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Why a Good Credit Score May Not Help You Get a Loan

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Think your good credit score is enough to help you get a loan? It may not be as adequate as you think if your unsecured debt ratio is high. Though most people have some level of unsecured debt, a high ratio of this type of debt is a red flag to lenders that you are not in a position to borrow more. Not sure what this means? Keep reading…

 

Unsecured debt defined:

Unsecured debt is debt that is not backed by collateral. For example:

Secured debt: a mortgage loan, which is secured by your house
Unsecured debt: credit card debt, which is not secured by tangible collateral

 

Unsecured debt ratio defined:

Your unsecured debt ratio is the comparison of your income to your unsecured debt.

 

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Unsecured debt ratio calculated:

The calculation for determining your unsecured debt is simple: divide your outstanding unsecured balances by your annual income and multiply that number (the dividend) by 100 to get your debt ratio as a percentage.

Here is an example of an unsecured debt ratio calculation:

Credit Card #1

$ 3,500.00

Credit Card #2

$50.00

School Loan

$20,000.00

Unsecured Loan

$10,000.00

Total Unsecured Debt

$33,550.00

Annual Income

$50,000.00

Unsecured Debt Ratio
(unsecured debt ÷ annual income x 100)

67.1%

 

Unsecured debt ratio numbers demystified:

An unsecured debt ratio of 20-25% or higher may make it difficult for you to get a loan.

Why is this? If you default on your debt, the lender has no power to recoup their money. The more debt you take on, the more difficult it will be for you to pay back all of the unsecured money you have borrowed. With unsecured debt above 25%, you are overextended and your lender may decide to lend you a smaller amount or deny you the loan or credit line altogether.

 

Improving your unsecured debt ratio explained:

The two simplest solutions for improving your unsecured debt ratio are to make more money or pay down your unsecured debts. Making more money is not always an option, so most people opt to pay down their unsecured debt as quickly as possible. You can begin by consolidating multiple unsecured loans or credit lines into one low-rate personal loan.

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