How to Lower Your Credit Card Interest Rates to Save Money

When you shop for a new credit card, the interest rate is one of the key factors to consider. The rate is partly what determines the size of your payments, and it also determines how easy (or hard) it will be to pay your balance off later on.

But what if you already have a credit card, and you need to lower the interest rate on the card? How do you go about it? Well, there are several ways you can do this actually. So let's take a look at each one in turn:

How to Get a Lower Interest Rate

These techniques do not work 100% of the time. But they do work some of the time, so they are definitely worth a try. Read the explanation offered for each technique to see which one might fit you the best. Here are five ways to get a lower interest rate from credit card companies.

1. Negotiating with Your Credit Card Company

You can negotiate with your current card company to get a lower interest rate on the card. But this usually only works if you're a good customer with no missed payments, and if you have a good credit score. After the economic recession, many card issuers raised interest rates across the board -- even for their most responsible customers.

I've heard stories from many folks who gave their card issuer an ultimatum: "You need to lower my credit card interest rate, or I am closing the account." Sometimes it works, while other times it does not. But it's an option for lowering your rate, so it deserves a spot on this list.

2. Switch to Another Card Company

If you're like most consumers in the U.S., you probably get a steady stream of "pre-approved" credit card offers in the mail every week. Throw those away. Better yet, shred them so nobody can use them. There's a better way to shop for credit card interest rates, and that's by using the Internet. We even have a web page that can help you find the best card offers available.

The credit card industry is fiercely competitive, and the interest rate is their preferred tool for competing with one another. These companies pull in new customers by offering lower rates, more so than any other marketing technique. As a result, many card issuers offer low rates on balance transfer -- sometimes as low as zero percent (for an introductory period).

If you are looking for a lower credit card interest rate, and you plan to pay down your debt, this is one of the best ways to do it. If you transfer your balance to a card with a lower rate, you can reduce your debt quicker because more of the payment will be applied to the balance (instead of interest). You'll also save money in the process, while reducing your debt -- so it's a double win.

3. Improve Your Credit Score

When you apply for a credit card, the card issuer will check your credit score to see what category you fall into. Depending on your score, you'll either be super prime (excellent credit), prime, near prime, or subprime (bad credit). Yes, you are just a number with a label to these folks -- that's the reality of it. The interest rate you get on your card will be largely determined by your credit score. In fact, this score determines your rate more than any other single factor. Thus, you can lower the interest rate on your card by improving your score.

If you improve your score significantly, try asking your current card company for a lower rate. If they don't give it to you, consider transferring your balance to a card with a different company. You'll probably qualify for a lower rate with the new company, based on your higher score.

P.S. -- We have plenty of advice on this blog to help you improve your score. Here's a good place to start that research.

Credit Card Fees and Fine Print

There's a lot of change happening in the credit card industry right now. New laws were passed in 2009 to better regulate this industry, and they will go into effect in the summer of 2010. What does this mean to you? It means you need to pay closer attention to the fine print, because the credit card companies will get a lot more creative in the near future. Many companies, for example, will charge entry and exit fees when new customers sign up, or when existing customers close their accounts.

Your primary goal is to lower your credit card interest rate to save money, but you also need to protect yourself in the process. So read the fine print!

Does Canceling Credit Cards Improve Your Credit Score?

Reader Question: "We have a few credit cards were thinking about canceling, but I'm wondering what this will do to my credit score (planning to buy a home soon). Does canceling cards improve a score, lower it, or not affect it at all?"

Let me start with those two dreaded words -- it depends.

Mostly, it depends on how old the card is and what kind of balance you have on it. Believe it or not, canceling a card can actually lower your credit score. But before we go any further, let's talk about the five factors that influence your score the most. Here's a chart that shows all five of them:



As you can see by the FICO scoring chart above, the length of your credit history accounts for about 15% of your overall score. With all other things being equal, a longer credit history will produce a higher score -- and vice versa. So if you are canceling your oldest credit card, you will shorten your history in the process. This could make your score drop. How much it will drop, I can't say. But it will likely have a negative impact of some kind.

