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 Just ask any lender: your hobbies or pleasant disposition do not
figure in its loan decision. Numbers do.
"Some of these numbers might seem like a foreign language, but they
are very important for people to know," said Shawn Gilfedder,
president and chief executive of McGraw-Hill Federal Credit Union.
"You would be surprised how much information is available to lenders
these days."
Here are a few of the key numbers lenders look at:
1. FICO score
A score of 760 or better puts you in the top consumer category,
likely granting you the lowest rates for loans. Consider a 30-year
mortgage on a $500,000 house, for instance: Getting a 4 percent
interest rate instead of 4.5 will save you over $50,000 over the
life of the loan.
Even if your credit is not pristine, at least make sure the trend is
improving, Gilfedder said. You can check your numbers from the three
main reporting bureaus, Experian, TranUnion and Equifax, at
FreeCreditReport.com, which provides one free report each year. A
version of your FICO score or your VantageScore, an alternate credit
rating, also appears on monthly statements from many banks and
credit card issuers.
2. Capacity
It matters greatly how much credit you have available right now.
"Think of it as how much gas you have left in your tank," said
Gilfedder. "You don't want to be driving around town with only a
gallon left."
For example, if your credit card limit is $10,000, and you have used
up $2,000, your remaining capacity is $8,000. Make sure you have
plenty of capacity left, and are not continually bumping up against
the ceiling.
Use all your credit lines every once in a while, even if you pay
them off immediately. If your credit line is dormant, lenders might
yank it, which would lower your overall capacity.
3. Debt-to-Income Ratio
If more than 42 percent of total adjusted gross income is earmarked
for paying off debt like car loans and mortgages, that could get you
in real trouble, Gilfedder said.
The lower that ratio, the better. This may be difficult in high-cost
housing areas like San Francisco or New York City. Exceed 42
percent, and "hawkish" lenders may deny a new loan.
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4. Liquidity Ratio
For companies, this means the ability to meet short-term liabilities
with short-term assets.
For individuals, it is a fancy way of referring to your emergency
fund: whether your cash on hand is enough to cover monthly bills.
Since so many people live paycheck-to-paycheck, financial planner
Cathy Pareto of Coral Gables, Florida, said it is critical to aim
for three to six months' worth of savings to handle any bills that
come along.
5. Net Worth
While banks do not consider such a broad number for loans, most
people want to track their wealth with a big round number. Net worth
is simply your total assets minus your total liabilities: the equity
in your house, plus your savings, investment portfolios and any
other assets such as cars, minus what you owe on them.
Net worth is one of the best ways to keep score even though it can
be greatly affected by stock market gyrations, for instance.
"It can be surprisingly difficult to tell if you are actually
getting ahead," financial planner Elizabeth Grahsl of Prosperity
Bank in Dallas said. "Net worth sums up everything going on in your
financial life."
(Editing by Beth Pinsker and Richard Chang)
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