Credit Card Basics

Credit cards can be useful tools or they can be your financial downfall. Credit cards are a quick, easy way to establish credit history, but can easily get out of hand and become the very thing that destroys your credit.

The basic problem with credit cards goes back to how easy they are to use. Too many people over use their credit cards and quickly find themselves maxed out and with a moderate to large sized loan to pay back. Credit cards that are maxed out are usually difficult and expensive to pay back. The outstanding balance is on a line of credit, so there is no set amount of time in which the balance must be paid off. This means that when the balance is paid down, credit becomes available and typically gets used again by the cardholder, thereby maxing it out again. Also, the minimum monthly payments on a maxed out credit card have very little impact on the princple balance.

What is the moral of the story?

Simply put, don't max out your credit cards. Don't treat your $5,000 credit limit as if you have an extra $5,000 to spend. Rather, regard it as a safety net to be used in emergencies. In a perfect world, that is the way to handle your credit cards. In a perfect world. Most people, however, end up maxing out their credit cards at some point and end up making only the minimum monthly payment. Again, the credit cards make spending money very easy and most credit cards have a healthy interest rate as well as various fees that make it difficult to get paid off.

If you are one of these people, the best thing you can do is to put all of your disposable income that you can into gettng that card--or cards--paid off as quickly as possible. Having a balance on a credit card that is more than half of the total limit has a negative effect on your credit score. When you pay your balance down below the 50% mark and when you pay it off entirely, you will see an increase in your credit score.

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Home Buying--Getting Ready

Buying a home is one of the largest financial transactions that most of us will make in our lifetimes. Especially considering the new and higher standards of mortgage approval, it is a very good idea to take the time to prepare before buying a house. Here is a quick checklist of some of the most important and relevant things you can do to prepare:

Know what is on your credit report before you apply for the loan. You can use the free annual credit report option and pay a little extra to get your three FICO scores and all three complete credit reports. This can be done online in a matter of minutes. It is a good idea to do this prior to making a loan application, because it will allow you the opportunity to anticipate and deal with any issues on your credit report that could otherwise slow your loan process down and cause you to miss a sales contract closing date.

Budgeting: Knowing what your FICO score is will allow you to have a hypothetical conversation with a loan officer and find out what kind of rate, payment and down payment you would have on your purchase loan. This will allow you to factor in and budget for the money out of pocket, the new monthly mortgage payment, and will give you a rough idea of what price range you should be looking in when you are shopping for your new home.

Down Payment: Another result of the mortgage meltdown is that it is very hard if not impossible to buy a house with no down payment. Unless you are able to qualify for a VA loan, you will have to make a down payment of at least 3% of the purchase price. Depending on the price of the home, even 3% can be a large amount. Plan for this and be aware that most lenders will require valid documentation of where the down payment is coming from and some will even require that the down payment funds will have been in your account for at least 30 days.

Reserves: In addition to having funds available for the down payment, many lenders also require verification that you have reserves---money in the bank---sufficient to cover two months of payments on the new loan including principle, interest, tax and insurance---your loan payment plus escrow, in other words.

Pay off Debt: Be aware that lenders will look closely at your debt to income ratio. Anything that shows on your credit report as an open account with a balance will be factored into your monthly outflow. Most lenders will require that your monthly outflow including your new mortgage payment be less than 45% of your gross monthly income. If you can----keeping in mind the down payment and liquid reserve requirements---pay off as much existing debt as you can a full month before you start applying for mortgage financing. This will give your credit reports time to update and reflect your new, lower debt load. This can also have the affect of improving your credit score.

These are just a few of the most important things you can do to prepare yourself for the home-buying process.

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