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As the old saying goes, the rich get richer while the poor get poorer, but why is it that some people seem to have the knack for accumulating wealth, seemingly without much effort? Are these people born lucky, or are they simply privileged? What’s certain is that in order to manage money successfully, it’s vital to absorb some basics of how things work in the financial world, as well as certain tricks of the trade with which savvy millionaires are likely familiar.
1. The inside banking secret
Banks use several factors to measure a potential borrower’s level of risk. These include the amount of money in his or her bank account (primarily savings), age of the account, and how many deposits come into it (as opposed to withdrawals). In a savings account, it is recommended that you have at least $400, but the more the merrier. It’s also recommended that you have a larger number of withdrawals than deposits, and many banks additionally prefer that you leave 20% of all deposits in an account. (This explains why incentives for keeping money in a checking account are so frequently seen.) However, very few people know that having multiple accounts within one institution can greatly increase your banking credibility. In addition to a personal checking and savings account, you can have a credit card, a HELOC (home equity line of credit), a signature loan, mortgage or an auto loan. Such diversity will greatly increase your chances of approval for any service you apply for.
2. The “almost paid” installment secret
The time has come: you’ve finally got the funds to pay off an auto or signature loan… you have a chance to reduce debt and increase your credit score. Sounds good, right? Not exactly. Installment loans are accounts that have one set payment amount, and once it’s paid off, the account closes. The problem is that on your credit profile, an open account is worth far more than a closed account. However, the more that debt on an open account is reduced, the more points will be added to a score. So, if you are financing a car or house and can afford to pay down an installment loan, do so, but just down to 10% of the remaining balance. This leaves the account open while reducing the utilization on it, resulting in a credit score jump in most cases.
3. The enhanced DTI secret
When applying for items such as a vehicle, credit card, even a house, one of the main things that lenders look at is a borrower’s debt-to-income (DTI) ratio. To calculate yours, divide gross monthly income (income from all sources before taxes) by gross monthly debt (all bills, including food, gas, rent and utilities). If this number is under 30%, underwriters will look favorably on your file.
As a general rule, you want income to be high and debt to be low, but even if debt-to-income ratio is on the high side, there is a way to counteract that: For bank applications in most cases, you can include projected income or household income. In calculating household income, include amounts that anyone in the home pays in terms of rent or other expenses, including family members, roommates and spouses. Alternatively, if sharing the rent with one or more people, you can divide the total amount of rent by the number of people paying it.
On many applications, there may be an ask for projected income. This is a chance for you to be creative, and think of the highest amount you can realistically make in your field for the next year, which will improve your DTI ratio and exponentially increase your chances of approval.