Preparing Credit For Large Purchases

Large purchases, whether you are investing in a vehicle, home or home improvement project, are not to be taken lightly. Before making significant financial commitments, consumers should exercise their due diligence and prepare for such purchases as much as possible. Many people use credit when making large purchases. That may entail using a credit card or financing a purchase via an installment loan rather than purchasing an item outright. To make buying on credit as consumer-friendly as possible, men and women must ensure they are in good financial standing, which can help them get lower interest rates so they pay less for an item than they might if their finances were not in the best of shape.
• Get your credit score. A credit score, also known as a FICO® score, is a number between 300 and 850 that is calculated based on your payment history, outstanding balances, length of credit history, new credit, and types of credit. Lenders look at this credit score to determine how great a risk you present as a borrower. Whenever you use credit to make a purchase or apply for a loan, your credit score will be checked. The higher the credit score, the more attractive you are to lenders and the lower your interest rate figures to be.
• Check for credit report inaccuracies. If your FICO score seems low, there may be mistakes on your credit reports. Request a copy of your credit reports from the three main credit reporting agencies: Equifax, Experian and TransUnion. Look over the reports thoroughly and address any mistakes immediately.
• Make sure you have a credit history. In an effort to avoid debt, some people never apply for credit cards or other lines of credit. But having no credit history can hurt you, even if you never accumulated any debt. For example, when applying for a mortgage, you will be asked to show at least three lines of credit (any combination of credit cards, student loans, car loans, and so on) that have been active within the past 12 to 24 months, according to the resource Credit Sesame. If you have no credit history, apply for a few credit cards and use them regularly, paying off the balance in full each month to maintain active credit and improve your score. However, do not try to establish lines of credit too close to when you’re making a large purchase, as doing so within six months of making your purchase can temporarily lower your credit score.
• Keep credit utilization within a safe zone. In determining your credit score, credit agencies will look at credit utilization, among other things. Credit utilization is the ratio of your credit card balances to credit limits as listed on your credit report. If your limit is $1,000 and you have a $300 balance, your credit utilization is 30 percent. To determine your credit utilization, simply divide your credit card balance by your credit limit then multiply by 100. The lower the credit utilization, the better. Pay down debt to help reduce utilization.
Consumers ready to make large purchases should factor in credit scores and attractiveness as buyers before they start shopping around.