Q & A with Dottie Herman

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Q1 - I am thinking of closing an old credit card that I never use will this hurt my credit? I am planning on buying a property and don't want my score to drop.

A - This is a good question, and the answer is yes, this could damage your credit score. Since this is a credit card and falls into the revolving credit category, when it closes you will lose the utilization allowance that the limit on the card gives you. If the balance-to-limit ratio on your aggregate revolving accounts is high, it will drop scores. Here is a good example of a consumer who had 3 credit cards:

• Card 1: limit of $10,000; balance of $5,000
• Card 2: limit of $5,000; balance of $5,000
• Card 3: limit of $5,000; no balance

Once you close Card 3, which has a $5,000 limit, the aggregate balance-to-limit ratio changes from 50% to almost 70%. This could drop scores 20, 40, or more points, depending on the rest of your credit and your original credit score.

Having higher aggregate limits gives consumers more leeway to increase balances without hurting credit. The lower your balances are on revolving credit, the better it is for Fico credit scores.

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Q2 - How does owing money on a credit card affect credit scores and how long does it take for the bad credit to clear from your history?

A - There are many factors that can lower your credit scores. One major factor is a high debt-to-limit ratio--owing too much money on credit cards can dramatically decrease your credit scores. If your balances are more than 7% of the card's limit, your scores will start to drop. The closer the balance inches up to the limit, the more your score will drop. Credit scores are sensitive to individual balance-to-limit ratios, but even more sensitive to aggregate balance-to-limit ratios. Your scores will continue to drop until your balance comes down. The rate at which your credit bounces back is dependant on a number of factors.

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Q3 - How much of an advantage does paying all cash play in purchasing an apartment?

A - Cash terms can provide a significant advantage for a buyer that sometimes even lead to a discounted price. In the current market, mortgage lending standards remain historically tight, so the terms of a sale--such a financing--have become just as important as the price that both parties agree to. Sellers have become acutely aware that getting a higher price isn't worthwhile if the buyer can't close because they can't get a mortgage. In other words, we are seeing discounts for cash purchases, but there is no standard rule of thumb for the amount of the discount, if any. Cash terms can also give you an advantage if you and a competing buying with a mortgage have offered the same price for a house--a seller will generally place the cash buyer in front of the mortgage buyer in this situation. Your real estate agent can guide you on the most strategic approach to a specific transaction.

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Q4 - If I am going to refinance is there a way to build my closing costs into the new amount owed each month instead of paying them upfront?

A - The vast majority of refinances build the closing costs into the new loan amount so there's no out of pocket expense for the borrower.  Therefore, that should be the case.  The potential issues in connection with  that have to do with the appraisal.  If adding the closing costs to the existing loan amount push the loan over 80% financing, that can be an issue as it could lead to extra costs (potentially making the mortgage not worth doing) or it could make the mortgage not doable.  Bear those things in mind, but the refinance should be set up with closing costs built into the loan.

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If you have a real estate question for Dottie, please send it to; Reporters@WPCnews.com