Viewing entries in
Trending

Are Your Student Loans Stopping You from Qualifying for a Mortgage?

Comment

Are Your Student Loans Stopping You from Qualifying for a Mortgage?

When you were filling out financial aid applications to help cover your college tuition you probably did not give much thought to how your student loan payments would affect your budget once you graduated. You almost certainly never contemplated how your student loans might impact your credit when you were ready to apply for a mortgage. However, whether you considered the ramifications ahead of time or not, the reality of the matter is that your student loans can sometimes make or break your ability to qualify for a home loan even if your loans have never been paid late or are currently in deferment.

If you are preparing to apply for a mortgage or are already struggling to qualify for a mortgage because of the student loans on your credit reports, the good news is that all hope is not necessarily lost. In fact, depending upon your situation there may even be a few different ways to solve your qualification problems. Take a look...

DTI Problems

Buying a home when you have outstanding student loan debts can certainly be a challenge for multiple reasons. One of the first ways that student loans can make it difficult for you to purchase a home is due to the fact that the amount of these loans will usually be counted against you when you apply for a mortgage. As a result your debt to income ratio (DTI) will increase, causing the amount you qualify to borrow to be reduced. Sometimes these DTI issues can make it impossible to qualify for the home you really want to purchase.  

Student loans may cause you DTI issues even if the loans are currently deferred. (Before you graduate and often for certain periods of time after graduation your student loans may be placed into a deferred status - that is to say that your payments are temporarily placed on hold.) Unfortunately even if you are not currently making a monthly payment on your student loans some portion of the debt still may be counted against your income when you apply for a mortgage loan and the lender calculates your ability to make a house payment.

Potential Solution #1: Consolidation

When you consolidate multiple student loans into a single new loan you can often lower your monthly minimum payment. Assuming that you are eligible to lower your payments through consolidation, consolidating those loans offers you a potential solution to lower your DTI thus enabling you to qualify for a larger loan amount.

Additionally, when you consolidate your student loans your credit scores might even see a small upward bump as well. By consolidating multiple student loans you can reduce your overall number of accounts with balances. Since FICO's credit scoring models pay attention to your number of outstanding debts, consolidating could certainly be a positive move for your credit.

 Credit History Problems

If you have not always made your student loan payments on time you may have another obstacle to try to overcome when you fill out a mortgage application. Unfortunately, if your loan payments are not current then they may put the brakes on you purchasing a new home entirely. Qualifying for a mortgage while your student loans are past due is going to be nearly impossible.

Naturally the easiest way to solve this problem is to pay to bring your loans back to current status if you can afford to do so. However, if your past due student loan debt is too high for you to pay off in one fell swoop, rehabilitation may be an option for you to consider.

Potential Solution #2: Rehabilitation

You may be able to eliminate the default status on your student loans and move those loans from collections back to current on your credit reports by entering into a rehabilitation program. To enter into the loan rehabilitation program you must agree in writing to make 9 consecutive monthly payments (each within 20 days of the due date). The size of your monthly payments will be based upon your income and a variety of other factors.

Once you have completed your rehabilitation payments successfully, your loan should be eligible to be removed from default status and should resume being reported on your credit as a current loan. Unfortunately, any late payments previously made on the loan before the account went into rehab will remain on your credit reports where they may continue to damage your credit scores accordingly for up to 7 years. As a result, during your loan rehabilitation process it would be wise to look into other ways to try to improve your credit - either on your own or with the help of a reputable credit expert.

DIY or Professional Help?

If you like so many millions of other Americans took out student loans to help finance your education then learning the best ways to manage that debt after graduation is a essential to your financial and credit wellbeing. You can try to figure out the best way to manage your loans by yourself or you can work with a pro. Naturally you have the right to try to consolidate or rehabilitate your student loans with your lender completely on your own (just like you have the right to try to repair your own credit or even attempt to perform your own vehicle repairs). However, just like DIY credit repair or auto repair may be an extremely difficult and inadvisable project, so can trying to resolve your student loan issues without professional assistance.

Remember, student loan servicers are supposed to help graduates by making sure that you are well aware of all of the different options you have available. Your loan servicers should be telling you about consolidation options, rehabilitation options, and even loan forgiveness options. However, the truth is that most of the time they do not. (Would a lender really be motivated to help you pay a smaller monthly fee even if the option is available to you?) By hiring a reputable student loan expert to assist you there will be someone on your side, guiding you step by step through finding your best loan repayment, rehabilitation, or forgiveness options and even filling out the paperwork to apply for these programs on your behalf.

CLICK HERE if you would like to have a student loan relief expert reach out to you today. 

michelle-black-credit-expert

Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.

Comment

20 Facts You Need to Know About Credit In Your 20s

Comment

20 Facts You Need to Know About Credit In Your 20s

As a young adult there will undoubtedly come a time when you will ask yourself the question, "Why didn't I learn about how to manage my credit during high school or college?" After all, you learned the formula to accurately calculate the area of a parallelogram with the given vertices (something you use every day in your career now, right!?). Regardless of what you did or did not learn during your school years, the unfortunately reality is that most graduates enter the real world with very little knowledge about the very important subject of credit.

Learning how to achieve and maintain great credit is a lifelong endeavor which requires hard work and consistency. However, the rewards of achieving stellar credit scores can be truly tremendous. While you cannot learn everything there is to know about your credit in a single article, here are 20 important credit facts which you need to know sooner rather than later as you embark upon (or continue) your journey into adulthood.

Fact #1: You have 3 credit reports.

A common credit myth which refuses to die is the false idea that you have only 1 credit report. However, you actually have 3 credit reports, 1 from each of the 3 credit reporting agencies - Equifax, TransUnion, and Experian.

Fact #2: You have hundreds of credit scores.

While you only have 3 credit reports, there are actually hundreds of different scoring models that can be used to calculate your credit scores depending upon who is checking them and for what purpose. Most lenders will use some version of the FICO credit score if you are applying for a loan or credit card. Although the idea that you have hundreds of scores may feel overwhelming the good news is that all of your credit scores are based upon the same information - the items appearing on your credit reports. Focus on maintaining clean credit reports and your scores should remain in good shape.

Fact #3: It is your job to check your own credit reports.

The Fair Credit Reporting Act (FCRA) gives you the right to expect accurate credit reports. Yet it is ultimately up to you to make sure that your credit reports remain error-free. No one else is going to monitor your credit on your behalf.

Fact #4: Checking your credit reports once is not enough.

Your credit reports are not static but are ever evolving and changing with new information. Therefore, checking your credit reports once is not going to be nearly sufficient. You can check your credit reports for free each year at AnnualCreditReport.com. You can also check your credit reports and scores more often (sometimes for a fee) through credit monitoring services online such as those found at GreatCredit101.com.

 Fact #5: When credit errors occur, you have rights.

If you do discover errors on your credit reports the FCRA gives you the right to dispute those errors with the credit reporting agencies. You can submit a dispute on your own or with the help of a professional. CLICK HERE for a behind the scenes look at how the dispute process really works.

Fact #6: Credit cards are not the enemy.

Many people, especially Millennials, are anti-credit card. After all, you have likely seen your parents or another person you care about misuse credit cards and possibly fighting for years to overcome poor credit card spending habits. However, credit cards can be a very powerful tool which can help you to build excellent credit when they are used properly, not to mention they offer unparalleled fraud protections to help you protect your hard earned money. Treat credit cards as if they were debit cards (never charging more than you can afford to pay off in a given month) and you will be off to a great start in the credit card management department.

Fact #7: Credit card debt is not your friend.

While the plastic in your wallet may not be inherently evil, credit card debt is a predicament which you should strictly avoid. Not only can excessive credit card debt land you in a pile of financial troubles, revolving credit card debt from month to month is going to take a toll on your credit scores as well. If you wish to earn great credit then it is essential to develop the habit of paying off your credit card balances monthly.

Fact #8: Late payments are a big deal.

From a credit scoring perspective it is a mistake to shrug off the occasional late payment as if it were insignificant. Late payments are actually a pretty big deal. Since a massive 35% of your FICO credit scores are based upon the payment history on your credit reports it will be virtually impossible for you to ever earn the great credit scores you desire unless you permanently squash the late payment habit. On the flip side, if your credit reports show a history of on-time payments then you will be well on your way to credit score greatness.

Fact #9: Collection accounts can really hurt you.

If late payments can negatively impact your credit scores, collection accounts can cause a credit score train wreck. When a collection account finds its way onto your credit reports you are virtually guaranteed to see your credit scores start sliding in a downward direction.

Fact #10: Medical collections can prevent you from qualifying for a loan.

Even medical collections can harm your credit, often severely. It is true that many loan underwriters might not require you to pay off medical collections if your credit scores are high enough to qualify for a loan (leading some to incorrectly believe that medical collection do not matter). However, the presence of the medical collections on your credit reports is most likely going to damage your credit scores. As a result, while the balances of your smaller medical collection may not matter all that much when you apply for a loan their presence on your credit reports is very likely to be a problem.

Fact #11: Paying off collection accounts does not undo the damage.

When most consumers set out to start repairing their own credit they will often begin by trying to settle old collection accounts. Unfortunately, the bad news is that paying off collection accounts generally will not do much (if anything) to improve your credit scores when you are applying for a loan. Most lenders still use an older version of the FICO credit scoring model. These older FICO models care much more about the presence of collection accounts than the balances of those collection accounts. Therefore, a collection account with a $0 balance and a collection account with a $5,000 balance will have nearly the same negative impact upon your FICO credit scores.

Fact #12: Debt collectors have to follow the rules.

Even if you owe an outstanding debt, 3rd party debt collectors are still bound to follow the Fair Debt Collection Practices Act (FDCPA) in their collection attempts. Among other protections afforded to you this law prevents debt collectors from lying to you, harassing you, or revealing information about you to others when trying to collection a debt. Click here for more information about HOPE4USA's free collection letter review service.  

Fact #13: Applying for too much credit can spell trouble for your credit scores.

You may find it unbelievable, but the mere action of applying for credit can potentially damage your credit scores. Credit scoring models are created by taking massive numbers of credit reports and comparing trends which lead to late payments and defaults. The stats clearly show that people who apply for credit more often are bigger credit risks for lenders to take on as new customers. As a result, if you want to achieve stellar credit scores you should make a habit of only applying for credit when you really need it.

Fact #14: Retail store credit cards can be dangerous to your credit scores.

Remember the tip above that says you should not apply for credit unless you really need something? Well, applying for a retail store card to save 15% off your order does not really qualify as a "need." Not only can the extra inquiry hurt your credit when you open a new retail store credit card, the new account itself can also lower your average age of accounts and potentially damage your credit scores even more. Finally, these types of cards are notorious for having low limits which makes it easy to run up a high debt to limit ratio - another dangerous prospect for your credit scores.

Fact #15: Co-signing can be the kiss of death for your credit.

At some point in your adult life you will probably be asked to co-sign for a friend or family member. However, whether you are co-signing for a loan, a credit card, or even an apartment you are risking your personal credit health by doing so. When you co-sign for a credit obligation you are equally responsible for the debt, just as if the account belonged to you and you alone. If the account is ever paid late it could cause serious damage to your credit scores.

Fact #16: Loved ones can add you as an authorized user to an existing credit card account.

For the sake of your loved ones, it is not a good idea to ask them to co-sign for you either. However, a loved one can help you to establish better credit for yourself without little to no risk to their own credit by adding you as an authorized user to an existing credit card account. Once the authorized user account shows up on your credit reports (assuming that the account has never been paid late and has a low or $0 balance) you might begin to see a positive impact upon your credit scores immediately.

Fact #17: Maintaining credit independence is important.

Even after you are married it is still important to keep your credit obligations separate from your spouse. The idea that you are required to co-sign for accounts with your husband or wife is completely false. In fact, unless both of your incomes are needed to qualify for a larger loan like a mortgage it is best to continue to maintain credit independence even after tying the knot.  

Fact #18: Payment history is not the only thing that matters.

While your payment history certainly is the most important factor considered in your credit scores (35% of your FICO scores to be exact) there are other factors which impact your credit scores as well. The age of your credit accounts, the mix of accounts on your credit, your credit card balances, the number of accounts with balances appearing on your credit reports, and how often your credit reports have been pulled lately are just a few of the other factors considered in the calculation of your credit scores. CLICK HERE for more information about how your credit scores are calculated.

Fact #19: You have the right to work on credit problems by yourself.

Bad credit happens to good people all the time. Identity theft, credit reporting mistakes, job loss, illness, divorce, and other unfortunate circumstances can easily lead to credit problems. Your credit problems might have even come about because you made money management mistakes and perhaps bit off a little more than you could chew financially. However, whatever the reason for your credit problems you do have the right to try fix them on your own if you wish. There is no legal requirement for you to hire a professional to help you (just like you are not required to hire an attorney to represent you in court.) If a credit repair company makes you feel like you have to hire someone else to work on your credit you are probably dealing with a scam.   

Fact #20: You have the right to hire professional help.

Just because you have the right to give DIY credit repair a try does not mean doing so is the best idea. Dealing with creditors, debt collectors, the credit reporting agencies, and building a credit recovery plan on your own can be an extremely difficult process to successfully navigate without professional guidance. Thankfully, you absolutely have the legal right to hire a credit expert to assist you in your credit restoration efforts if you are tired of trying to recover all on your own. CLICK HERE to schedule a no-obligation credit analysis with a HOPE4USA credit expert today.

What Now?

Remember, the reason your credit matters so much is due to the fact that the condition of your credit reports and/or your credit scores is going to have an impact upon your life over and over again. In fact, whenever you purchase a vehicle, apply for a place to rent, take out a mortgage loan, apply for auto insurance, open a new utility account, and perhaps even when you apply for a job your credit will probably be reviewed by companies deciding whether or not they wish to do business with you or hire you. Bad credit can lead to some very bad problems.

Thankfully, if you have made credit mistakes in the past you can absolutely make a u-turn today and start heading back in the right direction. With the right plan, a little time, and a bit of hard work you can overcome credit problems and set out to earn great credit in the future. It may sound like a cheesy marketing line, but the truth is that there really is no such thing as a HOPEless credit situation. 

 

michelle-black-credit-expert

Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.

Featured
3 Ways to Keep Black Friday from Busting Your Budget
3 Ways to Keep Black Friday from Busting Your Budget
Why You Should Never Pay to "Rent" a Tradeline
Why You Should Never Pay to "Rent" a Tradeline
Will Increasing a Credit Limit Help Your Credit Scores? 
Will Increasing a Credit Limit Help Your Credit Scores? 
Why Do the Credit Scores I Pull Look Different Than the Ones My Lender Pulls?
Why Do the Credit Scores I Pull Look Different Than the Ones My Lender Pulls?
Where Do Credit Scores Come From?
Where Do Credit Scores Come From?
Preparing Your Credit for a New Mortgage
Preparing Your Credit for a New Mortgage

Comment

How Credit Scoring Actually, Really, Truly Works

Comment

How Credit Scoring Actually, Really, Truly Works

Credit scoring is a complex process, a process driven by secretive software systems that are designed to evaluate the information contained in your credit reports and assign your credit scores based upon that data. If the information on your credit reports shows that you pose a higher risk to lenders then a credit scoring model will assign you lower credit scores. It probably will not come as a shock to you that higher credit scores can benefit you tremendously while lower credit scores can ultimately cost you a lot of money and cause a lot of unnecessary stress.

The unfortunate truth is that if you consistently struggle with poor credit scores then you could easily pay hundreds of thousands of extra dollars in interest over the course of your lifetime for your mortgages, auto loans, credit cards, and personal loans. For this reason, among others, it is a wise idea to learn everything you can about how credit scores are calculated and then use that knowledge to earn the best credit scores possible for yourself.

Credit Scoring by Category

Your FICO credit scores, the scores which are most commonly used by lenders, can potentially range from a low of 300 points to a high of 850 points. Altogether that means that you have up to 550 points up for grabs whenever a FICO scoring model calculates your credit scores. These 550 potential points are broken down into 5 separate scoring categories.

1.      Payment History - 35% (or up to 192 available points)

2.      Amounts Owed - 30% (or up to 165 available points)

3.      Credit History - 15% (or up to 82 available points)

4.      Mix of Credit - 10% (or up to 55 available points)

5.      New Credit - 10% (or up to 55 available points)

*The points above are given for example purposes and are not exact.

For more information about these 5 credit scoring categories check out our previous article, Where Do Your Credit Scores Come From?

How You Earn Credit Score Points

Most consumers have a completely inaccurate view of how credit scoring works. For example, one of the most common questions I receive as a credit expert goes along the lines of "Michelle, how many points will "X" lower my credit scores?" or "How many points will I lose because of "X" action?" However, the idea that any action or item on your credit reports will lower your credit scores is actually incorrect due to the fact that credit scores are always built from the bottom up.

When analyzing the data on your credit reports credit scoring models like FICO will ask a series of questions (aka characteristics) about your credit report and the answers to these questions (aka variables) will ultimately determine the credit score you are assigned. Here is a hypothetical look at how the process works in reality:

The Question (aka Characteristic)
What is the age of the oldest account on the credit report?
The Answer (aka Variable)

·        Less than 1 year old: 40 available points

·        1-2 years old: 50 available points

·        3-5 years old: 60 available points

·        5-10 years old: 70 available points

·        Greater than 10 years old: 82 available points

*Hypothetical variables and point values were used in the scoring sample above.

There are quite a few other factors considered within the "Credit History" category of your credit reports as well, so the example above is really an oversimplification. However, it does serve to give you a better idea of how the credit scoring calculation process operates.  

This question (characteristic) and answer (variable) exercise is repeated over and over again by the credit scoring model until all of the factors considered from your credit report have been completely analyzed. Next the points you earned above (based upon the variable which applied to your credit report) would be added to the points earned from the other credit categories and finally totaled together to come up with your overall credit score.

·        Payment History Category = 150 points earned

·        Amounts Owed Category = 120 points earned

·        Credit History Category = 60 points earned

·        Mix of Credit Category  = 30 points earned

·        New Credit Category = 40 points earned

·        Overall Credit Score = 700 (Remember, your scores begin at 300, not 0)

The Story Continues - Scorecards

Now that you have seen a hypothetical example of how a FICO credit score might be calculated, it is time to complicate the story even more. Credit scoring models also have another component known as "Scorecards." Scorecards make up the framework or skeleton of any scoring model. They separate consumers into like or homogenous groups and each group is scored a little bit differently than the other. Therefore, if your credit reports are being scored by a scorecard designed for consumers who have filed bankruptcy you would not be eligible to earn as many points in each category as you would be eligible to earn if your reports were being scored by a scorecard designed for consumers with no derogatory information (aka clean files). For more information about scorecards, click here.    

Feeling Overwhelmed?

As mentioned above, credit scoring truly is a very complex process. However, what is simple to understand is that credit scores are generated solely based upon the information contained within your credit reports. Therefore, if you maintain credit reports which are free from negative information, keep your payments on time, and keep your credit card balances paid off monthly then you will be well on your way to credit score success. Understanding how credit scoring works is important, but as long as you focus on developing healthy credit management habits you can achieve and maintain the good credit rating you desire.   

Need help overcoming past credit problems? CLICK HERE to schedule a professional credit analysis with a HOPE4USA credit expert today.

michelle-black-credit-expert

Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here. 

Comment