Author: Philip Tirone

The Consumer Score Hoax

Posted on May 30, 2021 by - CREDIT BLOG

An Additional Resource Exclusively for Students of the 720 Credit Challenge …

Every time I hear one of those catchy jingles on the radio advertising a “free credit score,” I cringe.
I’ve written about this before, but it bears repeating …
Almost none of the so-called “free credit score” website will actually give away free credit scores. They sell them, and the credit scores they sell are total junk.
The system is admittedly a little confusing, so let me explain the players …
There are two entities working to determine your credit score.
First are the credit bureaus—Equifax, TransUnion, and Experian. These three bureaus are responsible for collecting information about your payment history. If you pay your Visa bill on time, for instance, Visa will let the credit bureaus know that you pay as agreed. If you pay late, Visa will report a delinquency.
Think of the credit bureaus like a grocery store. The credit bureaus keep all sorts of information about you (groceries) under one roof.
That said, not all creditors will report to every single credit bureau. Your Visa credit card might report information to two out of the three credit bureaus. Your MasterCard might report to all three.
So the “grocery stores” all have slightly different information about you. Just like some grocery stores carry goat’s milk and some do not, some credit bureaus might know about that late payment on your Visa, and another might not.
But remember: the credit bureaus store the information. This alone isn’t enough to give you a credit score.
This is where the second entity comes into play.
Your credit score is created when a formula is applied to the information the credit bureaus keep about you.
That said, a different formula is applied to your information based on who wants to know your credit score.
For instance, if a potential employer wants to know your credit score, a different formula will be used than if a mortgage banker wants to know your credit score.
This is because the mortgage broker cares much more about your history on mortgage payments than a potential employer, who wants a more general picture of your financial trustworthiness.
If the credit bureaus are the grocery store, the formula is a recipe.
Like I said, your credit score is calculated when a formula is applied to the information stored by the credit bureaus.
But because the credit bureaus (grocery stores) all carry different information about you, and because the formula (recipe) varies based on who is requesting the credit score, you actually have many different credit scores.

  • When applying the auto formula, Equifax will produce one score.
  • When applying the tenant-screening formula, Equifax will produce a different score.
  • When applying the tenant-screening formula, TransUnion will produce yet another score.
  • And so on and so forth.

