Tag Archives: credit

 

Nov14

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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Nov06

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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Sep04

The Fastest Ways to Boost Your Credit Score

Posted: September 4, 2018 by Rachel Shepard

So many aspects of our culture rely on having a good credit score — buying that new car that will turn heads on the highway, finally moving out of that small apartment and purchasing your first home, or even opening a decent checking or savings account.

 

Unfortunately, it can be easy to lose our footing on the path of good credit. A 700+ score can drop below 600 in what seems like the blink of an eye due to any number of circumstances. You missed some payments during a few lean months. You were out of work for a period and relied on your credit cards until you got back on firm financial ground. An emergency arose, and you had to charge a few thousand dollars on a credit card that you had not budgeted for.

 

These are just a few common and easy ways our credit scores can take a dive.

 

While many have searched for some secret, sage advice on how to magically raise scores to the coveted “excellent” classification, the truth is there is no book of credit-boosting spells hidden away somewhere.

 

Boosting your score takes some effort — but fortunately, there are a few things you can do that can help you see some upward movement in your scores in a short amount of time.

 

Improve Your Credit Utilization Ratio

 

Whether you have a credit limit of $2,000 or $20,000, if you max out your available credit, it’s seen as a sign of financial trouble and your credit score will take a hit.

 

One of the quickest ways to potentially see an improvement in your credit score is to reduce your debt-to-credit ratio. While this could mean paying down your highest balances, this isn’t always the case, as your utilization depends on your available credit as much as on your current debt.

 

With that in mind, a little bit of strategy can go a long way.

 

Pay down the credit cards that have the highest usage rates first. If you have debt spread across several cards, prioritize paying down the one that is closest to being maxed out. The new, lower balance will often be reported to the bureaus at the close of your next statement, so your score could see a boost within 30 days or so.

 

Additionally, if you put a lot of your monthly expenses on credit cards to earn rewards, even if you pay off the balance each month, the credit reporting agencies might only see that you frequently have a high balance on your cards. To help with this issue, it’s a good idea to go ahead and pay down your credit card balances a couple of times a month.

 

Increase Your Available Credit

 

Now, if making large payments to bring down a hefty credit card balance isn’t a realistic option for you at this time, you can seek to improve your debt-to-credit ratio in a couple of different ways.

 

First, you can request an increased credit limit from one of your current credit card companies. If the company agrees to raise your limit, you’ve just improved your debt-to-credit ratio and you may see some movement in your credit score. Just be sure not to actually use your newly acquired credit because it would defeat the purpose of raising it to begin with.

 

Additionally, you can apply for new credit cards through other issuers. Again, if you are approved for a new card, you will not want to use your new credit — this is simply a means to helping get your credit score back in good standing. Save your new line of credit for when you’re back on your feet.

 

Check Your Credit Report for Errors

 

Mistakes happen — even among credit reporting agencies and credit card companies. Unfortunately, an error on your credit report can cause some serious damage to your score. Perhaps a system error from the credit card company reported a late payment when you in fact paid on time. Or you requested a forbearance on your student loans, but someone failed to communicate this to the credit agencies, and it looks like you’ve fallen behind on payments.

 

It is important to check your credit reports at least once a year to look for — and correct — these kinds of mistakes. If you see anything amiss on your report, you can file a dispute with the credit reporting agency to have the error corrected. If the error was negatively affecting your score, you should see an improvement in your credit score once the mistake is removed from your report.

 

It Takes Work

 

While the methods listed here aren’t as quick or easy as one might hope, these are a few solid ideas to get started on improving your credit score. Credit scores will never improve immediately — credit card companies generally report to the credit reporting agencies once a month, so even if these methods give your score a boost, don’t expect to see anything in under 30 days.

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