The time for a credit check up is NOW.  When you find errors on your credit report, you need to have some time for the corrections to be recorded and for the credit building actions you take to have a positive impact on your scores. 

With the 2009 income tax filing date so close to the homebuyer’s tax credit date and all the talk about “taxes” right now,  we went to CPA Janet Davis of Trusted Advisors Consulting to get the facts.  Ms. Davis has over 15 years of experience and works with clients in several states.

Who is a first time homebuyer?

For the current tax credit, first time homebuyers are defined as someone who has not owned a home in the past three years.  If a first time homebuyer enters into a contract to purchase a home by April 30, 2010, and the purchase closes by June 30, 2010, the homebuyer can qualify for up to an $8,000 federal income tax credit.  

NOTE: If you are a qualifying first time homebuyer and you purchase your home in 2010, you can claim the tax credit on either your 2009 or your 2010 income tax return.  If you’ve already filed your 2009 return, you can amend that return to claim a refund, says Ms. Davis.

Are you a long time homebuyer?

A long time homebuyer is someone who has owned a home for at least 5 out of the last 8 years and decides to purchase a new home.  They can qualify for long time homebuyer’s tax credit.  Like the first time homebuyers credit, the long time homebuyer’s credit of up to $6,500 is also available for homes in contract by April 30, 2010 that close by June 30, 2010.  The long time homebuyer’s credit can also be claimed on the 2009 or 2010 income tax return, and the 2009 return can be amended to claim the credit.

NOTE: High income taxpayers do not qualify for the credits.  The Internal Revenue Service (IRS) article provides information on the income limits for this tax credit and your tax advisor can help you determine your eligibility.  

MILITARY AND FEDERAL EMPLOYEES
The tax credit may be extended for one year for certain active military and federal employees currently serving overseas.  The IRS provides some information here.  Again, check with your tax advisor to learn more.

The Homebuyer’s Tax Credit will be beneficial to many tax payers.  Be sure you are working with a team of licensed and experienced professionals.  Your realtor, lender and tax advisor can guide you to a happy home purchase that gives you full benefit of all that the current market and regulations have to offer.

Thank you to Janet Davis of Trusted Advisors Consulting for sharing her expertise.

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However, there are some things that consumers should be aware of, especially if they are planning a major purchase in the next year and need to have a certain credit score to qualify.

When you apply for any new credit account, it is a Hard Inquiry and counts against your score.  So simply applying for the no payments/no interest account at a store will count against you.  Getting qualified for the account will add a new trade line to your credit file; it will most likely be listed as a retail revolving account.  These accounts are often issued with a credit limit that is right at the purchase amount, so if you bought a total of $4500 of furniture, the credit limit on that new account may be $4500.  If you do a $2200 jewelry store purchase, the credit limit on the new account may be $2200.  With no payments for one year, the balance will not change and this account will consistently be reflected on your credit report as ‘maxed out’, meaning that the entire credit limit has been used.

Account balances are included in the second largest part of the credit score.  The difference between the credit limit on each account and that account’s balance is the utilization ratio.  When balances are over half of the credit limit, scores usually go down.  When balances reach the credit limit, scores can drop anywhere from 10 to 45 points. 

NOTE: Keeping account balances under 25% of the credit limit is optimal.

WHAT TO DO

Having this information and being aware of potential credit rating consequences of opening new accounts will help you make informed decisions.  Ask the company/store before you apply as to their general policy of granting credit accounts, is it just for the amount of the purchase, or do they give it in certain increments such as a $5000 account or a $10000 account.  Make sure there are no pre-payment penalties.  Determine what your payoff date will be to avoid the interest fees and then set aside some money each month as a ‘payment’ toward that account payoff, if you are not sending in actual payments for the account.

If you are looking to purchase a home in the next year, you may want to reconsider that furniture purchase until after you have closed on the house.  This article has more credit tips for home buyers.

