Fact or Fiction? Not Having Debt Affects My Credit Score

Does not having debt affect your credit score? Not necessarily.

If you don't have debt, will it affect your credit score? We break this down for you and explain why you must have debt in order to have a good score (no way around it).

If you don't have debt, will it affect your credit score? We break this down for you and explain why you must have debt in order to have a good score (no way around it).

When you are working yourself out from debt, you do not use credit cards.  Or, at least, you should not use them.  Using cash is important while you are on the path to financial freedom. After all, credit cards are the reason many people are in debt in the first place.

Many people who are debt free choose not to use credit cards at all.  This is very common.  People who used credit incorrectly in the past worry that they will fall into the same spending traps again.  I get that.

However, those who do not use credit cards worry about their FICO score (i.e. credit score).  After all, if they have no debt at all, will this number not go down?

It is true, your FICO score is based upon your debt and how will you repay it back to the debtor.  Your FICO score takes several components into consideration:

10% based upon your type of debt
10% based upon new debt
15% based upon the length of time you have been in debt
30% based upon your debt level
30% based upon your debt history

What is important to realize is that your FICO score does not take into consideration your debt to income ratio.  It also does not consider what you have in savings.  So, if your debt to income ratio is only 15% and you have $25,000 in the bank, is your score really indicative of how you manage money?  Of course not.

Something that many people may not realize is that paying loans off early has absolutely no effect on your credit score.  It does not improve (nor hurt) it in any way.  In fact, there is no “bonus” to your score for paying off items early.  It simply only looks at if the loan was paid on time.  That’s it.  So paying off your loan early doesn’t hurt nor help your score in any way.  However, those debts where you are missing payments will absolutely hurt your score.

YOU MUST BORROW MONEY

If you want to maintain a good FICO score, you have to borrow money.  There is no other way to do it.  That means you must have debt.  Even if you pay off a card every month, for a short time, you carry debt.  Here is now debt is defined:

Debt (n)-

Debt (n)-

You’ll notice that it doesn’t say “unless you plan on paying it off at the end of the month, then it is really not debt.” Anytime you use money that is not yours, it is debt.

[clickToTweet tweet=”Anytime you use money that is not yours, it is debt.” quote=”Anytime you use money that is not yours, it is debt.”]

Whether or not you pay your balances in full every month, it is still debt.  However, that doesn’t mean it is a bad thing.  It can actually help you with your score.

THE SIMPLE WAY TO INCREASE YOUR SCORE

If you really want to increase your credit score, the simplest way to do that is with a credit card.  Just make sure you use it the right way.   The reason this is the recommended method of creating credit is so that your utilization rate can be calculated.  So, what is a credit utilization rate?

Utilization rate

Utilization rate

Here is a way to look at this in a practical sense, if you have a credit limit of $2,000 on your card and you have charged a total of $500, then your utilization rate would be 25%.  That could end up lowering your credit score.  The reason is that creditors believe that the higher your balance in relation to your credit limit, the less likely you will be to replay it (you as in “general public).

Of course, the best way to use a credit card is to always pay it in full every month and never charge too much on it.  These are tips which can help to keep your score on the rise.

MYTH DEBUNKED

It really is fact that you must have debt to have a good credit score.  That doesn’t mean long term debt.  That doesn’t mean you do not pay it off every month.  Debt is debt – no matter if you pay it back 3 days or 3 years from the time you made the purchase with a loan or credit card.

Whatever you do, do not let your FICO score control how you handle money.  It is one small part of your financial health.  What matters most is the manner in which you live your life – debt free to live like you want rather than being tied to a three digit number.

(I am not a financial advisor and the information listed within these posts is not to be construed a financial advice.   Financial concerns/issues should be addressed with a professional in order to receive advice and assistance.)

Source: pennypinchinmom.com

How to Get the Most Bang For Your Buck When Buying a Car

Need a new car? Car shopping can provide the perfect mix of excitement and stress. On one end, you’re getting a new car. On the other, you probably know it’s going to cost you a pretty penny. 

With the average cost of a new car being $37,000 and $15,000 to $20,000 for a used car, there is plenty of opportunities to save money on this large expense. In this guide, you’ll learn some basic car shopping tips along with how to save money and get more bang for your buck. 

Determine How Much You Can Afford

It’s best to determine a budget before you start looking for cars. Be honest about how much you can afford to spend or finance. If you can’t see yourself paying a car note for a $35,000 vehicle, don’t put yourself in that situation. 

Tap your savings and use other windfalls like work bonuses or a tax refund to add to your car budget. Look at your other current expenses and see how much you can afford if you’re going to finance along with how long your ideal term would be. 

For example, some car dealers can make the monthly payment seem smaller by stretching out the term for 5-7 years. Do you really want to be paying on your car that long?

Check Your Credit

If you’re going to be financing a car, check your credit early on to see where you stand. It doesn’t affect your credit when you check your score online and it usually won’t cost you anything. 

