New Credit Advice: Dont Pay off Those Credit Cards!

Credit needed for real estate mortgage financing differs from credit needed for consumer loans. If you need help getting a home mortgage, these credit tips will help you.

Contrary to what many credit advisors say, paying off credit cards each month is not always the best action to take. When making credit card payments, don't pay the balance in full each month -- let a little roll over. Carry a balance on your credit card every other month --as little as a dollar. Paying balances in full does not increase your credit score; paying balances in full may in fact lower your credit score. Accounts with zero balances do not compute significantly in your total score. For instance, a credit card with a perfect payment history and no balance will not raise your credit score as much as a credit card with a low balance. Any balance keeps the card active so it computes in your credit score.

You most likely have been advised to cut up your credit cards and close your accounts. Following this advice degrades many credit scores.

Canceling Credit Cards

Canceling credit cards can lower your credit score. Keep your longest-term credit card account open to show long-term credit history. If this account has prior late notations, negotiate with the creditor to drop negative reporting on your credit history file. Slowly close out newer accounts after they are paid off. Keep your best accounts open -- those paid on time or reporting "pays as agreed" and with the longest history.

Credit card companies may raise your rate if you cancel a card before it is paid off; it is best to keep accounts with outstanding balances open until you pay them off.

Perfect Balance of Credit

1. Mortgage over one year old with all payments on time

2. Visa Card or Master Card with less than 10% of available credit as balance due

3. Discover or American Express Card with less than 10% of available credit as balance due

4. Auto loan either paid off or paid down with low payments compared to monthly income.

Debt-to-Income Ratio

Credit scores do not reflect income -- credit bureaus do not have income reported to them. However, real estate lenders look at the consumer debt-to-income ratio -- the amount of monthly debts in relation to the amount of earnings. Consumer debt is more highly regarded/scores higher if total debt is under 20% of net income, or total monthly payments on all debts is less than 35% of monthly gross income.

Qualifying Ratios

Lenders want the total debt ratio (the percentage of total monthly payments, including the new mortgage, to income) to be less than 33% for a typical conventional mortgage. This means the new mortgage payment, credit card payments, and all other monthly debt payments should not equal more than about one-third of the monthly income.

Lenders want the mortgage debt ratio (the percentage of the new mortgage payment to income) to be less than 28%.

Non-prime loans have lower standards; some lenders allow debt-to-income ratios as high as 55%. Borrowers with less than perfect credit qualify more easily for a non-prime loan compared to an "A-paper" loan.

Once you total your monthly expenses and determine your debt ratio, you can estimate how much you can afford for a house payment. For example, if your income is around $3,000 per month, you can afford a home with payments around $1,000 per month (including taxes and insurance) with a conventional loan, if your other debt does not total more than 5% of your income.

For investors, these equations change. Lenders expect 10%-25% down on investment property and allow about 75% of the rental income to offset the debt ratio.

Understanding your credit helps you manage your credit so you can obtain real estate financing, either for the house of your dreams or for your financial future.

(c) Copyright 2005 Jeanette J. Fisher. All rights reserved.

Professor Jeanette Fisher is the author of "Credit Help! Get the Credit You Need to Buy Real Estate," "Doghouse to Dollhouse for Dollars: Using Design Psychology to Increase Real Estate Profits," and other books. Jeanette and her husband chose real estate investing to be able to care for their daughter with special needs. While buying and selling millions of dollars worth of real estate, the Fishers were forced into becoming credit experts.

Forget what you've been told about credit. Get the credit you need to buy real estate. Visit Real Estate Credit Help Center: http://recredithelp.com/

---

Credit Worthiness

Credit Worthiness is an important business and personal asset each... Read More

Tips For Getting Your First Credit Card

Most of us get a credit card on our name... Read More

Credit and Its Cost

What is Credit? Credit is money granted by a lender... Read More

Learn The Truth About Identity Theft

Identity theft is the fastest growing crime in America, according... Read More

The Easy Way To Gain Access To Your Free Online Credit Report

When you apply for credit, those lending you the money... Read More

Your Guide On Choosing a Credit Card To Suit You

Reach into your wallet or purse, pull out a card,... Read More

Bad Credit Loans For Those Who Seek Alternatives for New or Old Car

You can still save money on a Bad Credit Loan... Read More

Credit Counseling: Could it Work for Me?

In the face of financial hardship, many seeking a responsible... Read More

Commercial Collections: Business Finance Booster Shot

Commercial collections: fixture of the new B2B cultureIf you're in... Read More

Choosing The Best Credit Card To Apply For

Always shop around to get the best deal when choosing... Read More

Credit Cards

Credit cards are a form of unsecured credit. The issuer... Read More

Its Your Credit - Take Care of It!

Thanks to the Fair and Accurate Credit Act, American consumers... Read More

Credit Cards: What is the Universal Default Clause?

Most people who carry major credit cards are well aware... Read More

Why Americans Find Predatory Lending Offensive

"Menis - the author translates as "indignant rage" - It... Read More

Dont Fall for Credit Repair Scams

We've all seen the ads on television or in magazines,... Read More

How Can A Qualified Mortgage Consultant Help Boost Your Credit Scores?

Consumers interested in purchasing or refinancing a home will pay... Read More

Bankruptcy Myths Busted

The average American knows very little about bankruptcy. Most people... Read More

How Your Credit History Can Affect Your Life

Your credit history is an important aspect of your life.... Read More

The Credit Card Surprise That You Need to Look Out For

Companies that issue credit cards want to make a profit.... Read More

Searching For A Low Interest Credit Card?

These days, people need to very carefully consider what type... Read More

How To Get a Low Interest Credit Card

Consumers often have the first credit card that they ever... Read More

Credit Cards, Merchant Accounts, and Your Bottomline

Q: I'm opening a gift shop and want to be... Read More

How To Save Money On Credit Cards

Some credit cards offer a cash advance option. But how... Read More

Low Interest Credit Cards: A Thing of the Past?

With interest rates rising, low or zero percent credit cards... Read More

5 Surefire Ways To Eliminate Credit Card Debt

Do you have enormous credit card debt? You are certainly... Read More

All Is Fair In Love, War, and, Your Credit Report - At Least It Should Be! Understanding the FCRA

Fact: Over 150 million Americans have credit report with the... Read More

Looking for that Low interest Credit Card?

If you have been shopping around for a Low Interest... Read More

Learn How to Improve Your Credit Score

Having a damaging credit record can hurt you in many... Read More

Dont Trade Your Future for Todays DooDads

"Easy Low Down Monthly Payment," "Buy Now Pay Later," "You... Read More

All About Balance Transfers

What is a balance transfer?A balance transfer can be explained... Read More

Finding the Right Credit Card

There are so many credit cards out there to choose... Read More

Do You Want to Get a New Credit Card at a Great Rate?

1) Do your homework. Applying for and getting approved for... Read More

Getting Married? What Are The Finance and Credit Implications?

There is a big difference between looking after your own... Read More