Protect Your Good Credit

Whether it’s a personal dilemma, such as whether to change your job, a relationship, your address or a life challenge such as serious illness, unexpected unemployment, or death of a loved one, we make dozens of decisions everyday that can positively or negatively affect our credit history. Only after a traumatic event, which results in poor decisions, do most individuals realize that small decisions can have big impact later.

An associate called recently and asked that I look at her mortgage situation. She refinanced a few months ago after her father passed away. Her father had been successfully fighting cancer but about 9 months ago, took a turn for the worse, needed more full-time care, so my associate took time off from her business (she’s self-employed) and began taking care of her father. As time went on and he lingered, she began “living off credit cards, etc” to cover her bills. By the time her father died, between her grief and her increased debt, she made several rash decisions regarding her finances which have had very negative results on her credit.

Hindsight is always 20/20 and no one can be certain how they will respond to a particular situation until they experience it but, sometimes, forewarned is forearmed. Had my associate been aware of some specific credit pitfalls prior to her father’s illness, she may have been able to make better decisions in her time of crisis.

1. Quick costs More!!! Just like buying a bottle of water at 7-Eleven will cost you more than it will at Sam’s club, credit costs more when it’s provided quickly. Instant credit via credit cards can carry interest rates over 20%. While it’s convenient, just like 7-Eleven, it’s more costly than other credit sources, such as a Home Equity Line of Credit (HELOC). Credit card companies will allow you to apply over the internet or phone and issue credit in minutes, while Home Equity lenders have a more lengthy application and approval process and can take several weeks but offer much more competitive rates of interest than credit cards.
2. Review Refinance Terms and Costs Carefully!!! Due to recent years of high real estate appreciation coupled with low mortgage interest rates, refinancing to consolidate credit card and/or other unsecured debt has become very popular. Many loan officers sell mortgages like car loans, focusing on the monthly payment amount instead of the terms of the loan. Teaser rates, pay-option programs (which allow you to pay less each month but can cause your principal balance to go up over the life of the loan instead of down), and interest-only payments can often mislead a borrower as to what the loan is actually costing in interest and fees. It is important to make sure you understand what you’re paying in both fees for the loan itself and the interest rate you’ll pay over the life of the loan, especially if it is any type of adjustable rate mortgage. When getting cash back at closing to pay off credit cards and other bills, the amount of money that the lender or loan officer is charging you for the loan is often overlooked and can add up to thousands in unnecessary expense if it goes unchecked by the borrower. It is important for every borrower to remember that ANY refinance loan includes a recission period of 3 days. If necessary, a borrower can opt to change his/her mind during that time with no financial penalty.
3. Review Decisions about Finances with a Professional!!! Since it’s so easy to make poor choices when you’re distracted by a crisis, talk about any big financial decisions with a trusted, professional financial advisor first. Doing so can help protect you from problems later.

This entry was posted on Monday, May 14th, 2007 at 4:54 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.