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Posted on March 2, 2021

What Is a Cash Advance & How Do They Work?

There comes a time in most people’s life when they say to themselves, “I could really use a bit more cash.” Life can be expensive. In the event of an unexpected cost, such as a medical bill, a legal expense, or an auto repair, sometimes you simply don’t have enough. 

If you’re looking to secure more money in a short amount of time, a cash advance can be the right solution for you. A cash advance is a short-term loan taken out against your credit line, with a limit offered by your credit card issuer. A cash advance can be instant, or it may take a few days. Read on to learn all about cash advances, or use the links below to jump to a section of your choosing.

What is a cash advance? 

A credit card cash advance is a short-term loan that gives you cash by borrowing from your credit card’s available line of credit. Imagine if you could use your credit card to purchase cash, and then pay off the balance of that cash at a later date. That is, in essence, a cash advance. Here’s how a cash advance works: you can insert your credit card into an ATM, enter a PIN, and withdraw cash. While a debit card pulls from existing money in your bank account, a cash advance pulls from the available balance on your credit card. 

Much like anything else purchased with your credit card, a cash advance must be paid back at the end of each month, or else it is subject to an interest rate. However, the cash advance interest rate is not the same as your standard credit interest rate. In most cases, the cash advance is many times higher, averaging over 21% for most credit issuers. 

How much cash can you withdraw using a cash advance? 

Because a cash advance pulls directly from your credit balance, you can’t pull any more than your monthly credit limit for a cash advance. So, if you have a monthly credit limit of $3,000, it’s guaranteed that $3,000 is the maximum cash advance you could withdraw. It’s also based on your available remaining credit balance for that month. If you’ve already put $300 on your credit card that month, it’s guaranteed that $2,700 is the maximum cash advance you could withdraw that month. That said, most credit issuers set their cash advance limit much lower than your monthly credit limit. 

To determine the maximum cash advance available to your credit card, all you need to do is call your credit card issuer. Oftentimes, it’s also posted on your credit card statement or online credit card portal. 

Cash advance terms 

A cash advance certainly puts an oftentimes significant amount of cash into your hands quickly, but it does so at a handsome cost. Cash advances have many terms, and with many terms come many fees. Let’s review the terms of a cash advance. 

Credit card cash advance limit 

As mentioned earlier, a cash advance limit will never be larger than the available balance on your credit. However, in most cases, it will be significantly less—sometimes only 20%. 

Credit card cash advance APR 

According to usa.gov, an APR is an annual percentage rate. Every type of loan has an APR, from home mortgages to credit cards. An APR is an interest rate from a yearly perspective. It’s the percentage of your total loan amount that you’ll end up paying in interest, charges, and fees over the course of a year. Your cash advance APR is not the same rate as your credit card APR, but many times higher. For instance, if you have a cash advance loan of $1,000, for which you’ll end up paying $100 in fees throughout the course of a year, your loan has a 10% APR. 

Credit card cash advance fee 

At the time of issuing your cash advance, most credit issuers will tack on a fee of 3%-5% for the withdrawal. For your $1,000 cash advance, you may end up paying $50. 

Credit issuer service fee

As with many bank or financial transactions, there may be a service fee associated with your cash advance. 

Minimum monthly credit payment 

While there are no requirements in terms of how long it takes you to pay back your cash advance, you will still need to make your minimum monthly credit payment each month. 

Pros and cons to cash advances 

The most significant selling point to a credit card cash advance is its speed. A cash advance can get you a lump sum of cash in a few days max. And many times, you can get that chunk of change on the spot. It’s also simple. There’s no need to go through third party lenders or meet with a loan representative. You simply need to see a teller. And if your credit card has an associated PIN, you may be able to do the whole thing through an ATM. 

The cons of a cash advance are, of course, the fees. As we’ve mentioned, cash advances are very, very expensive. The average APR for cash advances is just above 21%, while the average credit purchase APR is only 15.7%. And unlike a credit card APR, a cash advance APR is unavoidable. Standard credit card purchases have a grace period for interest accrual; you won’t be charged interest unless you fail to pay off your balance at the end of each month. If you’re the type of person who pays off your total credit balance at the end of each month, you’ve probably never paid a single percent in your credit card APR. With cash advances, on the other hand, you start accruing interest the minute the cash advance is received. Even if you pay the entire cash advance back at the end of the month, you’ll still be liable for interest on the time between the day the cash advance was received and the end of the month. 

Does a credit card cash advance impact my credit score? 

The act of taking a cash advance has no impact on your credit score. It does not drop because you need a cash advance. Of course, paying your credit balance in a timely manner will result in stronger credit, and late payments will lower your credit score, and your credit card cash advance is included in this balance. However, where a cash advance can have a significant affect is with your credit utilization ratio. 

Your credit utilization ratio is a measure of how much of your total available credit you utilize each month. For instance, if your credit limit is $1,000, and you have a $300 balance, your credit utilization ratio is 30%. If you have a $1,000 balance, your utilization ratio is 100%. A high utilization ratio can negatively affect your credit score. That’s because credit issuers see high utilization as an indication of a credit risk; it’s possible you’ll owe more than you can pay. 

Alternatives to a credit card cash advance 

According to consumer.gov, a credit card cash advance is better than a payday loan, but not significantly. The moral of the credit card cash advance story is that it can be used as a last resort, but you should try to exhaust all other options first. Before choosing a credit card cash advance, consider the following alternatives: 

  • Is there a family member or friend you are comfortable asking for a loan from? 
  • Have you checked with your local charities or non profit organizations to see if there are funds or grants that you are eligible for? 
  • Can you take out a personal loan from your bank? These often have much lower interest rates. 
  • What are the fees associated with overdrawing your checking account? This isn’t a great practice, but could be used in an emergency situation. 

Looking for help to manage your income? We’re here for you. We can teach you how to budget, best practices for saving, and more. 

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Posted on March 2, 2021

How Long Does It Take To Rebuild Credit?

If you’re trying to rebound from a major financial nosedive, it may seem like you’ll never get your credit back on track. Maybe you’re overwhelmed by credit card debt, or you lost your job and got behind on all kinds of bills.

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No matter what has happened in your past, there is always something you can do to take control of your finances and your credit. It might take some time, but it is possible. So just how long does it take to rebuild your credit? Read on to find out.

How long does it take to rebuild your credit history?

Your credit score reflects the information on your credit report, so you have to take into account what items are listed, how much impact they have, and how long they stay on there.

The maximum amount of time for a negative item to stay on your credit report is 10 years. This is typically reserved for Chapter 7 bankruptcies and unpaid tax liens. Most other derogatory items, such as delinquencies, charge offs, and foreclosures, remain there for seven years.

If these items are accurate and all of the proper protocol was followed by creditors, it can be difficult to get them removed from your credit report ahead of schedule. However, it’s important to know that their effects on your credit score lessen over time, despite still being listed on your report.

How can you find the problem areas on your credit report?

Before even thinking about rebuilding your credit, you have to figure out exactly what’s wrong with it. Start off by ordering your credit report for free from each of the three credit bureaus.

Once you have them, carefully review each one to see what information is reported there. Lenders don’t just look at your credit score. They also look at your credit reports to see what is contributing to your credit score.

You’ll potentially see a list of credit items listing negative items. For example, you might see a late payment listed here, including how far past due it was. You’ll also see a list of your accounts in good standing, and a list of credit inquiries made over the last two years.

Assuming everything you see is accurate, you’ll have a good sense of what items you need to work on, either through actions you can take today, or simply by waiting.

How to Start Rebuilding Your Credit

Once you know what type of credit you’re working with, you can take a few different steps to start rebuilding. Some items take a while to make a difference in your credit score, while others start to have an impact right away.

Either way, all of these tips are necessary in order to maintain healthy credit even if some major items simply need time to repair themselves.

Pay Your Bills on Time

Maybe you’re living paycheck to paycheck, or maybe you just don’t pay attention to due dates. No matter what your attitude is towards paying bills, it’s time to shift your mindset and pay them on time.

Being just 30 days late on a payment can cause your credit score to drop more than 100 points. And the real kicker? The higher your credit score is, to begin with, the more points you’ll lose. So if your credit score is already in the high 700s or even the 800s, it’ll drop on the higher end of the range for any infraction.

