Happy Credit

Financial wellness, including higher credit scores have been linked to better wellbeing, as shown in a study published by Harvard Business School. The paper, published in 2018, is titled: Good Credit and the Good Life: Credit Scores Predict Subjective Well-Being. The study was conducted in both England and the United States with the cooperation of the banks and their customers who participated in the survey.

The Harvard study stated that “credit scores predicted life satisfaction even after controlling for a range of financial covariates, including income, spending, savings, debt, and home-ownership. Respondents with higher credit scores felt more optimistic about their future, promoting happiness. Further, the relationship between credit scores and wellbeing was moderated by participants’ prior awareness of their score. Together, these results suggest that creditworthiness can plausibly increase well-being, either directly or indirectly, meaning that interventions to improve creditworthiness could improve consumer welfare.”

Credit where due, I excerpted the above paragraph from an article published on October 5, 2021 by Benefits Pro. 

The referenced study is reminiscent of a study done by the Federal Reserve and about which I wrote in 2016 titled: Romance and Credit Scores.

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Financially Speaking™ James Spray RMLO, CNE, FICO Pro | CO LMO 100008715 | NMLS 257365 | October 7, 2021

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

The Secrets To Building An Awesome Score

Mom never told you as she didn’t know either

The not so  Secret Formula

Use your credit cards properly to build an awesome FICO^© Score. An awesome score will give you the best advantage for the best rates on insurance, credit cards, vehicle and other installment loans and home loans. As well, having a great score will give you a distinct advantage for certain employment opportunities. Having a great score will also help you to screen potential long-term partners to determine the likelihood of a successful relationship. Let’s face it, having a great score means you keep your commitments.

By way of proper use, let’s explore what it is that is rewarded by the scoring system. Two cardinal rules are never exceed using 30% of your available credit on any card in any month. Ever. Never maximize the usage of your credit limit on any card. Ever. Better is to not exceed using 20% of your credit limit. For example, the credit limit is $1,000.00. Do not exceed $300 in use and better do not exceed $200 in use. This accounts for about a third of your total credit score.

For best results, pay off the balance monthly. In addition to never maximizing the usage of your credit limit, never exceed the limit. Ever. For your best advantage do not ever close a credit card. The aging of your credit profile is essential to having a great score. The longer you have good credit, the better for your credit history and as a result your credit score. This accounts for a little more than a third of your score. In this and the previous paragraph we have discussed that which makes up about sixty-five percent of your total credit score. Such is illustrated in the following pie chart.

At each opportunity you get, or at each opportunity you can make, increase the amount your available credit. Once your credit card issuer sees you are managing your account well, they will offer to increase your credit limits so long as you have the ability to repay. Don’t be shy, after about 6 months, contact your card issuer and ask when you may qualify for an increase.

Keep in mind that a single 30-day late payment will ding your credit score by 90-115 points. Boom! The time it takes to recover from this one 30-day late payment will take from one to three years depending on your score at the time.

If you wish to take the time, the author of this article captured the reality of building a perfect score.

With all things, including credit cards, TANSTAFFL applies. TANSTAFFL was a term coined by Robert Heinlein in his 1961 novel Stranger in a Strange Land. There Ain’t No Such Thing As A Free Lunch.

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Financially Speaking™ James Spray RMLO, CNE, FICO Pro | CO LMO 100008715 | NMLS 257365 | June 24, 2016

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

The 4 C’s of Credit

The following is written primarily for those wishing to obtain a mortgage. However the same dynamics apply to credit cards, vehicle loans, insurance, employment opportunities and even dating eligibility.

Character – Reputation is a key factor in obtaining new credit. Bankruptcy, foreclosure, late payments, settlements, collections, judgments, charge-offs and other derogatory events weigh how your credit character is measured. A short-cut for evaluating character is the credit score.

Capacity – Is the ability to repay the obligation provable with third party documentation? This is measured by the stability of the income, and how long the wage-earner or self-employed has generated that income.

Conditions – What is the purpose of the loan? If the purpose is to refinance for a rate or term improvement, a simple letter stating such suffices. If applying for a cash-out refinance, how are the proceeds to be used? Documentation is required to explain the perceived additional risk. In situations where Character is less than stellar, a cash-out refinance for the purpose, for example, reimburse a family member could jeopardize loan approval.

