Obtaining and Maintaining Credit

Title: Get Smart About Debt.

Source: Money. Oct2009, Vol. 38 Issue 10, Special Section p1-7. 5p.
Document Article
Type:
Subjects: PERSONAL loans
DECISION making -- Economic aspects
DEBT -- Management
DEBTOR & creditor
FINANCE
CREDIT ratings
Abstract: The article is a special section and guidebook on managing personal debt. It presents so-
called rules regarding decisions to take loans, credit worthiness and associated loan
interest rates, use of home equity, lender perspective on personal credit reports,
elimination of debt, and maintaining good credit habits.
Lexile: 930
Full Text 1572
Word Count:
ISSN: 0149-4953
Accession 44175048
Number:
Database: MasterFILE Premier

RULE NO. 1: Borrow only when it makes financial sense.

During the boom one barely had to be breathing to qualify for loans and lines of credit. Result: Too
many people leveraged themselves silly. By 2007, U.S. households owed $1.33 for every $1 of
disposable income. With so much debt, many people couldn't cope when their mortgage rates reset or
they lost their jobs.

Before taking on debt, make sure not to get into a similar pickle. First, an individual must examine his or
her debt- to-income ratio, or monthly debt payments divided by monthly pretax income. It is necessary
to stay under 30%. Next, the individual must consider why he or she is borrowing money. Generally
speaking (but especially in tough times), one should try to limit borrowing to "good debt," which
finances something likely to retain or gain value, such as mortgages and student loans: homes,
historically, keep their value, and a college degree pays off in higher earnings. Low rates and tax
benefits are other signals that taking on a debt makes sense. Using credit for a vacation or a 50-inch TV
constitutes bad debt. Save up and pay cash instead.

RULE NO. 2: Eliminate the right debts first.

 Forty-eight percent of Americans are in debt, according to an AP poll. Knowing that debt exists is not
enough. A strategy must be discerned.

Specifically, tightening purse strings and accelerating payment on the debt that has the highest interest
rate first is a great start. Typically that's includes credit cards. Small increases in payments can
dramatically reduce the time and money it takes to zero out the cards. After paying off the highest-rate
loan, apply that money to the next-highest-rate loan. And so on. Individuals tend to not speed up
payments on home or student loans because of the tax deduction on interest. If an individual does not
have six months' worth of living expenses stashed away, split any extra money between paying debt and
building an emergency fund.

Lenders desire to dole out capital; however, they are more cautious than ever, carefully choosing
individuals with good to excellent FICO scores, so it is imperative to make oneself appear attractive to
lenders:

1: MONITOR HOW MANY INQUIRIES ARE MADE: "Soft" inquiries are made when an
individual or an existing creditor checks a report; "hard" ones appear when one applies for credit. Only
hard inquiries from the past year affect an individual’s credit score. The fewer, the better.

2: DISCERN INDIVIDUAL JUGGLING: The main part of one’s report lists open credit accounts,
plus those closed up to 10 years ago, with amount owed and the limit or initial loan amount. Lenders
want to see that an individual can handle a mix of credit types. A long history of managing debt looks
good, so keep oldest credit cards open and active.

3: BE COGNIZANT OF HOW MUCH CREDIT IS BEING USED: Lenders pay particular attention
to the amount owed on credit cards relative to the limits on the card. (Note: Creditors usually report to
bureaus the day the billing cycle closes, so a statement balance is incorporated.) Aim to use less than
20% of one’s available credit.

4: NOTE TIMELY PAYMENTS: Payment history is key in how lenders view the risk of an
individual. The later an individual is in paying a payment and the more times that individual slips up, the
less appealing a risk the individual is to creditors. If an individual has just one late payment on his or her
record, ask the lender to make a good-will adjustment on the report. If one’s credit history has become
flawed, resulting in liens, bankruptcies, and delinquent accounts, the effects can last up to 10 years
afterward. It must be noted, however, that an individual is entitled to add a personal statement to his or
her report, explaining reasons regarding late payments, i.e. loss of job, health difficulties.

MLA:

"Get Smart About Debt." Money Oct. 2009: 1A. Business Insights: Essentials, 8 Nov. 2018,

http://bi.galegroup.com/essentials/article/GALE%7CA207645306/b03ef53395859b19cce618ec39deb66f

?u=pl2808. Accessed 25 Mar. 2014.