When you apply for credit the first thing your lender will look at is your credit score and credit history. Lenders will use the information found in your credit report as well as your credit score to determine whether or not they will extend credit to you. The FICO credit score is a three digit number ranging from 300 to 850. The higher the number, the better your credit. But how high is high enough to get approved for loans? Do mortgage lenders use a different scale than credit card companies? These are important factors to consider when applying for credit. Here we look at what certain lenders are looking for before they will consider extending credit and how your credit score influences your interest rate.

Mortgage loans- If you are looking for a home, most mortgage loan servicers will require a FICO credit score of at least 620. While this number might get you approved, expect a higher interest rate than those who hit 760 or more. Mortgage interest rates are crucial as a few points in either direction can add up to tens of thousands of dollars.

Car loans- If your credit score is below 500, your dreams of buying a new car might have to be put on hold. A credit score above 500 will likely qualify for a car loan, however the mid to upper 700′s are needed for the best rates.

Unsecured credit cards- Ironically you need a higher credit score to qualify for a credit card than a home or automobile loan. Before applying for a credit card, check your score. If it is below 660 you will likely be redirected to credit cards for those with bad credit. Consumers with a credit score at or above 740 will see the best interest rates on unsecured credit cards.

It becomes clear when looking at the range of credit scores required to qualify for credit, that special attention must be paid to your credit score. It is not enough to have “good” credit that qualifies for a loan, rather you must aim for the best credit scores which qualify for the lowest interest rates. Lower interest rates can save you hundreds if not thousands of dollars over the lifetime of a loan. It pays to know your credit score and how that score affects your personal finances. Armed with this information, consumers have an idea of where they stand before they apply for credit.

Calculating Your Ratio

To understand your debt-to-income ratio, you need to add up the total amount of your fixed monthly expenses. These will include all your debts such as mortgage/rent, credit card bills, car loans, child support, and any loan payments. You will not include expenses that are not ‘fixed’ such as grocery bills, utilities, or debts that are to be paid off in the next two months. Then take your total income amount and subtract your fixed expenses. If the sum is low or even in the negative, you are already in financial trouble. You can see you are barely making ends meet even without taking into consideration utilities, groceries, and emergency money.

Too Much Debt?
Typically, your goal ratio should be 36% or less, meaning that your total debt should not go over 36% of your income. If your monthly income is $3000, your debts should not be more than $1080 a month. By doing the calculation, you can figure out how close to debt trouble you are. Any debts greater than 36% also means your credit score will be negatively affected and lenders reviewing your information for a loan will look unfavorably on your application because you have too much debt. Of course, each lender’s guidelines differ and while one lender may be okay with approving application for people with 36% debt ratio, another lender may be looking for 20% or lower.

When to Get Help
If you do the math and figure out you are bordering on debt trouble, it would be wise to start analyzing your current budget. You may need to start cutting expenses in every category or you may want to consider sources of supplemental income such as a second job. Depending on what kind of budget plan you have, cutting back on monthly expenses may be all that it takes to get back on track.

For budgeting that never comes together, you may need professional help. Credit counseling agencies can help you sort through your spending and advise you on the next steps to take to get your debt under control. Third-party intervention may be necessary for people who are finding it hard to create and stick to a strict budget. For those who have no budget to speak of, the first step would be getting finances in order and establishing a reasonable budget that focuses on the elimination of debt.

Pride and fear are often the two main factors for people not getting help early. If you wait too long to get a handle on your debts, it can often be too late. Debt does not go away and ignoring it will only make the situation worse. Taking the time to take the first step – either creating a budget on your own or seeking debt assistance – as soon as you feel there is a problem (ie: can’t afford basic bills, can’t pay more than the minimum on credit cards) will allow you to take control of your debts rather than letting debts take control of you.

To Buy or Not to Buy
For some families, a vehicle or two is a necessity. People need transportation to work and for kid’s activities. Many with bad credit have plenty of income to cover the cost of a car payment each month but still can’t wait to save up a hefty down payment. So what can be done?

First, a consumer needs to determine if a new vehicle purchase will hurt their budget. There are several financing calculators available online that can help decide how much car a person can afford in light of their other financial obligations. Once the payment amount is determined, consumers should scour the Internet and the local newspapers to find out where the deal is at. Look for a vehicle that is priced affordably based on your own finances and make sure the type of vehicle will meet the needs of the family. There is no point in buying a small economy car when a family actually needs a minivan to accommodate their lifestyle. If the pricing is not working out, it may not be the right time to buy.

