Making Tough Payment Choices

• In tough economic times, some homeowners may wonder whether it's worth making mortgage payments on time. It seems like everyone else that went into home loan default got extra help and even reduced their payments. So why should you continue to make payments on time, even if your home value has significantly dropped? It's because in the future, you will benefit and you will see it in your FICO score. This article will explain how making payments affects your FICO score.
  
  

Understanding FICO Score

• The FICO number is the most popular system worldwide for determining a person's credit rating. Creditors such as home lenders, auto dealers and personal lenders use the FICO score in establishing not only whether you get credit but how much percentage of financing you will pay for having that loan. FICO scores range from 300, which is significantly bad, to 850, which is outstanding. The average American's FICO score by 2007 is 723. Lenders typically consider 700 to be a good score.
  To understand how making payments affects your FICO score, you must understand what factors make up the score in the first place. Ten percent of your score is composed of new credit; another 10 percent comes from types of credit used. Fifteen percent is derived from length of credit. But the top two factors that influence your FICO score are amounts owed, 30 percent, and payment history, 35 percent. Payment history includes payment information on specific accounts, accounts paid as agreed, severity of delinquency and recency of past due accounts.
  
  

FICO and Missing Payments

• So imagine not making a payment or three on your mortgage in order to qualify for those special help programs. You may be reducing your payment for the next two years, but you are also affecting more than one-third of your credit score for the next seven years. Could you imagine going six months of no payment and into foreclosure just because your home is not worth it? Renters check credit, too. They may be skeptical on letting a person who missed six home payments last year rent a house.
  For some people during these times, missing payments and having them negatively affect their FICO score is a decision that they have to make. But if you aren't in that boat, you are better off in the future by continuing to make payments. Consider refinancing your mortgage to stave off any income pain until the economy gets back on track. By then you'll be thanking yourself as your credit score goes up.