To FHA or Not to FHA, That is the Question

I left off with my clients considering an FHA loan only because of the lack of credit on hubby's part. I did leave out a critical piece of the puzzle yesterday.

The reason hubby's credit score is critical is because the Mrs. is currently a stay-at-home Mom with the new baby. While her credit score is beyond excellent, she has no current income. We have to use hubby's income to qualify for a loan, but without a credit score it's a moot point -- income without credit doesn't help, credit without income is meaningless. You need both to qualify for a mortgage loan (save that FHA option).

Enter Mom & Dad. Mom & Dad are willing to co-sign on the loan. What does that mean? That means that Mom & Dad essentially become co-borrowers. I have to evaluate them and their finances just as I have done for my clients. Now, with Mom & Dad on the loan there's another wrinkle. Now we're going to have to face the issue of occupancy.

Primary residence loans (loans for properties you are going to live in) have the best interest rates. Rates for second homes are a bit higher, and when you get a loan for an investment property not only are the rates a bit higher still, but there are stricter guidelines you must meet. Obviously we wanted to get a primary residence loan -- I mean, my clients really are going to live in the house. To do this, hubby is off the loan (without the credit score (even with the income) more questions are raised than answered), the wife is now the primary borrower with her parents as co-borrowers. We're looking at a limited range of loan options that will allow a non-occupant co-borrower (parents) and we're waiting to get a computer-generated basic approval based on our file parameters to be sure it's a go. As it turns out, an income-less primary borrower won't fly -- even with exceptionally strong co-borrowers. Shoot. There goes the primary residence status.

So now we have to move the parents to the primary borrower position and look at the other types of occupancy. Since Mom & Dad already have a second home they can't buy another [now, that is something that doesn't quite gel in my mind, as my idea is that you can have as many "second" homes as you want -- a condo in Hawaii, an apartment in Paris, Brazil, and a weekend house in Tahoe, but according to lenders that's not the case] so we are forced into the investment property route. Luckily everything in their scenario (loan amount, credit scores, down payment...) worked into the tighter investment property loan guidelines. Unfortunately it does mean a higher rate (almost half a percent higher, for those wondering).

But it will work; they can get a loan and buy a house. My clients can buy their new home within their preferred time frame, work to build hubby's credit back up and then, assuming the numbers work down the line, refinance, take Mom & Dad off the loan and add hubby. In the meantime, they'll have a loan they're comfortable making the payments on and will be able to keep it for as long (or short) as they choose.

The Risk of Being Too Responsible

Phew, it's been a while. Two months since my last post?! What can I say? Life happens. Let's keep moving forward...

Currently I'm in the middle of a unique mortgage situation with great clients who are looking to buy a house in Berkeley, relocating from Southern California. They are realistic about their price range, pleasant to talk with, and she is an information sponge -- my favorite! They are sharp and extremely responsible with their finances. They've been planning to buy their first home for some time and in doing so have managed their credit accordingly. They have essentially no debt and are planning to have a down payment of over 20%. And yet, I can't approve them for a loan.

What's wrong? What happened? Her credit is impeccable, he has no derogatory issues whatsoever. But he also has no credit score. Not a one. Imagine you pay your one credit card bill in full every month, you paid off your student loans years ago, you have no car loan, no mortgage, you are in the black every month. Sounds like a good way to be financially responsible, but the problem is that without enough recent credit history you fall off the face of the credit world.

Banks want active credit history within the last 6 months. They want more than one line of credit. They want a recent track record with a history. Car loan, student loan, mortgage, credit cards, whatever you've got. The lending institution, whether you're looking to buy a house, car, or new shoes, needs to know you will pay it back; to make that judgement, they look to see proof that you pay your bills on time and you can manage the responsibility of debt and/or available credit.

