Understanding your financial health can be overwhelming and foreign. Taking into consideration how your income, assets, debts and credit score all play into your overall financial picture is crucial to grasp yet necessary to know in order to make future informed decisions. Whether it is buying a home, sending your child off to college, or planning on retirement there is a lot to pay attention to that will affect your long term goals. In this article we will review what credit is, why it’s important and an innovative solution to help you eliminate your interest, improve your credit and become financially free.
Let’s start with your credit score
Much of what drives your wealth is your credit score. As it can prohibit or enable decisions and/or opportunities you may seek out. Knowing what credit is and how it affects you is key to understanding how to build good credit. For starters, you need to know what credit is? It’s simple – it is the creditworthiness of your credit history. Put into layman’s terms, it is your ability to borrow money from a third party or institution with the promise to pay it back at a later date. The better your history is with repayment of funds borrowed, the better your credit rating becomes, which makes it easier to borrow money in the future and the less you pay in interest. Less interest, more money in your pocket.
For a number of reasons, but in this example, for the purpose of buying a home, your credit score tells the lender how good of health you are in financially. Most consumers set out to buy a home by hiring a Realtor, when really they need a full team. Working with a top Realtor will not only help you buy a home but will offer innovative real estate strategies and solutions so that the entire experience leaves you better off. They will provide resources such as Mortgage Lenders, down payment assistance and other vendors that are needed to get you on your path to home buying.
Got a little off track here, back to where we were; your credit score. A good credit score demonstrates that historically you have paid off your debts on time. Paying off your debts on time and having a good credit score in turn gives you access to more desirable loan programs and overall lower interest rates. When paying lower interest on a loan, that gives you more buying power and it lowers your monthly mortgage payment. To echo above, less interest leads to more money in your pocket.
There are a few key factors to keep in mind when working to build your credit
(1) Be on top of your payments – make them early or on time as they are due. Avoid paying unnecessary late charges. If payments are made 30 days past their due date, the creditor reports a 30 day late to the credit bureaus and that will decrease your credit score. Making them on time consistently helps to boost your score.
(2) Keep your balances at about 50% or less below your credit limit – it is ok to have multiple credit cards or other revolving lines of credit, just be sure not to max them out. When you have high balances it triggers to credit bureaus that you are overextending yourself.
(3) Try to minimize too many inquiries – if shopping multiple lenders for a mortgage company it doesn’t affect your credit as it would if you were shopping for mortgage lenders, auto loans and trying to open up credit cards all within a short period. This is another trigger to credit bureaus that you are getting financially strained and could potentially become a risk.
Now that you have an idea of how to increase your credit score, when shopping for a home loan it will open up more possibilities of what you would qualify for. Each lender will have their own set of guidelines and requirements for what your credit score must meet for them to lend on a home for you to buy. Most loans require a minimum of 620 but opportunities, rates and programs will get significantly more desirable the higher it is.
For credit scores that do not meet the minimum, there are still loan programs available to, but it will ultimately cost the borrower more. If you’re reading this and worried that your credit score is lower than the base, that is when it would be in your best interest to sit down, review your financial situation and see how you can increase your score. Depending on where you stand, it can take some time to clean up your credit, so have patience, the end reward is worth it.
Here are a few examples of what can improve your credit rating:
- Paying off or down current debt
- Paying off or making payment arrangements with outstanding collection agencies
- Taking action to dispute any accounts that do not belong to you
There are a number of reputable debt consolidation and debt settlement companies as well as there are many fraudulent ones as well. Do your homework. Visit the Federal Trade Commission’s website to educate yourself and to verify what companies are reputable (https://www.ftc.gov/). A debt consolidation company is one that will combine all of your debt into one loan and each month you make just one payment. Depending on the amount of debt you carry it can seem like a great idea upfront, but in the long term it can stretch out your payments and you wind up paying more in interest. Which results in less money in your pocket.
See where I am going with this. A debt settlement company charges you a fee to help negotiate your debt down so that you can pay less up front and the debt is forgiven. If you have excess cash, this can often be more appealing to help improve your credit score quicker. Less money in pocket upfront, but in the long run more as you will be paying less in interest overall. It is important to do your research, to take the time to fully understand and educate yourself on the process and what is going to be in your best interest. Also, be realistic.
You know yourself best, if you are someone who needs to structure a debt plan and can see value in paying a few bucks to get it set up then working with a company may be most viable for you. They will provide an analysis of your situation and then set you up with a plan that will be beneficial to you. If you are more self-disciplined, you might be able to tackle it on your own. On the Federal Trade Commission’s website listed above, they will even offer free literature on self-guidance to credit repair.
Now what if you learned that there was a third option, a more innovative solution, that not only helped you to increase your credit score, but also to get out of debt sooner? What if there was a way to tackle your debt smarter and ability to claim financial freedom in the foreseeable future? Thought of that, kind of amazing, I know.
Using a cash flow management software evaluates your current financial standing. This tool offers you solutions on how best to repay your debt to help reduce what you pay in interest in total which in turn helps you to pay off debt smarter. As a result, you pay less in interest, debt is reduced and your credit score increases. This will help you qualify for better rates & terms for future large purchases whether it is a new home, an investment property or even a boat. A system that you plug in your individual finances and it spits out a best case scenario with tools, guidance and suggestions to reduce your debt and grow your future wealth. A clear pathway to Financial Freedom.
What it boils down to is that your financial health is extremely crucial to care for as it sticks with you your entire life. Get more innovative solutions by taking control. Evaluate your current situation, set goals and take necessary steps to create the life that you want for yourself. And if today, your situation isn’t the most ideal, then don’t be afraid to look further into the various tips and strategies above that can help guide you on how to best and most efficiently pay off your debt to get your debt-to-income ratio down and your credit score higher.
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