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If you are
married and most of your debts are joint and
your spouse has an income, you should strongly
consider submitting a joint application. Otherwise you are trying to get a credit
approval based on your total debt but less than
your total income.
If you could easily cover all your household
debts yourself and have money left over at the
end of the month, you probably can apply on your
own. If you need your spouse’s income to cover
your monthly debts, you likely need to submit a
joint application.
Debt to Income Ratio
Many lenders will use the information you
provided on your application about your income
and the information on your credit file to
calculate a Debt to Income Ratio.
Those that do take what appear to be your fixed
monthly payments (Mortgage, car, minimum
payments on loans, etc., and divide it by your
monthly income. If the ratio exceeds a certain
percent, some institutions may decline you. If
you have more than one household income, you
should strongly consider making a joint
application since you don’t want the lender to
consider your request based solely on your
income but all of your household debts.
Credit Card Balances, Limits, Usage & how to
keep your scores high
Many people
think you have to carry balances on credit cards
and loans in order for it to be considered as
“having credit”. Not so. You simply need to keep
it active. The best scenario is to have one or two high
limits on a couple of credit card accounts to
show potential future creditors that other
people have deemed you “worthy” of that amount,
but not to run them up too much & make the
lenders think you need credit badly. Ideally use
each credit card you have at least once every
month, charging any amount and then pay it off
so the account will report the current month to
the credit bureau which shows the account active
rather than dormant. This tells people you use
it but don’t need it.
If you carry balances, creditors and credit
agencies have risk “triggers” for which they
will classify you as a higher risk and
dramatically lower your credit score and
increase your possibility of being declined for
personal loans and small business loans. If you
carry balances 20%, 50% & 75% or higher of your
total limits, these are threshold limits for
many companies. The percentages and how they are
interpreted will vary slightly, but what’s
important is that overall, these are considered
elevated risk levels. A person with a $2,000
credit card and a $1,900 balance will be
penalized more in the usage category than a
person with $50,000 in limits and $30,000 in
balances.
The person with $30,000 in balances may get hit
for having a higher total, but they will get an
advantage in percentage of limit usage.
If you have 75% or higher usage and are about to
apply for an important loan, one short term
trick to improve your score is to, believe it or
not, get another credit card so that your
percent usage goes down. This is feasible and
works better in the $5K to $25K range. Someone
with $10,000 in limits and a $5,000 balance is
going to have a lower usage percentage and look
better than a person with $5,000 in limits and
$5,000 in balances, even though they owe the
same amount.
A better solution would be to simply make a
large payment on a card, even if it from a
savings account. After you get the loan, you can
“repay” your savings account if it was on a
credit card or line of credit. This will not
work with a regular installment loan.
Disputes
Many people
will at some point have a dispute with a lender,
creditor, or retailer regarding a loan or
purchase they made and will consider not paying
amounts owed because they feel they were not
given what was promised. Not paying will
probably hurt you more than it will help you.
It’s happened to most of us. We bought something
that didn’t work right, we were charged
something we felt we shouldn’t have to pay and
so we don’t. Even though we are right, it will
very likely help us more by paying rather than
not paying.
If you have a dispute and you don’t pay the
disputed amount, the other party may report this
item as unpaid on your credit report. In many
cases, disputes are less than $500. If you think
you will probably take out large loans in the
future such as a mortgage loan, car loan, or
business loan, you will likely be saving money,
be more likely to get approved, and make your
life easier by paying the disputed item.
Example:
Britney Borrower receives a bill from a recent
hospital visit and there is a charge of $300 for
an additional X-Ray she didn’t realize was
considered an additional X-Ray, wasn’t told
about it, and so Britney refuses to pay. After
120 days trying to collect from Britney, the
Hospital charges off the account and reports it
to the credit bureaus as a charge off. The
charge off reports on Britney’s credit file
beginning in July. As a result, Britney’s credit
score drops from 655 to 605.
In August Britney decides it is time to buy a
home. She goes to her bank who promptly declines
her for a loan. She finds out she is declined by
her bank due to “derogatory credit” and because
her credit score is too low (The lender’s cutoff
is 630)
Britney then goes to an alternative lender who
approves her for her $200,000 mortgage, but due
to her recent derogatory credit and low credit
bureau score, is setting her rate at 8% instead
of the 6% on a 30 year note she would have
gotten with a 655 bureau score. If Britney pays
off the entire loan, she will pay $80,000 more
in interest over the 30 years because of the
$300 X-Ray bill she didn’t pay. Britney didn’t
save $300, Britney spent $79,700 more. Of course
she was in the right, but being in the right
doesn’t always put you in the best position.
Britney’s score may go up and she may refinance,
but that will take time, and interest rates may
go up in the meantime, when she could have
locked in at a low rate.
There are many other examples, but it is
generally better to pay a disputed bill because
it will cost you more in interest on higher rate
loans than the amount in dispute.
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