No wonder so many people are mystified by money matters. Sometimes, home financing facts defy logic.
– People with lots of debt can find it easier to get more credit than those with fewer bills.
Because lenders now rely on a single number, called a credit score, to size up the creditworthiness of borrowers, it’s the score that counts, not individual bills.
It would seem like those who don’t owe much would come in with high scores. Not so, finds a recent survey by Experian Consumer Direct, an online provider of credit products.
In fact, the national average credit score for those with debt above the national average is higher than the credit score for those with debt below the national average, finds Experian.
The average credit score on the Experian model is 677, with scores ranked on a scale from 330 to 830, with 830 being perfect.
The 25 percent of U.S. consumers carrying debt above the $11,224 average national load (debt includes car loans, credit card bills, everything but mortgage) averaged a score of 695.
More debt can often work to a consumer’s advantage, says Heather Greer, a spokeswoman for Experian, “as long as people manage their credit well, and have low balances in relation to the credit limit on each account.”
– If you forget to pay the Visa bill, will the roof spring a leak?
There’s no apparent connection between homeowners who fall behind with their bills and the possibility that wind, lightning or a similar calamity will befall their homes.
That’s why consumer advocates have been protesting the growing practice among insurance firms of using a homeowner’s credit score to set the rate charged on homeowner insurance. Insurers use credit scores to unfairly discriminate against groups that tend to have lower credit scores, consumer advocates say.
The Texas state legislature recently commissioned a study to examine whether there could be a correlation between a homeowner’s credit and the likelihood of filing a claim.
Turns out credit is a factor.
The study, which looked at some 600,000 Texas homeowners, found that policyholders who had credit scores in the bottom 10 percentile were 1.5 to 2 times more likely to file a claim than those in the top one-tenth. However, the age of the home and other factors are also big predictors of claims activity. The Texas study didn’t provide conclusions as to why credit scores are correlated to claim frequency.
– With a popular new mortgage, you can pay month after month, and still end up owing more than your starting balance.
It doesn’t happen quickly, but with each mortgage payment, homeowners typically chip away a little of the principal amount they borrowed, so they eventually own the house free and clear.
Now, mortgages are popular that turn that tradition on its head.
Often called “option ARMs” or “flexible payment ARMs,” these adjustable rate mortgages allow borrowers a choice of how big a check to mail to the lender each month: just a required minimum, or a larger amount. The bare-bones minimum, however, may not be covering all the interest charges normally due that month. The minimum payment is usually set once a year, but interest charges on these loans usually fluctuate each month, based on movements in market conditions. So, even if rates spike, the minimum stays the same and unpaid interest charges get added to the loan balance.
In lender’s parlance, the arcane term “negative amortization” describes arrangements where loan balances can get bigger. “The concept has been around for a long time, but it’s gotten popular in the last year,” notes Jack Guttentag, who runs a consumer-oriented Web site, www.mtgprofessor.com.
The 1980s was the last time the negative amortization loans appeared in big numbers, and the “the experience was bad,” he notes, because lots of owners couldn’t pay the mortgage bill when the minimum payment was adjusted upward.
“I’d really look carefully at these, especially in times of rising rates,” warns Guttentag.
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