Monthly Archive for September, 2008

A recent survey of 1,000 American households found that splurging is alive and well in the US despite uncertain economic times. According to CNN.com, Americans continue to splurge because it just feels good and they have been conditioned to go out and get that new Coach bag or iPhone even if they can't afford it. This habit can cause more than just the destruction of credit ratings and the increase in mortgage foreclosures--it takes down marriages too.

Couples talked about spending nightmares in which significant others ran through their partner's savings and blew the mortgage money on compulsive purchases. For example, in 2001, Joe Peacock had a $160,000 a year job in software design, and he was not in the habit of denying himself anything he wanted. Then, he lost his job--but not his spending habit. Until he realized that he had racked up $70,000 in credit card debt and was in serious trouble.

Joe gave up his addiction--and like all addictions it took real willpower. He learned to avoid spending by keeping himself very busy. "I learned how to entertain myself with everyday pursuits, like running, riding a bike, hiking, and drawing in my sketchbook," he says. "These things cost nothing." Happily, he and his wife paid off their creditors and stayed together.

Others were not so lucky. Marisa Vallbona's shopaholic husband was unable to stop, even for his family's sake. "I loved him dearly, but in the end, I realized that if I didn't divorce him, my kids and I would end up on the street." Kit Yarrow, a consumer psychologist at Golden Gate University in San Francisco has some tips for salvaging credit ratings, bank accounts, and relationships:

* Face it together and commit to overcoming the problem as a couple.

* Determine what psychological issues are triggering the spending problem. Counseling can help with this.

* Create a spending plan in writing and have everyone involved sign it.

* Stick reminders everywhere. She recommends something like a love note: 'With a love like ours, who needs new shoes?' rather than an admonishment: 'No shoes!'

For most families, relationships and the home are top priorities. Don't lose both by overspending in today's economy.

You were turned down for a home loan. Or haven't applied because you don't think you'd be approved. Well, no need to go into a bank's office, fill out a hundred forms, and get embarrassed when the dude in the blue suit says "No." You can see where you stand by doing a little investigative work online.

Beginning at the top, know that even A-grade credit is no longer enough to get you a mortgage. You need sufficient, stable income, and you need to document how much it is and how often you get it.

Step 1: Prequalify Your Income Before even looking at your credit, try checking out a mortgage prequalification calculator to see if you can afford the payments on a home in your neighborhood. If your income is sufficient, go to step 2. If it isn't, improve your debt to income ratio by putting a plan in place to pay off debt and get where you need to be income-wise. Other solutions people have tried include buying a home with someone else--the two incomes make home ownership possible.

Step 2: Determine Your Credit Grade Your down payment requirement can range from almost nothing to 30% or more, depending on your credit rating. So your credit grade is crucial in determining what else you will need to buy your home. If you have Grade-A credit you probably know it. A score in the 700s, several longstanding accounts with no late payments, and relatively low balances on your accounts are signs of a high-grade borrower.

Once you get out of Grade-A range, your credit may be assigned a subprime grade of A- to D. Those with grades C or higher are most likely to be able to qualify for a mortgage within the next year, so let's address these here.

A- starts at FICOs in the 660 range, a debt-to-income ratio of 38% max, no mortgage lates, and no more than 1 or 2 other slightly late payments. No recent bankruptcy. You can borrow up to 95% of the purchase price with A- credit. You may also be able to get an FHA loan with A- credit.

B to B- means a score of about 620, several late payments over the last 12 months, and maybe a couple of mortgage lates (but no 60 day late mortgage payments). You can have a debt-to-income ratio of up to 50% and finance 75-85% of the purchase price. You may be eligible for FHA financing if you have plausable reasons for the late payments and have done something about the situation that caused them. You may have had a bankruptcy within 24-48 months.

C+ to C- means a score of about 580, a debt ratio of 55%, and you may finance 75% of the value of the home. You become a grade C by being 30 days late on several bills and perhaps 60 days late on some payments. You may have had a bankruptcy within 12 months. You cannot qualify for FHA financing with C rated credit.

So, if you are an A-, B+, B, or B- borrower, your first stop should be FHA. See if you can avoid the bad credit mortgage market altogether with a government-backed mortgage.

If you can't go FHA or your grade is lower than B-, and you don't have a huge down payment (you probably don't because if you had that kind of money you'd be paying your bills, right?!), you need a plan to pay your bills and pay them on time. Notice that these credit grades are drawn mostly from your most recent credit experience, the last 12 to 24 months. And on a $300,000 home, the difference in down payment requirement for a C- borrower and an A- borrower is about $60,000! Not to mention the difference in interest rate you will be charged as a C-grade borrower. The good news is that within a year you could be an A- borrower. So if you are serious about buying a home, get serious about paying your bills on time. Trashed credit today does not doom you for life--unless you let it.

Life is harder for those with no credit--and more expensive too. Talk about being kicked when you're already down--you're already young and broke--now you can't buy a house, rent a car, or even reserve a hotel room. You've got to have credit to get credit, and it's harder to earn a nice credit rating when you have less money but everything costs more.

