Understanding Credit Scores

Credit Scores

• Credit score range is a numerical value from 300-850 indicating credit management skills and history.
• Having good credit determines trustworthiness to companies and lending agents and helps qualify for loans and credit cards with better interest rates.
• Good credit makes it easier to rent an apartment or buy a home and helps to get lower insurance premiums.
• Companies checking credit include: Credit card companies, insurance companies, employers (with written consent), and landlords.
• Equifax, Transunion, and Experian are credit bureaus.
• FICO specializes in calculating credit scores.
• Credit can be checked through credit card companies, non-profit organizations, and logging into the 3 Credit Reporting Bureaus.
• Payment history accounts for 35% and is weighted on how bills are paid (on time or delinquent).
• Length of credit accounts for 15% and is the amount of time a line of credit has been established.
• Type of credit accounts for 10% and is the responsibility to handle a mix of credit.
• Installment loans tend to raise scores, while revolving loans tend to lower scores.
• New credit accounts for 10% and is the number of credit inquiries and new line opening dates in the last 12-18 months.
• Amount owed accounts for 30% and is the percentage of available credit limits.
• Actions that can hurt credit include: making late payments, having a high Debt-to-Credit Utilization Ratio (30% or higher), and applying for multiple credit sources simultaneously.
• Closing a credit source after paying it off, stopping or not using your credit source for an extensive period of time, and balance transfers from one card to another can hurt credit.
• Co-signing for a credit source with someone who has bad credit, only having one credit type, and not monitoring your credit score and therefore missing errors can hurt credit.
• Car payments, mortgage payments, and credit card payments count toward credit.
• Thin file is a nickname for someone with little to no credit history, which makes it hard to access credit.
• Secured credit cards require upfront cash deposit, typically equal to the credit limit, acting as collateral.
• Student credit cards are specifically for students enrolled part-time or full-time and doesn't require a deposit and aims to help build credit and often comes with perks like travel miles or cash back with lower credit limits and higher interest rates.

Renting

• Lease is a contract by which one party conveys land, property, services, etc., to another for a specified time, typically in return for a periodic payment (typically is a year).
• Subleasing is finding someone to live there and pay you, then you pay the landlord (require permission from landlord/management company).
• Typical lease terms include : rent amount, security deposit amount, penalties for late payments, length of lease, subleasing terms, eviction terms, what's included (parking, appliances, ect.), pet clauses, tenant duties.
• Security deposit is the money paid upfront when renting a property and is held by the landlord to cover potential damages or unpaid rent beyond normal wear and tear (usually equal to one month's rent).
• Pet clause/fees gives whether or not a pet is allowed and what, if any fees come with it
• Renting is preferable to buying if one is going to live someplace for less than 3 years, does not have enough money for a down payment or emergency fund, has a low credit score, want less responsibility, or prefer to live in a big city.
• Renters insurance covers personal belongings damaged plus additional living expenses, but will not cover the actual structure you live in.
• Breaking a lease requires paying a penalty to break a lease (usually equivalent to 1-2 months rent).
• Justified reasons for breaking a lease: Active military duty, uninhabitable conditions, domestic/sexual violence, landlord harassment, onset of mental/physical disabilities
• Unjustified reasons for breaking a lease:: Buying a home, no longer liking where you live, relocating for new/school, moving in with a partner, lifestyle changes
• Rental application fees applications typically perform a background check and credit check (ranging from $35-$75).
• Requirements needed in order to rent include : Application fee, pay stubs, bank statements, identification- license, social security number, recommendations/references, vehicle registration information, and pet information.
• Pros of renting include: flexibility in being able to move, no property taxes, access to amenities (pools, gyms, dog parks, etc.), lower insurance costs, not responsible for normal maintenance and repairs, no down payment and lower credit requirements
• Cons of renting include: not building equity, you can't make changes to the property, rent can increase each year, and you may have close neighbors.
• Making on-time payments won't help your credit, but not making on-time payments will hurt your credit as your landlord/rental company has the right to report unpaid rent to the credit bureaus.
• 3rd party rent reporting allows you to pay a fee in order to have your rent payments reported to the credit bureaus, it may be beneficial if you're trying to build your credit score)

