Managing Your Credit Score

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The Importance of Managing Your Credit Score

Is it critical to be a proactive manager of your credit information? The answer is a most emphatic “Yes!”

Managing your credit information provides you and your family with security. Identity theft has become a serious problem in our society. If your identity is stolen it is usually for nefarious purposes. Some of the objectives of these thieves include to use your good name to purchase goods on credit, to obtain loans in your name, to sign contracts which they never intend to fulfill. Managing your credit information will enable you to protect yourself from the headaches and stress that arise after these thieves have invaded your private life.

The most obvious impact of identity theft is in your credit score. If you open a line of credit, or get new credit cards, or obtain loans and you do not repay them then your credit score is negatively impacted. When you are in need of a mortgage, for example, this negative impact will make the cost of your loan higher, in the best case, and in the worst case, it could prevent you from being approved for a mortgage.

Your credit score is called FICO. The FICO score is a credit scoring system developed by Fair, Isaac & Co. and which the 3 credit bureaus use to report to mortgage lenders. Credit scores can range from 450 to 850 and the higher the better. If you want to know what your credit score is go to www.annualcreditreport.com. You should at least order a copy of your credit report annually. There are 3 credit reporting bureaus: Experian, Equifax, and Trans Union. Your score is not likely to be the same in all three. This is because not all creditors report to all 3 bureaus.

A recent client had not needed credit for years and had ignored her credit score. When she decided to sell her current home and buy a new one she discovered that someone else had used her identity for over 10 years. The result? Her FICO score was under 600. If you are a victim of identity theft and credit fraud report it immediately to the credit bureaus, your credit card companies and the Federal trade Commission at www.ftc.gov.

There are some basic things you should be doing to manage your credit score.

First, monitor it regularly and make sure you address any errors with the creditor. Sometimes this is very difficult to accomplish, but you must be persistent. I had a recent client that fell for the “Open an account today and get 10% off your purchase” gambit that department stores often use. The salesmen took her information and input the data into the computer at the store. Her credit application was rejected because the clerk had input incorrect data. Her credit score took an immediate hit. After many phone calls, and exchange of rancorous communication, the issue was resolved, but it took 6 months to do so.

Second, keep your credit card balances below 30% of the limits and this means the total for all credit cards. Use the card and pay it off and never let the balance exceed 30%.

Third, pay your bills on time, especially your mortgage. A late mortgage payment can reduce your score by 100 points.

Fourth, don’t close credit accounts just prior to seeking a mortgage. This will have a negative impact on that 30% ratio. For example, if you have 3 credit cards with $3000 limits on each one and you have a balance of $2000 on one and no balance on the other two, your ratio of balance to credit limit will be 22%. If you pay close the two that have zero balances your ratio jumps to 67%!

Fifth, don’t go seeking new credit just prior to applying for a mortgage. A new account will lower the average age of your accounts. The longer your credit history with each account, the better the impact is on your score.

Sixth, any collection account or negative public records, like a bankruptcy or a court judgment against you will have a negative impact.

Remember, a credit score is a measure of how well a lender thinks you will repay your loan. Treat it with great care. It is a relatively simple process to monitor your credit information. Do yourself a favor. Monitor it regularly.

All Real Estate Is Local

And some localities are ready for buyers.

The local and national media have taken averages of home sales numbers, the volume of foreclosures, net price appreciation or depreciation and pronounced we are in a real estate crisis.

Admittedly, this headline-grabbing emotional outcry has had a chilling effect on real estate sales. The market is stumbling downward, in some areas, in a self-perpetuating cycle.

“The market is falling. Now is not a good time to buy.”

“Since people stopped buying, price appreciation has stopped.”

“Since price appreciation has stopped, I have some time to buy.”

“I am going to wait until it hits bottom.”

But the consumer and the investor are smarter than the media. And the consumer is telling us a different story. His story goes like this:

“Some people have more mortgage than they can handle and they will have to sell at a discount. I have cash and a good credit history. For me cheap financing is still available. I am going to buy deals.”

“Many neighborhoods are undergoing transitions. In these neighborhoods prices are being pulled up by the infill development. Average price appreciation in many neighborhoods has exceeded 10%. Before all the opportunity is gone, I am going to buy.”

“ I know of a neighborhood that has suffered with the foreclosure crisis. Over 70% of all sales have been bank foreclosure sales. However, nearby a recent significant investment has brought in investors. The price decline has stopped, inventory levels are down, and the days-on-market for homes is at an all-time low. I am buying now.”

Contrary to the hype, real estate sales have not stopped. Great deals are being closed every day. But how does one find them? What analytical tools does one use? How can you be certain?

Let’s look at a couple of examples.

First, let’s examine Washington Park. Washington Park is certainly one of the most desirable places to live in Denver. It is centrally located, has its own park, has a unique character of its own, and has very few foreclosures (4% rate). The 2^nd quarter 2007 data show that the average price of a home sold in Washington Park rose 14% to $641,000 with 184 sales. Within these numbers were 17 sales (9.2% of all sales) to infill developers (price range of $450,000 to $500,000) and 18 sales (9.8% of all sales) of homes that sold for more than $1 million (from $1 million to $2.280 million).

Roughly 22% of all lots in Washington Park already have infill homes.

The data show that 10% of all immediate future home sales will be over $1 million. So price appreciation will continue. If you want to live in Washington Park, buy now.

In North Aurora there is a subdivision of 1950’s ranches called Hoffman Heights. All homes are similar: 1500-1600 square foot ranches, 3 bedrooms, 2 baths. Since January 2006 71% of the 194 sales (source: MLS data, Canon Colorado team analyses) have either been foreclosures or short sales. This is the type of neighborhood that has been the focus of the media attention.

If we look at the sales data by semesters the average sales price dropped from $146,000 (47 sales), to $130,000 (66 sales) to $120,000 (74 sales). There are two obvious trends: sales are increasing and prices are dropping.

However, over the last month the average sales price has increased to $143,000, a 19% price increase over the last 6 months! Further, over the last 3 months prices have stabilized.

It used to take 120 days to sell a home in Hoffman Heights and the inventory levels of unsold homes was at over 9 months. Now there is 4.5 months of inventory and days-on-market is at 72, a 40% decrease.

Conclusion? Something is happening to change the market dynamics of this one neighborhood. Why is demand increasing? Why are people buying now at a faster rate? Why are prices ticking upward?

The Fitzsimons project may have something to do with it. I don’t have the answer, but lots of investors think they do.

So, is the market bad? Well, the answer is, “It depends.” It is bad for some and good for others. It is bad in some areas, hot in others and moving from bad to good in still others.

Don’t be a lemming. The cliff is just over the horizon. Make an informed decision based upon data analysis. We are here to help you.

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