Tuesday, November 3, 2009

Get Smart About Debt - Rule #2

Burned by their mistakes, lenders are now far more cautious. To qualify for any loan, you must prove that you're a low default risk; to get the best terms, you must be a sure bet. Consequently, rule #2 of "Get Smart about Debt" is to position yourself to get the lowest interest rates.

This step revolves around a high FICO score, the number used by most lenders to determine your creditworthiness. Today the lowest rates generally go to those with scores of at least 760 out of a possible 850. Boost your score by paying bills on time, reducing credit card balances to less than 20% of their limits, and correcting any errors on your credit reports.

Be sure to order a credit report from annualcreditreport.com. You are allotted a free report from each credit bureau every 12 months. You'd be surprised how frequently errors show up on these reports, and fixing them can increase your FICO score dramatically. While you are on the website, you might buy the Equifax version of your FICO score for $8.

To illustrate the benefit of having a top FICO score, consider two individuals looking to get a 30-year loan on a $200,000 mortgage. An individual with a 670 FICO score may qualify for an interest rate of 5.67%, making total payments on the home equal $416,521. Meanwhile, an individual with a 760 FICO score might qualify for a 5.05% interest rate, making total payments equal just $388,715.

Getting top rates may also require a larger down payment than in the past - 20% for a house, and 10% for a car. Lastly, you will certainly have to prove you have a steady income source.

Again, debt management is an area where a qualified financial planner can certainly add value. Be sure to speak to an independent fee only financial advisor to get objective, comprehensive advice on how to benefit from your credit rather than become a slave to it.

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