When you enrolled in Nationwide’s Debt Reduction’s Program, you made a decision that getting out of debt was far more important to you than trying to “save” your credit score. Most of our clients instinctively knew that they were going to sink deeper into debt if they continued doing what they had been doing before joining our program. What many people do not know is that, despite a great payment record and a relatively high credit score, their credit rating was already on the rocks.
Creditors offering “secured” debt products, such as a home or an automobile, will rate their prospective borrowers using three main criteria. In this article, I will attempt to give you a simplified overview of what is referred to as the “three legs of the stool” by which your credit worthiness stands. For example, a mortgage lender or an automotive lender “sell you” secured debt products. Secured being, if you fail to maintain your monthly payments the mortgage lender can take away your house through the foreclosure process. Likewise, and automobile lender can repossess your vehicle for failing to make your monthly payments on time.
Conversely, “unsecured debt” are things such as credit card debt, medical bills, or personal bills. They are not “secured” by anything other than your signature. Therefore, if you fail to make your monthly payments on time to them, they cannot come and take anything from you.
Now that you know the difference between secured and unsecured debt, I would like you to think about the acronym ICE. We use this to describe Income, Credit, and Equity. Let us look at each one of these at a time.
The first one is INCOME. Income itself is not a stand-alone consideration in the make-up of your credit score; however it does play a rather large role in the amount of income you pay out each month for various bills. An example of this would be someone who makes over one hundred thousand dollars per year in income, however has contractual commitments to pay back debt payments and living expenses that combined with other expenses, exceeds their spendable income. In other words, it is not the amount of income that is the problem; it is the amount of the available spendable portion of their income that has to be taken into consideration. Using formulas known as “debt to income ratios” or “debt ratios” for short, lenders will calculate a percentage by dividing the borrower’s contractual obligations by a look at a simple illustration: add the minimum required monthly payments for your mortgage (or rent), any car or truck payment(s), credit card payments, student loans, and any other debt payments you pay each month. Divide that total by the borrower’s gross monthly income. That gives you your debt ratio. If your debt ratio in typically higher than 38%, for a mortgage loan or more than 50% in the case of an automobile loan, you will find it harder to get the loan… but not impossible.
The second part of our acronym is CREDIT, and is the result of several considerations. For example, how has the applicant paid similar obligations in the past? How have they paid for unrelated obligations? Finally, what is their credit score, based on the computerized formulas of the three major credit reporting bureaus? This is where many consumers are confused… they think their credit rating and record with the bureaus are the only things that count. They are important, as we will see, but they are only one of the items considered. Mortgage companies care mostly about how the applicant paid their last housing obligation (mortgage or rent) over the past few years. Then they will look at how they made their other secured debt payments as a secondary consideration, then finally their unsecured debt payments. The same is true for automobile lenders. First, how did they handle their last car payment? Second, how did they handle their mortgage or rent payments. Finally, how did they fare with their unsecured debt payments. If the application is for unsecured credit, the lender will likely give equal consideration to the record of all types of payments. Then there is the credit scoring. This is a method of rating a borrower that is based on computer modeling. It takes many factors into consideration, and the formulas are patented. We do know that patterns of formulas however can predict eventual debt overload and failure. So your credit score can drop even if you are making your payments on time. If you are living on your credit cards, that pattern will eventually show up and your credit score will drop. For more information on scores, visit: www.myfico.com.
Finally, EQUITY is the third leg of our stool and generally applies only to secured debt. Think about it for a minute. When purchasing anything that is a secured debt, the lender typically wants you to put down a down payment when you buy a house or a car, but not when you apply for a credit card. Equity is what a lender will demand when the borrower’s debt ratios are high (income), or when their payment record or credit score look weak (credit). Lots of down payment can make up for shortages in the other two categories. But when payments have been missed, or debt ratios are disproportionately high, who has the extra cash to put down?
The truth is, if it’s been a struggle for you to keep up that good payment record, chances are that your credit rating is already in the tank. Many homeowners could not qualify for their existing mortgage if they had to reapply for their loan. In that situation, it’s only a matter of time until you run into a solid wall of insolvency, with no way out except bankruptcy or a debt settlement program such as ours. Our program is designed to head off that possibility. Our clients are willing to “bite the bullet” now rather than later, to turn things around now while it is still relatively painless. It may temporarily cost you that lofty credit report, but you’ll be debt-free in a short time instead of sliding deeper and deeper into the quicksand of unsecured debt.
To see if you qualify for this terrific program, call us today toll free at 800-890-6658. We have professional consultants standing by to answer all of your questions and help you meet the purchases of your dreams. If you cannot talk now, simply fill out the form to your right and someone will get back to you within 24 hours. We trust this helps you!