For the week ending February 4, initial jobless claims fell 15,000 to 358,000. This is near the 4-year low of 355,000 set week ending January 14 2012. The 4-week average, considered a more accurate gauge of labor trends, also fell, dropping 11,000 to 366,250. This is the lowest 4-week average since April 2008.

Initial jobless claims measure the number of people (non industry-specific) filing first-time claims for state unemployment insurance and are a leading indicator on the health of the labor market. The declining number of new unemployment claims has steadily dropped over the past two years.

Consumers and credit professionals wage the battle for credit education and improvement on several fronts. Initially, I want to help you become aware of the fact that credit scores and reports hold the key to all hopes of obtaining financial freedom, the best rates on home and auto loans, and of course, the American dream. I understand the system and I know how you can benefit from taking the smartest steps. If I do my job well for you, I will help educate you on the factors that make up your score, ways to navigate the system, and how to get good credit and keep it.

One of the ways I can help you avoid the traps of dangerous credit mistakes is to challenge 10 common credit card myths. Once you learn the truth behind these myths, you’ll be in a more knowledgeable position to distinguish between positive credit options and negative credit advice that can destroy your credit scores.

10 Credit Card Myths That Put Your Score At Risk

Myth #1: You Should Avoid Using Credit Cards – FALSE!

There are many finance experts out there that advise consumers to stop using their credit cards, pay off everything, and go to an all-cash plan. That may be a good way to get rid of debt, but it’s utter destruction to your credit score. Why? Because per Fair Isaac, the creator of the credit scoring system, there are 5 factors that make up your credit score, one of which is how you use and manage your credit card debt-a factor that makes up 30% of your score. That’s 255 points!

In order to prove to the scoring system that you know how to manage revolving debt, you MUST have active credit card accounts. Use your cards every month, for groceries, gas, etc. and pay them off every month. If you do not have a credit card at this time and your scores are under 650, you should consider immediately applying for a secured credit card. If your scores are high enough (ask your bank what the score requirements are), you may want to consider going to your bank to apply for a card. Exception: Do not apply for credit of any type when you are about to enter into or have already entered into a loan transaction. New Credit temporarily brings down your score due to the debt and the new account.

Myth #2: Consolidating Debt Onto 1, Low-Interest Credit Card Will Increase Your Scores – FALSE!

Everyone gets the offers: “Dig yourself out of your financial hole with a balance transfer.” They tempt you with big checks, one with your name printed on it. “Take a vacation. Improve your home. Or, just consolidate your debt. These checks are yours to do whatever you want.” Sounds great, doesn’t it? And it would be great except for the fact that if you consolidate all of your debt onto one credit card, you will max out that card and your credit score will drop 80-100 points overnight! Oops, they forgot to tell you that, right! Per Fair Isaac, if you have a maxed-out balance reported on your credit card statement, you can lose 75+ points instantly, regardless of how good your credit history is. Do not consolidate your credit card debt onto one low interest card UNLESS if after transferring the debt the balance on the credit card you are transferring to is under 30% of the available limit.

Myth #3: It’s Okay If You Go Over Your Credit Card Limit Because The Credit Card Company Authorized the Purchase – FALSE!

Nothing is further from the truth. Don’t go over your credit card limits, even if it’s just by one dollar. Doing so deals you a double penalty and you could lose 80-120 points from your scores. Why? Going over your limit makes it appear that you cannot hold to a creditor’s agreement and that you are overextended. Something to note: even if you call your credit card company and they approve an additional $ 200 over the telephone, you still get penalized.

Myth #4: Closing Credit Card Accounts Will Help Your Score – FALSE!

Don’t close credit card accounts at all, with the exception of closing a joint account after a divorce. You will lose points in two factors when you close a credit card account, both in the Amounts Owed factor which is worth 30% of your credit score, and in the Length of Credit History Factor which is worth 15% of your credit score. (These 2 factors combine to make up nearly half of your credit score, so pay attention here.) The more available money you have that you are not using, the better your score, and once you close the account, you lose the available limit on that card. Also, a common misconception by consumers is they believe when you close a credit card account, any bad history on that account goes away. This is not the case. That history stays with you.

