Borrowing money is the act of receiving money from a lender who you agree to repay on a payment schedule set by the lender. That simple relationship comes in many forms, can have an extensive library of unique terms, and could be subject to changing government regulations all of which are too extensive and complex to cover in this book.

Without getting too deep in the details, this chapter will look at:

  • the Consumer Financial Protection Bureau;
  • the three levels of personal debt;
  • your credit score;
  • your debt-to-income ratio;
  • how you decide if you can afford a loan.

Consumer Financial Protection Bureau

For consumers in the United States, there is the Consumer Financial Protection Bureau. Founded in July 2011, the CFPB was created to provide a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace. This government agency is tasked with making sure that banks, lenders, and other financial companies treat you fairly.

The CFPB website ( is your one best resource for learning about the financial marketplace. As highlighted on the screenshot at left (captured on 2/19/2022), the CFPB is also where to turn for help when you have a complaint about a financial transaction in which you feel that you were treated poorly or lost money.

You are encouraged to bookmark the CFPB website in your browser as a financial resource, which is equivalent to having your therapist on speed dial for emotional issues. Look to the CFPB website as your go-to place for topics that could include:

  • understanding types of loans;
  • how to prepare to apply for a type of loan;
  • the definition of key terms associated with a type of loan;
  • learning about financial issues such as debt collection and bank accounts;
  • getting help recovering from a financial transaction gone bad;
  • sharing your money story.

An advantage of having the CFPB website as your financial marketplace reference is that the website is kept up to date with current financial and government activities. You would do well to visit the site often when engaging in money discussions and transactions.

Levels of Personal Debt

Personal debt generally falls into three categories or levels: long-term, short-term, and convenience.


Long term debt typically means a 30-year mortgage used to purchase a primary residence. For most people, a mortgage is the largest debt they will ever take on. There are other loans that fit in the long-term category, such as education loans, because the loans take so long to pay off.

Long-term debt can be advantageous for building a good credit rating and, for mortgages, to take advantage of tax advantages and to build equity (the cash value of your home that is yours). In the case of student loans, the debt is offset by the increased income that can be earned with an advanced education.


Short-term debt, which typically lasts three to seven years, is used to purchase big ticket items such as:

  • Automobiles
  • Furniture
  • Recreation vehicles and equipment
  • Swimming pools

These are the items that get us mobile, make our house a home, and are just plain fun.


Convenience debt refers to using credit cards, which provide a convenient way to make purchases, particularly online. Credit cards are not always considered convenience debt. They can easily be short-term and possibly long-term debt. The difference is whether or not you pay interest to the credit card company. When you don’t pay a statement’s new balance every month, the credit card is at least short-term debt. If you continue to use a credit card and never bring the account balance down to zero, the credit card is a long (as in perpetual) debt.

A credit card is a convenience only when you pay the statement’s new balance in full each month. Otherwise, the credit card is a very expensive debt.

Your Creditworthiness

Your creditworthiness for borrowing money is measured a great deal by lenders with your credit score and your debt-to-income ratio (DTI). There are other metrics that may come into play depending on the type of loan for which you're applying, but your credit score and DTI are important creditworthiness numbers that you can monitor and change with appropriate handling of your day-to-day finances.

Credit Report vs. Credit Score

This text was copied from a CFPB post titled, “What is the difference between a credit report and a credit score?” which was last updated on August 3, 2017:

Your credit reports and your credit scores are two different things. A credit report is a statement that has information about your credit activity and current credit situation such as loan paying history and the status of your credit accounts. Your credit scores are calculated based on the information in your credit report.
Your credit score, as well as the information on your credit report, are important for determining whether you’ll be able to get a mortgage, credit card, auto loan, or other credit product, and the rate you’ll pay. Your credit scores are calculated based on the information in your credit report.
You have many different credit scores, and there are many ways to get a credit score. Your score can differ depending on which credit reporting agency provided the information, the scoring model, the type of loan product, and even the day when it was calculated. Higher scores reflect a better loan paying history and make you eligible for lower interest rates.
Errors on your credit report can reduce your score artificially - which could mean a higher interest rate and less money in your pocket - so it is important to check your credit report and correct any errors well before you apply for a loan.

Refer to the CFPB website for ways to get your credit report and credit score.

How To Improve Your Credit Score

This text was copied from a CFPB post titled, “How do I get and keep a good credit score?” which was last updated on March 29, 2019:

There is no secret formula to building a strong credit score, but there are some guidelines that can help.
  • Pay your loans on time, every time. One way to make sure your payments are on time is to set up automatic payments or set up electronic reminders. If you’ve missed payments, get current and stay current.
  • Don’t get close to your credit limit. Credit scoring models look at how close you are to being “maxed out,” so try to keep your balances low compared to your total credit limit. If you close some credit card accounts and put most or all of your credit card balances onto one card, it may hurt your credit score if this means that you are using a high percentage of your total credit limit. Experts advise keeping your use of credit at no more than 30 percent of your total credit limit. You don’t need to revolve on credit cards to get a good score. Paying off the balance each month helps get you the best scores.
  • A long credit history will help your score. Credit scores are based on experience over time. The more experience your credit report shows with paying your loans on time, the more information there is to determine whether you are a good credit recipient.
  • Only apply for credit that you need. Credit scoring formulas look at your recent credit activity as a signal of your need for credit. If you apply for a lot of credit over a short period of time, it may appear to lenders that your economic circumstances have changed negatively.
  • Fact-check your credit reports. If you spot suspected errors, dispute them. If you have old credit card accounts you are not using, keep an eye on them to make sure that an identity thief is not using them.

