Reverse mortgages a necessity for many retirees

Not long ago borrowing against your home to meet basic living expenses was unthinkable for most retirees.

Times have changed.
With equity markets slumping, bond yields in the doldrums and longer life expectancy, the first wave of Baby Boomers is finding itself short on cash and long on life — and that's why they're turning to reverse mortgages.
Establishing a reverse mortgage to meet those needs hits home — literally. The family residence is often the inheritance parents hope to pass along to their children, but financially it could be the only practical alternative.
A home is the biggest investment for most Canadians and, depending on its location and other circumstances, it may be the most lucrative. The Canada Mortgage and Housing Corporation estimates the average Canadian home appreciates in value each year by an average 5.4 per cent over a forty-year period — and, while short-term home values will rise and fall — they believe the long-term trend will continue.
What is a reverse mortgage?
A reverse mortgage allows property owners to tap into their home equity in a safe, tax-efficient manner. The homeowner receives payments from a lender using the property as collateral. It's reverse because the bank pays you, and not the other way around.
Plan members also retain legal ownership and can remain in their homes as long as they wish.
The full amount, plus interest comes due when the home is sold by the owners or as part of their estate when they pass away.
It's tax-free because the sale of a principle residence is not taxed.
Like traditional mortgages, the borrower assumes the risk of higher borrowing rates in the future. Plan members can choose to make regular payments on the interest or add them to the total amount owing.
Also, like a tradition mortgage, reverse mortgage customers are exposed to the double-risk of rising mortgage rates and falling property values.
The Canadian Home Income Plan, or CHIP, is the dominant player in the Canadian reverse mortgage market. CHIP allows homeowners 55 years or older to borrow up to fifty per cent of the current appraised value of their homes. Plan members can borrow in lump sums or regular advances over time.
CHIP's borrowing rates are structured much like a traditional mortgage — fixed or variable for different periods of time - but are generally higher. Unlike traditional mortgages total interest payments grow and compound as the reverse mortgage grows along with the total amount borrowed. CHIP guarantees that the amount owed will never exceed the appraised value of the home.
CHIP makes a lot of its money on fees - set up costs, appraisal fees, legal fees, administrative costs and penalties for leaving the plan early.
Home equity line a better alternative?
However, there is a cheaper way to borrow against your home through a secured line of credit, also known as a home-equity line of credit. Home equity loans made headlines recently following a federal government crackdown on the total amount that can be borrowed against the equity in a home from 85 per cent to 80 per cent.
Considering the dual risks of higher interest rates and lower house prices even 80 per cent is a dangerous amount to borrow against your home, and that's why a home equity loan requires financial discipline.
Unlike a reverse mortgage, which is only required to be paid off when the house is sold, the amount owing on a home equity loan is callable at any time by the lender in some cases. In other words, the bank can technically demand repayment in full any time, forcing the homeowner to sell.
To establish a home-equity line of credit the home owner must pay legal and appraisal fees but the borrowing rate is often half to one per cent above the bank's prime rate depending on the lending institution. Unlike a reverse mortgage the borrower must pay at least the interest owing on a home equity loan — but you can get around that by borrowing the payment on your line of credit.
Borrowing against your home in any manner is not for everyone and is not the only option for homeowners who are tight for cash. Homeowners who wish to remain homeowners can simply downsize to a cheaper home and live off the difference.
Many retirees choose to sell their homes and rent. All that cash can be invested in a more diverse portfolio of securities and decrease the individual's reliance on the value of a single asset.

Could your Mortgage be an Asset?

That massive amount of debt you call a mortgage could be an “asset” in the near future.
It sounds far-fetched but imagine a scenario where you sign a 10-year fixed rate mortgage at 3.89% and five years from now rates have climbed to 6% and variable rates are not much lower.
You decide it’s time to sell. Someone buying that property would very likely be interested in taking over your payments — they might even pay more for your home knowing how much they’ll save on interest.
Mortgage assumptions, as they are called, have virtually died in this time of falling interest rates. Why would you possibly want to take over somebody’s existing mortgage when you can get a lower rate today?
“I remember the days clearly,” says Glenn McQueenie, broker/owner of Keller Williams Referred Realty, about when the terms of your mortgage were a key part of any home purchase. “In the early 1990s a lot of people had 15%, 14%, 13% mortgages.”

A number of different scenarios played out back then. Often the sellers would buy down the mortgage rate so the buyer could qualify for financing — something one bank official said they are unlikely to approve in this day and age.

