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Buying a Car Painlessly

Buying a new car can be painless if you do your homework. The last two cars we’ve bought have been kind of a spur of moment decision. Actually, my husband, Steve and I have talked about the make and model of car we wanted but that’s about it. A couple of weeks ago I came home from running errands and announced to my husband I wanted to buy a new car. Our 1999 Jeep Grand Cherokee had 143,000 miles on it and had done a great job for 12 years but I was ready for a new Jeep. That’s all it took to get Steve on the hunt for a Jeep Grand Cherokee. And today you can do your home and shopping in the comfort of your own home on the Internet. Steve began by visiting www.truecar.com , a website that helps consumers determine the true price of a car. You simply enter the year, make and model of the car you’re looking for and you’ll get the sticker price listed at local dealerships. You’ll also get a graph with the best local price along with great, good and market prices.

The New Credit Score Rules

If you only read one article about credit scores this year, read this one.

The average credit score nationwide is 666, according to CreditKarma.com. That’s not only an ominous number, but can be a costly one.

Based on CreditKarma.com’s data, the trend amongst lenders shows that a 660 credit score is the threshold to be approved for a mortgage, auto loan and unsecured credit card. Digging deeper into consumers' credit health, nearly 40% of consumers have a credit score below 660. That means 4 out of 10 Americans would likely be denied for a mortgage and auto loan, charged sky-high interest rates, and only qualify for a secured credit card.

With credit scores controlling consumers’ access to credit and the prices they pay for lending products, Americans must take control of their credit health.

In the fine line between approval and denial in lending, consumers deserve to know more so they can do more about their credit health. While recent federal regulations have nudged open the door on consumers’ access to credit, it’s not enough. Consumers must be empowered to actively manage their credit, not just when they are transacting but also in their daily financial life.

As legislation and economic changes evolve the credit industry, consumers’ access to credit scores must be broadened. Here’s what you need to know about credit now.

1) It’s your consumer right to get a free credit score! Thanks to a recent federal regulation, consumers who are denied on a credit application or receive higher interests due to their credit profile are entitled to see their credit score for free. This only applies to declined consumers, so it begs the question: why aren’t all consumers getting their credit score for free? With such significant impact on accessing and pricing of financial products, free credit score access should be a right of all consumers. We may see government efforts to provide free credit score access on the horizon. Once a mysterious and proprietary secret of the credit industry, credit scores are becoming a powerful tool in the hands of consumers. 

 

2) Standards for accessing credit are always in motion. Once upon a time, the general “good” credit score standard was 660. During the recession’s credit crunch, the standard jumped to 720. It appears some credit card issuers are again expanding their credit standards and approving lower credit tiers. Some mortgage lenders say a 720 credit score is needed to get the best mortgage rate, while others say 750 is the new standard. Additionally, lenders are increasingly focusing on other credit details aside from your three digit score. For example, a consumer can have a 780 credit score, considered in the excellent range, and  be denied on a credit card application because their credit history is simply not long enough. It’ll take time and economic stability till lenders comfortably agree on credit score standards; hopefully that keeps you on your toes and improving credit health everyday. 

 

3) It’s not enough to check your credit score. One drawback of the federal regulation is its limitations. Giving consumers access to their credit after being denied is too little, too late. Credit scores can fluctuate suddenly, so a single snapshot isn’t enough. What’s necessary is for consumers to monitor their credit. Whether you have a 550 or an 800, tracking trends in your credit use and credit score helps identify areas to improve, habits to avoid, and most importantly, makes you conscious of how day-to-day financial decisions impacts your credit health. You might need several months’ cushion to polish up your score, so begin monitoring your credit as soon as you plan to buy a home or car, or apply for a loan or credit card. If you aren’t applying for credit but currently have a credit card, it’s still imperative to stay on top of your credit health. Issuers periodically do an account review, and if any new credit blemishes appear, it could affect your card terms. Proactively use free tools like CreditKarma.com’s free credit score monitoring service so you, and not lenders, are the first to know about recent changes on your credit. 

 

4) Expect credit score differences. The federal regulation also shined light on the fact that there are dozens of credit score models in use. While many consumers consider FICO to be the “real” score and everything else to be a “FAKO”, the truth is that every lender chooses differently: there are the credit bureau-specific models, the VantageScore, the FICO score, scores specific to lender type like mortgage, auto and credit card issuers, and even models particular to certain banks. If your TransUnion score and VantageScore have a 40 point difference, there isn’t a “more accurate” score. It’s similar to weighing yourself at home versus the gym or the doctor’s office; the scales show different numbers because they’re calibrated differently, but ultimately, they all measure your weight. Rather than obsessing over the three-digit score, focus on the risk factors involved such as your debt, number of accounts, and credit use. Just like diet and exercise will reflect in your weight across all scales, taking action to holistically improve your credit health will reflect across the broad spectrum of credit score models.

