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Raising Credit Scores Is Key for Consumers in Time of Tight Lending

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By Pamela Yip

RISMEDIA, Oct. 1, 2008-(MCT)-If you want an example of how tight credit has gotten for consumers, just ask Plano certified financial planner Jude Barcenas.His client in California wants to buy a house in Dallas to rent to her cousin.

But the California woman’s credit score of 620 keeps her from getting a loan.

“Now, they are requiring 720,” Mr. Barcenas said. “That’s a big hurdle for a lot of people. In June, she would have qualified.”

Let’s face it, the era of easy credit is over.

Banks, suffering from bad loans, have become much pickier about who will get a loan.

“What we’ve seen over the last couple of years is that there is less credit being opened,” said Charles Chung, senior vice president at Experian Decision Analytics, a unit of credit bureau Experian. “It’s about 30 percent lower than two years ago across all credit products.”

Loans are still available to those with good credit, but those with a less-than-perfect record have a much higher mountain to climb.

Todd Mark, vice president of education at Consumer Credit Counseling Service of Greater Dallas, said that to get the best interest rates, consumers now must have a FICO credit score of 720 or above-a substantial increase from previous standards.

Lenders also are upping their bottom line for approving loans, Mark said.

“Before, below 500 was the traditional cutoff for loan approval, no matter how high the interest rate or amount of money down,” he said.

Today, however, “if you’re around 620, you’re going to have difficulty getting access to things.”

A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time. The score helps lenders estimate the chances of your repaying a loan.

The most widely used is the FICO score developed by Fair Isaac Corp. It ranges from 300 to 850.

Major factors influencing your credit score include whether you’ve paid your bills on time, how much debt you’re carrying, what mix of debt you have and the length of your credit history.

The higher your credit score, the better deal you’ll get on credit card interest and other loans.

Raising their credit scores is a particular challenge for Texans, whose average credit score consistently ranks below that of the rest of the nation, according to calculations by Experian for its national score index.

Experian’s PLUS score, which is similar to a FICO score, ranges from 330 to 830. Texas and Dallas both had an average score of 669 in August, compared with 693 for the rest of the nation.

“Texas has a higher number of late payments, higher average number of inquiries where someone views your credit report and relatively high credit usage,” said Susan Thomas, Experian spokeswoman.

Here’s some of the ways that the ongoing credit crunch is affecting consumers:

Mortgages

“Mortgage money remains tight for all but the best borrowers — those with good, solid credit, who can and will document their income and assets, have at least some down payment and whose debt loads relative to their income are manageable,” said Keith Gumbinger, analyst at HSH Associates in Pompton Plains, N.J., which publishes mortgage information.

Eduardo Carmona, senior loan officer and branch manager at Homewood Mortgage in Carrollton, added that a down payment of at least 3% is now required to obtain a mortgage.

To maximize your mortgage borrowing power, pay off or pay down your debts as much as you can and save for a down payment.

Credit cards

If you’re applying for a card, issuers are taking a closer look at your credit history.

“Your credit score is by far your most weighted factor,” said Curtis Arnold, founder of CardRatings.com, which educates consumers about credit cards.

If you already have a card, “they’re looking at your payment history more so than ever before,” he said.

“They’re also looking at how much of that credit you’re using, your debt load,” Mr. Arnold said.

Generally, you shouldn’t use more than 30% of your credit limit.

“In this credit environment, there is no way I would pay late, that I would make a short payment or that I would skip a payment,” said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “The banks are circling their wagons. They do not want to take on additional risk.”

Home equity loans

“Conditions are still tight and will remain tight for the foreseeable future,” Gumbinger said. “You will need stronger credit scores and a deeper equity position.”

Craig Jarrell, president of the Dallas region of Pulaski Mortgage Co., said the equity requirements disqualify many people because of the drop in home values.
His advice: Stay in your house longer.

“Real estate is a long-term investment,” Jarrell said. “Ride it out.”

Student loans

The credit crunch has also made student loans hard to come by.

Marc Peterson, financial aid director at Southern Methodist University, said there are fewer products in the private market for parents when they’re denied a federal loan because of bad credit.

“A year to a year and a half ago, they could find a private loan because some private loans would often consider the lower FICO scores,” Peterson said. “Now, it’s much tighter. Now, you’re seeing denials.”

His advice to parents?

“They should do whatever they can to improve their credit rating because it is becoming very important, as we’re seeing in all lending,” Peterson said.
Parents and students should seek out a federally backed loan before going the private-loan route because private loans tend to cost more than education loans offered by the federal government

“Federal education loans also offer better repayment and forgiveness options,” said financial aid expert Mark Kantrowitz, who runs FinAid.org.

Copyright © 2008, The Dallas Morning News
Distributed by McClatchy-Tribune Information Services.

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