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.

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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.

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When you shop for a car, shop for the loan as well

Park State Bank logoBy Dale Lewis

I’m pleased to see how diligent most people are these days about shopping for a car. But I’m equally disappointed to see how many of them fail to apply that same diligence when it comes to shopping for the money to buy a car.

When they’re looking for the right make, model and price of car, they search high and low, at local dealers, sometimes out of the area and certainly online. They’ll make sure they understand the value of the car they want, comparing new-car prices and scrutinizing reseller value books for used cars to make sure they’re not paying a penny more than they should.

But when the negotiating is over and they’re happy with their deal, they’ll stop. The problem is, they’re only about halfway through.

The financing that most buyers need to purchase a car is at least half of the battle. But too many buyers fail to realize the importance of shopping for the best vehicle loan.

It’s not difficult. Most importantly, the shopper’s tool needed to get the best loan deal is the same one that the diligent buyer has already used to find the best car at the best price.

The best advice I can offer is don’t take the first loan offer you get. You wouldn’t do this with your car choice or price. But that’s exactly what many buyers do when they have picked out their vehicle, agreed on price and are ready for the financing.

Start shopping for your auto loan before you shop for your new vehicle. Narrow your search to several respected lenders, offer your credit history and see what they propose.

You can include your car dealer’s lending options in that search. But don’t forget traditional lending resources such as your local community bank, especially if you have a relationship with that bank. An independent lender doesn’t have the need to sell you a vehicle. As a result, they can look at the loan as the separate transaction that it is.

Check rates, loan terms and payment options. If one loan program looks good, ask other lenders if they can beat it.

Also, consider taking dealer incentives such as money off the purchase price instead of a lower loan rate and then trying to match or beat that rate with another lender. Doing this may give you the best of both worlds.

When you offer your credit history to lenders, it will count as an inquiry on your credit history. But if you do your loan shopping in the space of two weeks, it shouldn’t impact your credit score any more than a single inquiry.

As you shop for your loan, or even beforehand, familiarize yourself with your credit history and know your credit score. This will give you a firm grasp on your credit picture and will let you know if what lenders tell you is in line.

Don’t be so eager initially to talk monthly payment with your lender. Yes, this is important in the end. But one way many car buyers end up paying a lot more is by lowering their monthly payments and extending the loan term for a longer period—sometimes much longer. Do at least rough calculations about what you can afford, in terms of a down payment and your monthly payments. Think also about how long you plan to own the car as you’re determining your loan term.

These are just a few tips for those in the market for a new or used car. It’s great to be aggressive when it comes to finding the right vehicle at the right price. But remember that when you’ve struck a deal on a new car or truck, you’re only halfway done.

Dale Lewis is president of Park State Bank in Duluth. You can reach her at president@parkstatebank.com or 218-722-3500.

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