While the recent federal regulation is a positive move for consumers, lenders have already found loopholes, reports SmartMoney. For example, if the lender uses its own scoring model, they aren’t required to disclose that credit score to consumers. Also, insurance companies, which also use a credit score model to evaluate customers and price premiums, are excluded from this regulation and aren’t required to disclose credit scores to consumers who are charged a higher premium.

As the Consumer Financial Protection Bureau stretches its reach and more financial reform finds its legs, consumers must keep challenging Uncle Sam to keep the heat on the financial industry when it comes to credit score access. Consumers must also keep putting in the legwork to build healthy credit and keep an eye on their credit score.

We’re headed in the right direction when it comes to consumers' access to their credit score. But don't walk away from this topic just yet; we barely have our foot in the door.

 

Justine Rivero is the Credit Advisor and resident Credit Rockstar for CreditKarma.com, the pro-consumer credit advocate that helps more than 3 million consumers realize the everyday cost savings of having great credit health.

 

 

 

Getting a Mortage After a Short Sale or Foreclosure

Just a couple of years ago, Lisa and Laura (names changed for privacy) were caught in a housing nightmare. They had moved back to Sarasota, Florida from Nashville, Tennessee at the height of the housing market boom, and rented an apartment just long enough to decide they wanted to own their own home again.

They found a home in a community they really liked. It was a fixer upper that needed a lot of work, and the sales price was $365,000, but they jumped at it. “At that time there were lines of people waiting to buy, and there were bidding wars,” Lisa explains.

Within a couple of years, though, their home’s value had dropped by more than half. They had also put about $30,000 into repairs using a separate second mortgage, but the punch list just kept getting longer. “We were looking at (the decline in value) plus the fact that we needed a new roof; pool resurfacing and a new pool cage; plus a new kitchen, bathrooms, air conditioning and more,” says Lisa.

At that point they decided to cut their losses, and they got lucky. Their lenders allowed them to sell their home for $180,000 in a short sale. The mortgages totalled $435,000, so the banks took a total loss of $255,000. The remaining debt was forgiven. “We didn’t owe anything when it was done,” explains Laura.

After that harrowing experience, you might think they would never want to buy again. Once burned, twice shy, perhaps? But Lisa and Laura realized what a lot of experts are saying: it can be a great time to buy a home if you qualify. Mortgage rates are low, and home prices are within reach in many areas of the country.

But buying after foreclosure or short sale isn’t as common as one might think. Since the housing downturn, Sarasota-based real estate professional John Scherden has found himself working with many buyers and sellers involved in the short sale process. Buyers who were in bidding wars when prices were twice what they are today are often skittish now. “They don’t realize that when rates go up, they may not have the opportunity they have right now,” he says. John finds that buyers often focus on the monthly payment and waiting to purchase after mortgage rates have gone up will substantially increase their monthly payments and the overall cost of the property.

Deciding to jump in again, the couple’s main questions for me were, “How long do we have to wait after the short sale to buy?” and “What do we need to do to clean up our credit to qualify for a mortgage?” (For the record, I don’t offer credit repair services. I agreed to help Lisa and Laura in order to write about their experience for this article. If you have questions about your credit, I recommend you visit Credit.com where I and other experts answer questions for free.)

Reviewing their credit reports, we found several issues that needed to be addressed:

• Lisa’s credit reports show several older collection accounts from bills they didn’t receive when they moved back to Florida.

• Laura’s credit reports show a $5000+ charge off from a corporate card her previous employer had not paid.

• Lisa’s credit report showed the short sale, just over two years ago. She had obtained the mortgage on their previous home alone so it was not listed on Laura’s credit reports. It was just over two years old.

With regard to the collection accounts, I explained to both of them that paying a collection account generally doesn’t help boost your credit scores. However, mortgage lenders may sometimes require you to pay them off before the loan closes. I also explained that they may be able to settle those collection accounts for less than the full amount owed, and still bring the balance listed on their credit reports down to zero, but I wanted them to talk with a loan officer first. Credit strategies can be different when you are trying to get a mortgage loan, and I didn’t want them to do anything to jeopardize that.  

Laura’s collection account from a previously held company card opened another can of worms that I researched and wrote about for Credit.com. [Read: Important Warning If You Have A Corporate Credit Card.]

To answer their question about how soon they can get a loan after a short sale, I turned to Joe Kelly at ArcLoan.com, who in turn asked one of his loan officers, Carrie Chienyuen, to review their credit reports and financial situation, and explain their options.

