I guess I worship false idols.

March 25, 2011 · 34 comments

Since yesterday’s post focused on credit, I figured it was only appropriate to continue on that same theme today. Specifically, in regards to purchasing a home. A handful of commenters yesterday indicated that Girl Ninja and I should just ditch the plastic all together. Dave Ramsey says those keep who credit cards are “Worshiping the almighty FICO.”

Should GN and I swear off credit cards for life?  I vote no. In fact, I vote HECK NO! Do I wish we lived in a world were credit scores weren’t so darn important? Heck yes I do! But the world I live in, has determined credit scores are a very important part of determining one’s financial solvency.

When it comes time to purchase a home, Girl Ninja and I plan to follow the path of 99.9% of Americans and take out a mortgage. If you plan on paying cash, this blog post likely wont apply to you. It’s my understanding that the primary things a lender takes in to consideration when you apply for a mortgage are; A) how much you make, B) how much other debt you have, and C) your credit history/score.

If you have no credit history, or do things that could damage your credit history (like closing your oldest credit card accounts) then your FICO score will suffer. The lower your FICO score, the less inclined the bank will be to loan you money. Or at the very least, they will charge you a higher interest rate, since they perceive low FICO scores as “riskier” loans. Love it or Hate it, that’s the way it is.

Some will argue (as one did in yesterday’s post) “If you are worried about a Mortgage in the future, there are lenders who look at a lot more than your credit history!!” It’s true. There ARE lenders that will manually underwrite a loan for you. They’ll look at more than just your credit score (things like investments, savings, disposable income, etc). Unfortunately, manual underwriting is no longer the standard.

I want to get the best possible mortgage terms possible when it comes to owning a home. This means, I want as many banks as possible competing for my business. The number of banks that manually underwrite loans is SIGNIFICANTLY fewer than those that don’t. If I ignore my credit score, then I am forced into exploring mortgage options with a very small niche of lenders. The chances of me getting a ridiculously low interest rate decrease as I no longer have 50 different companies competing for my business.

Did know what the difference is between a 4.75% and a 6% interest rate on a $200,000 mortgage over 30 years? The person that takes the 6% loan will pay $55,000 more in interest! I gotta do what’s best for mine and GN’s financial situation, and unfortunately in this messed up world, that means keeping our credit score as high as possible (without borrowing money) so we can get the lowest interest rate possible.

What say you readers? Do you care about your credit score? When you bought your home, was your credit score a BIG piece in determining the lenders’ rates? Does my acceptance of current financial practices mean I worship at the alter of the almighty FICO?

p.s. Who knows what movie my stick figure drawing quote is from? No cheating.

{ 34 comments }

1 Kevin @ Thousandaire

If you are looking to buy a house soon, I think it makes a lot of sense to keep the card open. Credit score does matter

2 Kate

Our credit score + our long history of dealing with the same bank led to us getting a significant reduction on our mortgage rate when we bought our house. We spent 2 weeks negotiating back and forth with the bank, and in the end, got a spectacular rate: posted was 5.25%, “special” was 4.5%, ours was/is 3.69%.

HUGE difference on a 241k mortgage.

3 Jessica

Just out of curiosity, how much was your downpayment?

4 Kate

90k.

5 Brent

I would vote to NOT knock dave ramsey’s plan if you arent going to follow through with the rest of it. His plan is to cut the cards which will conclude in no debt score and a history of closed credit accounts. A manual underwriter will need to do the underwriting and there ARE plenty of them out there. regardless the next part of dave’s plan is to bring 20% of the home’s value on a 15 year fixed rate. Most lenders who see that you can bring that much to a shorter loan arent going to perceive you as risky. If you bring 3% of the value of the home you will be perceived as much more risky and yes you might need a good credit score to try and get good interest rates. The same could be said if you are taking out a 30 year loan, youll be more risky.

But I think that
1. bring 20% to a 15 year fixed rate mortgage
2. no real blemishes on a credit history (ie unpaid bills, bankruptcy, etc)
3. 0 credit score due to no credit for a long time

you’ll be manually underwritten and NOT found risky and youll get a good interest rate.

Also posting on the difference between a 4.75% and a 6% interest rate in thirty years isn’t helpful. First, Ramsey wouldnt suggest taking a 30 year loan. Second, since this is a blog about punching debt in the face I would suggest that you would be paying that mortgage (a debt) down as fast as you possibly could and that the difference won’t be that much since I’m assuming youll have it done in no time anyways.