If you need help improving your credit score, a credit repair company will negotiate with your creditors and credit agencies on your behalf in exchange for a monthly fee.

When you have a great credit score, it could be worthwhile to utilize a credit monitoring service to keep your information secure.

Your Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is all of your monthly debt payments divided by your gross monthly income expressed as a percent. It indicates to lenders your ability to handle the monthly payments for the money you want to borrow.

While debt-to-income ratio standards used by vendors vary, a typical interpretation of your DTI by a lender could be:

  • 35% or less: Your debt is at a manageable level.
  • 36% to 49%: You’re managing your debt, but lowering your DTI is encouraged.
  • 50% or more: Your money for spending and saving is probably limited.

When applying for a credit account for which your debt-to-income ratio is considered, ask the lender for the specific levels being applied.

How To Calculate Your DTI

Step 1 - Add up your monthly bills.

  • These are examples of monthly payments to include:
    • Mortgage/rent payments
    • Expense for real estate taxes
    • Expense for homeowner’s insurance
    • Car payments
    • Student loan payments
    • Minimum credit card payments
    • Time-share payments
    • Personal loan payments
    • Child support payments
    • Alimony payments
    • Any co-signed loan payments
  • The following monthly payments should not be included:
    • Utilities like water, garbage, electricity, or gas bills
    • Car insurance expenses
    • Cable bills
    • >Cell phone bills
    • Health insurance costs
    • Groceries/food or entertainment expenses

Step 2 - Add up your gross monthly income.

  • Include the following income sources:
  • Wages
  • Salaries
  • Tips and bonuses
  • Pension
  • Social Security
  • Child support and alimony
  • Any other additional income

Step 3 - Divide your total monthly bills by your total gross monthly income. Multiply the result by 100 to get your debt-to-income ratio in percentage.

You can use the Debt-to-Income Ratio Calculator in Income Companion as shown below.

On the Debt-to-Income Ratio page in Income Companion the calculation of your DTI is saved. Updating your ratio whenever a value changes is easy and quick.

Click here to enlarge image

When a lender asks for the information needed to calculate your DTI you could:

  • click on the “copy page” link;
  • paste the copy of the page into an email and send it to the lender.

Can You Afford It?

The one question about borrowing money that websites and creditworthiness metrics cannot answer is how well the payments fit into your Incredibly Cool Budget, or, Can you afford it? This is when playing “What If?” becomes a critical part of your financial planning. Being able to actually see the impact of a new commitment on your financial future both clarifies the choices and helps you to be comfortable with your final decision. With a few steps, you can see how a new loan or any other type of payment will affect your bottom line.

First, shop for the best deal. Look on the CFPB website for how to prepare for and negotiate the type of loan you are looking at. Go shopping for a loan armed with full knowledge of the relevant key terms, vendor disclosure requirements, and your rights. Once you have a tentative, unsigned loan agreement with the payment amount and schedule, you can use Income Companion and:

  1. Go to the Budget Space page. Open the live budget space to which the new payments would be added.
  2. Back up the live budget space.
  3. On the Budget Space page, add and open a clone budget space.
  4. Restore the clone budget space from the live backup taken in Step 2.
  5. Go to the Plan Bills page and add a bill for the tentative payment schedule.
  6. Go to the Look Ahead page, set the Months to “12” and look at the “New cushion balance” row to see the effect of the new payments on your cash flow. Right-click on the row to display the “New Cushion Balance (Bottom Line)” chart.
  7. Optionally, go to the Debt-to-Income Ratio page and add the tentative monthly payment to see how it affects your DTI.
  8. Go to the Budget Space page, open the live budget space, then delete the cloned budget space.

If you are okay with the changes to your bottom line and debt-to-income ratio in the cloned budget space that are a result of the tentative payments, you can proceed confidently with the loan. After the loan has been completed, add a bill to the live budget space to include the payment schedule in your Incredibly Cool Budget.

If the tentative payments added in Steps 5 and 7 above result in unacceptable, negative changes to your cash flow or debt-to-income ratio, what you do next is up to you given your financial situation. You could look at:

  • reconsidering the length and/or the amount of the loan;
  • increasing your income maybe by doing a side hustle;
  • eliminating bills that have a lower priority for you than the loan;
  • getting a consolidation loan that will pay off existing debts and give you the needed money;
  • discontinuing or reducing your use of credit cards to increase your bottom line;
  • reducing or pausing set-asides to sinking funds and savings to free up current cash.

By playing “What If?” with the contemplated loan payments, you will know whether or not they are a good fit in your Incredibly Cool Budget, and, if not, you will be able to consider all of your options.

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