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What to Know Before Buying a Foreclosed Home

If you’ve been keeping your eye on real estate home listings, you might’ve seen more foreclosed properties for sale at a reduced price. 

With record levels of unemployment and underemployment, many homeowners are falling further behind on their mortgages. Currently, there’s a federal moratorium on the most common mortgage programs through December 31, 2020. Unless further homeowner protections are in place, the foreclosure market will see an unfortunate rise.

In fact, according to mortgage and real estate analytics company Black Knight, 2.3 million homeowners are already seriously past-due on their mortgages. 

As devastating as it is to have more homes undergoing foreclosure, it also means that prospective home buyers, who were otherwise priced out of buying a home, might have greater access to homeownership. Here’s what you should know if you’re thinking about buying a foreclosed home.

Buying a Foreclosed Home 

There are many ways you can buy a foreclosed home, depending on what stage of the process the foreclosure is in:

  • Pre-foreclosure. Many homeowners are willing to sell before they’ve officially been foreclosed on. Depending on how much equity they have, they might need to do a short sale. 
  • Short sale. Homeowners can seek approval from their lenders to sell you the home for less than they owe on the mortgage. The bank will get less than it’s owed, but it still often approves short sales since they usually cost less than a foreclosure. 
  • Auction. Once a home is foreclosed it’ll often be auctioned off by the bank. But you’ll need cash on hand for this, and that’s not an option for most folks who need mortgage financing. 
  • Real-estate owned (REO) properties. Alternatively, banks can simply sell the foreclosed home through more traditional markets, just like a normal home.

It’s usually easiest to buy the foreclosed home once the bank takes over and it becomes an REO property. That’s because you can take your time and go through the mortgage underwriting process. You can also work with a realtor, and — importantly — write contingency clauses in the contract that let you pull out of the deal if a home inspection reveals more repairs than you expected. 

7 Caveats to Buying a Foreclosed Home

Buying a foreclosed home isn’t exactly the same as buying one directly from the homeowner. You’re potentially buying a home from a bank who took over after the previous homeowners were unable to afford the home anymore. This introduces a few twists into the home-buying process for you. 

1. You’ll Need a Realtor Who Specializes in Foreclosed Homes

The world is full of realtors, even including your Uncle Bob and Cousin Carolyn. But not everyone is equipped to handle the nuances of buying a foreclosed home. There are a lot of issues that can crop up — unplanned property damage, squatters, homeowners who settle the bill and try to reclaim ownership, etc.

If you’re serious about buying a foreclosed home, seek out a realtor with extra experience in this area. There are even special designations that some realtors can get, such as Short Sales and Foreclosure Resource (SFR) or Certified Distressed Property Expert (CDPE).

2. Houses Are Sold “As-Is”

With a typical home sale, you have the change to get the property professionally inspected before signing on the dotted line. It’s not uncommon for new issues to arise, and in a normal home buying transaction, you can often negotiate with the sellers to either fix the damage or discount the price. 

That’s not the case when you buy a foreclosed home. If a home inspection reveals unexpected damage — like the need for a full roof or a septic system replacement — banks often aren’t willing to negotiate. It’s a take-it-or-leave-it sale. 

3. Expect to Put In Some Work

The above point is especially important considering that most foreclosed homes do, in fact, need a lot of fixing up. 

Think about it: the previous homeowners lost the house because they couldn’t afford the mortgage. There’s a good chance they also weren’t able to keep up with routine maintenance either. From their perspective, even if they did have the cash, what’s the point of spending money on repairs, if they know they’ll lose the home in a few months?

You can save money by putting in some sweat equity (HGTV, anyone?), but even then you’ll need the cash to pay for materials. This also means that the home might not be move-in ready. If you do move in, you might need to put up with construction debris for a little while. On the bright side, though, this does give you a chance to upgrade the home to your own aesthetics. 

4. You Might Need Creative Financing

This brings up another issue: how do you pay for those renovations? Generally, you can’t just ask for a bigger mortgage to cover the necessary repairs. Most lenders will only lend you as much as the current home appraisal is worth, minus your down payment. 

You have a few options, though. You can hold some money back from your savings to pay for it in cash, but this means you’ll have a smaller down payment. An alternative is getting a loan from a different lender, like a personal loan, a 0% APR credit card, or even a home equity loan or line of credit if you’re lucky enough to start from a position with equity. 

Finally, there are some special “renovation mortgages” available through Fannie Mae and other lenders. These mortgages actually do allow you to take out a bigger mortgage so you can pay for renovations. You might need to provide a higher down payment or have a higher credit score to qualify, however. 

5. Watch for Liens on Foreclosed Homes at Auctions

If you have a big pot of cash and can pay for a home on the same day, an auction might be your best bet. But then you have to worry about a new factor: liens. 

If the property had any liens attached to it (such as from the previous homeowners not paying their taxes, or a judgement from unpaid debt), you’ll inherit that bill, too. 

This is usually only the case for auctioned homes. If you buy a foreclosed home as an REO sale, the bank generally pays off any liens attached to the property. Still, it may be worth double-checking if you have interest in a specific property. 

6. Be Prepared to Act Fast

You’re not the only one with the bright idea to get a low-priced, foreclosed home. Chances are good that there are a few other buyers interested in the property, which increases competition. Even though the home is listed at a big discount, this competition can still drive prices up. You might need to be ready to act fast, just the same as in any hot real estate market. 

7. Be Prepared to Wait

On the flip side, there’s a lot of extra bureaucracy involved in buying a foreclosed home once the seller accepts your offer. There’s often extra paperwork to fill out or other complications. 

For example, the home appraisal might come back lower than expected, which might make it harder to get enough financing for the agreed-on purchase price. If it’s a short sale, it might also take longer for the bank to approve the lower sale price for the home, based on what the homeowner’s mortgage is currently worth. 

Pros and Cons of Foreclosed Homes 

Buying a foreclosed home isn’t necessarily a good or bad idea on its own. It all depends on your own goals — for example, are you willing to figure out financing for repairs to get a deal on the home purchase price? Also consider how important it is for you to have a “move-in ready” home with no hassle. 

Weigh these pros and cons carefully, and what’s most important to you when buying a home. 

Pros Cons
Can get a deal that’s lower than market price Property is sold “as-is” and might not be move-in ready
Can customize the home to your specifications with repairs and upgrades Likely needs a lot of repairs and upgrades 
Requires creative financing for repairs and upgrades
Foreclosure process is long and might fall through 

The Bottom Line

Buying a foreclosed home can be a win-win situation. You get a home at a good price, and (usually) you can bring the property back to good, working order by fixing it up. As long as you go into the deal knowing that it’s not the same experience as a typical home purchase, buying a foreclosed home is a great way to launch into homeownership or real estate investing.   

The post What to Know Before Buying a Foreclosed Home appeared first on Good Financial Cents®.