Now, there's another important consideration here, and that is your credit utilization ratio. In the chart above, this is referred to as the "amounts owed," and it's shown in red. This factor compares your balance to your available credit limit. If you are using a high percentage of your available limit (i.e., you are nearly maxed out on your credit cards), then you will hurt your credit score. On the contrary, if you reduce the balance so that you're only using a small percentage of your available limit, then your score will go up.

So what does this have to do with canceling credit cards? Good question. Your utilization ratio is actually measured across all of your credit cards. So let's assume that you have three different cards. One of them has a pretty big balance, relative to the available limit (a high utilization ratio). The other two cards have low balances, relative to their credit limits. It breaks down like this:

Card #1 Limit: $2,000 Balance: $1,800

Card #2 Limit: $2,000 Balance: $100

Card #3 Limit: $2,000 Balance: $300

In this scenario, my total credit limit (across all of the open accounts) would be $6,000. My total balance across all cards is $2,200. So I'm only using 36% of my combined limit. Yes, I have one card that's nearly maxed out, but I have two others with very low balances. Now let's assume that I pay off cards #2 and #3 and cancel the accounts entirely.

After canceling the cards, my utilization ratio has changed dramatically. Now I only a single card (#1 above), and it has a big balance on it. Guess what happens to my overall credit utilization ratio? It shoots up to 90%. This is a scenario where canceling credit cards will actually lower my score, by increasing my utilization ratio (shown as "amounts owed") in the chart above.

But wait, there's more. If one of the cards I canceled was the oldest of the three, then I've also shortened the length of my credit history. And remember what we talked about earlier -- a shorter history generally means a lower score, relatively speaking. So this is a case where canceling cards has a "double whammy" effect. It increases my utilization ratio, and it also shortens the length of my history. So my score is going to take a hit.

Before Canceling Credit Cards ...

We've talked about a lot of different things here, so let's recap some of the key points. Canceling cards may increase or decrease your credit score, depending on which ones you cancel. The most important thing is your credit utilization ratio, and you can improve this factor just by paying your balances down (and keeping the accounts open). Use caution when canceling your oldest credit card, because this will shorten your history and may lower your score.

If you plan to apply for a mortgage loan in the near future, I would be extremely cautious about canceling accounts. If it has a negative effect (like the scenario I explained above), it might hurt your chances of getting approved for the loan. Your better off paying the balances down and leaving the accounts open. If you've got a few months before you'll be applying for loans, then it's not as big a deal.

I hope this helps you understand how canceling cards might affect your credit score, and I wish you all the best in your future home-buying process. Good luck.

What is the Statute of Limitations on Debt Collection Agencies?

Reader Question: "I am getting letters from a debt collector regarding an account that is several years old. Isn't there a statue of limitations for this kind of thing? How long can a collection company pursue an old debt that is unpaid?"

First, I want to define the phrase statute of limitations for readers who are not familiar with it. This is a legal term the refers to the length of time in which legal action can be taken. You hear this term used in the news a lot, when a person has committed a certain crime in the distant past. When they say it has exceeded the statute of limitations, they mean that it's past the point where legal action can be taken.

This concept also exists in the case of unpaid debts and collections. Except the statute of limitations for debt collection companies is not as clear-cut. In fact, it can be downright confusing -- especially with all of the misinformation people publish online these days.

Statute of Limitations for Debt Collectors

I think the best way to understand this process is start at the beginning. So let's talk about what happens when a debt goes unpaid, and how the statute of limitations comes into play.

• When a borrower goes into default (stops making payments), the original creditor has the right to send that account to a collection agency -- also known as a debt collector.
• Collection companies have a certain process they go through to try and recover unpaid debts. Typically, they will start with a letter of "introduction" to explain who they are, what debt they are trying to collect, etc.
• If the borrower does not pay the debt in question, the collection agency will move on to the next steps in their process. They might attempt to garnish the person's wages, which has to be approved by a judge in court. Yes, a debt collector can sue you in court.
• This entire process is regulated by federal law. Specifically, the Fair Debt Collection Practices Act (FDCPA) says what these companies can and cannot do when collecting.
• There is a statue of limitations that limits how long a collection company can pursue an old debt. These limitations are almost always defined by the state in which the borrower lives. A debt collector in Ohio, for example, has a much longer statute of limitations than a collector in Arizona (about 15 years and 3 years, respectively).
• Once the statute of limitations expires, neither the original creditor nor the collection agency can file a lawsuit. It's past the point of legal action by then.
• You'll need to do some research to find out what the laws and limitations are for your state. You might want to start with your state attorney general's website, or do a Google search for the key phrase "debt collection statute of limitations," followed by your state's name included. It varies from state to state, so it's not something I can easily include in this article.
  

