Credit 101: True or False

I receive a lot of questions on a daily basis from prospective buyers (especially first time home-buyers) relating to finances and primarily, CREDIT! Today, we are playing a little game of True or False as they relate to all things credit! What I love about Real Estate is the opportunity to learn and grow on a daily basis.  Many times, I grow right along with the people I’m working with and seek out answers to things I’m unsure of.  Yesterday, I had the opportunity to speak with David Bryce, Senior Loan Officer with Priority Home Lending and he broke down some of your most common credit questions.  If you are considering purchasing a home, I highly suggest giving him a call at 425.466.4533 and know he will be able to answer any questions you may have as they relate to financing. Also, feel free to email rachelwagner@johnlscott with any other questions you may have, I’m always happy to help!  Happy Wednesday and I hope you learned as much as I did in the following Q&A.

1.  Paying off an account that has been turned over to the creditor’s collections department or a collection agency will increase your credit score.

Sorry to start out with what amounts to a trick question but, the correct response is false- most of the time.  Only if the account has gone into collections recently is it wise to pay it off.  Older accounts should be left alone.

Scoring systems place the most emphasis on the most recent activity in your credit record.  Paying off collection accounts, no matter their age, registers as recent activity.  Consequently, the closer such a step takes place to pulling a credit report, the lower your score will be.  If the date of the last activity exceeds 12 months, leave it alone.

If the mortgage lender requires that you pay off an account in collections as a condition of obtaining funding, do so as part of the closing process so it will not impact the score the lender will pull shortly before closing to make sure nothing detrimental has happened to your credit since the loan was first approved.

2.  Closing a credit card account will increase your score.

False.  Closing a credit card could actually lower your score because the amount of revolving credit available to you will decrease.  Rather than close an account, keep your balance below 30% of its limit.  Credit scoring models rate debt utilization or the amounts owed on your accounts, almost as important as payment history.

3.  Having cash on hand in a saving account will improve your score.

False.  While lenders prefer that borrowers have some cash reserves to tide them over in case of emergency, scoring systems look only at credit.

4.  Borrowing money from a finance company is no different than borrowing from a bank.

False.  All credit accounts are not ranked equally.  Credit from finance companies will score lower than a bank card, travel and entertainment card, oil card or auto loan.  Ditto for payday loans, cash advance loans, check advance loans, post dated check loans or deferred deposit check loans.

5.  Seeking the help of a qualified consumer credit counselor will automatically improve your score.

False.  More often than not, a credit counselor negotiates on behalf of the consumer to make a lower monthly payment on an overdue account.  Even thought the creditor agrees, it is not the same arrangement for which the consumer signed up originally.  As a result, the payment more than likely will appear as late on the person’s credit report.

6.  You only need to worry about your credit score when you are buying a big ticket item such as a house or automobile.

False.  With the amount of fraud and identity theft taking place, all of us should check our credit reports at least once a year, and Credit Plus recommends twice.  By law, you are entitled to one free copy annually. Go to http://www.annualcreditreport.com to get your free annual report.

7.  Your credit score differs, depending on the item you are purchasing.

True.  Different industries use different scoring models, so scores will change, depending on whether you are buying a house, purchasing a car or applying for insurance.  Make sure your lender uses a score developed solely for the mortgage business.  Others are almost always 50 to 60 points higher than the score developed solely for the mortgage business.

8.  A finance company credit card scores the same as any other credit card.

False.  Finance company cards, which typically allow borrowers to open a store account with zero interest for a year, weigh more heavily on credit scores.  Worse, when you open the account, the creditor sets your limit at the cost of your purchase, meaning the card is maxed out and well above the 30% balance you should strive not to exceed.

9.  Negative credit information can stay on your record forever.

False.  Generally, negative information remains on your report for seven years from the last activity.  But if it involves a bankruptcy, it can stay for as long as 10 years.  The exception is a federal tax lien, the removal of which is determined by a prescriptive period.

10.  There’s nothing wrong with using your maiden name when pulling your credit report.

False.  Always use the same, full legal name.  Being consistent will help avoid confusion with other borrowers with the same name as yours.  Not all credit bureaus use Social Security numbers as the primary means of identification.

11.  If you have poor credit and cannot obtain credit on your own, the best ways to start rebuilding your credit record is by obtaining a secured credit card or asking someone to co sign with you for a major credit card.

True.  One reason for a low score is because there is not enough “positive’ revolving credit in your report.  Indeed, in many cases, when “positive” credit is added, a score will increase.

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Market Mondays: 2015 Economic Forecast

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This week I have decided to step back briefly and look at the market from a macro level as well as discussing predictions for 2015 that were shared at a recent conference.  It’s interesting and exciting to see where the housing market is headed, as well as the economic health of the real estate market as we head into 2015.  Before I dive into that information, as of October 27th, 2014 King County is at about 2.6 months supply of inventory while Snohomish County is hovering around 3.1 months supply of inventory.  Those numbers are a 4.2% increase from October 2014 in King County and a 6.2% increase in Snohomish.  With interest rates at a 16 month low, it is a great time to get in there and take advantage of this market if you are thinking of buying or selling your home.

What is the state of the real estate market?  Well, we are currently down 10.6% nationally from peak values in 2006, however, we are slowly making our way back up as demonstrated by the graph below.

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As demonstrated above, all but one top 30 metro areas show annual home value appreciation.  Seattle Metro leads the Puget Sound in annual home value gain at 8.3%, while other areas of the country who were drastically impacted by the recession are seeing a big jump in annual appreciation as well.

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Seattle Metro is currently down 11.5% from it’s peak, compared to the national average of 10.6%.

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Although Seattle Metro is slightly below the national average, what we are seeing is a steady increase in inventory, resulting in a healthier and more sustainable market as well as softening the rate of appreciation (which is still significant, regardless).  The nature of markets are to rise and fall (think rolling hills), however, slow and steady is preferred over sharp inclines and falls.

Are you ready for some good news?

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According to the National Association of Realtors and as demonstrated by the Zillow Real Estate Research for Professionals tool, negative equity has declined steadily since quarter 1 of 2012, which is great news for home buyers and home owners alike.  However, negative equity remains at 17% nationally and is highest in the bottom value tier.  The number of homes underwater is above 25% nationally and 30% in the Seattle area.  The middle value tier is 13% and the top value tier is 6% in the Seattle area.  Although these numbers are declining annually, there are still many homeowners who are underwater, especially in the bottom value tier.

As we move into 2015, mortgage rates are expected to rise, with interest rates expected to reach the 5% mark (which is still fantastic, historically), while rent affordability is below the historical average on a national level.  Renter households are forming faster than owner households for the first time since the late 1980’s and the market is responding with higher rental rates and a shortage of available rentals while the market struggles to keep up with the demand.  (translation: don’t rent if you can buy!)

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Below are some year over year percent change forecasts for Snohomish County, by city.  Appreciation rates are expected to continue to gain, however, slightly less than in 2014.  With rental rates skyrocketing, as well as a shortage of available rentals and low interest rates, now is a great time to get into a home for a first time home-buyer.  Investment properties in the bottom value tier to generate rental income are also a great option, it’s an exciting time in the real estate market around the country.  Please contact me with any questions you have at rachelwagner@johnlscott.com or call/text 425.324.0302.  I am available to help with any of your real estate needs.

And in other Simple Tranquil Living news, the holidays are quickly approaching! Okay, so that may not be news to you, but here at Simple Tranquil Living we have a lot of fun with holiday festivities so stay tuned for a special Halloween post and perhaps another GIVEAWAY! Happy Monday everyone!