Many moving parts go into buying a home and using logic when it comes to your credit report isn’t one of them. Allow me to explain. I have had more than one deal go south when I got a call from the underwriter letting me know that my client’s credit score went down to the point of kicking them out of qualifying for their mortgage because of something that my client did with their credit.
So for the record, if you are in the process of buying a house, or even thinking about it, you need to be aware of several things that will likely hurt your scores and your chances of getting a mortgage approval even though logic would dictate otherwise…or you may be left with doing StorageMart reviews to see where you should store your stuff just a little while longer.
Here are 4 make sense well intentioned actions you could take that could hurt your chances of getting a mortgage in the short term.
Closing Old Credit Accounts – don’t do this just before starting a mortgage application or while you are buying a home. While it seems like closing a credit account would be a good thing, part of your score is based on the age of your open credit accounts. Open older accounts typically means higher scores.
Not Using An Old Account – You should use your open credit from time to time. Just use it for gas or a dinner every once in awhile and pay it off at the end of the month. Positive activity on your cards goes a long way to demonstrating that you can manage your credit and thus improving your credit scores.
Paying Off An Old Collection Account – This action is murky territory at best. The guideline here is that if the collection account is over 12 months old don’t touch it until you speak to your loan officer. You may not have to pay it off at all in order to qualify. You may have to pay it at closing – but paying it then won’t impact your credit scores in a way that can kill your deal. Recent activity on a delinquent account is a sure way to drop your scores.
Paying Off A New Collection Account – Again, paying collection accounts is tricky business as you may be able to just pay it off at closing versus ahead of time. However, you may be able to go directly to your creditor and pay them directly. If they accept payment make sure that you negotiate taking the negative remarks off your credit report. You may be able to get them to fix what was bad thus making your scores possibly go up. If it is a medical collection account – be sure to check with your loan officer because in many cases you may not have to address these accounts.
Some consumers have been facing financial hardship such as the lost of a job, reduced salary, divorce, death or a medical emergency. During these time loans, bills and credit cards can quickly pile up and destroy the consumer’s ability to repay their financial obligations. Not only are these obligations weighting heavily on the consumer, the various credit card lenders are increasing the interest rates and fees on the consumer’s credit cards.
So what is the consumer to do about this situation? Some of the solutions make sound simply, in a normal economic such as:
- Borrow only what you need
- Pay all bills promptly and more than the required monthly minimum payment
- Understand your credit report
- Recognize financial situations
- Understand the type of loan you are requesting, is it an open credit, revolving or installment loan. Know the terms and repayment requirements.
One way to reorganize their financial situation is to:
- Call their mortgage lender to discuss a loan modification – This will achieve lower monthly payments
- Order a credit report – The consumer needs to know their credit score and identify any errors.
- If the consumer currently has a good credit score, call the credit card companies to obtain a lower interest rate
A good credit rating is one of the keys to financial freedom in today’s economic climate.
Today everyone is looking for a path to financial freedom during this difficult economic climate. They are looking for ways to safeguard their reputation and keep their buying and borrowing power.
The consumer knows that loans, bills, mortgages and credit card charges can increase very quickly, in particular the credit cards used for day to day expenses, it is a challenge to maintain the monthly payments. So in order to safeguard the consumer’s reputation and credit score rating, they need to review and relearn ways to protect themselves.
Some of the things the consumer needs to revisit are the following key ideas:
- Am I borrowing wisely and paying back promptly?
- Have I identified, avoided and recovered from various financial pitfalls?
- Have a gotten a recent copy of my credit report and do I understand it?
- Does my family have a financial plan for the future
The key to being a good credit risk is based upon the consumer’s credit score. This score is a numerical number assigned to the consumer based upon their credit history. This history is based upon number of opened and closed accounts, payment history, including late or missing payments and collection referral, original credit limit, current balances, etc. The higher your credit score is the better your ability to borrow at more favorable interest rates. The lower the score the consumer is charged a higher interest rate or decline altogether.
