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Tight credit means planning for loan

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Posted: Friday, February 20, 2009 4:03 pm | Updated: 12:29 am, Sat Oct 8, 2011.

Rebecca Warren: If you're planning to buy a home or a car in 2009, the process is going to be a lot tougher without an excellent credit score and a significant down payment.

If you're planning to buy a home or a car in 2009, the process is going to be a lot tougher without an excellent credit score and a significant down payment.

What's a good credit score? According to credit scoring giant Fair Isaac Corp., the best FICO score range as of late 2008 stood at 760-850.

If you have extraordinarily high debt levels, a record of late payments or very little money to put down on that home or car, you need to do some advance planning before you contact any lenders. Here are issues you need to incorporate into your planning:

Get some advice. You might be focused on paying down debt or saving up your down payment, but credit is only one part of your lifetime financial picture. It might be a good idea to talk with a tax professional or a financial planner to learn how to best use credit. It's always good to determine what your limits should be.

Pay down the balances you have. Fair Isaac Corp., the company that created the FICO score, is adjusting the way it computes its credit scores. One of the top changes will be a greater negative weight on credit utilization - how close you get to the borrowing limit of each of your accounts. The company says that for optimal scoring, each account's outstanding credit should be no more than 50 percent of the credit line and hopefully less. As you're paying down your balances, focus on the highest-rate credit cards or loans first.

Set a credit report review schedule. You have the right to get all three of your credit reports - from Experian, TransUnion and Equifax - once a year for free. You can do so by ordering them at www.annualcreditreport.com. Don't order all three of them at the same time, though. Spread out the dates so you'll get a continuous view of how your credit picture looks.

Pay on time and pay more than the minimum. To avoid late payments, note the due dates when the bills arrive and then set a date for payment five to seven days ahead so you'll definitely be able to mail your payment on time. To put more toward the balance, finally do a budget - this will help you identify the nonessential spending you've been doing so you can pay your outstanding credit balances faster.

Cut up cards, but don't close the account. Closing accounts - even those that have had zero balances for years - is a bad idea. Lenders want to see a long record of responsible credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint.

No-doc or low-doc loans? Find another way. If you are self-employed or otherwise don't have a lot of verifiable income, you may have the most trouble getting a loan. While banks and other lenders two years ago might have bent over backward to lend to people with unverifiable income, that gravy train is mostly over now. If you do get a loan, you'll pay far more for it than you would have before the credit markets blew up.

Rebecca Warren is a certified financial planner professional and certified senior adviser in Mesa. She can be reached at (480) 357-8380 or by e-mail at Rebecca@WarrenFinancialServices.com

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