1. Get your credit report.

If you are a U.S. consumers, you are entitled to one free credit report a year from each of the three national credit reporting agencies (Equifax, Experian and TransUnion) and you should get a copy of your report from each. – visit www.annualcreditreport.com to find out more.

Contrary to some wrongful belief, checking your credit report – or your FICO Score – will not have a negative impact on your report or score.

2. Check your FICO Score.

The 3-digit FICO Score is a summary of the information contained in your credit report. Lenders use FICO score to assess your potential credit risk.

Your FICO Score and credit report will give explanation why lose points, review those closely.

3. Correct any errors.

You want to make sure the information in your credit file is accurate – even small clerical errors could have a big negative impact on your FICO Score. If you find an error, follow the dispute resolution processes the credit reporting agencies have created and manage. They have 30 days to investigate and resolve the dispute. If erroneous information is discovered and removed from the report during the dispute process, your FICO Score will reflect the revised information the next time your score is requested.

4. Pay your bills on time.

Perhaps easier said than done, but this is the most important factor in your FICO Score. The more frequent and recent your missed payments, the greater the negative impact on your score.

Don’t get discouraged: it’s not the end of the world if you have a history of missed payments. The FICO score is “forgiving” by design as the points deducted for reported missed payment information gradually lessen as time passes, provided there are no additional new missed payments.

5. Pay down your debt.

The amount of credit debt you carry can have a big impact on your credit score – especially debt on revolving credit (credit cards, retail store cards, etc.). A key factor in the score is your revolving utilization percent; for example, a $7,000 balance on a card with a $10,000 limit = 70% credit card revolving utilization. The higher the utilization percentage, the more points deducted.

A great goal is paying down your balances so that revolving utilization is 30% or less. In addition to helping your FICO Score, you’ll pay less on interest each month.

6. Only apply for credit when needed.

Applying for credit (an inquiry) and opening new credit could cause your score to decrease.

Does this mean you should never seek new credit? Not necessarily – but you should be mindful. If you need to get a new car or you’re planning for a student loan, take the time to research rates, lenders of interest and financing options before you apply. This strategy can help reduce the number of inquiries posted to your credit report and help you secure a more competitive interest rate.

7. Be mindful of being a co-applicant or co-signing for a loan.

Many people agree to be a co-applicant on a loan or co-sign for credit with a family member or friend without fully understanding the potential consequences. If approved, you are legally responsible for that debt.

When you co-sign a loan or are a co-applicant, the lender will usually pull a credit report on everyone listed on the credit application form and that can result in credit inquiries being posted on your credit report. In addition, that approved credit loan or line will likely be reported as a new credit obligation on your credit report shortly thereafter – including credit balances and any missed payment information all of which can have an impact on your score.

8. Think twice before requesting a line increase on your credit cards.

Imagine this: you’re planning a big purchase, or going on that big vacation next week and would like some extra credit. Why not call up your credit card company to request a line increase?

By proactively making this request, you are seeking additional credit and the credit card company will likely access your credit report to help them make the decision to grant that line increase request and by how much. That credit inquiry could impact your score.

9. Don’t close unused, inactive credit accounts. 

You might have several credit cards or retail store cards sitting in your sock drawer, gathering dust. It may seem like a good idea to close them – but this type of action will not increase your score, and could potentially hurt it. If you don’t use the cards anymore, simply cut them up and dispose of properly – but don’t ask the credit card company or credit reporting agency to close them.

10. Be patient – it takes time.

This may be the hardest step of all, but it’s extremely important since changes to your FICO Score do not happen overnight. The score is complex and examines data in multiple ways to determine a consistent pattern of paying bills on time and keeping debt levels low. As you demonstrate those behaviors, the score will adjust over time reflecting your lower level of risk.

The post 10-Steps to Improve your FICO Score appeared first on DebtKid.Com.

But wait! There are drawbacks!  One of the major concerns is how bankruptcy will impact one’s credit score.

The degree how bankruptcy impact one’s credit score depends largely on where one’s credit score stands before filing.