Keep in mind, however, that an unpaid debt can still remain on your credit report. The statute of limitations only applies to legal actions (lawsuits), but not credit reporting. A negative entry can remain on your reports for up to seven years, according to the Fair Credit Reporting Act (FCRA).

So, to summarize: A statute of limitations is the period of time in which legal action can take place. After this time frame expires, a lawsuit cannot be filed. Such limitations are applied to the debt collection industry, but it varies from state to state. You need to research the laws in your own state to see who protections you have. These statutes do not apply to the credit reporting process -- that process is regulated by a different set of rules entirely (the FCRA).

I hope this answers your question about the statute of limitations for collection agencies in the U.S. Good luck.

Does Mortgage Pre-Approval Hurt My Credit Score?

Reader Question: "I'm confused about the pre-approval process. I haven't looked at any homes yet, but I am filling out a residential loan application for the mortgage planner. I think she just wants to see how much I can afford and go from there. Once this is done, how long do I have to buy something? Does the pre-approval expire after a few months? If I do it again, in say 6 months, will it hurt my credit report? I have heard it does. Also, is it different if I go for a Rural Development loan? I'm hesitant to go through this process and then end not finding."

These are all good questions. Let me start by saying you probably won't do any damage to your credit score by allowing a lender to pull your FICO credit scores. The credit scoring models are designed to allow for that sort of thing, because it's a normal part of the home buying process. If you applied for a bunch of credit cards in a short span, on the other hand, your FICO score might go down (because it shows you are having trouble managing your finances). But the pre-approval process won't affect your score much, one way or the other.

Secondly, I want to address another important issue you touched on in your question. You said the mortgage planner wanted to see how much you can afford. But you are the only one who can determine this. The mortgage lender can only tell you what they're willing to lend you. And that amount may be more than you can afford. People often get approved for mortgage loans that are too big for them -- it happens all the time, unfortunately. So you should be setting your own monthly budget, based on your monthly income and expenses. I recently published an article and video on this very subject, and you can find it here.

Most mortgage pre-approvals are only good for 30 to 45 days. If you don't have a suitable home in that time frame, you can simply renew the pre-approval. It's much quicker the second time around -- the lender just wants to make sure your income hasn't changed, your credit score is still about the same, etc. Your credit score make drop a few points, at the very most. But it's nothing to be concerned about.

Here's what it says on the MyFICO.com website about this subject. These are the folks who created the FICO scoring model used by most lenders today:
"For these types of loans, the FICO score ignores inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping."

I hope this answers your question, and I wish you well in your house hunting process.

Not a U.S. Citizen - How to Get a Credit Score

Reader Question: "I am currently not a U.S. citizen or resident (though my wife is a citizen) and we're looking to buy a home in the U.S. I wanted to find out how I could get a credit score, since I plan on applying for a mortgage from a U.S. lender. If I am a long-time user of a credit card, could I still get a credit score from one of the three U.S. credit-score companies, in the case that they have access to my information?"

My neighbors are non-citizens (from England), and they qualified for a mortgage about a year after moving to the states. They established credit primarily by obtaining credit cards. If you can get a credit card, and you have a Social Security Number, then you can build up a credit score.

Everything within the credit-reporting companies is managed by Social Security Number. So need to have that in order to establish a score. In addition to a credit card, you can establish a score with personal loans, checking / savings accounts, and other forms of credit.

The lender will also take you wife's credit into account, if you apply for a mortgage together. Your credit score is only a small piece of the approval "puzzle." The lenders will also want to know how much the two of you earn each year, relative to the amount you want to borrow. They'll want to know how much debt you are both carrying. And they'll want to know how long you've been employed with steady income.