Buying a Home

• Pros of homeownership include: Tax benefits, building equity, and consistant price
• Cons of homeownership include: Repairs are your responsibility, lots of maintenance, property taxes
• Down payments are a sum that must be paid upfront before the purchase of a home as larger down payments lessen the amount you need to borrow and will lower your monthly payment).
• For 2023 the minimum downpayment for a conventional home loan was 3%. Second homes usually require 10-20% down and investment properties require 15%.
• Real estate agents are licensed professionals and they will submit and negotiate offers on your behalf.
• Pre-approval is a document from a lender stating how much money they are willing to give you for a home loan.
• Making an offer includes seeting an offer price, deciding how much earnest money to offer, choosing any contingencies to include, write a purchase offer and submit to the listing agent
• Purchase includes one's personal information, price, earnest money amount, offer expiration time, desired fixtures, title stipulation, projected loan closing date, closing cost details, agent/broker fees, and seller's vacate date
• Earnest money is a deposit to show you are serious about purchasing the home,this is money you won't get back even if you walk away)
• If offer is rejected one can: move on to another property, keep an eye on the property (they may lower the price in the future), or build your best offer and try again
• Counteroffer allows a price trade, you can either accept or counter their counter offer (you can also walk away)
• What happens if your offer is accepted? Deposit earnest money, secure home loan, home inspection, home appraisal, review the title, transfer the utilities, obtain homeowners insurance, schedule any home repairs you want done before moving in, complete a final walkthrough, schedule closing, closing day (this will happen at an attorney's office)
• Home inspections typically cost between $200-500 you will get a detailed report of the homes systems and be made aware of any issues that exist (you can negotiate with the seller if the fixes are extensive)
• Home appraisal A licensed professional assesses the market value of a property (lenders require appraisals to ensure the property is worth the loan amount being requested)
• Closing costs are expenses beyond the property price that buyers and sellers pay when finalizing a real estate transaction (typically range from 3-6% of the loan amount). These costs include - appraisal fees, application fee for your loan, attorney fees, commissions for the real estate agent

Mortgages

• Mortgage is is a loan used to buy real estate. The borrower pays the lender over time (payments are divided into principal and interest).
• Fixed rate mortgage is a home loan that has an interest rate that stays the same over the life of the loan (easier to budget and the most popular option is 30 years)
• Adjustable rate mortgage (ARM) (Also called variable rate mortgage) is a home loan where the interest rate will fluctuate depending on the interest rates set by the Fed. (makes budgeting more difficult)
• Conventional loan is a loan not provided by the government but rather a private institution, like a bank (credit score of 620 and first time home buyers can get a down payments as low as 3%, if not its 5%)
• VA loan is a Loan type for members of the military-active duty and veterans (Benefits include options for no down payment, better interest rates, limited closing costs)
• Federal Housing Administration (FHA) Loan is a home mortgage insured by the government but issued by a bank or other lender that has been approved by the FHA (Must have a credit score of at least 580)
• Private Mortgage Insurance (PMI) is Required if you have less than 20% down on a home (This protects lenders in case you end up not paying your mortgage and once you have 20% equity in your home you can cancel this)
• Amortization Refers to the process of paying off debt over time in regular installments of interest and principal sufficient to repay the loan in full by its maturity date (Installment payments - option to pay for purchases over time by dividing the purchase amount into smaller equal payments)
• Loan underwriting, after an offer on a home the mortgage loan will undergo underwriting (This means the bank will assess your income, liabilities/debt, credit history, savings, and credit score)
• Defaulting happens when you stop making required payments. First, you will be considered a delinquent when your payment is more than 90 days late.
• Defaulting is determined when a payment is 270+ days late
• Foreclosure : When you continue to not pay, the bank will repossess the property
• Both defaulting and foreclosure will have a negative impact on your credit score

Buying a Car

• Leasing a car happens when you rent the car in exchange for monthly payments (typical leases are between 24-48 months)
• Pros of leasing include: Minimal maintenance and repair costs, you get to drive new cars more frequently, good for short-term living situation, lower monthly payments, usually require little to no money down
• Cons of leasing include: You never actually own the vehicle, a lot of leases include mileage stipulations, insurance costs are higher, it's a confusing process and leases are hard to alter or cancel
• Options at the end of a car lease: You can walk away from the lease (if you pay a disposition fee around $350), trade it in for a new vehicle, extend the lease, or purchase the vehicle
• Trade-in value is money dealerships will give you for your old car
• Carfax report provides a detailed report of a vehicle, including information about accidents, damage, repairs, ownership, and title status
• Auto loans, new require 20% down payment, lower interest rates but higher cost and used require 10% down payment higher interest rates but lower costs
• Upside-down car loan: This happens when you owe more for the car than it's actually worth
• Pros of buying new include: Warranty, latest features, reliability and customization
• Cons of buying new include: Depreciation, higher insurance costs and higher price
• Pros buying used cars include: Usually cheaper, lower insurance and taxes, the car has already endured the initial 20% depreciation a new car goes through during the 1st year
• Cons of buying used cars include: More wear and tear, higher mileage, unknowns and most don't come with warranties
• Options of where to look for cars include: Autotrader, carmax, cars.com, carvana, nearby dealerships
• Certified pre-owned (CPO) cars comes with added benefits and undergo a thorough inspection and reconditioning process, often including an extended warranty and roadside assistance
• Used cars are sold as-is with no guarantees beyond any remaining original manufacturers warranty
• Kelly Blue Book is one of the most trusted guides for automotive pricing (provide info on trade-in values and fair purchasing prices) and Great tool to use when looking to sell, buy, or trade-in a car