CFP Board eNewsletter
December 2007
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CFP Board eNewsletter |
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| The Credit Report Repair Kit |
An important first step when planning to apply for a loan — whether it’s for a mortgage on a new home or credit for a new car — is to make sure your credit reports are in good shape. Lenders use the information in these reports to determine your eligibility to borrow money. If you do qualify for a loan, your credit score can also influence the interest rate you are able to negotiate. Poor or inaccurate credit scores and reports can lead to rejected applications or higher interest rates. Here’s what to do if your credit history needs some repair work. A credit report is a basic summary of your record as a borrower, kind of like a Reader’s Digest condensed version of your financial history. It lists, among other things, major setbacks like tax liens and bankruptcy proceedings as well as how punctual you have been in making payments on mortgages, credit cards, retail store charge cards and car loans. Your credit score is a measure of your credit-worthiness; the more reliable your payment history, the higher your score. Adding Up the Value of Your Credit, in the December 2006 issue of It’s Your Turn, contains a detailed overview of how credit reports are compiled and how credit scores are calculated. Credit reports are managed by three main agencies — Equifax, Experian, and TransUnion. All of these Web sites contain information on how to correct your credit report and improve your credit score. For a fee, each firm will provide you with a copy of your report. But thanks to the Fair Credit Reporting Act (FCRA), every American is entitled to a free copy of their credit reports once a year. Visit Annual Credit Report.com to request your free copies. Should your report show credit problems, there are some simple yet effective steps you can take to improve things:
The Credit Center on investor information site The Motley Fool has more information on these and other tips for boosting your credit score. The Credit Learning Center on TrueCredit.com has a Credit Score Simulator that shows how representative scores can be improved by simple things like paying down credit card debt or making on-time payments. It also features instructions on “How to read your credit report”; click on the link on the right-hand side of the page, under “Related Items”. Entries can remain on your credit report for seven years, ten years or even indefinitely, depending on the kind of information involved. So if there is a mistake, it pays to correct it promptly. Even if your report is spotless, it could still be worth taking a look, since you may find evidence of fraud or identity theft that would otherwise go unnoticed. The three major reporting agencies all maintain separate records, so to be completely sure that your records are correct and up-to-date you should check all three. If you do uncover a mistake on your reports, the FCRA requires credit agencies to investigate your claim within 30 days. You should contact the relevant agency, inform them of the error, and provide as much evidence as possible to back up your claim. If a mistake has indeed been made, the agency must correct it and notify the other agencies of the change. If the agency denies your claim, the disputed information will remain on your credit report, but you are entitled to include a letter in your file explaining the reasons you believe the information is wrong. The Web site of the Federal Trade Commission, the nation’s consumer protection agency, has detailed information about your rights under the FCRA in its Your Access to Free Credit Reports section. The Credit Reports & Scoring area of the site has a range of useful information available for download, including “Building a Better Credit Report” (tips on how to improve your credit report and how to spot credit-related scams), “Credit Repair: Self-Help May Be Best” (a list of resources for low- or no-cost help), and “How to Dispute Credit Report Errors” (instructions on how to correct inaccurate information).