That said, if a lender pulls your score, the credit-reporting bureaus will almost always use something called the “FICO” formula. The only credit scores you need to know are credit scores based on the FICO formula.
But if you, the consumer, pull your own score from one of those jingle-y websites, the credit-reporting bureaus will almost always use something called a “Consumer” formula.
The trouble is that no one—no lender, no credit card company, no employer, and no landlord—will ever use your Consumer score.
Yet, this is the score you will get if you buy your credit score from most free credit report websites.
For instance, take a look at AnnualCreditReport.com. While downloading your free annual credit report, you will be offered your Equifax credit score for a fee. But check out the fine print:
“The Equifax Risk Score [a Consumer score] and the credit file on which it was based may be different than the credit file and credit scoring model that may be used by lenders.”
The truth is that the score a lender uses will be different. As of 2013, I have been in the mortgage industry for 20 years, and I have never once used an Equifax Risk Score.
When writing my book about how to build credit, 7 Steps to a 720 Credit Score, I studied tens of thousands of credit reports and credit scores used by my loan office. All of them—a full 100 percent—were based on the FICO formula, and not one of them used a Consumer formula such as the Equifax Risk Score.
This bears repeating: 100 percent of the tens of thousands of credit reports and credit scores that my loan office used to determine creditworthiness were based on the FICO formula.
So just how different are the credit scores sold on free credit report websites?
I tested this with my own credit file by pulling my FICO score and my Consumer score on the same day. My FICO score was a whopping 237 points lower than my Consumer score.
Then I asked my friends, Jocelyn and Michael, to let me run an experiment on their credit scores. Again, the Consumer score was artificially high.
Michael`s FICO score—the score a lender would consider—was 79 points lower than his Consumer score, and Jocelyn`s FICO score was 54 points lower than her Consumer score.
In all three circumstances, the Consumer score was higher.
This provides would-be-borrowers with an artificial sense of security.
Prospective homeowners or car buyers do a little research, realize that lenders provide the best interest rates to people with FICO scores of at least 720, then they buy their credit scores from a free credit report website.
They don`t realize that the credit score they are buying is not a FICO score.
And when their Consumer credit score comes in at 745 or 815, they think they are out of the woods. Instead of taking the steps necessary to build their credit scores, they sit back and relax.
But when it comes time to buy a house or a car, their loan applications are either denied due to low credit, or they end up paying more interest than they expected.
In Jocelyn and Michael`s case, the difference in interest on a $300,000, 30-year, fixed-rate home loan would have been about $12,000.
And this is a problem for everyone, not just prospective homeowners or car buyers. What about the folks who carry credit cards? These people buy their Consumer scores, and then wonder why they are not qualifying for better interest rates. My credit score is high, they think. I guess these are the best available interest rates.
Little do they know that they should take a few simple steps to rebuild their real credit score—their FICO score.
So what should you do about this dilemma?
Get an accurate representation of your credit score by buying it directly from www.720FicoScore.com. This is the one and only place you can get your FICO credit scores.
You will notice, though, that only two out of the three credit bureaus (Equifax and TransUnion) sell FICO scores through www.720FICOScore.com. Experian does not allow FICO to sell its credit scores to the general public. In fact, even Experian’s own website does not sell FICO scores.
It’s website has this disclaimer:
“Calculated on the PLUS Score model, your Experian Credit Score indicates your relative credit risk level for educational purposes and is not the score used by lenders.”
So if you want to know what your Experian FICO score is, the only place you can get it is from a lender …
But that’s okay, because you really only need to know two of your three FICO scores. Let me explain …
When determining your interest rate for any given loan or credit card, lenders look at your middle score and assign that rating to you.
For instance, if your Experian FICO score is 720, your TransUnion FICO score is 680, and your Equifax FICO score is 612, lenders will consider 680 to be your credit score.

Experian        720

TransUnion  680

Equifax           612

Because you most likely will be unable to get your hands on your Experian score, you won’t know which of your two scores is your “middle score”…

TransUnion  680

Equifax           612

Experian could come in higher, lower, or in the middle.
So what I suggest is that you work to raise both your Equifax and TransUnion scores to 720. This way, when you go in to apply for a loan, it will not matter what your Experian score is. If it is lower than 720, it will be “cancelled out” by your highest score. If it is higher than 720, it will cause another score to be cancelled out. Either way, your middle score will fall above 720, and you will be considered for the best possible loan terms.
I hope this clarifies some of the mystery surrounding the world of credit-scoring. As always, leave a comment below the Lesson Plan Video if you have any questions.

