Posts Tagged ‘budget’

Repairing a Low Credit Score

June 15, 2011

There are a couple points to make at the outset.  First, there are no easy fix, fast track methods to repairing and rebuilding poor credit.  It… just… takes… time.  Remember your credit score (and report) reveal your track record of managing payments.  If your score is a consequence of your actions, time is how your score will be repaired.  You didn’t drop to a low score overnight, even if “life” did happen (job loss, health problems, divorce, etc.).  This situation took time.  Don’t expect to bounce back to a 780 score overnight.  You need time to prove your ability to manage your finances and to pay expenses responsibly. 

The second point is to avoid unscrupulous credit repair service companies.  These companies often prey upon unsuspecting consumers promising to “fix” someone’s credit and to remove unfavorable information for “3 easy payments of $49.95”.  Nothing could be farther from the truth.  While errors on reports are not uncommon, truthful information no matter how unsavory cannot be removed.  If a bankruptcy or foreclosure happened, it will be reported and will be there for some time.  If you have a credit score, you are an adult.  Let’s not whine about a low score, let’s be proactive and start on a better path.  (If you have not reviewed your credit report in some time, visit http://www.annualcreditreport.com/ where you can receive a free report with your current scores once every 12 months.)

Okay, so you are behaving.  Your bills are paid as promised, you have a very low debt to income ratio, manage your money well and stick to your budget, and learn your credit score is not where you expected it to be.  Now what??

Start by reading your credit report.  Is the information listed correct?  Many times a keystroke error is all it takes to suddenly combine someone else’s credit history to yours and negatively affect your score.  If you are a “Jr.” or “Sr.” you can certainly understand this scenario.  Other times it may be that a debt has been fully paid and the creditor has stopped reporting the information to the credit bureaus so that a remaining balance still shows. 

If you believe your credit report contains an error you have the right to contact the credit bureau that reported it and dispute the information.  There is no cost to dispute this information and it isn’t complicated.  The best way to communicate with any credit bureau is in writing.  (Our website contains a sample dispute letter you can use.)  Provide your complete name and address, the item(s) in question, why the item is being disputed, and your request to have this corrected or removed.  Include a copy (never the original) of the documentation you have supporting your claim and a copy of your credit report with the items in question circled.  Keep a separate copy of everything you are sending to the bureau along with a diary of any activity, conversations and contacts. 

The reporting credit bureau has 30 days to investigate the disputed information and provide you with a written report of the findings.  The bureau is also required to send you a copy of your updated credit report if the disputed item has been changed as a result.

In general with time, a solid financial plan, and some perseverance you can repair, build and maintain your own credit standing.

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What Can I Afford?

March 31, 2010

So you have decided that now is the time for you to buy a house.  Perhaps you’ve done some research on what area of town you would like to live, how many bedrooms you’d like, style of home, and other items that are essentials or mere wishes.  But have determined what you can afford?  If you have a monthly payment in mind, is this realistic for your budget?  How do you even determine this?

Calculating this mystical figure is really a simple mathematical equation – no smoke and mirrors.  Let’s start from the lender’s perspective.  They are looking at the percentage of income that your existing debt and future home loan will consume.  The idea is to make sure your new home loan payments do not overwhelm your monthly budget. 

Using industry averages, start by taking your total monthly income and multiplying by 38% (.38).  The answer represents the ideal amount of your new mortgage payment and total debts.  (Debts include installment loans like car payments and revolving debt like credit cards.) 

For example;  If you earn $42,000 a year, your monthly income is $3,500.  ($42,000/12 months = $3,500)

$3,500 x .38 = $1,330

$1,330 is the combined total of current monthly debt and projected house payment.

Take this number ($1,330 in this example) and subtract your total debt.  The answer is the targeted maximum amount of your new home loan payment.  Keep in mind this number reflects the principal payment, interest payment, taxes and home owners insurance.  If you are not using an escrow account for your taxes and insurance, this targeted amount should be lower.

Here’s another way to look at this.  Let’s calculate just a total monthly payment by taking your total monthly income and multiply by 28% (.28).  This again is an industry average where a range of 25 – 30% is the target. 

Using the same numbers as the example above; $3,500 x .28 = $980.  Again this answer represents a principal payment, interest payment, taxes and home owners insurance.

How about another perspective?  What you qualify for, may not represent what you can realistically afford.  Does either of these amounts you just calculated seem realistic for your budget and comfort level?  Depending on your approach to personal finances, this may seem high.  If you currently have a high debt load, this amount may be surprisingly low.  Nothing could be worse than to have the joy of new home squashed by discovering you are now “home rich” but “cash poor”.  

