The Waiting Game: Is it Time to Invest in Real Estate?

The Waiting Game: Is it Time to Invest in Real Estate?

It's said that history repeats itself; that distinct patterns and regular cycles are apparent and even predictable to those who can correctly analyze and interpret the data. When it comes to economic markets, the same holds true. Stocks, bonds, and real estate markets each go through basic cycles of highs, corrections, lows, and recoveries of various lengths and intensities. The trick, then, is timing: when to get in, when to get out, and when to sit on the sidelines and wait.

This month, YOU Magazine looks at how the current real estate market compares to those of the past, while also examining what homeowners and potential home buyers need to do now to make the most of the post-subprime real estate market. We'll show you the numbers, what they mean, and how you and the right mortgage professional can make the most of the biggest investment you will likely ever make: your home.

Home Prices
It has been reported that national home prices have fallen recently, a trend not seen since 1991 – and one that has kept many potential home buyers on the fence and playing the waiting game. This decrease in prices, however, is not surprising in the least to the experts who study the market. In fact, between the growth in the number of speculators during the housing boom – when home prices reached record highs – and the increase in overall housing inventory, falling prices are a typical result within the basic model of a cyclical market.

Interestingly, while total existing home sales fell at a seasonally adjusted rate of 2.6% in April, new-home sales actually increased 16.2%, according to statistics from the Bureau of Labor. That's the largest jump in new-home sales in 14 years! The report also demonstrates that increases in new-home sales were widespread as well: 27.8% in the South, 8.5% in the West, and 3.8% in the Northeast. Only the Midwest region saw a 4.0% decrease. Again, while these numbers were higher than expected, experts who study employment figures were not all that surprised.

What does this mean? Well, for new home buyers, this is great news! This report demonstrates that home builders are taking extraordinary steps to move their inventory. In fact, home builders reportedly cut new-home prices more in April than in any month since 1970. This means that, in April, many home buyers had no problem finding a great deal on a brand new home. In fact, while total existing home inventory levels have increased 10.4%, which represent 85% of the real estate market, new-home inventories have actually fallen nearly 20% thanks in part to these amazing bargains.

The Subprime Effect
Ironically, while many builders and home sellers are more than willing to negotiate with qualified buyers (that is pre-approved, not pre-qualified buyers), many potential buyers may not even qualify for these same great deals in the near future. Since the recent collapse of subprime lending, an intense tightening of credit standards and lending guidelines is thought to have extended the downturn in the real estate market cycle. Not only do potential borrowers with credit issues now have fewer options, many current borrowers with credit issues may not be able to refinance if they continue to play the waiting game for too long in today's lending environment.

For the most part, borrowers and potential borrowers with good-to-great credit have nothing to worry about when it comes to potential fallout from the subprime market. There are plenty of conventional mortgage products available to suit the needs of these borrowers. Borrowers with Adjustable Rate Mortgages (ARMs) due to reset at a higher rate, however, can no longer afford to play the waiting game. ARMs borrowers should consider seeking advice from a professional mortgage specialist right away before their current monthly payments reset up to 50% or even 100% higher! Even with a pre-payment penalty, there are fixed-rate products that could help many ARMs borrowers avoid becoming part of the estimated $650 billion in subprime mortgages expected to default or foreclose in the coming years.

For potential borrowers with some credit problems, there are still opportunities to take advantage of the current buyer's market. Many lenders have started to reintroduce special mortgage programs that were eliminated just three to five months ago. Credit requirements are much tighter than they once were, of course, but high LTV/CLTV programs can still be found, and 100% financing is still available for both purchase and refinance loans. Despite the horror stories advanced by the media, it's important to investigate all options before assuming anything. Remember, available credit is also cyclical in nature, and the current tightening of lending standards is a direct response to the tremendous willingness of lenders to give credit during the real estate market's previous boom cycle.