Source: goodfinancialcents.com



The Best Student Loan Companies For Refinancing

Refinancing your student loans can make good financial sense, and that’s especially true if your current loans are stuck at a high-interest rate. With a new loan at a lower APR, you could save a bundle of money on interest each month and ultimately pay your student debt off faster. Consolidating several loans into one new one can also simplify your financial life and make keeping up with bills a lot easier.

College Ave and Earnest topped our list, but since student loan refinancing is an incredibly competitive space, you’ll also want to spend time comparing student loan companies to see who offers the best deal. Many lenders in this space offer incredibly low APRs, flexible payment options, borrower incentives, and more. This means it’s more important than ever to shop around so you wind up with the best student loan for your needs.

What You Should Know About Refinancing Federal Student Loans with a Private Lender

The lenders on this list can help you consolidate and refinance both federal student loans and private student loans. However, there are a few details to be aware of before you refinance federal loans with a private lender.

Switching federal loans to private means giving up federal protections like deferment and forbearance. You also give up your chance to qualify for income-driven repayment plans like Pay As You Earn (PAYE) or Income Based Repayment (IBR). Income-driven repayment plans let you pay a percentage of your discretionary income for 20 to 25 years before ultimately forgiving your remaining loan balances, so this perk isn’t one you should give up without careful thought and consideration.

Best Student Loan Refinancing Companies of 2021

As you start your search to find the best student loan for your lifestyle, take the time to compare lenders and all they offer their customers. While there are a ton of reputable companies offering high-quality student loan refinancing products on the market today, there are also companies you should probably steer clear of.

To make your search easier, we took the time to compare most of the top lenders in this space in terms of interest rates offered, fees, borrower benefits, and more. The following student loan companies are the cream of the crop, so you should start your search here.

Our Top Picks:

  1. Splash Financial
  2. College Ave
  3. Earnest
  4. SoFi
  5. CommonBond
  6. LendKey
  7. Wells Fargo
  8. PenFed Credit Union

Student Loan Refinancing Company Reviews

1. Splash Financial

Splash Financial may be a newer company in the student loan refinancing space, but their offerings are competitive. This company lets you check your rate online without a hard inquiry on your credit report, and their variable rates currently start at just 2.25% APR.

Not only are interest rates offered by Splash Financial industry-leading, but the company has a 95% customer satisfaction rate so far. Their cutting-edge technology also lets you apply for your loan and complete the loan process online, meaning less hassle and stress for you as the borrower.

Check Out Splash Financial’s Low Rates

2. College Ave

College Ave offers student loan refinancing products that can be tailored to your needs. They offer low fixed and variable interest rates, for example, and you’ll never pay an application fee or an origination fee. You can even qualify for a discount if you set your loan up on autopay, and a wide range of repayment schedules are available.

College Ave also offers a wide range of online calculators and tools that can help you figure out how much student loan refinancing could help you save and whether the move would be worth it in the end. Considering their low variable rates start at just 2.74% APR, there’s a good chance you could save money by refinancing if you have excellent credit or a cosigner with great credit.

Get Started with College Ave

3. Earnest

Earnest is another online lender that focuses most of its efforts on offering high-quality student loans. This company lets you consolidate debt at a lower interest rate than you might find elsewhere, and you get the option to pick a monthly payment and repayment period that works with your budget and your lifestyle.

While you’ll need excellent credit to qualify for the lowest interest rates, loans from Earnest come with variable APRs starting at 1.81% and low fixed rates starting at just 3.45%. To qualify for student loan refinancing with Earnest, you’ll need a minimum credit score of 650 and a strong employment and income history. You also need to be current on all your bills and cannot have a bankruptcy on your credit profile.

Refinance and Save with Earnest

4. SoFi

Also make sure to check out student loan refinancing company SoFi as you continue your search. This online lender offers some of the best student loan refinancing products available today, including loans with no application fee, origination fee, or hidden fees.

SoFi lets you apply for and complete the entire loan process online, and they offer live customer support 7 days a week. You can also check your rate online without a hard inquiry on your credit report, which makes it easier to see how much you could save before you commit.

Get Pre-Approved with SoFi in Less than 2 Minutes

5. Commonbond

Commonbond is another online student lender who lets you check your rate online without a hard inquiry on your credit report. With student loan refinancing from Commonbond, you could easily save thousands of dollars on interest with a new fixed interest rate as low as 3.21%. Repayment terms are offered for 5 to 20 years as well, letting you choose a new monthly payment and repayment timeline that works for your needs.

You can apply for your new loan online and note that these loans don’t come with an origination fee or any prepayment penalties. Your loan could also qualify for forbearance, which means having up to 24 months without payments during times of financial hardship.

Apply Online with Commonbond

6. LendKey

LendKey offers private student loans and flexible student loan refinancing options to serve a variety of needs. You can repay your loan between 5 and 20 years, and their refinance loans don’t charge an origination fee.

You can use this company’s online interface to check your rate without a hard inquiry on your credit report, and variable APRs start at just 2.01% for graduates with excellent credit. LendKey loans also receive 9.3 out of 10 possible stars in recent reviews, meaning their customers are mostly happy with their decision to go with this company.

Save Thousands by Refinancing with LendKey

7. Wells Fargo

While Wells Fargo is mostly popular for their banking products, home mortgage products, and personal loans, this bank also offers student loan refinancing products. These loans let you consolidate student debts into a new loan with a low variable or fixed interest rate, and you can even score a discount for setting your loan up on autopay.

Terms for Wells Fargo loans are available anywhere from 5 to 20 years, meaning you can choose a repayment schedule and monthly payment that suits your needs. Wells Fargo also lets you check your rate online without a hard inquiry on your credit report.

Get Started with Wells Fargo

8. PenFed Credit Union

PenFed Credit Union offers unique student loan products powered by Purefy. You might be able to qualify for a lower interest rate that could lead to enormous interest savings over time, and PenFed lets you choose a repayment term and monthly payment that fits with your budget and lifestyle.

You can apply for student loan refinancing on your own, but PenFed Credit Union also allows cosigners. Low fixed interest rates start at just 3.48% APR, and you can check your rate online without a hard inquiry on your credit report.

Learn More about PenFed Credit Union

What To Look For When Refinancing

If you decide you want to refinance your student loans, you’ll be happy to know the refinancing market is more robust than ever. A variety of lenders offer insanely attractive loan options for those who can qualify, although you should know that student loan companies tend to be very finicky about your credit score. Some also won’t let you refinance if you didn’t graduate from college, or even if you graduated from an “unapproved” school.

While you should be aware of any lender-specific eligibility requirements before you apply with any student loan company, there are plenty of other factors to look out for. Here’s everything you should look for in a student loan refinancing company before you decide to trust them with your loans.

Low Interest Rate

Obviously, the main reason you’re probably thinking of refinancing your loans is the potential to save money on interest. Lenders who offer the lowest rates available today can potentially help you save more, although it’s important to consider that you may not qualify for the lowest rates available if you don’t have excellent credit.

Cosigner Requirements

Also consider that most lenders will offer better rates and loan terms if you have a cosigner with better credit than you have. This is especially true if your credit isn’t great, so make sure to ask family members if they’re willing to cosign on your new student loan if you hope to get the best rate. Just remember that your cosigner will be jointly liable for repayment, meaning you could quickly damage your relationship if you default on your loan and leave them holding the bag.

