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How Your Credit Score Impacts Your Loan Terms

Posted: November 14, 2018 by Rachel Shepard

Some people are fortunate enough to have the means to pay for everything they need in cash, without worrying about things like loans and repayment terms. For the rest of us, however, loans are an important part of financing major purchases and getting through expensive emergencies.


So, unless you’re one of the few who can get by without loans, your credit score is going to be a key part of your financial future. Unfortunately, it’s all too easy for a few credit mistakes to result in a low credit score, which can impact the quality of the loan terms you are offered — and determine whether you’re offered a loan at all.


A Low Score Means a Lower Chance of Approval


One of the earliest lessons most people learn when they have bad credit is that few lenders are willing to take the risk of lending to someone with a poor credit history. As a result, the first hurdle to getting a loan with decent terms for those with a low credit score is simply getting approved for a loan in the first place.


And this hurdle can be made even higher when you are in need of a large loan. While your income will have an impact on the size of the loan you can get, your credit score will also be a big factor. The lower your credit score, the less likely lenders are to offer you a loan of any significant size.


Most consumers have a few options for finding a loan with bad credit, including subprime lenders who specialize in financing consumers with poor credit. Lenders like these tend to have very flexible credit requirements that mean you won’t be rejected out of hand simply due to having a low credit score.


Another potential option for finding a lender when you have bad credit is your local credit union. While you’ll need to become a member of the credit union to take advantage of its services, it can be a great alternative to big banks with stricter lending requirements.


Your Loan’s APR Will Be Based on Your Credit Risk


Even if your low credit score doesn’t stop you from getting approved, it will directly impact other aspects of your loan offer, starting with your interest rate.


In essence, your APR will be based on your credit risk, which lenders determine by checking your credit reports and scores. If you have great credit, you are a low risk to the lender. In other words, the lender knows you have a good chance of paying back your entire loan because you have a proven history of paying back your debts.


If you have a low credit score, on the other hand, you represent a high credit risk. That’s because something in your credit history indicates you may be less likely to repay your loan. The typical big bank has a low risk tolerance, which is why the major banks tend to have fairly strict credit requirements; they don’t want to risk you defaulting on the loan.


Subprime lenders are generally banks with a higher risk tolerance; these lenders are willing to risk that you default on your loan because they can potentially reap big benefits through the higher interest rates they charge. Basically, every subprime borrower pays higher interest rates to make up for the large portion of other subprime borrowers who will default on their loans.


Bad-Credit Applicants May Be Charged Higher Fees & Deposits


A higher interest rate isn’t the only way loans get more expensive when you have a low credit score. Many subprime lenders will also likely charge higher loan fees, such as the origination fee, than regular big-bank prime lenders tend to charge. As with interest fees, these higher loan fees help make up for the higher risk presented by bad-credit applicants.


Additionally, the amount of money it takes to secure a loan will also typically be higher for borrowers with low credit scores. Traditionally secured loans, like auto loans, will often require a larger down payment or more valuable trade-in vehicle to help offset the increased risk to the lender.


If your credit is particularly poor, you may even be asked to provide a down payment or another form of collateral for a loan that is usually unsecured. Some personal loan lenders, for instance, may require that you use your vehicle or property as collateral to secure the loan before you can be approved.


A Qualified Cosigner Can Help Offset the Impacts of a Low Score


While having a low credit score can definitely make your loan more expensive, there is a way to potentially reduce the interest rates and fees you are charged for a loan: a cosigner.


Typically a friend or family member, a cosigner is someone with good credit who agrees to share financial responsibility for the loan. Basically, a cosigner agrees to repay the debt if the primary borrower can’t (or won’t) do so. This reduces the risk for the lender, and it may result in receiving better terms like a lower interest rate or reduced deposit requirement.

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Can Credit Cards Save You Money?

Posted: November 6, 2018 by Rachel Shepard

Although it can be easy to forget as we’re swiping away, credit cards are a form of debt; the balance you build on your credit card is debt you owe to the issuing bank.


Given that they are debt and, by nature, debt is a negative, it may seem counterintuitive to consider that credit cards may actually help you save money — but they can. Everything from earning rewards to easy access to reusable financing can help you save money simply by using the right credit card.


Of course, it takes smart credit card use and responsible financial behaviors to make the most of your credit cards’ money-saving potential. No matter how strategic your plan, irresponsible use of credit cards will likely cost you more than you can save.


Purchase Rewards Can Be Very Valuable


The most obvious way your credit cards can save you money is through purchase rewards. The majority of prime credit cards — and even several subprime cards — now offer rewards programs that provide cash back, points, or miles on all of your net new purchases.


Most rewards credit cards have a flat unlimited rewards rate (1% to 2% is standard) that applies to every purchase. However, many rewards cards these days also have set bonus categories that provide higher rewards rates for category purchases. For example, a travel rewards credit card might offer triple points for travel-related purchases like airfare or hotel stays.


The best way to maximize your credit card rewards is to choose a credit card that offers bonus rewards for the purchases you make most often. If most of your budget goes toward groceries, for instance, choose a card with a high bonus rewards rate for grocery store purchases.


Although most credit card rewards are paid for by the interchange fees that issuers charge merchants for each transaction, many high-rate rewards cards will also charge high annual fees. Subprime rewards cards can also charge a variety of fees, so pick a credit card with no or low fees, like the ones on this list.