Bottom line: take care of those bills each and every month. Sign up for automatic bill pay that comes out right on payday if you have to. Also, note that this rule doesn’t just apply to credit cards and loans.

Just about any creditor can report a late payment to the credit bureaus, even your cell phone carrier or utility company. So get out the calendar and make a plan to pay each and every bill before it comes due.

Keep Your Debt Low

Owing a large amount of debt can hurt your credit in a variety of ways. There’s an entire category devoted just to your amounts owed, accounting for nearly a third of your credit score. And there are several different ways in which your debt level is analyzed for your credit score.

First, it’s important what kind of debt you have. Revolving debt like credit cards is not looked upon favorably because the debt is unsecured. There is no physical property that a lender could seize if you stop paying your balance. Plus, there’s no potential for any type of growth in value.

Whatever you purchased with your credit card probably won’t garner more money than you paid for it, and probably not even face value at that.

Installment loans, on the other hand, are scored better because they usually have an asset tied to them (like a mortgage or car loan.) They potentially offer some type of added value, like equity in your home.

Credit Utilization Ratio

Another reason to keep your debt low is that your credit score takes into account your credit utilization ratio. This refers to the amount of credit you have access to compared to the amount you actually use.

It’s ok to have a couple of credit cards, and the higher your credit limits are, the better it is for your credit. But the more you charge (and don’t pay off), the more that credit limit shrinks.

Ideally, you don’t want to use any more than 30% of your credit. So if your credit card limits total $10,000 and you only have a $2,000 balance, then you’re only utilizing 20% of your credit limit.

To quickly rebuild your credit, try to pay down any debt you have to get your ratio under 30%. You should notice an uptick in your credit score after a month or two.

Think Twice Before Opening New Accounts

You might think that getting a credit card is a great way to increase your credit utilization ratio without having to actually pay down debt. Just get a new card to increase your limit, right?

Not so fast. Your credit report is an intertwined web of information and making one seemingly simple change can have ripple effects you didn’t account for.

There are several ways that opening a new account could actually cause harm to your credit. For starters, you’re increasing the amount of revolving credit in your credit mix. That’s not going to help your credit score at all.

Credit Inquiries

Inquiries also hurt your credit score. Sure, it’s just five or ten points, but that can add up if you’re applying for several cards at once. Plus, each of those inquiries remains on your report for two years!

Finally, new accounts shorten your average length of credit because you’re essentially adding a big fat zero that brings down your more seasoned accounts.

It’s fine to get a new credit card if you need one for a specific reason, but don’t open one solely in an attempt to rebuild credit. You’ll probably end up doing more damage in the long run.

Don’t Close Old Accounts

On the same token, closing an old account could hurt your credit by inadvertently lowering your credit utilization ratio. Closed accounts do still contribute to your credit history length for another ten years, but they won’t count towards your available line of credit.

If you’re considering closing an account because you can’t control your spending, try locking up your cards or keeping them with a trustworthy family member.

You’ll also need to delete any saved credit card information on your phone and laptop so you’re not tempted to make quick-click purchases. Obviously keeping your debt on track is most important. However, if self-control isn’t an issue, then you’re probably better off keeping your current accounts open.

What factors affect your credit scores?

Although there are five separate categories, they actually overlap in a number of ways. Here’s how they break down:

  • Payment History (35%)
  • Amounts Owed (30%)
  • Length of Credit History (15%)
  • Credit Mix (10%)
  • New Credit/Inquiries (10%)

Opening a new credit account, for example, may increase your overall available credit. However, the brand new account also lowers the average length of your credit history and adds a new inquiry on your report.

That’s three different categories affected by one action, with one potentially positive change and two negative ones. Plus, each person’s credit score is weighted differently depending on the entire credit profile.

Bottom Line

Everything is relative. It’s nearly impossible to figure out exactly what effect your financial decisions will have on your credit score.

Rather than trying to manipulate potentially positive impacts, focus on the sure-fire wins like paying your bills and lowering your debts owed. They might take longer to rebuild your credit score, but you don’t run the risk of an unforeseen domino effect by muddled decision-making.

If you need more help, consider contacting a credit repair company. They help clients rebuild the credit by removing negative items from their credit reports. Check out our list of the top credit repair companies.

Posted on March 1, 2021

Tax Deductions on Home Equity Loans and HELOCs: What You Can (and Can’t) Write Off

Do you have a home equity loan or home equity line of credit (HELOC)? Homeowners often tap their home equity for some quick cash, using their property as collateral. But before doing so, you need to understand how this debt will be treated come tax season.

With the 2018 Tax Cuts and Jobs Act, the rules of home equity debt changed dramatically. Here’s what you need to know about home equity loan taxes when you file this year.

Acquisition debt vs. home equity debt: What’s the difference?

For starters, it’s important to understand “acquisition debt” versus “home equity debt.”

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“Acquisition debt is a loan to buy, build, or improve a primary or second home, and is secured by the home,” says Amy Jucoski, a certified financial planner and national planning manager at Abbot Downing.

That phrase “buy, build, or improve” is key. Most original mortgages are acquisition debt, because you’re using the money to buy a house. But money used to build or renovate your home is also considered acquisition debt, since it will likely raise the value of your property.

Home equity debt, however, is something different.

“It’s if the proceeds are used for something other than buying, building, or substantially improving a home,” says Jucoski.

For instance, if you borrowed against your home to pay for college, a wedding, vacation, budding business, or anything else, then that counts as home equity debt.

This distinction is important to get straight, particularly since you might have a home equity loan or HELOC that’s not considered home equity debt, at least in the eyes of the IRS.

If your home equity loan or HELOC is used to go snorkeling in Cancun or open an art gallery, then that’s home equity debt. However, if you’re using your home equity loan or HELOC to overhaul your kitchen or add a half-bath to your house, then it’s acquisition debt.

And as of now, Uncle Sam is far kinder to acquisition debt than home equity debt used for non-property-related pursuits.

Interest on home equity debt is no longer tax-deductible

Under the old tax rules, you could deduct the interest on up to $100,000 of home equity debt, as long as your total mortgage debt was below $1 million. But now, it’s a whole different world.

“Home equity debt interest is no longer deductible,” says William L. Hughes, a certified public accountant in Stuart, FL. Even if you took out the loan before the new tax bill passed, you can no longer deduct any amount of interest on home equity debt.

This new tax rule applies to all home equity debts, as well as cash-out refinancing. That’s where you replace your main mortgage with a whole new one, but take out some of the money as cash.

For example, say you initially borrowed $300,000 to purchase a home, then over the course of time paid it down to $200,000. Then you decide to refinance your loan for $250,000 and take that extra $50,000 to help your kid pay for grad school. That $50,000 you took out to pay tuition is home equity debt—and that means the interest on it is not tax-deductible.

Limits on tax-deductible acquisition debt

Meanwhile, acquisition debt that’s used to buy, build, or improve a home remains deductible, but only up to a limit. Any new loan taken out from Dec. 15, 2017, onward—whether a mortgage, home equity loan, HELOC, or cash-out refinance—is subject to the new lower $750,000 limit for deducting mortgage interest.

So, even if your sole goal is to buy, build, or improve a property, there are limits to how much the IRS will pitch in.

When in doubt, be sure to consult an accountant to help you navigate the new tax rules.

For more smart financial news and advice, head over to MarketWatch.

Source: realtor.com

Posted on March 1, 2021

What Is a Prime vs. Subprime Credit Score?

When it comes to credit, approval is all in the number—the three-digit number that’s your credit score. Most lenders and credit card issuers use this number to determine your risk level as a borrower. In general, credit scores are categorized as bad, poor, fair, good, good or excellent.

However, another important designation impacts whether you’ll get approved for a credit card or loan, the interest rate you pay and your terms. That’s the prime vs. subprime credit score designation. Really, It’s no different than bad, poor, fair, good, good or excellent, it just used different terminology.

Subprime encompasses bad, fair and poor credit. Prime covers good and excellent. And sometimes superprime is used to encompass the top tier of excellent. Table 1 shows how that breaks down.

Table 1: Credit scores, ranges and prime vs subprime designations

VantageScore  Score VantageScore Rating FICO Score FICO Rating Prime vs Subprime Designation
750-850 Excellent 800-850 Exceptional Superprime (800+)
740-799 Very Good Prime (750-799)
700-749 Good 670-739 Good Prime
650-699 Fair 580-699 Fair
600-649 Poor Prime (620+)

Supbrime (< 619)
300-599 Bad 300-579 Very Poor Subprime

Learn more about VantageScore vs FICO.

