What good is a good credit score?
What can it be used for?
What is a good credit score?
Areas Covered
•Six Principles to a Good Credit Score
• Credit Report
• Master My Credit
• Buy a Car
• Prepare for a Loan
• Refinance a Loan
• Buy a Home
• Get Married
• Start a Family
• Stay on Budget
• Get out of Debt
Vantage Score
While your credit report is a detailed, comprehensive document,
Vantage Score shows you your credit health at a glance.
Some factors influence your Vantage Score more greatly than
others. Here's the breakdown:
•Payment History (32%) The promptness of your payments
•Credit Utilization (23%) The percentage of available credit that you've used
•Depth of Credit (13%) The length of time you've had credit
•Balances (15%) Your outstanding balances
•Recent Credit (10%) The frequency you apply for new credit
•Available Credit (7%) The unused funds you have readily available
•Combined, the above factors are good indicators of how you pay your bills
and how much you rely on credit. If you do both responsibly, your Vantage
Score will reflect that.
The Six Principles that greatly
contribute to your Vantage Score
include:
Payment History
A history of late payments - even by a few days - can be potentially hurtful.
Payments received beyond 30-days of the due date are considered late.
When lenders report credit data to credit bureaus, they typically lump
payments that are late one day in with those that are late 59 days.
Credit Balance
Similar to the utilization issue, credit balances current and past provide
insight into issues of financial liquidity and prudent borrowing. Historically
maintaining high balances on key credit accounts will likely have a negative
impact on a score.
Recent Credit
A consumer that opens a number of credit accounts in a narrow timeframe
may be interpreted as experiencing cash flow problems, particularly if
utilization of his or her previously existing available credit is very high. In
addition, a large number of credit inquiries in a short timeframe may also
lower a score. However, multiple inquires for a mortgage or auto loan will
be counted as only one inquiry each, enabling consumers to shop for
favorable rates without fear of lowering their score.
Utilization
Having access to credit is one consideration, and how much of that has been
tapped into is another. An individual who has "maxed out" his or her credit
cards and/or other lines-of-credit may not be able to obtain any additional
credit or credit at the best possible terms. The lack of liquidity will deem
these consumers high-risk in the eyes of lenders.
Depth of Credit
Having a strong, long history of prudent credit use is ideal under any credit
scoring model. But as important as it is to have long-term credit
relationships, a diverse mix of credit accounts is also beneficial. Don’t close
accounts!!
Available Credit
Maintaining low balances on credit cards and open lines-of-credit will be a
positive factor in generating a score. The typical benchmark is to keep these
balances at or below 30% of the total available credit.
Credit Report…
When lenders evaluate your credit applications, they review
your credit report to get a detailed history of your credit. Your
credit report includes data provided by the three major credit
bureaus, TransUnion, Experian and Equifax. It features:
Personal Information…
The personal information section of the credit report contains
basic information about you, including:
Your name (Including any other names you may use)
Your date of birth
Current address
Previous addresses
Employer information
The data in this section is often used to verify your identity or
to confirm that the information you provided for an credit
application is accurate. Small variations in this data between
the three bureaus are normal as each agency has its own
recording procedures.
Summary…
The Summary section provides quick, high-level insight into the
accounts in all three of your three credit reports. This overview
allows you to quickly compare data being reported by the three
agencies and includes:
Total Accounts: The total number of open and closed accounts
Open Accounts: The total number of open accounts
Closed Accounts: The total number of closed accounts
Delinquent: The number of past due accounts
Derogatory: The number of accounts that are negatively impacting
your credit health
Balances: The total amount of debt you owe for all open and closed
accounts
Payments: The total amount of all your monthly payments for open
and closed accounts
Public Records: The total number of public records associated with
you. Includes bankruptcy filings, court judgments and tax liens
Inquiries: The total number of inquiries reported in the last 2 years
Account History…
The Account History section of your credit report provides detailed
information about all credit accounts that have been opened in your
name. Your credit accounts are divided into the following categories:
Real Estate: First and second mortgage loans are "installment" debt
which means they have fixed terms and regular payments.
Mortgages are "secured" debt, where your home is acting as the
collateral for the loan.