Market Indicators
Understanding the various nuances of the real estate market is challenging to say the least, even for the experts. And when market cycles reach pivotal points of change, like today's real estate market, it becomes even more challenging as economists split hairs and debate the finest details of the market's behavior. The good news is, you don't need to figure it all out yourself. Let your mortgage professional work out the details. As a home buyer, there's really only one concept to embrace, and that's the idea that the real estate market is cyclical; that, no matter how painful it gets to watch the news every day, the market will eventually turn and continue on its natural course.

There are, however, some basic indicators that savvy home buyers can pay attention to in order to obtain an edge over other investors: employment statistics and the production and availability of real estate and investment capital. These statistics each relate to the simple concept of supply and demand. When more people have jobs and more banks are willing to lend money, housing demand increases. Available inventory, i.e. supply, then sets prices at whatever consumers are willing to pay. We clearly saw this concept play out during the real estate market boom over the past few years when the national economy created jobs for 44 straight months.

So, what's changed? In June of 2006, unemployment rates reached 4.8%, the highest level in 13 months according to a Department of Labor report. Shortly after, the subprime collapse forced lenders to change their habits, and suddenly less money was available to borrowers. Inventories jumped, increasing supply, and many jobs – especially in construction and real estate-related fields – were lost. In other words, the relationship between supply and demand changed, clearly marking the end of the real estate boom.

In April 2007, however, unemployment dropped to 4.5% and new-home sales jumped, as builders offered great deals on current inventories and began construction on fewer new homes. Suddenly, with interest rates near historic lows, buyers on the fence were willing to pay for these discounted new homes.

Did these "early-bird" buyers make a good deal? Should they have waited for prices to fall even more? What about further changes in interests rates?

Well, let's look at an example. Let's say that a buyer is pre-approved to purchase a $300,000 home at 95% financing but decides to ignore possible interest rate hikes and wait for further price reductions on this particular home. With the economy showing strength in both employment and the stock market, it wouldn’t be outrageous to see interest rates increase just .75% in a very short period of time. Therefore, if rates were to increase while the price of the home did not drop any lower, the buyer's monthly payment would jump approximately $75 a month, or nearly $900 a year!

But, let's look at this from a different angle and a different cycle. On June 8th, 2004, the S&P 500 Index was at 1142. By August 12th, it fell to a low of 1063, a little more than 7% in two months. Since then, it has risen over 32%. As this article is being written, the S&P 500 Index closed at 1530, a record-closing high which some say nearly marks the end of its current boom cycle. Using the same $300,000 home from our example, this would equate to a home selling for nearly $400,000 only three years from now.

Are we saying that housing will duplicate this growth in its next boom cycle? No, certainly not. The point is this: by playing the waiting game – without good advice from a trusted source with their best interests in mind – and ignoring the basic concepts of historical market patterns, buyers can miss out on nice gains later on. In the end, homeownership, despite slumps and lulls in its cycle, is a great investment historically. After all, you can't live and raise a family in a stock. You can't refinance a bond when your kids go to college. And you can't retire into a mutual fund.

Stay ahead of the curve by making an appointment with your real estate and mortgage professionals. Put together a game plan that can't lose.

Should You Buy or Lease?

Should You Buy or Lease?
By Mark K. Solheim

To hear the critics wail, you'd think leasing a car is as bad for your finances as smoking cigarettes is for your health. Does that mean you're a closet wastrel if you've ever been tempted by ads that trumpet affordable monthly payments for a new car? Or, worse, that you are hurtling down the highway to financial ruin if you've already given in?

Relax. Leasing is not a mortal sin of money management. For some drivers, in fact, it makes sound fiscal sense. Leasing's not for everyone, but there's no reason to scorn the 15% of our fellow travelers who choose leasing over buying.

A Closer Look
Leasing often gets a bum rap because the lingo can make your head spin. It's difficult to compare one lease with another, not to mention to compare leasing with buying. And it can be tough to get a handle on leasing because the decision to lease or buy often depends on your mindset. "A lot of people are freaked out by having to turn in their car at the end of the lease," says Phil Reed, author of Edmunds.com's Strategies for Smart Car Buyers. "What they fail to realize is that they got the first years of a brand-new car's life."