Then there were the homeowners with a mortgage as low as 9% — try not to laugh. Those people had something to sell. “If there were two properties side by side and one had assumable financing at 9% compared to one at 13%, there would be a bigger draw to the 9%,” says Mr. McQueenie. “We didn’t have a lot of multiple offers back then, so this would get you more showings.”
The realtor expects we are going to see more people willing to assume mortgages and working that into any deal is going to make the negotiating skills of agents more important. “These have been more low-skilled times for realtors,” he says.
One of the factors that could drive this issue is the sudden influx of people who have been taking on a 10-year mortgage. In the past, consumers have shown almost no interest with the Canadian Association of Accredited Mortgage Professionals saying the market for 10 year products is less than 1% of all mortgages.
But people in the industry say that doesn’t take into account the last six months as the 10-year mortgage rate dropped below 4% and banks and discounters started promoting the offering.
“We have more clients going into the 10-year than ever,” says Paul Roberts, a mortgage broker with The Roberts Group, adding one advantage of the 10-year is consumers only have to pay a penalty of three months interest to get out of the mortgage after the five-year anniversary.
One key in signing any mortgage is whether it can be assumed by someone else or is portable should you want to keep it when you buy another property. Usually there are some fees of maybe a few hundred dollars with transfers.

“They key thing is whoever is taking over the mortgage, you want the bank to approve them,” says Ms. Roberts, noting you do not want to be liable if the person taking over your payments defaults. “You have to make sure you are removed from responsibility.”
She says there is little doubt that if rates go up, a low mortgage will have some sort of perceived value. “Say you had $300,000 mortgage and two [percentage points difference] every year, that’s $6,000. If you have five years left, that’s $30,000,” says Mr. Roberts, noting you not be able to sell the house for $30,000 more because it would not be appraised that high.
Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, says most fixed rate mortgages are assumable or portable while variable rate mortgages and home equity lines of credit are not.
“Previously mortgage assumptions were attractive because you could sell your property and your mortgage with it,” says Ms. Haque. “But the person has to assume the mortgage exactly as the terms are [written]. It’s one of the reasons mortgage ports are more popular. You have to remember if you are selling, you are likely buying another property. If you have an attractive rate and you are buying another property, you want to bring your mortgage with you.”
Either way, if rates go up dramatically and you are sitting 200 basis points below the prevailing market rate, you do have something of value even if it is debt.
“If you have a 10-year or five year [mortgage], within two or three years this will be an asset because they are historic lows. Rates will be higher, we now that, the only question is by how much,” says Benjamin Tal, deputy chief economist of CIBC World Markets.
For consumers locking into long-term mortgages, the higher rates go the more that loan may start to look like an asset.

Credit score: Why good financial behaviour can actually drag it down

So, what's your credit score? It's a bit like asking a woman how much she weighs, and the answer is fraught with just as much fear of judgment. But just like the number on the scale doesn't tell the whole story about your health, a pristine credit score is quite often not the symbol of financial virtuosity many believe it to be. In fact, some of the actions that drive up your score may actually drag down your finances.


1) The big 9-0-0

In Canada, credit scores are compiled by Equifax and TransUnion, both of which use a modified version of the credit scoring method called the FICO score. According to the Financial Consumer Agency of Canada, this score can range from 300 to 900, but exactly how your score is calculated is proprietary information (totally unfair, right?). What we do know is that a credit score is determined by your history of taking on debts and paying them off. (You can check out the precise combination of factors that go into your score here.)
So what about that canny gal who squirrels away her paycheques and pays for everything in cash? While she may be a paragon of financial responsibility by every sound measure, the bank thinks she's a deadbeat...which leads us to our next point.

2) No debt, no credit

Having a high credit score means you have to use debt, and that in itself, can be a problem — at least for some people. An open line of credit or unspent credit card balance can act as temptation or a tempest in a financial storm. Having and using credit is the best way for lenders to find out whether you're the type of person who takes care of business or walks out on her responsibilities. That makes sense. What doesn't quite add up is why those who come through with cash are stamped with a scarlet letter.


3) Testing your limits

Using a credit card will help you to build that ever-important credit history. But let's say you opt for a relatively modest credit card limit of say, $5,000. You don't want to get in over your head, right? To most people, this sounds like a reasonable use of credit. The credit scoring companies, however, may not see it that way — unless you're keeping the balance on that card under $1,200. You see, lenders like to see borrowers who spend about 25 percent of the credit that's available to them. This means if you want to use your card for a big purchase now and then, you'll need more credit, which, apparently, you aren't supposed to use.


