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livelaughlove21's avatar

Questions about loans and credit?

Asked by livelaughlove21 (15713points) April 11th, 2012

This past December, my fiance and I purchased a truck and got an auto loan through Wells Fargo. It’s a 6-year loan for a little over $10,000. Before this, I had VERY limited credit and he didn’t even have a credit score. Now, we have this loan, a secured credit card each (limit of $200, used to buy gas and then paid in full each month), and an unsecured credit card each (limit of $750 and $1000, payments paid on time each month). We really want to be able to stop renting and buy a home, hopefully around the beginning of next year if possible.

**Questions**
1.) Technically, the auto loan has my name listed first with my fiance as the cosigner. Does this affect his credit the same as mine, or does it only affect his if it goes unpaid?
2.) With the amount of credit I’ve described, is it realistic to think that we may be able to get approved for a mortgage (maybe a first time homebuyer’s program) at the beginning of next year?
3.) This month, the car payment was due 2 days earlier than it was in previous months and we ended up paying it 3 days late. There was no late fee because of the grace period—will that negatively affect our credit?
4.) After my unsecured credit card is payed off (it’s for David’s Bridal – I bought my wedding dress on it) in a few months, I plan on using a Kohl’s card I recently got approved for with a limit of $300 monthly and pay it off like I do my secured card. I don’t want too many credit lines open at once, but I know just one probably isn’t sufficient for credit history. Will this be enough?

Sorry if these are stupid questions, but we’re young and have very little experience with these things. We had to fight like hell just to get approved for credit to start building it. We’d be looking for a house in the $100–150K range with something like a $5,000 down payment. We really wouldn’t want to take anything less than a 6% interest rate. And we’ll be married in less than a month, I’m not sure if that matters as far as mortgage loans go (with cosigners and all that).

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6 Answers

wundayatta's avatar

There’s more to a credit rating than using credit cards. Your income is very important. They want to see that you know how to handle money. Paying off your bills each month in full is a good thing. But you can get too much credit.

Your credit limit on each card counts against the amount of debt the banks think you can handle, and if you have too big a combined credit card limit, it may keep you from qualifying for a mortgage the size you want. Use your credit cards to show responsible management of money, not to borrow a lot or to potentially borrow a lot. One credit card of the mastercard or visa type should be sufficient to do that.

Also, you may have a problem with the downpayment on your home. It may be too small. You may want a 15% or 20% downpayment these days. Banks are very stingy due to the banking crisis. They may require a down payment of that size.

JLeslie's avatar

I am going to disagree with @wundayatta a little, having open credit, but not using it to the limit increases your score, demonstrating you have credit availability is a good thing, so higher limits, but a low balance is good. I do agree always pay your credit card every month in full. Even if you pay in full every month, when a credit check is done, the outstanding balance on the card will count as a balance, so when you apply for a mortgage and they are looking at your stats for how much debt you havem the balance can negatively affect the statistics. The bank may ask you to pay it off and not charge during the approval process. Being three days late, but in the grace period probably did not affect you, but do try to be on time going forward.

The best way to know how your credit is doing is to check the score. Don’t check it too much, because checking your credit can negatively impact your scredit score. I know that is a crappy rule.

I recommend save save save so you have a good amount to put down on the house, and keep paying everything on time.

Congratulations on your engagement and I think it is great you both want to do the right thing financially. Best wishes. :)

Moegitto's avatar

I’ll answer your question in two parts, first with a story of mines showing how credit works and then a answer for your second part.

I had a repo (conditional, but it’s still considered a repossession) in 2005 of my car. It dropped my Credit score, I don’t know how low it went but I know it was at least the low 500’s. I got a high interest car loan on a 2004 Ford Explorer. Just by making monthly payments on that one vehicle I went up to a 634 credit score. I traded that in for a brand new 2011 Ford F-150. Now my credit score is above 800. I can guarantee paying your bills a little late won’t hurt you as long as you don’t lapse (creditors define lapse as a payment being late past the NEXT payments. Example: Missing March’s payment and then being late for April is considered a lapse. Even if you pay the full amount of both months on April the 2nd you still lapsed on a payment.). I have a credit monitoring service that sends me a email as soon as something pops up on my credit report and I normally pay my car payment a couple of days late because I get paid weird, no notices about a negative mark pops up on my report.