Getting a Deal
If the consumer finds the right vehicle at the right price, it’s time to get financing options. One can still finance through the dealership or explore the local banking institutions or credit unions for financing. There are also many options online for finding a vehicle financing loan.

Keep in mind that while a consumer can still get a loan with bad credit, there will be consequences. It is very likely that a consumer with bad credit will not get an interest rate under 9%. The actual rate will depend on past credit history and current credit score. Bankruptcies and repossessions of other vehicles will also weigh heavily in the lender’s decision.

It is good practice to come to the table with some kind of down payment. If there is a trade-in, consumers should know the value before making the deal. With a down payment, a borrower will show the lender they are serious about the loan and will also have less to finance in the loan. The amount of down payment should be sizeable and it can pay off to wait until some cash has been saved up.

For consumers with bad credit, the best advise is to not accept just any deal put on the table because of the thought negotiations may be limited due to poor credit. With proper research before stepping on the lot, those who can truly afford a new vehicle purchase can still walk away with a deal.

While it is true that closing credit card accounts may have a negative impact on your credit score, there are other reasons why closing an account is the best choice.

• Idle and unused cards are often involved in credit card fraud or identity theft.
• Other accounts are simply no longer the best choice for your credit needs.

Regardless of your reason for closing your credit card account, the following steps will help you avoid problems that may arise as a result of this action.

• Pay off the balance- As long as there is a balance on the account you must continue to deal with the credit card company. Closing the account will not make the balance disappear and as long as you are still responsible for paying off the balance there is no point in closing the account. Closing an account with a balance with hurt your credit score more than keeping it open with a balance.

• Confirm zero balance- Once you have sent your final payment on the account, wait a few days to ensure the credit has been applied. Before closing the account you will want confirmation that there is no balance remaining on the account.

• Make the request- Credit card companies do not automatically close accounts that have a zero balance. Contact the credit card issuer by phone and ask to speak to a representative who can help you close your account. Be prepared for a sales pitch which may include offers and incentives to retain your business. You may want to listen to these offers, especially if you have other credit card accounts that lack the same perks. If you are not interested in keeping the account open, politely tell the customer service representative as much and move on. You may want to take this opportunity to confirm no further action is required on your end toclose the account.

• Document your request- It’s always best to cover all your bases; in this situation it is recommended you follow up your phone call with a written notification. A short letter to notify the issuer of the card that you have requested your account be closed should suffice. Include your name, account number and telephone number. Invest a few dollars to send this letter via certified mail with confirmation of receipt.

• Check credit report- To ensure your account has been closed per your request, order a copy of your credit report after one month. This should be ample time for the information to be updated and recorded. There should be a note that states the account has been closed at customer’s request. If this information does not appear or is inaccurate, follow up with the credit card company to correct the information.

Consumers are becoming more educated in the proper handling of their personal finances. When you increase your knowledge, you increase the likelihood of making sound financial decisions which will in turn improve your overall financial health.

• Get in the habit of reviewing all information provided by your credit card issuer. Over the years as credit cards have become an integrated part of our lives many people became lax in reviewing information regarding their accounts. With new laws on the books, credit card companies are required to disclose information that can help you manage your account better. Whether you receive a paper statement or online statements, take the time to carefully review all information contained there each month to ensure you do not miss out on important notices that affect your account. By doing so you can avoid being taken by surprise by changes that may end up costing you more money or having a negative affect on your credit score.

• Make every effort to reduce balances. This may seem like a no-brainer but there are a surprising number of people who continue to make minimum payments or carry large balances on their accounts. With interest rates in the double digits and hefty fees applied if you go over your limit, reducing your balance must become a top priority. Utilizing all or most of your available credit has a negative effect on your score, so paying your accounts down not only helps your score, but reduces your debt as well.

• Resist closing older accounts. There are several factors that are considered when calculating your credit score. One of which is your credit history. While it may seem logical to close older accounts, especially those that you no longer use- this move can lower your credit score in that you are removing history of your credit use. Instead, consider making small purchases on older accounts that you pay off in full in order to have that information reported to the credit bureaus.

• Think twice before applying for credit. Despite the fact that credit card companies are cracking down on card holders, they continue to solicit new accounts for those who qualify. This is common in the retail industry where store accounts are available and routinely offered at checkout. In the best case scenario you accept the offer and qualify for another line of credit. In the worst case scenario you are declined and have added an credit inquiry which can reduce your score by 10 points.

Improving your credit score will open the door to opportunities that are unavailable to those who have average or low credit scores. The higher your score the better chances of qualifying for financing with attractive terms. Managing your credit cards well not only helps your credit score but also your overall financial health.

