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There is no shortage of tips on the Interwebs telling you how to maintain a good credit score or prepare to buy a home. You know the drill: Pay your bills. Return your library books on time. And don’t forget to vote. I’ve got some real tips that you might not have heard before based on the roughly 4,000 credit reports and loan applications I’ve seen over the years. Here goes:
#1. Establish automatic monthly payments for the minimum payment due on your credit cards – especially if you don’t use a card regularly. It’s easy to forget that you used that department store card one time three weeks ago if you haven’t pulled it out of your wallet in six months. By establishing automatic payments you’re covered for at least the minimum if you make a mistake. And you can always pay more!
#2. Make sure you monitor those automatic payments! Banks (and certainly humans) make mistakes. If you’ve got your car payment setup to be automatically withdrawn from your checking account each month, make sure that payment actually goes through. You are ultimately responsible if it doesn’t. Make a list of all the bills you pay each month – car payment, credit card, mortgage or rent. Then spend five or ten minutes at the end of the month to review the list and make sure everything on it was paid.
#3. Paying collections won’t help your credit score. Your credit score gets “dinged” when you get the collection. Your score doesn’t care one iota whether or not that collection is paid. Now the collection agency that manages to get you on the phone is going to promise you rainbows and unicorns if you pay that debt. Don’t believe them. Nothing good will happen if you pay them except your feeling of moral superiority for taking care of your financial obligations. You also eliminate the possibility, however remote, that they could file a judgment against you in the future. But it won’t help your credit score.
#4. Don’t refinance if you plan to sell your home in a year! Maybe even two years. We see this all the time. Homeowners refinance their mortgages because it’s the hip thing to do when interest rates are low. But it also costs money to refinance. If you’re keeping the house long term, the idea is that the savings on your monthly payment will eventually be greater than the cost of the refinance. But if you’re planning on selling the home fairly quickly, it might not be worth it. And that’s money you’re not earning on the sale.
#5. Don’t let car dealerships tell you how much car you can afford. I see this all the time. Somebody who earns $45,000/year is walking around with an $800/month car payment. Believe me when I tell you that car dealerships will give a loan to anyone in any amount. They don’t care. If you walk in and tell them you want to own a brand new $40,000 Honda Passport, they’ll sell it to you. They don’t care if you make $15/hour or $50/hour. And guess what? Every dollar you spend on a car payment each month is a dollar you can’t spend on a mortgage. If you want to own a home, embrace the Ford Fiesta over the Toyota Tundra.
#6. If you co-sign a loan or you have debt that is paid by your business, you may be able to exclude that debt from your loan application. But you’ll have to prove that the other party – or your business – has made the payments without your help for the previous year. That means, if you have an American Express card that you use for business purposes, you’ll have to show business bank statements to prove the business is actually making the payments. If you have one month out of the last year that you paid from a personal bank account, you’ll have to count the debt toward your personal monthly obligations. And you must have a 12-month history. If you just co-signed on a student loan for your kid six months ago, you have to count the payments toward your personal payment obligations because you won’t have a 12-month history.
#7. Speaking of student loans, they count toward your monthly payment obligations even if they’re deferred. The payments are considered differently depending on the type of mortgage you’re getting – Fannie Mae, Freddie Mac, FHA, VA, etc. But in nearly all cases, we have to consider some type of payment for those student loans.
#8. A payment isn’t late – on your credit report - until it’s 30 days late. You could make your car payment two weeks late every single month and it would never affect your credit score. Now, whoever has your auto loan is probably going to charge you a late fee. But it won’t be reported to the credit bureaus unless it’s 30 days late. And keep in mind, most utility payments, cell phone bills, and rent payments are not reported to the credit bureaus at all.
#9. For all that is good and holy in the world, do not file paper tax returns! It will take the IRS 4,000 years to get your returns into their computer system. And your mortgage lender may need to verify your tax returns directly with the IRS. If your adjusted gross income is $73,000 or less, you may be eligible for free online tax prep services. Google “IRS FREE FILE” for more info and make sure that you click on the irs.gov web site.
#10. Beware of information you find online – especially if it isn’t dated. Hey, the great thing about the Interwebs is that any expert can offer their knowledge and advice. And the scary thing about the Interwebs is that any yahoo can offer their not-so-expert knowledge and advice. Before following “expert” financial advice, do your own research. Ask for references. Make sure the person actually has the experience and abilities they claim. And make sure any mortgage-related information is dated. Mortgage products and guidelines change almost daily. It’s possible that the information you’re reading could have been accurate – three or four years ago. That doesn’t mean it’s relevant today. Always look for a date.
You can win – even when the market is changing. We can show you how. My contact information is on my web site. You can also text me at 360-301-7575.
My name is Emily Caryl Ingram. I lead a team of Mortgage Loan Specialists at New American Funding in Port Townsend, WA.
