A credit score is an extremely important financial tool. It provides access to the financing you need in order to buy a car, a home, or pay for college tuition, among other things. Since higher scores equate to lower costs and vice versa, it’s vital to understand the factors involved in calculating your score. Here are the five elements that make up a credit score, in order of importance:

Payment History: 35% impact. Paying debt on time and in full has a positive impact. Late payments, judgments, and charge-offs have a negative impact. Missing a high payment has a more serious impact than missing a low payment. Delinquencies that have occurred in the last two years carry more weight than older items.

When applying for a mortgage, every point in your credit score can make a big difference. So don’t make any major financial or credit decisions – even paying off an old debt or delinquency – without first discussing it with your mortgage professional.

Outstanding Credit Balances: 30% impact. This factor marks the ratio between the outstanding balance and available credit. Ideally, consumers should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home.

Credit History: 15% impact. This marks the length of time since a particular credit line was established. A seasoned borrower is stronger in this area.

Type of Credit: 10% impact. A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards alone.

Inquiries: 10% impact. This quantifies the number of inquiries (or requests for credit) that have been made on a consumer's credit history within a six month period. Each individual inquiry can cost from 2 to 50 points on a credit score, but the maximum number of inquiries that will reduce the score is 10. In other words, don’t start the loan process until you’re ready to act. Otherwise each individual credit inquiry could cost you. However, scoring models have now been adjusted to count multiple "hard" inquiries within a 14-day period as a single request. So, when you’re ready, your credit will be too.

Rebuilding Credit
It’s true, negative credit items can remain on your credit report for up to 7 years (up to 10 years for a bankruptcy). But this doesn’t mean that you have to wait 7 to 10 years to begin reestablishing a good credit rating. Because credit scoring models typically lend more weight to your recent activity than to the mistakes you might’ve made in the past, you can change your habits right now and begin reestablishing yourself as a good credit risk for a home loan or mortgage refinance in just 6 to 12 months.

The following are a few Dos and Don’ts when it comes to rebuilding your credit:

1) Three months prior to securing your mortgage, DON’T apply for, close, or pay off any credit cards, loans, or other kinds of credit without speaking to your mortgage professional first. Any one of these actions, as innocent as they might seem, could seriously affect your credit score, adding significant costs to your mortgage should your score suddenly drop.

2) If you have a credit card account with an excellent credit history, DO use it – but use it strategically. In other words, use it only for small purchases that you can easily pay off completely at the end of the month. Remember, creditors like to see evidence of stability, so the goal here is to keep the good reports coming month to month without falling into the same financial traps that led to credit challenges in the past.

3) If you don’t have a credit card, DO get a secured credit card. This is a great way to rebuild or establish credit quickly. Because this account is secured by funds that you deposit (typically between $100 and $400) you’re not seen as a great risk to the card issuer because of your initial investment. Again, use this card strategically to build a strong credit history. Pay your bill on time every month, and it won’t be long before you qualify for an unsecured credit account.

4) Finally, DO monitor your credit. Ask your mortgage professional to refer you to a professional credit repair company you can trust. Having an experienced professional on your side will allow you to focus on your long-term credit goals without having to make reestablishing your credit a second career.

If you or anyone you know has any questions about credit scores or what can be done to repair them, please don’t hesitate to call me. We’ll be glad to review your credit and see what, if anything, needs to be done to help meet your financial goals and needs.

Creative Cuisine

Ingredients:
- (1) 2 lb. Tri Tip Roast
- Extra-virgin olive oil
- Herbs d' Provence
- Kosher salt and pepper
- 1 cup crème fraiche or sour cream
- 2 to 3 tbsp. prepared horseradish
- 1 shallot, minced fine
- 1 tbsp. fresh dill
- Kosher salt

Directions:
Preheat oven to 350 degrees. Allow tri tip to come to room temperature. Rub with olive oil, and season liberally with salt, pepper, and Herbs d' Provence. In a large skillet, heat 3 tbsp. of olive oil until hot. Sear tri tip for 3 to 4 minutes on each side or until well-browned. Remove tri tip from skillet and place in a roasting pan or on a sheet pan. Place in oven and roast for approximately 25 to 30 minutes or until the internal temperature reaches 130 degrees (medium-rare) on an instant-read thermometer. Remove from oven and allow the tri tip to rest (loosely tented with tin foil) for ten minutes. Meanwhile, in a mixing bowl combine crème fraiche, horseradish, shallot, dill, and salt to taste. Set aside. Slice tri tip across the grain and serve with horseradish sauce on the side.

Street Smarts
Last Minute Tax Changes

On December 20th, 2007, the President signed the Mortgage Forgiveness Debt Relief Act of 2007 into law, creating headaches for the IRS but some great last-minute tax breaks for many homeowners in 2007.

One major provision temporarily spares homeowners the tax burden associated with canceled mortgage debt. Prior to this law, forgiven or unpaid mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure, was considered taxable income. The new law, however, waives these taxes from the beginning of 2007 to the end of 2009. This action could encourage some struggling homeowners to sell their “upside down” properties and avoid foreclosure.

The new law also extends until 2010 the mortgage insurance deductions created by the Tax Relief and Health Care Act of 2006. Designed to protect lenders from defaults and foreclosures, mortgage insurance (commonly referred to as PMI) is required for loans exceeding 80% of the property's value or sales price. PMI, an alternative to piggyback financing, makes it easier for certain borrowers to qualify for a home loan. Under the new law, qualifying taxpayers can treat PMI payments as home mortgage interest, which is tax deductible in most instances.

Finally, the new law broadens the home-sale gain exclusion for surviving spouses. In the past, the combined $500,000 gain exclusion was available only if a husband and wife filed a joint return for the year of sale.

If you think you might benefit from these new tax laws, we'll gladly refer you to a great CPA or Tax Preparer.