the statutes generally prohibit or limit a lender’s ability to go after the borrower’s assets to satisfy the unpaid mortgage debt. “There are some folks suggesting that state anti-deficiency laws should be expanded around the country as a response to the “mortgage meltdown,” Lampe said. However, he noted, “It is difficult to see how these laws could be made to apply to loans already on the books.”

A record amount of commercial real estate loans coming due in Texas and nationwide the next three years are at risk of not being renewed or refinanced, which could have dire consequences, industry leaders warn. Without new lending, many malls, offices, warehouses and other properties could default or go bankrupt.

Texas has about $27 billion in commercial loans coming up for refinancing through 2011, ranking among the top five states, based on data provided by research firms Foresight Analytics LLC and Trepp LLC. Nationally, Foresight Analytics estimates that $530 billion of commercial debt will mature through 2011. Dallas-Fort Worth has nearly $9 billion in commercial debt maturing in that time frame.

If a loan is not paid off or refinanced when it matures, the lender can foreclose on the property. “This is a very serious problem, and it’s not going to go away very soon,” said Jeffrey D. DeBoer, chief executive of the Real Estate Roundtable, an industry group in Washington, D.C. “The issue is what happens when loans cannot be refinanced. The stress on the financial system itself would be quite acute, and the impact on local communities and jobs could be quite serious. All of this adds up to what we think is a compelling case for policymakers to restart the credit markets.”

In the last few years, lenders sold a record amount of real estate loans as securities to investors. Then the $900 billion commercial mortgage-backed securities market came to a standstill as the subprime housing debacle, Wall Street crisis and recession hit. The lack of credit weighs on the industry, considering the refinancings coming due.

Most of Texas’ $27 billion in loans maturing through 2011 – $18 billion – is held by financial institutions, according to Foresight Analytics. Texas also has $9 billion in commercial mortgage-backed securities, the third-largest amount after California and New York, according to Trepp.

“Banks are saying we have to pay them off or they’ll take the property back – that would be an unnecessary death knell for the industry,” said Steve Golding, president of Dallas-based developer Jackson-Shaw. “The banks are just going to have to be patient. If everyone is forced to sell, the banks are going to lose and the taxpayers are going to lose.”

In addition, little credit is available for new loans. Jackson-Shaw has $35 million to $40 million in construction loans coming due this year, half of which do not have extension options, Golding said. In those cases, the developer will try to negotiate extensions with its lenders or seek long-term commercial mortgages for the properties. In the past 18 months, Jackson-Shaw has built up a “war chest” of cash for such situations.

Arizona is joining other states asking Congress to liberalize bankruptcy rules so judges can modify home loans to help reduce foreclosures. Arizona Attorney General Terry Goddard has joined the attorneys general from 21 other states in the effort. Current federal law allows bankruptcy courts to adjust other debts and loans, but not home mortgages. Goddard and other state AGs contend the courts could make the change immediately, which would help reduce foreclosures and generate new loan terms that could help borrowers and lenders.

California Attorney General Jerry Brown also is among those making the written push to congressional leaders. A similar effort was launched in 2008 but failed to gain approval, but the odds could improve with Democrats gaining seats in Congress and the incoming Obama administration.

In an unusual side effect of the credit-crunch racehorse trainer jailed for growing and selling cannabis to repay a loan shark debt should have sought professional help, an expert has said. Police found 199 plants at Swadlincote, UK which is the home and business of Robert Woods. Woods, who admitted producing and supplying the drug, said he made about £400 each week, which he was using to pay debts of £183,000.
The 55-year-old was given a 21-month prison sentence.

Mr Ward of East Midlands Public Protection Project Team, which investigates and prosecutes illegal loan sharks in the region, said: “This guy has got himself into all sorts of issues. The problem is there’s a temptation to borrow money from loan sharks to pay off creditors. That’s not the way forward. The first port of call is to get some sensible money advice from a body like the Citizens’ Advice Bureau. They can help people sort out a management plan. We run a 24-hour helpline for people who are victims of loan sharks. If people call, one of our investigators will take their case on board. Any contract with an illegal loan shark is not valid as it is an illegal form of borrowing. Therefore they cannot take people to the small claims court. We can prosecute loan sharks but we need information from the public.”
Mr Ward urged people who might be tempted to turn to a loan shark because of the credit crunch to think again.

So guys, if you have debt problems get good advice, don’t grow weed!

It happens to nearly every business sooner or later: A customer makes a purchase on credit, then never pays up; or a vendor loans a customer money to help keep the customer’s business afloat, but the company goes under anyway. The only good thing about bad debts is that you can turn them into a tax break. First off, the bad debt must be directly related to operating your business, says Frederick W. Daily, author of Tax Savvy for Small Business; nonbusiness bad debts generally aren’t tax-deductible. Note that you only take a bad-debt deduction if you previously recorded the amount owed as income received. If you have not previously included the uncollected amount in income, you don’t get to deduct the bad debt.

However, you still get to deduct your cost for the goods at issue. Be sure to include the cost of goods sold for unpaid merchandise in your total for “cost of goods sold” on your tax form to help reduce your gross income. Not every bad debt can be turned around, though: If you are in a service business and don’t have much in the way of cost of goods, you’re out of luck here. Also, unfortunately, only the cost of goods is deductible, not the full retail price you charged the deadbeat customer.

The total federal bankruptcy filings jumped up by 30 percent for the 12-month period ending Sept. 30, with business filings climbing by 49 percent in the same period, according to the Administrative Office of the U.S. Courts. The annual figures released on Monday may not bode well for the coming year, with the fourth quarter numbers showing a 34 percent rise in that quarter alone, according to the report.

Individuals seeking bankruptcy protection represent the bulk of filings, with a total of 1.043 million for the fiscal year ending Sept. 30, up from 801,000 in the same time for 2007. Business filings grew to nearly 38,700 for the fiscal year just ended, up from nearly 26,000 for 2007. Do you need a Bankruptcy Lawyer?

The report shows that the most severe cases, liquidations under Chapter 7, were up by 40 percent from fiscal year 2007, while Chapter 11 reorganizations rose by 49 percent. Only Chapter 12, designed to protect family farmers, was down — by 8 percent for the year. The numbers show some of the hardest-hit areas on a per capita basis were Tennessee, with 7.3 filings per 100,000 population; Nevada, with 6.4; Georgia, with 6.0; Alabama, with 5.9; and Indiana, with 5.89. When looking at liquidation filings alone, Nevada jumps to No. 1, followed by Indiana, Michigan, Kentucky and Colorado.

Broken down regionally, by circuit courts, the western states of the 9th U.S. Circuit Court of Appeals saw the biggest percentage gain, up by nearly 69 percent from 113,541 filings in 2007 to 191,595 in 2008, according to the records. Within the circuit, California’s Central Valley, Los Angeles and the state’s northern regions were hardest hit, followed by Nevada. Do you need a Bankruptcy Lawyer?

The Central District of California, covering the Los Angeles area, saw a 96 percent rise in filings, from roughly 29,000 in 2007 to 57,000 in 2008. The Eastern District, in the Central Valley, with heavy home foreclosures, saw an 83 percent rise and the Northern District saw a 69 percent jump. Nevada showed a 77 percent increase, according to the report. The smallest increase came in the 5th Circuit, up by 6 percent, with the bulk of the increases coming in Louisiana and Mississippi, still recovering from Hurricane Katrina.