Build or Repair Your Credit

If your credit score is holding you back from becoming a home owner, it is likely holding you back from other things as well. Credit scores are used for insurance, employment, cell phone accounts and a wide variety of things. Having good credit will not only allow you to purchase a home, it will also save you a great deal of interest and open doors for you that would otherwise be closed.

We recommend two simultaneous approaches to credit building: deal with the negative items and add positive items. We’ll review both below.

DEAL WITH NEGATIVE ITEMS

The thought that negative items will eventually just “go away” is flawed. Collections can turn into judgments, and judgments can stay with you for decades. It is important to deal with these negative items head-on. First step is determining what they are. Fortunately, you can see all the information the bureaus have on file for you for free at annualcreditreport.com. This site is the official site made available to consumers. Don’t worry about your credit score for now – you only want to know what is being reported to the bureaus. Get started here:

www.annualcreditreport.com

The next step once you know what is being reported is to create a plan. List all of the debts on a single page that you can clearly see, along with the list of creditors and their contact information. Make sure you know where the debt is coming from – was it actually yours, is the amount accurate (remember, collection agents and/or creditors may be entitled to additional fees per the original credit agreement or state law) and do you actually owe the debt?

A collection account is an account placed into a special category with the credit bureaus. The category is for debts that have serious delinquency and the creditor indicates to the bureaus that they haven’t been paid as agreed. To remove a collection, the debtor needs to work with the collection agency to bring the amount owed to $0. Settling these debts is an option, and generally any method to bring the amount owed to $0 is advised.

A judgment is a debt that is ordered to be paid by a judge. It is entered into the court system and becomes of record. Judgments do not go away until they are satisfied with the court.

Bankruptcies, foreclosures, deed in lieu, late payments and repossessions are all what they are – meaning none of these require any particular action as long as they are accurate. Some credit repair companies may claim or advertise that they can delete these old bad debts, but our advice is to acknowledge them for what they are and create a plan to ensure they don’t reoccur. Automate your monthly payments to make sure they are made on time, keep your debt within manageable levels, and track your credit on a regular basis to make sure all debts are reported accurately.

Our recommendation is to bring collection accounts and judgments to a $0 balance as soon as possible and to add positive credit. We also recommend that any inaccuracies be dealt with either through the dispute process or by contacting the creditor directly.

ADD POSITIVE ITEMS

You want to have 1 open revolving account (credit card/credit line) and 1 installment account in good standing. It’s important to do this today so you have positive credit building. The revolving account (credit card) doesn’t need to have much of a limit and you should use it regularly (gas for example), pay the balance each month, and keep the balance under 30% of the credit limit. The installment account doesn’t need to be for much either, maybe $1,000, and should have a regular payment set up for 1 year.

Secure revolving accounts require an initial deposit from you – say $300, that they hold and then give you a credit card credit line against that money. It’s a great way to start building positive credit.

Secure installment accounts are loans typically made by a credit union or bank. They put the proceeds of the loan into a savings account or certificate of deposit that are locked up until the loan is paid in full, then the money in savings is released to you. Think of it as a forced savings plan. The loan reports to the credit bureaus to add positive credit.

It is a good idea to check with your credit union or bank to inquire if they offer these types of accounts. Alternatively, here are two online options you might consider for each:

Open a secure revolving account here:

https://www.capitalone.com/credit-cards/secured-mastercard/

Open a secure installment loan account here (request secured, and the minimum $1,500):

https://www.onemainfinancial.com/prequalification

MONITOR

Any of the consumer credit models are ok (experian.com, transunion.com, equifax.com, creditkarma, etc), but www.annualcreditreport.com is the official consumer site. Regardless of what you use, the important detail is that you are actively monitoring progress on your bureau data. Seeing your credit score estimate is good, but more importantly watching how that score change over time will help you to know you are doing the right things.

GET HELP IF NEEDED

You don’t need to do this on your own. Free help is available from the MN Home Ownership Center: https://www.hocmn.org/search/?fwp_audience_services=homebuyer-advice. Tell them we sent you and you should get some great advice from them on getting your credit profile to a good place. We can also help you with creating a plan, reviewing your consumer report, and review your official credit report when you are ready to apply for new financing.

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Should I Refinance?

TO REFINANCE OR NOT TO REFINANCE?

That is the question, but how to find the right answer?  First things first – have your goals together.  Mortgage Lenders are great at putting together loan options, but they are often times basing those options on what you tell them.  If you are asking for the lowest rate, they will put those options in front of you, but surprisingly they may not always be the best options.  Wait!?  What, the lowest rate isn’t always the best option?  Of course not – considering that the lowest rates are adjustable, or shorter loan terms with payments that may be out of reach for you.  So, let’s look at your goals for the refinance:

Number 1: I WANT TO SAVE MONEY!

Everyone likes to save money – we like to save money!  That’s why we’re writing this blog instead of mailing you a letter.  Letters cost stamps!  Let’s be more specific: do you want to save money now, as in lowering your monthly debt payments, or do you want to save the most over the term of the loan?  Are you struggling to make the payments you currently have, or does your end of month surplus cash look like the US Treasury’s?