The Faces of Identity Theft

Posted on May 26, 2021 by - CREDIT BLOG, Personal Finance

About 80 percent of people have errors on their credit reports, and many of these are a result of identity theft. Identity theft can be a devastating event that gets in the way of learning how to build credit. Once a thief acquires your personal information s/he can quickly suck your account dry or steal your identity, resulting in not only a tremendous financial loss but a considerable outlay of time to put your affairs back in order.
Now, more than ever, you have to be careful about leaving any scrap of personal information available to scheming identity thieves. Take safeguards to avoid leaving yourself open to identity theft, and be aware of the many ways identity theft might occur.
Dumpster diving. One of the more common forms of identity theft is when thieves find pieces of personal information is to rummage through a victim’s rubbish. For example, the credit card offers that you discard without a thought might be used by a dumpster diver to set up credit accounts in your name. Bank account statements that have your credit card number or bank account might even be used to purchase items online or over the phone. To prevent this, purchase a shredder and use it on anything with your personal information.
Open-access mailboxes. If you have a mailbox that is not secured or is a community mailbox, beware of identity thieves snatching your mail and setting up bogus accounts in your name. If you’re going to be away on vacation, protect yourself from identity theft by asking the post office to put your mail on hold so no one can grab it.
Pickpockets and purse-snatchers. Make sure you never leave your purse or bag unattended. Having access to your credit card and driver’s license is an identity thief’s dream. For that reason, never, ever carry your Social Security card in your wallet.
Phishers and Phreakers. Be especially wary of phishers and phreakers, the newest form of identity theft. Phreakers are people who search for personal information by eavesdropping on telephone calls.  Phishers send cleverly disguised emails that ask you to provide personal account information. Using anti-virus software and a firewall is a good way to cut down on malignant attempts by criminals to access your information. Do not share your password with anybody and change it often to decrease the possibility someone may hack into your computer. Also watch out for spyware, which is often installed on your computer without your consent. It can monitor your computer for personal information, such as credit card numbers.
Keep a close lid on your Social Security number. This is your most sensitive personal information, and when an identity thief gets your Social Security number, s/he can easily steal your identity. Do not give out your number unless you started the call and can confirm the identity of the person/company you are calling.
Always keep track of your credit report. Regularly checking your credit report is the best weapon you have against identity theft. Request copies of your credit report at least four times a year. You can get a free annual credit report once a year. Follow up to see any suspicious information or other irregularities show up. Another important safeguard against identity theft is double-checking the purchases on your credit card and withdrawals from your bank account.

Are you living in survivor-land?

Posted on May 25, 2021 by - CREDIT BLOG

I can’t stop thinking about something my powerhouse friend Dave McLurg said…
(Dave has a brilliant business mind and is exceptional when it comes to strategizing so as to best leverage a business, offer, or a service.)
He said that people move in and out of three states-of-mind: survival, functional, and transformational.
He also said that while a person can move up the ladder, he or she can’t skip steps. So you can move from survival to functional, but you cannot move from survival to transformational.
If your state of mind is focused on surviving, you are thinking about basic needs, like putting food on the table. If you are in functional mode, you are thinking about getting the laundry done so you have something clean to wear to work.
These two phases aren’t very exciting, are they? In fact, “survivor-land” is downright depressing…
But the third area is… well, it’s transformational.
If you are in the third phase, you are considering where you want to go and how you can transform your life into something bigger and better.
This is where I want to spend most of my life.
Of course, we all live in “survivor-land” here and there, but if you are always focused on “just surviving,” you won’t be capable of focusing on transforming your life.
So if you want to limit the amount of time you spend in “survivor-land” and spend more time thinking about how to transform your life, you must find a way to quickly move up the ladder.
In other words, you must develop a method for getting out of “survivor-land” and into functional mode.
When I find myself focusing on the scarcity and “just trying to get by,” I ask myself a question…
What do I have to do next?
This way, I start taking action on things that need to get done. By taking action, I allow myself to stop being paralyzed by the fear of “getting by.”  For me, jumping into “action-mode” puts me in a state of mind that allows me to then shift gears and focus on my future.
For instance, if I’m going through the actions of getting my kids dressed (a functional activity), I can try to turn this function into a transformational moment. I can ask my kids: “What are you going to do today to make the day a great day?”
And then I can tell my kids what I’m going to do to make sure my own day is great.
How about you? How do you shift your focus from scarcity and surviving into transformation and thriving? Share your ideas below.
– Philip Tirone

The Secret to Using Installment Loans to Raise Your Credit Score, by 720 Credit Score