Low Fees or No Fees

Student loans are like any other loan in the fact that some charge higher fees or more fees than others. Since many student loans come with an application fee or an origination fee, you’ll want to look for lenders that don’t charge these fees. Also check for hidden fees like prepayment penalties.

Discounts Available

Some student loan companies let you qualify for discounts, the most popular of which is a discount for using autopay. If you’re able and willing to set up automatic payments on your credit card, you could save .25% or .50% off your interest rate depending on the lender you go with.

Rate Check Option

Many of the top student loan refinancing companies on this list make it possible to check your interest rate online without a hard inquiry on your credit report. This is a huge benefit since knowing your rate can help you figure out if refinancing is even worth it before you take the time to fill out a full loan application.

Flexible Repayment Plan

Also make sure any lender you go with offers some flexibility in your repayment plan and your monthly payment. You’ll want to make sure refinancing aligns with your long-term financial goals and your monthly budget, and it’s crucial to choose a new loan with a monthly payment you can live with.

Most lenders in this space offer repayment timelines of up to 20 years, which means you could spread your payments over several decades to get a monthly payment that makes sense with your income. Keep in mind, however, that you’ll pay more interest over the life of your loan when you take a long time to pay it off, so you may want to consider prioritizing a faster payment plan.

The Bottom Line

Student loan refinancing may not sound like a lot of fun. However, taking the time to consider all your loan options could easily save you thousands of dollars. This is especially true if you have a lot of debt at a high interest rate. By consolidating all your student loans into a new one with a lower APR, you could make loan repayment easier with a single payment and save a ton of money that would otherwise go to straight to interest without helping you pay off your loans.

The first step of the loan process is the hardest, however, and that’s choosing a student loan refinancing company that you trust. The lenders on this list are highly rated, but they also offer some of the best loan products on the market today.

  • Work with College Ave, our top pick, to refinance your student loan.

Start your search here and you’re bound to wind up with a student loan you can live with. At the very least, you’ll have a better idea of the loans that are available and how much you might save if you decide to refinance later on.

The post The Best Student Loan Companies For Refinancing appeared first on Good Financial Cents®.

Source: goodfinancialcents.com



Repossession Credit Scores: What You Need to Know

One of the harsh truths of secured loans is that your asset can be repossessed if you fail to make the payments. In the words of the FTC, “your consumer rights may be limited” if you miss your monthly payments, and when that happens, both your financial situation and your bank balance will take a hit.

On this guide, we’ll look at what can happen when you fall behind on your car payments, and how much damage it can do to your credit score.

What is a Car Repossession?

An auto loan is a loan acquired for the sole purpose of purchasing a car. The lender covers the cost of the car, you get the vehicle you want, and in return you pay a fixed monthly sum until the loan balance is repaid.

If you fail to make to make a payment or you’re late, the lender may assume possession of your car and sell it to offset the losses. At the same time, they will report your missed and late payments to the main credit bureaus, and your credit score will take a hit. What’s more, if the sale is not enough to cover the remainder of the debt, you may be asked to pay the residual balance.

The same process applies to a title loan, whereby your car is used as collateral for a loan but isn’t actually the purpose of the loan.

To avoid repossession, you need to make your car payments on time every month. If you are late or make a partial payment, you may incur penalties and it’s possible that your credit score will suffer as well. If you continue to delay payment, the lender will seek to cover their costs as quickly and painlessly as possible.

How a Repossession Can Impact Your Credit Score

Car repossession can impact your credit history and credit score in several ways. Firstly, all missed and late car payments will be reported to the credit bureaus and will remain on your account for up to 7 years. They can also reduce your credit score. 

Secondly, if your car is repossessed on top of late payments, you could lose up to 100 points from your credit score, significantly reducing your chances of being accepted for a credit card, loan or mortgage in the future. 

And that’s not the end of it. If you have had your car for less than a couple of years, there’s a good chance the sale price will be much less than the loan balance. Car repossession doesn’t wipe the slate clean and could still leave you with a sizable issue. If you have a $10,000 balance and the car is sold for $5,000, you will owe $5,000 on the loan and the lender may also hit you with towing charges.

Don’t assume that the car is worth more than the value of the loan and that everything will be okay. The lender isn’t selling it direct; they won’t get the best price. Repossessed vehicles are sold cheaply, often for much less than their value, and in most cases, a balance remains. 

Lenders may be lenient with this balance as it’s not secured, so their options are limited. However, they can also file a judgment or sell it to a collection agency, at which point your problems increase and your credit score drops even further.

How Does a Repo Take Place?

If you have a substantial credit card debt and miss a payment, your creditor will typically take it easy on you. They can’t legally report the missed payment until at least 30-days have passed and most creditors won’t sell the account to a collection agency until it is at least 180-days overdue.

This leads many borrowers into a false sense of security, believing that an auto loan lender will be just as forgiving. But this is simply not true. Some lenders will repo your car just 90-days after your last payment, others will do it after 60 days. They don’t make as many allowances because they don’t need to—they can simply seize your asset, get most of the money back, and then chase the rest as needed.

Most repossessions happen quickly and with little warning. The lender will contact you beforehand and request that you pay what you owe, but the actual repo process doesn’t work quite like what you may have seen on TV. 

They’re not allowed to break down your door or threaten you; they’re not allowed to use force. And, most of the time, they don’t need to. If they see your car, they will load it onto their truck and disappear. They’re so used to this process that they can typically do it in less than 60-seconds.

It doesn’t matter whether you’re at home or at work—you just lost your ride.

What Can You Do Before a Repo Hits Your Credit Score?

Fortunately, there are ways to avoid the repo process and escape the damage. You just need to act quickly and don’t bury your head in the sand, as many borrowers do.

Request a Deferment

An auto loan lender won’t waste as much time as a creditor, simply because they don’t need to. However, they still understand that they won’t get top dollar for the car and are generally happy to make a few allowances if it means you have more chance of meeting your payments.

If you sense that your financial situation is on the decline, contact your lender and request a deferment. This should be done as soon as possible, preferably before you miss a payment.

A deferment buys you a little extra time, allowing you to take the next month or two off and adding these payments onto the end of the term. The FTC recommends that you get any agreement in writing, just in case they renege on their promise.

Refinance

One of the best ways to avoid car repossession, is to refinance your loan and secure more favorable terms. The balance may increase, and you’ll likely find yourself paying more interest over the long-term, but in the short-term, you’ll have smaller monthly payments to contend with and this makes the loan more manageable.

You will need a good credit score for this to work (although there are some bad credit lenders) but it will allow you to tweak the terms in your favor and potentially improve your credit situation.

Sell the Car Yourself

Desperate times call for desperate measures; if you’re on the brink of facing repossession, you should consider selling the car yourself. You’ll likely get more than your lender would and you can use this to clear the balance. 

