How To Increase Your Borrowing Power
You can get a general idea of your borrowing power by totaling up all your sources of income and all your debts and then subtracting your debts from your income.
August 9, 2021
Your borrowing power refers to how much credit you can get based on your financial history, including your credit score. Generally, the higher your score, the more borrowing power you have. A healthier credit score also means that you’ll typically qualify for a more favorable interest rate when applying for credit, such as an auto loan, credit card, or mortgage.
Want to boost your borrowing power? You can improve your borrowing ability by practicing good money management.
How much can you borrow?
If you’re in the market for a loan, it’s helpful to know how much you can borrow before you shop around for lenders. The amount of money you can borrow depends on several factors.
Whether you’re buying a car, financing a home or applying for a personal loan, a lender will want to know whether you have the income to cover your everyday expenses plus the loan amount.
You can get a general idea of your borrowing power by totaling up all your sources of income and all your debts and then subtracting your debts from your income. This gives you a sense of how much money is left in your budget to cover a loan.
However, there are other variables involved in calculating your borrowing power. These variables can change depending on what type of loan you’re looking for.
How can I increase my borrowing power?
If you want to give your borrowing power a boost, there are several ways to improve your financial health and build your credit score.
Here are six tips that could increase your borrowing power.
Saving a bigger deposit
When contemplating a loan, one of the first questions people often ask is, “Can I borrow more if I have a bigger deposit?” In most cases, the answer is yes.
One of the things lenders look at is your loan-to-value ratio, which is how much you’ll owe on the loan divided by the value of, for example, the property you’re financing. While you can calculate the loan-to-value ratio for any kind of property, you’ll see this most frequently in the context of mortgages.
When you have a smaller down payment (also known as a deposit), your loan-to-value ratio is higher, making you a bigger risk to the lender. You can improve your loan-to-value ratio by saving until you can make a larger down payment, which can help you get a better interest rate and even qualify for a larger loan.
Showing lenders you can save
Lenders make decisions based on the amount of risk a borrower poses. Recent surveys reveal that fewer than 4 in 10 Americans have the resources to cover a $1,000 financial emergency, such as car maintenance or an unexpected doctor’s bill. If you lack savings, lenders may see this as a sign you’re unprepared for a sudden dip in income, which puts you at risk for defaulting on a loan.
You can turn this around with savings. If your budget is tight, it’s okay to start small and build up as you become more comfortable saving. The key is to be consistent by putting money in a dedicated savings account each paycheck.
Cutting back on unnecessary spending
You can also increase your borrowing power by eliminating unnecessary spending. If you struggle to save, take a hard look at your weekly spending and try to find areas you can cut back on.
For example, if you dine out for lunch, try packing meals. While this may seem like a small change, it can make a big difference. If you spend $10 a day on lunch, that’s $50 a week, which is $200 a month or $2,400 a year.
Reviewing your credit report
Any time you apply for credit, you can expect lenders to run a credit check. Despite credit scores being an integral part of the borrowing process, about half of Americans don’t know their score. This is a serious problem, as research from the Federal Trade Commission (FTC) shows that 1 in 5 consumers have errors on their credit report that could negatively impact their score.
The good news is you can review your report for free. In fact, federal law entitles you to one free copy every 12 months. You can request your report from each of the three major credit bureaus — Experian, Equifax and TransUnion — by visiting AnnualCreditReport.com, which is the government-approved site for obtaining your free reports.
Once you have your credit reports, you should review each one carefully, checking for errors and inaccuracies. If you find mistakes, you can dispute them for free.
To do this, visit each credit bureau’s website and follow their directions for filing a dispute. You can dispute online, over the phone or through the mail.
You should also make sure to review all three reports, as not every creditor reports to all three bureaus. This means a negative item or mistake may appear on one credit bureau report but not the others, so it’s important to review all three thoroughly.
Staying current on bills
Your payment history makes up 35% of your credit score, which is the most influential factor in determining your score. Unfortunately, even one or two late payments can damage your credit score. You can avoid this by always paying your bills on time.
If you suspect you’re going to be a few days late on a bill, it’s a good idea to contact your creditor and let them know. In some cases, a lender will offer a short grace period so you can make the payment late without hurting your credit score.
However, you should avoid any late payments. If you struggle to remember due dates, consider signing up for autopay. As a bonus, many creditors offer discounts if you enroll in automatic payments.
Paying off debt
Your credit utilization is the ratio of how much debt you have versus your available credit. Credit utilization makes up 30%of your credit score, making it the second most important factor in determining your score.
You can calculate your credit utilization by using the following steps:
Add all the balances on your credit cards.
Add the available limits on all your cards.
Divide your total debt by your overall credit limit.
Multiply the number you get by 100 to see your credit utilization as a percentage.
For example, if you have a credit card with a $5,000 limit and you owe $1,000, the math for calculating your credit utilization will look like this:
$1,000 ÷ $5,000 = 0.2 x 100 = 20%
Generally, you want to keep your credit utilization rate below 30%. In the scenario above, a credit utilization rate of 20% is good, as it shows creditors you have plenty of available credit if you need it. If your credit utilization is too high, creditors may assume you can’t handle your everyday expenses, which can make them less likely to offer you a loan.
Increase your loan borrowing capacity
If you’re thinking about applying for a loan, you should consider improving your borrowing power as soon as possible. You can begin doing this right away by paying careful attention to your budget, controlling your spending, saving more, paying down debt, and reviewing your credit report.
If credit card debt is impacting your borrowing power, take a look at Tally(1). Tally is a credit card payoff app that can help you streamline your debt and pay down existing balances. If you’re committed to smart money management, you may see positive changes sooner than you think.
(1) To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate.