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Understanding Loans, Home Mortgages, And How To Avoid Bad Credit

A credit score is a 3-digit number that was statistically summarized from your track record of debts such as loans and credit cards. Banks rely on good credit scores to determine your credibility and worthiness of approval for future loans or credit cards. Different banks have different minimum credit scores. In the US, a score of 700 or above is generally considered to be good while 800 is considered excellent.

Due to recent situations, banks and other lending companies are stricter and require multiple steps and paperwork to be done before granting a loan. For first-time homeowners, the myriad of options for financing type can be confusing and overwhelming. Homeowners have the opportunity to choose from different types of loans like the local loan and veterans loan which allows Veterans and people in service to make a loan.

If you have a credit card, it may have become a part of your life. You use credit cards to buy groceries and you strategize on ways to earn the most rewards. However, credit cards may also lead to getting bad credit.

Here are some ways bad practices can give you bad credit:

1. Constantly Keeping A Balance On Our Credit Card Will Not Help Your Credit Score

A lot of people think that having a balance month after month helps with your credit score, but it actually doesn’t. The only thing that you’re doing with this type of mentality is spending your hard-earned cash on interest. Pay your balance in full every month.

2. Do Not Max Out Your Card

Spending as much as your credit card will allow you, or right up to the maximum amount, is bad for your credit score. Outstanding balances are harmful to your credit score because it indicates bad spending habits.

3. Having More Than One Card

Do a spring cleaning with your wallet now and look at the other credit cards that you have that are just gathering dust. You do not need more than one credit card as this will only tempt you to keep swiping left and right. A good credit score also comes from being a responsible spender. Even if you no longer use this card or one card out of the ten you might have, you’re damaging your credit score because it’s bad for your utilization ratio since you’re detracting from the total credit that’s extended to you.

4. Frequent Late Payments

Your debt repayment history in loans and credit cards make up about 30 to 35% of the criteria for a good credit score. Each time you pay an outstanding amount past the due date, your lender or the bank will deduct a point from your total credit score. The amount deducted from your credit score will also depend on factors like how many days late was the payment made, the number of late payments in the past, and the amount of payment needed. These are permanent and can go into your record for years.

5. Settling Instead Of Actually Paying Your Bills

There are individuals who cannot make their loan or credit card payments in time or cannot pay their debt in full anymore, some due to the fact that they max out their cards, so they get lured into a scheme where they settle for an amount they can pay. The lenders will report this settlement to lending bureaus like banks and this will badly affect your credit score.

Due to the recent economic troubles, more and more people are looking at loans to save their businesses and to make mortgage payments on time.

There are steps that you can take to ensure the approval of your loan:

1. Understanding The Type Of Loan You Prefer

Before going to the bank, read up. Do your research about the types of loans that they offer, and read down to the last fine print. You need to be fully aware of the type of loan you are looking for and which one best suits you. There are many types of loans that arrive in your inbox, choose one that fits your situation better and you know you are comfortable with since taking out loans is a big commitment.

2. Ask Lots Of Questions

Contact the bank directly on what are the needed requirements if you finally know which loan you are going to take out. Set an appointment to discuss in person with their loan officer the necessary materials, documents, and timelines you will need to get started on the approval process. Once they see that you are hands-on with this approach, the more chances there are of having your loan approved.

3. Know Your Limit

Only you know how much money you can comfortably spend each month. Be aware of your current credit score and credit history. The loan officer will tell you the range of credit score required to approve a loan and this will also help you manage your expectations. That is why having a really good credit score is important. Review your credit history and spend some time correcting the errors. Lenders rely heavily on your past history so if they see you try to correct mistakes, this is an added point for you.

6. Have A Checklist

A checklist will help you monitor your actions step by step and will properly remind you of the documentation that you need for your loan application. It takes a lot of time to secure the documentation needed for your loan especially from your employer, and other legal government documents or documents from the bank itself. Having them completed before submitting is also a plus point for you.

7. Manage Your Expectations

Applying for a loan when you’re in a hurry is never a good idea. Loan officers have very strict protocols for approving loans. Make sure that you discuss the sequence of events during the process so you have an idea of what to do or what happens next. Know how to answer the questions that they have for you and be well prepared with the needed legal documents. Your goal is to take out a loan that you have the means to repay. For personal loans, the lender will ask what it will be used for, for example, home improvement, mortgage, or debt reduction.

Taking out loans is a frustrating process and sometimes despite having good credit scores and doing everything right, they don’t get approved. At the same time, too many loan applications can destroy your credit score. Find a balance and only take out loans for needed moments as loan approval requires a certain level of trust and relationship from your lending company or bank.

Photo Credits:
Photo by DJ Johnson on Unsplash
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Photo by Aaron Burden on Unsplash

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