Before you sell, calculate how much is left and make sure the sale will cover it. If not, you will need to find the additional funds yourself, preferably without acquiring additional debt. Ask friends or family members if they can help you out.

How Long a Repo Can Affect Your Credit Score

The damage caused by a repossession can remain on your credit score for 7 years, causing some financial difficulty. However, the damage will lessen over time and within three or four years it will be negligible at best.

Derogatory marks cease to have an impact on your credit score a long time before it disappears off your credit report, and it’s the same for late payments and repossessions.

Still, that doesn’t mean you should take things lightly. The lender can make life very difficult for you if you don’t meet your payments every month and don’t work with them to find a solution.

What About Voluntary Repossession?

If you’re missing payments because you’ve lost your job or suffered a major change in your financial circumstances, it may be time to consider voluntary repossession, in which case there are no missed payments and you don’t need to worry about repo men knocking on your door or coming to your workplace.

With voluntary repossession, the borrower contacts the lender, informs them they can no longer afford the payments, and arranges a time and a place to return the car. However, while this is a better option, it can do similar damage to the borrower’s credit score as a voluntary repossession, like a traditional repossession, is still a defaulted loan.

Missed payments aside, the only difference concerns how the repossession shows on the borrower’s credit report. Voluntary repossession will look better to a creditor who manually scans the report, but the majority of lenders run automatic checks and won’t notice a difference.

Summary: Act Quickly

If you have student loan, credit card, and other unsecured debt, a repo could reduce your chances of a successful debt payoff and potentially prevent you from getting a mortgage. But it’s not the end of the world. You can get a deferment, refinance or reinstate the loan, and even if the worst does happen, it may only take a year or so to get back on track after you fix your financial woes.

Repossession Credit Scores: What You Need to Know is a post from Pocket Your Dollars.

Source: pocketyourdollars.com



Minimum Payments on a Credit Card

Your minimum monthly payment is the lowest amount that you need to pay on your credit card balance. Any less could result in a derogatory mark, any more will clear more of the principal. 

Your monthly payment is one of the most important aspects of your credit card debt and failure to understand this could seriously impact your credit score and leave marks on your credit report that remain for up to 7 years.

With that in mind, let’s take a closer look at how these payments operate and how you can quickly clear your credit card debt.

How Minimum Payments on a Credit Card are Calculated

The minimum payment is calculated as a percentage of the total balance at the end of the month. This percentage ranges from 2% to 5%, but it has been known to go lower. 

As an example, if you have a $5,000 credit card balance and are required to pay 5% a month, then your monthly payment will be $250. However, this only covers the principal, which is the money that you borrowed. It does not cover the interest, which is where things get a little complicated and expensive.

What Influences Your Minimum Monthly Payment?

The reason credit card interest is so high is because it compounds. This means that if you have an annual percentage rate of 20% and a debt of $20,000, that debt will climb to $24,000, at which point the next billing cycle will commence and this time you’ll be charged 20% on $24,000 and not $20,000.

However, credit card interest is calculated daily, not yearly. To arrive at your daily percentage rate, simply divide your interest rate by 365 (the number of days in a year) and then multiply this by your daily balance.

For example, if we stick with that 20% interest rate, then the daily rate will be 0.00054%. If we multiply this with the daily balance, we get an interest rate of $2.7 for the first day. Multiply this by 30, for the total days in a billing cycle, and it’s $81. That’s your total interest for the first month.

So, when we calculate the 2% minimum monthly payment, we’re calculating it against $5,081, not $5,000, which means we get a total of $101.62, reducing the balance to just $479.38.

In other words, you pay over $100, but reduce the balance by a little over $20 when you make that monthly payment. If penalty fees and interest rates are added to that, it will reduce in even smaller increments.

Pros and Cons of Only Paying the Minimum Payment on your Credit Card

As discussed above, it’s imperative that you make the minimum payment, avoiding any late payment charges or credit score reductions. However, if you only make those minimum payments every month then it will take a long time to clear your balance and you may struggle to keep your head above water.

The Benefits of Paying More Than the Minimum

Many borrowers struggle to pay more than the minimum not because they don’t have the money, but because they fail to see the benefits. They focus on the short-term and not the long-term, seeing an extra $100 payment as a lost $100 in the present, as opposed to a saved $500 in the future.

However, if you can get over this mindset and start paying more than the minimum, you will do your future self a huge favor, helping with all of the following:

Shorten the Term and Lessen the Interest

Every extra dollar that you add to your minimum payment can help you get out of debt quicker than if you simply stick with the minimum. This is true for all debts—a higher monthly payment means that more money goes towards the principal, which means there is less interest to compound.

Credit card debt is like a snowball gathering momentum as it rolls, and this is exacerbated every time you miss a payment and are hit with penalty fees. By paying more than the minimum, you’re taking a giant chunk out of that snowball and slowing its progression.

You’ll Improve Your Credit Utilization

Your credit utilization ratio is one of the most important parts of your credit report, counting for 30% of your total. This ratio takes your total available credit (such as a credit limit on a credit card) and then compares it to total debt (such as the balance on that credit card). The higher the number, the more of your credit has been used and the more your credit score will suffer.

Every time you pay more of your credit card balance, you’re reducing this score and significantly boosting your credit score.

Avoid Maxing Out Your Balance

Not only will a maxed-out credit card do some serious damage to your credit utilization score, but it can also have a direct impact on your credit score on the whole. Lenders don’t want to see it and credit bureaus will punish you for it. If you’re still using the card and only paying the minimum, you may be stuck in a cycle of persistent debt, but by paying more and using it less, you can prevent that.

You May Get a Better Credit Limit

Credit card issuers monitor their customer’s activities very closely. If they clear their balances every month without issue, they are more inclined to increase their credit limit, offer them rewards, and generally provide them with good opportunities. If they are accumulating large amounts of credit card debt and only meeting their minimum payments, they’ll be less inclined to do any of those things.

It always helps to get on a creditor’s good side, because you never know when you will need that improve credit limit or access to that generous rewards scheme.

What Happens if you Only Make the Minimum Payment?

If you only pay the minimum, the debt will take a long time to clear and you’ll repay huge sums of interest in that time. If we go back to the previous example and assume an APR of 20%, a balance of $5,000 and a minimum payment of 2%, you will repay over 400% in interest alone and it will take you decades to repay the debt.

Thankfully, very few credit card providers will actually let you pay such a small amount on such a substantial debt. But even if we increase the minimum payment to 5%, it still looks abysmal for the borrower. It would take them about 9 years to pay the balance, requiring $250 a month and paying close to $2,500 in interest.

Although it’s more realistic, this is still a poor option, especially when you consider the card will still be active and you may still be using it, which means that every time you make a repayment, you’re adding more debt and offsetting all your hard work.

Your credit score will not suffer if you only make the minimum payment. Providing you make it on time then you will build a respectable payment history, a stable credit report, and a credit score that is sure to impress lenders. However, it won’t look great for your finances as you’re giving yourself an expensive liability that will cripple your debt-to-income ratio and your credit utilization ratio for years to come.