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| The Meaning of Mortgages II: Getting the Credit You Deserve |
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So, you’ve browsed around for attractive interest rates, calculated your debt-to-income ratio, and figured out the ideal term for your loan. (For more information on all of these topics, see Part I of The Meaning of Mortgages in the November issue of It’s Your Turn.) Now you want to find a mortgage. What’s the next step? Try pre-qualifying, or even getting pre-approval, for a loan. Pre-qualification or pre-approval can provide an important head start when shopping for a home, since the seller knows in advance that you won’t have any problems coming up with the cash. Plus it gives you, the buyer, additional security, because you know exactly how much of a mortgage you can afford, so you can focus your property search accordingly. During the pre-qualification process, you provide a mortgage lender with all the information needed to determine your credit-worthiness — your income, assets, and any other outstanding debts you may have. In return, the lender provides you with an estimate of how much it might be willing to lend. After the pre-qualification has been concluded, there is no obligation on either party to proceed with an actual loan. You could ultimately decide to go with another lender, and the lender could ultimately decide not to give you a mortgage. The pre-approval process goes a lot further, since the lender actually commits to lending you a specified sum, as long as your credit-worthiness checks out and the mortgage is agreed within a set period of time. To assess your credit-worthiness, the lender will verify the financial information you have provided and investigate your credit score and credit reports. Your credit score and credit reports are basically an evaluation of how reliable you are as a borrower. They show how punctual you have been in paying your bills, for example, and whether you have ever declared bankruptcy or defaulted on previous loans. If you’re planning on applying for a mortgage, it’s a good idea to have a look at your credit reports first to make sure they are correct and, if necessary, to take steps to improve them. For more information on credit scores and credit reports, see “Adding Up the Value of Your Credit,” in the December 2006 issue of It’s Your Turn. To order a free copy of your credit reports, visit the Annual Credit Report.com Web site or call toll-free 877-322-8228. For tips on improving your credit score, see “The Credit Report Repair Kit” in this issue of It’s Your Turn. Of course, the size of your mortgage will depend in part on the size of the down payment you are able to make. Lenders ideally like to see down payments of 20% or more of the asking price of a home. In cases where a down payment is less than 20% of the purchase price, buyers may be required to take out mortgage insurance, which protects the lender should the borrower default on the loan. Mortgage insurance can be cancelled once your equity in the home is greater than 20%. (Your equity is equal to the value of the house minus the amount of your mortgage.) The Federal Housing Administration (FHA) specializes in insuring loans to low- and moderate-income families and those who have experienced credit problems. Down payments on FHA-backed loans can be well below 20%, as long as mortgage insurance is included. More information on the FHA and mortgage insurance can be found in the “Buying A Home” section on the Web site of the U.S. Department of Housing and Urban Development (HUD). Veterans Administration loans also require small down payments, or sometimes no down payment at all. If you are a veteran, check out the Home Loan Guaranty Services section of the VA Web site for more information. “Removing Private Mortgage Insurance” on the financial information site Bankrate.com has a range of tips on how and when to cancel this type of insurance. This is the second of three articles on mortgages. Next month: Reasons to re-finance and how to avoid foreclosure.
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| Federal Reserve Proposes Reforms to Mortgage Lending Practices |
This week the Federal Reserve released a proposed a set of new rules designed to help prevent fraud and abusive lending practices and promote responsible mortgage lending. The changes set forth several proposals that may help the people hit hardest by the recent housing and credit troubles — consumers with poor or “sub-prime” credit. One provision would stop lenders from including penalties for sub-prime borrowers who pay their loans off early. Other provisions would require lenders to require proof of a borrower’s income for most types of loans and to structure loans so that borrowers, especially sub-prime borrowers, set aside money in escrow to pay for taxes and insurance. The proposal also includes provisions that would improve financial disclosures so that borrowers have a better chance of understanding the terms and conditions of their mortgages and so they receive this important information when it is most useful. It also takes steps to prevent misleading mortgage advertising, including displaying all applicable rates displayed with equal prominence beside any “teaser” rates that may be associated with a particular loan. While these rules are proposals and only now being released for consideration and public comment, the steps move toward improved disclosure of fees and conflicts of interest for mortgage lending. They follow CFP Board’s longstanding requirement that CERTIFIED FINANCIAL PLANNER™ professionals provide their clients with full and clear disclosure of fees and conflicts of interest for all services they provide, a requirement that has been affirmed and strengthened through the updated Standards of Professional Conduct that CFP Board has adopted, effective July 1, 2008. Consumers benefit when they have a clear understanding of all aspects of their financial options and can make informed financial decisions. For more information about the Federal Reserve proposals, visit their Web site at: www.federalreserve.gov/newsevents/press/bcreg/20071218a.htm For more information about the updated ethical standards for CFP® professionals, which take effect July 1, 2008, visit CFP Board’s Web site at:
www.CFP.net/aboutus/standards.asp
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| Financial Alerts |
Watch for Holiday Investment Fraud: Tips and Resolutions for Safe Investing “Investment fraud does not take a holiday,” said Karen Tyler, North Dakota Securities Commissioner and President of the North American Securities Administrators Association (NASAA). “The holiday season is a time of generosity. Unfortunately, it’s also the time of year when criminals aggressively seek to exploit the holiday spirit of goodwill.” NASAA urges investors to be especially vigilant to protect themselves from investment fraud during the busy holiday season. Read more for tips and guidelines to help make informed investment decisions at any time of the year at: www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/7666.cfm# Winter Weather: What to Do When Your Home or Car Is Damaged in a Winter Storm Winter's first storms have already left a path of damage and power outages across the country. When a storm strikes, it is important to know what to do if your home is damaged or if you are involved in an automobile accident. National Association of Insurance Commissioners (NAIC) provides guidelines to help you deal with a property damage claim or automobile accident at: http://www.naic.org/documents/consumer_alert_winter.htm Read more financial alerts.
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| Survey: What Is the Biggest Financial Decision You Will Make in 2008? |
Setting financial goals is a common focus at the end of the year, a time when many look to the future and set resolutions and plans for the next year. When financial goals include a big purchase or investment, it’s important to plan ahead. Let us know what you expect your biggest financial decision will be in 2008. Last month, It’s Your Turn asked how your 2007 holiday budget compares to last year’s budget. The responses show that many are reining in their holiday spending, with almost 50% planning to spend less this year, including more than 28% who have a much smaller holiday budget than in 2006. Just over 24% indicated a larger budget than last year, and 26% plan to keep their budget at about the same level as in 2006.
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| Savings in America: Many Admit They’re Not Doing Enough |
It probably comes as no surprise that Americans are not saving enough. It was almost two years ago, in January 2006, that the U.S. Department of Commerce reported that the average savings rate of Americans had fallen into negative territory for the first time since the Great Depression. A recent study by Wachovia and the Consumer Federation of America shows that Americans admit their savings are inadequate. The study, conducted in November 2007 by the Opinion Research Corporation, found that 52% of those surveyed admitted that they are not adequately saving for their futures. The study found that there were many reasons for not saving. Many cited economic factors such as unexpected expenses, large regular expenses, low or unreliable income and large consumer debt. A full 17% of those surveyed stated that they could not afford to save – that immediate financial difficulties overwhelmed their ability to plan for future needs and wants. But the study found that there were non-economic factors that had a broader impact on Americans’ lack of savings. Thirty-seven percent of those who identified themselves as not saving adequately or as not being able to afford to save cited “impulse spending” as a factor. The lack of saving was especially acute in the population of young adults aged 18-24. Of young adults, 54% indicated they were not saving adequately, compared to 29% of the entire group of non-savers. That’s especially unfortunate, given the importance that time plays in building savings through compounding interest. While these numbers may be discouraging, the fact that many are recognizing and admitting that they aren’t saving enough is a good step to turning the situation around. The America Saves campaign, a nationwide effort to encourage Americans to commit to saving, hopes to help many take those first steps to building wealth. More than 91,000 individuals across the country have affirmed their plans to save by enrolling with America Saves. Next year, from February 24-March 2, 2008, America Saves groups across the country will hold events to provide Americans with tips and tools to help you set goals, develop plans and strategies to reach those goals, and start saving. To learn more about America Saves Week and to find an organization near you that will participate in the 2008 effort, visit the Web site of America Saves.
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| About This eNewsletter |
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CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn. CFP Board exists to make people aware of the benefits of financial planning and to encourage people to seek out individuals who can help them apply the financial planning process to improve their financial lives. This eNewsletter is designed to provide information about financial planning, financial planning tools and resources, consumer alerts and more. Suggestions and feedback are welcome at mail@CFPBoard.org.
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