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/

The Advantages of Credit Cards

There are many evils associated with credit cards, but there are benefits that are hard to ignore. One... Read More

New Credit Scoring Model Could Help Millions

Mark and Beth, a young married couple in their twenties, established a goal to buy a home within... Read More

Identity Theft ? Who Would Want Mine?

With all my bills who would possibly want my credit? Let them steal my identity and pay my... Read More

How Healthy Is Your Credit

There's only one way to discover the "health" of your credit. You need to examine your credit report.... Read More

Compare Credit Card Offers and Reward Yourself

Here's a simple system on how to pay zero interest and get tons of free stuff. Almost everyone... Read More

Establishing Credit ? What You Need To Know Part 2

In my previous article "Establishing Credit ? What You Need To Know Part 1" I discussed the need... Read More

Understanding the Function of Credit

What is Credit?Credit is the backbone and the engine behind the workings of the economy. Credit simply allows... Read More

Free Credit Reports: From The 3 Major Credit Bureaus!

Get your credit report online for FREE. Many financial advisors suggest that you periodically review your credit report... Read More

Credit Repair Scams

"Erase Bad Debt !""Remove Negative Items From Your Credit Report"You've probably seen these headlines and others just like... Read More

Commercial Collections And Credit Granting

It is estimated that billions of dollars in delinquent commercial credit is currently being carried on the books... Read More

Like It Or Not, You Have A Score To Settle! Part 1

Just when most people finish with school and can stop worrying about test scores, there's a new kind... Read More

Cutting Credit Card Costs

What are the APRs charged by the credit cards in your wallet? If you are paying more than... Read More