If we’ve learned anything from the economic meltdown, it’s that credit can be both a wonderful and a terrible thing. Used judiciously, a loan can help you get a home or a car without having to come up with all that cash yourself. But when overused, credit can be a quick road to bankruptcy when the bill comes due.
Thankfully, you can avoid nightmarish scenarios by knowing the credit game beforehand. The five steps to get you started right:
1. Check your credit score and credit report. You can do this either through MyFico.com, AnnualCreditReport.com (the site that grants you one free report from each agency every year) or the sites of any of the major credit-rating agencies (Experian, TransUnion and Equifax). This will let you spot black marks (like unpaid bills) in advance, and take action to correct them before you apply for a loan. Even if there’s just a simple error on the report, it could take months to get it removed, so give yourself enough of a time cushion to have it resolved.
2. Do your loan calculations early. Online calculators, such as those at Bankrate.com, can help you figure out what a $20,000 car loan or a $200,000 home loan translates into every month. Setting those cost boundaries will make sure you don’t overstep them and take on too much debt.
3. For home loans, get your down payment together. This is a long-term project, so it’s something you should have started yesterday. If you know you’ll need to put down roughly 20 percent on a home purchase, then budget accordingly and start working towards that goal. Otherwise when signing loan documents, you might have to scramble at the last minute to come up with lump sums or risk losing the loan altogether.
4. Shop around. Don’t opt for the first loan offer you receive, but have a handful of options available to you. Mortgage brokers can get banks to compete for your business (find a local representative at Namb.org), as can sites like LendingTree.com. Healthy competition will prevent you from getting saddled with an unfairly high interest rate.
5. Get your paperwork in order. Especially these days, after having been burned in the subprime lending crisis, banks require a flood of documentation before loaning out a single penny. So start getting those documents together, whether it’s old tax returns, recent pay stubs or letters from your HR department confirming your employment.