One of the biggest criticisms of leasing is that in a buck-for-buck comparison of leasing and buying, leasers usually shell out more money. That's because, after the loan payments are done, buyers get to keep the vehicle (pay cash and you come out further ahead). If your modus operandi is to buy a car and run it till it sputters and dies, leasing isn't right for you. But you're a good candidate, Reed says, if you've decided that you're always going to have a car payment – as many drivers do, now that six- and even seven-year loans are gaining popularity. It's a good bet that you can drive more car for less money if you lease. You'll never actually own the car, but who really owns a car when the bank holds the title until the loan is paid off?

A few other advantages: A lease usually ends about the same time as the warranty, so you probably won't pay for any repairs. You won't have to worry about whether you'll get a fair deal on a trade-in. In most states, you pay sales tax only on the monthly payments rather than on the full value of the car. Plus, many of today's leases include gap insurance to cover the difference between the lease payoff and an insurance settlement if the car is totaled or stolen.

Yes, there are early-termination fees if you change your mind. But if you finance a car and bail out before the loan is paid off, you could easily owe more on the loan than the car is worth. And it's true that you pay extra for exceeding the 10,000- to 15,000-mile yearly limit typically written into a contract. But buyers who rack up high mileage also pay a penalty: lower trade-in value.

Design Your Own Lease
If you choose a manufacturer-subsidized lease, you'll probably be locked in to the terms. But if the car you want isn't being pushed by the carmaker, there's plenty of room for bargaining. Either way, contact several dealers to see who's willing to cut you the best deal. Reed of Edmunds.com recommends a term of three years because that's often the turning point in a car's life (when the warranty expires, for instance, or you may need new tires).

Ask the dealer to compare leasing offers on the car from the manufacturer's financing arm as well as a few banks. That may produce a lower "money factor" (basically the interest rate) or higher residual, either of which translates into lower payments.

Next, target the capitalized cost – leasing lingo for the price of the car written into the lease. Gross cap cost includes the price of the vehicle, fees, extended service plans, gap-insurance premiums and any other add-ons. Adjusted cap cost is the gross cap cost minus reductions for trade-in, down payment, and rebates. That adjusted cost is the amount you actually finance. Don't pay sticker unless you have to. Both Kelley Blue Book (www.kbb.com) and Edmunds.com list actual transaction prices to give you an idea of what others are paying.

If you expect to drive more than the number of miles included in the standard contract, try to negotiate a higher limit. Or you may be able to buy extra miles up front for an extra 10 or 15 cents per mile, versus the usual 15- to 30-cent-per-mile penalty charged at the end of the lease.

You usually have the option of buying the car at the end of the lease instead of turning it in. The purchase amount, typically the residual value, is written into the lease. Buying may not be a good idea, though, if the residual was set artificially high.

Not up for haggling? Kiplinger's has teamed with CarBargains, a buying service from the nonprofit Consumers' Checkbook organization. Its LeaseWise service will negotiate with five local dealers for you. The cost is $335. Visit www.kiplinger.com/links/carbargains or call 800-475-7283.

Reprinted with permission. All contents © 2007 The Kiplinger Washington Editors, Inc.

Where Can My Kids Learn About Money?

Where Can My Kids Learn About Money?
Also: What should I do with a $400,000 inheritance?
COMMENTARY
By John W. Schoen
Senior Producer
Updated: 7:18 a.m. PT June 4, 2007
This week, a Minnesota mom is worried that her kids aren't getting the education they'll need to manage their finances as adults. Though there are a number of organizations that can help, kids still learn most of what they know about money from their parents — the earlier, the better.

I have three children, 15, 13 and 10. I am concerned because they are not going to be introduced to managing finances in school until 11th or 12th grade. Way too late. Are there organizations available to educate them on this subject outside of school?
—Shari S. Roseville, Minn.