According to FICO, bankruptcy and other credit mistakes affect your credit score. Using a mock scenario with two different credit profiles, FICO showed a bankruptcy could cost up to 240 points for someone with a 780 credit score and 150 points for someone with a 680 credit score. While the person with the higher credit score loses the most points, in both examples the individual credit scores end up around the same place, 540 and 530.

The higher the starting FICO score, the more it may fall. After bankruptcy, the record may impact your credit score for 10 years.

These days, if you want a loan with good interest rate, you need a credit score of above 720. Protecting your reputation actually saves you money.

The post Bankruptcy Affects One’s Credit Score appeared first on DebtKid.Com.

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Therefore a house is a lousy investment.

I concur with him. The house I purchase in Flower Mound, Texas in year 2000 cost me $240,000. Right now I have a contract on it for $315,000. After 14 years, it appreciated about 31% in total, or about 2% per year.

But most of us buy a house for reasons other than investment.

The gratification of putting a roof above oneself and the family cannot be measured with a price tag or rate of return.

According to Census Bureau, the US home ownership stands at 64.9%, at or near 18-year low. Still, most of us still end up with buying a home. (Read: http://economix.blogs.nytimes.com/2014/01/30/why-the-homeownership-rate-is-misleading/?_php=true&_type=blogs&_r=0)

I just bought recently. I have bought my current home and am the in process of selling my previous one.

Mortgage interest rate is low, in absolute terms; houses prices are relatively low, compared to the historical highs reached before the financial crisis.

Of course if you want to buy a house in places like San Francisco, where people put 70% of their income to pay mortgage, you will disagree with me on both mortgage rate and house prices.

But the home sale across the country is not taking off. Why?

Dow payment, rising interest, and lenders’ tight underwriting guideline are a few things blamed for the slow real estate market.

I have certainly experienced the effect of lenders’ tight underwriting guideline. When my lender, Provident Funding, questioned a very legitimate tax exemption on the housing, I thought they have gone too far.

Taxing entities typically grant tax exemptions to people who use the house as a home – it is called “homestead exemption”.  In the city and county I am living, the homestead exemption is 20%. In other words, one does not have to pay tax on 20% of the appraised value.

But since when I purchased the new home I was still in ownership of the old home, the lender excluded the tax exemption in calculating how much mortgage I can afford.

That was fair enough, as I had not sold the house yet, no had I put the house for sale.

The house I was going to purchase locates in an area called “Dallas County Utility and Reclamation District” (DCURD).  The name sounds very official. The truth is, it has nothing to do with Dallas County.  It is a master-planned district, called “Las Colinas”, a city within the city of Irving. In order to build canal and lake system in the area, a tax authority is established. Tax rate is about 1.8% of the property value, but for residential houses, the tax is virtually exempted.

If the tax is not exempted, it will make the tax burden on the house very unattractive.  Combined annual property tax rate will about 4% of the house.  It is like instead of paying for a 4% interest rate on the mortgage, I will be paying 8% interest rate.

The seller, who had owned the house for nine years, had enjoyed tax exemption each and every year.

But since it is virtually exempted, it should be a no-issue, right? Wrong?  Of course the Provident Funding personnel would not take my word for it. So I requested DCURD send them a statement, which states positively that my house is exempted from DCURD tax for the next 50 year and the DCURD tax rate itself is set to decline in the next five years or so.

No use. For qualification purposes, un-exempted tax rate will be use, said the mortgage underwriter.

After the financial crisis, it is understandable that lenders tighten the underwriting guideline; but to the extreme of tossing out a very legitimate tax exempt, I think they have gone too far.

The post My Lender Ignored a Very Legitimate DCURD Tax Exemption appeared first on DebtKid.Com.

That gets me worried.

In this series, I share the notes that I used to talk to them about money.

First I am focusing on credit.

What is Credit?

Credit is other people’s willingness to let you use their money that you will repay some time in the future.  It is a privilege, not a right. By “other people”, I mean banks, credit unions, credit card companies, or even your relatives (parents, for example).