In this case, hubby wanted to be rid of his student loans -- what can that hurt, right? Get rid of tens of thousands of dollars of debt -- that's sure to help your credit score. The thing is, banks look at different kinds of debt differently. For example, a student loan, while carrying a higher balance, is looked at more favorably than the lower running balance on the Macy's card. Why? For one the balance on the student loan isn't going up (typically) and the interest rate is essentially fixed about as low as you can get where debt is concerned. Also, it's a loan for education -- to essentially raise your earning potential. On the other side, the Macy's card has a high interest rate (22.9% as I type this) and you, as the consumer, can increase your balance on a whim (max out the card? I'm sure Macy's would be happy to increase your limit).

So as I mentioned earlier, this particular couple had no Macy's card, no running balances. They had one active credit card and paid the balance monthly. We tried to use this fact to pull a score out of at least one of the reporting agencies (Equifax, TransUnion, Experion), but as it turns out that card was showing a dispute. A couple months ago there was a charge on the card that was invalid. The couple disputed it and won. But the card company hasn't yet removed the dispute status from their account, so now, as long as that shows as being in dispute, for credit report purposes, the account is essentially frozen (even though it's not).

Things weren't looking good. Things were looking like FHA was the only answer (FHA is the last program that allows non-traditional credit assessment; they'll look to your history of paying rent, utility bills, etc. to determine credit). FHA is a great government program for people with low down payments. Here, though, the problem becomes that all FHA loans require mortgage insurance, regardless of down payment (conversely, non-FHA loans only require mortgage insurance with less a than 20% down payment). Since my clients had more than 25% to put down, FHA's added cost of mortgage insurance (about $120/month as it would be) plus higher costs to get the loan to begin with was certainly not our favorite option.

Keep in mind that this family is relocating and under pressure to find a place to live. Sure they could rent a while until this all got worked out -- but realistically, building credit history can take a year, maybe two. They certainly don't want to rent for two years, not when the market is good to buy -- house prices are low, interest rates are low, and the timing for them is now. It's my job to find a way to get them money to buy a house and to do it correctly & honestly so that the rug is never pulled out from under them (but that's the only way I work anyway).

I have my work cut out for me on this one. Many calls to make, research to do, numbers to run. Come back tomorrow to find out how things are working out, this post is long enough as it is.

AmEx, I'm Disappointed (though I should know better)

There's an American Express commercial on t.v. lately that really bothers me. The premise is that customer service agents for AmEx tell stories of how they helped card holders in some special way that warmed their hearts. I don't mind the idea, most of the stories are innocuous, but there's this one that I can't even have as background noise, it demonstrates all that's wrong with our culture of consumerism.

The AmEx rep tells a story of how they helped a customer who proposed to his girlfriend. The newly engaged couple were at the jewelry store to buy an engagement ring and whatever credit card he was using was declined (certainly it wasn't an American Express card). So his fiance suggests he call AmEx, which he does, and they issue him a new credit card with a balance high enough to allow him to begin his married bliss deep in debt.

Other stories told in this line of commercials are ones where the customer service agent helped the customer get something they had difficulty getting on their own -- more like a concierge service (plane tickets, theater tickets, dinner reservations, etc.). Those I can tolerate. I understand it is a commercial for a credit card and they make their money when we spend what we don't have, carry a balance and pay interest. It's the name of the game and knowing that I can suffer through the other "heart warming stories".

The engagement ring one though is a tough pill for me to swallow. The idea that the fiance suggests to her groom-to-be that he open a new credit card so she can wear something big & shiny rather than have some patience so he can actually afford to buy her a ring (and for AmEx to make this commercial not only condoning this, but encouraging it). Maybe they could have chosen something smaller, or of a lower quality -- something that was in the budget. No, in this story the ring obviously came ahead of the marriage. I hope AmEx gave him a Black card so she can charge their lives away for the wedding.

Our culture is one of consumption, there's no way around it. We are marketed to directly & indirectly to buy more, have more -- it's the American way; have the biggest, newest, "best" toy and your status in this society rises. That must be why bride-to-be suggested her honey get a whole new line of debt -- she was just trying to be a good American.

Let's Play House

Practically speaking, you should really be able to afford the payments you'll be making once you buy a house. It makes sense that people should be able to make the payments required of them for mortgage, insurance, & taxes (and we're not even talking about household maintenance). Part of the correction happening now is that for the most part, buyers are being required to put 10-20% down for a home purchase. This is certainly a shift from the not-so-long-ago days of 100% (or more!) loans.

