A Perfect Score, Why It’s Not Necessary

There is a small percentage of people who have ever hit 850 for their credit score. Having a perfect score is a lot of work. While this opens doors for loans and credit cards, a perfect score isn’t necessary to qualify for financing. If you’re focused on getting a perfect score, you may want to rethink your strategy.

Why you don’t need a perfect score.

perfect scoreOne think people assume is that with a perfect score, you’ll get the lowest rates. Lenders don’t distinguish between someone with an 850 score and someone with a score between the high 700s and low 800s. Once you get to a certain point, you fall into the best credit risk category. This means even if you don’t have an 850 you still qualify for the best rates. Having an 850 score does not put you above someone between 770 and 800.

Your score can change overnight. They are not fixed, they can change from day to day. Under the FICO scoring model, payment history and the amount of debt you have make the most impact. If you miss a payment or carry a high balance on a card, your score is going to dip. Even applying for a new card, or taking a loan can knock your score down. In reality, you have more than one score. Each of the credit reporting bureaus have their own version of the FICO score. So, your score can vary widely. The chances of getting an 850 on all three at the same time is very slim.

You score reflects how you are at managing your money and handling your debt. The lenders goal is not to pick borrowers who have a perfect score but to find those who are most likely to pay their debt. Paying your bills on time, keeping a low debt balance and using a mix of debt types show that you’re a good candidate for a loan.

Celebrate Paying Your Debt

While you’re paying your debt, it’s common to restrict yourself. You stop any vacations and tighten the belt. No more going out, nothing extra at the store. It’s important to remember to treat yourself. You need to celebrate small milestones. Paying off a credit card or even just paying off $1000 in debt. It is important for you and your family’s sanity. Often kids do not understand. They don’t understand the sudden need to cut back, or how they could help contribute. Simple expenses that used to be normal can no longer be done, like going to the movies or going out to eat. Allowing you to celebrate financial wins as you work down your debt will help them understand that you’re on a different budget now, but that it’s still ok to enjoy things.

Little things you can do while paying your debt.

  • paying your debtTake a day trip. The most expensive part of taking a trip is the hotel. Save expenses and take a day trip. Drive to the beach, have a picnic in a park in another town. Visit a local landmark. These are ways to spare expenses while getting away from the norm.
  • Go out for dessert. Going out for dessert after a nice home cooked meal can seem like a real treat. This can be a great, inexpensive way to celebrate a milestone.
  • Buy a book. Buying a book is an inexpensive way to keep yourself entertained.
  • Rent a movie. Renting a movie may not seem like a real treat if it’s in your budget. However, if you’re a very tight budget that may have been one of the first things to go. Make it a full experience. Soda, popcorn, candy, etc. Renting a movie and having popcorn at home is a lot cheaper than going to a theater.

Loan-to-Value Ratio, What is Best

It can take years to save for a down payment on a home. The more money you put down, the less you need to borrow. This affects your loan-to-value ratio or LTV. So, what is loan-to-value ratio? This is how much you’re borrowing from a lender as a percent of what your home’s appraised value. If you bought a home valued at $150,000 and your loan is $125,000 your LTV would be 83%. The higher the ratio, the riskier you appear during underwriting. With a lower down payment, you have less equity. Should you get behind on payments and end up in foreclosure, the lender may have a harder time earning enough to pay off your remaining loan balance. This is generally why homebuyers with a higher LTV have higher mortgage rates.

What is a good loan-to-value ratio?

You may be asking yourself, what is a good LTV ratio. This ratio varies depending on the type of loan you’re applying for. If it is a conventional mortgage a good ratio is 80%. loan-to-valueMost lenders do expect borrowers to have at least 20% as a down payment. However, if it is a loan that is backed by the Federal Housing Authority, also known as the FHA, there are different rules. For homebuyers who are trying to qualify for an FHA loan, an acceptable LTV ratio is 96.5% if your credit score is at least 580. If your credit score is between 500 and 579 your LTV cannot be higher than 90%. There are other types of loans that allow your LTV ratio to be as high as 100%.

Having a high LTV ratio can affect a buyer in different ways. For one, if the LTV ratio is higher than 80% and you’re approved for a conventional mortgage, you will have to pay private mortgage insurance. You can eventually get rid of the insurance as you pay down your mortgage. If your LTV is too high, taking out a mortgage is going to be more expensive. In addition to paying insurance, you’ll likely have to pay more interest.

Why is your Debt-to-Income Ratio Important?

We all know that having more income than debt is a good thing. But the question is, what is ideal ratio between income and debt. This is where you need to consider your debt-to-income ratio. If you have to high of debt-to-income, and any thing negative effects your income, you could be swimming in debt. This does not mean you want to completely avoid debt. Debt-to-income ratio, also known as DTI, is the direct relationship between your monthly debt and your gross monthly income.

Every month you must budget with what you have coming in and what you have going debt-to-incomeout. You have recurring bills such as phone and internet. Regular expenses such as groceries. Then there is your debt. This includes rent, car loan, student loans, and any personal loans or credit cards you may have. If you feel like you’re living paycheck to paycheck, or that all your income goes to making credit card payments, you may have a high debt-to-income ratio. The formula is DTI = total monthly debt payment/gross monthly income.

Why is Debt-to-Income Important?

DTI is an extremely important number to keep an eye on. This is going to tell you about your financial situation. The higher the debt percent, the harder time you’re going to have making payments if your financial state changes in a negative way. From a creditor or lenders perspective, DTI is a measurement of risk. Those with a higher DTI are more likely to default on a mortgage or miss credit card payments. Assessing your DTI is part of the mortgage underwriting process.

So, what counts as a good DTI? Generally, you want this to be under 36%. The bottom line is, your DTI is an important measure of your financial security, and responsibility. The lower the ratio, the more affordable your debt is, and the more wiggle room you have should your finances change.

Debt-to-Credit Ratio, What is it?

Credit cards make shopping easy, you can go from store to store without having to carry cash. Not only do they make shopping in person easier, but they open new doors with online shopping. It can seem like you have an endless supply of money within this little plastic card, but you must remember that credit cards do have limits. Your debt-to-credit ratio does affect your credit score. Generally, when you apply for a credit card the lender will provide you a limit based on your income, credit score, and sometimes your debt-to-income ratio. When you max out your credit card, this means you’ve spent up to the limit. When you do this, you will see an impact on your credit score. Debt-to-credit ratio (sometimes known as credit utilization ratio) is one factor used to obtain your credit score.

debt-to-creditHow does debt-to-credit ratio affect my credit score?

Your FICO credit score is made up of five parts. Each one carries a set weight within the total score. How you’ve managed your debt and made payments is 35% of your score. The amount of new credit accounts you’ve opened as well as the different types of debt is 10%. The different type of debt is made up of credit cards, student loans, auto loans, etc. The length of your credit history is 15%. Finally, we come to your debt-to-credit ratio. This accounts for 30% of your score. What does this mean? This means you need to avoid maxing your card and stay clear of the credit limit. The lower the utilization, the better.

While other forms of debt do affect your score, they do not carry as much weight as credit cards. So, while you may have available credit you can spend, that does not mean you should. The best thing to is to keep your debt-to-credit ratio below 30%.