Chart courtesy of the Fair Isaac Corporation, aka FICO
If you have ever looked into getting a home mortgage, you're aware that your credit score is a critical part of the lending equation. A less than excellent credit score can cost you extra money on your payments each month or even prevent you from taking out a new loan altogether.
The main distinction between different types of debt is whether there is any type of collateral associated with it. Think stuff that is tangible - a car or a house. Debt taken out for these types of purchases is called "secure," since the lender could repossess the items if a borrower can no longer make payments.
On the other hand, debt that is associated with student loans or credit cards is considered "unsecure," because a lender cannot immediately recoup money lent. However, this isn't necessarily bad for credit: As long as you are making minimum payments on time every single month, these liens can gradually strengthen your credit, regardless of being secure or unsecure. A borrower who faithfully makes payments each month demonstrates to a lender he or she can handle the responsibility of taking on a new loan.
The only real "bad" debt is debt that you cannot afford to pay off in a timely manner. If your minimum monthly lien payments owed are more than 43 percent of your monthly income, your chances of obtaining a new mortgage will be slim to none - you will need to work on paying off existing debt first.
If you have any questions regarding liens on your credit report or things you can do to improve your credit score, don't hesitate to contact a licensed loan advisor, whose goal it is to help you make prudent financial decisions. As always, call us toll-free at 877-939-0339 for more information.
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