How does one save $45,000? $100,000? Going in, it can seem daunting & overwhelming. True, it would help if you've been saving or if you have family that could offer some assistance in gift money, but the reality is that you have to start somewhere and not all family members have an extra $10,000 or $20,000 lying around to help get you started. One of the best ways to get saving for a down payment is to play house.

Playing House

Let's assume you're renting now and want to buy a house in the next few years. Let's also assume you're paying $1,500 a month in rent. You want to buy a house and figure you can afford to buy something in the $450,000 range. You plan to save 10% ($45,000) for your down payment.

The basic premise of playing house is that you want to pretend you have all the bills now that you will have once you're a homeowner. You will have to pay these bills once you buy your house so you should be able to pay them now if you feel you're in the position to be a homeowner. Take the total of all new "homeowner bills" and subtract your current rent from that total so you know how much you can expect your cost of living to increase. No, these will not be exact numbers, but it can be close enough. The extra you need to pay as a homeowner gets put into a savings account that you do not touch. This savings account will become the down payment on your house.

Okay, let's play....

• Your new mortgage: A $405,000 loan ($450,000 purchase price -$45,000 down payment = $405,000 loan) in today's market will cost you around $2,500/month for a fully amortized mortgage (meaning not interest only).


• Property Taxes: In the Bay Area Realtors & loan officers will typically use 1.3% of the purchase price of a home as an estimated tax rate. In this scenario this represents $5,850/year or $488/month


• Insurance: Let's estimate you'll pay around $1,200/year, or $100/month


• Utilities: Typically when you rent water and garbage is paid by the landlord, but when you own the property you're paying these utilities. Also, your gas & electric bill will likely go up with more space to have to heat & light up. Let's say water is $25/month, garbage is $30/month, and the gas & electric will go up around $50/month


• Home Repairs & Maintenance: This is a truly variable figure and depending on the type of home you choose it could be covered by a Home Owner's Association (if you do buy into an HOA make sure to include those dues in this calculation as well) or you could be on your own to maintain everything from the landscaping to a leaky faucet to roof repairs. I don't want to go overboard here, but I'd like to be somewhat realistic as well. Let's give this section of savings around $100/month

Okay, that should just about do it. Let's total up the expenses of owning a $450,000 home:

Mortgage $2,500

Taxes $488

Insurance $100

Utilities $105

Maintenance $100

Total: $3,288

Current rent $1,500

Added cost to own the home: $1,793 every month

Now, you have to start pretending you bought the house already and have these bills coming in every month. Open a high-yield savings account (ING, Emigrant, or the like). Set up auto-debit from your checking account so that every month $1,793 gets transferred to the savings account.

If you find it's too tight on your budget to do this, you need to re-evaluate if buying a house is the right move for you. You could decide that maybe $450,000 is more than you can afford and choose to look at a condo instead (where water, garbage, hazard insurance, and maintenance all fall under the HOA dues you'd pay each month). However, if you find that with some simple lifestyle adjustments you can swing the extra $1,793 each month then in about two years of consistent and untouched savings you'll have your $45,000 down payment and more importantly, you'll know that you'll have no problem with the additional costs of being a homeowner.

The Trickling Down of the Increased Limits

The banks have begun to put out their own guidelines for the new "Jumbo Conforming" loans. Each has slightly different criteria, most are offering more options and flexibility than Fannie Mae (like you can get a cash out on a refinance with some) but there are certainly costs associated with any choice that makes it a riskier loan.

It truly is a different picture for each person, as each person's financial picture is different. For advice specific to your situation, please consult a professional who is well versed in this continually changing market.

Feel free to leave a comment below if you're buying or refinancing in the Bay Area and need guidance.