Credit Cards: Credit card accounts are "revolving" debt which means
they have open terms and varying payments. Credit cards are
"unsecured" debt, where no collateral is put up as security for the
loan.
Automobile: Automobile loan accounts are "installment" debt which
means they have fixed terms and regular payments. Automobile
loans are "secured" debt, where your automobile is acting as the
collateral for the loan.
Student Loans: Student loan accounts are "installment" debt which
means they have fixed terms and regular payments. Student loans
are "unsecured" debt where no collateral is put up as security for the
loan.
Account Details
Each account listed on your credit reports includes detailed
information based on the most recent update to the credit
bureaus from your lender. Be mindful that, in some cases,
these updates aren't immediately reflected in the credit report
and take time to come to the attention of the credit bureaus
systems.
The details included are:
•Creditor Name: The official account name. This may differ from the larger financial
institution that manages your account
•Account Number: An identifying number for your account. A portion of the number
is hidden for your security. In the event you need to dispute an inaccuracy related to
this account, this partial account number is all that is needed
•Condition: Whether the account is open or closed
•Balance: The amount you presently owe on the account
•Type: The account's specific type. Common types are real estate, credit card,
automobile and student loans
•Pay Status: The account's payment status
•Past Due: The amount of payment overdue
•High Balance: The most you have ever owed on the account
•Terms: The number of payments you have scheduled with the lender to pay off the
entirety of the loan
•Limits: The maximum you are approved to borrow
•Payment: The minimum amount you are required to pay each month on the amount
•Opened: The date the account was opened
•Reported: The last date that any information on this account was reported to a
credit bureau
•Responsibility: Indicates who is responsible for the account
•Late Payments: A summary of your 30, 60, and 90 days past due payments from the
last 7 years
•Remarks: Notes about the status or condition of your account
Collection Accounts…
Collection accounts are accounts that are severely past due and have been
transferred to an attorney, collection agency or the creditor's internal collection
agency. As your debt is transferred between different agencies, you may see several
records on your report for the same debt. Only one record should be marked as open
at a time. All the collection records and the original debt record will expire from your
credit report at the same time. Collection records use a unique summary format on
your credit report:
•Creditor Name: The official name of the company currently collecting the debt
•Account Number: An identifying number for your account. A portion of the number
is hidden for your security. In the event you need to dispute an inaccuracy related to
this account, this partial account number is all that is needed
•Original Creditor Name: The name of the original creditor where you accumulated
your debt. This could be an account that is listed on your credit report (such as a
credit card) or an account that is not listed on your report (such as a library, video
rental or cell phone company). If this creditor was a medical office, the name may be
masked for your privacy
•Responsibility: Indicates who is responsible for the account
•Condition: The current status of your collection record. For example, open, closed or
paid
•Original Balance: The amount of debt owed on the original account before it was
transferred
•Date Opened: The date the account was transferred to the collection agency
•Date Reported: The date of the collection agency's last update to this account record
Public Information…
The public information section of your credit report includes publicly
available information about legal matters affecting your credit. This could
include judgments against you in civil actions, state or federal tax liens and
bankruptcies.
There are eight types of public records that can appear on your credit
report:
•Bankruptcy: A legal filing that relieves a person of responsibility for all or
some of their debts because they are unable to pay
•Tax Lien: A claim filed by a local, state or federal tax agency against a
person who owes back taxes
•Legal Item: A general filing. This is most commonly a judgment against
you in civil action
•Marital Item: A legal filing related to a marital or divorce issue
•Financial Counseling: A public record indicating that a person has
participated in financial counseling
•Financial Statement: A type of financing statement filed by a creditor
against a person's property. This can be filed when a loan is secured against
personal property
•Foreclosure: A record indicating that a mortgaged property has been taken
over by the creditor because the borrower has defaulted on the loan
Public Information…
The public information section of your credit report includes publicly
available information about legal matters affecting your credit. This could
include judgments against you in civil actions, state or federal tax liens and
bankruptcies.