Those are only my arguments on why having a good credit score is NOT necessary when shopping for a home loan. My real arguments for getting rid of credit cards are that I am tired of seeing the banks, insurance, and credit companies have all the tall buildings in the big city from screwing most americans over on the interest of their credit card bills and taking advantage of people who cannot seem to control themselves when it comes to buying things. They try to pitch everything they provide as a helpful service when in fact i see it fill their pockets and do the receiver of the service more harm than good. I refuse to support a system that i believe is harming to society and others around me.

6 Ninja

There is no way you could argue that manually underwritten loans are as common as standard lending practices. When it comes down to it the more lenders I have available to me, the more options I have, and the better rate I can get. Supply and demand. I’m leaving myself options, don’t want to be limited to ONLY banks that offer manual underwriting.

Never said credit history was necessary to get a loan, but I don’t think it hurts. Especially when that credit history is from responsible credit card use, in which the balance is paid off in full every month. Dave’s way works, but so do other schools of thoughts. To each his own.

7 Brent

manually underwritten arent as common but there are plenty of them out there, most local credit unions will do it along with some chains. I understand why you would want to keep all the options available to compete but if you go to both with 20% on a 15 year fixed the lenders will only come down so low and i think both manual and, do i call it automatic?, underwriters will end up with the same low interest rate.

a good (or clean) credit HISTORY is necessary (i will say that since i think it needs to be said) but the score i dont think is necessary when being manually underwritten obviously. I’ve seen many people who fully intended to pay their balance off get bitten on errors and glitches from those credit card companies and have to fight for months on end to get it straightened out along with the headaches of dealing with the folks on the telephone. Most folks i know just gave up and paid the credit card the “fines” for the “error” just to make the headache go away.

on a side note, experian is looking at including rent payments on their credit reports which would end up figuring into their scores. i might actually get a credit score if that goes through.

http://www.experian.com/ask-experian/20110216-rent-payments-may-now-be-part-of-your-experian-credit-report.html

thanks for the response ninja, good to know someone actually reads my comment :)

8 Ninja

thanks for commenting. always appreciated. and I think “automatic” written sounds fine to me since i don’t know what it’s called. haha. that would be interesting if rent gets factored in.

you’re probably right a 15 yr mortgage with 20% down will probably get you some pretty sweet interest rates regardless of credit history….unless that history is very very bad.

9 El

Been reading for while, and I hate that this is my first post. But I can’t help myself.
The quote is from 10 Things I Hate About You.

With the credit card issue, I’ve been considering a similar situation. I hate carrying around a credit card that I don’t use, mainly because I don’t like worrying about the account getting hacked into. However, I’m looking into making some larger purchases with my fiance and I don’t want to get screwed for losing a longer history of credit. I’m almost deciding the opposite way of you. I’ll take the extra interest just for the piece of mind of not having that extra card.

10 Melisssa

Don’t cut them up. You’re earning some fantastic rewards on them from your previous posts and pay them off responsibly. Considering also that you travel internationally they’re a considerably more secure form of payment, offer a reasonable exchange rate, and offer a more trackable record of international expense for tax purposes… beats carrying around a wad of Euros that poses a more likely risk of getting pickpocketed in a seedy part of Munich…but I digress… Easier to call the credit card company and halt purchases on a card than it is to attempt to recover 200 Euro that you don’t have formal record of actually having with a foreign authority.

Why do I feel that most of the authors telling the public to cut up the cards under all circumstances – Dave Ramsey, Mary Hunt, etc. – reek of tinfoil hat conspiracy theorists that want to make us believe everyone is out to get us? I tend to tune them out these days. Some of their principles and advice are sound, but some are entirely too politically and/or religiously charged.

Me, I like the convenience of paying in plastic. Haters can hate! I’ll keep my plastic…

11 goblue255

I agree 100%!

If you pay your cards off every month, you are throwing away the convenience of using plastic instead of cash AND the rewards, which can lead to free vacations or decent cash back checks.

The only reason I think you would want to cut up all of your cards is if you spend more with credit than you do with plastic. Personally, I actually spend less with credit, because I don’t have to deal with change that I don’t cash in very often. And beyond that, I track all of my purchases with Quicken automatically on my credit cards. When I use cash, I don’t categorize those purchases and can’t track my spending as closely.

You could argue that credit card companies are out to get consumers who rack up large bills they can’t afford and don’t understand what they are getting themselves into… but they don’t exactly make much money off those of us who cash in the benefits without paying interest!