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Keep your computer’s security systems updated.  If you have not done an Anti-Virus and/or firewall update recently, do so now.  If you have not done a hard drive back-up lately, it might be a good time to perform your back-up.

The Federal Trade Commission (FTC) issued a consumer warning this week that includes the following recommendations:

Do NOT give out personal or financial information to solicitors; this includes your Social Security Number and bank account numbers.

Give donations directly to the charity, NOT to solicitors for the charity who often keep a portion of the donations for themselves.

Check out the charity before you donate at the Better Business Bureau’s Wise Giving Alliance.

Additionally, the U.S. Computer Emergency Readiness Team has issued a warning of potential email scams that includes information on fraudulent search engine results that may lead to malicious links.

It is always in your best interest to be cautious and diligent when doing financial transactions online.  When doing so during an emotional event, extra care is necessary to be certain that your donations and good intentions go where you want them to, and your personal financial well-being is not affected.

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Additionally, the WHBAA establishes a of up to $6500 for existing home owners buying a principle residence between November 6, 2009 and April 30, 2010.  Again, the last date to have the purchase contract signed is April 30, 2010 and it must close by June 30, 2010 to qualify. 

What is the definition of a move-up or repeat home buyer?
For existing home owners, the law defines a tax credit qualified move-up home buyer as a home owner who has owned and resided in a home for at least five consecutive years of the eight years prior to the purchase date.  Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.

For more information on this new law and tax credit extension, you can see the White House Press Release here.  You can also get more information on the National Association of Home Builders’ website by clicking here.  Check with your accountant or financial advisor to determine your eligibility.

If you are thinking about considering a home purchase in the next six months, the time to check your credit is NOW.   You will want to be sure that all errors are corrected before visiting your lender and that you have done everything you can to optimize your credit rating and qualify for the best interest rates.  Contact us now for your Credit Check-up for only $100 with a complete credit analysis.

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Spoofing is often used by identity thieves to pretend to be someone in an official capacity, calling to persuade unsuspecting victims to give personal or financial information.  Because they can easily scare people by claiming there may be some suspicious activity on their bank account, it is hard to resist giving the information asked for to protect financial accounts. 

WHAT TO DO TO PROTECT YOURSELF

1) Realize your caller ID may not be showing you exactly who is calling – don’t assume it is accurate.

2) NEVER give financial or personal information out over the phone unless you initiated the call.

3) Remember that your bank already knows your account numbers and doesn’t need to ask you for them.

4) Be suspicious of callers asking for “confirmation” of your info, including social security number, credit card numbers and credit card security codes.

5)  Tell them you will call back with the requested information, then hang up and call your actual bank or credit card company yourself.  Look on your statements or the back of the credit card for the customer service phone number.

6) If you already gave your information over the phone, contact your bank or financial company to tell them you may have been scammed.

7) Do not call phone numbers listed in email “alerts”.  Look up the number for that account from your own statements and call to ask about it.

8) Check your account statements each month for suspicious or unknown activity. 

9) Check your credit reports three times a year to be vigilant for fraudulent activity.  You can do this at no cost by going to www.annualcreditreport.com.  You get one free from each of the three credit bureaus every year, so check one bureau every four months for monitoring purposes.

10) Report phishing and other scams to the Federal Trade Commission.

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If you are considering, or need to, purchase a new appliance for your home, you may want to wait until November to take advantage of any extra rebates or credits you may be eligible for.  This Wall Street Journal article provides the basic information.  Info on federal tax credits for energy efficiency was updated September 14, 2009 and can be found here.

Taking advantage of all available rebates and credits can help you extend your purchase power and help your budget.  You may want to consider using those extra dollars toward your credit building plan to increase your credit scores, providing more options for your financial future.  Contact us today to get your personal Credit Building Plan today.

The First Time Homebuyer Credit expires December 1st.  This means that you must complete the closing on the house no later than November 30th, 2009.