Carrie shared the latest Fannie Mae guidelines with us. After a deed-in-lieu of foreclosure, preforeclosure sale, or short sale, there is a mandatory waiting period of two years for a loan with an 80% maximum LTV (loan-to-value ratio), or four years for a loan with a 90% LTV. If the borrower can document extenuating circumstances, the waiting period for a loan with a 90% LTV drops to two years.

Since the couple had the money for a down payment, they could get back in the game if they were ready. Carrie also explained that another option: Laura could try to qualify for the loan on her own. They could still hold title to the home jointly, even if Lisa wasn’t a co-borrower.  

Carrie also described FHA guidelines, which are even more generous. The couple could get an FHA loan with a down payment of only 3.5%. The APR at the time of the quote was a jaw-dropper, at less than 5%. (Keep in mind rates can change daily, and depend on individual circumstances.) FHA requires a three-year wait after a short sale or foreclosure, however.

Carrie warned that if they were to get a conventional loan, they would probably have to pay off the collection accounts first. But with an FHA loan, it likely wouldn’t be required. In the meantime, Laura is trying to work with the card issuer to resolve the corporate card account, by far the largest collection account listed.

Not surprisingly, the two were thrilled at the prospect of getting a do over. They will decide shortly whether they want to make the plunge back into homeownership. But more importantly, they feel like they are starting to gain a sense of control again.

“I know there are a ton of people out there like us, and I know I feel so lost with everything that’s happening with the economy,” said Laura.

If you’re thinking of buying a home after going through a foreclosure, short sale, or other credit problems, I recommend you:

1.       Get your credit reports from AnnualCreditReport.com or a credit monitoring service and review them carefully. Make note of anything you don’t understand. If you are hoping to get a mortgage soon, don’t dispute or close accounts until you have talked with a loan officer.  

2.       Understand your credit scores. You can get an idea of where you stand using a tool like Credit.com’s free Credit Report Card or by purchasing at least one of your FICO scores. FICO scores are the most commonly used scores in the mortgage loan evaluation process. Listen to my podcast, Credit Score Fact or Fiction, with former FICO executive Tom Quinn.

3.      Get prequalified by a loan officer to review your credit and your financial situation to see if you qualify. Listen to my podcast with ArcLoan.com’s Joe Kelly where he explains how to get a mortgage after credit problems.

I am not trying to imply that getting a mortgage after foreclosure or bankruptcy is going to be a walk in the park. I am sure plenty of loan officers will read this and start recounting of all the hassles they’ve gone through with their clients. Lenders are much more careful than in the past, and you must be able to document your ability to pay the loan. Your credit must be on the mend as well. But still, if you’re in the same boat as Lisa and Laura, it can be encouraging to know that it may be possible to put your past behind you – possibly sooner than you think.

Gerri Detweiler

Personal Finance Expert: Credit.com

Co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis and Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.

Disclosure: Credit.com and ArcLoan.com are both currently sponsors of my radio show, Talk Credit Radio.

 

 

Graduates -- Learn to Live Financially Healthy

College (and high school) graduations are right around the corner, but perhaps the most important learning of all is still come – learning how to live financially healthy.   
 

1. Give Yourself a Spending Reality Check. Notice there’s no mention of “budget”? Budget reminds me of self-denial and regret, much like the word diet. A spending plan allows you to create your own personalized plan. This is perhaps the most important step for students who have relied on their parents and/or student loans to get them through school. We're a nation of spenders and we spend unconsciously. Begin by tracking your spending. Use a small notebook or blank checkbook register and write down everything you buy with cash, check, ATM card, debit card, and credit card for at least 14 days (30 days is better). Most people discover at least one thing they’re spending more on than they realized. Simply writing it down will likely prompt you to spend 10% - 20% less.
   

Growing Pains: Money Lessons We Should Have Learned

If only our earliest encounters with money, like getting a quarter for cleaning our room or a whole dollar from the Tooth Fairy, taught us what we would need to know about personal finance. Instead, we learned the hard way by growing up.

A lightbulb flickered in my head in fifth grade when I realized my $10 weekly lunch allowance didn’t need to be spent on cafeteria pizza. By saving $2 a week for two months, I could buy my first Backstreet Boys CD. It was a moment I’d never forget, for it finally dawned on me exactly what money was worth—anything I wanted.

Over the years, I traded school lunch for CDs, birthday money for movie tickets, and even college textbook money for new boots. The exchange value of money, as I like to call it, grew larger and grander as I moved into my early 20’s. I likely “exchanged” thousands of dollars before I graduated college, yet still hadn’t learned how to manage my finances. By the time I got my first job, I spent more on food and happy hour than on rent and found myself in serious credit card debt. Obviously, I still didn’t have a clue about money management.