There are eight types of public records that can appear on your credit
report:
•Bankruptcy: A legal filing that relieves a person of responsibility for all or
some of their debts because they are unable to pay
•Tax Lien: A claim filed by a local, state or federal tax agency against a
person who owes back taxes
•Legal Item: A general filing. This is most commonly a judgment against
you in civil action
•Marital Item: A legal filing related to a marital or divorce issue
•Financial Counseling: A public record indicating that a person has
participated in financial counseling
•Financial Statement: A type of financing statement filed by a creditor
against a person's property. This can be filed when a loan is secured against
personal property
•Foreclosure: A record indicating that a mortgaged property has been taken
over by the creditor because the borrower has defaulted on the loan
Master My Credit
To master your credit, pay close attention to your credit alerts and regularly review
your Vantage Score and credit report. Your Vantage Score and grade, which is a
summary of your credit health. A grade of C or above will help qualify you for most
credit and loan terms. The better your score, the better the interest rates available
to you.
To be sure your Vantage Score represents you well, confirm that the information
detailed in your credit report is current and correct. If not, follow the procedures to
dispute any inaccuracies. Questionable line items could be the sign of identity theft.
Of course, even if all information is accurate, you can still be proactive about
effectively managing your credit. For example, if your credit report contains
negative records over ten years old, initiating a dispute may help remove them. Just
be sure not to dispute positive records on your report.
A positive account over ten years old will reflect a strong history of credit.
Another opportunity for attaining mastery is in reviewing your active credit and
loan accounts. Make sure you're not testing the limits of your credit cards, or
carrying a debt to income ratio of over 35%. If you have more debt than you'd like,
refinancing could help you lower your monthly payments. And creating a reasonable
monthly budget and honoring it will help you reduce your debts.
Also, be sure to reserve emergency funds in a savings account. If you need the
money for a surprise expense, using it won't cost you interest.
By cleansing your credit report and accounts, you'll be well on your way to
mastering your credit.
Master My Credit…What I can do?
Research your options for refinancing.
Create a sensible monthly budget.
Dispute credit report inaccuracies and verify
expired debts have been removed.
Make a list of areas of improvement.
Establish a routine of monitoring your credit alerts.
Schedule a monthly contribution to a savings
account.
Car Buying
Cars are expensive, but practicing the wisdom when buying can help make buying one more
manageable. The key is to be realistic and practical.
If you need to finance your car, take care of your credit before you apply — doing so may save
you money. For example, if you save a mere 1% annual interest on a $20,000 loan over six
years, the savings could be more than $550. Remember, generally the higher your credit score,
the lower the interest rate you will be able to obtain.
While financing through the dealership is often convenient, keep in mind that there are other
options available. Check with local banks and credit unions, or consider a home equity loan,
for better rates and terms.
Review your credit report, credit score and debt accounts on an ongoing basis. Inspect them for
opportunities to enhance your financial well-being by disputing inaccuracies or paying down
balances. In addition to helping you prepare for a loan, looking into your credit will also help
you think like a lender — and give you more insight into the approval process. When it comes
to car buying, the more information you have, the better equipped you'll be to negotiate.
In fact, when shopping for cars, research is essential. First, find how much car you can afford
by determining what your budget allows and using a debt-to-income ratio calculator. If your
debt or monthly expenses are especially high, weigh the advantages and disadvantages of
adding another loan payment to your budget. It can be a good exercise to try saving your
monthly payment for a few months to see if you can fit the new payment into your budget.
Consider your options; it may make sense to set your sights on a less expensive car. Or maybe
a used car would be a smarter decision. After all, new cars generally depreciate 10-35%
during the first two years. Investigate depreciation rates on the models you're researching. Of
course, if you're considering a used car, be sure you know what you're getting. Maintenance,
warranty and insurance costs may outweigh the initial savings. On average a new car can cost
$729 per month, including maintenance, insurance, licenses and related costs.*
Leasing a car is another option to contemplate. Leasing is like renting, but for a
longer period of time. While leasing might not save you money over the long term, it
could fitmore easily into your monthly budget.
Whether buying or leasing, it pays to plan ahead. If you're going the financing route,
start by thinking about your down payment. The more you pay up front, the less
you pay in interest and the lower your monthly payments. Trading in a car you
already own is another way to lower the total amount you have to pay. Make sure
you research the current value of your trade-in ahead-of-time.
