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The Personal Strategic Planning Model

"Values lay the groundwork for your goals;
goals lead to the fulfillment of your mission;
your mission leads to the realization of your life's work
— your legacy!"

Your Credit score Ranking not Rating

If you're a responsible consumer and pay your bills on time, you don't run up exorbitant credit card debt, and you have a healthy credit mix, you probably assume your fabulous credit score of say, 760, is solid and safe. That is, until you go to apply for a home loan, or car loan and see that your credit score is actually more like 720 now. Or, maybe your credit score hasn't changed, but you are now denied a loan that you were able to get a year ago with that same, fabulous score.

So, what happened?

Yuliya Demyanyk, a senior research economist with the Federal Reserve Bank of Cleveland, provides this fascinating finding about credit scores:

Your credit score is not a rating of your credit worthiness, but rather a ranking of your credit worthiness compared to the rest of the U.S. population at a specific point in time.

In other words, when your credit score changes — even if your credit behavior doesn't change — it's because your rank order compared to the rest of the population has shifted. For example, if the rest of your fellow Americans are paying more of their bills faster than you, this will affect your rank and your score. Conversely, if your fellow Americans slip in their payments, your credit score and rank will rise. So, even if you do everything right, you are thrown into the mix with the rest of the population and your score/ranking is affected by what everyone else is doing.

Hidden Data Point — Credit Risk vs. Credit Worthiness

An additional component of your credit score is your credit worthiness. This is a data point that predicts the likeliness that you will pay your bills on time or fall behind in payments. You won't see this number since it's part of a credit-reporting bureau's secret, credit-scoring model, but this is important to lenders who make the assessment of whether to loan you the money. Like it or not, it is an indication of your level of risk to a lender: "What kind of track record does this person have in paying loans on time?"

Another thing to understand is that the relationship between credit score and credit risk is dynamic and changes over time. So the risk associated with a 700 score last year is not the same as the risk with a credit score of 700 this year. And it's risk that the lender fundamentally cares about, not the score.

Also, even though your credit score and credit worthiness might be stable, conditions beyond your control — market conditions, a bad recession — could affect everyone's credit worthiness, not just yours. This is certainly true today in our financial crisis that has affected major aspects of our economy — namely, jobs and housing. So, that fabulous credit score that got you loans in the past may have changed as the "bar" for a good score shifts upwards and out of reach as lenders pull in and loan less.

How Your Credit Score Is Calculated:

For the most part, credit scores are generated from one of three major credit bureaus – Equifax, Experian and TransUnion. Each of these bureaus collects credit information on you and then applies a statistical algorithm to calculate your credit score (the Fair Isaac Corporation was the first to create such a score which is why credit scores are still oftentimes referred to as FICO scores). Each of the bureau's scores will vary slightly because they each have their own proprietary methods to track customer credit behavior and use different methods for collecting data on you. Recently, the three bureaus have gotten together and created a common score call the VantageScore, which is common across the three bureaus.

Factors That Affect Your Credit Score:

35% — Payment history

Lenders look at your payment history on all your accounts; the length of your positive credit history and how long you have gone without a negative item; whether there are any severe unpaid debts like bankruptcies or foreclosures; and the number and severity of delinquencies in your credit history.

30% — Amounts Owed

Too many credit accounts and a high ratio of credit balances to credit limits can affect your score. Also affecting your score is the amount of debt on each account and the level of debt paid off on term accounts.

15% — Length of Credit History

Longer credit histories result in higher scores. Important factors incorporated into credit scores are: length of credit history, length of time specific accounts have been open, and the duration of time since each account was last used.

10% — New Credit

Credit scores track consumers who suddenly take on new debt and potentially overextend themselves, by checking to see when the last time a consumer opened an account and how many accounts were opened and by looking at the number of inquires on the consumer's credit reports.

10% — Types of Credit Used

The type of credit you have plays an important role in determining your credit score. A "healthy mix" of installment loans (mortgage payment, auto loan) and revolving credit from banks is considered better for your score.

What's a good credit score?

Scores may range from around 300 to 900 with the average credit score in America being around 720. Here is an approximate range of how credit scores are judged:

Excellent credit = 720 and above

Good credit = 660 to 719

Fair credit = 620 to 659

Poor/bad credit = 619 and below

For anecdotal evidence of your good credit standing, if you notice you are receiving a lot of zero percent credit card or lines of credit offers, you are probably in pretty good shape.

Summary

In conclusion, having a high credit score is still very important in getting the best mortgage rate, and you should be guided by the factors that make up your credit score. But, since you are ranked against the rest of the population and financial conditions also impact credit worthiness, improving your credit score is not always within your control.

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Truth about your credit score

Rent vs. own ratio to flip in 2011?

Posted by Nin-Hai Tseng, writer-reporter

January 4, 2011 1:41 pm

Many Americans are content to rent after witnessing the crumbling housing market in recent years. But with rents on the rise and home prices continuing to fall, a reversal is in sight.