Qualifying amounts should be used as guidelines and not absolute rules.  Consider other factors that contribute to your monthly budget.  How many kids do you have?  Will any of them need braces, require extra medical care or want to go to college someday?  Do you like to travel, try new restaurants or attend sporting events?  Are you adventurous and want to get the “project” home that becomes truly your own? 

When considering what home to buy, also consider that you are committing to a loan that extends over a lengthy period of time.  Thirty (even fifteen) years are a large portion of your life, during which “life” is going to happen.  Be prepared for those occurrences by not over extending yourself with a mortgage payment that keeps you awake at night.

Our intent is to provide some guidance in helping you determine what monthly payment you can undertake based on your particular budget and needs.  If you would like to take this a step further to determine how much house you can afford with these payments, give us a call.  Our business is based on working for you and your long-term goals.  We also have a number of different calculator options on our website to help you make informed decisions when purchasing or refinancing your home.

Too Much of a Good Thing?

March 18, 2010

Last month we posted an article on RD (Rural Development) home loans.  We outlined the basics and how this is a great option to consider when purchasing a home, especially when so many areas and buyers may qualify.  Unfortunately, this program may come to a sudden halt – at least for the rest of this fiscal year.

Early last week a memo from the US Department of Agriculture Rural Development alerted lenders that they anticipated funding for this year’s program to be exhausted by the end of April, 2010.  This news itself is nothing earth shattering, but the timing most certainly is.  Normally funds start to become depleted in the fall near the end of USDA’s fiscal year which ends September 30th. 

The other challenge is that there will not be any Conditional Commitments.  Typically as funds are depleted, loans are conditionally approved pending more fund allocation.  Once the department has the new fiscal year’s budget approved with new government funding those loans are fully approved and business continues as usual.  Not this year.  Since there is such a huge gap between now and the start of the next fiscal year, Conditional Commitments are just not appropriate.

So what caused this problem?  Why did the funding end so quickly?  The easiest explanation is the growing popularity of the program.  Kevin Smith, Area Director for Rural Development says, “Record demand, not only in Michigan but nationally, for the Guaranteed Rural Housing loan program will led to the full utilization of Congressionally appropriated funding at an early time frame this fiscal year.”

We too have seen a steady increase in RD loans; and our company continues to underwrite more RD loans than any other lender in the state of Michigan.  As more borrowers learn about the program with low income requirements, 100% financing options, and the vast amount of area classified as rural; demand will continue to increase. 

The next obvious question is what can be done to ease this challenge in the future?  Should more money be allocated to the program?  Should the upfront funding fee be increased like the FHA program has done?  Should this be a top subject for Congress to focus on?  Smith could not comment on policy issues of the federal government, but one thing is sure.  If you want to take advantage of this program yet this fiscal year, you need to have a signed purchase agreement as soon as possible.  There are only 6 weeks left before committed funds are anticipated to be exhausted.  Miss this window, and you may need to wait until October to get in on this program again.

Things could always change based on how the federal government reacts.  Time will tell.  In the meantime, we’ll keep watching and will let you know how this program progresses.

Physical and Financial Fitness – Who is Responsible?

February 9, 2010

We recently found a blog post by Philosophy Professor Nina Rosenstand from San Diego Mesa College where she raised the question of whether or not staying slim was a moral responsibility.  She implicitly asked who should ultimately be responsible for our own physical health, and whether or not an employer could assume this task.  While the focus of her article was on physical fitness, it got us thinking.  Who is ultimately responsible for your financial fitness? 

In the same way our weight is used as one indicator of physical health, a person’s credit score is used to portray a person’s financial fitness.  Your credit score measures your fiscal responsibility from the past up to the present.  Like your weight, this too is only one indicator of your overall financial health.   A credit score doesn’t account for factors outside of your control like a company closing leaving you without a job and therefore no income, that potentially leads to foreclosure.  Your credit score doesn’t explain a divorce that suddenly cuts your income in half. 

However, do the occurrences of life totally void us of all responsibility when it comes to our finances?  Are “we the people” to some degree responsible for this messed up economy due to our collective lack of financial accountability?  Can we be allowed to wash our hands of financial integrity just because “life” happens?  Shouldn’t we expect the unexpected to happen?   