The Earned Income Tax Credit has been increased for qualified taxpayers with three children for 2009 and 2010 tax returns.  The Additional Child Tax Credit also had changes making it available to more families for 2009 and 2010.

The Hope Credit for families with children in college had some modifications this year that apply to tax years 2009 and 2010.

The Making Work Pay Tax Credit is in effect for 2009 and 2010.  For people who receive a paycheck subject to tax withholding, the reduced amount withheld in each paycheck should have been implemented this spring.  For people who do not have taxes withheld in their paychecks by their employer, they may be able to claim this credit on their tax return.

Sales tax and some other fees paid for new vehicle purchases between February 17, 2009 and December 31, 2009 is deductible up to $49,500 this year.  More info in this article from the IRS. 

Unemployment benefits received in 2009 are tax free for the first $2400 thanks to the American Recovery and Reinvestment Act, according to the IRS.

You can visit the IRS’s “What If” page to find out possible tax ramifications of different life events due to the economic downturn, events such as foreclosures and severance pay packages.

These tax items may not have a direct impact on your credit scores.  However, more money in your pocket may mean the ability to pay down credit card debt and other financial obligations, which can be a positive step toward growing better credit scores for your financial future.

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The question is: DOES MAKING A PARTIAL PAYMENT ON THE MORTGAGE HURT MY CREDIT SCORE?

The answer is: IT COULD.

Usually a late payment on any account gets reported on the credit report when a monthly payment has been skipped.  This shows up as a 30 day late payment.   NOTE: A payment that is past the due date by a few days or even two weeks is generally NOT reported to the credit bureaus as late.

Sometimes a partial payment is not considered a full payment by the company receiving it and they report it as a late on the credit report.  If two months go by with just a partial payment, not paying the full “amount due” on the statement, it CAN show up as two consecutive late payments and may be reported as two 30 day lates or a 30 and a 60 day late.  It just depends on how the mortgage company decides to report it to the credit bureaus. 

Another thing to consider is that it is very common for loan servicing companies and lenders NOT to accept partial payments.  Because anything less than a full payment amount can be considered as contractually not serving the obligation, the partial payment may be returned to the sender or it may be held as “pending”, waiting for the rest of the payment.   Additionally, when the lender receives a partial payment, they decide what to apply it to.  They may see the insurance and taxes as an important item to preserve their collateral, the house, and decide to put the partial payment into escrow, applying nothing toward the loan balance or interest.   An unaccepted partial payment will result in a late payment on the credit report.

Payment history is the number one factor in credit scores.  One late payment, when the rest of the credit report is unblemished, can cause a dramatic drop in credit scores.  So before you stop payments or send in partial payments, communicate with your lender.  Be sure to look at all options that help your financial situation now, and into the future.

You can read more about Short Sales and their impact on credit scores here.  The Federal Trade Commission also has consumer information available on this topic.

There are two types of Inquiries.

When you check your own credit reports, whether your annual, no-cost ones, or your FICO reports with your actual FICO scores, or some reports you get with a monitoring service you’re enrolled in, FICO says it NEVER counts against the consumer to obtain their own credit reports.  It is a SOFT Inquiry.

Other SOFT Inquiries occur when a company you already have an account with does periodic monitoring of your credit reports, or when a company wants to send you a “pre-approved” offer, or when a prospective employer checks your credit as part of the job application process.  Soft inquiries do not count against your score.

The reason checking your own credit does not count against you is because you are NOT applying for a loan.  Whenever you sign a loan application, or approve one by giving your name, date of birth and social security number, it is considered a HARD Inquiry and will count against your scores.  These hard inquiries stay on your reports for two years and are included in the score for that time.  They can count from 1-12 points each.

NOTE: Try to limit your credit inquiries to less than (6) annually.  According to the FICO company, lots of inquiries means greater risk: people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their report. 

There is some consideration for real estate/mortgage and auto rate shopping.  The FICO scoring formula takes into account that most lenders “shop the loan” to get multiple possibilities for their customer to get qualified.  You can learn more about inquiries and rate shopping here.