Collateral – How much equity is available to protect the investor? In a purchase or refinance, this is the percentage of Down Payment/Equity vs Appraised Value and the loan amount. The lower the loan amount to the equity, the stronger

For example, when the character and/or the credit are challenged a down payment/equity position of about thirty percent can mitigate two of the “C’s”.   The greater the collateral/equity, a lesser weight may be given to Character, Capacity.

What is your credit score? Use this credit score simulator to find out. It’s free and it will give you a good idea of what your score range is right now.

Caution – Finally, be very wary of credit repair schemes, many are designed to part you from your hard earned money. Most of these “service providers” are scams. It’s easy to see if they are running a scam. The scammers require cash up-front; this is not legal. Pursuant to the Credit Repair Organization Act (CROA), any credit repair work must be completed before a consumer may be charged for the work. For more information, see: Credit Repair Basics.

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Financially Speaking™ James Spray RMLO, CNE, FICO Pro | CO LMO 100008715 | NMLS 257365 |October 19, 2015

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct for your situation. This information is not legal advice and is for guidance only. You may reproduce this information in whole and not in part, providing you give full attribution to James Spray.

Purchase or Refinance During a Chapter 13 Bankruptcy

Chapter 13 Plan

This post is written for folks currently in a Chapter 13 Plan. It is also helpful for those contemplating filing a Chapter 13 Bankruptcy Reorganization Plan. This post is also helpful for those recently Discharged from Chapter 13. A mortgage refinance or a home purchase, while still in a Chapter 13 bankruptcy, is possible; it is also a complicated financial and, legal transaction. To do this requires a highly specialized mortgage professional experienced with both FHA lending rules and Chapter 13 bankruptcy as well as local court rules.

The Chapter 13 Payment

One of the most important things to understand is the importance of on-time Chapter 13 Payments to the mortgage underwriting process. I strongly encourage you to read this: The Chapter 13 Payment. Your Chapter 13 Trustee payment is given the exact consideration as your housing (mortgage/rent) payment in underwriting. From the underwriting perspective, one thirty-day late payment of either the mortgage or Chapter 13 Trustee payment will sink your prospects of getting mortgage loan approval for at least a year. Mail your payment early or set your on-line bill pay or direct payment to the Trustee so that you always know your payment has had time to get to the Trustee’s office and be posted by the staff at that office. Too many times, on review of the Chapter 13 Payment history, we find a payment was posted on the 2nd day of the month. One day counts as a late payment. An experienced mortgage lender can help you check your Chapter 13 payment history in real time.

Mortgage Choices for Chapter 13 Debtors (purchase or refinance)

The only mortgages available, either for refinance or purchase, for those in a Chapter 13 Plan are those insured or guaranteed by the Federal government. These mortgages are either: insured by FHA,  guaranteed by VA or the USDA. Each

Any mortgage so long as it’s FHA, VA or USDA.

of these home loans are underwritten with the same guidelines as set forth in the FHA Handbook. How does a bankruptcy affect a borrower’s eligibility for an FHA mortgage? From the FHA Handbook:  “A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction.*”  Most underwriters will consider the Chapter 13 Trustee’s approval as permission from the court.

Application to Incur New Debt

To get underwriting approval for a Chapter 13 Debtor to refinance the Chapter 13 Trustee (in Colorado) or the Judge must approve your application to incur new debt. Contact your attorney to determine how and when to best proceed, or not. There are situations when it may not be in your best interest to purchase or refinance while in Chapter 13. This is a process which you can only do with the advise and assistance of your attorney. Your attorney must prepare the financial statements to submit to the Trustee in order for authority to be granted for a lender to offer new credit. Your mortgage loan originator should be able to assist your attorney in completing the Application to Incur New Debt.

Mortgage Refinance After Chapter 13 Discharge?

Yes. One may refinance or purchase within 2 years following the Discharge. BUT, it is easier to get approved for a mortgage while still in Chapter 13. This is because, following Discharge, a manual underwrite is mandated. Few lenders are willing to take the risk of not having the safe harbor provided by Automated Underwriting. Begin reestablishing good credit as soon as your Chapter 13 Plan is confirmed and continue this discipline while your case is still open so by the time your Discharge enters, you have solidly reestablished good credit.

Two years following Discharge, with reestablished credit, one may qualify for a conventional or Qualified Residential Mortgages (QRM) to purchase or refinance a home loan.