Myth #5: Becoming an Authorized User on Someone’s Credit Card Makes You Legally Responsible for the Account – FALSE!

It is true that any activity on these accounts, good or bad will show up on your credit report if you are an authorized user, but unless you are a JOINT owner or Co-Signer of the account, you are NOT legally responsible for terms of the agreement with the creditor, and you can have your name removed from the account at anytime. Keep in mind that if any negative history reported during the time your name was on the account, that history will remain, but no further negative history will be reported.

Myth #6: The Type of Credit Card Doesn’t Matter – FALSE!

The credit scoring system does not like third-party finance cards (i.e. department store cards, furniture store cards, etc.) Always try to stick with major credit cards (i.e. Visa, MasterCard, etc.)

Myth #7: Your Divorce Decree Protects Your Credit Score – FALSE!

Even if your divorce decree stipulates that your ex-spouse is financially responsible for debt that is held in both your names, you remain financially liable for that debt until it is paid in full. Both of you entered into a binding contract with the creditor. If your ex-spouse is named as the responsible party for a jointly held debt, and you cannot afford to pay off the account and close it immediately, then you should monitor the account closely to make sure it is being paid on time. Otherwise, negative payment history information will appear on your credit report, and could drop your score by up to 75+ points overnight. Keep in mind that it is against the law for a creditor to remove a late pay without documented proof that it was their error. One late pay can affect your score for many years.

Myth #8: Marrying Someone Who Has Poor Credit Will Hurt Your Credit Score – FALSE!

Although getting married generally means that you’ll be combining finances, your credit reports won’t be combined. If you open a joint account, the credit information will show up on both reports, but your (or your spouse’s) past negative credit history won’t be reflected on the other person’s credit report unless you add your spouse as an authorized user to an account that has a negative history.

Myth #9: Making Arrangements to Pay a Charged-Off Credit Card Account Will Help Improve Your Score – FALSE!

If you have an old charged off credit card debt and you make payment on it, or make a written or oral promise to pay it, you will renew the 7 year credit reporting statute from that date. The best path to take in this instance is to debt negotiate. Offer the creditor .30 – .40 cents on the dollar as payment in full in exchange for a deletion letter from the creditor.

Myth #10: Those Pre-Approved Credit Card Offers Do Not Hurt Your Score – FALSE!

Just because credit is offered to you, does not mean that you should accept it. When you receive one of those pre-approved credit card letters in the mail, your credit report has not been pulled yet, so you are NOT approved for the account. Once you pick up the phone to call the creditor, they will pull your report and you will be penalized immediately for the hard inquiry (10% of your score.) It is best to avoid these types of special offer credit cards (including Department Store offers of “Open an account today to save 15% off of your purchase.” The scoring system frowns upon 3rd party finance cards.

In Conclusion

The bottom line about misinformation? It’s always going to be out there, and many empty promises presented are tempting-but if something seems too good to be true, it probably is.

What’s in my credit report?

Answer

Your credit report contains your personal identifying information, such as your name, address, Social Security Number and employment information. It also contains information on all of your accounts of credit, payment information, the types of credit you have and any public record of judgments, bankruptcies or liens.

On the other hand, your credit report does not contain information such as race, sex, marital status, salary, and interest rates.

To find out more about what’s in your credit report, ask for our Fact Sheet: Inside Your Credit Report.

How Loan Modifications are Affecting Credit Reports and Scores

Just over a year ago, the Obama Administration’s $75 billion mortgage modification program went into effect, a response to the first year of “The Great Recession,” where nearly two million Americans lost their homes through foreclosure, short sales, and deeds in lieu of foreclosure. An effort to rescue homeowners teetering on the brink of disclosure, it has reduced monthly payments for hundreds of thousands of people in the past year. But what has its impact been beyond the basics that it set out to accomplish? If you decide to take part, how would it affect your credit report?

As you might expect, mortgage lenders didn’t let the Obama modification program slide for many people without reporting their participation to the three credit reporting agencies. When a creditor sends information about you to a credit reporting agency, a note is made in your credit report with a code representing things like the amount of money you borrowed and whether you paid on time. The codes are defined by the Consumer Data Industry Association (CDIA), the trade association representing the credit bureaus, and stand for all kinds of credit issues, from relatively little things all the way to bankruptcy. When the new mortgage modification program went into effect last year, however, lenders and reporting agencies didn’t have anything that specifically pertained to the Obama Administration’s rescue plan.