Are There Any Advantages to Just Paying the Minimum?

The only advantage to paying just the minimum is that you will have more money in your pocket at the end of the month, which will allow you to make additional investments and purchases that would otherwise not be available to you. However, this is a pretty narrow-minded way of looking at it, because while you will have more cash in the long-term, it comes at the expense of many additional risks and obligations, not to mention thousands of dollars’ worth of additional interest paid over the term.

What Happens if you Can’t Pay the Minimum Payment?

If there is a late payment or a missed payment, your creditor may charge you a penalty fee or a penalty rate. If your payment is due for more than 30-days they may also report you to the credit bureaus, at which point a derogatory mark will appear on your credit report and your credit score will drop.

This can happen even with a single missed payment, which is why you should never simply skip a payment on the basis that you’ll just double-up next time around.

Instead, contact your creditor, explain your situation, and see if there is anything they can do to help you. They may say no, but it doesn’t hurt to ask, and, in most cases, they will offer you some kind of reprieve. After all, they want their money, and if they can increase their chances of getting paid by providing you with some leeway, they’ll often be more than happy to do it.

Some people believe that you can simply pay a few dollars and it will count as a minimum payment and not show on your credit report. This is a myth. Technically, any payment that doesn’t meet the full minimum requirement can be classed as a late payment and can lead to fees and derogatory marks.

Resources to Lower Minimum Payments on a Credit Card

It’s important to keep a close eye on your credit card statement and activity at all times. Monitor your spending, making sure it doesn’t go overboard, and if you find yourself struggling to make payments at any time, checkout the following resources and options to get the help you need:

  • Credit Counselors: Speak with a trained expert who has helped many individuals in a similar position. They will discuss your finances and your debts and will help you to find a solution.
  • Debt Management: A debt management plan can help when you’re struggling to meet your debt obligations and have a huge debt-to-income ratio. They will provide assistance and help you swap multiple debts for a single consolidation loan.
  • Debt Settlement: An option that works best for individuals with multiple debts and missed payments. It’s one of the cheapest ways to clear personal loan and credit card debt, as well as other forms of unsecured debt.
  • Debt Consolidation: Another consolidation loan option, this time with a long term, ensuring that you pay less per month but more over the term. This is a good option if you’re stuck in a tricky spot right now and need to reduce your outgoings.

In all the above cases, you can use the NMLS Consumer Access site to find a legitimate and reputable company or professional working within the financial sector. You can also use resources like the Better Business Bureau as well as the many guides, reviews, and help files right here on the Pocket Your Dollars website.

How to Reduce the Balance on a Credit Card Debt

One of the best ways to reduce your balance is to initiate a balance transfer. As the name suggests, this entails moving your balance from one card to another. Balance transfer cards entice you by offering a 0% APR on all transfers and this lasts for up to 18% with the best providers. 

In that time, you won’t pay any interest on your balance, which means all your monthly payment will go towards the principal and you can reduce your debt in huge leaps as opposed to small steps.

These cards are not without their issues, however. You will need a good credit score to get a card that has a good APR and balance transfer offer. If you don’t, and you fail to clear the balance during that introductory period, you may be paying more interest than you were before.

In most cases, though, these cards will be just what you need to ease the burden of mounting credit card debts and get back into the black. Take a look at our guide to the best balance transfer cards to learn more and discover how you can move your current balance to a card that has more preferable terms, in the short-term at least.

The Bottom Line: Clear that Balance

A minimum payment is the least amount you need to commit to a credit card balance. If credit card debt was a house party, the minimum payment would be the equivalent of showing up, saying your introductions, and then hiding in the corner for the rest of the night. If you really want to make an impact, you need to be proactive.

It doesn’t have to be twice or thrice the size of your minimum payment. It doesn’t have to be a consistent sum that you pay every month, but it does have to be something. Don’t worry if it’s only 1% or 2% of the balance, because every additional payment helps. Just pay whatever you can afford, whenever you can afford it. A small amount of money today can save you a huge sum of money in the future.

Minimum Payments on a Credit Card is a post from Pocket Your Dollars.

Source: pocketyourdollars.com



Prepare for Holiday Shopping with These Timely Credit Tips

According to a YouGov Parent Survey in 2019, a quarter of parents entered the 2019 holiday shopping seasonstill paying down debt related to 2018 holiday spending. Deloitte numbers put holidayretail salesgrowth in 2019 at 4.1% year-over-year. In 2020, Deloitte predicts growth of between 1% and 1.5% year-over-year for the holiday season.

It might be that some people no longer want to pay for holiday gifts, decorations and food a year down the road. But it’s also true that the COVID-19 pandemic has hit consumerwallets and some people might be cutting back this year.

That doesn’t mean that people aren’t shopping. Google and other thought leaders note that changes to shopping habits and the need for social distancing and other measures will likely spread the holiday shopping season out longer. Shoppers are also likely to turn to online shopping.

With a ton of shopping opportunities, a longer holiday shopping season and pent-up pandemic energy, it might be easy to overspend and create debt you’ll deal with into the future. Follow these tips to prepare for holiday shopping so you can protect your financial standing, save money and make the most of the resources you have this season.

1. Check your credit scores

Begin by checking your credit scores and reports. They tell you where you stand if you want to apply for credit. They also give you a baseline of where you are so you know if your score goes up or down later with no explanation.

An unexplained drop in your credit score can be a sign your financial information is compromised. Unfortunately, the holidays are prime time for many scammers. Using a service, such as ExtraCredit’s Track It feature to keep tabs on 28 of your FICO scores, helps you know when you need to act to protect your credit.

2. Ask for a credit limit increase

If you have existing credit cards and you’re a cardholder in good standing, the months prior to the holidays can be a good time to ask for a credit limit increase. You’re not asking so you can spend more-it’s typically advisable to keep spending in line with your budget no matter how much credit you have.

You’re asking for a higher limit so you can spend what you already planned to without hurting your credit utilization. Credit utilization is the second-most important factor in determining your credit score-second only to payment history. It’s the ratio between your credit limit and how much of that credit you have used.

If you have a card with a limit of $1,000 and you spend $300, that’s a utilization rate of 30%. But if you get approved for a credit limit of $2,000 and you spend $300, that’s a utilization rate of only 15%, which is better for your score.

3. Apply for a credit cardwith a 0% APR introductory offer

Those with good or excellent credit might want to consider applying for a card with a 0% APR introductory offer. If you qualify for such a card, you typically have one or two years to pay off purchases made during the introductory period without accruing any interest.

This can be a way to finance your entire holiday without paying anything more for the privilege of doing so. However, it’s still important to maintain your budget and not overspend just because you won’t be paying the balance off until later. Otherwise, you make this season’s holiday festivities next season’s problem.

4. Pay down debt before-and after-the holidays

Speaking of last season’s debt: If you can pay it down before you start spending this season, that’s a great accomplishment. It also frees up your credit and your budget so you can better enjoy the current holiday season. If you’re paying $100 a month on your debt, that’s $100 a month that might go toward gifts or celebrations that you don’t have to put on a card this year.

