Credit Education
CREDIT EDUCATION FOR
FIRST TIME HOMEBUYERS!
Call Now: 215-533-4355
Bad Credit: Why & How
Credit is integral to qualifying for loans of any kind. Any outstanding
debts are reflected in your credit history. The more debt, the lower your
credit score. A credit score falling below 640 equals bad credit, and your
loan application is denied.
Beating Bad Credit
To help recover from bad credit and boost your score, you can do the following:
1) make your monthly payments on time
2) pay down your balances
3) dispute inaccurate information
You need a middle score of 640, the credit score most mortgage
companies are comfortable with. In addition you want to re-establish
good credit by having 3 positive trades that have not been late for
a year or more. Most mortgage companies expect this.
Staying on top of your credit scores
Anyone can boost their credit in the short term. BUt you want to
avoid flash-in-the-pan results. Upon improving your credit scores it is
equally important that you continue the trend after buying your house.
All of our clients walk away with the tools to remain on top of their credit,
and we make sure all of our clients get a Credit Monitoring Service.
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About Credit
Credit is generally the most challenging hurdle for the first time homebuyer.
Understanding how credit works is a tremendous benefit to everyone.
• Trade Credit registers on your credit report and is broken down into two parts:
• Current Credit: any credit you pay monthly bills on: credit cards, student loans,
auto loans and personal loans.
• Collections: unpaid items that have been charged off, and now the Creditors are
pursuing full payment: medical bills, parking tickets, auto repossessions, credit cards,
judgments, cell phone bills and utility bills.
• Alternative Credit: If you have too little Trade Credit to qualify for a mortgage,
another avenue of credit to draw from is Alternative Credit. Alternative credit
consists of the kinds of bill payments that don’t register on your regular credit:
PECO, PGW, Cell Phone, Cable, Water, Daycare, and
Insurance (rent, life, health, auto, etc).
Establishing Alternative Credit requires a letter from the utility company stating
you have been their customer for the past year, and have not been more than
30 days late on any payments.
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Example:
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Rent can be one of the strongest markers of Alternative Credit, and earns
special mention here. Most lenders categorize landlords in two areas:
1) Management Companies, and 2) Private. If your landlord is in the business
of renting houses, or does it through a Management Company then they can
fill out a simple verification of rent form stating you have always paid your rent
on time. If your landlord is a Private renter then we need your last 12 months
of canceled checks showing you paying your rent. Paying rent by cash or
money order won’t provide a paper trail for your payment history and
should be avoided.
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The Good, The Bad and The Ugly of Credit: A Closer Look
We live in a credit driven society. Yet most Americans have only a vague
idea of the impact credit has on their lives. If you’re a first time homebuyer,
or you’re just curious about how credit works, keep reading.
What is credit anyway?
Every time you do business with a company that requires a monthly bill (be it a
utility company, a management company, a credit card company) that company
regularly informs the credit bureaus as to whether or not you paid your bills on time.
Credit Bureaus
The three biggest, most influential credit bureaus continue to be Trans Union,
Experion, and Equifax. Between them they have compiled comprehensive
credit histories on almost everyone in the U.S. Not only do they receive this
information, they also supply detailed specifics to creditors deciding to extend
a consumer’s credit. Prime example: A car dealership wants to know if a
prospective buyer will honor a payment plan on a new vehicle, so they request
a credit report on that individual. This is often referred to as “pulling” someone’s credit.
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Credit Reports
The credit report shows your personal information including name, address,
phone, SS, birth certificate, as well as your payment history with existing creditors.
Every creditor you encounter reviews this information and makes a decision
on whether to extend your credit or not. If you don’t pay a creditor who has
extended your credit they lose money and could go out of business.
Their decision to loan you money is related to their success. In order to
make the right decision they use what is known as your Fico credit score.
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What is a Fico Score?
Fico, a company created by a University professor and behavioral scientist,
specializes in predicting human behavior, specifically the likelihood of individuals
paying what they owe. Predictions are based on the individual’s most recent credit history.
To explain the premise in simple terms, consider the parent and child dynamic.
A mother walking down the street with her 7 year old already knows exactly
what moment her son will start tugging on her arm as they pass the
candy store, just as she knows he’ll leave the vegetables on his dinner plate
for last, and that at some point between bath and bed times he’ll manage to
get into a fight with his sister, because the child has exhibited this behavior
consistently time after time. It comes down to law of probability.
The higher your credit score the stronger the likelihood you’ll make your
payments on time in the next year. The lower your score the more likely
you will default and not pay them back in the next year. This is what
creditors consider when pulling your credit.
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Credit Scores: Slippery Slopes and Baby Steps
So let’s say you miss your car payment. Your creditor reports it as not paid.
Fico then interprets it as “uh-oh, something is wrong, they may have lost their
job or are having financial difficulty.” Fico drops your score down tremendously.
Let’s say you resume payments and bring the balance up to date. Fico brings
your score up some. After 6 months of paying on time they bring it up even more.
Every month after that they will bring it up a little until, after two years of paying
on time, the score is almost back to where it was.
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