It’s All In the Code

Initially, they used the code AC, one that already existed but which is normally used when someone makes a partial payment on an account, arguing that it was the closest fit. However, the AC code created more problems for people struggling to get on their financial feet. By inaccurately portraying people participating in the modification program as making only partial payments even if they were making full payments before and after entering into loan modification, the AC code’s appearance on their credit report damaged their credit. According to a U.S. Treasury Department spokeswoman quoted in a recent New York Times article, the AC code lowered individual credit scores between 30 and 100 points, depending on individual circumstances. Responding to concerns about the AC code’s relevance to the loan modification program and its tendency to unfairly damage the credit scores of program participants, the CDIA created a new code in November to specifically address the Obama Administration’s efforts to help homeowners in danger of losing their houses. Labeled CN, the new code signifies that a loan has been modified through a federal program and, unlike the old AC code, it has no impact on FICO scores. 

Retroactive Or Not?

Whether people with the old AC code applied to their participation in the loan modification program will have their credit reports modified, the AC code becoming a CN, seems up in the air right now. The New York Times reports that while the CDIA guidelines don’t specifically address such a modification, the Treasury Department claims that the AC code will eventually be dropped for people who meet the criteria for CN. In the meantime, what can you do if you are in the Administration’s loan modification program and have an unwarranted AC on your credit report as a result? Be proactive! Don’t wait for your bank to take care of it when and if they get around to it – call your lender yourself and demand that they change the AC code to a CN!

Credit Awareness: Keeping You Informed

How Loan Modifications are Affecting Credit Reports and Scores.

Brought to you by Mike Richardson Owner of Alliance Home Mortgage

530-410-0263 – mike@ahmloans.com

While the CN code will have no impact on your FICO score for now, how it is interpreted in the years ahead remains to be seen. The philosophy behind what effect various credit-related activities have on your FICO score is the risk factor they represent. Someone with a history of late payments is considered by the scoring system to be more likely to not pay back his debts than someone without such a history. So what happens with the CN code in the future will depend on whether the credit reporting agencies decide that there is a correlation between participation in the loan modification program and inability to repay over the months and years ahead.

In Conclusion

Of course, no matter what happens in the future, the reporting change to the CN code does not mean you’re off the hook when it comes to making your payments on time! Even though, for now, there is no penalty to your FICO score for participating in the Obama Administration’s mortgage modification program, the usual penalties for late payments still apply. So no matter what twists and turns take place in the coding of specific items on your credit report, the basics will always apply. Make your payments on time, either online or by mailing them in 7-10 days before the due date. By staying on top of your financial situation and being proactive in your relationship with your creditors, you can get yourself into a strong position for the future no matter what happens with government programs and the policies of the credit bureaus in the years ahead.

Here’s the deal.  Most banks have a list of large vendors (such as Verizon, A T & T, VISA, MasterCard) who already have accounts set up where your bank can easily transfer your payments electronically. Large mortgage companies will also have accounts set up nationally.

However, you’ll need to read the fine print.  Your bank will tell you how long it will take before your creditor will receive your payment.   Some will have same-day or second-day payment options.  If you find that the bank is telling you that there will be a five-day transfer time, what they really mean is that particular creditor will be receiving a paper check and it will take five days for that check to be prepared and sent in the mail. 

So, here are some tips for paying your bills using automated bill paying…

• Find out when your funds will be transferred from your account to your creditor’s account
• Will the money be electronically transferred or will a check be written instead?
• Set up email alerts to remind you when bills are due to eliminate late fees
• Enter the date you want the bill to be paid
• Set up a notice to let you know when the bill has actually been paid
• Set up a notice to let you know when your account balance reaches a certain minimum dollar amount so your account does not become overdrawn
• Monitor your bank balances every other day.

Just paying a little extra attention will eliminate late fees and overdrawn bank accounts! 

A Kiddie Condo loan! 

And it doesn’t apply ONLY to condos! 