See if you can use a site like Credit Karma or Credit Sesame to check your credit for free. Realize that these sites provide a Vantage score which is different from the Fico score that most car dealers use. Just keep in mind that your score may show up higher on a site like Credit Sesame but it does give you a range to consider. 

You can also try to sign up for MyFico to check your actual Fico score or Discover Scorecard which is free to use. The better your score, the better rate you can get on a car loan.

RELATED: 5 Reasons Why Your Credit Score Can Decrease

Compare Your Shopping Options

There are so many places to consider when you’re looking to buy a car. There are car dealerships, private lots, and even rental car companies that sell cars like Enterprise. 

You can start by visiting a few websites or calling car lots to see what type of inventory they have. There Car dealerships do a good job of regularly updating their website. 

Schedule a day and time to come in and look at cars and do a few test drives. 

RELATED: 5 Things to Lookout For When Purchasing a New Car

New or Used?

A common question car buyers have is whether they should get a brand new vehicle or go the used route. This really depends on your budget and preferences. For most people, buying used will be the best decision because it saves you money. 

Used cars can be in great condition and some may even have low mileage. Buying used doesn’t have to mean your car was manufactured in 1992. You can still buy a fairly newer car that has all the features you like without the brand new price tag. You may even be able to get a warranty on the used car as well for a few years.

When considering a used car, make sure you ask to see all the details regarding the full history of the car like maintenance, repairs, accident history, etc. CarFax is a site that provides detailed reports on all used cars that you can access. If you’re purchasing a car from a private owner, you can always have a mechanic come with you to assess the vehicle. 

Remember, it’s important to do your due diligence in this area because if you catch potential issues early, you can save a ton of money.

RELATED: Buying a New Car? 5 Areas Your Mechanic Should Check Beforehand

Where To Finance

If you’re going to finance your car, you want to get the best rates and terms possible. Car dealerships tend to offer in-house financing but it’s not the best. It also takes a while as your salesperson may spend time shopping around with their dozens of lenders to find you an ideal interest rate. 

Other car lots may offer a ‘buy here pay here’ option where you don’t have to finance through another company. While this may sound convenient on the surface, you won’t have any other rates or offers to compare and the car lot may not have the most competitive offer. This means you could end up overpaying extra for financing. 

One of the better options to get affordable financing is to use your bank or credit union. Don’t forget, you can also get financing online from trusted lenders. 

See if you can get a loan with better terms and interest then pay the car owner or dealership with the cash. From there, all you’d need to do is pay the loan off with your 3rd party lender. 

Need a new car? Car shopping can provide the perfect mix of excitement and stress. Click To Tweet 

Saving More on Your Purchase

Buying a car can be expensive no matter how you dice it. However, there are quite a few things you can do to save while car shopping. 

Trade-in your current car. Some car lots and dealerships will pay you cash if you trade in your current car in exchange for the new one. Depending on the car you have and its condition, this could save you hundreds or even thousands of dollars.

Have excellent credit. There are so many benefits to having great credit. With a high credit score, you may even be able to get a 0% APR on your car loan for several months or years. 

Negotiate. Many people forget that they can negotiate the price of their new car. Dealerships may not be so willing to work with you, but if you’re buying from a smaller car lot or private owner, they may be more willing to negotiate on the price of the car.

Shop around for insurance. Auto insurance is a requirement. Still, that doesn’t mean you have to pay an arm and leg for it. Shop around and compare quotes to find the best option for your needs and preferences. 

Source: everythingfinanceblog.com

What Credit Score is Needed to Buy a House?

You’re finally ready to take a huge leap of faith into the next big chapter of your life: homeownership. With all of the excitement and anxiety that comes with the territory, there are also a number of important steps to take and checkboxes to tick off before you can even think about jumping into the housing market.

If you’re like most people, buying a home is among one of the most expensive investments you’ll make in your lifetime. Such a monumental purchase requires plenty of time and preparation. One of the most important preparation steps is building and maintaining a stellar credit score.

Having a healthy credit score is the key to paving a way toward the life you’ve always dreamed of. With a good credit score, getting approved for everything from a car loan to a mortgage is made easy. Even though everyone has a credit score, it can be a bit confusing trying to dissect what your credit score says about you, how it’s calculated, and how it applies to your homebuying capital. Using this guide, we’ll walk you through everything you need to know about credit score to buy a house.

What is a credit score?

A credit score is a number that represents a person’s creditworthiness. This number ranges between 300-850— the higher the number, the better the score, and ultimately the better the credit score, the more reliable a borrower appears to potential lenders. 

The credit score calculation is based on credit history. Credit history is the aggregate evaluation of overall debt rates, number of open accounts, and repayment history. Lenders use credit scores to assess the probability and risk of a borrower’s ability to repay their mortgage in a timely fashion.

Although exact scoring models may vary slightly by lender, most use FICO Score calculation standards as a basis. FICO uses data from three major credit bureau companies—Equifax, Experian, and TransUnion—to measure individual credit scores.

From this information, they compose a total score based on the following five factors:

  1. Payment history – 35%
  2. Amount owed – 30%
  3. Length of credit history – 15%
  4. Types of credit – 10%
  5. New credit – 10%)

Once you’ve had your credit score evaluated with a free credit check, take a look at the table below to see how your score measures up in the eyes of your future potential lender.

  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 300 to 579

Do keep in mind that as frequently as your financial situation changes, your credit score fluctuates with it. Your credit score from a couple months ago is likely different from the score you may earn today.

What credit score is needed to buy a house?

As mentioned before, your credit score plays a significant deciding factor in your home buying potential. The healthier your credit, the more options you’ll have available to you. The minimum credit score needed to buy a house varies by loan type, location, and lender. Generally speaking, a credit score at or above 670 is great enough to grant you access to favorable interest rates on a mortgage.

In need of a more in-depth look at the credit scores needed for each type of loan? We’ve got you covered.

  • Conventional loans: Conventional home loans are not insured by a government agency and adhere to the standards set by Fannie Mae and Freddie Mac. Conventional mortgages typically require a minimum credit score of 620, however, in order to score the most competitive interest rates, you’ll need a credit score at or above 740.
  • FHA loans: Insured by the Federal Housing Administration, FHA mortgage loans are designed to cater to low-to-moderate-income borrowers. The minimum credit score needed to qualify for an FHA loan is 500 if you are able to make a 10% down payment or 580 if you’re able to put down 3.5%.
  • VA loans: Distributed by the U.S. Department of Veterans Affairs, VA loans are available to active-duty military members, veterans, their spouses, and other eligible beneficiaries. Although VA loans do not demand a minimum credit score requirement, VA loan lenders may require that you have a score of at least 620.
  • USDA loans: USDA mortgage loans are insured by the U.S. Department of Agriculture and intended for low-to-moderate-income borrowers looking to purchase a home in a rural location. The USDA requires a minimum credit score of 580 for its loans, but there is a bit of wiggle room to work with if your score is a little lower under certain circumstances.

How can I prepare my credit score to buy a house?

If you are exploring your options and seriously thinking about buying a home, it may be worth dedicating some time to prepping and boosting your credit score before you dive into the market. Whether you have a poor credit score and you’re looking to reach a 620 baseline score or you already have good credit but want to qualify for prime interest rates and term conditions, use these tips to get started.

Pay off your debts

It should come to no surprise that paying off your debts is among the most foolproof ways to boost your credit score. Doing so allows you to improve balance out your debt-to-income ratio, which is an incredibly crucial factor mortgage lenders weigh when deciding whether or not to approve you. 

If you have credit card debt, do what you can to settle that outstanding balance. Your credit utilization rate, which measures the amount of revolving credit you have compared with the total amount of credit you have available, is an important calculation lenders account for during the application process. Although there is no standard credit utilization rate mortgage lenders look for, 30% or less will set you up for success. Ultimately, the lower your rate, the better.

Avoid applying for new credit

No matter which lender you choose, they are bound to conduct a hard inquiry into your credit record nearly each and every time you apply for a mortgage. In the vast majority of cases, you’ll see your credit score decrease by five points or less, after just a single hard inquiry.

If you choose to have several inquiries completed within a short period of time, you’ll likely bear the brunt of a compounding effect that lowers your credit score even more.

Pay your bills on time

Payment history is the most important element of your credit score evaluation. Making late payments on utility bills, rent, or student loans can significantly impact your score and quickly turn a very good score into a fair score. 

Fortunately, paying your bills on time is something you can automate amidst the digital age. Where possible, set up auto-payments so you never fall behind on your bill payments again.

Consider waiting

If you’re struggling with a poor credit score or a score a bit lower than on you desire, it may be a smart idea to simply pause your home buying venture. Because your credit score has such a consequential impact on your ability to obtain a manageable mortgage, it’s likely in your best interest to wait and build your credit score rather than rush into a mortgage that features unattractive terms and rates. 

In the event that your credit report includes any number of outstanding highlights, such as a repossession or bankruptcy, it may take a considerable amount of time and rebuilding for your credit score to recover from these types of damaging financial factors.

Although placing your homebuying plans on pause may not be a part of your plan, it may make the most financial sense for your situation. Refocus on getting your credit back on track so you can dive into the market with confidence when your score is whipped into shape.

Wrapping up

Your credit score determines a great deal about your future financial leverage. In order to get the best terms, conditions, and interest rates on a mortgage, you’ll need a categorically good credit score of at least 670 to pursue your dreams of buying a house. Using these tips, you’ll be able to step into the market with the knowledge and credit confidence you need.

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Source: mint.intuit.com