4) Walking the credit line

Not only do credit scores favour borrowers who have more available credit, they reward borrowers who've done a lot of borrowing. The more types of debt you've had, the better — as long as you've paid it off on time, of course. This means that when it comes to your credit score, you're better off using a loan than paying in cash. The real catch-22 is that this loan will help boost your credit score and get lower interest rates on future loans. So essentially, you're paying interest to lower the interest rate on your next loan!


5) Debt's no problem

Paying off your debt is key to getting a top credit score. But there's a catch: when it comes to revolving credit like that used for a credit card or line of credit, whether you pay it all off or just the minimum is inconsequential. So while you don't actually need to pay a penny of interest to secure a good credit score, you also won't be punished if it takes you the rest of your life to pay off the balance.

6) Just in case

There's some solid truth behind that old cliché about putting your credit cards in the freezer (on ice, get it?) to keep you from overspending. Closing credit cards can actually hurt your credit score. Most sources say the ding won't be that big or last that long, but experts still advise against cancelling a credit card right before you go to apply for a loan. A credit card can represent two key aspects of keeping a high score: your credit history and your available credit. Based on what's best for your credit score, you should just tuck those pesky cards in between the ice cream and the Lean Cuisine and try to avoid temptation (good luck with that).

Credit Score Zealots Pursue Fool's Errand for Top Score

Jeff Rose, a 33-year-old financial planner, is trying to improve his credit score even though it's 780, which is 69 points above the median score.
Rose, who lives in Carbondale, Illinois, said he opened up a second credit card last year to establish another line of credit and help boost his score. He said he doesn't know exactly what actions will help or hurt his score, so wants to get it above 800 to ensure he gets the best rate if he refinances his mortgage.
Three years after the credit crisis when lenders abruptly closed accounts and cut limits, consumers, including those who have excellent scores, have become more focused on getting the number above 800. Those efforts may be futile because once consumers have FICO credit scores of 760, a higher one doesn't mean they'll get better interest rates on mortgages and credit cards or more elite card offers, said Greg McBride, senior financial analyst at Bankrate.com, a unit of Bankrate Inc.
"There's very little incremental benefit to getting a score above that," said McBride, who's based in North Palm Beach, Florida. Once consumers are above 760, "it's a lot more difficult to move the score up in any noticeable way, and little reward."
Mayank Maheshwari, 26, a business analyst who lives in Jersey City, New Jersey, said his FICO score is 780 and he's still trying to get it higher. He has a student loan that he hasn't paid off in full, although he can afford to, because he thinks maintaining monthly payments on time will help increase his score.
FICO Scores
The most common scores are based on models established by Minneapolis-based FICO, formerly known as Fair Isaac Corp., which are used to gauge a consumer's financial health. The numbers, which range from 300 to 850, affect the ability to get mortgages and credit cards, as well as the rates borrowers pay for them. The score is used by 90 of the 100 largest U.S. financial institutions, according to FICO's website. There are other scores used by lenders, such as VantageScore, which has a 501 to 990 range for measuring credit risk.
About 18 percent of 200 million consumers in the U.S. with credit scores, or 36 million Americans, had credit scores of 800 or higher in 2011, according to estimates from FICO. More than 75 million had scores of at least 750 while the median credit score last year was about 711, FICO said.
'Bragging Rights'
The percentage of consumers with scores of 750 or more has fluctuated only slightly during the past five years, said Barry Paperno, consumer affairs manager for myFICO.com. That's because consumers with high credit scores tended to maintain their good behaviors during the credit crisis, such as paying down debt and cutting expenses, Paperno said.
The score that's considered the cutoff to qualify for the best rates, however, has changed. Before the recession, it was generally 720 instead of at least 750, said Ben Woolsey, director of marketing and consumer research at CreditCards.com, a website for cardholders based in Austin, Texas.
FICO credit scores rank borrowers according to the likelihood of default and there's almost no difference in the probability of default when a consumer has a 780 or an 820, said Ken Lin, chief executive officer and founder of San Francisco- based Credit Karma. That means lenders won't price a consumer differently and extend different rates, since the risk is virtually the same, Lin said.
"If you're at 780 plus, it's all bragging rights from there," Lin said.
Credit Decisions
