Debt Settlement Blog

Bad credit mortgage options remained non-existent for struggling homeowners seeking home refinancing with fixed rates and reduced monthly payments.  Millions of homeowners have been turned down by mortgage lenders across the country, because of low credit scores, delinquent mortgages, negative equity or employment instability.  Some homeowners may qualify for loan modification plans if they happen to have their mortgage collateralized by Fannie Mae and Freddie Mac.  However, only conforming home mortgages qualify for the federal mortgage modification program.  Jumbo mortgage loans do not qualify for the FHA mortgage, FDIC or federal foreclosure prevention plan, even if the homeowner resides in a high cost area like California, New York, Virginia or New Jersey. 

Today the Minnesota-based credit score developer FICO released the results of a study measuring the breadth of credit card limit reductions as well as the subsequent impact to consumer’s FICO credit scores. The study is the first of its kind since credit card issuers began to heavily ramp up their credit limit reduction activity in early 2008. Here are some highlights of the FICO study: 16% of the U.S population had their overall available revolving credit reduced between April and October of 2008. With credit bureau databases holding 200+ million consumer credit files, this would seem to indicate that at least 32 million cardholders lost some of their credit limits during the study timeframe of April 2008 through October 2008.

11% of the U.S. population, or 22 million consumers, lost some of their credit limits for a reason other than risky credit activity such as making payments late, having accounts go to collections, or having a negative public record added to their credit report during the study time frame. Credit card inactivity or low balances likely caused the lowered credit limits for this group. The median FICO score in this group is 770, so the adverse changes to their credit limits are not a result of poor credit risk.

A recent Fair Isaac report indicated that 10 million consumers acknowledged that their credit limits were reduced by a credit card company or home equity lender.  The financial companies that hold the debt on these credit cards claim that the maximum revolving debt for these accounts changes “because of some sort of risky credit activity including late payments, accounts in collections, or a negative public record added on their credit reports.”  However thousands of consumers with good credit scores ( borrowers with no late payments and no increased risks) reported to have their credit lines cut or significantly reduced without any changes in the credit profile.  Many of these consumers also claim that the reduction in credit limits caused their credit scores to drop on average of 40 points. 

More than anything else, Sondra Page wants to be a homeowner again.  Before she qualifies for a mortgage loan, she needs to increase her credit score. And, to elevate her score, she has to reduce her debt to income level, so that home loan underwriters feel comfortable lending her money to a finance a new home.

It’s a problem common to many Americans as today’s credit crunch is putting pressure on consumers like Ms. Page to pay off or make a significant dent in their debt.  To achieve that, most credit counselors suggest that borrowers need a debt reduction plan. “If your goal is getting out of debt, the first thing to do is put together a strategy of attack,” said Todd Mark, vice president of education at Consumer Credit Counseling Service of Greater Dallas.   Ms. Page’s debt problems started after the breakup of her 32-year marriage four years ago.  “When he divorced me, I didn’t have the finances to pay the bills,” said Ms. Page, 58, of Dallas, a finance clerk at a church school. “He paid the bills. All I wanted to do was to hang on to my house.”

So she stopped paying some bills go so she could pay her mortgage. Then, last year her home was damaged in a fire. After her lender took its share of the insurance proceeds to pay off the mortgage, there wasn’t enough money left to repair the home.  When Ms. Page, then a homemaker, asked about a home equity loan to repair the house, the bank told her that she did not qualify for any type of home improvement loan because her credit score was too low. She applied with other mortgage lenders but was turned down because of her credit score.

A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time. The score helps home loan lenders estimate the chances that you will repay a loan. The higher your credit score, the better deal you’ll get. As the credit markets have tightened in recent weeks, lenders have raised their standards and now are requiring higher credit scores before they’ll loan money. That’s why consumers like Ms. Page need to attack their debt.

Prioritizing is key

First, counselors say, know what you owe. Add up your debts and determine what category they fall under. Is it secured debt, which has collateral, such as a car or home, backing it? Or is it unsecured debt, such as credit cards? Or both?   Prioritize your debts. Secured debt should be paid first because you need a roof over your head and a car to get to work.  To ensure that you don’t miss a mortgage payment, consider setting up your online bill-paying to have the mortgage check sent out on the first day of the month.  “Pay additional principal each month [on top of your regular monthly mortgage payment], even if it is only $50,” said Craig Jarrell, president of the Dallas Region of Pulaski Mortgage Co. “Just send in something extra on a regular basis.” That will help you pay off the mortgage more quickly.  Debt relief plans, like debt settlement, consumer credit counseling or bankruptcy should only be considered if you absolutely can no longer afford your credit card payments.

To eliminate credit card debt and consolidate bills, credit counselors advise putting the most money toward paying off the card with the highest interest rate first, and make minimum payments on the rest to stay in good standing with your creditors.  After you pay off the card with the highest rate, move on to the one with the next highest rate and so on.  While that’s the most practical advice, much of money management is also psychological. So, if you have smaller balances that you can pay off, do it. It may not be the cheapest approach, but it will help you succeed in the long term.  “Some people need those short-term successes to stay on the plan,” said Mr. Mark.  An important point on minimum payments: Pay as much over the minimum as possible.  “If you’re making minimum payments, you’re paying pennies on the principal each month, and it takes forever to pay off the actual debt,” Mr. Mark said.  You have to lower the outstanding balances of the principal, excluding interest and other charges. Paying as little as $5 more than the minimum payment will make a huge difference in how long it will take you to pay off that credit card.

Read Complete Debt Relief Article > By Pamela Yip