If You Don't Use Credit, You Don't Have Any Credit!

This morning I received a phone call from a good friend, who started by saying, “I have a friend . . .” No honestly she really did say that. Anyway, her friend has paid off her mortgage, paid off the car loan, and paid off and closed her credit card accounts. She is totally debt free.

Knowing that she should be a great candidate, she went to her lender to talk about a new mortgage and found out that she currently has no credit scores. When her lender told her to go get a credit card account and come back in six months, she was shocked. In her defense, she has always had great credit, paid everything on time, and never been overwhelmed by debt. Why would she not be a stellar candidate for a loan?

Credit models have tightened up like everything else and the last six months to a year of your credit history is more important than ever. If nothing is there, then the credit repositories don’t want to recommend you as a good credit risk.

Credit counseling and advice is a big part of what I spend time talking with my customers about. Although I warn them against doing anything while we are in the mortgage loan process, I speak very candidly with them about developing and maintaining their credit history throughout their lives.

So, here is the 20 second version that I recommend to my customers:

• Always maintain at least (2) open credit card accounts.
• Never close credit card accounts unless you are having a problem with that particular credit card. The date opened of the oldest card you have is significant also.
• Use your cards routinely every 3-4 months.
• Always make at least the minimum monthly payment, if you miss the due date, pay it before 30 days passes
• Keep your open balance(s) below 50% of the credit limit(s) of your credit cards, this shows good utilization of credit

One last item of advice, never co-sign for anyone on anything unless the bill is coming to you. The problem occurs that if they get into trouble making their payments, you will always be the last to know and by that time, it has destroyed your credit also.

Credit affects many things in your life including, background checks, security clearance, insurance rates, and what you pay for future loans. Be aware of what affects your credit and know how to maintain good credit.


© 2012 Richard Swan
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.

Home Mortgage Rates Have Never Been Better -Talk About Your Options

Almost daily, a past customer, or new referral is calling my office to ask about a refinance. They usually begin the conversation with, "Is now a good time to refinance?" There will likely never be a better time than now.

With refinance rates around the 4% mark, this is a great opportunity for so many mortgage options (i.e., refinance, buy a second home, home improvement, debt consolidation, rate reduction, term reduction, purchase an investment property, etc.). Rates have never been this low in my lifetime.

If you look at buying power, a 4% rate on a $200,000 loan will save a customer about $88,000 over the 30 year life of the loan, versus a similar 6% rate. What could you do with $88,000? For investors, people purchasing residential properties for rental purposes, the cash flow potential for their property is significantly better.

The rental market, or fair market rent of a property, is driven by two factors, what the market will bear, and what a similar house could be purchased for at prevailing rates. If an investor purchases a home with a 4% rate, and then the mortgage market moves to 6.0-6.5% for new home buyers, then that investor will typically increase his monthly rent. If the renter can’t buy for what he is paying in rent, then the rental market remains strong. Although the property owner’s costs remained the same, he can typically charge more for the property and increase his profit margin.

Second homes are another strong market when interest rates get extremely low. Buyers are able to maximize their buying power, or minimize their monthly payment for a second home. Using a $200,000 loan at a rate of 4% versus 6%, the average borrower will save about $250 on the monthly payment at the lower rate. The monthly savings can be the decision maker about whether a second home is affordable or not.

While mortgage rates are low, many credit cards are still charging 18-22% for balances carried to the following month. Borrowers can consolidate debt and pay off those bills in a fraction of the time, saving thousands of dollars in monthly fees and interest.

If you have considered a refinance or purchase of real estate, now is the time to get off the sofa and make a call. While rates could drop in the future, you have definitely lost the opportunity if they go back up.

© 2011 Richard Swan
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.