Fair, Isaac, the company that compiles our FICO scores, has created an expansion score, which is derived from non-traditional credit, including utility payments, layaway charges, and bank deposit records. However, this doesn't completely solve the problem because in many places it's illegal to report utility records and it can be difficult getting nontraditional creditors to bother reporting credit data (there isn't anything in it for them and it does entail an expense).

Today the system has been improved further, allowing you to get your rental history included in your credit rating. By paying a small fee and registering with Payment Reporting Builds Credit, you can get credit for your payment history including daycare, cell phone, rent, and insurance payments. Fair Isaac promised that it will include data from RentBureau and PBRC when compiling your score.

Registering with PBRC, opening a secured credit card, and piggybacking as an authorized user on a relative's account are all strategies that can accelerate the acquisition of a usable credit history for a young borrower. Of course, all this reporting doesn't do you any good if what's being reported isn't favorable. So if you go through the trouble of getting your payment history recorded for posterity, make sure it's worth recording.

Which should you make and which should you miss? A couple of decades ago one creditor was known for being so sloppy with it's records that no one took delinquencies from them seriously. "Oh, don't worry about that one; it's just Sears" was heard in many trade groups and credit bureaus before the retail giant got its act together. But are there accounts you can pay late these days? Yes, and no.

First, if you are going to be late on anything DON'T let it be your mortgage. Next on the list is your car payment. Then look at the rest of your accounts--it's better to miss a payment on one big account and pay all the little ones on time--the number of delinquencies is more important than the size of the debt.

And finally, missing a utility payment will get you a late charge and maybe your service turned off (if you let it go too long) but it won't show up on your credit rating. If you are trying to repair your credit it might be worth taking a hit with late fees and preserving your history. Other bills that probably won't get reported are medical bills, insurance payments, daycare fees, newspaper subscriptions, and layaway payments. Make sure these get paid before they end up in collection (ugly) and you'll be fine as far as your credit report goes.

It comes in the mail. It has lots of exclamation points on it, so it must be GOOD!!!! It comes with a CHECK. Pay off all your bills! Consolidate your credit cards to one monthly payment!

Replacing all those credit cards and consumer loans with a single loan MUST be good for your credit, right? And a lower payment means you'll be saving a bundle too! Right?

Maybe not. Remember, the big print giveth and the small print taketh away. Trading in several monthly payments for one isn't a legitimate reason to replace those debts with a new one. Consider the following:

1. Paying off and closing out accounts may hurt the "utilization" part of your credit score. For example, if you have 5 accounts with a total limit of $5,000, and you owe $3,000, you are utilizing 60% of your available credit--not great, but not too bad either. By closing those accounts out and replacing them with a $3,000 consumer loan you now have 100% credit utilization. So, you say, maybe I'll just leave the old accounts open? If you have the discipline to refrain from tapping them while that $3,000 account remains open, that's an option....as long as the bureaus don't then ding you for having too many open accounts.

2. Consolidation could cost more. A lower monthly payment isn't really "savings" unless you are getting a lower interest rate too. And stretching out the debt over too much time can cost you more in the long run even if you get a lower rate. Suppose that you have a $10,000 car loan at 7%, and you have been paying on it for a three years and you now owe $4,000. Your payment is $198.01 and you will have it paid off in 2 more years. Now, some pretty, exclamation-point-loaded mailer shows up, you bite and call the 800 number, and the sales agent tells you (in a very sexy voice!) that you can use that check to pay off the car loan and your payment will only be ONE THIRD as much!!!!! Well, Slick, if you use that check your payment will drop to $57 all right, but only because your $4000 has been stretched out into a ten year loan! And your interest rate just went to 12%!

3. The consolidation loan may have "teaser" provisions. In other words, just because your balance transfers start with a low fixed rate doesn't mean they will stay that way. Especially if the consolidation loan is another credit card or unsecured account, the terms can probably change whenever the lender chooses to change them. Read the entire agreement and make sure you aren't jumping out of the frying pan and right into the fire.

Consolidation loans, carefully chosen, can be life-savers. There is a reason for their popularity--the right one can indeed lower your interest, give you a manageable payment, and help you get your financial house in order. The best consolidation loans are those secured by equity in your home. Unlike most other loans, mortgages are highly regulated. Rates can't be changed arbitrarily, and if you get a fixed rate loan your rate and payment will not change. This makes budgeting easier. Mortgages may also confer some tax advantages--check with an advisor to be sure. And because they are secured by property, debt consolidation mortgages are considered less risky by lenders and rates should be considerably lower than for the unsecured debt you will be replacing. For best results (from a credit rating standpoint), keep a few old accounts (the ones with the best payment histories) open but destroy the cards and don't use them. You want your credit report to show low credit utilization. Make that monthly payment on time and get used to budgeting. Eventually you'll get the loan paid off and can divert that monthly amount into savings.

It's pretty common knowledge that there are a lot of dirtbags in the credit repair business. It may surprise you then that there are legitimate firms out there that can in fact improve your credit score quickly. And since according to CNNMoney mortgage interest rates have dropped like crazy--but ONLY for those with credit scores ...

Bankruptcy is referred by so many as a "last resort." Not necesarily. For those facing foreclosure, bankruptcy may be the best solution available. If you have a lot of debt and you lose your home through foreclosure, you unload your house payment but you still have all your other debts. You can't pay them with ...