“Credit” can be used inter-changeably with “loan”.

How do you earn credit?

To earn the trust of the “other people”, you need to demonstrate you can borrow money and pay back on time. As stated in the good old book: “Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much.” (Luke 16:10)

What are the types of credit?

Categorized by how the credit is extended and how it is paid back, credit falls into the following three categories:

Installment Loan: require regular payments, usually monthly, until the principal is paid off. Car loans, student loans, and mortgage all fall in this category.

Revolving Credit: includes bank credit cards, store credit cards, and home equity line of credit. You are required to pay at least the minimum payment by the due date. You can pay the minimum amount, the full payment or anything in-between. You can keep using the credit as long as you pay the minimum and stay within the credit limit.

Service Credit: used for monthly utility bills, such as electricity, gas, and yes, your cell phone bills. You set up an account, use a service and get billed by the service provider.

What Are the Advantages of Credit

• You can get instant gratification, “buy now and pay later”;
• Usually, no interest is charged when credit card bills are paid in full by due date;
• Credit cards are safer to carry around than large sum of cash around;
• Keep record of how you spend money so you can analyze your spending habit;
• Some credit cards offer “bonuses” such as cash back or frequent flyer miles.

What Are the Disadvantages of Credit

• You can forget how much money you have spent and lead to overspending
• Interest costs can be very high. How high? 15-20% for unpaid credit card balance is very common.
• If you only pay the minimum each month, then the pay-off period will extend to very long
• Since you owe so much money to other people already, you may not have much buying power left in the future

What is a Credit Report?

Lenders do not take your word for it when they come to determine whether to extend credit to you, instead they pull your “credit report”.  It is kind of like your “school report” but lists different things. It describes your past use of credit, such as being on time in paying back debt, types of credit accounts opened, number of loans applied for, and the amount of outstanding balances.

Three companies, called credit bureaus, gather information about you and give it to lenders. These three companies are:

• Equifax (www.equifax.com)
• Experian (www.experian.com)
• Trans Union (www.transunion.com)

You can order you credit report once a year to check for errors or see if your identity has been stolen. Following the directions that come with the report, you can fix the errors.

What are Credit Scores?

Sometimes referred as a FICO score, a credit score is a three digit number that describe your trustworthiness, or your future bill-paying behavior. It ranges from 300 to 850.  It reminds you of your SAT scores?  Fortunately, you can have a low SAT score but achieve a high credit score. Lenders look that the number and decide whether to give you a loan, or if they do, on what terms (interest rate, down payments, etc.).

These factors affect your credit score:

• Previous payment history
• Amount money owed
• Number of recent credit inquiries
• Length of credit history

In conclusion, you should be smart to build, use and maintain your credit-worthiness.

The post Money Talks for Young People (1): Tips and Traps of Credit appeared first on DebtKid.Com.

Interested reader can read my earlier blogs on this matter here:

http://www.debtkid.com/my-journey-to-get-a-mortgage-loan-the-beginning

and here:

http://www.debtkid.com/cope-with-discrimination-against-self-employed-in-mortgage-lending

Yes, it was Provident Funding who was giving me all the hard time.  As I have closed on my house, I am not afraid to bad mouth them a bit.

I have had a mortgage with this lender for my previous house since 2004.  For the past 10 years, I never missed a mortgage payment to them, but this time around, they acted as if they never knew me.  It is not that the mortgage service side of the business and the mortgage originating side of the business never talk. On the contrary, they do.  My mortgage broker told me he actually talked to the same people when he tried to contact them on the service side of the business.

It is just that the mortgage underwriting business has become so stringent since financial crisis of 2008-2009.

It is all about debt-to-income ratio. It is all just business.

After Provident Funding arbitrarily assigned an annual income of $56,000 for me, reducing the debt level becomes crucial. My debt-to-income ratio came a bit above their underwriting guideline.

