New Years Resolutions for your Financial Life: How to Keep Your Credit Score in Shape
Be the first to comment on this post
This week’s guest writer for the Arlington, MA Real Estate Blog is Wells Fargo Senior Lender Michael J. Tanionos.
Like many of my clients, you might be following fairly responsible spending practices for most (or all) of your adult years, but could find yourself challenged to get the best interest rate on your home mortgage because your credit score is not what lenders consider to be excellent. Too often I come across very qualified new home buyers who end up paying more for their house over time, to the tune of tens of thousands of dollars – all over very simple issues. Here are some common, but unknown, pitfalls:
1) Opening & Closing
Credit Card Accounts: You are ready to buy a beautiful hand tufted oriental rug imported from China, and if you get the Macy’s charge card, you can save 30%. If it’s $1,500, that’s some significant money. You sign up for the card, buy the carpet, pay in full and then CLOSE the account. Why not? You are financially responsible and don’t want too many credit cards out there with your name on it, you think. But, the moment you close the account, your credit score will drop. That’s because you used to have access to, let’s say $ 5,000 of credit you no longer have access to. This increases what lenders call your total credit limit debt ratio, which negatively impacts your score. Thus, you are considered a greater risk. It’s counterintuitive, but it’s true.
2) Haggling with Utilities: Due to some problem with a utility or the phone company, you have been more than fair and continued to pay your bill on time. But finally you are fed up, you take your complaint to anyone who will listen – in store, by phone, by mail, etc., and then decide that the thousands of dollars a year you give them isn’t worth this. There should have been a resolution by now, so you stop paying a month or so before your agreement is expired. At this point, the issue is only over $30 (or it could be more), but the problems it will cause you, and the subsequent credit score risk that will follow , will eventually lead to paying exponentially more come mortgage time and for the life of the loan. No matter how right you may be, in the eyes of the credit gurus, it doesn’t matter who was right, they just see the lower credit score. Being so driven to win the battle over $30 can cost you thousands on your mortgage in unnecessary interest. So what’s the lesson? Pay the bill, then fight the good fight for a refund.
And, of course the most obvious …
3) Don’t buy what you can’t pay for: Like eating, it seems simple … eat when you are hungry and stop when you are full. But many people (including myself) often struggle with that simple notion. Except for a house and a car, you shouldn’t finance anything else you don’t have to. Your credit cards should be used to get points and free simple luxuries you may need (like travel, electronics, etc.) Paying for items with a credit card also helps you track where and how you are spending your money. So use them responsibly, and don’t carry balances over month to month.
A Positive Step to Take: Sign up for Free Credit Report Alerts. This seems like just another thing that will cost you money, but trust me, it’s worth every penny. For as low as $12 a month you can sign up for a service that will alert you via email and or text anytime your credit score moves, your credit report is pulled, or a new account is opened. This is extremely valuable in preventing identity theft as often times if you can catch it early enough, the impact to your credit and financial life will be minimal.
I’ve advised many clients to practice these steps and come back in six months or a year, and they have saved thousands of dollars … just by buying a home at a time in their financial lives that made the most sense. I hope you do too.
Michael J Tanionos has graciously shared this information with our Blog readers. He may be contacted at michael.j.tanionos@wellsfargo.com