What better way to purchase a home for your son or daughter who is headed off to college?  It’s a no-brainer!  The process of buying a Kiddie Condo is simple – your child applies as the PRIMARY borrower on an FHA loans (so they do need to have a credit score) and you and/or your spouse are the co-mortgagors.  Your income and assets are used to qualify, and rather than needing a large down payment–which is required to buy an investment property–the standard FHA down payment of 3.5% is all that is needed.  Couple this with the fantastic FHA rates and it’s a WIN-WIN for everyone!  And yes, you can rent out other rooms…just as long as your child is living there.

An added benefit of the Kiddie Condo loan is that it helps build your child’s credit score as long as the payments are made on time.  Payment history makes up a huge portion of the credit score so make sure you know that the payment is made on time each month…better yet, set it up for automatic draft.  Helping your child build their credit is one of the best gifts you can give them.  They will be ready to “fly” on their own with a strong credit score all because you helped them purchase their first home…a Kiddie Condo!

If you have children in college (or near college age) call me for all the details.

1. Debt consolidation:  While you may have enough equity in your home to pay off credit cards or signature loans, stop and do the numbers.  Let’s say that the unsecured loans will pay off in less than 5 years.  If you refinance them, and even reduce your mortgage term to 15 years, you’ll probably be paying more interest over the long run.
2. Increasing the term of the mortgage:  While a lower interest rate can save you a ton of money, don’t make the mistake of adding additional years to the new loan.  Let’s say that you started with a 30-year fixed rate.  You’ve been making mortgage payments for 3 years now.  Don’t refinance again for 30 years—look at the payment, with the lower rate, based upon a 25-year term instead. Going back to 30 years means you’d be paying your mortgage for 33 years.
3. Planning to move before recovering closing costs:  There are closing costs when you refinance your current mortgage.  As your loan officer, I can run the numbers and let you know the number of years it will take you to break even and recover your closing costs.  So, if you are planning to move within the next 2 years, but it will take you 5 years to recover your costs, you may not want to refinance at this time.
4. If you want to switch from an ARM to a fixed rate:  When it comes to adjustable rate mortgages, these days, it may still be the best rate available—without having to refinance.  I can review your current ARM terms with you, what index the loan is tied to, when it will adjust, and the interest rate caps.  While it might be better to obtain a fixed rate, again, it’s important to look at the big picture. 
5. To obtain cash:  It will depend upon the reasons you want or need the cash.  Are looking for cash to create a “cushion” for emergencies (because you don’t have one now)?  Are you planning to buy more real estate?  College funds?  Or Invest in a new business?  Compare.  For example, is the interest rate cheaper to get cash out for your child’s college education than it would be to get a student loan? 
6. To get a no-cost mortgage:  There are three options when it comes to closing costs.  You can add the closing costs to the loan and obtain a higher mortgage.  You can “cover” the closing costs by paying a higher interest rate.   Before choosing the option, run the numbers based on the different interest rates, loan amounts and loan terms and choose which one is best for you. 

The bottom line:  Do the math.  If you are looking to refinance, I can help you with the different options mentioned above.

But, here’s the catch—not all credit scores are created equal. 

There are lots of different credit scores used for different purposes.  Even the credit scores you might buy from TransUnion, Equifax and Experian are what are called “educational scores” – which will give you a good idea if you have excellent credit, fall in the middle or are a poor credit risk.  While this info is useful (to an extent), it won’t help you know where you stand before applying for a loan unless you know which “scoring model” the lender will be using. 

Here are some tips: 

• Order a copy of your free credit reports through AnnualCreditReport.com.  You will get a report from all three credit bureaus.  What you need to do is to check to make sure all the information is accurate, including balances, monthly payments, open and closed accounts. 
• If you decide to buy a credit score, buy a FICO score, offered by MyFico.com.  This is the one being used by a vast majority of lenders.  Only TransUnion and Equifax provide FICO scores and the cost is around 20 bucks. 
• There are some free services that will give you a general idea of where you stand  … CreditKarma.com, Quizzle.com, CreditSesame.com are all free and they also provide some financial tools for you to use. 

Oh, and finally, the National Bureau of Economic Research says that a little more than 1/3 of consumers have actually obtained a copy of their credit report.  Are you one of them?