Does A Good Credit Score Really Matter Anymore?

Does a high credit score matter anymore? Most don't careA couple mortgage refinances ago, I almost screwed myself because I had an $8 judgment against me from my local utility company that crushed my credit score by ~100 points. I thought I had an excellent credit score of 780, and I did, when I first started my 100 day refinance hell. But when my refinance bank pulled my credit report again around the 90th day, my TransUnion score plummeted to 680.

My mortgage refinance was delayed by another 10 days as my bank investigated the situation. Thankfully, everything turned out fine in the end. Since that time, I decided to regularly check my credit score once a year like I check my latest insurance coverage and health coverage. It’s good practice given it’s estimated about 5% of credit reports have errors as well.

Given I finally got rejected from my latest mortgage refinance attempt by Chase, I’ve begun to question whether a credit score has any meaning anymore. You see, I never missed a mortgage payment on this particular mortgage, and my latest credit score showed a 787. Anything above a 740 is considered excellent, and good enough for the best rate by major lenders.

The Average Credit Score For Approved Mortgages Is Declining

average-fico-approved-mort

Before the recession, average FICO scores for approved mortgages averaged around 720. 720 is actually the cut-off point between “Good” and “Excellent” credit. Given the housing market collapsed nationwide anyway, one shouldn’t be too impressed with a 720 credit score. A 720 credit score should be viewed as average, at least from this loan officer’s perspective.

After the housing bubble burst, the average score for approved mortgage applicants shot up to 769 from 2009 until the end of 2012. A 769 credit score beats out 80% of all other credit scores out of 850. In other words, banks weren’t lending to hardly anybody. The upside is that the probability of a similar type of housing crash in the future has declined.

The “good news” for borrowers is that according to Fannie Mae the average credit score of an approved mortgage applicant is now down to 741 as of the first quarter of 2015. I say “good news” because it’s brutal for even good income earners to get a mortgage nowadays. Many renters I know have been shut out of the housing market simply because they can’t get a loan.

Although credit standards are loosening, a credit score of 741 is still a pretty high hurdle to overcome given you still need a good income and a healthy balance sheet to cover borrowing ratios. But at the margin, a lower credit score hurdle should allow more people to borrow money to further support the housing market recovery. I still see little signs of sub-prime mortgages or negative amortization mortgages returning. But one thing we should be concerned with is the latest Federal Housing Administration initiative to get Boomerang Buyers back in.

What’s Hurting My Credit Score And Why Is It Fluctuating So Much?

Fluctuations In Credit ScoreAnd just like that, I’m no longer in the 800+ credit score club full of beautiful people. As part of my mortgage application process, the bank had to pull my credit score. The big white envelope in the mail with the results reminded me of my college acceptance letter way back in 1994. When I opened it, I was disappointed to discover my credit score dropped to 790 from 805.

Since September, 2013 when I first broke the 800 credit score mark when I applied for my Discover It credit card for travel and double the rewards points, I’ve done nothing different. Every single mortgage, utility, and credit card bill has been paid in full without fail. Actually, that’s not true. I was a week late on one credit card payment because I was traveling. I gave them a ring and they dropped the late fee and said no problem. (See: How Does A Late Credit Card Payment Affect My Credit Score)

So I wonder, what could have hurt my credit score in just six short months. Perhaps you, too, have seen a decline in your credit score without any apparent reason. Let’s think things through.

FICO Score Open Access: You Now Get A Free Credit Score When You Apply For A Credit Card

light-bulb-momentI recently had a connect the dots moment I’d like to share with you. In a program called FICO Score Open Access, FICO announced on November 4, 2013 that it plans to allow any lender who uses FICO scores to determine an applicant’s creditworthiness to allow the score to also be available to all applicants for free. So far only Barclaycard US and First Bankcard have signed up, but surely a tremendous amount more credit card companies will sign up once the word gets out to consumers.

When I applied for the Barclaycard Arrival World MasterCard, I received my latest credit score in the mail of 805. At the time, I didn’t think it was strange because I always got my credit score in the mail during all my previous eight mortgage refinances. I also hadn’t applied for a new credit card in a decade so I thought receiving my score was just status quo or at least a nice gesture by Barclaycard. The reality is that most credit cards don’t send you your credit score if you apply for their card. The reason why we do get our credit scores during a mortgage refinance is because we’re paying to refinance or take out a new mortgage. Nobody pays to apply for a credit card!

As any proud personal finance blogger would do, I proceeded to write a post on how to improve your credit score to 800+ with this newfound information. We know that pulling your credit score too often may bring down your credit score. The idea is that if there’s a sudden rush of credit inquiries, it may signal the person is in a cash crunch.

