5/30/2017

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Debt and Credit

In most cases, credit and debt go hand in hand.

If you buy something on credit, you automatically have debt, and in most cases, if you have debt, it's because you've gotten credit in one form or another. In some instances, if you apply for certain types of loans or credit cards, if you don't already have other types of debt, you will be turned down.

Recently, a young couple applied for a loan to buy a home. They had more than enough income, job stability, and had the down payment. Everything looked great on paper, but they had no credit. They were told that they should apply for a credit card or buy a car to show some type of payment history.

This may sound a little odd, but it's true and there are times when you can't get credit if you don't already have some debt. Some companies want to see that you can make payments on time before they will extend credit to you.

There are also times when the appearance of too much debt can cause a potential lender to deny you credit. If you have someone run your credit history on several occasions in a short period of time, creditors will look at it as if you are taking on debt, whether you are or not, and they will deny you a loan.

Take for instance, if you want to buy a car and you go to 10 different dealerships looking for the model you want and each dealership runs a credit check on you, it will hurt your FICO score. Your credit report will reflect the 10 hits and it will actually drive your FICO score down. Lenders, especially banks and mortgage companies, do not look favorably on this type of behavior, even if it was not your intention to buy 10 cars.

Not all credit is good for you not all debt is bad for you. It depends a lot on what you make it. A home purchase can be a great debt if you keep it until it is paid in full, which may take anywhere from 10 to 40 years, more or less.

A mortgage is a long term debt that is given depending on your credit score. The better the credit, the better the terms of the loan and vice versa. To extend favorable terms to a borrower, the lender looks at all issues relating to the borrowers credit score. This also applies to loans on automobiles, boats and yachts, farms and ranches, and other long term purchases.

But good debt can easily become bad debt if you don't make payments on time or if you lose whatever you purchase through repossession, bankruptcy, or foreclosure. Bad debt is synonymous with bad credit and it can take a toll on anyone who has to deal with creditors who have little or no sympathy for you if you get behind.

When getting credit, the best way to make sure it doesn't turn into bad debt is to make sure that what you are getting is what you can afford to pay back. Remember, you can get laid off, fired, or demoted, lose a spouse to illness, death, or divorce, or there may be any number of events that can cause you to lose income.

When the economy is doing good, businesses tend to extend credit more easily and borrowers tend to buy things that they usually live without. This works fairly well until the economy slows down and people realize that they may be over their heads in debt.

If you don't protect your good credit by accumulating bad debt, your credit score will be impacted in a negative way. This may affect you for many years to come. The good news is that bad debt and bad credit can be improved, and if handled right, can become good debt and good credit. To turn things around, it will take work, time, and dedication to the cause.

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