Preliminary Requirements for Purchase or Refinance While in Chapter 13

• Twenty-four months of current housing payments with no 30-day late payments and, the likelihood of the income continuing for at least three years.
•  Two years IRS Returns showing your income is sufficient to pay the mortgage as well as your Chapter 13 payment and any debt not included in the bankruptcy payment.
• Minimum middle FICO Score of 620 . Most will need to practice what I’ve previously posted as FICO  101a, 101b and 101c for several months prior to making a successful application for mortgage credit.
• For anyone with a fear of having credit make time to read both Credit: Use It to Build It (Part 1) and Credit: Use It to Build It (Part 2).
• Begin rebuilding your credit as soon as your Chapter 13 Plan is Confirmed/Court Approved; this is when your property has been revested to you.
• The maximum limited-cash out loan to value on an FHA appraisal is presently 95% – Refinance.
• The minimum down payment is 3.5% of the purchase contract or appraised value whichever is less. – Purchase
• The maximum Debt to Income Ratio is 45%. This is pushing the envelope. While in Chapter 13, it is mandatory to have Court approval (in Colorado, the Trustee approval suffices) to obtain a mortgage.

There is more detail to this process than can reasonably be discussed herein but this is the essence of purchasing or refinancing while in Chapter 13.

*Reference: FHA Handbook 4000.1 II.A. 5.a.iii (H)(2)(3).

Disclaimer: This article does not represent that any of the information provided is approved by HUD or FHA or any US Government Agency.

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Financially Speaking™ James Spray, RMLO, CNE, FICO Pro |  CO LMO 100008715 | NMLS 257365 | November 1, 2010 – Revised May 2, 2018 | Copyright 2010-2018

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Credit: Use It to Build It (Part 2)

 

 

 

 

 

 

As discussed in Credit: Use It To Build It -Part 1, it is essential to qualify for and properly use credit in order to have credit. A thin credit file does little good to help one build or rebuild credit. Thin credit is described as a file lacking in length and depth of credit history. Thin is not a good thing in the credit sense.

The length of a credit history is a matter of time. A short credit history may have accounts that have been open for a matter of months or one or two years. A long credit history may span decades because open, active accounts remain indefinitely.

The depth of a credit report is an issue of the number and types of accounts you have. A credit history with only one or two accounts will likely be considered thin, even if it spans many years. A “thick” file would have several accounts of different types. For example a credit history could include credit cards, installment loans and a mortgage.

The Basics

Let’s start with the basics, understand the mechanics of the FICO Pie Chart as well as the art and science of Rebuilding Your Scores. Credit scores are not a big mystery; they are simply a measure of the information reported to the credit reporting agencies by your creditors. Learn about your credit reports control that which you can as to what is reported and your credit scores will follow.

Credit Score Facts

On credit scores, how do they work? What you can do to raise your scores is discussed in this blog. It is necessary to understand there is a difference in the credit scores one may obtain for free via the Internet. These are not the scores used by lenders. They may not even be close to those used by lenders. In this blog we discuss the difference between what we call FICO or FAKO Scores?

Join a Credit Union

Not just any credit union will do. Some credit unions are so large they act more like a bank than a credit union. To learn a little more about credit unions and to find one you can join, read our blog titled: Credit Union Power. This is a key step to reestablishing your credit. Once you’ve become a member, ask for help to set up a $500 secured installment loan. Next, utilizing some of your savings, as much as possible, set up a secured credit card account and use it properly.

Beginning Anew or New?

Whether beginning from scratch as a young person with no credit or whether starting again, the tasks are quite similar. Read through both Part 1 and Part 2 of these blogs to learn more of what to do and not do as you begin this new journey. If you have a family member with excellent credit, read and share this blog on this which we call inherited credit. You have the opportunity to learn about how it works and how it doesn’t work.

Credit Utilization

Anyone who uses credit cards could have high utilization, particularly those which pay off their balances in full each month. This is because balances are often reported to the credit bureaus mid-billing cycle. So if you have a $5,000 limit and you charge $4,000 in a month, you could be reportedly utilizing 80% of your available credit. The result is most often dramatically reduced FICO™ Scores.

We wish you success!

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Financially Speaking™  James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | September 21, 2014

 

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Credit: Use It or Lose It!

 

Credit Atrophy

In neither of the below situations had either credit user been reckless or irresponsible. Neither had run up large balances and there were no late payments. The problem with each was that they simply hadn’t been using credit and had allowed open accounts to age-out from lack of use and be closed by the credit provider.

She Quit Using Credit

In December, my mortgage client’s co-signer’s FICO Scores were all over 830 and given that 850 is the ceiling, we call these great scores! In February, when my client was ready to set a closing, her co-signer had no reported FICO Scores. This means they had fallen below the mortgage score floor of 350.

His Credit Cards Expired

In the early Summer of  2013, my son-in-law began shopping for a home in their new town. His scores were all in the early 800s. By the time it came to schedule a closing in late Summer, his scores had all dropped into the 740 range. What happened? His unused credit lines were closed by the providers. The result was that his usage of available credit increased such that his scores dropped. Rather than having less than 20% of his available credit in use, he now had more than 45% of his available credit in use. He had not increased the amount of credit he was using. He lost open unused credit, which had a negative impact on his overall score as it appeared he was overusing credit.

Retired Credit

“FICO has the primary scoring model for mortgages and most other lending decisions. Its model require an [creditor] update to a credit report within the last 6 months. Your credit file is usually updated monthly for active accounts…” Source.

What to Do?

The card issuers have models which track your usage or lack thereof. The credit provider also incurs ongoing costs such as credit reporting, accounting and audit controls. Be Aware: If you are not using the credit card every six months, or so, the creditor may simply close the account. If the account is not being reported, it cannot be scored. If nothing else, charge something you need to purchase regularly, perhaps a pair of socks. Pay the invoice when due and never pay interest.

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Financially Speaking™  James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | August 22, 2014 | May 14, 2018

 

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Dear Daughter: About Building and Responsibly Using Credit

Dear Daughter:

In the beginning, select and join a credit union. Use this financial institution as your primary bank. Credit Unions are unique financial institutions. As a member you are an owner, not just a customer.  Your credit union is almost everywhere you are with shared services. Most credit unions offer free checking, free debit card services, free ATM’s, no monthly service fees, low cost auto loans, low interest rate/no fee credit cards and more. Search for one near you, just click here.

Credit Unions are insured by the National Credit Union Association and backed by the Federal Government up to $250,000.00.

 Begin developing a strong relationship by being responsible with your accounts. This will help you establish a solid reputation with your primary credit union.  In many ways, this illustrates your self-respect in the financial world.

·         Balance your checkbook at least monthly; ask a credit union officer to show you how.

·         Do not rely on overdraft protection; set up shares/savings secured in case you need it.

·         Overdraft protection is there to cover math errors only; if you have to use it, pay it off immediately.

·         Do not live on credit – it is but a tool, use it wisely as such.

·         Avoid credit monitoring/score watching services – these are a waste of time and money.

Build emergency savings for emergencies; they happen. Build separate savings for play such as getaways and vacations. You can set up special savings accounts with your credit union.

Building credit requires using credit and using it wisely. Limit your use of credit by using it wisely. Don’t pay interest on disposable goods such as food, gas, clothing, entertainment or vacations.

Once you have your credit union account set up, you may wish to ask a parent or relative with good (740 FICO) to excellent credit (780 FICO) to allow you to inherit their credit reputation. This tool, properly used, can greatly enhance the ability of one with a thin or young credit file to build one’s own credit in a more expedited manner.

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Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | July 8, 2013

 

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

New Credit During and After Bankruptcy Guide

New Good Credit Required

Mortgage Refinance After Chapter 7 Discharge – Yes, two years after your discharge, it is possible to refinance providing there is at least 5% equity in the property, an excellent mortgage payment history (no 30 day late payments), provable income and reestablished credit with good FICO scores. This is applicable with only FHA, VA and USDA mortgages. Do not sign a reaffirmation agreement without the approval of your attorney. For the rest of the story, click here.

 Purchasing a Home After Chapter 7 Bankruptcy Discharge – Yes, two years after your discharge, it is possible to purchase providing you have at least 3.5% down payment, an excellent housing rental payment history (no 30 day late payments), provable income and reestablished credit with good FICO scores. To read the rest of the story, click here.