Prime and superprime borrowers are more likely to qualify for credit cards and loans and access better interest rates, terms and perks, such as rewards, including points and cash back. That said though, there are credit cards for people with poor credit, bad credit and even no credit.

Is My Score Prime or Subprime?

Although each lender has its own criteria about which scores it considers prime and which scores it considers subprime, generally, you need a score of at least 740 to be considered a good risk by lenders. Scores of 620 to 799 are usually considered prime. Scores below 620 are subprime. And individuals with superprime scores have scores that exceed 800.

The Fair Isaac Corporation, the inventor of FICO scores, releases periodic data about score distribution among United States consumers. Recent FICO score data, released in January 2020, gives the following breakdown of prime vs subprime credit scores in 2019:

  • 16% of Americans have a very poor credit score (300-579).
  • 18% of Americans have a fair credit score (580-669).
  • 21% of Americans have a good credit score (670-739).
  • 25% of Americans have a very good credit score (740-799).
  • 20% of Americans have an exceptional credit score (800-850).

If you’re wondering where you sit, you can get your free VantageScore credit score from Experian here on Credit.com.

What Are the Effects of Prime vs. Subprime Credit?

A prime credit score makes it much easier and more affordable to get a credit card—especially if you want a rewards credit card—purchase a home, buy a new car or finance home repairs or higher education.

A subprime credit score can make it more difficult to qualify for a credit card or loan. And if you do, you’ll likely end up paying a higher interest rate for the card or loan.

When you improve your credit score and get into the prime or super prime category, you get lower interest rates, higher loan amounts and credit lines and even special programs like rewards credit cards, low APR credit cards and sign-up bonuses like and 0% APR on purchases and balance transfers.

Subprime borrowers sometimes have to take additional steps to be approved for a loan. For example, a cosigner with good credit can improve your chances to qualify. However, he or she is responsible for payments if you default on the cosigned credit card or loan. If you’re buying a home or a car, the lender may require a higher down payment than it does for a prime borrower.

Although interest rates for a prime vs subprime credit score vary dramatically depending on the type of loan and the lender, you could pay tens of thousands less over the life of the loan if you have prime vs subprime credit score. For example, a subprime auto loan can have an interest rate of 10% or higher, while prime lenders can access rates of less than 5% or even 0% with special financing.

A credit card for subprime borrowers can carry an interest rate of more than 25%, compared to less than 10% or even an introductory rate of 0% for a prime or superprime credit score.

According to the federal Consumer Financial Protection Bureau, subprime mortgages are more likely to have an adjustable interest rate, which means your interest and monthly payment amount can increase over time. Prime mortgages are more likely to carry a fixed rate.

Keep in mind that a prime credit score isn’t necessarily a one-way ticket to loan approval. While lenders take your credit scores into account, they also consider factors like income, debt utilization and overall finances when deciding whether to extend you credit or a loan.

What Factors Impact My Score?

If your credit score falls into the subprime range, your credit history might not be long enough for lenders to make an astute judgment about your ability to repay a loan. Using credit responsibly by making payments on time and keeping a low balance on the cards you do have may slowly improve your score.

Other common characteristics of subprime borrowers include:

  • A high credit utilization ratio, which is the amount of your available credit you’re currently using. Lenders generally like to see a ratio of less than 30% with 10% being ideal.
  • A history of late payments—Most lenders report late payments to the three major credit bureaus after 30 days, with additional reporting at 60 and 90 days late.
  • A history of defaulting on debt—These debts may be written off by the lender because they were not repaid after several years or sent to collections.
  • A history of legal judgments or bankruptcy—These are seen as serious black marks by lenders and remain on your credit report for seven to 10 years.

Learn more about “What Is a Good Credit Score?” and “Just How Bad Is My Credit Score?”

How Can I Improve My Credit Score?

Moving from the subprime to prime credit score category has distinct benefits that put you on the path to a brighter financial future. You may be able to buy a home instead of renting. If you lease, you’ll have a better selection of properties to choose from. You’ll have lower interest rates on everything from your mortgage to your car loan to your credit cards, which means you’ll spend less money on monthly payments and more to put toward repaying debt, savings and meeting other financial goals.

Whether you’re working to exceed the 740 credit score threshold or want to maintain your already excellent score and become a superprime borrower, try these tips to improve your score:

  • Check your credit report and score. If you don’t know where you stand when it comes to prime vs subprime credit, you can’t be able to take steps to boost your rating.
  • Dispute any inaccuracies on your credit report that could be affecting your score.
  • Set up automatic payment reminders through your financial institution or on your phone or email calendar. You can receive a text or email so that you never miss a payment, helping you avoid late fees and dings to your credit score.
  • Pay down some of your debt to improve your credit utilization ratio. Lenders like to see borrowers using no more than 30% of your available credit. If you’re able to do so, opening a new line of credit will improve your utilization and subsequently, your credit score.
  • If you’ve missed payments in the past, bring those accounts current to improve your account standing, especially if some items have gone to collections. Once that happens, the black mark will remain on your credit report for seven years even if you eventually pay.
  • Keep old accounts open. The length of your credit history contributes to a healthy score, so even if you’re no longer using a card you avoid closing it.
  • Avoid applying for too many accounts in a short period of time. Lenders may see this as a red flag and the resulting hard inquiries have a negative impact on your score.
  • Create a budget and expenses you can eliminate or reduce to repay your debt. This not only boosts your score but also puts you on track to reach other financial goals—like building an emergency fund.

Learn more about how to improve your credit score.

Source: credit.com

Posted on March 1, 2021

APY vs. APR: The Difference Explained

These two little acronyms can have a big impact on your finances. Learn why.

It’s easy to get confused when the concepts of annual percentage yield (APY) and annual percentage rate (APR) are being tossed around. You’ve probably come across these acronyms when opening new financial accounts or reviewing the terms on your existing accounts, but what exactly do they mean? What is the difference between APY and APR?

In their simplest forms, APY refers to what you earn on the cash that’s stashed in a savings vehicle, while APR refers to what you owe when you borrow. While it may sound like something that belongs in an advanced finance class, understanding the difference between APY and APR can help you make smart financial decisions when it comes to saving for your financial goals and managing your debt.

Now, roll up your sleeves for a deep dive into APY vs. APR:

What is APY?

APY refers to the total amount of interest you earn on a deposit account each year. You may not think of yourself as a lender, but if you have a deposit account, you are. The bank is essentially paying you for lending them money. Bank accounts that are often associated with an APY include:

  • Savings accounts
  • Money market accounts
  • Certificates of deposit (CDs)

What is APY? It's the total amount of interest you earn on a deposit account each year.

APY is based on an account’s interest rate, and it also factors in how often the interest compounds. Justin Pritchard, an independent financial planner with Approach Financial in Montrose, Colorado, says one of the big differences between APY and APR is that APY takes compounding into account. (APR only shows the annual interest on an account, not whether the interest compounds or not.)

If you’re trying to answer the “what is APY?” question, understanding how compounding works is key. On some deposit accounts, interest compounds daily, meaning interest gets added to your account’s principal balance one day, and the next day the interest rate applies to that new principal balance. With other deposit accounts, interest may compound monthly, quarterly or annually. The compounding effect of APY can help you accumulate wealth faster because you are effectively earning interest on your interest. Nice, right?

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For example, if you open an online savings account with a 2.10% APY, interest compounds daily and you deposit $15,000, after five years you’ll have earned a total of $1,644 in interest.1 Your total interest earned each year would be as follows:

  • 1 year: $315
  • 2 years: $637
  • 3 years: $966
  • 4 years: $1,301
  • 5 years: $1,644

“The magnitude of difference between APY and APR grows with more compounding periods,” says Erik Goodge, president of uVest Advisory Group in Newburgh, Indiana. “The only way APR and APY would be the same is if you were only getting paid or owed interest once per year,” Goodge says.

What to know when comparing APYs

Once you understand “what is APY?”, it’s time to compare the APY on different accounts to help you determine how much money your savings can earn over time. If the numbers start to make you dizzy, a savings calculator can come to the rescue. The Discover savings calculator, for example, can help you determine how much interest you’ll earn each year based on APY, your starting balance and for how long you plan to save.