Can you imagine getting your credit score pulled, getting denied by the credit card company, and being left in the dark as to why? That would be as aggravating as getting a college or work rejection letter in the mail with no reason for denial. The new FICO Score Open Access plan will supposedly allow participating banks to show applicants their credit history, any late payments, and debt levels.

You can still get your latest TransUnion credit score for free from a trusted company like AnnualFreeCredit.com if you aren’t looking for a participating rewards credit card. Just make sure you cancel the credit monitoring service before the grace period is over if you don’t want to get charged for such a service.

I’m predicting Barclaycard US and lesser known First Bankcard are going to gain outsized market share of new credit card applicants until every other credit card company participates as well. The FICO Score Open Access system is a great step for consumer rights.

RECOMMENDATION

Check your free credit score now! I highly recommend signing up for Credit Sesame, a company that provides free unlimited daily credit scores, free monthly credit reports, free 1-Bureau credit monitoring and alerts, free analysis of all your credit and loans, and free $50K identity theft insurance and ID restoration help! Unlike other “free” credit score companies who hope you forget not to cancel before their free 30-day trial is up, there’s no need to give Credit Sesame your credit card information.

A credit score is important when trying to get the best loan terms possible for a mortgage, car loan, or personal loan. Because of a delinquent $8 electric bill payment my tenant didn’t pay, I unknowingly had a credit score in the 600s that almost torpedoed my mortgage refinance! Finally, it’s simply a great idea to have constant monitoring to get a complete financial picture. You just never know with so many credit report errors and identity thieves out there. Sign up for your free credit score with Credit Sesame today. 

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Updated 2H2015

Should I Ask Someone For Their Credit Score Before Getting Into A Serious Relationship?

Average Credit Score By Age ChartA very good friend of mine will only marry a woman with at least a Master’s degree from a top 25 school. Given less than 10% of the western world has a Master’s degree, it’s kind of curious why he’d want to limit his pool of mates given he’s still single at 35 years old. The answer is that he has a Doctorate in Medicine from Columbia and a cardiology fellowship from Cornell.

As any good friend should, I’ve made fun of him for years for being so picky. He’d always retort, “Look Sam, I’m a catch! If a woman wants to date me, they’ve got to be up to snuff.” He’s hilarious and I love him for it! I could never quite understand his insistence for a highly educated woman until I finally got an 805 on my credit score this summer. (How To Improve Your Credit Score To 800+)

The difference between an 805 credit score and a 770 credit score is negligible. You still get the best rates by lending institutions who gladly open up their coffers. But to go from a high 700s level to over 800 takes years. The process feels like plate tectonics where land moves only one inch a year. So being the very honest person that I am, I suddenly started thinking questions such as:

“Should I figure out someone’s credit score before I marry them?” 

“Should I set a minimum credit score limit for a woman I plan on dating?”

“Should I raise my minimum credit score hurdle rate for prospective tenants to 760 from 720?”

“Can I fully trust someone with my financials if s/he has under a 700 credit score?”

“Will TransUnion send me a framed copy of my credit score if I ask?”

I’m suddenly an arrogant bastard! I went through some very similar thoughts after I finished business school as well. Suddenly, everybody without an MBA didn’t seem as smart, especially my bosses who just had undergraduate degrees and not even CFA designations. Despite my more experienced bosses bringing in more revenue to the firm, I mentally discounted their achievements. The air of superiority only lasted for a couple months before I returned to a normal cog in the wheel. (Should I Get An MBA To Find A Wealthy Husband Or Wife?)

The more you achieve, the higher your expectations of others. I kind of feel sorry for children of very wealthy parents, brilliant entrepreneurs, celebrities, or double PhDs.

EVERYTHING IS A SCREENING MECHANISM

A Correlation Between The Number Of Credit Cards One Has And Net Worth

Average credit card interest rate chartI believe the ideal number of credit cards is three or less as stated in my  post, “How Many Credit Cards Is Too Many?” One of the main reasons for having three or less is so that you don’t spend too much time playing the churn and burn game for rewards points. Once in a while is fine, but there is a law of diminishing returns.

If you’re spending time applying for new credit cards, reading about new credit cards, keeping tracking of all your credit cards, and canceling your credit cards, then you are taking away time from making more money elsewhere. Your mind focuses on the small picture when it should instead be focused on the big picture. Furthermore, unless you are an organizational machine, you will undoubtedly miss a payment or forget to cancel your card before the introductory period is due thereby negating some of the initial sign up benefits.

Everybody should have at least one credit card for convenience sake. Many credit cards have travel insurance which comes in handy when you lose your luggage in a strange land and need a place to stay. Credit cards help build credit which is important for individuals looking to buy a home or apply for a coveted job. Buyers protection is also a great reason to have a credit card just in case you want to dispute a vendor.