My advice is to start talking to a lender, if you're ready to move forward with the process. In your situation, I would sit down with a local lender (in person), rather than doing things online. They can tell you what you need to work on, if anything. And who better to listen to than the lenders themselves?

I hope this helps you out some. Good luck.

Four Credit Cards Nearly Maxed Out - Best Way to Pay Them Off?

Reader Question: "I have four credit cards with a total balance of $4,500. My FICO score is in the 580's and all cards are close to being maxed out. I understand that having them below 50% will help increase my score, and what I really want to do is pay off all of the debt. Since I want to increase my FICO score as fast as possible, would it be better to pay them all down to less than half first, and then work on one card at a time using the 'snowball' payment plan?"

Unfortunately, I'm not familiar with the snowball payment plan you mentioned. I have never heard of the 50% rule either, with regard to credit utilization ratio. I recommend keeping things simple, since all of your credit cards are nearly maxed out. The FICO scoring system considers your entire credit usage across all accounts, but it also looks for "max out" situations. You currently have this situation across all four cards, so your best bet is to lower all of the balances in tandem.

If you want to use half the limit as a target, that's fine too. Fifty percent, forty percent, thirty percent ... whatever. The main thing is that you are lowering those cards away from their limits, and the more you do this the better.

Related article: Best Ways to Pay Off Debt

If you need more input on this, you might want to check out the forums over at MyFICO.com. There are people there who spend a lot of time analyzing this kind of thing (too much time, if you ask me). Still, it might be worth a visit. Take care.

Credit Card Sent to Collection - How to Rebuild Credit Afterward

Reader Question: "I have recently graduated from college and had a baby in the same nine months! I have hit financial struggles and have not been able to pay any of my credit cards. My credit cards will soon be sent to a collection agency. I have full intentions of getting these debts paid off once I get a full time job. I will also start paying my student loans. Is there any hope of fixing my credit score after my accounts are sent to collections and paid off from there? Will my student loan payments help build my credit score back up?"

First of all, congratulations on your graduation, and your new baby! Secondly, I'm sorry to hear about your financial struggles. Now let's get on to the question at hand...

Yes, it's certainly possible to rebuild your credit after the initial hit. Your score will go down when the late / missing payments are reported to the credit-reporting agencies. There's no way for me to predict how much it will drop -- only that it will. Other factors are taken into account by the credit scoring models, but late payments are high on the list. Your payment history accounts for about 35% of your FICO credit score. So when the original creditor reports it, your score will take a hit.

The best thing you can do after that is to (A) pay off the past-due balances as soon as possible, and (B) make all payments on time going forward. When you eventually pay off those accounts, I would wait 30 days and then check your credit reports again. You want to make sure your reports show the payment in full. You won't be able to remove the collection entry from your reports -- that kind of entry can stay on there for up to seven years. But you can change the current status to "paid" and get on with your life. Your score will rise steadily over time, as long as you continue to pay all other bills on time.

Making your student loan payments on time will certainly help you rebuild your score after the collection issue. Think of it as a "time and good behavior" situation. Regardless of what damage you do to a score, you can always improve it with time and good behavior. Within this context, I'm referring to the kind of behavior where you pay all bills on time, maintain low balances on credit scores, etc.

Here are some related articles you might want to check out:

• How to increase your credit score quickly
• Paying off debts and collections to improve credit

I hope this helps you out some. Good luck with the new baby.

Paying Off Debts - How Long Until My Credit Score Improves?

Reader Question: "I have a question about my credit score. Why is there such a difference between the three credit agencies? TransUnion has me at 761, Experian - 732 and Equifax 701. I am looking at buying a house sometime this year. I think I'm sitting pretty well for a good rate on a mortgage but would like to improve the lower two scores. In the past month I paid off my car, one of my student loans and my credit card. So right now I only have student loan debt. How long will it take for these payoffs to affect my score, and will they change it much?"

Question #1

Let's start with your first question, since it's the easiest one to answer. The reason the credit bureaus don't agree is because they are three different companies with different procedures. They collect information differently from one another. They convert data into credit scores differently. And they keep their own data proprietary -- they don't share it.