The average rate for a 30-year fixed mortgage was 3.89 percent in the week ended Jan. 12, according to Freddie Mac. The average interest rate charged on credit-card balances was 12.8 percent in November, according to Federal Reserve figures released Jan. 9.
A FICO score of 760 or higher on a $300,000 30-year fixed mortgage may qualify a borrower for a 3.62 rate or $1,368 monthly payment, compared with a 3.85 percent rate and monthly payment of $1,406 for those with scores from 700 to 759, according to myFICO.com. Having a credit score of at least 720 means a consumer may get a 3.89 rate on a 36-month auto loan of $25,000 and pay $737 a month, compared with 5.31 percent and a payment of $753 for those with scores from 690 to 719.
The decision to offer a mortgage and the size and rate on that loan is based on many factors about a borrower's financial history, Tom Kelly, a spokesman for JPMorgan Chase & Co., the largest U.S. bank by assets, said in an e-mail. JPMorgan's risk management approach is proprietary, and criteria that go into the decisions on credit cards may be based on income and credit history with other Chase products, said Paul Hartwick, a spokesman for the New York-based bank, also in an e-mail.
Elite Offers
While the type of mortgage product and region may impact rates, generally FICO scores above 720 receive the lowest rates, Terry Francisco, a spokesman for Bank of America Corp. in Charlotte, North Carolina, said in an e-mail. A FICO score is one of several considerations the bank uses in determining credit-card rates, Betty Riess, a spokeswoman for Bank of America, which is the second-biggest U.S. lender, said in an e- mail.
Elite card offers are more likely to be based on income and assets than solely on high credit scores, Bankrate's McBride said. When making credit decisions, American Express looks at a cardmember's credit profile, which includes total debt level, reported income, credit bureau score, credit report and payment history, Melanie Backs, a spokeswoman for the New York- based firm, the biggest credit-card issuer by purchases, said in an e-mail.
Hiccups Happen
Revolving debt, which includes credit cards, climbed in November by $5.6 billion, the biggest advance since March 2008, according to Federal Reserve data.
"There are a lot of companies out there competing for credit," said Linda Sherry, director of national priorities for Consumer Action in Washington. "Once you're there, your dance card is going to be full," she said, referring to a score of about 770.
The benefit for consumers who have good scores and are still trying to raise them is that they'll have more of a cushion in case they do something that negatively affects their scores, said Woolsey of CreditCards.com. Borrowers should also keep in mind that each lender may vary on what they use as a cutoff for qualifying for the best rates, although anything above 750 generally should be sufficient, he said.
"Some hiccups could happen and I get whacked and I'm a 720, so you shouldn't be too comfortable because you never know what might happen," said Rose, the CEO and founder of Alliance Wealth Management.
Timely Payments
Consumers with scores from 750 to 800 who want higher numbers should continue what they're doing, just for a longer period of time, said FICO's Paperno. That means continuing to pay bills on time, keeping a low amount of debt relative to available credit and not opening accounts unless needed, he said.
Making a payment 30 or more days after the due date could cut a score by as much as 110 points while applying for a new card may result in a five point drop, said Liz Weston, author of "Your Credit Score."
Borrowers should avoid using more than 30 percent of their available credit, even if they pay their balances in full, because the balance owed may be reported to the credit bureaus before the payment is due, according to McBride.
Credit Monitoring
Some things consumers do to try to raise their scores, such as paying for a credit score monitoring service, aren't worth it, said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group in Washington. Monitoring doesn't prevent errors or identity theft and consumers may not understand the cost of the service, Mierzwinski said.
Instead, borrowers may want to just stagger looking at each one of the free credit reports they're entitled to annually from the three major credit bureaus every four months, he said.
"Credit is there to save you money," said Lin of Credit Karma, referring to how a high credit score can help consumers qualify for lower interest rates. "You shouldn't be using money to build credit."
To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net
To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.

What Credit Score Should You Have?

by Jean Folger

A credit score is a number that helps lenders evaluate a person's credit report and estimate his or her credit risk. The most common credit score is the FICO score, named after software developer Fair Isaac and Corporation. A person's FICO scores are provided to lenders by the three major credit reporting agencies — Experian, TransUnion and Equifax — to help lenders evaluate the risks of extending credit or loaning money to people.

