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June 14, 2019 Consumer Loans Home Loans Personal Banking Joshua Williams

Know Your Credit Score

It is important to know the buying power that you have. Your credit score determines your creditworthiness to a financial institution. In other words, it represents how suitable you are to receive a loan. We will go over good and bad credit, what to do if you find a fraudulent account on your credit report, and what is a debt to income ratio.

Credit Score

Your credit score tells them how long your credit history is and if you have a clean history of making on-time payments or a history of late payments. Credit scores range from very poor (around 300) to excellent (800+). According to Experian, one the three major credit bureaus, the average credit score is between 600-7501. However, sometimes a high score doesn’t show the broader picture. It is possible to have a high score in the 700 to 800 range and have a very limited history. This could be a concern when applying for such a large amount to purchase a house if you have only had a slew of small credit cards opened for a short amount of time, even if they are paid on time. There are two possible remedies to this situation:

  • Add a co-borrower t your application, not a co-applicant. The difference is that a co-borrower will be listed on the loan note as an owner and will be equally responsible in the event the loan is defaulted. Defaulting on a loan means that it has not been repaid according to the agreed upon terms. If there is a late payment that would be reflected on their credit history as well. Keep in mind that their current debt will also be considered. That could pose a problem if they are overextended with debt. You would want someone with a longer credit history that has carried prior large balances and has a clean history of repayment.
  • Wait as you build your credit. While not necessarily quick or ideal, this will help you in the long run. Build your credit with a Savings Secured loan where you put funds into an account as collateral. You are then give a loan for the amount on hold with a low interest rate and pay it back during a set term. The loan is reported to all of the credit bureaus and will help build a positive credit history.

Fraudulent Accounts

If you have any question of the validity of an account, call that creditor, or that company that issued the card or loan, to make sure it is valid. Sometimes you may not recognize the name of the creditor, especially if it is for a store credit card. A lot of store credit cards will be listed by the financial institution or group that owns the cards and might not list the actual store name. A quick Google search should put your mind at ease but don’t be afraid to call and verify the account. If you find a fraudulent account you will have to dispute it with the three credit bureaus; Experian, Trans Union, and Equifax. A dispute can take months to be resolved so remember to hang onto a copy of any documentation. You may need to provide it to a financial institution during your mortgage application process. Be up front with the lender about it so they will know ahead of going into the review of your application. The mortgage loan officer that reviews your application hates surprises just as much as you do. Federal law requires that each of the three credit bureaus provide a free credit report to each individual once a year, so make it a habit to thoroughly check these reports annually to avoid such fraudulent activity.

Debt to Income Ratio

Another factor that affects your credit score and potential to be approved for a loan is called your debt to income ratio. This takes into account your gross monthly income before income taxes are taken out and how much debt you have to pay each month. Here’s how to calculate yours:

  • Write down your minimum payment on any and all:
    • credit cards
    • personal loans
    • car loans
    • housing (depending on your situation, this would either be our rent or mortgage payment)
  • Add them up to find the total.
  • Subtract this total from your gross monthly income.
  • Take that figure and divide it by your gross monthly income. That percentage is your debt to income ratio, or how much of your income is spent on current credit obligations alone and not daily expenses like groceries, utilities, cable, gas for your vehicle, etc. For example, a 50% debt to income ration means that half of your gross income is going towards your credit obligations.

Since this calculation is using your income before taxes have been taken out, a 50% debt to income ration could be considered on the higher side. You may be required to pay down certain credit balances before you can be approved. This will help your bottom line and could even increase your credit score which could possibly position you for a better interest rate on your mortgage loan. Remember, long-term, you want to be debt-free, so taking the time and making the effort to pay off unnecessary debt will not only help you short-term, but it will help with your future financial success.

Take the time to review your credit report, calculate your debt to income ratio, and find out what your buying power is. You will then feel more confident when applying for credit and can make adjustments as needed. Know your credit score.