When shopping around for a new account, don’t call it quits after comparing only the APY. While it’s a helpful indicator of the returns you’ll get, the APY won’t take potential fees into consideration.

“Minimum balance fees, or any type of activity-related fees, like ATM withdrawals, could eat into the interest you earn,” Pritchard says. “A higher APY might not be worth it if you’re going to pay fees.”

Learning how to avoid fees or finding bank accounts that don’t charge fees could help you maximize your interest earnings. Discover’s Online Savings Account, for example, has no monthly fees for maintenance and no balance requirement.

What is APR?

Now that we’ve answered “what is APY?”, it’s time to explain APR. The APR is the total amount of annual interest you pay on an installment loan or revolving line of credit. “If you’re getting a loan, that’s usually the number you’re going to see,” Goodge says of APR.

When you’re learning APY vs. APR, note that you may see an APR associated with:

  • Credit cards and store cards
  • Auto, home, personal and student loans
  • Lines of credit, including home equity lines of credit (HELOCs) and personal lines of credit

When considering a new credit card or loan option, evaluating an account’s APR can be more telling than evaluating its interest rate. While APR is based on the interest rate, it may also include some of the lender’s fees, points and other costs associated with credit, Goodge says.

When learning APY vs. APR, remember that APR is the total annual interest you'll pay on an installment loan or revolving line of credit.

Say you’re comparing two lenders that both offer $1,000 loans with a 10.00% interest rate. Lender A charges a $50 fee and adds it to your loan’s balance. Lender B does not. If you compare the APRs, Lender B will likely have the lower APR. Come again?

This is because with Lender B, the 10.00% interest rate applies to your $1,000 loan. With Lender A, on the other hand, you may pay more in interest because the 10.00% interest rate applies to the $1,050 (the loan amount plus fee) you have to repay.

When considering APY vs. APR, know that in some cases a loan with a lower interest rate but high fees could have a higher APR than a loan with a higher interest rate and lower fees.

discover.com

Posted on March 1, 2021

Best Small Business Loans for 2021

Good Financial Cents
business loans, finding the right one may be your biggest challenge.

Let’s take a closer look at some of the leading possibilities out there, ranging from peer-to-peer lending to short-term lines of credit.

Funding Circle: Business Loans With Less Red Tape

funding circle loans reviews

funding circle loans reviewsFunding Circle is a peer-to-peer lender. The platform connects your application with investors who would like to earn money on your loan repayment.

But don’t confuse Funding Circle with basic crowdfunding. Though it’s funded by investors and not a traditional bank, your experience will be similar to the process of getting a Small Business Administration loan. But, you can access the funds much more quickly — usually within 10 to 14 days. Your business will also need a proven track record of at least two years to qualify, and the applicant should have a credit score of at least 620.

If approved, you’ll have a term loan up to $500,000 for six to 60 months. You can avoid a lot of red tape compared to the SBA process, but your interest rate will be higher, too. Funding Circle loans range from about 11 to about 40 percent APR.

Those rates actually come in lower than some online lenders as we’ll see below. Ideally, your business can pay off this debt quickly and avoid a lot of these finance charges. Funding Circle doesn’t charge prepayment penalties. 

Funding Circle Pros:

  • Speed
  • No prepayment penalty
  • Simplicity

Funding Circle Cons:

  • Not for startups
  • Higher rates than SBA loans

Learn More

Lending Tree: A Great Comparison Tool for Business Loans

lending tree mortgage logo

lending tree mortgage logoLending Tree doesn’t loan money, but the site will connect your business to a variety of lenders which could make your shopping process much more efficient.

If you like to compare loans, you’ll probably like Lending Tree which starts by asking you a series of questions about your business: its revenue and years in operation, for example. Then, you can see a list of lenders who could meet your needs. You can either continue the process of applying through Lending Tree or simply allow the different lenders to contact you.

One of the knocks against Lending Tree over the years — the site has been in operation for more than two decades — has been the way the service interacts with your credit report. When you enter your Social Security number on Lending Tree, multiple lenders can pull your credit almost simultaneously, and each hit could lower your score.

My advice here is to not enter your digits. When you don’t share your Social Security number, Lending Tree can still generate a list of lenders and show you their rates and terms. Then you can choose whether to apply. It’s more legwork for you, but it’s worth it to control who pulls your credit.

In other words: you can use Lending Tree to build a shopping list, but you’re still doing the shopping. You will still get phone calls and emails from a lot of lenders, however.

Lending Tree Pros:

  • A great tool for comparing loans
  • Service stocked with quality products

Lending Tree Cons:

  • Potential for multiple credit score runs
  • Potential for unwanted phone calls from lenders

Learn More

Kabbage: When You Need a Business Loan Tomorrow, or Today

kabbage small business loans logo

kabbage small business loans logoIf your business needs money right away, a Kabbage loan can deliver up to $250,000 as a line of credit. 

Often, you can access this money within a day via PayPal or your existing business checking account. You can also get a physical Kabbage card in the mail within a couple of weeks. One reason Kabbage delivers money so quickly: It doesn’t run your credit as a traditional lender would. So if you have a rough credit history, you can still get financing. (You will need to have a year in business and $50,000 in annual revenue to apply.)

Kabbage is super convenient. Of course, your business would pay for this convenience through high-interest rates. By high, I mean your APR could range from about 24 to 99 percent. Kabbage does not charge a prepayment penalty. So, theoretically, you could get an emergency loan, pay it off quickly, and avoid these exorbitant interest charges.

Not so fast, though: Kabbage’s accounts front-load your interest in a way that takes away much of the incentive for an early payoff. 

If your business has an emergency, Kabbage can be a lifesaver, especially if you have shaky credit. But a Kabbage loan isn’t your best bet for more strategic business borrowing.

Kabbage Pros:

  • Superfast access to cash
  • Credit scores don’t affect eligibility
  • The convenience of PayPal, ACH

Kabbage Cons:

  • Expense
  • Complex payback structure 

Learn More

Other Small Business Loans to Consider

The loans above can be easy to secure, and they offer a pretty wide variety. The next loans I’ll mention cover some of the same territories but in different ways. 

OnDeck: Another Super Convenient Option

ondeck small business loans

ondeck small business loansOnDeck presents another form of alternative business borrowing. It works a lot like Kabbage, except OnDeck is more suited for expansions and other one-time expenses.

Your business would need $100,000 in annual revenue, and the applicant would need a credit score of at least 600, and preferably 650 or so.

These qualifications are more stringent than Kabbage’s. In exchange for meeting these requirements, you may qualify for friendlier loan terms:

  • Interest Rates: OnDeck’s lines of credit top out around 65 percent APR, which is still considerably higher than you’d pay to an SBA lender but lower than Kabbage’s max of 99 percent. OnDeck’s term loans can range from 9 to 99 percent APR depending on your qualifications and loan amount.
  • Maximum Loan: OnDeck offers up to $500,000 in term loans for up to 36 months. Its lines of credit top out at $100,000.
  • Prepayment: Like Kabbage, OnDeck does not charge prepayment penalties. However, unlike Kabbage, you can save more by paying off your loan early because of OnDeck’s more conventional fee structure. 

OnDeck is best suited for short-term funding, but a well-qualified applicant could use the service for capital investments or opening a new location.

OnDeck Pros:

  • Quick and easy application process
  • Options for a term loan or credit line

OnDeck Cons:

  • More stringent eligibility guidelines
  • Rates high compared to traditional lending

Learn More

BlueVine: Nice Online Invoice Factoring Option

bluevine small business loans

bluevine small business loansThe business has a rhythm: Incoming revenue pays outgoing expenses which require more incoming revenue. It’s kind of like inhaling and exhaling. If your business gets off rhythm — which can happen because of unexpected expenses or the seasonal nature of your trade — BlueVine can help through invoice factoring.

BlueVine will “buy” your invoices that haven’t come due yet. You get your cash now, and then BlueVine collects on your invoices later, keeping the money to satisfy your loan. Of course, all this convenience comes with a cost. Your company’s APR would range from 15 to 68 percent depending on your qualifications and the amount you factor.

Loans can vary in size from $20,000 to $5 million, and the longest loan term is 13 weeks — basically one quarter in your fiscal year. 

