What to Consider When Applying for a Home Loan

What to Consider Before Buying a HomeThe home buying process isn’t always easy, and without preparation, homebuyers can experience more difficulty than necessary. When you need a home loan, the hope is that your lender approves your loan application, but if you want the best possible outcome, it is equally important for you to both understand how certain factors can affect your ability to secure a home loan and what you can do to ensure your odds of approval are high.

If you are planning to purchase a home, here are a few things you should consider when applying for a home loan.

Your Credit Score

When it comes time to apply for a home loan, one of the many factors that will affect your eligibility is your credit score. It is likely that your mortgage lender will have a minimum credit score requirement, and if you don’t meet it, your loan application may be denied. It would be wise to review the minimum credit score requirement before you apply for a mortgage to ensure you have a good chance of getting approved.

If there is a lender that you prefer, but your credit score does not meet the credit score requirement, you can take the necessary steps to improve your score before you apply for a loan. Paying down a small debt, getting derogatory information removed from your report, or ensuring your bills are paid on time can all improve your credit score.

Down Payment

Homebuyers are often expected to put money down on their new home. This amount will vary, but people should keep in mind how their down payment can affect them. For example, how much you put down on your home will factor into the total cost of your home loan. The home may cost $200,000, but if you are putting down 10%, or $20,000, you won’t need to take out a loan for $200,000 to cover the total cost of the home.

Additionally, when you put down a larger down payment and decrease the amount of the home loan, a lender may be more open to approving your application and offering a lower interest rate, which will ultimately affect the total cost of the loan and your monthly payment amount.

Debt-to-income Ratio

In addition to reviewing your credit score, lenders will likely review your debt-to-income ratio. This number is important because it allows lenders to compare how much money you owe with how much money you make. You can calculate your debt-to-income ratio by dividing your total of their monthly bills by your total monthly income. For example, $2,000(monthly bills)/$3,500(monthly income)= 57%.

Type of Loan

Lenders offer different types of home loans, so you’ll want to determine what type of loan you will apply for when the time arrives. Depending on the lender, you may have access to loans designed for first-time homebuyers, veterans, and other buyers fitting of certain criteria. Along with these different types of loans may come different types of requirements, including the location of the home, credit score, and down payment amount.

With various types of loans existing, you can also speak to your mortgage lender to determine which is the best option for you.

Owning a home is a huge accomplishment. And as difficult as the home buying process may be for some, it doesn’t have to be. If you know where you stand, you may find fewer obstacles in your way and get approved for your dream home.

Source: creditabsolute.com

What is a Credit Limit, How is It Determined, and What Credit Cards Offer the Highest Limits?

[UPDATE: Some offers mentioned below have expired and/or are no longer available on our site. You can view the current offers from our partners in our credit card marketplace. DISCLOSURE: Cards from our partners are mentioned below.]

What is a credit limit and how is it determined? A credit limit is the maximum amount of credit you’re allowed, and it is determined by a financial institution (bank, credit union, retailer, etc.).

Essentially, when you apply for a credit card and you get approved, the issuer decides how high (or low) your limit will be. The average credit card limit is $16,737, but this varies depending on your credit score and where you live.

We know how it goes: first you cross your fingers hoping you’ll get approved for the credit card you want. Then you cross them again hoping the credit limit will be generous enough to get you what you want. Maybe you need it to pay for some expensive dental work or perhaps you are applying for a 0% balance-transfer offer so you can transfer debt from another, higher-interest card. Either way, the credit limit is often a few hundred or a few thousand dollars short of what you need — and you have no idea why. How did they even come up with that number?

Credit card issuers will tell you what factors they consider when they assign a credit limit, but exactly how they calculate it remains proprietary. Not a single card issuer we reached out to for this story could (or would) give us specific information about how they determine credit limits.

In every case, your credit score and income level will have a great deal to do with whether you are approved, and for how much. If you’ve had credit before and handled it well, a card issuer is more likely to approve your application. But that is not the whole story.

Your income comes into play, and so do your current financial obligations, such as rent, a car loan, and the amount of credit available to you through other cards. Part of the equation is behavioral: What do they think you are likely to do if you have more credit extended? In this guide, our Credit.com experts present the top cards with high credit limits that match your financial health and history, and help you understand all that goes into determining your credit limit.