Unfortunately, personal finance is not part of the mainstream curriculum at most schools. Despite the increasingly complex financial products and services available to Americans, only a handful of states have moved to reverse the gaping hole in public education and financial literacy for young people.

In the past several years, dozens of states have considered bills requiring some form of financial education in public schools. But only nine states include personal finance as part of their high school graduation requirements: Alabama, Georgia, Idaho, Illinois, Kentucky, Louisiana, New York, Texas and Utah, according to a 2006 report from the National Association of State Boards of Education.

Meanwhile, nearly half of American kids leave high school without understanding how to save and invest for retirement, handle credit cards, or understand the difference between inflation and recession, according to a survey by the National Council on Economic Education, one of several groups working to improve financial literacy. Others include the National Endowment for Financial Education, Jump$tart and Junior Achievement.

These groups also provide materials to schools and community groups that are interested in setting up personal finance courses for kids. You might consider getting together with other like-minded parents or contacting your local parent-teacher association and approaching your school about teaching personal finance.

In the meantime, you can be a very important teacher and role model for your kids. They won’t admit it, but most kids are influenced heavily by their parents — even long after they’ve made it clear they won’t be caught dead with you at the mall.

If they’re not on an allowance, get them started. How soon? If they’re old enough to understand the impulse to buy candy at the checkout line, they’re old enough to understand an allowance. Make them responsible for as much as you feel comfortable. Have them set aside money for savings and regular donations to a charity or service group of their choice.

The more spending they’re responsible for, the sooner they’ll learn how to stick to a budget. It’s not unreasonable for a 15-year-old to handle most expenses, based on a monthly number you work out, beyond basics like food, clothing, shelter and medical costs. As an added bonus, you may find you have an easier time with your own budget. (No more “Mom, can you buy me these $100 jeans?”)

Expect them to make a mistake now and then; that’s how they learn. Avoid the urge to bail them out. If they must have something that’s beyond their budget, work out a loan — with a strict repayment schedule — to teach what it feels like to be in debt. Better in debt for a few hundred dollars — to you — that to hit adulthood and go on an “easy credit” borrowing spree that lands them in debt beyond repair. Based on the mail we get every week, the problem is widespread.

As they get older, show your kids how you pay the bills. Explain what a mortgage is. Help them find part-time work. The sooner they get a job, the sooner they have a personal stake in their budgeting. At the end of the year, walk them through the basics of a tax return.

If they plan to go to college, make it clear that they’ll have a stake in those costs too — either an on-campus job or some level of student loans that will give them a first-hand feel for debt — without burying them in loans when they graduate.

Most of all, teach them early about the predatory lending practices of the financial services industry, which is reaching younger into adolescence for new customers. Many college freshmen now pass a booth on their first day on campus, set up with the school’s blessing, offering credit card accounts — complete with a $50 “starter credit” just to them hooked on the habit of using the card. If your child is approaching adulthood and hasn’t figured out how to manage credit, make sure you get to them before the card companies do.

What should my husband and I do with a $400,000 inheritance? We are 56 years old. We need to do something that will allow us to have a substantial amount at retirement, and yet pay off student loans and fix up the house. What would you do?
-- Name and address withheld

I’d put it in Treasury securities while I got used to the idea of having $400,000 that I didn’t have the day before.

Then I’d ask around and find a financial adviser I liked and trusted. If you trust the lawyer who handled the estate that generated this windfall, you might get some names there. It’s like finding a doctor: Get referrals, set up a get-to-know-you appointment, ask lots of questions —and if it doesn’t feel right, by all means move on to the next name on the list. Rinse. Repeat.

In the process of shopping for an adviser, I’d also read up on investment basics. Maybe take a local continuing education course, but be wary of ”free seminars” taught by brokers passing themselves off as “personal finance experts.” Ditto any cold calls you get offering a "free investment review."