12 Melissa

I’m not overly familiar with Dave Ramsey (have listened to his show a few times/never read his books), it sounds like he counsels/offers advice to a lot of people that are indebted and not paying off their credit cards each month. In those cases, it absolutely makes sense that people who can’t or won’t pay off their credit card should not get one (outrageous interest rates).
Some of what the “experts” advise does not make sense from a purely financial perspective, but does make sense when you take into account human nature.

13 slug

Live the right way. Spend less than you make. FICO will take care of itself.

14 Sarah

I agree that you should keep the card open. I would suggest calling your CC company and just threatening to cancel the card and see if they will waive the yearly fee. I have done that before and it worked, but I did have to call every year.

(10 things I hate about you!!!!! One of my all time favorites!)

15 Melissa

Interested to know how much FICO actually applies to mortgage rates. I bought my place in 2003 at 23 with a 6.25% ARM when they were giving mortgages to anyone, I had a decent FICO score but mostly new credit. Refinanced for 6.25 fixed in 2005 and FICO was high but think was a pretty standard rate back then. I just refinanced again under the making homes affordable program to 4.875%, I was told that to do the program they didn’t run credit or ask for financial statements….I had to ask the guy isn’t that how we got screwed on these houses in the first place? I’m stuck underwater in my house so not sure how it works now when buying new.

Go ahead and worship FICO, I believe that a high FICO score should be worn as a badge of honor. It is a measurement of how you have handled your finances. Knowing your score gives you power too, when buying a car or a house it makes it easier to shop because you tell the dealer your score before starting negotiations and they can give you a rough estimate of what the loan will look like, if you don’t like it you can walk away before they put an inquiry on your report. I had a WAMU credit card that didn’t give points but provided your FICO score each month and would email you everytime it changed by 20pts. But then stupid Chase bought them out and cancelled it.

16 spork

I agree, to each their own. I worship at the altar of plastic. Without it, my obsession with budgeting through mint.com would be a lot harder to sustain. Then you get the extra benefits of the enjoyment of paying it off each month, credit card rewards, and my current apartment waiving my deposit due to my credit history (my only credit history consists of student loans and credit cards), I’m happy with plastic.

17 Jenny_Dee

I refied down from 6.35% to 4.75% just last month….wheee!!!! Plus, I dropped to a 20 year mortgage, so not only did I shave 5 years off my original loan, I’m saving about $50K in interest. Now, to deal with a car loan *sigh*

18 sara

I no longer have any credit cards, and will never ever have one again. There’s a whole long reason why, but I won’t bore you with the details here (though you can read my story on my blog if you’re interested). I seriously do not care about my credit score-it means a big fat nothing to me. I did check it recently though (got in on a deal where I earned a gift card by signing up for a free trial to a credit score company), and my credit score is actually higher now than what it was two years ago when I had multiple cards. For some reason closing out a bunch of cards, and not having any has improved my score. Go figure lol!

The mortgage is under my hubby-he didn’t have credit cards when he first got it 8 years ago, nor did he have any when he refinanced about a year and a half ago (no student loans, car payments etc either). When he refinanced he ditched the traditional bank he had been going through, and went with our local credit union. We got a 4.25% fixed rate on a 15 year, and the credit union made the process really easy and stress free. I’d highly recommend looking into a credit union for a mortgage, when the time comes!

19 Larry

Write on the board 100 times:

“I will not listen to Dave Ramsey.”
“I will not listen to Dave Ramsey.”
“I will not listen to Dave Ramsey.”
“I will not listen to Dave Ramsey.”
“I will not listen to Dave Ramsey.”
etc,

20 sara

Dave Ramsey’s program saved my marriage, and totally changed how we handle money, so while some may disagree with his plan-it’s helped a LOT of people.

21 Larry

Good for you. I say, don’t worship any single “authority,” particularly one who’s out to make money from you by selling books, operating a TV or radio program, and in general behaving as if he or she is the last word in dealing with your money. I suggest anyone who looks at Dave Ramsey and his ilk with rose-colored glasses should turn to the link below, from the excellent http://www.badmoneyadvice.com. Like some other tools, credit cards can be abused. They are also a legitimate and valuable tool for managing one’s finances.

http://badmoneyadvice.com/2009/05/ten-things-dave-ramsey-got-wrong.html

22 krantcents

Like it or not, everyone should learn how to use credit responsibly. Credit cards are part of that responsibility.