If you do use credit to pay for the 2020 holidays, have a plan for paying it down as soon as possible. That’s especially true with 0% interest cards. The longer you wait, the greater the chance you’ll miss the introductory period and potentially be on the hook for a lot of interest expense.

5. Create a holiday spending budget

Whether you’re using cash or credit-or a mix of both-enter the 2020 holiday shopping season with a plan. Take an honest look at your personal budget. If you don’t have a budget, create one before you move forward. Then decide how much you can realistically spend during the holidays.

Consider which gifts you want to buy and which events you want to host or attend. You might not be able to do everything, and that’s OK. Be honest with yourself, your family and your friends about what you can afford to do with your time and money this year.

Then make a list and assign each item a monetary budget. That can include:

  • Gifts as a total
  • Gift extras, such as wrapping and tags
  • Shipping, both for receiving items you buy and for shipping gifts to others
  • Food and drinks
  • Travel
  • Decor
  • General festivities, such as tickets to holiday events

Once you assign a dollar amount to a category, stick to it. That’s a good idea even if you’re spending with credit.

6. Align budgeted spendingwith credit cardrewards

Once you know how much you want to spend, decide how best to spend it. If you’re using credit cards for the holidays, check your accounts to see if any offer cash back or rewards points. If they do, double-check which categories or stores you can shop in to earn the most points with each card.

For example, some travel rewards cards offer 6x points when you shop at supermarkets. You could use such a card to cover the food-and-drink portion of your holiday budget and reap the biggest rewards possible from that spending. You might also be able to maximize rewards when purchasing gift cards.

7. Guard your financial information and identity

As you enjoy holiday shopping, be on guard. Don’t use debit card PIN numbers unless you have to, and shield the keypad when you enter your information. Keep a close eye on your wallet or purse, and check your credit card statements regularly to ensure all charges are yours. You can also use ExtraCredit’s Guard It feature to help keep your identity and account information safe during and beyond the season.

Sign up for ExtraCredit today!

The post Prepare for Holiday Shopping with These Timely Credit Tips appeared first on Credit.com.

Source: credit.com



Why You Should Not Buy a Credit Privacy Number (CPN)

What Is a CPN, or Credit Privacy Number?

If you’re looking to repair your credit, you may have come across websites that advertise a credit privacy number, credit protection number or CPN. These numbers are nine digits like a Social Security number (SSN), and sellers claim that you can use them instead of your SSN. However, these CPNs are often actual SSNs lifted from real people, reportedly children, prison inmates and the deceased – and you can never legally buy a new SSN. In other words, a CPN is no solution to your credit rating problem. Under no circumstances should you try to buy a CPN.

Why a CPN is No Credit Fix

Websites have sprung up all over the internet, offering CPNs to people with bad credit or low credit scores. They advertise that this number can serve as a “get out of jail free” card for your bad credit. In theory, you can use a CPN instead of your SSN on credit applications to hide the poor credit associated with your personal SSN. If you have bad credit but still need a credit card or loan, this can seem like the solution, assuming you can pay anywhere from hundreds to thousands of dollars.

That price might seem worth it for a chance to wipe the slate clean. However, these offers are essentially a big scam. The CPNs you can buy online are not legally assigned credit protection numbers. Instead, they are usually stolen Social Security numbers, taken from children, the deceased or inmates.

Also, using a purchased CPN puts you in some hot water, too. Credit agencies can easily spot discrepancies if you try to use a CPN on an application instead of your SSN. Not only will this fail to help your credit, but it’s also committing fraud which is punishable by jail time.

How to Avoid CPN Scams 

What Is a CPN, or Credit Privacy Number?

If you’re dealing with some bad credit, don’t turn to a CPN. Only scammers sell CPNs, and they in turn may cheat you out of your personal information as well as hundreds or thousands of dollars. Using a purchased CPN can also put you in jail, even if you didn’t know the number was fraudulent. This is why it’s important to be aware of this popular scam.

If you really need a CPN or new SSN, it will be free. The process will go through the Social Security Administration Office, since a new number would be tied to your old SSN. That said, it is very hard to qualify to receive a new number. Having bad credit is never a qualifying reason.

How to Get a Legal CPN

With so many fraudulent websites and companies trying to sell you a way to reset your credit, it’s hard to know how to get a legal CPN. Unfortunately, there’s a lot of misinformation out there. Some experts say that you can speak with an attorney to obtain a legal CPN. The attorney can then contact the Social Security Administration Office on your behalf. However, others maintain that all CPNs are illegal.

Generally, it seems that you cannot get a legal CPN unless you actually need one. These situations include celebrities, government officials and people under witness protection. You can also apply in other specific instances, like if you’re a victim of abuse, stalking or identity theft. A real CPN would be attached to your SSN, so it’s still not an escape from the credit tied to your SSN.

You may also stumble upon offers to obtain an EIN, or Employer Identification Number. The IRS does issue EINs, but only businesses can use them for business costs. This means that you cannot legally obtain an EIN as an individual looking to improve your credit. You also cannot make up a home business, apply for an EIN and use that new number for a credit reset. It is a federal crime to obtain an EIN under false pretenses. In any case, the credit profile for your EIN is still tied to your SSN.

Bottom Line

What Is a CPN, or Credit Privacy Number?

You shouldn’t ever, under any circumstances, try to purchase a CPN. These offers are fraudulent and don’t provide any credit repair or relief. At the very least, buying a CPN wastes money you should put towards repaying your loans in the first place. At worst, you could go to jail for fraud. There are better, more constructive ways to repair your credit. If you’re truly in a situation that calls for a CPN, contact your lawyer for assistance.

Tips on Rebuilding Your Credit 

  • Of course, the best way to legally clean up your credit is to pay back your debts and improve your credit practices. A good place to start is to pay off your credit card debt with the highest interest.
  • Sometimes you’ll just have to wait for your bad history to fall off your record. Generally, negative info stays on your credit report for seven years. If you can’t get a debt collection removed from your credit report, for example, it’ll stay there for seven years. However, as time goes on, the toll it takes on your report lessens.
  • Don’t go it alone. If you have a good income, but you’re just bad at managing your money, a financial advisor can help. With guidance, you can make smarter choices – and even start growing your wealth. To find an advisor, use our free, no-obligation matching tool. It will connect you with up to three advisors in your area.

Photo credit: Â©iStock.com/becon, Â©iStock.com/Xesai, Â©iStock.com/Kerkez

The post Why You Should Not Buy a Credit Privacy Number (CPN) appeared first on SmartAsset Blog.

Source: smartasset.com



How and When to Talk to a Credit Bureau

Two women wearing pink smile at a phone while drinking coffee in a cafe against a gray wall.

Your credit score can have a huge impact on your life—for better or worse. In many ways, the three major credit bureaus are the keepers of your credit score. They’re responsible for maintaining credit reports, which means you may need to contact them about the information included on yours. While this may seem daunting, it’s really not complicated.

