What's Your Score? What Does It Mean?

The credit industry is keeping score. Every time you apply for a credit card, a mortgage, insurance, or perhaps even a job, your application is judged in part by your credit score. Ranging from 300 to around 900, the number is used by lenders to objectively measure your creditworthiness. The higher the score, the more likely you are perceived to repay credit. Consumers with scores less than 600 usually are categorized as higher risk and may pay a higher interest rate or be denied credit.

Fair Isaac & Co. (FICO) is the largest creator of credit scores. While most lenders use FICO scores, there are many different kinds of credit scores, and some lenders even create their own scoring models. Thus, your credit score could vary by 30 to 100 points because lenders weigh credit factors differently.

Factors that affect your credit score include payment history, amount of debt you carry, length of credit history, whether you frequently apply for new credit, and your credit mix (credit cards, retail cards, mortgage, personal loans).

The best advice is to pay bills on time and only charge as much as you can afford to pay in full when the bill is due on credit cards and other revolving accounts.

To order your credit score for $12.95, go to www.MyFico.com. Call the credit reporting agencies for pricing options for credit reports and credit scores: Equifax 800-685-1111; Experian 888-397-3742; TransUnion 800-888-4213.

High Loan-to-Value Loan: Friend or Foe?

A high loan-to-value (HLTV) mortgage or home equity loan is one that equals or exceeds the value of a borrower's home-sometimes reaching as high as 125% to 150%. Some lenders market this type of loan toward people who have run up considerable credit card and other consumer debts because it can consolidate outstanding debt and lower borrowing costs.

In exchange for offering their home as collateral, borrowers are charged lower interest rates than they would pay on unsecured consumer loans. Lower interest rates coupled with long maturities (up to 30 years) make monthly payments attractive, because they often are less than the monthly payments of the loans paid off in consolidation.

Still, there are potentially serious drawbacks. Many borrowers think HLTV loans are mortgage loans and accordingly believe interest payments are tax-deductible. But Internal Revenue Service rules prohibit interest deduction on any part of a mortgage that exceeds the market value of the house.

Lenders place emphasis in underwriting for HLTV loans on the borrower's credit quality as opposed to collateral value. For example, lenders evaluate applicants on credit scores, financial stability, and ability to handle payments. They are enacting new lending guidelines and increasing credit score requirements to ensure that HLTV loans perform successfully and to weed out risky borrowers.

When managed properly, HLTV loans are safe-and profitable for the lender. The biggest disadvantage of converting unsecured credit card and consumer debt to an HLTV loan is that in case of default, the borrower could lose his or her home. Still, many people burdened by the high cost of unsecured consumer debt are willing to take the risk in order to lessen their monthly payments. If you're in that situation, talk to a loan officer at FCFCU for information about safe options.