Posted on May 24, 2021 by - CREDIT BLOG

I always tell people that one of the best ways to get a great credit score is to have an installment loan on your credit report.
But how are you supposed to do this? 🙂
Just run out and buy a car so that you can add an installment loan to your credit report?
Nope. Here’s an easier strategy.
Go into your local credit union and explain that you want a secured loan that is reported to all three credit bureaus as an installment loan.
And because the sole purpose of this loan is to get your credit score to increase, you should apply for a small loan–somewhere around $500.
Now, to get this loan, you might need to offer collateral…
If you have a car that has been paid in full, then you can use your car as collateral.
If you don’t have a car that is paid in full, the credit union will let you know if you have other options.
Here’s one that I suggest…
Explain that as a term of your $500 installment loan, you will leave the money in an account at that credit union.
In fact, you should do this regardless of whether you have collateral.
Be upfront. Let the bank representative know that you are trying to build your credit score, and that you want to do it in a way that offers the credit union 100 percent security in making the loan.
So whether you are putting up collateral or not, when the credit union gives you the loan, open a checking account at that local credit union.
Stick the full amount of the loan into this account.
Don’t get checks. Don’t get a debit card.
Just let the money sit in the checking account
Then set up a payment plan so that the loan is paid automatically and in full from this account over the course of six months.
It bears noting…
When you first get the loan, your score will drop a little bit.
But paying an installment loan in full and as agreed is one of the best things you can do for your credit score …
And since this installment loan will be paid in six months, you will see the benefits of a higher credit score within a few short months.
Philip Tirone

Credit-Scoring Factor #1: Payment History

Posted on May 19, 2021 by - CREDIT BLOG, CREDIT SCORING

In my book about how to build credit, 7 Steps to a 720 Credit Score, I remind readers that a clean payment history is only one aspect of a good credit score. That said, it is among the most important aspects, counting for 35 percent of a credit score.
The credit-scoring bureaus use 22 criteria to design the intricate formulas used to determine a credit score. These criteria can be segregated into five factors (“What Are the Credit Score Factors?):

  1. Payment history
  2. Outstanding balances
  3. Age of credit
  4. Type of credit
  5. Credit inquiries

This blog focuses on the first: payment history.
This portion of the credit-scoring formula looks at:

  • Your payment history on revolving accounts such as credit cards, retail accounts such as gas cards, installment loans such as car loans, finance accounts, mortgages, and other credit accounts. I think it goes without saying that the formula responds better if a credit report has no late payments.
  • The severity of late payments. A 30-day-late payment will be judged less severely than a 120-day late payment. And an account sent to collections will cause the score to drop even more.
  • The presence (or lack thereof) of repossessions, collections, charge offs, and public records such as bankruptcies, judgments, and foreclosures. The fact of bankruptcies and other severe defaults will hurt your score the most, especially if they have happened recently.
  • The recency of late payments. Your payment history if weighed on a scale with the most recent payment activity given more weight than past activity For this reason, recent late payments will affect your score more negatively than aging ones. This is because the scoring models assuming that current behavior is a far better predictor of your future behavior than is past behavior.

In fact, if your prior credit report is spotless but you make on late payment, your score will probably experience a sharp drop. This is because the scoring bureaus will assume you have had a shift in your financial situation. If you make late payments all the time, the scoring bureaus will eventually start making gradual deductions.
This is not to say that one or two late payments will cause your score to plummet so drastically that you are unable to qualify for a loan. One or two blemishes on an otherwise strong credit report might be overlooked. However, if you have a high credit score and make a late payment, you will be docked more points than if you already have a low credit score and make a late payment.
In other words, your payment history is a critical component of your credit score. However, the most important part of this is your recent behavior. The past two years of your payment history are far more revealing than behavior that occurred five or six years ago. And with some exceptions (e.g., bankruptcies, which stay on a credit report for ten years), your payment history from eight years ago is a moot point as most items fall off a credit report in seven years.
In my free teleseminar, I talk about how banks use your payment history to legally rob you of your hard-earned money. Be sure to check it out!