Your credit scores are based on the information contained within your credit reports, and the information in your reports comes from your financial activity. But each of these companies interprets your past behavior in different ways. So the scores rarely match. Sometimes, there is a big difference between them (like the 60-point difference between your TransUnion and Equifax scores).

Question #2

There's no way for me to predict how long it will take for your score to improve, because there are too many variables at work. Your credit utilization ratio is one of the biggest factors that affect your credit score. This ratio measures how much of your available credit limit you are using. If I have a credit card with a $5,000 limit, and my current balance is $2,500, then my utilization (or usage) is 50%. I'm using half of my available balance. If I keep that card open by pay the balance down to $500, then my utilization ratio improves considerably -- and so will my credit score.

However, if I pay off my credit card balance and close the account, then I don't have any utilization at all. No cards ... no credit limits ... no balances. Now it becomes harder for an imperfect scoring model (like the FICO score) to measure my "performance." Additionally, by closing my older credit account, I might even shorten my credit history. This can also lower my score.

Of course, if you have a solid payment history on all of your debts, then closing a credit card is not going to make a huge difference in your score. Not in the grand scheme of things, at least. You can see what I mean by there being a lot of variables at work. This is why it's impossible for me to offer you any predictions, as far as time frame is concerned.

Some lenders will look at all three of your scores when reviewing you for a loan. This would work out in your favor in this case, because the highest score would bring up the average. Other lenders will only look at two out of the three, or perhaps even a single preferred score.

I think you're in good shape for getting a mortgage loan, with your current scores. If everything else checks out, you would probably get a good rate on a loan. Of course, if all three of your scores were in the 760-or-above range, you'll probably qualify for the best rates the lender has to offer. And that can make a big difference in your monthly payment.

If you can afford to wait a few month before getting a loan, you might want to do that. There's a good chance your score(s) will go up by then.

My Credit Score is 640 and Wife's is 740 - Can We Get a Home Loan?

Reader Question: "I've had bad credit for a while, but I've been fixing it for the last two years. I had substantial credit card debt and defaulted on a lot of them. They will all be paid off within the next couple of months. My credit report shows four accounts that are paid in full, but shows that they were delinquent about a year ago. My current credit score is 640 and my wife (who is not on any of these accounts) has a 740 credit score. How hard is it going to be to get a home loan? Total income is 125,000 a year."

First of all, keep on doing what you're doing! It sounds like you are on the right track, and that you've come a long way in terms of improving your credit score. There's nothing you can do to remove the initial delinquencies from your credit report, even though you have paid those debts in full. Paying them off is the right thing to do, but the initial delinquent reporting can remain on your credit reports for up to seven years. Still, you are doing the right thing by paying your old debts, and a mortgage lender will take this into consideration.

A credit score of 640 is a little low for mortgage qualification, by today's standards at least. Most lenders would put you into the subprime category, and they just aren't making subprime loans anymore these days. But you don't have far to go -- 670 is the minimum qualification score cited by most lenders today. Of course, they'll also look at your debt-to-income ratio and other factors. But the FICO score is important.

Your wife's credit score of 740 is definitely strong enough for mortgage approval. If the two of you apply for a mortgage together, the lender will take both of your financial histories into account. So you stand a good chance of getting approved for a loan -- especially if you can bump your own score up to 670 or above.

My advice is to keep up what you're doing. You might also want to apply for a mortgage quote, just to see what kind of feedback you get. If a lender denies you, they will tell you the reasons why. They may also give you specific advice on what to fix. It couldn't hurt.

Which Debts to Pay First When Money is Tight

Reader Question: "My husband recently lost his job, and we have limited funds to hold us over until he finds work again. We are wondering which debts we should pay first, and which ones could be put 'on hold' for a while. Thanks."

I'm sorry to hear about your husband losing his job. In a perfect world we would always be able to pay our debts in full, and we would never have to prioritize what we pay and when. But, as you can attest, we obviously don't live in such a world. Life throws us a few curve balls from time to time, and it often involves money.