THE IRRATIONALITY OF PERSONAL FINANCE

How To Improve Your Credit Score To 800 And Higher

805 Credit Score Financial SamuraiIt took 14 long years and many false hopes, but I finally broke 800 on my credit score back in September, 2013! It’s 2015 now and my 800+ credit score has remained steady.

The last time I checked my credit score before 9/2013 was when I refinanced by primary home mortgage in the spring of 2012 before I left my job of 11 years. My TransUnion credit score actually came back at a dismal 697 because there was a late $8 electricity bill charge my tenants did not pay from three years ago. As a result, my bank said they would not go through with my refinance after I had waited for 80+ days already.

I was able to fix my credit score in 10 days after I told my local utility company to write a “clear credit letter” to my bank. My credit score thankfully jumped back to 797 within three months and my refinance was complete. What is scary about the whole thing is that I had successfully refinanced another property in 2010 with no signs of an impending hit due to the $8 late payment. This is why I urge you to check your credit score once a year to make sure there no errors, especially if you are planning to refinance or take out a significant loan.

My latest credit score check came due to my application for the Discover credit card I plan to use for all my travel related expenses. I’m on a 10+ weeks a year travel mission from now on and it just makes sense to sign up for a card that provide bonus miles and points for every dollar spent. So it was with great surprise through the application process that my credit score is now 805.

In this article I’d like to highlight the main attributes of determining one’s credit score and my thoughts on how I was able to finally break 800. Hopefully this post will give you helpful first person insight.

How Often Are There Errors On A Credit Report? All The Damn Time!

Lion of Lucerne MonumentThe Oregon lawsuit awarding a woman $18.6 million in punitive damages from Equifax is a big reminder why we should check our credit report at least once a year. Julie Miller contacted Equifax eight times between 2009 to 2011 to fix mistakes including her social security number and birthday on file. She didn’t make much progress.

The Federal Trade Commission found in a 2013 study that 21% of the 2,968 credit reports they investigated contained errors. The survey also found that 5% of the errors represented issues that lead consumers to be denied credit. Various other studies have also shown that 25-30% of credit reports have errors. Pretty high if you ask me.

The purpose of checking your credit score before applying for a mortgage or a loan isn’t only to assess the viability of getting such a loan and figuring out the expected interest rate. The main reason why I check my credit score once a year is because of identity theft and errors. If I’m not taking out credit, someone else better not be using credit in my name!

MY PAINFUL EXPERIENCE WITH CREDIT SCORES

Will Marrying Someone With Bad Credit Hurt My Credit Score?

Bitten Chocolate

Love is love. Ever since I was a wily teenager, I’ve had the romantic notion of being with a woman I care about no matter what her financial circumstance. My father used to subtly encourage me to meet some of his friend’s daughters who so happen to come from wealthier backgrounds. They were never my type unfortunately. Only until I reached college did I realize he was trying to play match maker to ensure my financial well-being.

I remember bringing one girl home to “hang out” at the age of 13. When my parents found out she was raised by a single father, I could sense my parent’s lack of enthusiasm. Or maybe they just didn’t like what we were up while they were still at work! My parents didn’t say anything mean, they just weren’t supportive of my latest fling. They encouraged me to stop messing around and start studying instead.

I also recall talking to my parents at the age of 14 about dating a real life princess. Her name was Tengku Zarina and I was smitten. Zarina was of Malaysian royalty and my parents were fascinated by the potential. Unfortunately, my pursuance failed since she was two years my senior. Girls hate younger boys, which is why single men love growing old. If you’ve wondered why men tend to only date younger women, now you know it’s all the woman’s fault!

CREDIT SCORES, FINANCIAL STATUS AND MARRIAGE

How Much Will A Foreclosure Hurt My Credit Score?

Foreclosure Overlooking Hong Kong HarborThe housing market correction was brutal. If you are one of the millions of people considering foreclosure or a short sale, you need to read this post first and understand all the consequences before proceeding. If you are already in foreclosure or going through a short sale, then you should check your latest credit score and figure out how to climb out of purgatory.

A foreclosure and a short sale have similar negative hits on your credit score. A foreclosure is generally worse because you are not working with your bank whom you owe money to settle your debts. A short sale, on the other hand is debt forgiveness. Your bank agrees to forgive the difference between the sale and what you owe. Just be aware you will probably have to pay taxes on your deficiency. There is no free lunch.

Once your credit score gets trashed, it takes anywhere from three to seven years to fully recover. Sometime your score may never fully recover at all. With all the questions I’ve received on the subject, and my own temptation of letting one of my vacation properties go during the economic crisis, this post should help you weigh the pros and cons of foreclosure or a short-sale. The information is gathered from our friends at FICO, two real estate lawyers I spoke to, my own experience, and thoughts from several mortgage officers.

How Much Will Your Credit Score Get Hit In A Foreclosure?