Credit Repair- What You Need To Know (Step 1)

So you have a loan for your car, you have a loan for your house, you have a loan for the fence you just put in, and you have a student loan. Do you need anymore? The answer is no! If you are afraid that you have too many loans you might want to look at some options to improve your situation. First off let me explain what too many loans does to your credit report.

Your credit report score is calculated by several different factors. The break down is pretty complex but you can take a look at the pie chart below for an example of the break down.



The biggest part of your credit report is calculated by your payment history, how your payments have been made. Have you been on time? Have you been more then 30 days late? Stuff like that all goes into the credit history which is 35% of your credit score.

The next biggest part of the pie chart is the amount owed on all your debt. This is HUGE! When you apply for a loan with a bank one of the deciding factors is how much debt you have verse how much income you have, banks call this the debt to income ratio. You can figure our your ratio after you pull your credit report. (If you want to pull your credit report visit Equifax)

Calculating your debt to income ratio. The reason I recomended to visit Equifax is because when you calculate your debt to income ratio you need to know the MINIMUM payments required, not the amount that you actually pay because some of us pay more then is due. You also need to know how much your gross income is. If you are married you need to visit Equifax to pull your spouses credit as well. Add up ALL of the minimum payments amount on your credit report and your spouses, write this total down. Now add up all your monthly gross income (the amount before taxes are taken out) that you receive, write this total down. Take your monthly debt total and divide it by your gross monthly income total. This will give you a number that needs to be multiplied by 100. Once you've done that you have your debt to income ratio. Here is an example:

Total minimum monthly debt payments = $870
Total Gross Monthly Income = $3000

870/3000 = 0.29
0.29 x 100 = 29%

So what does your debt to income percentage mean?

Well let's say you're looking to buy a home. Banks do not usually let you have a home loan with a payment that makes your total debt to income percentage higher then 43%. What this means to you. let's say that the above percentage is your percentage. So you already have 29% for your debt to income. This means you can only get a mortgage payment that is about 14% of your income, which is $3000.

so 3000 x 14% = $420

You can afford a monthly mortgage payment of $420.

It is very important that you pull your credit report at least once a year so you know where you stand. So what do you do if you have a high debt to income ratio? Well first things first, pay off what you can. But don't go too quickly to your creditors and pay off every account you own, this could actually hurt your credit. Let's look at the pie chart one more time:




Take a look at the credit history portion, it is 15% of your credit score. Your credit history is determined by the length of time you have had credit established. So why not pay off all your credit cards and loans? Well the minute you pay off a credit card the credit history for that card no longer counts towards the length of time your credit has been established. It's recomended by Equifax and the other credit bureus not to close out the oldest credit card you have on your credit report. Even if you don't have a balance on the credit card it's a good idea, if you want to close all your other ones, to keep that one older card open. Now don't close all your credit cards either. 10% of your credit score is the type of credit you have. Credit bureus say that your credit score will be better if you have between 3 - 5 credit cards, at least one instalment loan (auto, mortgage, suv, ect.). So try to keep at least 3 cards open. BUT you don't want your balance to be any higher then 30% of your available credit limit. For example, if you have a $1000 limit on a credit card you don't want to cary a balance of more then $300 to the next month.

The last part of your credit score is 10% of your score, this part is new credit. Make sure you don't get a bunch of new credit cards or loans all at one time. This could hurt your credit report because it sends red flags out that you might be in a financial bind.

There you have it. Step 1 to what you need to kmow about credit.

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