Enhancing and using credit is key to financial health

Park State Bank Steven J. Raj 08-20-2013By Steven Raj

Credit remains a mystery—and sometimes a scary subject—for many people.

We know we’re likely to need credit at some point in our lives. Most of us have understood from an early age the importance of building and maintaining good credit. But questions linger about what exactly credit means, how to maintain and how to improve it.

As a banker, credit comes into play in discussions and decisions I make with clients nearly every day. I’d like to demystify the concept as well as provide some tips for how to better understand, better use and better maintain credit.

A good place to start is a clear understanding of what credit is and how it works. A simple definition of credit is your reputation for meeting your financial obligations, including your bills and any loans you have taken out.

Your credit score, determined by one of three large national rating agencies—and available at no cost to you for review—is a number between 300 and 850 that ranks your creditworthiness based on a compilation of your financial history. A good rating, generally considered 700 or higher, can help you obtain credit, or the ability to borrow funds to make purchases. The most common uses of your credit score are to obtain a credit card or to apply for a loan, often to buy a house or a car.

If the words of your parents or grandparents are ringing in your ears, it’s for good reason. Many of us have had the message emphasized to us since youngsters that we would one day need credit and that it was important to ensure we had a good credit score. Our parents and grandparents knew from experience about the daunting experience of seeking credit for one of those big purchases in life.

So how exactly does one go about building and keeping good credit?

First, pay your bills on time. Staying current with utilities, purchases on credit cards and store credit programs is essential to establishing and maintaining good credit. You may not consider your electric bill a form of credit, but it is. The utility company has provided you with service based on the trust that you will pay for what you have used at the end of every month. When you do, you bolster your credit. When you don’t, you damage your credit.

A strong credit score generally requires that you do some buying on credit as well. Those who always pay for their purchases on time but do so entirely with cash don’t leave much of a credit track record compared with those who purchase responsibly using credit cards.

Bankruptcies, foreclosures and other adverse financial judgments can have the worst impact on your credit. By following the basic tenets of credit—using it wisely and only for items you can afford—consumers can avoid these dangerous traps. Once you fall into one, it can take years to climb out.

What can you do to improve your credit score? In addition to using the credit you have and staying current with payments, you can request an increase in your credit limit. Just make sure you have been able to handle the credit limit you already have. Another avenue in credit building are credit counseling courses provided by your local bank or credit agencies.

Young people seeking to establish credit or those who want to improve their credit after experiencing problems also can participate in a credit-building loan program, offered at many local banks. These programs allow you to take out a loan, with proceeds placed in an interest-bearing savings account. You make payments on the loan to the bank. When the loan is paid off, you not only have a pot of money in a savings account but also have established a track record of paying off a loan, building your credit.

Credit is an important part of financial life in America. Our parents and grandparents were right when they told us that we would one day need credit and that it was important to build and maintain good credit. Doing this is our responsibility with how we spend and pay our bills, but your local banker is there to help if you have questions or needs.

Steven Raj is Vice President of Lending at Park State Bank in Duluth. You can reach him at stevenr@parkstatebank.com or 218-727-8001.

Posted in Uncategorized | Tagged , , , , , , , , , | Leave a comment

Here’s how to prepare when applying for a mortgage

Park State Bank Steven J. Raj 08-20-2013By Steven Raj

Spring weather has arrived in the Northland, and the home-sale market is heating up, too.

As more for sale signs pop up and more buyers look in earnest, it’s a good time to consider financing a new home and the steps you’ll need to take as a buyer to be prepared. I tell clients to consider the financing side of home purchasing before they start looking for that new home. That way, they know exactly what to expect and what they can afford. Here are some of the fundamentals you need to know as you begin the process of applying for and qualifying for a mortgage loan:

  • Gather your documents: Your lender will want to see evidence of your current financial situation as well as your financial history. You’ll need to provide your W-2 statement for the last two years and your paycheck stubs. If you are self-employed, you will need your personal income-tax returns from the last two years and possibly your business tax returns as well. Your lender needs to verify your income as well as your employment status and history. If you have gaps in your work history, be sure you can explain them and show how your situation now provides a steady income stream.
  • Credit is crucial: Lenders will want to review not only your credit score but also your overall credit depth. If you have a great score but not a lot of credit history, you still may not be able to qualify for a loan. Especially for first-time homebuyers, showing a strong history of borrowing and being able to repay those funds is important. Lenders usually like to see at least four lines of credit that have been open, with a solid repayment record, for the past 12 months. But be wary of opening a lot of new credit cards or other credit accounts right before you apply for a loan, as these may bring down your credit score.
  • Non-traditional forms count, too: As you assemble your credit documentation, don’t forget non-traditional forms such as proof that you are current and have made timely payments for rent, utilities and recurring expenses such as home and car insurance. These are not traditional forms of credit, but they count in your favor if they show you as a reliable payer of your bills. Ultimately, that’s what a mortgage lender wants to see.
  • Ask about credit help: If your credit score is not where it needs to be, or if you don’t have sufficient credit depth, ask your lender about credit-building tools that can help. Community banks often have “credit builder” programs that allow you to take out a loan, place the proceeds in savings and pay the lent money back over time. It’s an easy, simple and safe way of building your credit while also building up a savings account to help with your home purchase.
  • Debt-to-income ratio matters: After reviewing your financial situation, your lender will do a calculation to determine your debt-to-income ratio. This is simply a tally of all of your credit payments and other recurring bills, along with your anticipated new house payment, divided by your income. Your debt-to-income ratio should never exceed 45 percent. If it does, you may only qualify for a smaller house payment, may need a larger down payment or will have some work to do to get your finances in better shape.
  • Explain large deposits: If you have recent large deposits in your bank account, your lender will ask you about them. Be prepared to explain them. Your lender needs to be sure that these are not borrowed funds that you will need to repay at some point. Keep a paper trail of any large deposits, such as proceeds from a car sale or funds transferred from other accounts.

Shopping for a house is exciting, whether it’s your first one or simply a new place to call home. You’ll be prepared to make the deal on the new house you want if you know what to expect when it comes to financing that purchase—and especially if you have started early and are pre-qualified to make an offer.

Steven Raj is Vice President of Lending at Park State Bank in Duluth. You can reach him at stevenr@parkstatebank.com or 218-727-8001.

Posted in Uncategorized | Tagged , , , , , , , , , | Leave a comment