You’ll also want to be sure to pay off your purchases well before you start accruing interest fees to ensure your earnings stay in your pocket, rather than going right back to the bank. Even the most lucrative rewards credit card won’t provide enough in rewards to make paying big interest fees a good idea.


Issuer Portals Can Unlock Exclusive Discounts


In addition to purchase rewards, your credit card may also give you access to the credit card issuer’s online shopping portal. Offered by most major banks, issuer shopping and discount portals can contain exclusive coupons and discounts for tons of popular brands, as well as special offers for extra bonus rewards on partner purchases.


How the shopping portal works will vary by issuer. Some portals provide coupon codes to be entered at the time of sale, some portals use trackable cookies to automatically credit your account, while other portals will simply attach the discount to your card account for online or in-store use.


Save On Interest Fees with Credit Card Grace Periods


While many occasions call for a long-term installment loan that you can repay over months or years, sometimes you simply need a small loan to get you through the next two weeks. Rather than turn to expensive payday or cash advance loans, you may be able to use your credit card as a means of short-term financing.


Given that many payday loans can have APRs in the three digits, using a credit card — even a subprime card with a 30%-plus APR — is already a better deal. But, that deal gets exponentially better when you only need a few weeks to repay your balance. That’s because most credit cards offer a grace period on new purchases to pay off your balance before you start accruing interest fees.


Although some cards don’t offer a grace period (most commonly the case with subprime credit cards), cards that do offer one will provide a grace period of at least 21 days, though the full period is generally from the time the transaction posts until the day the bill for that billing cycle is due.


One important thing to remember is that the grace period for interest only applies to new purchases. Other transaction types, such as a balance transfer or cash advances, won’t qualify for the grace period. The interest fees for ineligible transactions will start to accrue as soon as the transaction posts to your account.

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How Does Maxing Out a Credit Card Impact Your Credit Score?

Posted: August 15, 2018 by Brittney Mayer

While an increasing number of consumers are aware of their credit scores, a good deal of confusion still exists about what does — and doesn’t — impact your score. For example, there is a popular myth that carrying a balance from month to month will somehow help your credit.


This is not true, however. While you do need to occasionally use your card to build up payment history — you can’t have a payment history if you don’t, you know, make payments — which is an important part of your credit score, you don’t need to carry that balance beyond your due date to reap the benefits.


And, more importantly, you shouldn’t carry a balance beyond your due date because that’s when interest fees will start to come into play. Interest fees compound daily, which can get expensive even if you have a card with a relatively low APR.


However, there are other reasons to avoid carrying a balance or, worse, maxing out your credit cards beyond the inevitable interest fees. The most important of which is the potential impact on your credit score.


The Direct Impact is to Your Utilization Rate


Each month, usually around the time your statement period ends, your credit card issuer reports your card balance to the credit bureaus to be updated on your credit reports. This balance is used by credit scoring agencies and lenders to determine your utilization rate or ratio, which is the ratio of how much debt you have to your total available credit.


For example, if you have a balance of $500 and a total credit limit of $2,000, then your utilization rate is 25%. A high utilization rate is seen as risky by models and creditors because it means you may be struggling to pay off your debts.


So much so, in fact, that your utilization rate — both overall across all cards as well as per individual card — is worth up to 30% of your FICO credit score. As a result, having one or more credit cards with an extremely high utilization rate, such as cards that are maxed-out or near their maximum limit, can cause your credit score to drop by dozens of points.


On the bright side, that damage isn’t permanent. Paying down your balances to reduce your utilization rates can help your score rebound in a month or two when the new, lower balances are reported to the credit bureaus. However, there could be more lasting repercussions.


Watch Out for Secondary Consequences

One of the most common consequences of maxing out a credit card is that the issuer may see the high utilization rate as a sign of financial trouble — which means you suddenly seem like a high-risk investment. Some issuers may respond by reducing your credit limit to the current balance on your card (or lower) to avoid the potential of your debt level rising, which can cause your utilization rate to increase even more.


In extreme cases, issuers may decide to cut their losses and cancel your card entirely, leaving you with a limited window to pay off your balance. Issuers can close your account at any time, and they’re under no obligation to provide notice if they choose to close your account.


Additionally, maxed out credit cards can negatively contribute to your debt-to-income ratio, which is an evaluation of the total amount you owe on your debts each month versus your monthly income. A high debt-to-income ratio is a red flag for lenders and credit card issuers, one that can cause you to be denied for new credit if creditors don’t believe you can repay your debts.


Dealing with Maxed-Out Credit Cards


The most obvious solution to maxed out credit cards is also the most basic tenant of responsible credit card use: Only charge what you can afford to repay that month and pay your bill in full. If you need to make purchases that will put your balance close to your limit, consider making multiple payments during the month to avoid having a high balance reported to the bureaus.


Another way to avoid maxing out any specific card is to spread out your purchases when possible. A low to moderate amount of debt spread out across multiple cards will tend to be better for your credit score than the same amount of debt on a single card.


Alternatively, credit card consolidation with a personal installment loan can shift debt from a maxed out credit card to a loan, thus reducing your credit utilization rate. Even better, if you can get a loan with a low APR, you could save on interest fees, as well. Keep in mind that consolidation may not help with your debt-to-income ratio, however, and that opening a new account may have its own credit repercussions.

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