Loans and Mortgage Tips

Remember, this chapter is all about getting started. It’s your pep talk to get you over the hump. So while we’re breaking it all down, let’s look at your credit score (we’ll discuss it more in Chapter 20). It’s a great measure of how bad your debt situation is.

If your debt situation is worse than you care to admit, your credit score will help to bring you back to reality. It’ll also help you measure your progress in the eyes of lending professionals.

I’d suggest that you check your credit score once a quarter as you’re trying to clean up debt. It’s kind of like standing on the scale when you are trying to lose weight. It’s where the rubber meets the road. Either your overall situation is improving, or it isn’t. Getting your credit report isn’t the same thing as getting your credit score. Ideally, you would check both two to four times per year. You can receive your free credit report, which shows your account history and should be checked for errors once per year by visiting www.AnnualCreditReport.com. Your credit score, which is actually computed for lenders by private companies like the Fair Isaac Company (creators of the FICO score), is not required to be given to you for free. However, you can visit websites such as www.MyFico.com and pay a small fee to view this score that determines your rates on loans.

Here are the basic ranges and ratings for the FICO credit scores:

700–850. You’ve got “Very Good” to “Excellent” credit depending on where you fall in that range. Getting a loan is usually no problem for people with scores in this range, and borrowers with these scores usually get the best rates and terms.

680–699. You’ve got “Good” credit. With a score in this range, you can usually get a standard loan as long as your other factors, like income and down payments, are solid.

620–679. You’ve got “Okay” credit. You can usually get a loan for smaller purchases without a co-signer or a major down payment, but you’re going to pay for it. Borrowers in this range and below start getting charged higher interest rates and fees.

Below 620. It’s official, you’ve got “Bad” credit. You may or may not get approved for a loan based on how far below 620 your credit score is. If you do manage to get approved, the further your score falls, the higher the interest rate you’ll typically pay.

It’s important to stop and assess if your debt problem is getting worse by the day, or if you’ve managed to stop the bleeding. If your monthly debt service is steadily climbing each month, that’s the dead opposite of trying to get rid of debt. If more water is leaking into the rowboat than you’re bailing out, it’s only a matter of time before you sink. In other words, you’ve got to take decisive action.

To make sure you’re not taking two steps forward and three steps back, make a chart where you start tracking your short-term balance, long-term balance, monthly debt service, and credit score.

It doesn’t matter how you create this chart. If you know how to use a computer spreadsheet, you can do it there. If not, go steal some paper and crayons from the closest kid you can find. Whatever you do, make sure it’s got a graph that plots your progress or decline. I promise this will go a long way to keeping you motivated and on track.