Credit Cards With High or Unlimited Credit Lines

Did you know there are credit cards with unlimited credit lines? Well, there are—and you’ve probably heard of them. Although credit limits are determined by various factors, as we discussed (such as income and credit score), it is possible to find cards with high limits. Here are some of our favorites, from our trusted partners*:

Chase Sapphire Preferred® Card

  • Earn 60,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That’s $750 when you redeem through Chase Ultimate Rewards®. Plus earn up to $50 in statement credits towards grocery store purchases.
  • 2X points on dining at restaurants including eligible delivery services, takeout and dining out and travel & 1 point per dollar spent on all other purchases.
  • Get 25% more value when you redeem for travel through Chase Ultimate Rewards®. For example, 60,000 points are worth $750 toward travel.
  • With Pay Yourself Back℠, your points are worth 25% more during the current offer when you redeem them for statement credits against existing purchases in select, rotating categories.
  • Get unlimited deliveries with a $0 delivery fee and reduced service fees on eligible orders over $12 for a minimum of one year with DashPass, DoorDash’s subscription service. Activate by 12/31/21.
  • Earn 2x total points on up to $1,000 in grocery store purchases per month from November 1, 2020 to April 30, 2021. Includes eligible pick-up and delivery services.

Blue Cash Preferred® Card from American Express

  • Earn a $300 statement credit after you spend $3,000 in purchases on your new Card within the first 6 months.
  • $0 introductory annual fee for one year, then $95.
  • 6% Cash Back at U.S. supermarkets on up to $6,000 per year in purchases (then 1%).
  • 6% Cash Back on select U.S. streaming subscriptions.
  • 3% Cash Back at U.S. gas stations and on transit (including taxis/rideshare, parking, tolls, trains, buses and more).
  • 1% Cash Back on other purchases.
  • Plan It® gives the option to select purchases of $100 or more to split up into monthly payments with a fixed fee.
  • Cash Back is received in the form of Reward Dollars that can be redeemed as a statement credit.
  • Terms Apply.

Credit Cards for Building Credit

You’ve checked your credit score, and it’s not as high as you’d like — in fact, it’s quite low. Don’t worry, you can rebuild your credit score. It will take time, so be patient (and diligent about paying your monthly bills on time) and eventually, you could be qualified for an unlimited credit limit. Until then, consider these credit cards, which will help you continue to build your credit:*

OpenSky® Secured Visa® Credit Card

  • No credit check necessary to apply. OpenSky believes in giving an opportunity to everyone.
  • The refundable* deposit you provide becomes your credit line limit on your Visa card. Choose it yourself, from as low as $200.
  • Build credit quickly. OpenSky reports to all 3 major credit bureaus.
  • 99% of our customers who started without a credit score earned a credit score record with the credit bureaus in as little as 6 months.
  • We have a Facebook community of people just like you; there is a forum for shared experiences, and insights from others on our Facebook Fan page. (Search “OpenSky Card” in Facebook.)
  • OpenSky provides credit tips and a dedicated credit education page on our website to support you along the way.
  • *View our Cardholder Agreement located at the bottom of the application page for details of the card

First Progress Platinum Elite Mastercard® Secured Credit Card

  • Receive Your Card More Quickly with New Expedited Processing Option
  • No Credit History or Minimum Credit Score Required for Approval
  • Full-Feature Platinum Mastercard® Secured Credit Card
  • Good for Car Rental, Hotels; Anywhere Credit Cards Are Accepted!
  • Monthly Reporting to all 3 Major Credit Bureaus to Establish Credit History
  • Credit Line Secured by Your Fully-Refundable Deposit of $200 — $2,000 Submitted with Application
  • Just Pay Off Your Balance and Receive Your Deposit Back at Any Time
  • Apply in just a few moments with no negative impact to your credit score; no credit inquiry will be recorded in your credit bureau file
  • Nationwide Program though not yet available in NY, IA, AR, or WI * See Card Terms.

Why Your Credit Limit Matters So Much

While it feels great to get approved for a new account, pay attention to the credit limit. If you’re given a limit of $2,000 and you regularly spend $1,500 per month, then you’ll be using 75% of your credit, which can really hurt your credit score. Balances higher than 20% to 25% of your available credit can hurt your credit scores.

In the case of a balance transfer, you’ll have to weigh that against the interest you’ll save by getting out from under a high interest rate. And in the case of essential bills, like dental or medical, you may have to accept a temporary hit to your credit in order to pay the bill and avoid having an account turned over to collections.

So getting a high credit limit is ideal. There is no credit limit calculator that determines exactly what limit you’ll get, unfortunately, but we’ll help you figure out what factors may go into the decision.

What Should Your Credit Limit Be?

Having a high credit limit comes with many perks, and if a company offers you a high credit limit when you apply, it means they consider you a reliable customer. This is a good thing. But if you look at the flip side, what if you’re an overspender? It can be tempting to want to spend as much credit as you’re given, but doing so can really hurt your credit score.

Keeping your limit low could prevent you from spending more than you have (but to avoid this, you should consider using financial apps to better manage your spending habits and/or debt). Ideally, a high limit is both preferable and recommended, if you want to improve your credit. To improve your credit, you can apply for credit cards with high limits. If you maintain a high limit and a very low or no monthly balance, the better for your credit score.

