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Take a Reality Check before Bad Credit Makes it Difficult to Refinance
By Richard BarringtonMortgage Credit Problems Columnist
One of the challenges
credit counselors often face is that they are not asked for help until it is
too late. A number of options become closed to you once you rack up a history
of bad credit: it becomes more difficult to refinance, interest rates on credit
cards may rise, and debt consolidation loans may become more expensive or
unavailable. This can become a downward spiral, so it's important to stop that
process before it gets started.
Homeowners Early
Warning for Mortgage Problems
With millions of American households slipping into foreclosure, it is clear that home owners need some sort of early warning system before their credit situations get out of control. The National Foundation for Credit Counseling offers a quiz for home owners called the "Mortgage Reality Check." It is billed as a way of assessing your risk of foreclosure, but homeowners would be wise to take this quiz well before foreclosure looms as a possibility.
Importance of Acting
Before Bad Credit Makes Mortgage Refinance Impossible
Why is an early warning system like the home owner quiz so important? Because the earlier you catch a problem, the more options you have for solving it. For example, one of the most important tools a home owner has for managing debt is refinancing. Under the right circumstances, refinancing can lower interest rates, make monthly payments more manageable by stretching them over a longer period of time, and/or consolidate other debts. Once you have established a bad credit rating, mortgage refinance is likely to be unavailable or overly expensive.
Tellingly, a couple areas of emphasis on the National Foundation for Credit Counseling home owner quiz are knowledge of your financial situation, and your vulnerability to adjustable mortgage rates. These fit right in with the idea that taking action early can be the best solution. Certainly, people who take the responsibility for knowing the details of their mortgage and finances are less likely to be blindsided by problems, and people who look to switch out of an adjustable rate mortgage are less likely to have conditions change on them suddenly.
Develop a Game Plan
If the home owner quiz identifies that you are subject to some risk factors, develop a game plan for managing that risk. In priority order, you might consider the following:
- Learn to budget.
- Improve your credit rating.
- Look at refinancing options.
Refinancing can make the most dramatic difference, but it should come last because once you've made some progress on your bad credit, you can refinance at better terms. This in turn can create more budget room down the road--and turn your improving credit situation into an upward spiral.
Sources:
National Foundation for Credit Counseling
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
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