NOTE: Even if the lender’s credit report only shows 6 or 12 months worth of inquiries on it, FICO says they stay on for two years and are included in the FICO scoring formula that entire time.  So even if your lender says “don’t worry, it will come off in a month or in 6 months”, that does not necessarily make it so. 

WHAT TO DO
Don’t make excessive loan or credit card applications.

When you do sign an authorization paper for someone to pull your credit, write on that paper that you are only authorizing ONE credit check on that date, and none in the future.  Get a copy of that paper for your records.

When shopping for a mortgage or auto loan, write out that you are authorizing credit checks for a two week period and list those dates.  Example: I authorize ABC company to check my credit report from June 1, 2009 until June 15, 2009 and no other dates.

Dispute unauthorized inquiries with the company reporting them and with the three credit bureaus.

Contact us for individual credit consulting services and to schedule your group presentation for Credit 101.

DO NOT APPLY FOR OR OPEN ANY NEW ACCOUNTS

This includes all of the following:

Automobiles                    Boats

Trucks                                Motorcycles

Furniture                          Outdoor Furniture

Gasoline Cards                Department Store Accounts

Jewelry Accounts         Mail Order Catalog Accounts

RVs                                      Three Wheelers and Quads

Appliances                       Patio Fixtures and Equipment

Electronics                       BBQ Grill

Gym Memberships       Lines of Credit

Very often, people who have worked hard to build their credit get so excited when they find out they qualify for a home loan that they take that excitement out shopping with them.  They find new furniture for the new house, new televisions and computers, new cars to park in the new garage, maybe a new watch or diamond earrings to celebrate.  If those items are purchased on credit or with a loan, the credit scores change and the new debt might take the consumer over the lender’s debt-to-income ratio (DTI).

Each time you apply for credit, it is a Hard Inquiry on your credit report that stays on for two years and can count against your score.  Additionally, 10% of your FICO score is based on the category of “New Accounts” and there can be a 2-3 month temporary drop in scores when new accounts are opened.

DO NOT CLOSE EXISTING ACCOUNTS
Many people assume that the best way to get better credit scores is to pay down their existing debt and then close all of their revolving accounts such as credit cards, store accounts and gasoline cards.  Yes, paying down the balances on these cards is a great way to help your scores.  However, closing these accounts that are in good standing can actually hurt three major parts of your FICO scores and will usually cause a drop in scores.

NOTE: closing accounts that have late payments or other negative marks on them does NOT make the negative items go away.

KEEP ACCOUNT BALANCES LESS THAN 25% OF THE CREDIT LIMIT
The second largest part of the FICO score is “Amounts Owed”; this is the Utilization Ratio or debt-to-available-credit amount.  When balances on revolving accounts are over 50% of the credit limit on the account, there is generally a negative impact on credit scores.   

Keep account balances under 25% of the credit limit for optimal credit score growth.  It is okay to have a zero balance.  Remember, don’t close the accounts when they are paid off.

PAY ALL BILLS ON TIME
The number one factor in the FICO scoring formula is “Payment History”.  The best way to help your credit rating is to pay all bills on time, every time.  This includes timely payments to companies that do not usually report your account information to the credit bureaus such as the phone company or electric company.   When you have a delinquent utility bill that goes to collections, that collection account often shows up on credit reports and is a big negative.

Additionally, many lending programs require a minimum or 12 or 24 months with no late payments on anything as a qualification for a home loan.  So set up a system that keeps you on top of your bills and their due dates.

For your personal Credit Check-Up that includes an analysis of your current accounts and details on how you can optimize your credit building efforts, contact us today.  The $100 you invest in good credit can save you thousands in future interest payments with a better qualifying rate.

ATTENTION LENDERS:  We know the lending industry is changing weekly if not daily.  Please share your comments of  additional or new requirements that consumers should be aware of.  Thank you.