Credit Resources
Joint Debts 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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