A person's credit score affects his or her ability to qualify for different types of credit and varying interest rates. A person with a high credit score may qualify for a 30 year fixed-rate mortgage with 3.8% annual percentage rate (APR). On a $300,000 loan, the monthly payment would be $1,398. Conversely, a person with a low credit score, assuming he or she qualifies for the same $300,000 mortgage, may pay 5.39% on the loan, with a corresponding monthly payment of $1,683. That's an additional $285 per month, or $102,600 over the life of the mortgage, for the person with a lower credit score.
Unfortunately, we don't start with a clean slate as far as credit scores are concerned. Individuals have to earn their good numbers, and it takes time. Even when all other factors remain the same, a person who is younger will likely have a lower credit score than an older person. That's because the length of a credit history accounts for 15% of the credit score. Young people can be at a disadvantage simply because they do not have the depth or length of credit history as older consumers.
Factors That Affect Credit Scores
Five factors are included and weighted to calculate a person's FICO credit score:

• 35%: payment history
• 30%: amounts owed
• 15%: length of credit history
• 10%: new credit and recently opened accounts
• 10%: types of credit in use
It is important to note that FICO scores do not take age into consideration, but they do weight the length of credit history. Even though younger people may be at a disadvantage, it is possible for people with short histories to get favorable scores depending on the rest of the credit report. Newer accounts, for example, will lower the average account age, which in turn could lower the credit score. FICO likes to see established accounts. Young people with several years worth of credit accounts and no new accounts that would lower the average account age can score higher than young people with too many accounts, or those who have recently opened an account.
Average Credit Scores by Age
FICO scores range from a low of 300 to a high of 850 — a perfect credit score which is achieved by only 1% of consumers. Generally, a very good credit score is one that is 720 or higher.

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This score will qualify a person for the best interest rates possible on a mortgage and most favorable terms on other lines of credit. If scores fall between 580 and 720, financing for certain loans can often be secured, but with interest rates rising as the credit scores fall. People with credit scores below 580 may have trouble finding any type of legitimate credit.
Based on data compiled by Credit Karma, there is a correlation between age and average credit scores, with scores rising along with age. According to their data, the average credit score by age is as follows:

Age	Credit Score
18-24	638
25-34	652
35-44	659
45-54	685
55+	724

Keep in mind, these are averages based on limited sampling of data, and many individuals' credit scores will be above or below these averages for a variety of reasons. A twenty-something, for example, could have a credit score above 800 by making careful credit decisions and paying bills on time. Likewise, a person in his or her 50s could have a very low credit score because he or she took on too much debt and made late payments. The FICO credit scores take all five factors into consideration.
The Bottom Line
The Experian National Credit Index study helps explain how the behavior of certain age groups can affect average credit scores. The study found that people in the 18-39 age group had the greatest number of late payments during the previous 12 months; that the 40-59 age group held the greatest amount of debt; and the 60+ age group had the lowest average credit utilization (used the least amount of credit that was available to them).
Though it is not unheard of for a young person to have a stellar credit score, more commonly these ratings rise as people acquire credit, make careful credit decisions, pay bills on time, and gain depth and length in their credit histories.

Copyrighted, Copyright © 2010 Investopedia ULC. All rights reserved.

The Incredibly Shrinking Variable Discount

Just weeks ago you could find variable-rate mortgages at prime – 0.80% (P-.80%) or better. Consumers thought they were here to stay, but the tables turned…fast.
Economic troubles and lender profit motives have shrunken variable discounts beyond expectations. Banks are now commonly quoting prime rate, for example, with little discounting.
Once the last few holdout lenders with P-.50% disappear, discounted variables could move towards P-.25%…or worse. Some lenders even suggest that prime or prime plus could be the new normal.
Meanwhile, aggressive brokers are selling five-year fixed rates at 3.25% or less. That’s an unusually low 50 basis point premium to a variable. A spread that tight doesn’t come around often, and it makes you rethink all of the research suggesting variables are the way to go.