If your credit is flawed because of divorce, illness, job loss, or other circumstances, it
may help to explain your situation to a potential lender. If you can present a
sound plan for repaying those debts, you may have a better chance of getting the
loan and financing terms you're seeking.
Remember, looking inward and understanding the lender's point-of-view can help
you position yourself to negotiate the loan rate you deserve. And having healthy
credit gives you the best bargaining power.
This is a great option if you are planning on deploying within the next 2 years. You
can turn-in ANY leased car with military orders, no questions asked, even if your
over the mileage limit or damaged the vehicle. This only includes deployments or
overseas assignments like Korea or Germany.
Car Buying…What I can do?
Address the two big questions — new vs. used? Buy vs.
lease?.
Research negotiation strategies to be prepared when you go
into the dealership (For every $1,000 you drop off the
manufacturer's suggested retail price, your monthly payments
on a 48-month 10% loan may be $25 less).
Set a goal for a down payment of at least 10% and
incorporate it into your monthly budget.
Explore auto loans at banks, not just dealerships.
Review your budget and calculate your debt-to-income ratio
to help determine what you can afford, based on the cost of
insurance, gas, parking and maintenance.
Read the reviews on cars that meet your needs.
Prepare for a Loan
Whether you're looking to finance a home, car, college education or other significant
purchase, you need to prepare your credit for a successful loan application — and to
receive the best possible interest rate for you.
To begin, review your credit report carefully. If anything seems inaccurate or
unfamiliar, file a dispute and allow time for the investigation. Review them
regularly — and especially before a major purchase.
Lenders will review your credit report when evaluating your loan application to
determine your interest rate. With a healthy credit report you are on the path to an
affordable loan.
Continue your preparation by reviewing your credit score, which can help you
measure the strength of your credit report. If your grade is a C or below, examine
your existing debt accounts. Late payments and maxed-out credit cards can have a
significant negative impact. Strive to correct problem areas by paying down debt,
limiting inquiries and paying bills on time.
Lenders look more favorably on debt-to-income ratios below 35%. If yours is higher,
increase your payments or look for other expenses that can be eliminated.
Practice plugging the new loan payment into your budget to ensure you can afford
the expense. Take the time to shop around for the best deal and empower yourself
with information to negotiate.
A little preparation can really pay off. Mastering your credit health before applying
for a loan can save you thousands in the long run.
Preparing for a loan….What I can do?
Review your credit report and dispute any
inaccuracies.
Pay your bills on time — at least the minimum, and
if possible, in full.
Avoid applying for many new credit accounts as you
prepare for the big purchase.
Work to pay down your credit card balances below
35% of the limits.
Know the interest rate you deserve and shop around
for the best deals.
Practice plugging your new loan into your monthly
budget to see what you can afford.
Refinance a Loan
As you work toward achieving personal financial goals, your own financial status will change and so will the economic climate. If market
conditions and your credit are both favorable, it's a good time to think about refinancing mortgages and auto loans.
Here's how: first, monitor your credit report and credit score to evaluate your credit health before it's reviewed by lenders. Look for
opportunities to enhance your financial well-being, like disputing inaccuracies or paying down balances. If your financial habits have
improved significantly since your initial loan, you may already be eligible for a lower rate.
Next, determine whether refinancing is truly a sound financial decision. While the concept of switching to a lower rate is compelling, there
will be fees, closing costs and other expenses obstructing your path. Read the fine print and calculate the total cost. Depending on your
situation, refinancing may or may not be worth the expense.
There are several reasons to refinance your home:
To lower the interest rate on your mortgage, reduce your monthly payments and overall cost
To reduce the term or length of your loan and save thousands of dollars in interest
To consolidate your debt
To determine if you should refinance there are three standard questions to ask yourself:
How much can I lower my monthly payment?
How long do I plan to stay in the house?
How much will I pay in refinancing costs?
In general, it's wise to refinance if you can secure a rate at least two percentage points lower than your existing loan. However, it depends
on the total savings amount and your personal goals. For example, refinancing can make sense even if the savings is only a 1% difference
on a $100,000 loan — 1% equals $1,000 savings a year.
Make sure you do the math. To estimate how long it will take you to break even after refinancing your mortgage, divide the total
refinancing cost — including points, insurance and prepayment penalties — by your estimated monthly savings with the new loan. For
example, if you currently have a $150,000 30-year mortgage loan at 6.5% and a monthly payment of $948, and you refinance to a 6% loan
with a monthly payment of $899, you could reap substantial savings over the life of the loan, depending on the fees and costs.
When calculating your potential savings, don't forget to factor in the cost to refinance. Mortgage application fees may range from $100$350, origination fees typically come to 1/4th to 1% of the loan amount, and there may be attorney fees, title search and insurance,
prepayment penalties and appraisal fees. Assure yourself in advance that the costs to refinance will not outweigh your savings.
If you plan to keep your home longer than the amount of time it will take you to break even, then refinancing could help ease your
financial path. But if you're planning on selling your home in the near future, refinancing may not be the best option for you.
If you discover that refinancing may be too expensive, consider other paths. For example, if you have a large balloon payment coming
due, speak with your lender about negotiating a term extension. If your adjustable rate mortgage payments are proving difficult to budget,
find out if you can switch to a fixed rate loan.
Researching loan products with multiple lenders will give you a better idea of which loan will meet your needs most effectively — how
you can expect to benefit from either refinancing or negotiating new terms on your existing loan. Both knowledge of the available lending
options and the quality of your credit can help you negotiate significant savings.
Refinance a Loan…What I can
do?
Research other options like re-negotiating the terms
of your existing loan.
Investigate rates and loan products with different
lenders.
Calculate the total cost of refinancing and
determine if it is the right decision for you.
Review the interest rates on all your loans
periodically.
Make a list of areas for debt management
Buy a Home
Your home is your haven, a place of comfort and calm. But investing in real estate can be
stressful. Prepare for the process — and responsibility — of buying a home, so you can work
towards your goal with confidence.
Start by thinking deeply about your credit report, Vantage Score, and debt accounts, looking
for opportunities to enhance your financial well-being. After all, taking control of your credit
before applying for a home loan can save you money in the long run. Learn more about
preparing for a loan.
Then, when your credit is aligned, start your search for your new home. But keep your
finances in focus when house hunting, and stay within your price range. Typically, most
borrowers can afford an asking price of two and a half times their annual salary.
To be more exact, calculate your loan to value ratio, the amount you’ll need to borrow divided
by the property's value, which shows you how much house you really can afford. Rates increase
significantly for loan to value ratios above 80%. To lower your ratio, look for less expensive
homes, or save up for a higher down payment.
However, even if you qualify for a large loan, it’s not always wise to borrow a vast amount. And
remember that there are many types of mortgage loans — fixed rate, adjustable rate, short
term, and long term. Each has its advantages and disadvantages. Do your research and choose
the one that best fits your finances.
For example, while fixed rate mortgages have slightly higher rates than other loans, your
monthly mortgage payment will always remain the same — no surprises. And while adjustable
rate loans start out much lower, you run the risk of having your interest rate and monthly
payments increase over time.
Just keep in mind that having healthy credit gives you the most flexibility to choose the loan
you want.
Buy A Home…What I can do?
Determine your price range.
Calculate your loan-to-value ratio.
Make a list of areas of improvement.
Research the pros and cons of different mortgage
products.
Dispute credit report inaccuracies.
Set a goal for a down payment and incorporate it
into your monthly budget.
Establish a routine of monitoring your credit.
Get Married
Marriage is a lifetime commitment where love, friendship and devotion intertwine with
finances and partnership. Before you tie the knot, be sure that you and your spouse-to-be have
a clear idea of each other's financial history, habits, priorities and goals.
Most importantly, be honest with each other. Clear communication about financial matters is
the best way to set expectations and prevent arguments. Be open about your income, debts and
future plans — and ask your fiancé to do the same. Set goals together and develop a money
management plan that you can both agree upon.
If one or both of you has existing debt before the wedding, work together to create a plan for
managing it. Keep in mind that past credit problems may affect future loans, and take action
to resolve them. To start, review your credit reports together to get a clear picture of where you
both stand.
If you open a joint account or apply for a loan together, the record appears on both of your
credit reports. So while combining your finances can help you qualify for more money or better
rates, a negative report has consequences for both of you.
For major purchases that often come along with marriage, like a home or a car, make sure
you save money for a down payment before applying for a loan. Anything you can put towards
the total cost up front will save you money in interest over time.
Before you get to a home or car purchase, you'll probably be saving up for the Big Day. A grand
wedding oftentimes becomes a grand expense. If the two of you are paying for it together, begin
saving early in your engagement. Carefully consider large expenses that result in debt as
you may be adding unwanted stress to your newlywed years.
Ultimately, marriage is about love, partnership, commitment and working together. Do your
best to communicate clearly and honestly about your finances, and practice good spending and
saving habits together.
Getting Married…What I can do?
Be honest with your spouse and discuss your financial goals
and dreams.
Allocate part of your monthly budget to saving for a down
payment on a home or other large purchases.
Make a list of creative ways to manage wedding expenses.
Agree on how much each individual will contribute to
ongoing fixed expenses and to saving. Discuss joint checking
and savings accounts.
Develop a money management plan together that meets both
your needs.
Determine if a prenuptial agreement is needed.
Start a Family
Bringing new life into the world is exceptionally exciting. It can also be daunting,
when you consider the impact to your home economics. But with some simple
financial planning, you can help you effectively prepare for the needs of your
growing family.
Now is the time to re-evaluate your monthly budget. In fact, create two: one for prebaby and one for post-baby. Your pre-baby budget should shift more money than
ever to reducing debt payments and increasing savings.
Regularly review your credit score, credit report and debt accounts, looking for ways
to improve your financial footing. And while maintaining and managing your budget
and debt payments is often not easy, doing it now will pay off after your little one
arrives.
Your post-baby budget should include all your baby-related expenses, including
childcare and college savings. Consider that one of you may be working less — or
not at all.
Be sensible about what your baby really needs. And be creative. Your friends and
family members may be able to offer you a trove of gently used items that their
children have quickly outgrown.
Since shopping for your baby will no doubt be tempting, try using cash and keeping
the credit cards at home. You can factor spending money into your budget, setting
aside the cash in advance, and you won't accumulate new debts.
Debt can have lasting effects on your credit card rates, mortgage rates, and
eventually student loan rates — when your little one is all grown up and heads off to
Starting a Family…What I can do?
Make a list of the essentials and the "nice to haves" for your
baby and focus on the essentials first.
Research the cost of childcare and discuss which options are
right for your family.
Re-evaluate your monthly budget, allocating more money to
reducing debt payments and increasing savings.
Together with your partner create a baby budget in advance
of having the baby.
Stay on Budget
Maintaining your financial health requires commitment and discipline. And much like going
on a diet, adhering to a budget isn't easy.
Before dividing your dollars, consider your short and long term financial goals. If there's
something specific you're looking to buy or accomplish in the future, you'll want to set aside the
funds to help you finance it in addition to saving for the unknown.
Also consider your Vantage Score, credit report, and your debt accounts. By paying close
attention to your credit alerts and regularly reviewing your credit health, you can monitor how
your debt is affecting your overall financial health and your ability to obtain affordable loans.
If your credit is suffering from excessive debt, a portion of your budget should be devoted to
reducing your outstanding balances. If much of your debt is attributed to overuse of credit
cards, it may be a good time to clean out your wallet.
In fact, a wallet cleanse can be done every few months. Look through each pocket and remove
old receipts, extra credit cards, and items that should be kept safely at home, like your Social
Security card. The process is good protection against identity theft, and it improves your
financial focus on the go.
Once you've picked about two or three cards to keep using, your wallet is better equipped to
match your budget. And don't apply for new cards even if there's a great offer at the register.
Not only will you have another statement to manage, you'll have even more temptation to
spend.
Similarly, craft your budget with cash in mind. If you're going shopping, stop by the ATM and
withdraw the exact amount you need. That way you're less inclined to make an impulse
purchase a blow to any budget.
It's also wise to reduce spending on luxury items and try clipping coupons for extra savings.
But don't make your budget overly strict. Leave realistic room for entertainment and
occasional treats. The more balanced your budget, the easier it'll be to adhere to it.
After all, a wisely designed budget makes your financial management easier, not more
Staying on Budget…What I can do?
Allocate a realistic amount of your budget to entertainment
and other discretionary spending.
Create a spreadsheet to track your spending on luxury items.
Cleanse your wallet transferring extra credit cards and your
Social Security card to a safe place at home.
Make a list of your financial goals.
Dispute credit report inaccuracies.
Pick two or three credit cards to keep using.
Pick a day to clip coupons from the newspaper and mark it on
the calendar.
Allocate money in your budget to saving for the unknown.
Get out of Debt
The adage 'all things in moderation' applies to many aspects of life — and debt is
certainly one of them. Gaining control of your debt and paying it down can have a
positive impact on your ability to obtain affordable loans with lower interest rates.
Debt can be classified as good or bad. 'Good' debt is money you have borrowed for
secure, long-term gains such as student loans or a reasonable mortgage. 'Bad' debt is
money borrowed on credit cards or retail cards, or high monthly payments for
unnecessary expensive items.
Good Debt:
A house you can afford
Education and enhancing your skills
Large items, as long as total payments for debt is under 35% of your budget
Better To Save Up For:
Luxury items such as boats, cameras, jewelry
Entertainment items, such as TV's, entertainment systems, non-essential
furniture or accessories
Vacations
The first step toward controlling your debt is to ground yourself in reality by
regularly reviewing your credit report, credit score and debt-to-income analysis.
While reviewing your report, look for problem areas — like maxed-out cards or late
payments. Analyze your debt-to-income ratio; your goal should be to reduce this
ratio to a healthy level of 35 percent or less.
Get out of Debt
Next, organize your debts and determine which should be paid off first. Credit card
debt and small loans should be paid before low-rate student loans and home loans.
Answering "yes" to any of the following questions can help you figure out which
accounts need your immediate attention.
Do you have any debts with rates over 8%?
Are there accounts above 35% of their credit limit?
Do you have any debts that are close to being paid off?
Do you have any debts with high annual fees?
Start executing your pay-off strategy, tackling high-interest credit card debts first.
Call your credit card companies and try to negotiate favorable terms and lower
interest rates. Then transfer your balances to the cards with the best terms and
lowest rates, making sure to account for transfer fees. To avoid harming your credit
score, try to keep each card's balance under 35% of its total line of credit.
If you have credit card debt that is too large to handle with your income alone,
consider taking out a personal loan from your bank to cover it. Your bank can
probably give you a much lower rate and a more manageable payment schedule.
After taking control of your credit card and small debts, evaluate major loans, like
your auto loan and mortgage. There may be an opportunity to consolidate some of
your other debts into these larger ones. Also consider your refinancing for mortgages
or major purchases like auto loans — shopping around at banks and other lending
institutions for the best rates and lowest fees.
Get out of Debt
Once you've organized your debts, create a monthly budget to manage your
spending and loan repayments. Calculate how much of your income you can direct
towards repaying your debts, and allocate those funds first to the debts with the
shortest terms and highest interest rates.
Take advantage of technology to help keep you on track, like using an online
calendar to mark the due dates and the payment amounts you calculated for each
bill. Also, sign up for automatic bill payment through your bank to make sure you
stick to your schedule.
Finally, keep watch for your credit alerts and stay on top of your progress. Set aside
time each month to review your progress and celebrate milestones. With time
and perseverance, you will prevail over your debt.
Getting out of Debt…What I can do?
Set aside some time each month to review your progress and
make necessary adjustments.
Sign up for automatic bill payment.
Investigate your bank's personal loan options.
Transfer your credit card balances to less expensive cards.
Determine which debt should be paid off first.
Create a monthly household budget. Consider consolidating
your smaller debts into your auto or home loan.
Mark due dates and payment amounts on a calendar and
arrange for reminders.
Negotiate lower interest rates and better terms on your
credit cards.
Research refinancing for your auto and home loans.
Summary
•Six Principles to a Good Credit Score
• Credit Report
• Master My Credit
• Buy a Car
• Prepare for a Loan
• Refinance a Loan
• Buy a Home
• Get Married
• Start a Family
• Stay on Budget
• Get out of Debt
References
For free credit report:
www.annualcreditreport.com
All information referenced from:
www.zendough.com