The reason you have to do your homework is that you’re going to need to start off by asking this person a lot of questions. You need to figure out what those questions are. And if you go in knowing a few answers, you stand a better chance of finding out how truthful this person is early on.

You also need to think of buying financial services the way we all think of buying a car or a new TV. People will read up forever and scour the Web for information and reviews ahead of a $2,000 electronics purchase — and then hand over $400,000 to someone they’ve barely met without asking the questions they really want to ask.

The reason for this is that the financial services industry has cowed us all into thinking that what they do is so complicated that there’s no way you or I could understand it. That’s why these folks speak in jargon; it’s designed to remind you how dumb you are in their presence. (Which is one reason we started writing this column.)

The biggest sleight of hand usually takes place when you get to the issue of what this advice is going to cost you. Over the life of the typical retirement savings horizon, a difference of 1 percent in management fees can mean the difference between an annual vacation in the Caribbean and a bus trip to stay with friends. These fees are tucked away everywhere. Think of them as the “rust proofing” car dealers used to try to sell you.

There are some very fine, honest financial advisers out there. Unfortunately, the modern financial services industry is set up to make a profit for itself, not you. Making money for clients is also good, but losing other people’s money never got a broker or adviser fired. The way the law is written, you have to show evidence of deliberate fraud. And most of the contracts governing brokerage accounts prevent you from taking your complaint to court anyway; you’re required to go to arbitration in front of a panel that includes representatives from the financial services industry.

No matter what you do with your windfall, go slow. If you don’t like the risk of stocks, that’s fine. Some very smart people have all their money in municipal bonds and they sleep very well at night.

It’s true that you probably need to put some money in stocks to beat inflation over the long run. But you can do so very cheaply with index funds, and eliminate the risk of a stock-picking manager picking the wrong stocks.

In other words, no matter how much good advice you get, you’re on your own. The sooner you realize this, the better your chances of making investment decisions in your best interest — and not in the interest of the financial institution you’re working with.


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URL: http://www.msnbc.msn.com/id/18968245/

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Where Do My Income Tax Dollars Go?

Where do my income tax dollars go?
Also: How come we all get two extra days to file our taxes this year?
COMMENTARY
By John W. Schoen
Senior Producer
Updated: 3:12 p.m. PT April 15, 2007
You worked hard for that money you just sent off to the IRS. So like many tax filers, including Mark in Colorado, you're probably asking yourself: Just where, exactly, does my money go when the government gets its hands on it? Let's see who gets what.

Don't forget, you have two extra days this year to send in your check — one because April 15th falls on a Sunday and another day because of two holidays that aren't on most people's calendars. Which got Lloyd in Louisiana wondering: what's up with these late deadlines?

What does all our income tax money go to pay for?
— Mark, Greeley, Colo.

If you have trouble balancing your checkbook, imagine trying to keep track of where $2.7 trillion goes every year. Even with armies of government accountants and auditors, it’s hard to know with certainty exactly where your income taxes end up. But you can get some idea from the government’s accounting of where it went last year.

For the complete, gory details, you can check the latest estimates from the official budget on the Government Printing Office Website, where you’ll find the government’s finances sliced and diced — by agency, department, function and source — with historical data back to the 1940s and beyond.

What you’ll also find is a lot of big numbers. So to give you some sense of proportion, here’s — roughly — how the federal budget compares to your budget and mine.

Let’s assume you make $52,000 a year — or $1,000 a week — which is about the median household income in the U.S. The real number was $46,326 in 2005, but give us a break with the math, okay? Remember, that $1,000 a week is tax free. (Hey, you’re the government.)

Here's where it went (we used 2006 figures from Table 3.2, "Outlays by Function and Subfunction"):

Last year, the three biggest federal budget items were Social Security, health care and defense spending — each of which ate up about $200 of your $1,000 weekly paycheck.

