The Story on Credit

When Johan and I sold our house last year and bought a new house, we knew we’d have to get the new loan in his name since I had changed from salary to commission-only which greatly changed my financial history. We had confidence in his credit for various reasons and figured the loan process would be smooth and easy. But that’s when this happened…

Home-Alone

Flashback 2 years ago, Johan moved out of his apartment and they hit him with an extra bill. Not only did they keep his deposit, but they were trying to charge him more money to fix things in the apartment “caused by dogs.” It’s funny because he never had a dog in his apartment and everything they were claiming was bogus.

Long story short, we refused to pay thinking that small amount couldn’t possibly hurt his credit and then we were hit with the truth. Fast forward almost 3 years – trying to buy a house – and his credit was hit hard by that “small amount.”

Warning: Don’t ever let anything go to collection at those credit bureaus, no matter how “unfair” the charge. Pay it and dispute later.

I’m going to share a few lessons we’ve learned along the way about credit and how this translates into making a large purchase, like a home.

Keep an Updated Address
A lender told me once that the thing that hurts peoples’ credit the most tends to be medical bills. And it’s not even that people refuse to pay them – it’s that someone moves, forgets to update their address with the hospital and/or their insurance, the bill gets sent to the wrong address, it never gets paid, and it goes straight to credit collection. How is this fair? Exactly, it’s not. There are lobbyists for this issue trying to change its effect on credit but unfortunately there’s no solution right now. So make sure that if you’re going to get billed by anyone, they have your updated address.

la-afp-getty-u-s-jpg-20150213

“Debt-free” Isn’t the Best for Credit
Now don’t get me wrong here, I’m not saying you need to rack up a bunch of credit card debt and never pay your student loans. What I’m saying is that you need to be using credit in order to build a credit score.You’ll want to go slap some congressmen after hearing this but it’s actually not good to pay off all debt and live on cash-only. We actually just applied for a new credit card so that Johan could rebuild his score faster. Make sure that each month you’re always paying your minimum balance (at least), you don’t spend more than 30% of your credit limit, and you’re consistently paying into 3-5 different accounts.

Example:
Car payment = $250/month
House payment = $1200/month
Student loans = $300/month
Visa card (limit is $10,000) ~ $2000/month
American Express card (Limit is $5000) ~ $1000/month

This is 3 revolving accounts where you’re consistently making the minimum payment and 2 revolving credit card accounts where you always pay the full balance and you don’t spend more than 30% of the limit. This is great! Even if you pay off your student loans quickly, you’ll still have 4 revolving accounts which is wonderful for your credit. I know I know, it’s crazy sauce that you have to maintain some form of “debt” to prove you’re good at handling money. But who thinks the government is perfect? Yeah…

credit-score-chart

Pulling Credit Will Not Hurt Your Score
Lots of my clients are worried about talking to lenders because they think if they get their credit report pulled too many times that it’ll severely hurt their credit. All I can say is, “Don’t believe everything you read on the internet.” Did you know that any inquiries made within a 45-day period count as one? So 10 different people can pull your credit at one time and it’ll show up like one person pulled it 1 time. If you’ve got a really good score, this may drop you 2-3 points total, so it really does not “hurt” your credit. Some people have even seen their score go up as a result of this. If you have a low score and you’re still worried, just mention it to the lender before starting the process and he/she can give you the best options.

Talk to a Lender 6 Months Before Buying
This one is really important, especially for young people just out of college or people worried about their credit. If you’re thinking about making a home purchase then it’s really good to get with a lender 3-6 months ahead to see where you stand. I know a lender who said he had a client fresh out of college and she literally had no credit score – she didn’t have any history! So he told her to get a credit card and become an authorized user on her fiancé’s card, and then BAM, her score went up to 720 within 3 weeks. Crazy huh? That little change made a huge difference and that’s what lenders are for. They can coach you on how to raise your score and things to stay away from so you can qualify for the best possible rate once it’s time to buy. Trust me, don’t wait, they’re there to help.

fico-credit-score-scale

So folks, those are the biggies. Hopefully you know a little more about how credit works than before you read this post and hopefully you can all go out and start working on those scores. Most lenders will tell you they’ve never seen someone with a perfect score, but there are ways to get there. Why don’t we all try? 850 here I come!!

“For no man can lay a foundation other than the one which is laid, which is Jesus Christ. Now if any man builds on the foundation with gold, silver, precious stones, wood, hay, straw, each man’s work will become evident; for the day will show it because it is to be revealed with fire, and the fire itself will test the quality of each man’s work.” – 1 Cor. 3:11-14