Being financially sound (i.e.: strong credit scores, emergency savings, balanced budgets, living within our means) has many benefits such as lower health and auto insurance rates, better interest rates, and even job offers.  Should we push the blame of financial blunders onto someone else?  At what point do we say this is my life, my finances, my responsibility?  Along with teaching our children about living healthy, we need to also teach them financial responsibility.  Perhaps we might find that sound financial health can lead to better physical health.

We are not so ignorant (nor arrogant) to think that hiccups are not going to occur along the path of life.  They do.  And if you have not experienced one, odds are you will at some point.  As a company we are bound by industry and legal regulations to enforce set standards of acceptable financial health.  However, we also want to help our clients improve and maintain optimal financial health.  We cannot fix a client’s struggling credit any more than we can do sit-ups for you, but like a personal trainer we can offer guidance, suggestions and helpful ideas. 

What are your thoughts?

What exactly is a Credit Score? (part 4)

January 29, 2010

This is the last post from this series on your credit score.  To review, we discussed what information was on your credit report, contributing factors to your score, and how to build and maintain a strong credit score.  This post will highlight ways to repair a damaged credit score.

Part 4 – How can I repair a low credit score?

There are a couple points I must make at the outset.  First, there are no easy fix, fast track methods to repairing and rebuilding poor credit.  It… just… takes… time.  Remember your credit score (and report) reveal your track record of managing payments.  If your score is a consequence of your actions, time is how your score will be repaired.  You didn’t drop to a low score overnight, even if “life” did happen (job loss, health problems, divorce, etc.).  This situation took time.  Don’t expect to bounce back to a 780 score overnight.  You need time to prove your ability to manage your finances and to pay expenses responsibly. 

The second point is to avoid unscrupulous credit repair service companies.  These companies often prey upon unsuspecting consumers promising to “fix” someone’s credit and to remove unfavorable information for “3 easy payments of $49.95”.  Nothing could be farther from the truth.  While errors are not uncommon on reports (we’ll discuss this in a moment) truthful information, no matter how unsavory, cannot be removed from your report.  (For information on fraudulent credit repair services, what to avoid and how to report illegal activity visit our website for more information.)  If a bankruptcy or foreclosure happened, it will be reported and will be there for some time.  If you have a credit score, you are an adult.  Let’s not whine about a low score, let’s be proactive and start on a better path. 

Okay, so you are behaving.  Your bills are paid as promised, have a very low debt to income ratio, manage your money well and stick to your budget, and learn your credit score is not where you expected it to be.  Now what??

Start by reading your credit report.  Are the creditors listed, those you actually have or have had accounts with?  Are your name and aliases correct?  Are your date of birth, social security number and address(es) correct?  Many times a keystroke error is all it takes to suddenly combine someone else’s credit history to yours and negatively affect your score.  If you are a “Jr.” or “Sr.” you can certainly understand this scenario.  Other times it may be that a debt has been fully paid and the creditor has stopped reporting the information to the credit bureaus so that a remaining balance still shows.  Surprising as it may sound, even with all the computer systems in the world, credit reports are ultimately managed by people capable of making mistakes.  (No really.)

If you believe your credit report contains an error you have the right to contact the credit bureau that reported it and dispute the information.  There is no cost to dispute this information and it isn’t complicated.  The best way to communicate with any credit bureau is in writing (go old school here) with the letter sent by registered mail with a return receipt to confirm they now have your letter.  (Our website contains a sample dispute letter you can use.)  Provide your complete name and address, clearly identify the item(s) in question, explain why the item is being disputed, and your request to have this corrected or removed.  Include a copy (never the original) of the documentation you have supporting your claim.  (For example, if you paid off that credit card, include a copy of the final statement showing a $0 balance.)  Also include a copy of your credit report with the items in question circled.  Keep a separate copy of everything you are sending to the bureau along with a diary of any activity, conversations and contacts. 

The reporting credit bureau has 30 days to investigate the disputed information and provide you with a written report of the findings.  The bureau is also required to send you a copy of your updated credit report if the disputed item has been changed as a result.

In general with time, a solid financial plan, and some perseverance you can repair, build and maintain your own credit standing.

What exactly is a Credit Score? (part 3)

January 26, 2010

In part 1, we covered what information was included in your credit report.  Part 2 revealed the components of your credit score and how much each one contributed to your overall score.  Part 3, covers how to manage your credit.

Part 3 – How do I build good credit?