 Mortgage Refinance During Chapter 13 – Yes, after you have been in your payment plan for one year, it is possible to refinance. This is the case providing you have no 30 day late payments to either the Chapter 13 Trustees office or your bank/mortgage company, and providing there is at least 5% equity in the property. While harsh, understand there is absolutely no tolerance for either 30 day late payments or any new derogatory credit. Read the rest of the story by clicking here.

Building New Good Credit After Chapter 7 Discharge – I have written numerous blogs on what to do and not to do when rebuilding your credit following a financial catastrophe. You can subscribe to my blog for free and learn how to rebuild your credit. To help narrow your immediate search, here are a couple of good blogs on this topic: Credit Union Power  and Credit Cards After Bankruptcy.

Building New Good Credit During Chapter 13 – Your Chapter 13 Plan must first be court-approved before you can begin rebuilding credit while in your Payment Plan. Be very wise and careful in so doing, as any new bad credit after filing for bankruptcy protection is very harmful to your credit and financial recovery.

Mortgage Modification After Chapter 7 Discharge or During Chapter 13 – Your best source of information and help on this is through the Making Home Affordable Website. Again, I urge that you do not sign a reaffirmation agreement. This is an area of widespread fraud. Caution: I encourage you read this for your protection: .

Renting After Bankruptcy – Click here for tips and guides and resources you may find helpful.

National Mortgage Settlement – Was your mortgage originated before January 1, 2009? Does Wells Fargo, Bank of America, Citi, Ally/GMAC or Chase service your mortgage? If so, these are settlement details regarding such. Contact the CO Attorney Generals web site for information.

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Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | June 1, 2012

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Refinance After Chapter 7

US Customs House – Bankruptcy Court Denver, Colorado

 

You filed a Chapter 7 Bankruptcy and all debts were discharged. You selected not to reaffirm mortgage(s). You have continued paying on your mortgage(s) and now you want the payments reported on your credit report. With one exception that is not going to happen. The fact is that there is but one permanent way to get your mortgage payments reported on the credit reports and that is to refinance your mortgage, when possible. When your bankruptcy was discharged, the Promissory Note portion of the mortgage was legally eliminated. As a result, the mortgage payments will no longer be reported to the credit reporting agencies. Consumers, for obvious reasons, cannot self-report their credit history. For further information as to why the bank or mortgage company doesn’t report your payment, refer to an earlier post I wrote on this subject.

How To Get “Credit History” For Your Mortgage Payments In Order To Refinance

How can you refinance when your present mortgage servicer does not credit report your mortgage payment? There are a couple of ways to do this. The least expensive is for you to obtain proof of your mortgage payments for the past twelve (12) month and provide this to your mortgage broker.  A temporary way to pull the mortgage payments onto the credit reports is via a proprietary system such as Rapid Rescore which is available only to mortgage brokers. Your mortgage payment history can be pulled onto the credit reports for the purpose of mortgage refinance by a mortgage originator in cooperation with a credit reporting service through a credit rescoring system. This is a temporary fix only; a bridge to refinancing once all other factors are in place. The only permanent way to get your credit report to reflect your mortgage payments is to refinance if and when you are eligible.

How To Qualify For Refinance After Chapter 7

• You have been paying your housing expenses [rent or mortgage(s)] on time every month for at least the last 24 months – in rare circumstances, 12 months.
• There have been no 30 day late payments on your mortgage(s) since filing bankruptcy.
• The CAIVRS Authorization system  provides a clean report regarding default on an applicant’s past Federal government loans or guarantees.
• Your current taxable income as well as that of the past two years proves you can pay your mortgage and your debt ratio is acceptable to the lender.
• The taxable income used to qualify for the home loan will continue for a minimum of three years.
• You did not have a junior mortgage prior to filing or it is also current with no late payments or see (*) below.
• No other real estate was included in your bankruptcy or was foreclosed, short sold or surrendered such as investment property or second home within 4 years.
• You have no new bad credit whatsoever and no open credit disputes.
• Your present property value is 10% greater than what you owe on your mortgage(s), i.e., the house can be sold to payoff the mortgage(s), in full, including the cost of sale.
• You have minimum 700 middle FICO® Score (not FAKO scores). To get an idea of your score range use the FICO® Score Simulator (garbage in = garbage out).
• All borrowers must have established new good credit and exhibit that they are managing it very well.
• If the property is a Condominium, it must be FHA approved for FHA home loans or VA approved for VA home loans.

Investor Overlays

Investor overlays are measures lenders take to manage risks. You may need to shop around as, some lenders require 36 months from the Chapter 7 Discharge. Most lenders require higher credit scores, say in the plus 700 range before considering a new loans. The higher the FICO® Score, the better the rate and the lower the cost of the rate will be offered. There is much more to be discussed on the subject of lender overlays

Reaffirmation Is Not Necessary To Refinance

If your mortgage lender/servicer/bank insists that the mortgage must be reaffirmed, you simply need to call on a more seasoned mortgage banker or broker. There are those who will tell you that you must reaffirm the debt. Neither your attorney or I would recommend doing this; nor should you, in any case, do so without seeking the advice of your bankruptcy attorney. Keep in mind that the reaffirmation must be done prior to the Discharge and that is only your bankruptcy judge that can approve a mortgage reaffirmation – my understanding is that many will not.

Readers of this blog most often read Credit Union Power and New Credit During And After Bankruptcy too.

(*) The junior or second mortgage lien was legally stripped from the property in the bankruptcy. Note: this is a very, very rare circumstance. Another option is: the mortgage has been settled, such as via a short payoff in which case a further time-out period may be required.

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Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | January 12, 2012 | Revised October 5, 2014

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

 

Credit Cards – Special Promotion Credit Cards, Credit and Charge Cards, Debit and Prepaid Cards

Recently, I received the following email comment from a potential client. She had, among other things, this to say on the subject of a Special Promotional Charge Card: “Just an FYI. I had my credit pulled by Chase about 6 weeks ago, and got a shock. My scores had dropped anywhere from 75 to 100 points. It turns out that I got dinged by [XYZ] Company earlier this year. I bought a new cell phone from then in January. They said if I opened a charge account with them, I could get a discount on accessories I needed for the phone. [XYZ] opened the account, then failed to send me a statement until the 3^rd billing cycle, and when I got the 3^rd one, I paid the $30 + $20 in fees immediately and asked them to send me the first two statements. I thought that was the end of it, but apparently they then reported me to the Credit [Reporting] Agencies.”

She protested the lack of statements and was able to get her credit reports corrected but it caused her great inconvenience as well as lost time and may have cost her the opportunity to obtain an improved mortgage credit rating and a lower housing payment. In retrospect, it appears those were pretty expensive cell phone accessories. The problem with this situation was not the promotional credit card, it was the 30 day late payment.

Should one take advantage of promotional charge or credit card offers?

As with nearly all business decisions, there is a risk -v- reward evaluation needed.  Keep in mind that opening new accounts can indicate increased risk to lenders and can hurt your credit score. Everyone’s situation is unique, but as a general rule, you should only apply for credit when you need it. Should you go on a shopping spree, and take advantage of all special credit card offers during that spree, one should expect to get reduced credit scores. This is part of the risk. So the question is: was the special  promotional reward worth it?

What’s the difference between charge and credit cards?

It is important to know the difference between a charge card and a credit card.  The Federal Reserve offers this brochure explaining the difference. In short, a charge card is payable in full on receipt of the monthly bill and most charge cards have no limit. A credit card  may have a high balance limit and can carry a balance at interest with certain minimal payments. On this, it will be helpful to review the ‘new’ rules governing how a balance on a credit card must be treated by the creditor.

What is a private label (store) credit card? 

The largest provider of store credit cards is General Electric Consumer Finance. A historic example of a GE store credit card is J.C. Penny. This particular private label credit card will display on a credit report as GE/JCP or GEMB/JCP. There are similar cards offered by many retailers from a variety of banks.

What is a pre-paid credit card?

First one needs understand that a pre-paid credit card is not a credit card; it’s actually a stored value card. In 2012, nearly 12 million consumers loaded more than $64 billion onto pre-paid cards. The main reason some consumers to this is they want to avoid going into debt. Pre-paid cards help folks with this goal because when the money stored on the card is gone, it gone. To be clear, the pre-paid issuer of the card does not report the  payment history to the credit reporting agencies.

What is an affinity credit card?

An affinity credit card is offered by an organization that the user recognizes and supports such as a travel club, alumni, university, social club, airline or other entity.

Image attribution

Financially Speaking™ James Spray, CCMB, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | November 3, 2011 | Updated April 3, 2014

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