The best place to start is by looking at your budget.  How much are you spending on all of your debt each month?  Is that a high or low percentage of your monthly income?  Do you have discretionary funds?  Do you have a large amount of unsecured debt?  How did you get to where you are and what changes need to be made to not get there again (if it’s not where you want to be)?  Is your retirement savings on track?  Having the answers to these questions before approaching a refinance is a great idea.  Even better – meet with your financial planner before talking to your lender to help put these answers, and goals, together.  Define what “saving money” looks like for you first.

Number 2: I WANT TO LOWER MY PAYMENTS

Debt isn’t much fun (well, it is for us, but for different reasons than you would think), but what it offers can be great.  Mortgage loans are necessary for most people to own a home.  We think owning a home is great!  Auto loans are generally necessary to finance your transportation.  Student loans – education.  Credit cards?  We’re not much of a fan of these.  Using a credit card for convenience and paying off the balance each month?  That’s generally a good thing.  Credit cards are bridge financing if you carry a balance – the interest is costly and paying the minimum will take forever to pay off the balance.  The point is: carrying the right kind of debt is ok, but eliminating the wrong debt is essential to your financial health.  Sounds like we are talking about cholesterol here and the analogy works: having a mortgage loan is like HDL- your financial health is better with this kind of debt, but high a high credit card balance is like high LDL and puts your finances on the path of systemic failure.  Refinancing offers an opportunity to right the ship, a “statin” for your system.  By eliminating the bad debt and restructuring/lowering your monthly debt payments you can bring your finances to a better place.  But beware – the last thing you want to happen is to combine all of your debt, lower your payments and then go on a spending spree.  It’s important to take full advantage of the opportunity and create a sound financial plan to avoid adding the “LDL” debt again in the future.  If your payments are reduced, plan to put some emergency money away and make sure you can pay off that credit card each and every month for good.

Number 3: I NEED TO FIX OR IMPROVE MY HOUSE

Construction loans, credit lines, fix up funds and often times local money is available in addition to your existing mortgage loan.  Sometimes it doesn’t make sense to refinance your current mortgage just to get some money to put a new roof on the house.  Look at the terms of your current mortgage and what is available from your lender.  If the interest is going up on your current loan by more than what you would save on the construction financing portion, then just add the construction loan instead.  Generally construction financing rates are higher than first mortgage rates, but if you are borrowing a small amount or your current mortgage has a much lower rate, then adding the secondary financing is a better option.  If the construction project is larger, then it might make sense to refinance to a construction loan program like FHA 203k or Homestyle so that you can make the improvements and get a low, fixed rate loan for the project and your current mortgage balance all in one.

Number 4: I WANT TO LOWER MY TOTAL COST

Long term planners – this paragraph is for you.  How much does the rate need to decrease for a refinance to make sense?  If your other debt is in order, and your home is perfect as-is, then let’s look at break even points and a cost-benefit analysis.  The absolute way to compare your current loan to a new loan is how much and how long.  Take your current payment times the remaining term to calculate a total cost on your current loan.  If the refinance option reduces that total number by an acceptable amount, by the same math (how much times how long), and the payment works, then it generally makes sense to do.  Let’s look at an example:

Current principal and interest payment (exclude taxes and home insurance): $1200

Remaining number of payments on your loan: 280

Total cost: $336,000

New 15 year loan principal and interest payment: $1516

New total cost: $272,880

If the higher payment fits into your budget, this certainly makes sense to do if you are looking for long term savings.   Even if the refinance costs $3,000, the savings is about $60,000 over the term.  This is a common scenario right now for many 30 year loans with rates in the mid-4% range to refinance down to a 15 year term.  You should also compare the total cost on your current loan if you simply increased the payment, but generally the refinance will add up to more savings.

The other calculation you need is the break even point.  At what point in the future will I recoup all of the costs of doing the refinance?  Two ways to calculate the break even offer manipulation of this time frame.  One way to calculate break even is on the interest savings.  If you save .625% in interest on the loan (reducing the rate by this much) and the refinance costs 2.375% of the loan amount, then it will take 3.8 years to recoup (ignoring time value of money and the decreasing benefit of interest savings over time).  If you are a spreadsheet guru you could put this into an amortization table and calculate the exact break even by interest savings, but hey, life isn’t exact anyway.  The other way to calculate break even is on a cash flow basis, but this isn’t as effective a calculation.  If the monthly payment savings is $300 and the loan costs $6,000, then it will take 20 months to break even.  The reason this approach is flawed is that you might be extending the term on your loan for this payment savings, which would potentially cost more in the long run.  The simple formula here is: cost divided by benefit.  That will yield the break even point.  Have your lender help, and if they don’t know how to calculate this for you, then find a different lender!

Number 4: I WANT TO REDUCE MY TAX BILL

Mortgage interest is tax deductible.  If you consolidate other debt that doesn’t have tax deductible interest, you could reduce your overall tax liability.  Bring in your CPA and let’s have coffee with calculators.  It’s great fun, and so is saving money!  We think the government has enough to work with anyway, so why give Uncle Sam more than he has contracted for?