Even though you may not have health insurance, about $219.40 of every $1,000 of your taxes went to pay for health care last year. On an annual salary of $52,000, that works out to $11,408.80 a year. The biggest chunk of that ($124.20 per thousand) went to pay for Medicare, which provides health coverage for people over 65. The rest ($95.20) went for Medicaid, which covers low-income families and individual, and state administered health coverage for children.

While most households are having a hard time setting aside a few bucks a month for their IRAs, your government is busy stashing away retirement cash for a rainy day; some $206.60 of the weekly paycheck went to the Social Security fund — most of which is officially “off budget.” (But let’s not get started on that whole lock-box thing.)

Next up is military spending. This includes a variety of defense costs, including salaries for the troops ($48.00); operating and maintenance costs ($76.70); “procurement” — which means stuff you bought ($33.80) — and research, development, test and evaluation of all those things you bought ($25.80). Throw in $12 or so for things like “atomic energy defense activities” and housing the troops, and you paid $196.50 to keep the world safe. (Or $10,218 for the year.)

Unfortunately, Uncle Sam — like many Americans — has been living beyond his means and spending more than he takes in. To make up the difference, the Treasury steps up by selling more debt — roughly the same as you or me using our credit cards. And like most credit card users, Uncle Sam isn’t paying back that debt, he’s just making the minimum monthly payment. So interest on the Treasury’s credit card eats up $122.20 of Uncle Sam’s $1,000 paycheck. That bill is cut by $36.80, thanks to the interest that the government pays itself for Treasury debt that it keeps “off-budget.” (Again, let’s not go there.) Your net interest payment amounts to $85.30.

There’s also a line in Uncle Sam’s budget for $132.70 for “income security” which includes things like unemployment insurance ($12.70); food and nutrition programs ($20.30), and housing assistance ($14.40). Also tucked into this line item is the cost of retirement for federal workers ($37.00).

After that the bills start to look pretty manageable — but then you’ve only got about $160 left. You’ve got to keep up in a fast-changing, competitive global world, so Uncle Sam spends $44.60 per thousand on education, including $19.00 on colleges and universities and $15.00 on elementary and secondary schools. Workers training programs cost $2.70 and social services related to education and training cost another $6.20.

You may have also heard your elected representatives talk about their commitment to keeping American in the forefront of science and technology. Last year, they’ve devoted $3.40 to general science and basic research. Another $5.50 went to pay for the space program.

Like anyone else, Uncle Sam has to get around. Transportation costs ate up $26.50 per thousand in federal spending, including $17.00 for ground transportation; $6.80 for air travel and $2.50 for water transport. Imagine spending just $17 bucks a week on your car and $2.50 for a boat.

The government also spent a few of your tax dollars on agriculture ($9.80) and the environment ($12.40). So call it $22.20 for landscaping and gardening.

While our military is working to keep the peace overseas, keeping the peace at home was a relative bargain. Total spending for the administration of justice came to $15.40, including federal law enforcement ($7.50), and maintaining the federal courts ($3.80) and federal prisons ($2.30).

Despite all the headlines about billions spent for helping victims of natural calamities like hurricane Katrina, federal disaster relief and insurance spending amounted to just $17.40 per thousand last year. Another $3.20 went to community and regional development.

And while some readers complain about seeing their tax dollars going to fund aid to other countries, it’s not a big number. Last year, $6.30 went to pay for international development and humanitarian assistance. Housing ambassadors around the world and other expenses related to conducting international affairs set you back $3.20. Another $2.90 went to help beef up security outside our borders.

Finally, spending all this money and managing all these activities also cost money. So figure $6.90 for general government costs.

So there you have it. Not all of that money came from your incomes taxes, by the way. This year individuals will pay about $1.2 trillion of the $2.7 trillion federal spending, while corporations will pay $342 billion. The rest comes form Social Security taxes ($873 billion); excises taxes ($57 billion) and other taxes and fees ($98 billion.)

For everything else, there’s U.S. Treasury debt.

What is the reason for having a extra day to file federal income taxes?
-- Lloyd F., Monroe, La.