As children we learn to spend and as adults we learn to save. Along the way, did we ever learn how to manage our day-to-day personal finances? Unfortunately, for most of us the answer is no.

Luckily, I’m older, wiser, and in less debt, and in the spirit of good karma, I’m sharing the five money lessons I wish I knew—and we all should’ve learned—growing up:

Financial Self-Defense: Arm Yourself Against Identity Theft Crooks

A decade ago, a thief walked into the offices where I was working in Washington DC and, in the middle of the day, walked out with several computers, a television and a VCR. One of the offices hit was just two doors down from where I sat working, oblivious to the heist. The experience left everyone in the office unnerved. How could someone have pulled off that crime right under our noses? Why weren’t we paying better attention?

I imagine identity theft victims often feel the same way. Many probably question whether they could or should have been more vigilant.

Financial Chore #3: Consolidate Your Debt

This post is the third in my series on knocking out chores to get your financial house in order.

What’s the best way to consolidate my debt?

Should I try debt consolidation?

Where can I get a debt consolidation loan?

It's not unusual for someone in debt to be making five to eight payments each month just to credit card companies. In that sense, debt is a lot like clutter. Even when you manage to make all the payments each month, it takes up an enormous amount of mental and physical energy just to keep up. 

DebtConsolidationCare.com, which offers free advice to consumers with debt consolidation questions along with a free debt consolidation calculator, lists eight benefits of debt consolidation, including a single monthly payment, reduction of interest, and stopping collection calls. All of those benefits lead up to the ultimate goal, however, which is to get out of debt. If you keep that goal in mind, it will be easier to make a choice about which option to pursue.

Financial Chore #1: How Get Your Credit Reports

I’ll never win a Good Housekeeping award, but when my house does start to look pretty tidy you can bet it’s a sign that I am either expecting guests…or procrastinating. There is probably some dreadful project hanging over my head, and even scrubbing grout has become more appealing than tackling it.

When it comes to finances, I know there’s no shortage of chorse to dread: reviewing your credit reports, dealing with old collection accounts, filling out tax returns, reviewing insurance beneficiaries, etc. Is there really anyone who enjoys dealing with that stuff?

Knocking these chores off your list usually does feel good. Unfortunately, though, the payoff isn’t always as strong as when you say, lose weight, remodel your house, or do something more public others that can “ooh” and “ahh” over.

Save Money While Shopping

Anyone who has ever heard me speak about credit reports and credit scores knows I do not recommend you open a department store credit card to save money the day the card is opened. For the first time in years I just opened a Kohl's credit card. I know it resulted in a hard inquiry on my credit report, but I decided it was worth it. Several months ago I signed up to receive Kohl's emails because they were free and I got a $5.00 off coupon. Since I signed up I regularly receive 15% off coupons and Friday I received a $10 off coupon plus the 15% off coupon. This morning I went to Kohl's to shop for the items for next year's Money Wise Women fund raising event. I found so many things on sale (50% or more) and clearance that I ended up shopping for myself and Christmas gifts as well.

When I got to the cash register and pulled out my coupons the sales clerk told me I could get another 30% off if I opened a Kohl's credit card today. I'm shaking my head "no thanks" as she proceeded to tell me all the benefits (sorry I don't remember all of them). Anyway, I thought about it and decided since I frequently shop at Kohl's it was probably a good idea to open a credit card. My original bill was $97.95 but after all the discounts I spent $58.58 (including tax). That's $39.37 in savings and that doesn't include the original discounts and clearance prices. I saved a total of $153.91. WOW! Here are the  items I bought for $58.58: 3 holiday hand towels, 2 small garden flags, 2 large garden flags, 6 small holiday gift bags, 2 holiday mugs, small holiday loaf pan, set of 4 holiday spreaders, and 2 holiday travel mugs. I still can't believe I bought all these things for under $60.00.

But, here's the deal. I will pay the credit card off in full when I receive the bill. I will NOT pay the 21% interest that Kohl's charges for carrying a balance. If you pay off your credit cards in full each month, check out Kohl's offer of 30% off for opening a credit card. It's good through Sunday, November 7, 2011. Hat's off to Tambre, the sales clerk who shared all the benefits to opening a Kohl's credit card.

Warmly,
Marcia Brixey

Are You in Financial Survival Mode?

A lot of us have been in survival mode – financially -- the past couple of years. The challenging economic times has resulted in avoidance in dealing with more than just the day to day finances.  If you’re ready to ditch the survival mode and start creating a financial survival kit, here are some action steps.