Read on to learn about when to contact a credit bureau and how to do it. Contact information and tips have been provided for each of the three credit bureaus—Experian, Equifax and TransUnion—to make it as simple as possible.

When to Contact a Credit Bureau

Anytime you notice inaccuracies on your credit report, you should immediately contact the credit bureau. This can include misspelled names, incorrect address information, unreported salary changes or erroneous employment information.

Here are some other reasons why you might need to contact a credit bureau:

  • There are credit cards, collections missed payments or anything else on your report that you don’t recognize.
  • You’re in credit disputes with your credit card issuer or financial institution. You can address this with the credit bureaus, which are required to investigate.

For help talking to the credit bureaus and starting a credit repair plan, you can work with a professional credit repair agency. They offer credit monitoring, credit repair services and text alerts so you don’t miss a thing.

Get Credit Repair Help
  • You want to get a hard inquiry removed from your history, especially if it’s an unauthorized inquiry.
  • An account is missing from your report.
  • You want to remove inaccurate or unfair collection accounts from your report. Keep in mind that if you can’t dispute them successfully, these accounts can stay on your account for a number of years.
  • You want to request a free annual credit report.
  • You want to put a temporary freeze or lock on your credit file.
  • You notice any sign of fraud on your credit report.

Information to Gather before You Call

You want to have the right information on hand when you call a credit bureau. Prepare yourself by collecting the following information in advance, just in case:

  • Your name, address, Social Security number and date of birth
  • A copy of your annual credit report
  • Evidence of the inaccuracies or errors, if relevant
  • Personal financial information, such as your mortgage information, depending on the reported issue
  • Any other supporting documentation

Credit Bureau Contact Information

Because there are so many potential reasons to contact a credit bureau—general inquiries, disputes and credit freezes, for example—there are many different phone numbers and online contact forms to wade through. If you call the wrong number, you may simply be told they cannot help you and directed to call a different number, wasting precious time and energy.

To help you avoid that frustration, we’ve gathered several ways you can contact the credit bureaus for common inquiries here.

Equifax Phone Numbers

Reason to Contact

Phone Number

Availability

General inquiries

866-640-2273

 

Service cancellation

866-243-8181

8 a.m. to 3 a.m. (ET)
7 days a week

Request a copy of your credit report

866-349-5191

8 a.m. to midnight (ET)
7 days a week

Fraud alert

800-525-6285

8 a.m. to midnight (ET)
7 days a week

Credit dispute

866-349-5191

8 a.m. to midnight (ET)
7 days a week

Credit freeze

888-298-0045

8 a.m. to midnight (ET)
7 days a week

2017 data breach

888-548-7878

8 a.m. to midnight (ET)
7 days a week

Opt out of mailing lists

888-567-8688

 

 

If you don’t like talking on the phone, Equifax also offers live chat support. You can chat with a member of their customer support team between 8 a.m. and midnight (ET), Monday through Friday.


TransUnion Phone Numbers

Reason to Contact

Phone Number

Availability

General inquiries

833-395-6938

8 a.m. to 11 p.m. (ET)
Monday–Friday

Credit dispute

833-395-6941

8 a.m to 11:00 p.m. (ET)

Monday–Friday

Credit freeze

888-909-8872

8 a.m. to 11 p.m. (ET)

Fraud alert

800-680-7289

8 a.m.to 11 p.m. (ET)

Free annual report

877-322-8228

 

Haven’t received your report

800-888-4213
800-916-8800 (to speak to a representative)

 

Manage your subscription

833-806-1626

8 a.m. to 9 p.m. (ET)

Monday–Friday

 

8 a.m. to 5 p.m. (ET)
Saturday–Sunday

Technical support

833-806-1626

8 a.m. to 9 pm. (ET)

Monday–Friday

8 a.m. to 5 p.m. (ET)
Saturday–Sunday


Experian Phone Numbers

Reason to Contact

 Phone Number

Availability

Experian membership

479-343-6239

6 a.m. to 8 p.m. (PT)
Monday–Friday

8 a.m. to 5 p.m. (PT)
Saturday–Sunday

Free credit report

888-397-3742

 

Credit dispute

866-200-6020

 

Fraud alert

888-397-3742

 

Credit freeze

888-397-3742

 

Cancel membership

479-343-6239

 

ProtectMyID subscription

866-960-6943

 

Opt out of prescreened offers

888-567-8688

 


Alternatives to Calling Credit Bureaus

Not all experts think calling a credit bureau is the best approach. Don Petersen, an attorney at Howard Lewis & Peterson, PC, in Utah, recommends calling a bureau for only basic administrative questions—such as updating an address or asking if a recent data breach has affected you.

For most other issues, Petersen advises his clients to write to credit bureaus or submit disputes online. This provides you with an official record of your request.

If you do prefer to call a credit bureau, take notes during the call and follow up in writing after the telephone conversation. In your follow-up letter, you should include the name of the representative you spoke with as well as details of what transpired in your conversation.

Send important requests—especially disputes—through certified mail. This allows you to track the letter and ensure that the credit bureau responds in a timely manner. Never send original copies of documents, as the bureaus may not return anything you send.

Equifax Mailing Addresses

Reason for Contact

Address

Credit dispute

Equifax Information Services LLC
P.O. Box 740256
Atlanta, GA 30374-0256

Request a copy of your credit report

Equifax Disclosure Department
P.O. Box 740241
Atlanta, GA 30374-0241

Fraud alert

Equifax Information Services LLC
P.O. Box 105069
Atlanta, GA 30348-5069

Credit freeze

Equifax Information Services LLC
P.O. Box 105788
Atlanta, GA 30348-5788


TransUnion Mailing Addresses

Reason to Contact

Address

Credit freeze

TransUnion
P.O. Box 160
Woodlyn, PA 19094

Credit dispute

TransUnion Consumer Solutions
P.O. Box 2000
Chester, PA 19016-2000

Fraud alert

TransUnion Fraud Victim Assistance
P.O. Box 2000
Chester, PA 19016

Request credit report

TransUnion LLC
Consumer Disclosure Center
P.O. Box 1000
Chester, PA 19016


Experian Mailing Addresses

Reason to Contact

Address

Credit dispute

Experian Dispute Department
P.O. Box 4500
Allen, TX 75013

Credit freeze

Experian Security Freeze
P.O. Box 9554
Allen, TX 75013

Privacy

Chief Privacy Officer
Compliance Department
Experian
475 Anton Blvd.
Costa Mesa, CA 92626

Report a relative’s death

Experian
P.O. Box 9701
Allen, TX 75013


Track Your Credit

Under the Fair Credit Reporting Act, you have the right to obtain a free copy of all three reports once each year. These free reports can be accessed on the government-mandated site operated by the big three credit bureaus, AnnualCreditReport.com.

You can also sign up for the free credit report card offered by Credit.com, which provides a snapshot of your credit as well as the ability to dig deeper into the elements that affect your credit score. When you sign up, you’ll also get regular emails with tips and tricks for keeping your credit healthy.

Sign Up Now

The post How and When to Talk to a Credit Bureau appeared first on Credit.com.

