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3 Steps to Gear Up For a Big Purchase

You’re planning on taking a huge financial step towards a milestone. Maybe you’re thinking about buying a new car or possibly you’re thinking about going as big as purchasing your first home.

Making the purchase isn’t just about having money, it’s about how you’ve spent it in the past. You’ll need to know what your credit score is, how banks evaluate your credit history, and you’ll have to start thinking about a down payment.

It’s time to start getting all of these important aspects in order before you take the plunge:

Know What Your Credit Score Is

If you weren’t aware already, you have the right to know what your credit score is. There are three credit bureaus (TransUnion, Experian, and Equifax) that calculate your credit score constantly. They’re always getting in new information about your spending habits, your current debts, and your ability to pay them off.

As such, you’re entitled to one free credit report from each of these bureaus every year. It’s essential that you take advantage of this if you’re thinking about making a big purchase soon. This way, you can know exactly what credit agencies, banks, and lenders see when they look at your report.

Keep in mind that each report is a little bit different. Each credit agency rates your scores based on the same criteria, but they may have a little bit of a differing calculation for getting there.

Your scores will not be wildly different from each other, but you will likely see small fluctuations in your score from each bureau. Each credit score is correct, and will be seen by any bank that you try to apply for a loan through. They’ll be able to see exactly what you see on your report.

Your report will show you everything you’ve ever done that has affected your credit. If you’ve had overdue credit card payments, funds that were transferred to collections, or if you’ve requested several loans in the last year, each of these occurrences will appear on your credit history.

Take some time to really pick through everything that you see on your report. Once you know exactly what kinds of things are affecting your credit score, you can start to improve it.

Approximately 79% of credit reports contain errors. Before you go make big purchase, make sure there are no errors on your credit report. And if there are? Do everything you can to get them removed. This will impact your interest rate tremendously (and you’ll be amazed at how that interest adds up).

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Know How to Improve Your Credit Score

Most Americans land within the fair to average credit score, which is about 630-689. A smaller portion of people have a higher credit score than that (in the good or excellent rage). And that’s great!

Don’t be fooled though. Each bank has their own discretionary tools for deciding who is approved for a loan. Everyone out there can benefit from improving their credit score. Even those who are in the fair or good range could potentially be denied. So, it’s always a sound decision to start working on your credit score.

With that being said, a large amount of people also live in the “bad” credit range, which is 300-629. Don’t be discouraged. You can start improving your credit score right now.

Most likely, you’ve been human and have made some late payments, maybe you’ve had a bill or two make it to collections, but that’s okay. You can start fresh and start working out each of the negative details that you see on your report.

What’s more, you should know how important simply making your payments on time is. About 35 percent of your credit score is made up of just your payment history. This means that if you start making payments on time right now, your score will go up.

The other thing you need to remember is that mistakes stay on your credit report for about seven years (however, do note that this is not a law — those negative items can be removed). So, you’ll need to make enough good habits to outweigh the bad ones.

Another bad habit that sticks with many people, is maxing out their debt limits. About 30 percent of your credit score goes to the amount you owe on credit and your total amount of debt. As such, if you have outstanding debt, the best thing you can do for your credit score, is to start whittling down your total debt bit by bit.

When you take a look at your credit, you might find that your credit score looks incredibly low. You might even possibly be looking at a score as low as 250. This usually means that you’ve got little to no credit on your report.

You’ve taken out no credit cards and you’ve never owned a previous car. That’s okay! That’s not a bad place to be in. This just means that you’ve got to start building up some good habits on your credit.

One great way to do this is through a secured credit card. Basically, the credit card has zero risk because you’re using your own money. You apply for the card, then put down a small deposit, and then spend.

You’re required to pay back any money that you spend of course and your spending habits are reported on your credit. When/if you decide to close the account, your deposit is fully refunded to you.

Start Saving as Much as Possible

The other aspect you’ll want to keep in mind is your down payment. We’re talking about a big purchase, such as a car or home, which means you’ll have a bank lend you thousands of dollars.

In return they usually want to know that you’re good for the money, that you’ll be able to pay it back. That doesn’t just mean that you can financially handle the monthly payments, but also that you’re willing to take down the total amount of the loan.

For example, your bank might offer you $10,000 for a car, but they could expect that you’ll put down $1,000 before they hand over the loan. So, in all reality, they’re only responsible for lending you $9,000 and you take care of the rest.

They’ll usually be quite candid about the fact that they won’t be lending you the full amount that you’re looking to spend, you’ll need to show some initiative as well. And believe me, after you work through fees, interest, etc. you’ll still be paying at least $10,000 for that car anyway.

Another reason that you might want to save is just so that you can pay a little bit extra on your monthly bill. Now, of course, this isn’t a necessity, but you’re going to be charged interest each month based on your remaining balance.

This means, that if you start paying off a little bit more, even if it’s just five or ten dollars, you’ll be paying less interest in the end. Plus, it’s just a good habit to have some extra money in savings in case you aren’t able to pay your bill with your regular income for any reason. It’s always smart to have a backup plan!

Once you have your credit score right where you want it and you’ve secured a down payment, there’s nothing that’s stopping you. You know have the financial freedom to sit down with a banker and put your money where you mouth is.

You can enjoy the fruits of your financial labor. Celebrate! You’re well on your way towards achieving your goal!

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By Trisha Miller

Trisha is a writer from Boise, ID. She is a dedicated vegan, an avid gamer, cat lover, and amateur SFX artist. Find her on Twitter — @thatdangvegan.

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