A couple of things worked against me to that front. Here are two of them that played a role in the story:

1. I had a monthly car lease payment of about $600
2. I had not sold my original house yet before I closed on the new house. Mortgage payment:  about $,1300

So first a lower rank loan officer suggested me to pay off the leasehold.  I was about one-third into my three-year car lease. Paying off the lease early is to accelerate the next 20 or so payment to today. Effectively the loan officer was asking me to pay for the interest but forsake the benefit of holding onto the money. Not very smart financially, not I was promised that if I did that, I would get my loan.

Well, it did not solve the problem. A couple of days later, a senior loan office reviewed my case and ruled that even I paid off the leasehold, I still do not own the car outright. In the end, I still owed money on the car, so paying off the lease did not help.

That left me with little choice but to pay off the mortgage on the original house. A reduction of $1,300 in monthly payment goes a long way to bring down the debt-to-income ratio.

The post Paying off a car lease does not help mortgage application, Paying off a mortgage does appeared first on DebtKid.Com.

As I disclosed in the previous article of this series, http://www.debtkid.com/my-journey-to-get-a-mortgage-loan-the-beginning, my wife has been working for a company and I have been self-employed, each with a long and stable history. I have been paying myself around $100,000 a year and my wife has a gross income somewhat less. Even though we are not a straight self-employed family,  he extra scrutiny I received during the loan application made me think that self-employment is heavily discriminated.

Unlike some other people who do not qualify for a loan because they take business deduction aggressively and in the end show very little business income. In doing so, they can minimize tax. Unlike wage-earners, self-employed people actually had to pay twice as much tax on social security tax. So the incentive for people to deduce as much as expenses legally and pay themselves as little as possible is definitely there.

I, on the other hand, have been proudly paying myself a very comparable wage and paying the government whatever taxes that were due.

There are people suggest that instead use net income on the business, lenders should use gross income to qualify self-employed. Maybe during the hay-days of real estate bubble, but we are in 2014. Now, it is in only in one’s dreams.

Oh, Lord, just one more bubble!

Aside from my personal tax returns, I also submitted W-2 forms and the K-1’s for the two LLC companies that I own shares in for both 2012 and 2013.

There are actually three companies under my control and I will explain one day how I ended up with so many companies.  But that is not enough, the lender also requested the tax returns for the past two years of the three companies that I own. So there are 6 pieces documents in addition.

I admire their thoroughness in requesting documentation. If you think about it, in the paper trail, personal tax returns have to agree with the W-2’s, which have to agree with the tax returns of the companies; also, the K-1’s have to agree with the tax returns of the companies.

Any discrepancy could invite questions and demand explanations, but in my case, they all agree with each other.  Lucky me.

And the lender do not just want to take my word for it, they had me sign T4605’s so I give them permission to obtain copies of my personal tax returns as well as the tax returns for each companies from IRS. That is four pieces of extra paper I had to sign and submit.

So after all these work, you will think they would show that I have about $100,000 in annual income?

Wrong!  Somehow they think I will make about $56,000 each year based on the documents I submitted.

The mortgage broker could not explain to me what kind of math they used.

If you are self-employed and looking for buying a house on mortgage, from now on for two years, do the following:

• Be less aggressive on your business expenses deduction,
• Pay yourself a decent wage,
• And finally, keep good documentation, for you definitely need it.

I will disclose who the lender is once the deal is closed.  We are closing on the house this week.

Accidentally, debtkid version 1.0 also had a piece on this subject. Check it out:

http://www.debtkid.com/home-loans-for-the-self-employed-good-luck

The post Cope With Discrimination Against Self-Employed In Mortgage Lending appeared first on DebtKid.Com.

My tax was done back in February. I need the updated information to complete the applications for financial aids for my three children, and as it turned out, I would not qualify for any mortgage loan if I did not have the tax return of 2013.

Early birds get the worm.

If you are going to miss the deadline, do not at least forget to file for extension.  Per IRS web site (http://www.irs.gov/uac/Extension-of-Time-To-File-Your-Tax-Return):

If you are not able to file your federal individual income tax return by the due date, you may be able to get an automatic 6-month extension of time to file. To do so, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return  by the due date for filing your calendar year return (usually April 15) or fiscal year return. This form is also available en español.