Basically, the consumer needs to obtain a copy of their credit report from one of the following three credit bureaus: Equifax, Experian or TransUnion. Once you have this report, the consumer needs to set down and review this report for accurate information.
The three major credit reporting services use a numerical range of between 300 to 800. According to John UYlzhelmer, president of consumer education at Credit.com, “A 700 used to be enough to nab the best rates, but now a consumer needs a FICO score of 750.” When the consumer decides to use a debt settlement company one of the issue discussed how this will affect the consumer’s credit score. In the past, the higher your FICO (credit score) score the better risk you are to lenders. This score has meant you might be able to get lower interest rates either on your secured or unsecured borrowings.
Debt settlement is an alternative method of getting the consumer out of their unsecured debt burden. It is a program what is intended for those consumers facing undue financial hardship caused by the loss of a job, death of a spouse or medical emergency. The debt settlement option which is available to consumers is sometimes considered the last resource before filing bankruptcy.
However, if the consumer is seeking out a debt settlement program their FICO score’s have already dropped. The drop in score has been caused by late payment, over limit or high balances. In fact, paying off a card and keeping it inactive will not necessary hurt your credit score nor will it help your credit score. Recent news articles have indicated that lenders are closing or reducing credit limits on inactive or low usage credit cards. This is also having a negative affect on the consumer’s credit score.
Whether you use a debt settlement program or you try on your pay down your debt yourself. So either way the consumer’s credit score will be changed over time. The good news is as your debts are negotiated your credit score will begin to improve again.
The consumer needs to explore a debt settlement program as an alternative to their financial hardship. Debt settlement is a method by which a third party negotiates on behalf of the consumer to reduce and sometime cut in half their credit card debt. This is not a quick fix or an easy process. The consumer needs to understand how this program works and how it will affect their credit score.
Any consumer who decides to enter into a debt settlement program needs to be aware of the positive to the program and pitfalls.
What are the positives to this program:
· The consumer now has a plan to climb out of debt.
· The consumer has a timetable for getting out of debt.
· The consumers credit will improve overtime as the debt is negotiated.
· The consumer may not continue to face the harassing collection calls.
· The consumer feels better about trying to resolve their debt by not filing bankruptcy.
What are the pitfalls:
· Consumer credit score will drop.
· Consumer may face a tax bill on the forgiven debt over $600.00.
Every consumer worries about their credit score. This credit score is key for allowing the consumer to borrow whether to purchase a home, car or apply for a new credit card. So once the consumer starts on the debt settlement program, one of the key steps to helping you’re current score is to continue making all other payments on time, This means making your monthly mortgage, auto and equity line payments. It is important to continue meeting your secured debt obligations.
As a consumer, we need to understand the meaning of the word credit. Credit is considered as either secured or unsecured monies loaned to you by a lender, in return for future payment. Lenders or creditors who have advanced to you monies to purchase your home or credit card companies/retail stores which allow you to charge purchases with the understanding you will pay them principal and interest over a period of time.
A good credit score means you are a low risk consumer while a lower credit score means you are a riskier borrower. Credit scores from the three major credit bureau’s (Equifax, Experian or TranUnion) range from 300 to 850.
However, according to a recent article in “USA TODAY”, lenders are clamping down on credit and credit scores are taking a hit. The lenders are reviewing all of their consumer credit cards and making determinations about who is using their credit cards. Lenders are closing credit card accounts and lowering credit limits for millions of consumers who have never paid late. When a card is closed by a lender this effects your credit score.
However, maybe as a consumer you had a fair to good credit score. But do to the recent economic environment you are not able to keep up with your financial obligations. This is going to affect your credit score since late payments, mortgage modifications and high balances are now taking a bigger toll on your scores.
So when you are looking at debt settlement program and you are informed that your credit score will take a hit. You credit score may had already taken a hit because of your late payments and too much credit with high balances prior to entering into a debt settlement program.