• Know where you stand- The goal is to improve your score, therefore you should know where you stand when you begin. This not only gives you a starting point but also the ability to track your progress along the way.

• Reduce credit card balances- If you haven’t already paid off your credit cards, this is the first step to not only reduce debt but improve your score. Credit utilization is a term used to describe how much of your available credit you are using. Your credit score will improve if you can get your balance below 30% of your available credit.

• Make timely payments- Make a list of all payments due and the date they are due. Create a schedule that allows for every payment to be made on time. Credit card accounts, mortgage and car notes, insurance premiums and many other reoccurring bills can be paid online. If you have trouble keeping payment dates organized, consider automating your payments to ensure they are paid on time each month. The key to automated payments is making sure you have the funds available on the due date to avoid overdraft or insufficient fund fees.

• Keep old accounts active- Your credit history plans an important role in calculating your credit score. Many people make the mistake of closing old, unused accounts. A better move would be to show some activity on your oldest account to ensure that activity is reported to the credit bureaus.

• Monitor your credit report- The only way you can spot and dispute inaccurate information on your credit report is by regularly reviewing the information contained there. If false information is reported, it is your responsibility to contact the responsible parties to correct the information.

A few years ago, lenders were more willing to take a chance loaning money to individuals who had less than perfect credit. Those days are long gone and anyone in need of financing today must meet higher standards. Improving your credit score will improve your chances of qualifying for a loan with better terms should the need arise in the future.

Protecting your privacy is the single most important reason why you should check your credit report. Credit reports offer a great deal of sensitive information such as name, addresses; past and present, social security number, birth date and past and present employment information.    As a consumer you have the right to know who has requested your credit report.   Each time you apply for credit the lender may request a copy of your credit report prior to granting you credit.  Your permission is not needed for circumstances in which you are asking for credit.  If you have not given a party permission to access your report it becomes a matter of compromised privacy for you because they have access to your personal information.   Consumer surveys report that there are approximately 10 million victims of identity theft in this country each year.  Don’t be a victim of identity theft. 

You want to know who has checked or attempted to gain access to your credit report.  Privacy and identity theft are major consumer threats.  It is legal for lenders to check your credit report to approve you for borrowing.  It is not legal for other parties such as landlords, employers or insurance companies to gain access to your report without your written consent.  You have the right to know who has attempted to access your credit history.  When you request a copy of your report it should also contain the identity of all parties who have requested your credit report within the last six months. 

You need to ensure the accuracy of your credit report.  An inaccurate report can be the difference between getting approved or denied for credit.  Your credit report includes pertinent information about your personal credit history.  Delinquent payments, liens bankruptcies and outstanding debts are all listed on your credit report. Creditors that have granted you credit make regular reports to the credit reporting agencies that produce the credit report.  A survey conducted by a U.S. Public Interest Research Group (USPIRG) in 2004 found that there were significant errors in one in four consumer credit reports. Checking and correcting your report if necessary is your responsibility. It can be both frustrating and time consuming to correct the report, however unless you push for the errors to be corrected do the report may remain inaccurate and negatively affect your credit score. Ensure that your personal information is correct as well as your debts and borrowing history. 

It is important at to be an informed and aware borrower. What you don’t know about your report can hurt you.  Your report determines your credit worthiness in many circumstances in your life.  Issues or discrepancies with your credit report should be addressed immediately through credit reporting agency responsible for your report. 

Luckily, it seems that many in the nation began to take a real interest and dedication to paying off debts and getting their financial house in order. With credit cards becoming harder to get nowadays, it is wise for people who already have cards to keep them in good standing by paying off balances each month and spending wisely on credit.

For those who still find it a struggle to eliminate credit card debt, there are steps you can still take to find relief. Here is the top tips for paying down plastic debt and eliminating it entirely:

Stop Spending
If you find it too difficult to come up with even the minimum required monthly payment, stop spending immediately. Living on your plastic line of credit is a sure-fire way to stay deep in debt. If you can’t pay for something in cash, don’t buy it. If you are living day to day on credit, seek out a second source of income immediately.

More Than the Minimum
When constructing your monthly budget, make a point to include more than the minimum amounts for credit card accounts. If you begin to expect having to pay more a month through planning, the faster you can pay down the debt. Pay as much extra as you can afford but stick with the commitment to paying more every month, not just when you feel like it. By using this tactic, you can essentially cut years off of your debt payments and improve your credit score at the same time.