Number 5: I STILL DON’T KNOW WHAT TO DO

This likely has been more fun for us to write than for you to read about it.  We are only going to complete a refinance for you if it makes financial sense to do so.  Sure, completing loans is fun, but we need to make sure it is to your benefit.  MN State law requires that the loan have benefit for you, and we’re you’re fiduciary, which means we need to look out for your best interests (no pun intended!).  Bring your questions and scenarios to us and we’ll crunch numbers, calculate the savings, project long term costs, ask CPAs for tax analysis, talk with financial planners about retirement and other savings goals, and have you leaving our office more confident in your financial future.  Maybe then you can spend more time working on getting that LDL lower instead of worrying about making extra payments on that credit card that seems to be stretching out to infinity.

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Removing Disputes On Credit Report

The latest hurdle in getting mortgage approval is to have all disputes on credit removed. Since a tradeline (account) dispute removes that account history from the credit scoring models, the investors have become wise to inaccurate credit scores due to disputes. Often times when a dispute is removed a credit score will go down (especially if the tradeline has a negative history, excessive balance or is recently opened). You will want to have all the disputes on your credit report removed prior to submitting a mortgage application. First, review your credit information by visiting www.annualcreditreport.com and retrieving your free reports (note – it will not give you scores for free and you can only access the information once per year, so make it count!).

Through annualcreditreport.com you can remove disputes, or you can also call the bureaus direct here:

TransUnion

312-985-2000
It has a machine greeting buy just stay on the line and you are transferred to a live person, tell them you need to speak with someone in the Special Handling Department.
Tell the representative “I need to dispute the compliance condition remarks code of “AID” (Account In Dispute) because I am no longer disputing the account”. The representative was able to take care of this over the phone and will issue a email conformation within 72 hours.
Alternatve Transunion: 800-916-8800

Equifax

404-885-8300
Answered by a representative, tell them you need to speak with someone in the Executive Customer Service department. Tell them the same phrase above. I received email conformation within 24 hours that it was removed.
Alternate Equifax: 800-203-7843

Experian

888-397-3742
You need to access your credit report from annualcreditreport.com first. You will need to 10 digit number on top of your credit report. Speak with someone in the National Customer Service Center. Tell them you want the dispute removed. They will issue a email response within 48 hours

Alternate Experian: 714-830-7000 press “3” and ask for customer service

Don’t make any selections from the automated system and just hold for a representative. Ask for “consumer affairs” and explain they you have a loan pending and you need all disputes removed. Once they indicate they will remove the disputes, ask when it will be updated for your lender to request a new report.

Additional resources if any of the above do not yield results:

Experian

  1. Call 714-830-7000
  2. Press 0 to talk to a representative.
  3. They will require the last 4 digits of your social security number and other identifying information.
  4. You will also need a 10 digit Experian report number. Advanced Credit Solutions
  5. Clients can contact us for this number. Other clients can get this number from a free Experian credit report from www.annualcreditreport.com

Trans Union

  1. Call 800-916-8800
  2. Press 3 to talk to a representative.
  3. They will require the last 4 digits of your social security number and other identifying information.

Equifax

  1. Call 800-846-5279
  2. This number is a direct line to a live operator
  3. They will require the last 4 digits of your social security number and other identifying information.
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How to Fix Your Credit

  1. Identify what the negative items are that reporting in your credit file. You can review all of your credit information here:www.annualcreditreport.com. AnnualCreditReport.com is the official site to help consumers to obtain their free credit report. It is a free service as long as you do not request your credit score. The individual credit scores usually cost around $7 each. The catch ‚ only one review per year is free. Once you know what the negative items are, you can begin correcting them. Review everything in detail, and if something is reporting inaccurately, request a dispute right on this web page. If you have outstanding collections/judgments/past due accounts, be sure to get them paid as soon as possible.
  2. Create some positive trade lines on your credit. A trade line is an account that reports to the credit bureaus. Typically, a utility bill or cell phone account is not considered a trade line, but an auto loan, student loan and credit cards are considered trade lines. Make sure that you have some positive trade lines of varying types reporting on your credit. If not, open one or two. A great way to get a loan or credit card when your credit is lacking or in rough shape is via a secured loan or secured credit card. US Bank has a great program for this, go and see my banker Emily Ervin in the Bloomington branch.
  3. Save documentation! If you pay something in full, get a paid in full letter from the creditor. Start a file on all the receipts you receive, as well as payments that you make.
  4. Follow up. If you review all three credit bureaus at one time, you cannot review them again for 12 months. Instead, review one report of the three, one at a time. I will review my report every 4 months by only reviewing Transunion, Experian and Equifax one at a time.
  5. Check with a professional. Credit experts and mortgage lenders can help you review your official report. If you can correct some things on your own, do that first before contacting a lender or credit expert. A great credit repair resource here locally is Warren Bauerfeld, 612-889-1117. Please mention us when you call him.

Lenders usually take a positive view of individuals with a range of credit accounts – car loan, credit cards, mortgage, etc. – that have a record of timely payments. However, a high debt to credit ratio on certain types of revolving (credit card) accounts and installment loans will typically have a negative impact.

www.experian.com
www.transunion.com
www.equifax.com

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