Jumbo-Conforming Guidelines

Well here we are with guidelines for the new jumbo-conforming ($417,000-$729,750) loans. Granted there's been a definite flight to quality in terms of the loans banks are willing to give, but the highly anticipated increased conforming limits don't look like they're going to be the saving grace people were hoping for. Here's what we're looking at:

• Full documentation only. All income must be verifiable with W2 forms, tax returns, pay stubs; assets must be verified with bank statements
• Available programs are 15 and 30-year fixed rates (no 40 year terms here) with fully amortizing payments, or a 5-year fixed program with either fully amortized or interest only payments (still, borrowers will have to qualify for the interest only payment by proving they can make a fully amortized payment on the same loan)
• One unit properties (no duplexes, triplexes, apartments, etc.)
• No cash out on refinances -- any refinance must be for a better rate and/or terms only (however, generally banks don't consider a nominal amount of cash received to cover closing costs, usually $2,000 or less, a cash out loan)
• Home buyers will have to put a minimum of 10% down
• Refinances will have a maximum loan to value of 75%
• Debt-to-Income ratio is a maximum 45%
• Minimum FICO score 660 (however, if you're buying a home with less than 20% down payment, you'll need a 700+ FICO)

These are the guidelines as per FannieMae which we expect the big banks to adopt in their lending as well. These products are not yet available commercially (with the big banks, BofA, Wells, WaMu, Citi, etc.), but now that FannieMae has released their guidelines the banks should follow suit fairly quickly.

BREAKING NEWS

FHA just announced the increased conforming loan limits and as expected, our Bay Area counties (SF, Alameda, Contra Costa, & Marin) have the maximum limit of $729,750! That will stay in effect until December 31, 2008 unless they decide to make it permanent.

Now, we just have to wait to feel the effects outside of FHA from Fannie & Freddie Mac and then the investors like Wells Fargo, WaMu, Chase, Citi, etc.

Check back often as I'll be sure to post new developments as soon as possible!

The Stimulus Bill & Increased Conforming Loan Limits

There is an element of the Stimulus Bill that will temporarily raise the conforming loan limits from $417,000 up to $729,950. Why "up to" and not just "to" almost $730,000? FHA (the Federal Housing Authority) will base the new limit by location. It will be based on 125% of the median home price with a maximum of $729,950.

The idea is that the traditionally lower conforming interest rates combined with higher limits (through the end of 2008) will help stimulate the economy. Those of us in the real estate world have all been excited by this proposal -- a nice jump to our slowed industry.

The primary question I'm hearing from my clients is "When?" When will buyers & home refinancers benefit from the increased limits? Good question.

Here's the deal: FHA had 30 days from when Bush signed the bill into law to set the limits. They say they'll have the new limits out the first week of March. Then what? Then Fannie Mae & Freddie Mac (the GSEs -- Government Sponsored Enterprises) will make their adjustments. Once they make their adjustments to not only the limits, but likely to the guidelines for borrowers things will trickle down to the big banks (BofA, WaMu, Wells, etc.). I've heard another 2 months at most, but no one really knows. We're all hoping for sooner (fingers crossed).

More things that no one really knows: what's really going to happen. It's highly likely that here in the Bay Area we'll get the maximum new conforming loan amount (that $729,950), but will the interest rates for loans at $400,00 be the same as those at $550,000? $700,000?

Fannie Mae is pretty fair in how they charge borrowers for added risk. You want to state your income and not have it verified? Okay, but we're going to charge you a slightly higher rate for it. You want a loan and your credit's not so hot? Well, okay, you still fall in the "okay" zone so we'll lend to you, but we're going to have to charge you a higher rate. Basically, if you represent a larger risk as a borrower, you can still get the money, but it'll cost you.

So, going back to the higher limits. Doesn't a $700,000 loan represent a higher risk than a $400,000 one? There's more to lose, right? Does it not stand to reason that if you want a loan that benefits from the increased limits that you may be charged a little more? But again, who knows how, or if, that will be accounted for.

I would love to see our high cost area get a small break for home owners and home buyers. It's about a 1% difference in rate, which can make a big difference. Don't think we're going back to the days of less cost equals more house (like with interest only and pick-a-pay loans). The banks are going to stay tight on qualifications and down payments for the time being.