Build Your Credit Score in Five Minutes

Posted on May 18, 2021 by - CREDIT BLOG

Want to know how to build your credit score in just five minutes?
I’ve got an easy tip that you can accomplish in about five minutes…
Ask your credit card company to increase your credit limit. This will lower your utilization rate and, as a result, help you build your credit score.
You see, the credit-scoring bureaus place a lot of emphasis on your balance-to-limit ratio (also known as your utilization rate). The lower your balance as a percentage of your limit, the higher your credit score will be. Credit bureaus prefer that your utilization rate is never higher than 30 percent, meaning that if your credit limit is $1,000, your balance is never more than $300.
So when a credit card company increases your limit, be sure you do not increase your balance.
A lot of people worry that asking for a limit increase will hurt their credit scores. While it is true that your credit card company might need to pull your credit report, the credit inquiry will hurt your score only nominally, and only for a few months. In the long run, the limit increase (coupled with a balance that stays the same or decreases) will help build your credit score.
And in some cases, you might be able to ask for a limit increase without having an inquiry added to your credit score.
If you are worried about adding another inquiry to your credit request, ask the credit card company these three questions before making a request for a limit increase.
1. “Do I qualify for a limit increase without having you run my credit report?”
If you do, simply ask for the full amount you want your limit increased to. If the creditor wants to run your credit report, remember that an inquiry will be added to your credit report, and your score will drop slightly. Ask the next two questions and decide whether you want to take the chance or not. Like I said, if your request is granted, the inquiry won’t matter because the limit increase will help your score in the long run. But if your request is denied, your score will suffer for a few months.
2.     “Can I request the maximum increase, or must I provide you with a specific limit request?” If the creditor requires that you provide a dollar figure to which you want your limit increase, you will need to ask the third question. If not, you can request the maximum increase.
3. “If I request too much, will you deny the request completely, or will you make a counteroffer?”
If asking for too much means that creditor will deny the request completely, you might want to start by requesting a 10 percent or 20 percent increase, especially if your credit report is going to be pulled. If the creditor will make a counteroffer, request the full amount you need to raise your limit enough so that your balance is less than 30 percent.
If your request is denied, your score might drop a little due to the inquiry. But don’t worry too much about it—inquiries stay on your credit report for two years, but they only affect your credit score for twelve months. And inquiries from several months prior won’t impact your score more than a few points. Just work on lowering your balance, which will build your credit score by lowering your utilization rate.

Lou Holtz has 3 questions for you…

Posted on May 18, 2021 by - CREDIT BLOG

These three questions are the “catch-all” questions for everything… for parenting your children, for handling your finances, for making professional deals.

Before we get to that, let me back up and tell you how I know Lou Holtz.

One of my mentors is Harvey Mackay, author of five bestsellers, including Swim with the Sharks. As part of our mentoring relationship, Harvey introduces me to his close friends and associates. (I’ve blogged about the fact that success relies, at least in part, on getting physical exposure to people you admire.)
At any rate, Harvey introduced me to Lou Holtz. Aside from being kind enough to take his picture with me, Lou gave me some great advice…

It’s the same advice he gave to his players on the field, to his teammates on projects, and to the coaches he manages.
Anytime you are tackling a problem, ask yourself:

  1. Am I doing the right thing?
  2. Am I doing the best with the time I have allotted for this?
  3. Am I treating others as I would want to be treated?

If you can answer these questions with a resounding yes, you are on the path to success. If you say no to one or more of them, make the proper adjustments, and rework your solution.
Once Lou told me about these questions, I started using them all the time. When I’m disciplining my kids, I ask myself: Am I doing the right thing? Am I doing the best with the time I have? Am I treating my kids the way I would want to be treated?
And when my kids are being unfair to one another, I ask them the three questions…
When dealing with a client, I ask myself those questions. You get the point.
Lou also gave me one other question. Consider it the bonus question.
This person helps a person keep focused when working toward a goal…
The question is: What’s important now?
When Lou was coaching his teams through a season, he kept perspective by asking over and over: What is important now? What is important now?
By doing this, he stayed in the moment and kept his team focused on making the most of that moment.
I pass this advice along because I think it applies to just about everything.
What is important now?
This is a question I can ask myself if my kids are ever in crisis. It’s a question I can ask myself when I’m trying to accomplish something for my business.
In crisis and in success, asking What is important now? stops us from focusing on distractions and reminds us to keep doing our best in the moment…
As always, let me know your thoughts by posting a comment below.
What is important in your life right now? Let me know!