I used to believe at least partial of the blame for people miss the deadline is the complexity of our tax code. The current tax code calls for different tax rates at different income levels for different kinds of income, allows numerous kinds of deductions. The task to complete a tax return is a challenge to this country’s average math and business education level.

Of course, politicians love this game. It is a pleasure to design and determine other people’s fortune. Power intoxicates people. If the tax rate is flat and no deductions apply, what else can the President, Senators, and Congressmen/women trade horses on?

So I am not optimistic about the flat tax proposal. It will not happen.

Understanding the tax code and making tax-smart decision is one’s life is mission impossible, so let me put that aside for now. I was sharing my latest experience of applying for a mortgage with two friends during a church function, and the topic of property tax exemption emerged. What I found out was alarming.

In Texas, we do not have to pay state income tax, instead, we pay a higher property tax than folks living elsewhere. Typical property tax rate for residential is between 2.0% to 2.5%, depending on the city one lives in. Each year, the tax appraisal office will send residents a notice stating the appraisal value of the house and tax collector will send the tax bill based one value. The tax consists of multiple components, for example, my current house has town tax, school district tax, and county tax.

On my tax bill, school district tax rate 1.47%.  But the county also allows a $15,000 homestead exemption, which translate about $210 less tax I have to pay. All it takes is to fill out an claim form and the exemption applies for as long as one occupies the house as a primary residency.

Between the two friends I talked to, one has lived in the same area for over ten years and knows nothing about the homestead tax exemption. The other has live here for three years but “has not yet find time” to fill out the claim form.

My belief that complex tax codes is to be blamed has shaken somewhat.

If you read this article, just google “homestead tax exemption for x county”, replace the “x” with the name of the county you are in.  You may be overpaying for property tax over the years.

Also, there are still two days left. File your tax on time this time around. You may find some other tax breaks that you have managed to avoid.

Diligent birds get the worm.

The post Diligent Birds Get the Tax Breaks appeared first on DebtKid.Com.

But digging into the reasons given by the three bureaus highlights one major differentiating factors.

These are the key factors that impacted my credit scores, as spelled out in the report:

1. Too many inquiries last 12 months (Transunion, Experian)
2. Proportion of loan balances to loan amounts is too high (Transunion, Equifax, Experian)
3. Length of time revolving accounts have been established (Transunion)
4. Too many accounts with balances (Experian)
5. Time since delinquency is too recent or unknown (Equifax)
6. Level of delinquency on accounts (Equifax)
7. Number of accounts with delinquency (Experian)
8. Time since most recent account opening is too short (Transunion, Equifax)

And these are the key factors that impacted my wife’s

1. Too many inquiries last 12 months (Experian)
2. Proportion of loan balances to loan amounts is too high (Transunion, Equifax, Experian)
3. Too many accounts recently opened (Transunion, Experian)
4. Too many accounts with balances (Experian, Equifax))
5. Lack of recent installment loan information (Transunion)

As one could tell, my wife has got a far shorter list than me. Factors 1-4 are essentially the same for two of us.  The real difference is really item 5-7 for me and my wife does not have them.

Item 5-7 bears some explanation, for my reputation is on the line.

Delinquency? Delinquency for me? I never knowingly missed a payment in my life and I am proud of the fact.

What humbled me here are the things I did not know and beyond my control.

All three items all stemmed from a missed payment of $60 to Kohl’s Card in the middle of 2012. The card has a credit limit of mere $1,000. I am the only person shop is the discount clothing store so no card is issued under my wife’s name.

The statement got lost in the mail (which happens, as we sometimes receive credit card statements for our neighbors because of USPS’s mistake), and I did not know the existence of the bill and naturally did not pay it. To the credit of Kohl’s, it had an automatic voice machine call me a number of times since they did not receive any payment on due date. I habitually hang up on those phones calls, thinking it was some kind of telemarketing. I did not find out about it until I received the bill for the next months.  I called back and explained the situation. Kohl’s was kind enough to waiver any late fees and interest, but it found its duty to report to the credit bureau.