My point is this: Don't base your actions on the idea that the increased conforming loan limits will be your saving grace. The fact is that no one knows exactly what is going to happen. I've heard a lot of talk going around. I've heard mortgage brokers (not with my company, of course) telling people that as soon as the Stimulus Bill is passed they'll be able to get a $700,000 loan for under 5%. Now that's just not true...it could end up being factual, but at this point don't believe it as fact. Do your research and ultimately make the decision that's best for you & your situation today and tomorrow. And if you need information specific to your situation, leave a comment & we'll talk.

Basic Bond Info

Rates and prices move in inverse fashion with bonds. If you buy a bond for $100, and it pays you a fixed payment of $5, the yield is 5%. If you have to pay $200 for it (the price doubles), suddenly you're only earning 2.5% (the rate goes down). Conversely, if you pay $50 to earn $5 (price dropped), you earn 10% (rate increased). Simple.

The image to the above is the 10-year Treasury Note over the past year (end of February 2007 to today).

When the Fed cuts rates

This has to be one of the questions I get asked the most by clients and Realtors alike:

What happens to mortgage rates (and why) when the Fed lowers their rates?

The short answer is mortgage rates tend to go up after the Fed announces a rate cut. "But that doesn't make sense -- shouldn't mortgage rates go down if Fed rates are cut?"

It's widely known when the Fed will meet to discuss rates; analysts across the board give opinions about what the Fed will do -- raise or lower rates and by how much they think they'll move. These opinions are out in the general financial markets weeks before the Fed actually meets. And the analysts are good at what they do -- they may not be spot on, but they're usually pretty close.

Because we "know" a couple weeks ahead of time what we think the Fed is going to do, the market generally prices in that opinion before the actual announcement is made. Once the rates are adjusted by the Fed (or unadjusted, for that matter) the market shifts again.

For example, say the Fed is meeting in two weeks and it's expected they they will lower rates by .5%. In the two weeks leading up to the announcement the financial markets "price in" the coming rate cut. The markets may decline slightly, bring mortgage rates down with them. Then the Fed meets. Say the analysts were right on track and the Fed drops rates by .5%; the markets had already accounted for that cut and so they remain relatively unchanged after the announcement, with potential for a slight increase. The market is happy since they correctly predicted what the Fed was going to do and the market rallies and goes up -- mortgage rates go up too.

Now, say the analysts were a little off the mark. The Fed still reduces rates, but by only .25%; the market has already pre-priced in a .5% decrease in rates -- whoops, too much decline. The economy isn't in a place where it needs a whole .5% cut; the market is happy that the economy's doing better than predicted and it goes up, mortgage rates go up too.

Okay, so what if the market predicted .5% and the Fed lowers rates by .75%? Now the economy needed a bit more of a boost than the .5% would give. The market priced in .5% cut weeks ago, but now things look worse on a macro-economic scale. The market may decline, mortgages rates should drop too.

What happened in January? The Fed was scheduled to meet (and expected to reduced rates) on the 30th. Martin Luther King, Jr.'s birthday (observed) fell on Monday, January 21st. The US markets were closed for the holiday. Before the markets opened on Tuesday, the Fed held an unscheduled meeting and reduced rates by .75%. This unexpected, unscheduled reduction a week before the scheduled meeting was to take place shocked the market to a 300 point decline. Mortgage rates fell. Wednesday morning things looked about the same -- market declines all over the place were holding strong. Then there was a shift; the market turned around. By Wednesday afternoon the market had gained 600 points -- 180 degree turn around! Mortgage rates jumped right back to where they were the previous week. And we still had to hear what the Fed would do in their scheduled meeting the following week (they dropped the Fed rates again, this time by .5% and the mortgage rates rose slightly and then dropped slightly ultimately having no meaningful effect).

The rates that the Fed raises & lowers is not any rate that you or I would see on any of our bank statements. "Fed Funds" is the rate that banks can borrow money from each other to keep their reserve amounts in line. The "Discount Rate" is the interest rate at which an eligible financial institution may borrow funds directly from the Federal Reserve when their reserves dip below the reserve requirement. The Discount Rate is considered the last resort for banks, which usually borrow from each other. The Federal Reserve can change either, but they can't change mortgage rates. The Fed's job is to control inflation while maintaining moderate growth. Their job is not to support the stock or bond market.

