Guest Columnist

Charlene Crowell | 12/28/2010, 9:20 p.m.

Don't Allow a Seasonal Splurge to Ruin Your New Year

In 2010, many consumers will likely find that the traditions of the annual holiday season may be difficult - if not impossible - to observe this year. According to the Urban Institute's National Survey of Homeless Assistance Providers, more than 500,000 people in this country do not have a place to call home each night and half of these people are also without shelter. Moreover according to HUD, an estimated 2,000,000 people experienced homelessness at some time during the year.

If you are one of the nearly one in four homeowners with a mortgage owing more on your home than it is now worth, count your blessings and remember that you are not alone.

The most recent survey by the Mortgage Bankers Association found that as of the end of the third quarter this year, approximately 7 million homeowners were 60 days or more delinquent on their mortgage. Although California, the nation's most populous state, has the dubious distinction of being home to the largest number of delinquent mortgages - over 600,000, the highest average mortgage debt per borrower is in the District of Columbia with $342,695.
Despite deep and widespread indebtedness, the holidays will still tempt many to use credit to help make their celebrations merry.

And, although access to credit is a long-standing concern for minority businesses and consumers alike, seasonal celebrations should not become an excuse to worsen already strained personal finances.

As many lenders, especially those offering mortgage loans, raise credit standards to qualify for a range of financial products, the cold and hard factor in reaching a decision on approving or rejecting a credit application will be determined by how well consumers have already managed their credit in this deepening recession. Troubled homeowners who have suffered foreclosure, a short sale or bankruptcy, should be mindful that those developments have likely already dropped your personal credit score.

Similarly, for those who are entering trial periods for loan modifications or are 30-days delinquent on a mortgage, think seriously before taking out a credit application to take advantage of a limited discount for new credit accounts. How often new credit applications are filed is one of the factors that determine credit scores.

The other factors in determining a credit score are payment history, outstanding debt, credit history length, and credit mix. Two of these factors - payment history and outstanding debt - account for 65 percent of the total score.

If you are considering whether to purchase a home in the New Year, be mindful that your credit score will be far more important than a seasonal extravagance. As many prospective homebuyers consider applying for mortgage loans, applicants with a credit score less than 700 will likely find credit approval a dicey process.

Among the largest banks, 90 percent use Fair Isaac Corporation (FICO) scores to make decisions. For example, if a consumer had a FICO score of 680 and then missed a monthly debt payment that one failure could lower their score by 60-80 points.

FICO scores range from 300-850 and measure how well consumer credit has historically been handled. In general, higher scores lead to better credit terms. In the case of mortgage lending, the direct benefit could be a lower interest rate over the life of the loan. Consumers with scores of 700 or most often qualify for lower mortgage rates. On a 30-year, $300,000 mortgage, a difference of 100 points could mean saving or paying $40,000 in interest over the life of the loan.

If you do not know your credit score, there is a convenient and free service available. Visit the government-mandated site, www.annualcreditreport.com where each year consumers can receive free credit scores. Although, many firms advertise 'free credit reports', those are usually private services that require a paid subscription for full access to your information.

If you're in doubt this holiday season about your credit, visit the government site and keep those dollars for something more useful.

Charlene Crowell is the Center for Responsible Lending's communications manager for state policy and outreach. She can be reached at: