Looking Beyond Your Credit Score
A person in their late-20s or early-30s will need decent credit if they plan to buy a car, get a mortgage on a house, or get a loan to start a small business. While building your credit score using personal credit cards is a great start, it does not guarantee that you will be able to get the type of credit you want or need.
A common issue that many people run into is a lack of credit diversity. It is often assumed that having one or two credit cards that are in good standing will suffice. However, if you want to lease a car, you may be surprised to find that many lenders will deny your application, even if you have good credit. Why? Because you have no history of using auto loans in the past.
In addition to credit diversity, you also need to think about your debt-to-income (DTI) ratio. This ratio is usually expressed as a percentage, and it reflects the level of debt you have compared to your regular annual income. For example, let’s say that you currently have an annual salary of $50,000 and are working to pay down $40,000 in credit card debt. This would mean that you have a DTI of 80%.
A DTI of 43% or below is considered healthy. Many lenders will also accept DTIs up to 50%, but having a DTI of 80% is considered very risky. It means that a large portion of your annual income is just going toward debt repayment. If you want to get a mortgage, you will have a very hard time finding a lender until you have paid down your debt. So, even if you have a good credit score, you may be prevented from getting the type of credit you want because of poor spending habits.