Co-signing on student loans means the co-signer who may not have control of the payments will still have the updated payment history on their credit record.
The CFPB says, “Outstanding student loan debt has now crossed the $1 trillion mark. Student loans have eclipsed credit cards as the leading source of U.S. household debt outside of mortgages. This is a major issue for students, recent graduates, and their families”.
We are finding that student loan defaults and delinquencies are at an all time high and those who have co-signed are, in many cases, left with the scars on their credit causing great problems moving towards the future.
John was about to purchase a condo in NYC. The mortgage he needed approval for was 1.2 million. In the last 5 months he had shopped for a car over a period of 4 months, asked for limit increases on 2 credit cards, and he had his credit pulled for a preapproval letter when first going out with his realtor. In total he had 5 inquiries in the past 7 months. His current Fico score is a 742. He is planning on applying for the mortgage next week. John and his wife are shopping at Bloomingdales and his wife requests they purchase a sofa and put it on his Bloomingdales credit card. John agrees and when he gives his card to the cashier the card is denied due to the purchase being more than the cards limit. The cashier informs John she can request they make an exception and give him a limit increase. John agrees and the transaction is approved. He and his wife are thrilled. Unbeknownst to John, when he applies for the mortgage a week later his score is now a 710. John had no idea that six “hard inquiries” are considered extreme and could drop his scores 20-40 points. John can no longer qualify for the same mortgage. That one extra inquiry changed his plans completely. Potential loan applicants should be informed that “hard inquiries” or “third party credit reviews” could have a negative effect on credit scores and should be kept at a minimum one year prior to applying for a loan. Third party inquiries for mortgages are viewed in 45 day periods as one inquiry. These groups of inquiries (as long as they are less than 6) only drop scores 2-5 points each 45 day window.
The Credit Card Act of 2009 has been amended to help “stay at home spouses” who are working in the household raising children or are addressing other issues that need full time attention. In the past spouses who are working hard to care for an ill and aging parent, raising children, or even going back to school for a better education have given up the ability to get approval for credit due to lack of income. In the past non income earning spouses were in a vulnerable position since their ability to cultivate and manage their independent credit and scores was limited to the individual income they could prove. Without the ability to get your own credit and continue to build it actively when faced with a divorce, death of spouse, or the loss of the income earning partners position, a dead end quickly presents itself. Now with the ability for consumers over the age of 21 to use their spouses income as part of the qualification for a primary credit card approval, independence plus the development and nurturing of credit can continue. You never know when an opportunity will arise where credit is an essential part of participating. It is extremely important to keep excellent credit and scores. Having credit and using it well is a key factor in having high credit scores.
One recent 30 day late payment on a mortgage will cause a rejection for a refinance or purchase and will drop scores over 100 points for many consumers. This impact to the credit score can last for years costing dramatic financial losses, frustration, and a failure to meet personal and financial goals. For many loan officers and real estate professionals it will mean the loss of an opportunity to fund a loan or sell a property. Consumers need to be very careful reading their mail since many loans are being transferred to new service providers. If consumers miss notification thinking a letter is junk mail or a promotional offer they can easily find themselves in this position. If the consumer never received notification we can begin the fight with the creditor to remove the late. BE SURE TO WARN YOUR CUSTOMER BASE OF THESE POTENTIAL PITFALLS!
Many of us have found ourselves in a position over the past 5-7 years where one or more of our credit cards were surprisingly closed by the creditors. It is usually a shock and never seems to come at a good time. Even those with excellent credit and no need for the extra credit card feel slighted when they find out they have been rejected for continuing use of a credit card. Some even try to fight the creditor to re-open it with no success. The worst is when a creditor closes a credit card on us right before we are applying for a mortgage, causing our score to plummet. When balance to limit ratio’s change due to a reduction in the aggregate limit, it could drop scores substantially, depending on the current balance.
For example, if we have $50,000 of credit card debt with a $25,000 balance and a card closes that has a $25,000 limit we have gone from 50% balance to limit ratio to 100%. This action could drop our scores 50-100 points depending on our current Fico scores. This drop could cause a rejection for a mortgage or a much higher interest rate, costing us hundreds of thousands of dollars over the term of the mortgage.
How could this be that creditors are allowed to just close credit cards on us without notifying us in advance? Isn’t this wrong and illegal? Unfortunately, the answer is that it may be wrong to us but it is completely legal. Since the Credit Card Act of 2009, many changes were made to protect the consumers interest but not regarding creditor’s closing credit cards.
Creditors can close accounts for many reasons and some seem quite legitimate, like late payments occurring, going over the limit, and filing a bankruptcy. Creditors can also watch your credit reports and assess your spending, payment patterns, and management habits. If they feel you are carrying balances with other creditors that might make you a riskier bet they can shut you down without warning. Inactivity of credit is a common reason creditors close accounts as well, so if you don’t use your credit card accounts at all they may pull the plug. Also, if you open too many accounts in a short time your ability to manage all of that new credit at once may be questionable.
A creditor can close a credit card account for a delinquency, inactivity, or default without informing the consumer. When creditors close accounts due to poor credit they have to notify the card holder 30 days after the closing. Although it may seem wrong to take this action against the consumer without warning, there are valid reasons. Although many consumers would not take a negative action some would spitefully rack up charges once they know the account is closing, having no intention to pay them back.