Now, on to your house question.Sadly most places either require an extravagant amount of money (around $25,000 minimum) for a down-payment. A down-payment is kind of like a promise, your saying “this large sum of money is proof that I can pay your terms”. If you ever run into a situation where you can lease/buy a house without a down-payment just turn around and walk out the door. No down payment means higher monthly payments, and this applies for anything credit related.

And JLeslie is 10000000% correct, anytime your credit report is accessed (by you or anyone else) it brings your rating down. The term for what this is called is “Credit Hungry”, it makes you look like your going around trying to get a lot of products. If your in the market for a car/truck/SUV and you go to Ford, Chevy, Toyota, Nissan, and Kia they all run your credit separately. It looks like your “flaky”, you don’t know what you want and you “might” be a liability to the lien holder. This also works for ANYTHING that runs your credit, department store credit cards, regular loans, house loans, etc.

Sadly, like my story shows, it takes years to build a good credit history. Not 10 years or something but you have to build it up. This is not a stupid question by any means, I was young and ruining my credit by jumping around trying to get the hottest thing at the moment and not caring about how I would pay it next month. If you don’t ask you won’t learn. I’d advise trying to pay your bills on time more though because the loan holder has the right to add a late fee anytime and that fee doesn’t add up to your total amount owed, basically you’ll be losing money.

JLeslie's avatar

Actually, @Moegitto points out something else that is important, if your credut score is low you will pay a higher interest on your loans. It seems unfair, the people probably least able to pay more are the ones required to. There is a lot of rewards for having good credit, and over time it saves you a lot of money.

It’s a good idea to put down 20% on a house, because if you don’t you will be charged insurance called PMI in your monthly mortgage payment. However, many of us paid the PMI on our first houses, because it is hard to save that much when you are just starting. I recommend even more important is to have some cash in savings leftover after you close on your house, so if God forbid anything goes wrong, loss of job or illness, you can afford your bills for a few months and not lose your house or anything else altogether. Always have a little cushion.

wundayatta's avatar

@JLeslie I think there’s a difference between getting a good credit score and getting a home mortgage. If you have a lot of credit cards and make all the payments, that will increase your credit score. However, when it comes time to get a mortgage, it will reduce the amount that you can borrow, because they consider you to have borrowed the entire credit limit on all your credit cards.

We were advised to get rid of all but one credit card when we wanted to get a mortgage, and we did so. I’m not sure why you need more than a couple of credit cards anyway, unless you are carrying a balance from month to month. We always paid off in full every month, and thus never had a balance and never paid any interest or fees. We only needed one credit card. We now have two, but that’s because one pays us back a lot, but isn’t taken everywhere. The other is taken everywhere.

I have no idea what my credit score is. I don’t really want to ask, since that seems to count against it. However, I have never had a problem with credit. I probably have a bad score now since we paid off our home and our car, and we only keep a couple of credit cards which we pay off every month.

JLeslie's avatar

@wundayatta I am not advising to get a bunch of credit cards, I am saying the open credit looks good. It can be one or two cards with $3k limits. It does not have to be 10 cards with $500 limits.

You actually pointed out something that I was not thinking, that if you have open credit that shows as an amount that can be borrowed, it might work against a mortgage approval because the individual’s salary may only warrant a certain amount of total loans. I had not thought of it like that, I was thinking just credit score. I honestly don’t know, or did not know that might be the case. I still think it goes against how I understand it to work, but also am not very sure of myself on that, and certainly think you could be correct. That is a good thing for the OP to double check I think. Closing credit cards can negatively impact credit scores because then the open credit is reduced. One thing seems to be able to help and hurt at the same time if you are correct.

Thanks for further explaining.

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