debt, FICO score, and credit worthiness
I’m bringing back to a little more debt situations and scenarios with this blog post. Check out the video blog I did too :) This is more of the narrative attached to the video if you’d rather read that!
Today we are going to jump off right away and talk about what debt is, how you can find out your debt, and the tools you need to utilize and realize are available to make debt, finances, and your budget much easier. Some of these include knowing your credit score, figuring out balances of loans owed, what your FICO score means, and how credit worthy you are based on your credit to debt ratio. Then we will talk about the easiest way to get a comprehensive debt analysis your self, and what you need to do with those numbers. Next segment will be based around budget. How to create one, how to utilize one, how to maximize one, and how you should treat a budget.
On a note, all of this was research I have done in my spare time. I utilize the best resource, the Internet, and look for trusted money management sites from banks, financial institutions, and professionals like Suze Orman. None of this is my own knowledge, and none of this is hidden facts. I just plan on condensing and cutting it down to fit into your attention span.
Ok, let’s talk about what debt is. Debt is obviously what you owe specific lenders for a variety of loans they gave you.
Some of them are considered secured loans and some are unsecured loans. A secured loan is something that has collateral attached to it as a way of repayment if necessary. You can consider your car loan a secured loan. If a bank or a credit union gives you a loan to purchase a car, the car itself is used as collateral. The car can then be taken back by the financial institution if necessary. These are usually characterized by a set payment and a non-fluctuating interest rate.
A majority of loans out there are unsecured debt. These are characterized by a financial institution loaning out money without a physical collateral, and have varying interest rates and payments that depend on a lot of factors.
The big question on your mind, especially if you are around my age, is what is student loan debt considered out of these two? The answer is really neither. Technically from the definitions I just gave it would be unsecured, but it isn’t. it is secured because the government secures the debt and lets the lenders know that it will be paid back. We will get into how it affects your credit score a little later.
It is important to look at your bills each month and look at how much you actually owe each lender. Take that and write all of that information down in a binder so that you know exactly the extent of your debt. Also write down your monthly payments. Do this with your other bills as well, like your credit card debt. Then also log your other payments or anywhere else you money goes. Rent, cable, cell phone, electric, internet, any of those bills. Take a sheet of paper or an excel spreadsheet and log all of these things. Anywhere your money goes needs to be logged. Take that whole number as a dollar amount of your debt each month. Take the frequency you get paid and the NET amount of each. Don’t use your gross earnings because that money that is taken out for taxes can’t be used monthly. Add that together. Subtract your earnings from your monthly debt to see where you sit with left over money. That dollar amount and how to create a very simple budget will be next week. You also need to keep one months worth of bills so you can monitor interest rates, charges for interest, and small debits on your cards that you might have forgot you agreed to.
It is very, very crucial to know your credit score too. You get one free look at your whole entire credit report from the three main credit reporting bureaus once a year. The year is 365 days, not an actual calendar year. Use this to your advantage. I had a credit monitoring website that I paid for monthly and I’ll tell you this- it was not worth it. I didn’t use it enough and that was more money out of my budget. You need to know it once a year, and you need to know what it means and how to increase it. Your credit score is an average of what the three credit reporting bureaus have found about your debt and debt repayment history. They look for a few basic things. These are as follows: they look to see the number of loans you have out, the running balance compared to available balance, the number of on time and the number of late payments, any severely delinquent accounts, and accounts and bills that have been sent to collections.
The number of loans you have out is very important. Even if you have more loans with zero balances, if you have a large number of loans you are looked at as credit reckless therefore reducing your credit score. Major credit cards with zero balances are looked on more favorable than store credit cards with zero balances.
The dollar on the loan compared to the dollar amount available for the loan, with respect to unsecured debt, it also important. If you constantly run high balances close to the threshold of available balance on a credit card, you are again looked at as credit reckless therefore reducing your credit score.
The number of times of late payments- this is a no brainer. They want to make sure that you are taking care to make sure the bills are paid on time.
Severely delinquent accounts- these might be accounts that you either forgot you had, or maybe were taken out falsely with your name or social security number. You will never know if you do not take advantage of the free yearly look into all three reports. If this is the case, the websites make it very easy to follow the necessary steps to clear that up.
Collections bills are another thing that you may not know are attached to your name and social security number. My husband and I move around a lot, and he recently discovered a $650 collections bill for something he had done 5 years ago when he was 18.
The total number of dollars you have used up versus the total number of dollars you have available on your debt is what they call your credit worthiness. If you barely have any breathe room between what you have for balances on cards and what you potentially have available on them, you can absolutely reduce your credit score and credit worthiness. They consider this your FICO score. This is used to evaluate, very basically, if you should be allowed and are responsible enough to take on another loan. Mortgage lenders, car dealers, and other credit card companies use this to evaluate their risk in lending you money.
You need to know your credit score because you will need to know ways to improve it. On time payments are a big thing. Paying off store credit cards and closing them down is a plus as well. Getting rid of delinquent accounts by calling the credit card companies to figure out what you need to do to bring the account back current. This may require a bigger monthly payment and consecutive monthly on time payments for a length of time. Using your credit cards for smaller purchases and paying them all the way off builds your credit score.
This can be maximized after taking those numbers I had you calculate before and using them to your advantage. Let’s say I have an income of $2000 a month. I calculated my debts and realized that I spend $1200 a month on everything I have committed to paying. The rest of my money is not tied up to any one particular thing. That means I have a left over surplus amount of $800 in this case. But don’t get too excited. This is left for everything else- groceries, gas, going out, out to eat, hair cuts, gym membership, dog food, and unforeseen circumstances like new tires, brakes, or anything else big ticket. The idea is to budget and factor some of this into your monthly expenses because we are going to get out of debt. Getting out of debt requires you to NOT USE YOUR CREDIT CARDS. Period.
I hope this helped shed some light onto what you are up against. Next segment we will hash out a budget and talk through steps to maximize it and your income. As always, if you want to reach out to me, check me out at newlymarriednewlydebted.tumblr.com for more tips and insight.