Trying to catch break. Your friend Jared is dismayed that he keeps having his lo

Question

Trying to catch break. Your friend Jared is dismayed that he keeps having his loans rejected. He asks you to review various parts of this Criteria of Credibility, starting with his credit scores and report. Q1(a). “I have a proven track record for being able to obtain credit,” Jared notes. “For example, I have credit cards with combined limits of just over $60,000. Surely that should give me credibility by demonstrating that others are willing to lend to me! I’ve also proven that I can manage my payments by keeping a balance of around $58,000 - the interest on which I pay on time each and every month.” What two specific parts of Jared’s situation above are likely the reason lenders are worried? Be specific and explain the implications of what you’ve noted. Q1(b). You find yourself with Jared shopping for appliances at a local home center. A salesperson mentions that Jared can receive a zero percent loan on an appliance package if he opens up a store credit card. Stressing his financial savvy, Jared notes that he recently negotiated the purchase of his car, his computer, and his big screen TV all with similar zero percent interest rate credit card accounts he opened for each purchase. What specific component of Jared’s credit report is he inadvertently hurting? Explain the significance of his actions relative to that component and include your reasoning. Q1(c). In rejecting his most recent loan request, a lender mentioned that Jared’s lack of experience in real estate investing concerned the loan committee. “I can’t get a loan unless I have experience - but I can’t get experience unless I get a loan first!” Jared laments. What are three ways for Jared to overcome this (very common) beginner’s challenge?

Explanation / Answer

First thing, I noted is that Jared is paying only the interest on his credit card loan liability not the Principal. This would remain as a liability continuously until he pays the entire amount.. Secondly, he has bought Car, Computer and big screen TV through the Zero percent interest card. Again the liability increases on his side. So, everymonth he needs to meet the EMI for all these above mentioned liabilities. Hence, his Credit score would obviously be less until he meets all his payments.  

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