Your buying, and more importantly payment habits, have a direct impact on your credit rating.  Your rating, or credit score, is based on payment history.  The better you are at paying your debt obligations as agreed and when agreed, the higher score you will receive.  Here are 10 tips to establishing and maintaining good credit.

1.  Apply for a credit card.  Creditors want to know you can not only handle debt, but also different types of debt obligations.  This is not a free pass to open an account with every retailer in the mall however.  Limit yourself to no more than 2-4 cards and make your payments on time and for at least the minimum amount each month.  Your credit cards are to be used to maintain or to build credit, not as a way to live beyond your income level.

2.  Make all your payments on time.  As mentioned above, the due date is when your payment must be received, not postmarked.  If this is a challenge for you, consider automatic bill payment.  This is now offered by most creditors, utility companies and banks at no additional cost.

 3.  Avoid late fees.  Late fees are a key indicator that your money is controlling you, not the other way around.  Be advised though, that just because you are not being charged a late fee, does not mean your creditor does not consider your payment late.  Watch your due dates.  (Can you tell timeliness is rather crucial?)

 4.  Stay current.  If you have had a problem and are behind in payments, get current and stay current.  Call your creditor and talk to them.  They are willing to work with you, but they are not mind readers.  They cannot help if they don’t know what is going on.  Most creditors these days would rather receive some payment than nothing at all.  Communication is key, along with a willingness to make an attempt at repayment.  This step can often avoid an account going into collections.

5.  Keep your credit balances at less than 50% of the limit.  This is crucial!  A little known secret here, whether or not you pay off the balance of your card each month, keeping your balance to nothing higher than 50% of the credit limit shows you have available credit.  Available credit means you are most likely not overextended, and that can mean low credit risk.

6.  Do not open new cards as a means to increase available credit.  It is far better to manage a few accounts successfully, than to have several accounts with little to no activity.  Remember the idea is to prove you can manage your finances, not that you can open accounts.

7.  Review your credit annually.  Knowing what your creditors are reporting helps you avoid surprises or potential problems.  It is not uncommon to find errors on your credit report. 

8.  Establish a budget.  Despite how some may feel, ‘budget’ is not a four-letter word.  It is a plan for you to control your money so that it does not control you. Non-mortgage debt should not be more than 20 – 30% of your gross monthly income.

9.   Ask for help if you need it. No one is perfect or has all the answers.  If creating a realistic, working financial plan seems out of reach, ask for help.  Consider contacting a reputable credit counseling organization with trained advisors in this area.  Do not be confused with a Credit Repair Company though.  Many offer claims to remove information from your credit report.  You cannot remove truthful information.  Time is your ally for credit mistakes. 

10.  Start now.  Just because your credit has been a problem does not mean that all hope is lost.  You can have great credit again – just start.  Pay all your bills on time, every time, as agreed.

What exactly is a Credit Score (part2)

January 22, 2010

Last time we gave you some information on what components are included on your credit report.  This time we’ll dive a little deeper.

Part 2 – How is a credit score determined?

Have you ever wondered how that three digit number that so much of your life depends on these days is reached?  While no one outside of the organization that designed the number knows exactly, some basic information is known. 

Your credit score is a complex mathematical model designed by the folks at the Fair Isaac Corporation (FICO).  Three different credit bureaus use the data collected to determine an actual score based on this model.  The data is reported by creditors to these agencies – Equifax Credit Information Services, Experian and Trans Union National Disclosure Center.  (You can find links to these agencies on our website.)  A credit score can range from 300 – 850 where, the higher your score the less risk you represent.

Your score is based on five criteria that carry a different ‘weight’ in relation to the whole score.     

1)      Your history of payments accounts for 35% of your total score.  Payment history covers how you pay your bills and if there have been any collections, bankruptcies or judgments. 

2)      The balance and available credit on your accounts factor 30% into your score.  An account near the credit limit poses a much higher risk than one at less than 50% of the limit.

3)      The length of history on any account has a 15% weight.  The longer an account has been open and active, the more time you have had to ‘prove’ yourself. 

4)      The number and type of credit you have accounts for 10%.  More open accounts, has a potential for greater debt and therefore a lower score.  More variety of accounts though can show more experience with different types of credit and generally a higher score.

5)      New credit accounts for the remaining 10%.  Brand new accounts often signify new debt.  Multiple inquiries within a short timeframe can also indicate you are looking into taking on debt. 

In general, lagging payments and multiple new accounts can indicate a problem and therefore reduce your credit score.  The better you are at managing your finances and paying bills as expected, the lower risk you are and that translates into a higher credit score.