BlueVine Invoice Factoring Pros:

  • Speed and convenience
  • Rates can be competitive

BlueVine Invoice Factoring Cons:

  • Your customers will know you factored their invoices
  • You will lose part of your business revenue in loan costs

SmartBiz: Access SBA Loans More Quickly

smart bix small business loans logo

smart bix small business loans logoLong before P2P and other online lending came along, the federal government created the Small Business Administration to help businesses access capital without putting their futures at too much risk.

The SBA continues to be a stabilizing force for small businesses that need to borrow funds even though the application process is tedious.   Enter SmartBiz, a new service that can help you access an SBA loan more quickly and easily if you have an established business with $50,000 or more in annual revenue and at least two years of continuous operation.

These loans work especially well if you’re buying real estate for your business or opening a new location.  SBA rates are tough to beat. Qualified applicants (675 or higher credit score) can get large term loans in the 10 percent range and real estate acquisition loans in the range of 7.5 percent.

And, rather than taking months to cut through all the red tape, you could have the loan in place within a week. You’ll still have to go through a strenuous application process — uploading documents, sifting through paperwork — but SmartBiz cuts out a lot of the waiting.

SmartBiz Pros:

  • Access SBA stability quickly
  • Low rates for business loans

SmartBiz Cons:

  • Not for startups or new firms
  • SBA documentation still required  

Other Niche Lenders to Consider

Some of my other favorite lenders for businesses with specific needs include:

  • Fundbox: Great for applicants with low credit
  • Accion: An option for startups
  • Kiva: Excellent choice for microloans ($10,000 or less)

Some Final Business Loan Thoughts

As a business owner, you have options. The market is wide open for business loans which means you can get the funds you need without spending weeks or months making it happen. Business owners in previous generations didn’t have this kind of freedom.

But remember what Eleanor Roosevelt (and Spiderman’s Uncle Ben) said: Great freedom requires great responsibility.  In this case, the freedom of borrowing requires the responsibility of working the new debt service into your future business plans. 

So no matter how much you borrow or why you’re borrowing, make sure you’re planning for the added expense of repaying the loan over the coming months and years.  That way your loan can open up new horizons without limiting your ability to prosper from the new possibilities.

Reader Interactions

Good Financial Cents, and author of the personal finance book Soldier of Finance. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.

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Source: goodfinancialcents.com

Posted on February 28, 2021

Value of U.S. Housing Market Hits Another All-Time High

Posted on October 29th, 2020

In the second quarter of 2020, the U.S. housing market hit an all-time high of $32.8 trillion, per The Federal Reserve’s Flow of Funds Report, as referenced in the latest Monthly Chartbook from the Urban Institute.

That was up from roughly $32.4 trillion in the first quarter of 2020, thanks to an increase in home equity from $21.1 trillion to $21.5 trillion.

Meanwhile, outstanding mortgage debt remained steady at $11.3 trillion, which tells us most borrowers are paying down existing mortgages and/or applying for rate and term refinances to lower monthly payments.

And that’s a good thing because it means most homeowners aren’t overleveraged like they were back in 2006, before the housing crisis ushered in the Great Recession.

Looking at it a different way, American homeowners have a collective loan-to-value ratio (LTV) of about 34%.

The Housing Market Appears to Be Healthy Despite Record Home Prices

value of housing market

  • U.S. property values continue to rise as mortgage debt keeps falling
  • American homeowners have a collective loan-to-value ratio (LTV) of about 34%
  • Mortgage debt is essentially unchanged from 2006 while home values have risen nearly $8 trillion
  • This means today’s homeowners are in good shape overall, but it’s harder for new buyers to enter the market

While one could always express caution when prices hit all-time highs, you’ve got to consider more than just the price.

More important is to look at housing affordability and the debt held by existing homeowners.

Fortunately, U.S. homeowners only carry a collective $11.3 trillion in mortgage debt, which appears to be flat or even lower than total housing debt back in 2006.

There are several reasons why today’s homeowners are carrying a lot less mortgage debt. For one, most haven’t tapped their equity.

Very few homeowners these days have applied for cash out refinances or pulled equity via home equity line of credit or home equity loan.

cash out share

Instead, they’ve been paying down their home loans each month, enjoying tailwinds propelled by record low mortgage rates.

Simply put, homeowners owe less and pay more in principal with each monthly payment, creating a housing market that is less leveraged.

This is a good thing for individual households and for the housing market as a whole because it means borrowers aren’t overextended, and have options if they’re unable to keep up with monthly payments.

A decade ago, mortgage payments often weren’t affordable because of so-called exploding ARMs that reset much higher after the borrower enjoyed an initial teaser rate.

And because they didn’t have any skin in the game, aka home equity, they couldn’t refinance to seek out payment relief.

That led to a flood of short sales and foreclosures, and eventually the creation of widespread loan modification programs such as HAMP and HARP.

Today, even if a homeowner falls behind due to COVID-19 or another setback, they could potentially sell for a tidy profit and move on.

This protects both that individual and their local housing market, which might otherwise suffer from declining property values due to the presence of distressed home sales.

In summary, this is why today’s housing market is very different than the one we experienced more than a decade ago, despite some economists seeing home prices in “bubble territory.”

But What About Housing Affordability Today?

  • Mortgage affordability has actually improved in recent years despite surging home prices
  • Existing homeowners typically spent 17.5% of household income on their monthly housing payments in September, down from 19.6% two years ago
  • Low mortgage rates are improving affordability, but rising down payments are hurting prospective buyers
  • Property values have grown at 2X rate of incomes over the past six years, and typical U.S. home now worth 3.08 times median homeowner household income

It’s great that existing homeowners are enjoying record low mortgage rates and equally affordable housing payments, but what about prospective home buyers?

Well, housing affordability has actually improved since 2018 due to the ultra-low mortgage rates available, per a new analysis from Zillow.

This is despite the fact that home values have grown at about double the rate of incomes over the past six years.

While households typically spent just 17.5% of income on monthly housing payments in September, down from 19.6% two years earlier, the typical U.S. property is now worth 3.08 times median homeowner household income, an all-time high per Zillow.

In other words, monthly payments are cheap for existing homeowners, but their properties are valued well above their incomes.

They remain affordable because many of these homeowners have small mortgage balances and super low mortgage rates.

But if these same folks were to buy their homes today, it might not work out, which brings us to those prospective buyers, or Gen Z home buyers.

Zillow noted that home values have increased a whopping 38.3% since September 2014, while homeowner incomes have gone up just 18.8% over the same period.

If a home buyer puts down 20% on a median-priced property they would have only needed about $36,600 at the start of 2014, or 6.4 months of income for a median homeowner household.

Today, they’d need a $52,000 down payment, which is 7.5 months of income for that 20% down payment to avoid PMI and obtain a more favorable interest rate.

Even worse for those still renting, Zillow expects home prices to rise a further 7% over the next year, which would increase that required down payment another $3,600 to about $55,600.

This is essentially going to steer more new home buyers into low down payment mortgages, such as FHA loans that only require 3.5% down, or Fannie Mae HomeReady and its mere 3% down requirement.

While it at least gives them an option, they’re going to have higher mortgage payments as a result, due to a larger loan amount, higher mortgage rate, and compulsory mortgage insurance.

Additionally, they’ll have very little skin in the game, which could present a problem if home prices take a turn for the worse, as they did a decade ago.

The good news is the bulk of homeowners are sitting pretty on mounds of equity, so assuming cash out refis don’t become the next big thing, the overall housing market should be relatively safe.

Could Existing Homeowners Afford to Buy Their Properties at Today’s Prices?

One last thing. We’ve basically got this weird situation where a lot of existing homeowners probably wouldn’t be able to afford their same properties if they were to purchase them today.

However, they’ve got a ton of home equity that is only growing each month thanks to regular payments of principal and rising home prices, meaning more money is essentially locked in their properties.

At the same time, it makes a move difficult because even a lateral purchase would be pricey from an affordability standpoint when you factor in stagnant incomes and higher property taxes.

Or the fact that some of these owners are retired or not making peak income.

In the end, it further exacerbates an already difficult situation in terms of housing inventory, which has been on the record low end of things for quite a while.

That just points to even higher home prices and lots of equity accrual, which buffers the housing market, but makes it increasingly difficult for new homeowners to get into the game.

Source: thetruthaboutmortgage.com

Posted on February 28, 2021

How to Get a Loan with Bad Credit

Everyone needs extra money from time to time, and this doesn’t change when you have bad credit. Unfortunately, your options become much more limited when you have bad credit. This makes it difficult to qualify for a loan, even when you need it to cover a financial emergency.

young couple

Whether you’re wondering how to get a car loan with bad credit, pay hospital bills, or even qualify for a mortgage with bad credit, we’ll show you how to improve your credit score and get your finances back on track.

Not only will you find out how improving your credit score can save you money on your next loan, you’ll also learn steps you can start taking today to start building your credit.

How does bad credit affect your ability to get a loan?

Before you start looking for a loan, it’s important to get an accurate understanding of your credit score. Most lenders use the FICO scores, which ranges from a low of 300 to a high of 850. A “bad” credit score is typically defined as lower than 629.

If you want to know your exact number, you’ll have to purchase that information from FICO. But if you simply want to see what kind of derogatory items are on your credit report (and potentially fix them), you can request a free copy of each of your three credit reports.

It’s a good idea to take advantage of this free service every 12 months to check your reports for accuracy even if you’re not actively looking for a loan.

Once you’ve established whether or not your credit score is low, find out the exact impact bad credit can have on your life. Bad credit affects you both financially and emotionally, but the most expensive effect is the type of loan you’re able to get.

Higher Interest Rates

When applying for a loan, the lender will charge you higher interest rates for a poor credit score. That’s because your lender sees you as a greater financial risk, so they charge higher rates in case you default on the loan.

Higher interest rates can really add up over the life of the loan. Keep reading to find out exactly how much.

Application Denied

Even worse than getting a high interest loan, you may not qualify for a loan at all if your credit score is too low. If the loan is for something non-essential, then this may not be that big of a deal.

But it can significantly affect your well-being if you have serious financial needs, like car repairs or medical bills. At this point, some people decide to turn to “no credit check” lenders who offer predatory products like payday loans.

Though short-term, these loans have extraordinarily high APRs and often lead people into a cycle of never-ending fees for what started off as just borrowing a few hundred dollars. Luckily, there are many ways to avoid ending up in this situation.

Where can you get a loans for bad credit?

If you do have a poor credit history, some reputable lenders might be willing to offer you a loan. Just remember, you’re going to be paying a lot of interest on top of the amount you borrow.

Check Out Our Top Picks:

Best Personal Loans for Bad Credit

It’s always good to check with your local bank or credit union, although they are likely to have stricter lending standards and a slower origination process. If you have an existing relationship with a bank or credit union, they may be willing to help you out.

Many online lenders offer quick approval and funding, even for borrowers with a low credit score. Just be sure to do your research to make sure the company operates a legitimate business.

Before taking out a personal loan from anyone, check to see what kind of reviews that company has received and what its Better Business Bureau rating is.

Bad Credit Lenders

Here are a few online lenders that offer bad credit loans:

  • Avant is a major online lender offering bad credit loans that only requires a minimum credit score of 580.
  • MoneyMutual is a lending aggregator that offers short-term loans to borrowers with low credit. You do need to have a consistent monthly income of at least $800 to apply.
  • CashUSA partners with lenders offering loans to people with bad credit between $500 and $10,000. The credit and income requirements are flexible, but the interest rate could be pretty high.
  • BadCreditLoans.com is a lending marketplace for borrowers with bad credit who need quick access to cash. You could receive up to $10,000 with loan terms up to 60 months.
  • PersonalLoans.com is another lending marketplace that offers personal loans to borrowers with poor credit. You will need to prove that you have a monthly income of at least $2,000 to qualify.
  • OneMain has physical locations in addition to its online presence and actually has no credit score minimum. The company says its average customer has a credit score between 600 and 650. Don’t get too excited, though – your APR could be as high as 35.99%.

Things to Know About Applying for a Bad Credit Loan

If you do decide on getting a bad credit personal loan, keep a few things in mind so you don’t damage your credit scores even further. First, limit your number of loan applications.

Every time you apply for a loan, the lender makes an inquiry on your credit report. This lowers your credit score anywhere between one and five points depending on your situation.

That might not seem like a lot, but it could affect your interest rate if you’re on the border between “bad” and “fair” credit. Plus, many lenders view a large number of inquiries as a risk factor, especially if they’re all made within a short period of time.

Thoroughly research potential lenders in advance and see if they offer to make a soft pull on your credit rather than a hard one. That way you can compare interest rates without hurting your credit even more.

Going through a lending marketplace is a good way to limit your credit inquiries as well. With just one application, you’ll receive quotes from multiple lenders that are willing to work with you.

How much extra interest should you expect to pay on a loan with bad credit?

Even after getting approved for bad credit loans, there’s no getting around the fact that it’s going to be an expensive decision. Just how expensive depends on the terms and conditions of the loan.

On top of your interest rate, your lender may also charge an origination fee. Unfortunately, this is a pretty universal concept, so there’s not much you can do to avoid paying it.

The origination fee is usually charged as a percentage of your loan amount, so – just like interest – the more you borrow, the more you pay. You don’t have to come up with the cash upfront; instead, the fee is deducted from your loan.

Make sure you account for this deduction in your loan request. For example, if you need a $20,000 loan and there is a 3% origination fee, be sure to request $20,600 because 3% of $20,000 is $600.

Annual Percentage Rate

A helpful tool in determining the best interest rate and applicable fees is the loan’s annual percentage rate or APR. This number helps you compare offers that have different rates and fees to see which is better on an annual basis.

However, APR does not account for the loan term, which is the amount of time it will take you to pay off your loan. A loan may have an extremely low interest rate, but if it takes 10 years to pay off, you might actually end up paying a lot more in interest.

There are a lot of variables to consider when figuring out how much interest you’ll be paying. Let’s look at an example to help put these facts and numbers into context.

Auto Loan Calculator

Let’s say you want to figure out how to get a new car loan with bad credit. By using an online calculator, you can determine if making the purchase now is worth paying the extra interest compared to fixing your credit first.

According to Experian, the average length of a new car loan is 67 months and the average loan amount is $28,711. For simplicity’s sake, let’s say you get a 60-month (five year) loan for $28,000. Here is how MyFICO estimates different credit scores to stack up in the same scenario.

The differences in the amount of interest paid over the life of the loan are jaw-dropping: a person in the lowest range pays nearly $9,500 more than someone in the highest range. So you wouldn’t be paying $28,000 for that new car, you’d actually end up paying almost $37,500.

Bumping your credit score up just 31 points from a 589 to a 620 could save over $4,600 in this scenario. Think of how many paychecks that adds up to before you decide on getting a loan with a bad credit score.

Fico Score APR Monthly payment Total interest paid
720 – 850 3.312% $507 $2,421
690 – 719 4.636% $524 $3,424
660 – 689 6.751% $551 $5,069
620 – 659 9.474% $588 $7,262
590 – 619 13.848% $649 $10,958
500 – 589 14.944% $665 $11,918

Should you fix your credit before applying for a loan?

If you want to potentially save thousands of dollars on your next loan, then yes, you should consider fixing your credit before you apply. While some credit components take time to improve, there are many actionable steps you can take right now to improve your credit scores.

It’s always better to get a head start on the process rather than waiting for a financial emergency. If you don’t need the money right away, take the time to fix your credit now so you can save big when you are ready to borrow.

Here are five steps you can take right away to fix bad credit:

1. Dispute any errors on your credit report

Before you attempt to repair your credit, you want to know what you’re dealing with first. So the first place to start is by reviewing and disputing any errors on your credit report. And checking your report will give you a good idea of where you can begin making improvements.

2. Start making your payments on time

One of the easiest ways to raise your credit score is by making your monthly payments on time. Your payment history counts for a significant portion of your credit report, so if you struggle to make your monthly payments on time, your credit scores will take a hit.

And you may be surprised to learn that this applies to more than just lending products. It also includes credit cards, personal loans, home loans, utilities, and even your cell phone bill. Once you have that under control, start paying down any existing credit card debt.

3. Lower your credit utilization ratio

Your credit utilization ratio accounts for 30% of your credit score, meaning you’re not just judged on the amount you owe, but also on the amount you have borrowed compared to the amount you are allowed to borrow.

If your credit cards let you borrow up to $10,000 and your balance is $4,000, your credit utilization ratio is 40%. Ideally, your credit utilization ratio should be below 30%, so try to make extra payments until you can reach that ideal range.

4. Consider using a credit repair service

If you’ve already taken the steps we outlined above with minimal success, then you may want to consider hiring a professional. A credit repair service can dispute any negative items on your account and help improve your credit score faster than if you’re doing it on your own. Here is our top choice for a credit repair service.

By law, an item must be removed from your report if the creditor can’t verify it within 30 days. By having a tireless advocate on your side, you’ll make sure your current and past creditors are following the law. They will help you make sure your credit history has been updated to accurately reflect your financial history.

5. Show a lender can you repay the loan

Once you’ve put in the work to raise your credit score, it can help to look for ways to show an online lender, bank, or credit union that you’re able to repay the loan. Providing proof of income can give a lender more peace of mind and demonstrate that you’re financially capable of repaying the loan.

If you don’t have any proof of income and your credit score is still lower than you’d like, you can consider applying with a creditworthy co-signer. Ideally, this will be someone who has a good credit history and can vouch for you with your lender.

However, you should only use a co-signer if you’re certain you can repay the loan. If you default on a loan, the bank will go after your co-signer, which will put their financial future at risk.

How can you maintain your credit score once it’s fixed?

After taking the time and effort to raise your credit score, make sure you do everything in your power to keep it up — or get it even higher!

You might not be looking for another loan or line of credit at the moment, but you never know what your financial future will look like. Perhaps you rent an apartment now, but want to buy a house further down the road.

Getting a Mortgage

It’s hard to figure out how to get a mortgage with bad credit, so do your best to make sure you take care of your credit now. That means paying all your bills on time, setting aside cash for emergency savings, and not racking up unnecessary debt.

Remember, most infractions stay on your credit report for up to seven years, so the financial decisions you make now stick with you for a long time.

Renting an Apartment

Plus, think of all the ways poor credit affects your life outside of getting a loan. Many landlords run credit checks on prospective tenants, so it can be difficult to rent an apartment with bad credit.

Potential Employers

Potential employers also sometimes run credit checks on job applicants to see how they handle their money. Why? They think that if you’re not responsible in your personal life, you probably won’t be responsible in your work life.

So bad credit not only affects your spending power, it affects your earning potential as well. Keep every door open by making a conscious effort to continually improve your credit. It would be a huge waste of time and effort to give up on all the progress you just made. Do yourself a favor and consciously manage your money going forward.

Final Thoughts

It certainly is possible for people with bad credit to get a loan, but that doesn’t mean it’s the best decision for you. Analyze just how urgent your financial needs are. Then, decide if you can wait a while to improve your credit before taking out a high-interest loan.

A reputable credit repair service can help you aggressively put your credit score on the fast track to improvement. Check out our credit repair reviews page for a list of reputable credit repair companies that can get you started today.

Source: crediful.com

Posted on February 27, 2021

What is revolving debt and how does it differ from installment debt?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Revolving debt is any debt without a set loan amount for a specific amount of time. Revolving accounts have an established credit limit, but you don’t have to follow a payment schedule or pay a fixed minimum amount each month. 

Not all debts are created equal, and it’s important to understand how different types can affect your credit score. Two of the major debt types—revolving debt and installment debt—work in different ways, and learning the nuances of each can help you manage your debt and maintain a higher credit score. 

How revolving debt works

The most common form of revolving debt is a credit card. With revolving credit, you have an established line of credit that you can draw on as often as you need to, so long as you don’t go over your limit. Your credit limit is determined based on your income, assets and credit history. 

Here are the basics of revolving debt:

  • Instead of paying a fixed minimum payment each month, your payments are a percentage of how much you borrowed that month. This means your monthly payment rates can change. 
  • You aren’t obligated to pay off the entire balance each month, but you’ll be charged interest on whatever balance you still owe. Revolving credit—such as credit cards—often have high interest rates. 
  • As you pay down your balance, you can continue to borrow more until you reach your credit limit. For example, if you reach your credit limit of $300, a payment of $100 will immediately allow you to borrow an additional $100. 
Revolving debt doesn't obligate you to pay a set balance each month. Like a revolving door, you can borrow repeatedly until you reach your credit limit.

Types of revolving debt accounts

Some types of revolving debt are backed by your assets, while others are not. The most well-known form of revolving debt is a credit card, which is unsecured. A home equity line of credit is another form of revolving debt, which is secured by your home.

These are the most common examples of revolving debt:

Credit cards

A credit card allows you to use any available funds at any time, as long as you continue to make minimum payments and don’t go over your credit limit. Carrying a balance on a credit card subjects you to accruing interest rates, whereas paying in full by the due date listed on your statement allows you to avoid interest charges. 

Home equity lines of credit (HELOCs) 

HELOC funds are commonly used by homeowners who need to cover a large expense, such as a home remodel. How much you can borrow is based on the equity of your home, which also serves as collateral. You aren’t required to pay a specific balance each month, but making payments replenishes your available credit (similar to a credit card). 

The main difference between HELOCs and credit cards is that you can only access a HELOC during a defined amount of time, known as the “draw period.” It typically lasts around five to 10 years, after which the debt must be paid back during a “repayment” period and funds can no longer be withdrawn. A HELOC usually has far lower interest rates than a credit card, since it’s backed by an asset (your home). 

Personal lines of credit 

Very similar to a credit card, these are funds you can borrow as needed and repay immediately or over time. Personal lines of credit allow you to carry a balance that accrues interest as you continue to borrow. Interest rates are usually variable, so it’s tough to predict how much you’ll end up paying for what you borrow. 

Lines of credit usually allow you to withdraw money in the form of a check or cash. If you need cash, a personal line of credit can be the more affordable option due to the high fees associated with credit card cash withdrawals. It’s also possible to receive a higher credit limit with a personal line. 

Business lines of credit

Business lines of credit operate almost identically to personal lines of credit, except they’re used for business expenses. This type of revolving loan lets you access your funds as needed to finance continuous short-term purchases, such as inventory, equipment repair or filling in a gap in cash flow. 

common types of installment debt

How revolving debt and installment debt impact your credit

Revolving debt and installment debt both impact your credit score. Having a mix of different types of credit accounts is one way to build your credit score. Successfully managing multiple kinds of credit is a good indicator to lenders that you’re a responsible borrower. 

While late credit payments of any kind will always negatively impact your credit score, revolving debt in the form of credit cards can look riskier to lenders. This is because unlike installment credit, there’s no personal asset—like a house or a car—attached to it that can be repossessed if you don’t pay on time. 

How revolving debt affects your credit score 

Credit bureaus consider credit card debt to be one of the most reliable indicators of your risk as a borrower. Since lines of credit are one of the most common forms of revolving debt, it’s important to understand the ramifications it can have on your credit score.

Pay attention to these factors when managing revolving debt:

  • High credit utilization ratio: The higher risk attached to revolving credit is mainly due to its impact on your credit utilization ratio. Credit utilization is the amount you owe versus the amount you have available to borrow. Your credit score can drop if you’ve reached your credit limit on all your credit cards—the FICO® scoring method ranks credit utilization as the number two factor used to measure your credit score (right after your payment history). 
  • Number of open revolving accounts: There is no specific number of credit cards that is considered the right number, but lenders do take it into consideration along with your credit history. 
  • Age of open revolving accounts: The older your revolving credit accounts are, the greater the benefit to your credit score. A longer history of responsible credit management indicates less risk to lenders. 
The higher risk attached to revolving credit is mainly because of how it impacts your credit utilization score

How installment debt affects your credit score 

Installment debt is typically considered less risky than revolving debt since it’s secured by an asset that you wouldn’t want to lose—whether that’s a new home, your car or your college tuition. It’s also considered more stable, so it has lower interest rates and less of an impact on your credit score.

Here are a few ways installment debt impacts your credit: 

  • Credit mix: Since having a mix of different credit types can boost your credit score, adding installment debt into that mix will help you diversify if, for example, you’ve only ever built your credit by using credit cards. 
  • Payment history: If you faithfully pay your installment debt each month for the agreed upon loan term, your credit score can go up substantially. 
  • Credit utilization ratio: You can use installment debt like personal loans to pay off high balances on your credit cards. This can significantly benefit your credit score because by using an installment loan to immediately pay off credit card debt, your credit utilization ratio is instantly lowered. 
  • Hard inquiries: Shopping around for installment loans like mortgages and auto loans triggers hard inquiries that lower your credit score. 

Should I be carrying revolving debt?

While revolving credit can certainly improve your credit score, it requires careful attention in how you use it. If you have a habit of missing payments or using too much available credit, it might harm your score more than it would help it. It’s also possible for lenders to make a mistake and inaccurately report a missed payment on a revolving debt account. 

Here are some helpful questions to ask yourself if you’re thinking about building your credit with revolving debt:

  • Do I need to borrow a large sum of money quickly? While you can use revolving debt to finance a large expense, a key component of using revolving credit responsibly is keeping your credit utilization low. Your credit score can dip if you borrow too much too often, or if you’re close to reaching your maximum borrowing limit. It might make more sense to consider a personal loan with a fixed payment timeline instead. 
  • Will I make my payments on time? Payment history plays a crucial part in how your credit score is determined. If you can’t consistently pay for revolving debt on time every month, it might be best to avoid it for the sake of preserving your credit score. 
  • How is my current credit history? Even if you end up getting approved for a line of revolving credit, lenders could hit you with high interest rates if you don’t have a favorable credit history. 

The credit repair consultants at Lexington Law can help you remove questionable negative items that might be harming your credit score. Since revolving debt can have a significant impact on your score, make sure you address errors on your credit report as soon as possible. 

Source: lexingtonlaw.com

Posted on February 26, 2021

What is revolving debt and how does it differ from installment debt? – Lexington Law

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Revolving debt is any debt without a set loan amount for a specific amount of time. Revolving accounts have an established credit limit, but you don’t have to follow a payment schedule or pay a fixed minimum amount each month. 

Not all debts are created equal, and it’s important to understand how different types can affect your credit score. Two of the major debt types—revolving debt and installment debt—work in different ways, and learning the nuances of each can help you manage your debt and maintain a higher credit score. 

How revolving debt works

The most common form of revolving debt is a credit card. With revolving credit, you have an established line of credit that you can draw on as often as you need to, so long as you don’t go over your limit. Your credit limit is determined based on your income, assets and credit history. 

Here are the basics of revolving debt:

  • Instead of paying a fixed minimum payment each month, your payments are a percentage of how much you borrowed that month. This means your monthly payment rates can change. 
  • You aren’t obligated to pay off the entire balance each month, but you’ll be charged interest on whatever balance you still owe. Revolving credit—such as credit cards—often have high interest rates. 
  • As you pay down your balance, you can continue to borrow more until you reach your credit limit. For example, if you reach your credit limit of $300, a payment of $100 will immediately allow you to borrow an additional $100. 
Revolving debt doesn't obligate you to pay a set balance each month. Like a revolving door, you can borrow repeatedly until you reach your credit limit.

Types of revolving debt accounts

Some types of revolving debt are backed by your assets, while others are not. The most well-known form of revolving debt is a credit card, which is unsecured. A home equity line of credit is another form of revolving debt, which is secured by your home.

These are the most common examples of revolving debt:

Credit cards

A credit card allows you to use any available funds at any time, as long as you continue to make minimum payments and don’t go over your credit limit. Carrying a balance on a credit card subjects you to accruing interest rates, whereas paying in full by the due date listed on your statement allows you to avoid interest charges. 

Home equity lines of credit (HELOCs) 

HELOC funds are commonly used by homeowners who need to cover a large expense, such as a home remodel. How much you can borrow is based on the equity of your home, which also serves as collateral. You aren’t required to pay a specific balance each month, but making payments replenishes your available credit (similar to a credit card). 

The main difference between HELOCs and credit cards is that you can only access a HELOC during a defined amount of time, known as the “draw period.” It typically lasts around five to 10 years, after which the debt must be paid back during a “repayment” period and funds can no longer be withdrawn. A HELOC usually has far lower interest rates than a credit card, since it’s backed by an asset (your home). 

Personal lines of credit 

Very similar to a credit card, these are funds you can borrow as needed and repay immediately or over time. Personal lines of credit allow you to carry a balance that accrues interest as you continue to borrow. Interest rates are usually variable, so it’s tough to predict how much you’ll end up paying for what you borrow. 

Lines of credit usually allow you to withdraw money in the form of a check or cash. If you need cash, a personal line of credit can be the more affordable option due to the high fees associated with credit card cash withdrawals. It’s also possible to receive a higher credit limit with a personal line. 

Business lines of credit

Business lines of credit operate almost identically to personal lines of credit, except they’re used for business expenses. This type of revolving loan lets you access your funds as needed to finance continuous short-term purchases, such as inventory, equipment repair or filling in a gap in cash flow. 

common types of installment debt

How revolving debt and installment debt impact your credit

Revolving debt and installment debt both impact your credit score. Having a mix of different types of credit accounts is one way to build your credit score. Successfully managing multiple kinds of credit is a good indicator to lenders that you’re a responsible borrower. 

While late credit payments of any kind will always negatively impact your credit score, revolving debt in the form of credit cards can look riskier to lenders. This is because unlike installment credit, there’s no personal asset—like a house or a car—attached to it that can be repossessed if you don’t pay on time. 

How revolving debt affects your credit score 

Credit bureaus consider credit card debt to be one of the most reliable indicators of your risk as a borrower. Since lines of credit are one of the most common forms of revolving debt, it’s important to understand the ramifications it can have on your credit score.

Pay attention to these factors when managing revolving debt:

  • High credit utilization ratio: The higher risk attached to revolving credit is mainly due to its impact on your credit utilization ratio. Credit utilization is the amount you owe versus the amount you have available to borrow. Your credit score can drop if you’ve reached your credit limit on all your credit cards—the FICO® scoring method ranks credit utilization as the number two factor used to measure your credit score (right after your payment history). 
  • Number of open revolving accounts: There is no specific number of credit cards that is considered the right number, but lenders do take it into consideration along with your credit history. 
  • Age of open revolving accounts: The older your revolving credit accounts are, the greater the benefit to your credit score. A longer history of responsible credit management indicates less risk to lenders. 
The higher risk attached to revolving credit is mainly because of how it impacts your credit utilization score

How installment debt affects your credit score 

Installment debt is typically considered less risky than revolving debt since it’s secured by an asset that you wouldn’t want to lose—whether that’s a new home, your car or your college tuition. It’s also considered more stable, so it has lower interest rates and less of an impact on your credit score.

Here are a few ways installment debt impacts your credit: 

  • Credit mix: Since having a mix of different credit types can boost your credit score, adding installment debt into that mix will help you diversify if, for example, you’ve only ever built your credit by using credit cards. 
  • Payment history: If you faithfully pay your installment debt each month for the agreed upon loan term, your credit score can go up substantially. 
  • Credit utilization ratio: You can use installment debt like personal loans to pay off high balances on your credit cards. This can significantly benefit your credit score because by using an installment loan to immediately pay off credit card debt, your credit utilization ratio is instantly lowered. 
  • Hard inquiries: Shopping around for installment loans like mortgages and auto loans triggers hard inquiries that lower your credit score. 

Should I be carrying revolving debt?

While revolving credit can certainly improve your credit score, it requires careful attention in how you use it. If you have a habit of missing payments or using too much available credit, it might harm your score more than it would help it. It’s also possible for lenders to make a mistake and inaccurately report a missed payment on a revolving debt account. 

Here are some helpful questions to ask yourself if you’re thinking about building your credit with revolving debt:

  • Do I need to borrow a large sum of money quickly? While you can use revolving debt to finance a large expense, a key component of using revolving credit responsibly is keeping your credit utilization low. Your credit score can dip if you borrow too much too often, or if you’re close to reaching your maximum borrowing limit. It might make more sense to consider a personal loan with a fixed payment timeline instead. 
  • Will I make my payments on time? Payment history plays a crucial part in how your credit score is determined. If you can’t consistently pay for revolving debt on time every month, it might be best to avoid it for the sake of preserving your credit score. 
  • How is my current credit history? Even if you end up getting approved for a line of revolving credit, lenders could hit you with high interest rates if you don’t have a favorable credit history. 

The credit repair consultants at Lexington Law can help you remove questionable negative items that might be harming your credit score. Since revolving debt can have a significant impact on your score, make sure you address errors on your credit report as soon as possible. 

Source: lexingtonlaw.com

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