It wasn't hard for many homeowners to bid adieu to 2010. It was the year where, in many metropolitan areas across the country, rents surged as home prices fell, leading a growing chorus of skeptics to question the so-calledAmerican Dream of homeownership.

Perhaps not surprisingly, it makes more financial sense to rent than buy today in many U.S. cities, according to the latest data from Moody's Analytics. After declining during the depths of the latest recession, prices for rentals nationwide increased modestly by about 3% in 2010, partly driven by a record number of homeowners looking for new digs after foreclosing on their homes. In Moody's latest list of rent ratios (which is the price of a typical home divided by the annual cost of renting that home) for 54 U.S. metropolitan areas, 39 fell into the 'better to rent' category -- roughly the same level it's been for the past year.

But that may finally be about to change. Moody's chief economist Mark Zandi expects the trend to reverse this year in many major cities. This would be a positive development, as a healthy housing market typically puts renting and owning at more equal footing.

"By mid 2011 and certainly by end of 2011, buying will be superior to renting in most parts of the country," Zandi says.

A few factors will be at play. For one, home prices are expected to fall further, with some economists expecting a 15% to 30% drop this year. This might be bad news for household finances and current homeowners fearing that their most prized asset stands to lose more in value. On the flip side, this makes homes more affordable and might finally spur more home sales, especially at a time when the rate of home construction has been the lowest since before the Second World War.

Just last week, the S&P/Case-Shiller index of property values reported a 0.8% fall in prices from October 2009 – the biggest year-over-year drop since December 2009. Eighteen of 20 cities showed a drop in prices in October. This was led by a 2.1% decrease in Atlanta, followed by a 1.8% drop in Chicago and Minneapolis. What's more, six markets, including Atlanta, Miami, Tampa and Portland, Ore., reached their lowest levels in October since prices started to retreat.

Indeed, the housing market continues to suffer from too much supply. Though rent prices are generally expected to continue rising modestly this year, the overhang will probably help keep prices from rising too much. "Expect more declines in home prices and more rent stability," Zandi says.

Still, the comparative costs between renting and buying will largely depend on individual market conditions. For instance, cities in Florida and Arizona, which continue to experience high foreclosure rates, falling home prices and widespread unemployment, will be areas where homeownership will likely be more affordable than renting, says Daisy Kong at Trulia, a San Francisco-based real estate data provider. Meanwhile, renting will probably continue to make more financial sense in national and regional job centers such as New York, Omaha and Seattle, she says.

And while it could become more attractive to buy than rent this year, it's anyone's guess how long it could take before a flurry of home sales transpires. Household finances have improved only modestly and are still quite a mess. Also, lending standards for new mortgages have tightened considerably and many economists have said a housing rebound will likely fall mercy to the unemployment rate, which is expected to improve some but still hover over 9%.

Will the American Dream return to your town?

Location	Price-Rent Ratio
Atlanta, GA	12.82
Austin, TX	21.08
Boston, MA	17.71
Baltimore, MD	17.42
Charlotte, NC	25.98
Chicago, IL	15.09
Cincinatti, OH	13.74
Cleveland, OH	11.43
Columbus, OH	15.61
Dallas - Fort Worth, TX	16.98
Denver, CO	22.08
Detroit, MI	12.32
East Bay, CA	35.06
Fort Lauderdale, FL	15.19
Hartford, CT	18.52
Honolulu, HI	34.72
Houston, TX	16.01
Indianapolis, IN	14.68
Inland Empire, CA	14.75
Jacksonville, CA	15.12
Kansas City, KS	14.4
Las Vegas, NV	13.89
Long Island, NY	21.09
Los Angeles, CA	14.99
Memphis, TN	17.92
Miami, FL	14.57
Milwaukee, WI	22.36
Minneapolis, MN	14.04
Nashville, TN	23.88
New Orleans, LA	15.66
New York, NY	15.43
Norfolk, VA	19.88
North - Central New Jersey	24.69
Oklahoma City, OK	16.11
Orange County, CA	27.14
Orlando, FL	13.1
Palm Beach County, FL	16.64
Philadelphia, PA	15.94
Phoenix, AZ	12.35
Pittsburg, PA	11.71
Portland, OR	25.74
Raleigh, NC	24.39
Richmond, VA	22.18
Sacramento, CA	15.85
Salt Lake City, UT	18.05
San Antonio, TX	17.77
San Diego, CA	21.75
San Francisco, CA	27.17
San Jose, CA	32.27
Seattle, WA	26.96
Bridgeport, CT	18.49
St. Louis, MO	14.04
Tampa, FL	13.08
Washington - Northern Virginia - Maryland	18.48
Manhattan, NY	28.34
Metropolitan Area Average	14.85
U.S.	10.42

Source: Moody's Analytics, price-rent ratio for third quarter of 2010. As a general rule of thumb, you should often buy when the ratio is below 15 and rent when it's above 20. If it's between 15 and 20, lean toward renting.