Popular research indicates that people have saved money on variable-rate mortgages:

• 88.6% of the time:
  • Source: Floating Your Way to Prosperity, 2001, Moshe Milevsky, PhD; Study period: 1950-2000
• 90.1% of the time:
  • Source: Moving Mortgages, 2008, Moshe Milevsky, PhD; Study period: 1950-2008
• 83% of the time:
  • Source: Variable Rate Roller Coaster Still Hard to Beat, 2011, Douglas Porter and Benjamin Reitzes, BMO; Study period: 1975-2011

Odds like that make some people question the sanity of going fixed.
But there’s a little more to the story.
While variables have cost less than 5-year fixed mortgages a majority of the time in the past, favourites don’t win every game.
More importantly, assumptions are key when it comes to rate studies. Two important factors have impacted the research quoted above:

1. A multi-decade bias towards falling rates
2. Use of posted rates (instead of discount rates)

“Interest rates have been trending downward for two decades,” BMO Capital Markets Senior Economist Benjamin Reitzes told us in a recent interview. By default, he says, that’s tilted the table more in favour of variables than it otherwise would be.
Looking ahead, rates are no longer able to drop over one percent. The most we can realistically hope for is an extended period of horizontal rate movement. (The BoC can still cut rates slightly, but the European and American crises and sub-2% core inflation won’t delay hikes forever.)
As a result, Reitzes says, “Going forward, borrowers won’t see the same advantage to variable rates as they have in the past 25 years”
The second factor that’s largely ignored when citing rate research is the actual mortgage rates used for backtesting. Each of the three studies above uses posted rates in their historical analysis.
Reitzes states that this practice distorts the results somewhat. “Discounts off posted rates were not as prevalent historically.” Nowadays, however, “Most people get a (rate) discount if they are credit-worthy borrowers.”
That matters, because the rate discount you get obviously impacts the likelihood of your mortgage outperforming other options.
Here’s an example.

• If you look at data from 1970 to 1995, the average difference (spread) between 5-year fixed and variable rates was 126 basis points.*
• The average difference today is roughly 50 basis points.

That’s a remarkable 76 basis points lower than historical rate spreads. That makes a huge difference in research conclusions.
If you theoretically backtested with the same spreads as today (i.e., 25 bps off prime for variables and 204 bps off posted for 5-year fixeds), you’d find that fixed rates outperform considerably more often.
According to Milevsky, “…The historical probability of doing better with the floating rate mortgage…hovered around 70% to 80%” when the borrower used deep discount rates (based on a 1965-2000 study period).
Using today’s discounts, that 70-80% drops to just 53%, based on our findings from 1970 to 2006. (Obviously today’s spreads would not have applied historically but, as Milevsky maintained in his research above, that is beside the point.)
In other words, the fixed/variable decision would have been a coinflip, based on today’s spreads.

(Click to enlarge)
This isn’t meant to imply that fixed rates now have an insurmountable edge. If the Bank of Canada drops rates unexpectedly, a variable could easily beat all other terms over the next five years.
A variable may also prevail for other reasons. See:

• The Fixed/Variable Mortgage Conundrum
• IDEAS for Choosing Fixed or Variable

That said, if the BoC’s next rate move is up (which is the highest probability outcome, say economists), the boring old 5-year fixed could certainly outperform. That’s true even when compared to a variable with payments set at the 5-year fixed rate. (We’ll post a scenario like this soon.)
The nice part is this: If you go fixed and variables end up winning, you’ll likely be out far less money than in most prior years.

---

* Data source: Bank of Canada. (We chose 1970-1995 because 1970 is as far back as we have clean 5-year fixed rate data, and 1995 was before rate discounting started taking off. Yes, people actually used to pay posted rates.)
Note: If you’re already in a discounted variable, the conclusions drawn here may not apply to you. For guidance on locking in, always consult a mortgage professional.

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Rob McLister, CMT

6 Credit Report Items That Scare Lenders

You pay your bills on time and never miss a payment. If you're still having trouble with credit, something on your credit report could be scaring lenders. Everyone knows the big gremlins that haunt credit reports: items such as bankruptcies, foreclosures and even late or missed payments. Less dramatic items can also spark some anxiety in skittish lenders. When you apply for a loan or a card account, lenders review your credit score and pull your credit report. Or they may take that report and pump it through one of their own scoring systems. If they don't like what they see, you could be rejected. Or you may get approved with less-favorable terms. And it isn't just new applicants who have to run the gauntlet. Credit card issuers periodically review their current customers' files, too. Even more confusing is that different lenders zero in on different credit report items. So it's entirely possible that, even for the same loan, no two lenders will see your credit history in exactly the same light. Think there could be something heinous lurking on your credit report? Here are six items that could scare lenders.  