And it has been hurting my credit score ever since.

Lesson learned: pay your bill on time no matter how small it is, otherwise it will make you less creditworthy than your spouse.

The post How Come My Credit Scores Are Lower Than My Wife’s appeared first on DebtKid.Com.

Its stock price dropped more than 3%.

Given my experience in the past couple of weeks in getting a mortgage, I am surprised at how difficult it is nowadays for people to get loans from lenders. In my journey, I flirted with the idea of getting a loan from JPMorgan Chase, and dropped the idea in a couple of hours.

It has been a noteworthy experience and I am going to share it with my readers.

At the beginning of March, 2014, my wife and I entered a contract on a house in Irving, TX. We are moving about 15 miles closer to my wife’s work place. The distance translates into about 30 minutes of commute time each way. Think about CO2 she is producing less than otherwise over the next 20-30 years.

My wife works for a company and draws a steady salary and she have worked there for almost 10 years now. Through her employment, we also have medical insurance. Every entrepreneur should have a hard working wife like mine.

I have been self-employed for the past 7 years and have paid myself around $100,000 in salary during the past two years with year-over-year growth. I disclose these numbers to illustrate my point, not to bragging about myself. Plus, it is not much, is it?

We were confident that we should be able to get a mortgage easily. We were wrong.

The closing date was set on April 8, 2014, some 40 days away, leaving ample of time for us to arrange the financing. We were wrong.

We are getting our loan from a mortgage broker. As a starter, aside from filling out and the standard forms that they provided, these are the documents he required:

1. Federal Tax Return for both 2012 and 2013 (2)
2. W2 forms for me and my wife for both 2012 and 2013 (10)
3. K-1’s for two LLC companies that I own shares in for both 2012 and 2013 (4)
4. Property tax statements and insurance premium statements for the three rental homes that I own (6).
5. Bank statements for the past two months that shows we have enough cash to cover the down payment of 25% of the selling price (2).

So that is 24 documents in total. This is indeed just the beginning.

After receiving our application material, the broker ran our credit report. It has been awhile since last time we saw one of these. My scores from the three Credit Bureaus were around 735 and my wife’s were 780. Somehow the Credit Bureaus think my wife is more credit-worthy than me. Fine with me.

I am the primary borrower so my scores matter more. 735 is still a good FICO score. So It is still better than more than half of the country’s consumers.

So we should have no problem in getting a loan to buy a dream house, right? Wrong!

The post My Journey to Get a Mortgage Loan — The Beginning appeared first on DebtKid.Com.

I told him not to work. Instead, he should focus on studying and his scholarship depends on his grades. If he drops below “B” average, he may lose his ten thousands of dollars in scholarship. No part time job as a cashier in the world could make up for the loss.

In the mean time, his grades suffered.

Well, the boy just has to learn his lesson the hard way. I am just a middle-aged father, what do I know?

One side effect is that he actually made about $6,100 gross income, divided among two W-2 forms, above the $5,950 line that mandate an dependent to file tax return. \

He employers have been very lenient towards him, for all in all, he paid $41 in federal income tax. Of course, that is after Social Security and Medicare withholding.

So I helped him file tax return for the first time in his life. He is getting all of the $41 back. The check has been in my in-box for two weeks now for he does not come home very often.

In all seriousness, the best thing to do with his money is probably open an IRA account and put $5,500 into the account as 2013 contribution.

We were talking about starting investing at young age and let compound growth propel you to become a millionaire. Very few of us started to invest when we were just born, but never to late to start.

Last time I checked, there is no minimum age to set up an IRA account, as long as one can show he/she held a real job and made real money. Kids could make money by sweeping floor, watering plants, or walking dog, but those jobs are kind of hard to keep good records for.
But as soon as one made money that comes with a W-2 form, he/she should seriously think about opening IRA.

As a parent, I like the idea that my kid locks his money away in an IRA account. It will help keeping him away from many kinds of trouble.

The post There is No Minimum Age to Start an IRA Account appeared first on DebtKid.Com.