So, which debts should you pay first? Let me start by saying I'm not a financial advisor. Just a finance writer. So you might want to consider getting some non-profit debt counseling. Among other things, a counselor can tell you which debts to pay first, how to budget your money, etc.

With all of that being said, here's what most experts recommend for paying debts with limited resources.

1. Housing is an essential item that should be placed at the top of your list. Having a roof over your head is clearly one of the most important items. So your rent or mortgage payments should be given top priority. You should continue to pay these debts first to ensure you have a place to live. This is especially important if you own a home -- you don't want to sacrifice your biggest asset by having it foreclosed upon.

2. Secured loans are those that are backed by some form of collateral. Your mortgage loan, for example, is a secured loan -- if you don't pay it you'll lose your house. These types of loans should be put at the top of your priority list. If a creditor could take you to court for not paying your debt, and eventually seize property or other assets, you need to pay those debts first. Unsecured loans, on the other hand, can be given less priority.

3. Utilities are also important. After all, what good is a house if you don't have electricity. If you live in a harsh environment where heating / cooling are necessary, this even becomes a safety issue. So this is another debt you should pay first.

4. Car payments are another high-priority item, especially if you need your car to get to and from work (or in your husband's case, to find work). You can't pay your debts without income, and you can't secure or maintain your income without the required transportation.

Getting Help With Your Debt

I've touched on this earlier, but it bears repeating. There are several non-profit organizations that can help you manage your debt, decide which ones to pay first, and much more. "Non-profit" means that these groups offer free and low-cost counseling services. There are several groups worth looking into. Here are two that I recommend:

• National Foundation for Credit Counseling (NFCC.org)
• Consumer Credit Counseling Services (CreditCounseling.org)

I hope this helps you decide which debts to pay first when money is tight, and I hope you guys get back on your feet quickly. Good luck and best wishes.

Credit Score Improvement for Beginners

How does credit score improvement work, and why is it important? How does it relate to the home buying process? These are common questions among first-time home buyers, and they are some of the topics we will address in this lesson.

Things to Know About Credit Improvement

So without further ado, here are some of the most important things you should know about credit score improvement and how it relates to home buying:

1. Good credit is the key to financing, especially when it comes to home loans. When you apply for a loan, one of the first things the lender will do is check your credit. Why do they do this? Here's why...
2. Your credit score is basically a numerical representation of your past financial activity. In other words, it's a number that shows how well (or poorly) you have managed your credit in the past.
3. It's harder to get approved for a mortgage loan today than it was just a few years ago. Because of the housing crisis and economic recession we just went through, lenders have tighter lending standards. This makes credit score improvement more important than ever, especially for home buyers.
   
4. You are the only one who can improve your score. There are many companies who claim to know "secret" techniques for doing this, but these companies are mostly scam artists. Credit score improvement starts and ends with you.
5. There are certain tried-and-true techniques for improving a credit score. These have not changed much over the years, despite other changes in the reporting industry. The key to improvement lies within three things -- paying your bills on time, reducing your credit card balances, and fixing errors on your credit reports.
   
6. While it requires patience and persistence over time, this process is well worth the effort. This article shows the real-world benefits of credit score improvement, in the form of money saved each month.
7. There is plenty of information online to help you achieve success in this area. This blog, for example, offers more than 100 articles on the subject of credit improvement and similar topics. There are also several non-profit organizations who offer free and low-cost counseling in this area.
8. FICO score improvement can help you get approved for a home loan, and also get a better interest rate on that loan. We've talked about that. But it's important to realize you should start this process early. It's a marathon -- not a sprint. Here's an article that explains how long it might take to improve your score significantly.
   

I hope this articles gives you the motivation and direction you need to improve your financial situation. And I hope you realize just how important credit improvement is when you are buying a home and applying for mortgage loans. If you would like to learn more about this subject, check out our My Credit Score library of articles. Good luck!

How a Better Credit Score Affects Your Mortgage Payments

Summary: How does a better credit score affect you when applying for a mortgage loan, and how much money can it save you each month? Let's take a look.

I'd like to take a break from answering credit questions in order to share some interesting math with you. I know what you're thinking: "There's no such thing as interesting math." But stick with me. The following numbers will show you how a better credit score could affect your mortgage rate and save you money. Ah, now I have your attention!