Shop for a Better Card
If your credit score is still in good standing but it is getting harder to meet even the minimums, start shopping for a card with lower interest rates. During the recession months, many credit card companies shot cardholder interest rates through the roof. Where once was a 9% rate, there soon was a 25% rate. Now as the industry is trying to rebound, card companies are trying to woo new customers. Check out the many online comparison sites and then transfer your balance to a lower interest card.

Get On the Phone With Creditors
Now that some of the drama in the industry has died down, consider contacting your creditors and ask them for lower rates. They may not want to risk losing you if you have been great about payments in the past. Many will be willing to work with you by renegotiating your card terms.

Find Alternative Sources for Funds
If credit card balances are quickly spiraling out of control, you may need to borrow cash from other resources. Your 401k, life insurance, and savings are all viable sources for cash. You may also investigate a home equity loan to pay off all debts. There are several places you may be able to turn for extra cash, but do so with extreme caution because you can end up losing more than you bargained for by not considering the consequences.

Why Does It Happen?
Credit scores are based on the different factors of your financial life. The score is supposed to be a reflection of how responsible you are for paying back debts in a timely manner and how well you manage your financial obligations. When your credit report has no information to gauge, your score goes down considerably. In theory, a person with lots of debt who still pay on time may have a better score than someone without any debts at all. The credit score formula involves a mix of credit card account activity, mortgage loans, student loans, and other types of extended credit. If you have none of those account types, you have nothing to calculate.

Why Does It Matter?
There are many who feel a credit score is worthless because they are living debt-free and have no plans to apply for a line of credit or a loan in the future. However, that assumption can be a costly one. Nowadays, there are many situations were a credit score will make a big difference in your life such as when applying for a job, renting an apartment, or when you purchase vehicle insurance. These companies will often pull a credit report and base rates or job offerings on your credit score because the score is meant shed light on credit risk factors. For someone who is responsible enough to have no debts, an increase in insurance premiums is boldly unfair.

What To Do About It?
If your credit score is suffering because you are debt free, there are things you can do to help the situation. It may not be the most desirable way for you to fix your finances but when it comes to necessity for insurance purposes, you may not have many other choices. Here are some things to consider for upping your credit score:

Get a Credit Card
You may have closed your credit card accounts long ago but using a credit card for normal, everyday purchases and paying off the balance in full at the end of the billing cycle can signal a jump in your score in a few months time.

Apply for a Loan
It sounds crazy to apply for a loan when you haven’t a need for a loan but it can help you get your credit score back on track. You can visit with your bank or credit union and apply for a small personal loan.  A loan officer may be able to advise which is best for your situation. The money loaned can then be deposited into an account and all monthly payments can be automatically withdrawn each month. This may not be the best solution for everyone but it is an option.

People who have wrestled with long standing debt often find themselves facing an unsure future once that debt has been paid off. The reason for this dilemma is the fact that most people who have been dealing with debt for months or even years have no idea what to do with that “extra” cash that is now available in their budget. If you are recently debt-free and not sure how to proceed in the future, the following tips can help you manage your money in the recovering economy.

• Debt- Anyone who has successfully paid off high interest debt (or those currently in the process) understands how long and frustrating the journey can be to debt-free living. With that being said, it is imperative you remember that journey as you move forward in the future. It is true that many people end up in debt for reasons beyond their control, however the rest of the population can usually blame only themselves and poor money management. Avoid future debt whenever possible and tread carefully with credit cards in the coming months. New regulation that will be in place in 2010 should provide some protection to consumers, but those who have historically had trouble managing credit should avoid incurring debt regardless of new rules.

• Savings- Debt is the four letter word that often stands between financial independence and living paycheck-to-paycheck. Once debt has been eliminated, consumers have to deal with an infusion of cash in their daily budget. Do not waste this opportunity to build your savings. The current economy is not offering high yields for savings right now, however this should not discourage you from shopping around for the best interest rate offered for traditional savings accounts. After building an emergency fund, you may consider short term CDs or other savings vehicles that do not tie you into long term commitments. Opportunities for better interest rates are likely right around the corner as the economy improves in upcoming months.

• Rebuild your credit- As consumers and lenders alike gain confidence in the recovering economy, a good credit score will be necessary should you need to borrow money to buy a home or automobile. Take steps today to begin the long process of rebuilding or improving your credit history and credit score. This will help set you apart from the rest of the pack in qualifying for more lucrative terms and conditions for future loans.

Everyone is struggling to find level ground in the wake of the recession. Fortunately all signs indicate the recession is in fact over, however that does not mean things will immediately go back to “normal”. It will likely take many months or years in some cases for consumers and businesses alike to feel confident in the economy. By following these tips you can feel comfortable that you are on the right path the long term financial security.