So how can consumers protect themselves from credit cards closing by the grantor?
1. First keeping low to moderate balances is a great help. Trying to stay at 20-40% aggregate and individual balance to limit ratios on credit cards is a good way to keep the credit risk alarms from going off.
2. Making sure all credit cards are active a few months out of the year is a great idea. Consumers don’t have to charge a lot of money in those few months they just need to make a small purchase.
3. For those who have many cards and only carry a few with them they can put recurring auto pay memberships on the cards they don’t carry like EZ pass, gym memberships, etc.
4. Making sure your credit is excellent and keeping it that way will also insure you look your best for those watching. Those with poor credit should search out an excellent credit repair company and get a free assessment of what can be done.
5. Many credit monitoring products help you daily, weekly, monthly to evaluate your credit standing while watching your balances. This is a great way to stay on track of your credit activity.
6. Only opening new accounts when you have strategically decided it is the right time and the right credit account. Randomly opening credit is never a good thing.
Some consumers are under the false impression that if credit is closed by the consumer it impacts them less than when the creditor closes the account. This is totally false. The scores can drop just as much depending on many factors including the balance to limit ratios on revolving credit.
This is the season for romance but with romance comes relationships and for many marriage. Although we all have the best intentions and high hopes for the future of our relationship we all know the reality could be very different from the original dream. When a relationship ends in divorce or a break up, many successful individuals have assets to split which may include a property with a joint mortgage. If the property is given to one of the parties in the divorce agreement the mortgage must be refinanced into their name. Many divorce agreements state this must occur but if it is not done immediately there is no real way to enforce it. If the party who is taking over the property cannot qualify for the mortgage, due to lack of income or poor credit, the original mortgage will remain. Both parties will be responsible no matter what the divorce decree states unless the loan is refinanced. If the mortgage is not refinanced the individual that no longer reaps the benefit of the property will still incur delinquencies associated with the mortgage on their credit, remaining legally responsible if the loan defaults. If that individual wants to buy a property of their own in the future and they need mortgage approval their income will have to cover both the old and the new mortgage. This could be another issue since their income may be inadequate to cover both.
A collection account can be placed on credit reports for something as minor as not paying a parking ticket, library book fee, or a magazine subscription.
If a creditor is not paid within a period of time the debt owed by the consumer gets passed on to a collection agency. Many of these agencies purchase or borrow the debt hoping to make a profit by collecting a commission or a higher amount than the purchase price they paid for the debt. Most consumers do not realize that just because they pay the collection does not mean the delinquent account will suddenly correct itself. In many cases if the debt is a small amount of money paying it off could reduce the score even further.
If you have experienced this please share it with us?
We have had many clients who come to us for help due to derogatory credit from co-signing for a child, partner, or friend. Co-signing for a loan, lease, line, or credit card is a very risky endeavor. Once you sign on the dotted line or approve the terms you are making yourself vulnerable to someone else’s payment patterns. Since the primary on the account will receive and pay the bill your credit is in their hands. If they make sloppy payments, default on the account, or just have an accident and make a payment late it can have a devastating effect on the co-signers credit and financial life.
When and if you decide to co-sign it is very important to be in control of making the payment. This is the only way to insure that payments will be made on time. Besides opening up credit to the possibility of delinquencies if your friend or relative defaults you are also obligated to pay the debt. If it is a mortgage and you plan on getting your own loan in the future you may be in for a big disappointment. Since your income will have to cover all obligations (including the co-signed mortgage) you may be rejected for the loan or qualify for a much smaller mortgage. Co-signing is a risky business and before jumping to help all consumers must look at the full cost of being nice!
Starting to build good credit and scores should be done at a young age.
Since the Credit Card Accountability Act of 2009, consumers under the age of 21 cannot get credit without proving an income or having a co-signer apply with them for new credit. Once a young adult opens credit as a primary card holder, whether the parents co-signs or not, any old authorized user accounts will help to increase credit scores since the account will age the credit profile. Parents can add their children on as authorized users to old credit cards without even letting the young adult know. In three months this account will be added to the individuals credit profile and since average age of credit is a factor in the Fico scoring formula this old credit will help to increase the score.
Once these two accounts age on credit for a year the consumer can buy his/her Fico scores to see where they stand: http://northshoreadvisory.com/orderreports.html. At that point they can apply for a new credit card based on the current Fico score.
Any tax liens updated on credit can affect Fico scores dramatically. A new tax lien can drop scores 100’s of points. The higher the score prior to the lien update the more it drops. The reduction in the score can cause rejections on loans or higher interest rates even if the lien is paid. We have seen State tax liens as low as $200 on credit reports. In many cases consumers paid the debt as soon as they received a letter stating they owed it but liens were placed so quickly they felt they didn‘t have time to even make the payment. Some didn’t even know they owed the money until they saw it on credit. Although state tax liens are generated for minor debts the IRS has become more lenient and has raised the threshold for what prompts a tax lien. Now instead of getting a tax lien for debt over $5000 the threshold has become $10,000 and above. Please contact us to review any reports with liens and we will examine whether they can be removed and scores increased.