How to Increase Your Borrowing Power and Get More Credit
You can get a general idea of your borrowing power by totaling up all your sources of income and debts and then subtracting your debts from your income.
Contributing Writer at Tally
August 7, 2022
Your borrowing power refers to how much credit you can get based on your financial history, including your credit history and score. Generally, the more favorable your credit history, the higher your score and 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 a loan product — such as a car loan or home loan — or a credit card.
Want to boost your borrowing power? Below, we’ll cover how lenders determine your borrowing power and ways you can improve it to get more credit.
What is your borrowing power?
Knowing your borrowing power before shopping for lenders is helpful when you're in the market for a loan. The amount of money you can borrow depends on several factors.
Whether you’re buying a car, financing or refinancing a home, or applying for a personal loan, a lender will want to know whether you’re in a financial situation to cover your everyday living expenses plus the loan payment.
You can get a general idea of your borrowing power by totaling up all your sources of income and 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 loan payments.
However, there are other variables involved in calculating your borrowing power. These variables can change depending on the type of loan you’re looking for.
How can I increase my borrowing power?
If you want to boost your borrowing power, there are several ways to improve your financial situation and build your credit score.
Here are nine tips that could increase your borrowing power.
1. Save for a bigger down payment
When contemplating a loan, one of the first questions people often ask is, “Can I borrow more if I have a bigger down payment?” In most cases, the answer is yes.
Lenders look at your loan-to-value ratio (LTV ratio), which is how much you’ll owe on the loan divided by the value of the asset you’re purchasing with the loan proceeds. For example, if you took out a $300,000 mortgage to finance a new home that’s appraised at $325,000, your LTV ratio would be 92.3% (300,000 / 325,000 = 0.923).
Your loan-to-value ratio is considered whether you’re a homebuyer applying for a mortgage or looking to refinance your current home.
When you have a smaller down payment, your LTV is higher, making you a more significant risk to the lender. You can improve your LTV 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.
Also, you can avoid falling into the lender’s mortgage insurance requirements with a down payment of 20%. Some lenders will approve you with as little as 0% down but often require private mortgage insurance (PMI), which usually includes a monthly premium added to your mortgage payment.
This added PMI premium increases your debt-to-income (DTI) ratio — the amount of your monthly debt payments divided by your total monthly income — which lowers your borrowing power. Avoiding PMI will allow you to borrow more.
2. Show lenders you can save
Lenders make decisions based on the amount of risk a borrower poses. Recent surveys reveal that fewer than four 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 of defaulting on a loan.
You can turn this around with savings. If your budget is tight, it’s OK 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 or another interest-bearing bank account each paycheck.
You can increase your ability to build savings by eliminating unnecessary spending. Review your weekly spending and try to find areas where you can cut back.
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; $200 a month, or $2,400 a year.
You can also review monthly bills and trim where possible. For example, if you have a streaming service you rarely use, you may want to consider canceling it.
3. Review 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, 13% of Americans polled don’t know their credit score and 71% don’t understand the issues they can encounter from having a bad credit score. This could be a problem, as research from the FTC (Federal Trade Commission) shows that one in five consumers have errors on their credit report that could negatively impact their score.
The good news is that you can review your report for free. 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, the government-approved site for obtaining your free reports.
Once you’ve received your credit reports, 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 by mail.
Be 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 on the others.
4. Stay current on bills
Your payment history comprises 35% of your FICO credit score, making it the most influential scoring factor. One or two late payments can damage your credit score — avoid this by always paying your bills on time.
Creditors can’t report you as late until you’re at least 30 days past the due date. If you suspect you’ll pay after the 30-day mark, it’s a good idea to contact your creditor and let them know. Sometimes, a lender will offer a short grace period so you can make the payment late without hurting your credit score.
If you struggle to remember due dates, consider signing up for autopay to avoid late payments. Some creditors even offer interest rate discounts as a bonus if you enroll in automatic payments.
5. Pay off debt
Your credit utilization is the ratio of how much revolving debt, such as credit cards and lines of credit you have, relative to your available credit limits. Credit utilization is 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 revolving credit accounts
Add the available revolving debt credit limits
Divide your total revolving debt by your overall revolving debt credit limit
Multiply your number by 100 to see your credit utilization as a percentage
For example, if you have a $5,000 credit card limit and you owe $1,000 on that card, 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 as low as possible. In the scenario above, a credit utilization rate of 20% is good — it shows creditors you have plenty of available credit if you need it and that you use your credit cards responsibly. If your credit utilization is too high, creditors may assume you can’t handle everyday expenses, making them less likely to offer you a loan.
6. Extend your loan term
In most cases, the longer your loan term, the lower your monthly payment. This means a longer term will allow you to borrow more money with less impact on your DTI ratio, giving you eligibility for a larger loan.
But be careful when extending loan terms; lenders often increase the interest rate on longer-term loans, which will increase the total cost of the loan.
7. Take advantage of homebuyer programs
If you need to increase your borrowing power to buy a home, search your local area for various homebuyer programs. Many cities, counties and states offer grants and other subsidies for specific cases, such as low-income borrowers or first-time buyers. And because these are often given as grants, they don’t count as debt or require repayment as long as you adhere to the program’s terms.
8. Shop for a better interest rate
Your interest rate will impact your monthly loan payment; a higher interest rate means a higher monthly payment, which increases your DTI ratio and lowers your borrowing power. Shop around for comparison rates until you find the lowest one. Use that rate to negotiate with the other lenders until you reach the lowest possible interest rate.
You may worry about multiple loan applications and the impact of all those credit inquiries on your credit score. Fortunately, some credit scoring models allow for rate shopping. When rate shopping, you can apply for the same type of loan from multiple lenders during a fixed period, but only the first credit inquiry will impact your credit score. The rate shopping period is typically 14 days.
You may also increase borrowing power by opting for a low variable-rate loan instead of a fixed-rate loan. This is risky, as that variable-rate loan will undergo interest rate hikes that mirror the Federal funds rate. If the Federal bank chooses to increase interest rates dramatically, your once low-cost variable-rate loan could become unaffordable.
9. Don’t leave out income
When filling out your loan application, make sure you include all your monthly income sources, including:
Investment property income
Including all your income can lower your DTI ratio, increasing your borrowing power.
Increase your loan borrowing capacity
If you’re thinking about applying for a loan, look into ways to improve your borrowing power. You can begin doing this immediately by paying careful attention to your budget, controlling your spending, saving more, paying down debt and reviewing your credit report.
If credit card debt impacts your borrowing power, consider the Tally†credit card payoff app. The app 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.
†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. Annual fees range from $0 to $300.