How to Qualify for Credit PDF

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LECTURE NOTES NEW FALL 2019...

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Credit capacity: Determining your own ability to borrow money OR borrow more money Your credit ability (the “five C’s”) Tools that the bank uses: Credit score Credit report Collateral Guarantee The most important test for taking more credit is YOUR analysis of ability to handle another loan: Check your budget, can you afford to make more loan payments? Be truthful and conservative. Fudging the conclusion only hurts yourself Character - Do you pay bills on time? Capacity - Can you repay the loan? Capital - What are your assets and net worth? Collateral - What do you have of value that you pledge to the lender that they can repossess if you fail to honor the terms of the agreement? Conditions - What economic conditions could affect your ability to repay the loan? Have you borrowed money before? Do you pay your bills on time Do you have a steady job? Could you lose your job? Looking at your income and existing debt, can you easily pay this new debt? Do you have enough assets to pay your bills? If an asset is secured, will it easily cover the debt? Could a change to your personal situation change your ability to pay?  Trend of total available credit  The total amount of unused credit available to you under all credit agreements  Unused credit = credit agreements less the amount of credit that you have used  Trend of total debt incurred  Is your total debt owed increasing, decreasing or remaining the same? 

Basic credit calculations

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Credit score

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Credit report

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Collateral and guarantees

1. Debt payments to income ratio (“DTI”) a) The front end test: All housing costs/ total income a) The back end test: Total recurring payments (except housing)/total income 1. Front end test result should not more than 36% and the back-end test should not be more than 28% 1. Debt payments to income ratio (“DTI”) a) The front end test: All housing costs/ total income a) The back end test: Total recurring payments (except housing)/total income 1. Front end test result should not more than 36% and the back-end test should not be more than 28% 3. The net worth test: 1. Divide total liabilities by net worth 4. Total liabilities should not exceed total net worth The net worth test: Divide total liabilities by net worth Total liabilities should not exceed total net worth  FICO scores are the credit scores most lenders use to determine your credit risk.  You have three FICO scores, one for each of the three credit bureaus - Experian, TransUnion, and Equifax.  Each score is based on information the credit bureau keeps on file about you.  As this information changes, your credit scores tend to change as well.  Your 3 FICO scores affect both how much and what loan terms (interest rate, etc.) that lenders will offer you at any given time.

Credit history: Until you have a history, you have no score.  Having credit accounts - credit cards or loans - over a period of time will get your credit score off the ground.  Payment history: If you have been late on bills or outright not paid them, this will negatively affect your score. 

Lenders figure if you've failed to pay bills in the past, you'll probably do it again ... and they'll be stuck with the bill.

If you can prove that you are reliable about paying bills on time, your credit score will be much healthier.  Types of credit: Folks with only a secured credit card (typically, cards requiring the user to pay in advance) are often seen as being riskier than someone who shows they can handle different types of debt.  Bankruptcies: As you might expect, these lower your credit score pretty dramatically.  Some credit analysts may improve the credit score AFTER people decline bankruptcy because the law only permits another declaration of Chapter 7 bankruptcy (forgiveness of some debt) after 6 years have passed and Chapter 13 bankruptcy (repayment plan) after 13 months  Bankruptcy filings remain in your credit files (and presumably your credit score) for 7 years Amount you owe: How deep in the hole are you?  For this, lenders look at how much "open" credit you have on credit cards.  You might not have maxed them all out - but you could.  Therefore, lenders will consider this potential debt, and too much of it can hurt your score.  Having the cards maxed out will make the score even worse. Requests for new credit: Repeated attempts to borrow money or open new credit cards over a short period of time can look worrisome, thus lowering your score. When planning to get a new credit card or take out a loan, do your research and make only applications you are serious about. •

Per Consumer Reports:

According to a recent federal report, "the typical 'A' credit or prime borrower ... has a FICO score that exceeds 650, has no late mortgage payments, and no more than one 30-day late payment on consumer credit.“ •

Some lenders consider 680 to be the score that borrowers with good credit must have

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Scores below 550 are higher risk credits

Extracted from an article by Liz Weston of MSNMoney.com: 1. Pay down credit card bills 2. Use credit cards less often (...