You probably already know that earning a better credit score will help you get a lower interest rate on a mortgage loan. That score isn't the only thing lenders will review -- they'll also look at your income, your overall debt and other things. But your credit picture is one of the top factors that determine whether or not you get approved for a loan. So the better your score, the better your chances of getting a mortgage.

In the current economy, you'll probably need a score of 750 or higher to get the best rates a lender has to offer. But how does this translate into monthly savings? Let's do some basic math to find out. Here's a realistic scenario that shows how much a better credit score can save you each month.

A Better Credit Score Scenario for Saving Money

Let's say I'm looking for a home loan in the amount of $250,000, after my 20% down payment. So I find a lender and apply for a loan. I find out that my credit score is 650, which is at the bottom of the lender's qualification scale. I'm able to get approved with a score in this range, which is good. But I won't the get lender's best interest rates at this level. I would need a better score to do that. So here's how the numbers work out.

Mortgage Scenario #1

• I opt for a 30-year fixed mortgage.
• The loan amount is $250,000.
• My FICO credit score is 650.
• The lender approves me for an interest rate of 6.9%.
• My mortgage payment comes out to around $1,646 per month.

Now let's assume I went through this same process with a better credit score, and all other factors being the same. How does this affect my monthly payment? How much money do I save? A mortgage calculator reveals the following numbers:

Mortgage Scenario #2

• Once again, I choose a 30-year fixed mortgage.
• The loan amount is the same -- $250,000.
• This time, I have a better credit score-- 780.
• The lender approves me for their best rate, which is 5.4%.
• My mortgage payment comes out to around $1,400 per month.

In this scenario, I could save around $246 per month. I don't know about you, but I sure would like to have another $246 in my pocket each month. And with a better credit score, that's exactly what would happen. What does that amount mean to you? A car payment? A few trips to the grocery store? More money to put toward savings, or perhaps a few more dinners out each month? However you spend it, we can agree that it's better off in your pocket than the lender's pocket!

This is a very realistic scenario, by the way. I didn't pull these numbers out of thin air. I used Freddie Mac's weekly mortgage survey for interest rate figures, and I used an accurate mortgage calculator provided by Bankrate.com. And the numbers don't lie. You can save a lot of money by improving your credit situation before buying a home.

If you find out that your score is low, and you want to know how to improve it, you'll find plenty of advice on this blog. Here is some recommended reading on the subject. You can also find a lot of good advice on the MyFICO.com website.

I hope this helps you understand the value of a better credit score, and how it relates to your monthly mortgage payment. Good luck.

Duplicate Entries from Collection Agencies - Can I Dispute It?

Reader Question:

In looking at my credit report, I see a lot of cases where an original debt was charged off and sold to a collection agency (perhaps then sold to another agency,) and so is reported multiple times... I read Brandon's blog article from 11/08 about duplicate entries, and I understand that this is "the same account with two different statuses"... can you please tell me whether I should dispute this? Which entry really should stay on there, the original one (since it's the oldest and would be the soonest to "fall off")? Also, if I have paid the debt and wish to get a "goodwill removal," should I write to the original creditor or the latest collection agency to ask for it to be removed (if I paid the collection agency)?

Brandon's Response:

Inaccurate information is the only thing you can successfully dispute. Actually, you can dispute just about anything, but you'll only get results when dispute errors. For example, if a creditor really did charge off a debt and sell it to a collector, then there's not much you can do about that entry. If it's truthful and accurate, it can stay on your report for up to seven years. It's hard for me to say what's accurate or inaccurate, because I don't know anything about the accounts.

If you have paid the debt off, your credit report should reflect this. If it still shows the debt as being open / unpaid, then somebody needs to update the reporting -- typically this would be the last person who reported the status for that item. If the information is incorrect, you can dispute it with the reporting agency that produced that particular report (TransUnion, Equifax or Experian). They are required to investigate the item. And if they find that your claim is correct they must remove the erroneous item.

Here's a Consumer Reports article that might be eye-opening.

And here's an FTC guide to credit report repair:
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm

Hope that helps.

-Brandon