In fact, this year we all get a two-day extension. The first extra day was simple enough: because April 15 falls on a Sunday – not a business day – you would otherwise get until midnight Monday, the 16th to file your return.

The reason for the second extra day is a little more complicated. At first, the extra day only applied to taxpayers who live six Northeast states and the District of Columbia, whose returns are processed the IRS’s Andover, Mass. office. That’s because people in the great Commonwealth of Massachusetts – including the federal workers at the IRS - celebrate Monday as Patriots’ Day, a legal holiday.

So far so good. It wasn’t after the IRS printed up its forms – giving an extra two days just to those folks whose returns go to Andover – that someone noticed that April 16 is also holiday in the District of Columbia. Though not a federal holiday, Monday is Emancipation Day, a legal holiday for people who live in our nation’s capitol - including federal workers at the IRS.

Originally celebrated every year from 1866 to 1901, Emancipation Day marks Abraham Lincoln's 1862 signing of the act that ended slavery in the District. This year, thousands of people are expected to march to Congress to press for legislation giving D.C. a seat in the U.S. House of Representatives.

Meanwhile, up in Massachusetts, they’ll still be celebrating Patriots’ Day. For those of you who don’t remember, the holiday commemorates the Revolutionary War battle of Lexington and Concord, which was fought on April 19, 1775. (In the 1960s, the date was changed to the third Monday in April.)

On Monday, they’ll hold a re-enactment of the battle, a Red Sox game at Fenway Park (this year, against the LA Angels) and the annual running of the Boston Marathon.

At this writing, the forecast was for rain and temperatures in the 30s. So don’t forget to bring your slicker.


© 2007 MSNBC Interactive
URL: http://www.msnbc.msn.com/id/18098378/

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How Can I Fix My Credit Score

How can I fix my credit score?
Some simple steps you can take - without paying for "credit repair"
COMMENTARY
By John W. Schoen
Senior Producer
Updated: 8:16 a.m. PT May 29, 2007
Maybe it's the rising tide of spam offering "credit repair" but a number of readers have been asking lately how they can increase their credit scores. Before you go pay someone to give you advice you can get for free, check out these simple steps you can take to build better credit.

How would a person go about repairing their credit score when it is low?
— M.P., Bryan, Tex.

I'm trying to raise my credit score. Is it better to pay off credit cards and close them or leave them open with credit available showing?
— Tea C. Newark, Del.

Unfortunately, it's a lot easier to lower your score than it is it raise it.

But there are a number of things you can do to try to raise your so-called FICO score, named for Fair Isaac and Co., the company that created this credit rating system now widely used by lenders of all stripes for a quick read on your creditworthiness.

While the system is widely used, it’s far from perfect. Good lenders use it as a starting point, and each one has their own ideas about how high your score should be. They may also base their decision on other information not contained in the score — like how long you’ve lived at your current address or held your current job.

In general, you’ll pay higher interest rates the lower your score. In theory, the lower your score, the higher the risk to the lender that you won't pay the loan back. FICO scores range from 300 to 850; the median score is 723. To get the best rates, you’ll usually have to have a score of at least low- to mid-700s.

Your credit score is compiled from information collected by the three major consumer credit agencies and each one calculates scores a little differently. So you probably have slightly different scores with each agency.

So the first step in raising your score is to make sure the information used to calculate it is correct and up-to-date. For that, you’ll need to get copies from each credit agency; you can get one free every year by going to AnnualCreditReport.com — a Web site set up under a federal law requiring the credit agencies who collect all this information on you to give you access to a free copy of your reports once a year. You’ll see a number of other pitches out there for "free" reports; when you get to the fine print, you have to supply a credit card, sign up for a "credit monitoring" service and then cancel after they've charged your account.

Once you get your report, look it over carefully. Are there records of past due payments you can show you made on time? Are there accounts still listed that have been closed? Worse, is someone else’s account or address listed under your name? One reason to check your report if to see if identity thieves have been opening accounts in your name. If you find any mistakes, write to the reporting agency and ask to have the information corrected. You should get a response within a few weeks; if not, give them a call.