That's the long and the short of it. So if you're looking to lock in a rate for your mortgage, you're usually better off getting something in place before the Fed makes any announcements -- I can always renegotiate your rate with a different investor should rates fall later :)

Real Estate Cycle Overview/Outlook

While I can't take credit for writing this, I thought it was interesting & insightful enough to present....

If one looks back on previous economic cycles, typically housing recessions have been followed by big booms in the industry which have usually persisted for at least two to three years. Is this the same? Many experts think not, since the forces driving the current downturn are much different from those in the past. Before the 1980s, pent-up demand moved housing. The Federal Reserve would tighten, to keep inflation in check, which increased the cost of mortgages. There was no "secondary market" for mortgages, and many homebuyers put off buying homes because they were unwilling to pay the higher mortgage rates or because they were unable to get loans. During the economy-wide recession that usually ensued, interest rates fell, and this "pent-up demand" boosted home buying. What about now? Although higher rates helped the housing downturn, but many potential borrowers who would like to buy homes cannot obtain the credit. We are now faced with a huge potential supply of housing, as foreclosures mount and many move back to renting instead of owning.

-from my corporate Director of Capital Markets

Beer Tax Logic

I received this in an email and thought it was a decent explanation of the tax system from the perspective of drinking buddies...

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing. The fifth would pay $1. The sixth would pay $3. The seventh would pay $7. The eighth would pay $12. The ninth would pay $18. The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers,' he said, 'I'm going to reduce the cost of your daily beers by $20. Drinks for the ten now cost just $80.'
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected.

They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings). The sixth now paid $2 instead of $3 (33%savings). The seventh now pay $5 instead of $7 (28%savings). The eighth now paid $9 instead of $12 (25% savings). The ninth now paid $14 instead of $18 (22% savings). The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before and the first four continued to drink for free, but once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "but he got $10!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got TEN times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something very important....they didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works.

The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

-from a University of Georgia Economics Professor

Conforming - Jumbo Spread

The difference in rates between a conforming loan amount ($417,000 today) and a jumbo loan (anything over $417,000) has historically been .25%-.5%; since August 2007 it's been hovering around 1% or more.

With the conforming limits about to be raised to just under $730,000 in high cost areas, the question becomes what will happen to the spread between the now higher conforming limit and the now larger jumbo loans.

It is widely hoped that spreads will narrow, but many analysts feel that the change in conforming limits will actually have a negative impact on loan amounts above $730,000, due to the perceived higher risk.

This means that the high end homeowner or home buyer whose home is in the $915,000+ range could end up paying a premium in interest rate to own a premium home.

Quick Notes

• The next meeting for the government to discuss Fed Funds (rates) is March 18th. Currently, Wells Fargo expects the Fed to cut rates by another half point (50 basis points)
• On Thursday, February 14th Mr. Bernanke, the Chairman of the Federal Reserve will give his semi-annual testimony on the status of the economy. Market particiants will watch his words closely.

How to Boost Your Credit Score

First off, let's make sure you know what your credit score means. Basically, your credit score is a measure of how risky it is to lend you money; it's a measure of risk. When you apply for a loan (credit card, car loan, house loan, etc) your score affects the terms (especially the interest rate) of the loan you are offered. Credit scores range from 300-850; a higher score means a lower interest rate and an easier time getting loans. The score to aim for to get the lowest interest rate is 760 or higher.

What makes up your credit score?
35% is your Payment history
30% is the Amounts you owe
15% is the Length of your credit history
10% is based on New credit
10% comes from the types of credit you use

Tips for responsible credit management (or How to Improve your Credit Score):