Source: credit.com



How to Get Approved for Credit in a Financial Downturn

In a recession it’s common for many people to rely on credit cards and loans to balance their finances. It’s the ultimate catch-22 since, during a recession, these financial products can be even harder to qualify for.

This holds true, according to historical data from the Federal Reserve Bank of St. Louis. It found that during the 2007 recession, loan growth at traditional banks decreased and remained deflated over the next four years. 

Credit can be a powerful tool to help you make ends meet and keep moving forward financially. Here’s what you can do if you’re struggling to access credit during a weak economy.

Lending becomes riskier in a weak economy. Does this mean you’re completely out of luck if you have bad credit? Not necessarily, but you might need to take the time to understand all of your alternatives.

How Does a Financial Downturn Affect Lending?

Giving someone a loan or approving them for a credit card carries a certain amount of risk for a lender. After all, there’s a chance you could stop making payments and the lender could lose all the funds you borrowed, especially with unsecured loans. 

For lenders, this concept is called, “delinquency”. They’re constantly trying to get their delinquency rate lower; in a booming economy, the delinquency rate at commercial banks is usually under 2%. 

Lending becomes riskier in a weak economy. There are all sorts of reasons a person might stop paying their loan or credit card bills. You might lose your job, or unexpected medical bills might demand more of your budget. Because lenders know the chances of anyone becoming delinquent are much higher in a weak economy, they tend to restrict their lending criteria so they’re only serving the lowest-risk borrowers. That can leave people with poor credit in a tough financial position.

Before approving you for a loan, lenders typically look at criteria such as:

  • Income stability 
  • Debt-to-income ratio
  • Credit score
  • Co-signers, if applicable
  • Down payment size (for loans, like a mortgage)

Does this mean you’re completely out of luck if you have bad credit? Not necessarily, but you might need to take the time to understand all of your alternatives.

5 Ways to Help Get Your Credit Application Approved 

Although every lender has different approval criteria, these strategies speak to typical commonalities across most lenders.

1. Pay Off Debt 

Paying off some of your debt might feel bold, but it can be helpful when it comes to an application for credit. Repaying your debt reduces your debt-to-income ratio, typically an important metric lenders look at for loans such as a mortgage. Also, paying off debt could help improve your credit utilization ratio, which is a measure of how much available credit you’re currently using right now. If you’re using most of the credit that’s available to you, that could indicate you don’t have enough cash on hand. 

Not sure what debt-to-income ratio to aim for? The Consumer Financial Protection Bureau suggests keeping yours no higher than 43%. 

2. Find a Cosigner

For those with poor credit, a trusted cosigner can make the difference between getting approved for credit or starting back at square one. 

When someone cosigns for your loan they’ll need to provide information on their income, employment and credit score — as if they were applying for the loan on their own. Ideally, their credit score and income should be higher than yours. This gives your lender enough confidence to write the loan knowing that, if you can’t make your payments, your cosigner is liable for the bill. 

Since your cosigner is legally responsible for your debt, their credit is negatively impacted if you stop making payments. For this reason, many people are wary of cosigning.

In a recession, it might be difficult to find someone with enough financial stability to cosign for you. If you go this route, have a candid conversation with your prospective cosigner in advance about expectations in the worst-case scenario. 

3. Raise Your Credit Score 

If your credit score just isn’t high enough to qualify for conventional credit you could take some time to focus on improving it. Raising your credit score might sound daunting, but it’s definitely possible. 

Here are some strategies you can pursue:

  • Report your rent payments. Rent payments aren’t typically included as part of the equation when calculating your credit score, but they can be. Some companies, like Rental Kharma, will report your timely rent payments to credit reporting agencies. Showing a history of positive payment can help improve your credit score. 
  • Make sure your credit report is updated. It’s not uncommon for your credit report to have mistakes in it that can artificially deflate your credit score. Request a free copy of your credit report every year, which you can do online through Experian Free Credit Report. If you find inaccuracies, disputing them could help improve your credit score. 
  • Bring all of your payments current. If you’ve fallen behind on any payments, bringing everything current is an important part of improving your credit score. If your lender or credit card company is reporting late payments a long history of this can damage your credit score. When possible speak to your creditor to work out a solution, before you anticipate being late on a payment.
  • Use a credit repair agency. If tackling your credit score is overwhelming you could opt to work with a reputable credit repair agency to help you get back on track. Be sure to compare credit repair agencies before moving forward with one. Companies that offer a free consultation and have a strong track record are ideal to work with.

Raising your credit isn’t an immediate solution — it’s not going to help you get a loan or qualify for a credit card tomorrow. However, making these changes now can start to add up over time. 

4. Find an Online Lender or Credit Union

Although traditional banks can be strict with their lending policies, some smaller lenders or credit unions offer some flexibility. For example, credit unions are authorized to provide Payday Loan Alternatives (PALs). These are small-dollar, short-term loans available to borrowers who’ve been a member of qualifying credit unions for at least a month.

Some online lenders might also have more relaxed criteria for writing loans in a weak economy. However, you should remember that if you have bad credit you’re likely considered a riskier applicant, which means a higher interest rate. Before signing for a line of credit, compare several lenders on the basis of your quoted APR — which includes any fees like an origination fee, your loan’s term, and any additional fees, such as late fees. 

5. Increase Your Down Payment

If you’re trying to apply for a mortgage or auto loan, increasing your down payment could help if you’re having a tough time getting approved. 

When you increase your down payment, you essentially decrease the size of your loan, and lower the lender’s risk. If you don’t have enough cash on hand to increase your down payment, this might mean opting for a less expensive car or home so that the lump sum down payment that you have covers a greater proportion of the purchase cost. 

Loans vs. Credit Cards: Differences in Credit Approval

Not all types of credit are created equal. Personal loans are considered installment credit and are repaid in fixed payments over a set period of time. Credit cards are considered revolving credit, you can keep borrowing to your approved limit as long as you make your minimum payments. 

When it comes to credit approvals, one benefit loans have over credit cards is that you might be able to get a secured loan. A secured loan means the lender has some piece of collateral they can recover from you should you stop making payments. 

The collateral could be your home, car or other valuable asset, like jewelry or equipment. Having that security might give the lender more flexibility in some situations because they know that, in the worst case scenario, they could sell the collateral item to recover their loss. 

The Bottom Line

Borrowing during a financial downturn can be difficult and it might not always be the answer to your situation. Adding to your debt load in a weak economy is a risk. For example, you could unexpectedly lose your job and not be able to pay your bills. Having an added monthly debt payment in your budget can add another challenge to your financial situation.

However, if you can afford to borrow funds during an economic recession, reduced interest rates in these situations can lessen the overall cost of borrowing.

These tips can help tidy your finances so you’re a more attractive borrower to lenders. There’s no guarantee your application will be accepted, but improving your finances now gives you a greater borrowing advantage in the future.

The post How to Get Approved for Credit in a Financial Downturn appeared first on Good Financial Cents®.

Source: goodfinancialcents.com




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