1. Multiplying Lines of Credit Opening one new card is normal. Opening three in a short amount of time could signal something bad is going on in your financial life. When it comes to credit card issuers, "the account monitoring window has shrunk," says Norm Magnuson, vice president of public affairs for the Consumer Data Industry Association, the trade association for credit reporting companies. "It used to be months and months. Now you find companies doing account monitoring monthly or every other month." And the one thing those issuers don't want to see is that you're asking everyone in town to lend you money. "That would raise some questions," he says. "It could be an indicator of something that's going on. I don't think it's in the best interest of any consumer to go out there and be a collector of credit lines."

2. A Housing Short Sale "People are told short sales won't hurt their credit," says Maxine Sweet, vice president of public education for credit bureau Experian. "But there is no such thing as a 'short sale' in terms of how the sale is reported to us." "The way the account is closed out is that it is settled for a lesser amount than you agreed to pay originally," she says. "The status is 'settled.' And it's just as negative as a foreclosure." One tip: Negotiate so the lender doesn't report the difference between your mortgage and what you repaid as "balance owed" on your credit report, says John Ulzheimer, formerly of FICO, now president of consumer education for SmartCredit.com. Your credit score will take a heavyweight hit, but this action will slightly soften the blow, he says. Sweet's advice is not to discount the notion of a short sale, just go into it with your eyes open. "It may be the right decision to get out of the house," she says. It may be "better than a foreclosure in terms of the economy, moving the house and moving on with your life. Just don't expect to walk away with no impact to your credit history."

3. Someone Else's Debt Here's something you might not know: When you co-sign on the dotted line to help someone else get a loan or a card, that entire debt goes on your credit report. While the fact you've co-signed is neither good nor bad, it does mean that -- as far as any potential lenders are concerned -- you're carrying that debt yourself. And it will be included in your existing debt load when you apply for a home mortgage, credit card or any other form of credit, says Ulzheimer. And if the person you co-signed for stops paying, pays late or misses payments, that bad behavior will likely go on your credit report. So when someone tells you that co-signing is painless because you'll never have to part with a dime, you can tell them that's not true. Co-signing means agreeing not only to repay the obligation if necessary, but also to allow the debt -- and any nonpayment -- to count against you the next time you apply for credit yourself. Co-signing for a friend or family member "plays well at the Thanksgiving table, but it doesn't play well in the underwriting office," says Ulzheimer.

4. Minimum Payments While creditors make money when you carry a balance, lenders who view your credit report don't like to see you paying just the minimums. "It suggests you're under financial stress," says Nessa Feddis, vice president and senior counsel for the American Bankers Association. "You may be defaulting," she says. Paying minimums once in a while doesn't necessarily signal a problem, she says. For instance, paying minimums in January, after holiday spending. Or paying minimums one month as you wait for your annual bonus to arrive. But consistently paying minimums month after month signals that you can't pay off the full balance, and your current and future lenders will see that as a giant red "stop" sign when it comes to granting additional credit.

5. A Lot of Inquiries This is similar to soliciting a lot of new credit. When lending standards tightened, a lot of borrowers, especially subprime borrowers, were having trouble getting credit, says Sweet. That meant that they had to apply multiple times to try and get what they wanted. And, with the VantageScore at least, that "actually influenced the impact of inquiries -- they are more important than they used to be," she says. With the FICO score, the impact of inquiries has remained about the same, according to Ulzheimer. Every time you allow a potential lender to pull your credit report, your score can take a small hit. The exact impact varies with the consumer, the score and the number of inquiries. And if you're applying for a home, auto or student loan, you can minimize the damage by making all of your applications within a two-week period. When you do that, the score bundles all the similar inquiries and treats them as one. Unfortunately, there is no similar grace period for credit card applications. 6. Cash Advances "Cash advances, in many cases, indicate desperation," says Ulzheimer. "Either you've lost your job or are underemployed. Nobody takes out cash advances against a credit card because they want money sitting in a bank somewhere." Because the interest rate is generally higher than for the credit card charges, "you're generally borrowing from Peter to pay Paul," he says. How it hurts: First, the cash advance is immediately added to your debt balance, which lowers your available credit and can lower your credit score, says Ulzheimer. And all potential lenders will see your score. Second, larger card issuers regularly re-evaluate their customer's behavior. To do that they often pull the credit report, the FICO score and the customer's account history and put those three ingredients through their own scoring systems, says Ulzheimer. Many of the those scoring models penalize for cash advances, which are often seen as risky, he says. Since your account history is available only to that issuer, only your behavior score with that card is likely to be affected, he says. However, if the issuer slices your credit line or cancels your account, that could impact your credit score. And that could affect your relationship with other lenders.