• Pay your bills on time This has the largest impact on your credit and you have complete control over it. If you mail a payment late or forgot to send it call your credit card company and let them know. If you have a good history with them they'll often waive any late fees and not ding your credit.
• Don't apply for every card you're "pre-approved" for You don't need 25 credit cards (I hope). Part of being responsible with your credit is limiting it. If you keep applying for new cards the lending world will see that as you're looking for money; if you're looking for money you may be a higher risk and it could hurt your score. A bunch of new accounts will lower your average account age and older, longer histories are what you're going for.
• So you have too many cards and you want to thin out your wallet. Don't go cancelling all your cards Part of your credit score is determined via your credit history. The longer your good history, the better. If you want to cancel cards, look at those you got most recently and start there. Look to cancel cards recently opened cards with an annual fee or the highest rates. If you have a card you got in college with an astronomical rate, but it also carries your longest history, don't cancel that one! Call the company and see if they can give you a better rate. I've done this with my first credit card and the card I have with that bank now has my lowest interest rate. They moved me to a different type of card, but kept my history in their system. That is the best of both worlds.
• Keep your debt to available credit ratio in check This ratio is your total available credit (limits on all accounts) divided by your total debt (all outstanding balances). Keep this number under 50% -- 30% or less is even better. This means that as you pay off your balances, don't automatically close the accounts! Keeping the account open, but not using it will lower your ratio. What the lending world is looking for is that you know how to not spend all the money that is available to you. That is responsible credit usage and will improve your score.
• If you've had credit issues in the past that you've worked to clear up don't forget you'll need to reestablish good credit. This means opening a new account and using it responsibly. You can start by charging only minimal amount and paying it off in full by the due date. It's not a quick fix, but over time the only way to improve your score is by responsible credit use.
• If you're in a situation where collection agencies are calling you for outstanding payments Call the original lending company (not the collection agency) and try to work out a payment plan. Before you jump to a credit counselor or consolidating service (both of which can actually hurt your credit in the short term), call the companies you owe money to. Work out a payment plan. They'd like you to pay your full bill, but if you're not currently paying anything you may have room to negotiate a lower balance. The original lender is the one with the power to help your credit. Your goal is to get the balances out of collection and the company to stop reporting the collection to the credit bureaus (once you're out of collections, of course). If the lender won't work with you and you're forced to work in the collection system you may still be able to work with them to set up a payment plan, but the collection will still show on your credit report.

It's easy to feel like you're sinking into the depths of credit troubles with no way out -- but you always have a way to fix things. It's not an overnight solution, but keep working at it and you'll see your credit score go up; and then you'll have the power to make your interest rates go down.

Funding Your Emergency

Alright people, this is going to be a quick one. You need an emergency fund.

Where is this coming from? Well, I was in an accident yesterday. Thankfully no one was hurt. But it was a frightening experience; one that reminded me of the necessity of an emergency fund.

You never know what's going to happen. Accidents are accidents because they were not intended. You can't plan for them, but you should be prepared for them. What happens if you find yourself unable to work & running low on funds? Unless you have that duck-endorsed insurance, you could be in real trouble. It is yet another reason not to spend more than you make.

Pick an amount that you know you wouldn't miss on a monthly basis, $25, $50, $100. Skip that extra cup of coffee or bring your lunch from home for a couple days, there's $25. The amount you can spare is not as important as putting it away with consistency. Open an Emigrant or ING online savings account and set it up to automatically transfer your savings from your checking account. You don't have to think about it, you don't have to do anything, and you chose an amount you can live without, so you probably won't even miss it.

The next step: Forget about that account.

Until you have an emergency where you need the money you've been saving (and the bi-annual Nordstroms sale does not count), that money doesn't exist to you. It is off limits, out of bounds, locked behind an electric fence. It is there for your own personal rainy day. It is your umbrella. We all know that when it rains, it pours; so get to saving now so when if your rainstorm should flood your life you can keep your head above water.

Want to feel really secure? Aim to have 3-6 months of your living expenses saved. If you're self-employed, double that. It may seem out of reach to have 6-12 months of expenses saved, so don't look at it as needing to save all you spend in a year. Break it down into smaller goals. Save 2 weeks' worth of expenses. Then work to a whole month. Then six weeks, eight weeks, and so on. Break it down as much as you need to get it done.

The key is to start. You have to start. Go now, open an online saving account (if you don't trust online banking open a savings account at your bank; the interest you earn won't be as high, but if that's what you need to do, do it).