Credit Inquiries Won’t Hurt, As Long As …

Posted on May 15, 2021 by - CREDIT SCORING

“But Phil,” my client was saying, “I don’t want to pull my credit report. Won’t that hurt my credit score because of the credit inquiry?”
My response was, “Nope. A credit inquiry won't hurt your credit score—at least, not if it is soft.”
Let me explain …
The only kind of credit inquiries that hurt your credit score are “hard” inquiries. Hard inquiries are defined as inquiries into your credit score by a lender for the purpose of determining whether to extend you a loan.
All other inquiries are considered “soft” inquiries, and while they appear on your credit report, they do not hurt your score. So pulling your own credit score is considered a soft inquiry. Likewise, if a landlord or a potential employer pulls your report, the inquiry will not hurt your score. A lender’s inquiry might even be considered soft if it is done to determine whether to change your interest rate.
In other words, pull away! Checking into your own credit report is considered responsible behavior, and you won’t be punished for doing so.
So how many times can you pull your credit report? As many as you want. You can pull your own credit report every single day of the year, and your score won’t drop a single point. But if you have more than two credit inquiries by a lender within a six-month timeframe, your score will probably dip a few points.

A letter to my mom…

Posted on May 13, 2021 by - CREDIT BLOG

Dear Mom,
When I think back to my childhood, one memory in particular still makes my eyes well up with tears…
While other parents were driving Mercedes and BMW’s, you were driving the school bus. And you did it with a smile on your face!
And work ethic isn’t the only thing you gave me. You are the definition of “Super Mom.” You have taught me that…
1) My word is my wand.
In fact, I can still hear your voice: “Phil, your word is your wand.”
If I was angry and complaining, you taught me that I would attract whatever I was focusing on. If I continued to use words of frustration, I would attract more frustrating things in my life. But if I used words of gratefulness, I would be given other things for which I would be grateful.
And guess what? My word is my wand, and that is why my life is so great right now.
Thank you, Mom.

2) I should always make it fun.

It was late into my elementary school years when I learned that “Energy Balls” were actually pitted prunes and that “Moon Candy” was dried apricots.
I specifically remember a day when I had a friend over, and you said, “Who wants some Energy Balls?”  Lacey and I jumped up and down…
I can only imagine what my friend was thinking, but I still grin when I think about the sick look of disappointment on his face when you brought out the “treat.” After recovering from his shock, he said, “Those aren’t Energy Balls. Those are PRUNES!”
Well, to this day, I still love my Energy Balls… and countless other kind-of-gross things that you made fun.
3) It will come back tenfold.

Perhaps your greatest lesson was this: “Everything you give will come back 10 times, so just keep giving.”
I remember the time you donated enough money to sponsor a pew at church. Money was tight, so I asked, “Why are we giving that much money when we can’t buy what we need for our own household?”
You said, “Whatever we give will come back ten times. Let’s keep giving and believing!” And you were right, Mom. It always came back ten times… and more.

4) I should give it to God.
I never saw you worry, Mom, even when you were single, raising two kids, and barely making ends meet.
Whenever you saw me worry, you always said: “Give it to God, Phil. It’s not your problem.”
Then you showed me how to take action, believing that God would solve the problem. In fact, you are still the Queen of Action because you know that God will solve your problems, so you work on His side to find a solution… and fast!
But you don’t worry, and this makes all the difference. You keep a smile on your face, and it has taught me to keep a smile on my face.
5) To work hard and to NOT focus on the money.

Your work ethic is unmatched.

I remember when you wanted me to attend a private school that we couldn’t afford. You got creative, put your ego aside, and went to the school with a proposal…
“You let my son go to school here for free, and I’ll drive the bus without pay.”

I couldn’t be more proud of my bus-driving, queen-of-action Super Mom. I’m a lucky man.
I love you.
Happy Mothers Day!
– Philip Tirone
I would love to hear your thoughts on what my mom taught me. Please leave a comment below.

How to Qualify for a Loan

Posted on May 12, 2021 by - CREDIT BLOG, Personal Finance

In today’s rough environment, knowing how to build credit isn’t enough if you want to also know how to qualify for a loan.
Ideally, a loan sits on a stool with four legs: income, down payment, savings, and credit score. If necessary, a stool can stand with just three legs. It cannot however, stand on just two, and it is important for would-be borrowers to understand this when learning how to qualify for a loan.
You are going to need at least three out of four “stool legs” to get a worthwhile loan.
Before applying for a loan, understand that the lender is in the business of earning a return on its investment. The lender could invest in the stock market, bonds, annuities, mutual funds, or any number of other things. The lender is only interested in giving you a loan to you if the lender can earn a worthwhile return in the form of the interest payments you make as the loan is paid.
To make this determination, the lender considers the four stool legs we discussed.
How to Qualify for a Loan—Stool Leg Number #1: INCOME
The lender considers your income. The higher your income as compared to your existing debts (your “debt-to-income ratio”), the more likely you are to make your monthly payments.
How to Qualify for a Loan—Stool Leg Number #2: DOWN PAYMENT
Next, the lender considers the down payment you are going to make on a loan attached to property (such as a car or home loan). The bigger the down payment, the more protection a creditor has. First, the property has more equity invested in it, meaning it is more likely to have enough equity to be sold at a profit to pay off the loan. As well, the borrower has more invested in the property and is therefore more likely to prioritize loan payments.
How to Qualify for a Loan—Stool Leg Number #3: SAVINGS
The lender considers your savings. Also called “reserves,” your savings are important because they tell the lender your likelihood of weathering any rough spots in your life, getting back on your feet, and making those loan payments.
How to Qualify for a Loan—Stool Leg Number #4: CREDIT SCORE
Finally, the lender considers your credit score. The credit score gives the lender a glimpse into your character and how important it is to you to keep your word and repay your debts. It also further assists the creditor in analyzing your ability to repay by revealing whether you are already carrying large amounts of debt.
When considering how to qualify for a loan in today’s market, a person really needs four out of four stool legs, though some exceptions might apply. If the would-be borrower is strong on any three out of the four, a lender might make an exception, even if his fourth leg is weak. A strong income may make up for a lack of reserves. Or a high credit score can make up for a small down payment. In normal lending environments, a borrower with a strong income, lots of savings and a big down payment will probably be allowed to slide on a mediocre credit score, but s/he would pay high interest rates.
For major purchases, like cars and houses, it’s worth thinking about these four criteria at least six months to a year in advance of applying for a loan.
Keep your income as high as possible when learning how to qualify for a loan. You can get a second job or work to bring home additional commission. This will help your income, savings, and down payment. Dedicate as much of your monthly earnings to a savings account and maximize your reserves. Learn how to create a budget. If you have family members willing to help you with the down payment, get the money from them in advance so that when the lender looks back at several months’ worth of bank statements, the lender will see consistent higher balances. (Keep in mind that you should discuss the tax consequences for cash gifts with a tax consultant.)
Get a copy of your FICO Score and review it for any errors. If you find them, contact the credit bureaus and follow their steps to have the information corrected. Make all you payments on time, and try to pay down your balances on existing accounts. Attend our free teleseminar so that you can learn how to improve your credit score quickly.
Although the four legs of our stool are the most important criteria, learning how to qualify for a loan means that you take a look at some smaller factors as well. How long have you been at your current job and address?

  • People who move around a lot are generally consider bigger risks than borrowers with proven job stability and a permanent address. From a lender’s perspective, a stable lifestyle—two or more years at the same address—equals a safe investment.
  • In addition, the lender wants to know that you have a history of making plenty of money to afford the loan. Ideally, your job should also be stable, meaning you have been employed for at least two years at the same company.

In today’s market, knowing how to qualify for a loan can be tough. Lenders have more stringent guidelines than ever before. Remember to start early and learn everything you can about building picture-perfect credit!