These days, it may seem impossible to get financing no matter what you try. One of the biggest blocks to getting a loan is your credit score, a number calculated by the major credit reporting services. It represents how big a risk you are to lenders, such as the likelihood that you will default on a loan. In order to avoid that mess, you need to clean up your credit before you borrow. So if you want that new home, new car, or that education, you need to do three important things first.
Pay Your Bills
A few years ago, a series of commercials aired on TV that showed people hunting for the Credit Fairy. If only it were that easy to put a few invoices under your pillow and then “poof,” your credit score was perfect. The only way to truly raise your score is to pay your bills. Even if you are in a situation where you aren't earning enough to cover everything, you need to show the lenders that you are still trying hard to cover your debts. Sit down with all of your outstanding bills and work out a budget in which you can pay each of them a small amount each month. Pay off the smallest bills first, then work your way through the rest. This is a simplified version of Dave Ramsey's “Debt Snowball” and it's highly effective at getting rid of debt.
Use the Tools Available To You
Credit tools such as mortgage, debt consolidation, and emergency fund calculators will make it a lot easier to keep track of your payments. They can show you how to save money by making small adjustments to your plan. You can also get a sense of how big a loan you can handle. These calculators are available through most banks and many credit management sites. They'll even work in the interest rate, which can add tens of thousands of dollars over the life of the loan. While you're at it, get your free annual credit report online and look at what past debts are still bringing down your score. Errors happen all the time, and old resolved debts sometimes stay on your report longer than necessary. Every point counts, so follow up and get rid of the things that are holding you back.
Enlist Professional Help
If the numbers are just too much to handle alone, talk to a CPA or a financial planner to help you navigate the math. If you can't afford one on your own, look into free credit clinics offered by local banks and lending institutions. Remember that while the lenders don't want to lend to someone they don't trust, they do still need to offer loans to stay in business. It's in the lender's and your best interests to help you clean up your credit. Dave Ramsey and Suze Orman offer free advice on their radio shows, which you can catch online if your local station doesn't carry them. Your local Adult Education program might even have a course or two on financial management. You don't have to go it alone.
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