OK, so now you know what your report says about you. Unfortunately, while the law gives you free access to your credit reports, you’ll have to pay to get your FICO score. Some lenders will provide your score when you apply for a loan. But if you want to know beforehand, you have to go to MyFico.com and pay $15.95. (You can sign up for a free 30-day trial once.)

While the exact formula for calculating your score is not public, the basics are available on the Fair Isaac & Co. Web site, along with guidance on how to raise your score. And while there are companies out there selling “credit repair,” you don’t need to pay to have someone else raise your score for you. Here are the types of information the formula takes into account, how much weight it gives each category, and what you can do on your own to raise your score:

Payment history: 35 percent
The single most important thing you can do is the simplest: Pay your bills on time. More than a third if your FICO score is based on your payment history: how often you’re late paying credit cards, car loans, mortgages and student loans. The later you are, the more you hurt your score. And closing an account with late payments after you’ve paid it off doesn’t get rid of the damage to your score any faster than leaving it open.

How much you owe: 30 percent
The next biggest chunk of the score is based on how much you owe. The simplest solution: Pay down your credit cards and other installment loans. Moving money from one card to another won’t help: you have to reduce the overall balance.

Credit issuers also look at how much of your borrowing power you’re using. Even though you’re keeping up with monthly minimum payments, if you’re at your limit on one or more cards, you’re at greater risk of getting in over your head — which will likely be reflected in your score. On the other hand, if you can get your bank to raise your limit, the extra headroom on your account should help your score.

Length of credit history: 15 percent
This one is hard to speed up; lenders want to see a track record of timely payments. Even if you have had credit for along time, a lot of newer accounts will lower your score. That’s why closing old accounts may reduce your score: it may shortens the average length of your credit history.

If you’re just getting started, stick with one or two accounts and gradually add more. If you can get yourself added to an account of a relative with good credit, that may help. And if you have no credit history, you may want to start with a secured loan or credit card. By keeping money in a savings account with the same lender — and using it to back your loan — you’ll lower the risk to the lender, get a better rate and start building a good payment history.

New credit: 10 percent
Opening up a lot of accounts all at once can also hurt your score — even if you pay all your bills on time and don’t carry big balances.

You may also hurt your score if you’re constantly changing cards and chasing a lower rate. Your score can also take into account how many inquiries lenders make to credit agencies asking about your credit. Too many request for information may mean you’re embarking on a borrowing binge. On the other hand, Fair Isaac says it doesn’t count inquiries form lenders who want to pre-approve you — without your approval. And shopping among several lenders all at once – without opening more than one account — also shouldn’t have an impact, according to the company’s Web site.

Types of credit: 10 percent
Most people have different kids of credit — credit cards, mortgage, car loan, student loan, etc. Open-ended credit — like a credit card is called revolving credit because it doesn’t have a fixed number of payments. A car loan or mortgage, which does, is known as an installment loan because when you finish the payments the loan is closed. Lenders want to see how you handle both kinds of credit. But opening more accounts won’t necessarily help offset a spotty track record of payments on existing loans.

I do not believe in credit cards and every online site I have gone to asks for credit card info. I don't have a credit card, don't want a credit card. So how can I get my credit scores for free?
— Connie S., Citrus Springs, Fl.

If you’ve never borrowed money from a bank or other commercial lender, you may not have a credit history. Which means you won’t need to check your score because you won’t have one.

But credit agencies keep track of more than just credit cards. You can still check to see if you have a credit history — for free — without a credit card. The sites that ask for credit card numbers are trying to trade on confusion about the process by signing you up for “credit monitoring” services for as much as $90 a year. You don’t need that.

The only thing you’ll need to provide AnnualCreditReport.com is your name, current address, Social Security number and date of birth. You’ll then be forwarded to the credit agencies Web sites one by one, where you can view your report online and print it out.


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