23 Alotta Lettuce

My husband and I bought our home in January of 2010, and the process of qualifying for a loan was MUCH easier than I ever expected it to be, especially considering the prevailing wisdom that credit was “very tight” at the time.

My credit score at the time was only 640, my husband’s was just under 700, and we were able to easily secure a 30 year note at 5% – the lowest rate ANYONE was getting at the time – without paying points. We applied with our credit union and two independent mortgage brokers and were approved by all three for the same rate. Ultimately we went with one of the brokers because they offered us the best terms as far as costs, and the day after we closed, our mortgage was assigned to BOA, and a year later, we have no complaints.

The entire process was very reassuring to me, because it seemed to disprove the idea that people with less than perfect credit are doomed to sub-par terms where lending is concerned, and that’s simply not the experience that we had.

24 StackingCash

In past posts I recommended taking a real estate class. May I suggest you take a mortgage broker’s class now? The mortgage broker makes money from points, fees, and secret back end commissions when they sell you a loan. Don’t think that it’s all about the interest rate, be on the lookout for other costs regarding financing. My knowledge is more limited in this area, but I’m sure I will learn more if I ever get my real estate license…

25 Sparta

Keeping excellent credit without borrowing too much is a great strategy. However, if you want the lowest rate on a fixed-mortgage, you can also buy down the interest by paying for “discount points”.

Allow me to illustrate. Let’s say you are getting a $100k mortgage @ 6%. Your monthly payment for principal and interest will be $599.55 per month. With the purchase of three discount points, your interest rate would be 5.25%, and your monthly payment would be $552.20 per month. The cost to buy three discount points (or 3%) would be $3000 upfront.

26 Momma Star

I am a hugeeeee Dave Ramsey follower, maybe even obsessed ;) but I am not a member of his forum because no matter how much obsessed I am.. the forum members are a notch ahead of me. I feel if I want to become a member on his forum I would have to believe in his steps 100% and that means giving up my precious credit cards (which does not carry an obscene balance). I too am a believer of FICO scores not because I want to but as you said we live in a world of where every finance purchase made is depended on and around your FICO score. While I don’t rely on credit cards completely its neat to have them to make purchases with and earn some of those lovely rewards ;)

BTW…… stick ninja’s quote is from 10 things I hate about you?

27 Stephanie

I’m not planning on doing anything tricky to up my FICO score. I only plan on continuing to be a responsible person, paying off my credit cards every month, paying down my student loans every month, and avoiding being stupid. Like it or not, your credit history/credit score impacts a lot of things. Besides mortgages, it also impacts insurance rates and getting a job. So, I guess we can worry about the FICO indirectly by worrying about our credit history, making sure our credit history is up to date, and pay off debts on time and quickly. As for what rate you’ll get with certain FICO scores, I’m pretty sure your score will be high enough if you’re kicking debt in the face and being responsible.

28 Corina

what does SIGINCIFACNTLY mean?:-)
as long as credit cards give you rewards and you pay them in full , it’s crazy to give them up. But i do agree some people are better off without the temptation – I think our duty is to make sure the system is working for us not against us.

29 Ninja

It means either A) I can’t spell or B) I don’t proof read….take your pick :)

30 Justin @ MoneyIsTheRoot

Haha I caught the 10 Things I Hate About You quote as well! Love that movie.

I have to say credit score does matter, but once you are above 700, I would say that anything higher probably doesnt return much benefit in the form of lower rates. So yes, you need a good credit score, but then 20% down, and lower term mortgages will probably bring the real benefit in paying less interest.

31 Happy Homeowner

When I bought my place last spring, credit score was obviously a big factor but there was also a great deal of attention paid to my income and down payment. I think FICO scores are only one piece of what can be an interesting pie. I would keep open the cards just for the history (after migrating to a no-fee card for GN). Good luck!

32 Marie

In case no one else has posted it – my favorite movie ever 10 Things I Hate about You.

33 This Guy

Julia Stiles, 10 Things I Hate About You.

Don’t test my chick flick knowledge.

P.S. I may own a home now, but I still know nothing.

34 Crystal @ BFS

10 Things I Hate About You was my FAVORITE movie for about 2 years! It was replaced by a few different ones since then and now R.E.D. and The Blind Side share that spot, lol.

In regards to the actual post, I don’t care about my credit score unless I want to finance something. I keep a close eye on our credit reports to make sure I am never unpleasantly surprised. :-)

Previous post:

Next post: