Most of us think that little debt doesn’t hurt, right? Well, it begins like that. You buy little by little on your credit card, and before you know it, you have thousands of dollars in debt. Yet many of us wonder that what is wrong with debt?
When we want to get a loan, that is when we realize the big deal about debts. It is good to start with knowledge of your debts and credit score if you want to get a loan.
Lenders learn all about borrowers’ finances and how efficiently they pay their credit card bills and other loan instalments. Here are the ways debts can hurt your chances of getting a loan, and what you can do about them.
Get Started on Clearing Up Your Debt
Debt may not feel like a burden, and is like an illusion when you swipe your card or sign loan documents. However, you pay the expense of your debt in the form of high interest.
The higher the interest rate, more the debts accumulate, and you get stuck in a vicious cycle. The only exception is an APR credit card or incentive free loan or zero percent, but these have a cap too, which you can lose if you default on your payments.
Improve Your Credit Score
Credit scores are essential considerations for personal loan applications. The higher the score you get, the better are your chances of approval.
Check for Errors in Your Files
According to the Consumer Financial Protection Bureau, common errors that might hurt your score include misconstrued accounts and closed accounts reported as open, and improper loan limits.
At AnnualCreditReport.com, you can get your credit reports free of charge once a year. Dispute any mistakes online, in writing, or by phone with evidence to support your claim.
When you apply for a home loan, for example, your other loans such as auto and student debt, are all taken into account. You may be refused a mortgage loan if your other debt payments are too high.
For most situations, if you intend to secure a mortgage, your total monthly debt payments can not exceed 43% of your income.
Get on Top of Your Payments
If you don’t do this already, start paying more than the minimum amount, how much ever you can, towards your monthly payments for all your debts.
It will support your payment history and your credit use ratio, which is the amount of the current credit you use. These two factors together account for 65% of your FICO ranking.
You can also request for an increase in your credit limit. If you have an increased income after you got your credit card and have not defaulted on any payments, you have a better chance of getting a higher credit limit.
A 30% credit score is based on the debt sum you have. The lower your credit score is, the more debt you have relative to your credit limits and your initial credit balance.
Even if you don’t get a credit card or loan, your credit value affects your life and your other commodities’ costs, such as automotive insurance products, etc.
Rebalance Your Debts and Income
Loan applications request your annual income, and you may include part-time money earned. Consider starting a side-job to increase your income or working towards a full-time increase.
Do as much as you can to repay your debt, too. Take liquid assets, such as taxable-account stocks.
Boost your revenue and lower your debt, which means a percentage of your monthly debt payments divided by the monthly return, will improve your debt/income ratio. Note that most lenders have strict DTI criteria.
Debts are not ideal, however, sometimes they are the only viable way out of a financial crisis. Boost your chances of getting a loan by balancing your debts, and always keep your doors open to better financial opportunities.