Should I Ask For a Higher Credit Limit?

If you believe the credit limit you were assigned is too low, you can call the credit card issuer and ask for a higher one. It helps if you can justify your request with some information the issuer did not have when you applied (“I just mailed in my last car payment” or “My spouse has returned to work, and now our household income is higher than the number on the application”). It’s smart to consider that your credit limit can also be lowered if you give your lender reason to believe you may not be able to handle your current limit.

Sometimes, however, you can get them to change their mind simply by sweetening the pot and letting them know you’ll bring over a balance from another card or charge a significant purchase to the new card. Issuers want cardholders who pay interest on balances. After all, that’s how they make money.

When Should You Ask For a Credit Increase?

If you already have a credit card and feel you deserve a credit limit increase, you should ask yourself the following questions:

  • Am I paying off my balance each month?
  • Has my income changed significantly to justify the credit increase?
  • What should my credit limit be?
  • Do I have good credit?

You should wait for at least one year after opening your credit card to ask for an increase. When you do ask, be prepared. The credit card company may make a hard inquiry on your credit reports — and this, of course, can impact your score (minimally, though).

If you feel you have built up good credit, are financially responsible and capable of taking on a higher credit limit, then you should consider asking.

What If My Limit is Raised Without Asking?

Sometimes your credit card issuer may raise your limit without your requesting it, too. That can happen after a period of paying on time and keeping balances low. Some people worry that perhaps there is a downside to this, and wonder if they should ask that the lower limit be reinstated. Generally the answer is no.

Assuming your credit card usage stays the same, you’ll be using a smaller percentage of your available credit, and that can only help your score. Remember, it’s a good idea to keep your credit utilization to less than 20–25% of your credit limit; less than 10% is ideal. Credit utilization refers to the ratio of your credit card balance(s) to your credit limit. The lower, the better for improving your credit, earning rewards, and saving money.

So, sadly, it’s generally not possible to know exactly what your credit limit will be ahead of time. In the meantime, you can control some factors that may affect the issuer’s decision. It’s important to maintain (or work toward) good credit.

You can check your progress with a free credit report summary, updated every 14 days, on Credit.com, or you may find free scores on your monthly credit card statement. You should be sure you are comparing the same score from month to month, because many scoring models are used, and you want to be sure you look at the same one so that changes are meaningful.

The other thing you can do is to check your free annual credit reports to make sure the information there is accurate (and to dispute any that is not). Because your scores are calculated from information in your credit reports, you want to make sure it’s correct and that your information has not been mixed in with anyone else’s.

What Factors Go Into Selecting Your Credit Limit?

When credit card issuers determine your application status and your credit limit, they use a variety of factors, all of which may weigh differently to the issuer. Here’s what could impact their decision:

  • Your monthly income—If your income changes drastically from year to year, this could change the issuers decision. Again, if you salary changes (or if your marital status changes and impacts your income), the issuer should be notified.
  • Your credit history and worthiness—Have you had low or high credits before? Have you kept zero or low balances on previous credit cards? This could impact the application status.
  • You relationship to the issuer—If you’ve been banking with them for years or have another card from them, this could help get you approved and issued a high credit line (but only if you’ve proven to be a reliable customer).
  • Your employment status—This may or may not make a difference, but the issuer would like to know if you are part-time, full-time, self-employed, or unemployed, as this could affect your ability to pay off your future balances.
  • Your residential status—If you own a home and pay a monthly mortgage, you will likely be able to pay monthly credit card bills, too.
  • What type of card you’re applying for—Are you applying for the card with the highest rewards, but you have low credit? Make sure you’re being realistic when you apply for a credit card, but don’t sell yourself short either.

Managing Your Credit and Personal Finances

We’re all aiming for financial stability, and whether that means owning a home, paying off your mortgage, paying for your kids’ colleges, or retiring early, the ultimate goal is to lower your debt-to-income ratio and become debt-free. To determine your credit, limit calculators are available online.

Use Credit.com’s debt-to-income calculator to evaluate how much combined debt you currently have (ex. student loan debt plus car loan payments plus credit card payments, etc.) and how long it will take to pay off based on your current income and your monthly rent.

If you’re struggling to pay off the balances on the credit cards you currently have, check out Credit.com’s credit card payoff calculator to determine how much you still owe and when you’ll likely be debt-free. Just remember, credit repair takes time (and credit repair services are available to those who need them), but when your credit score improves, likely so will your credit limit.

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

*Note: At publishing time, the Capital One, Chase, Credit One Bank, and Discover credit cards are offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of Credit.com alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).

More on Credit Cards:

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Source: credit.com

Latest Annual State of Credit Report from Experian: How Do You Stack Up?

Every year, the credit reporting agency Experian puts out a report on credit trends in the United States. The Fourth Annual State of Credit takes a look at trends divided by geography and age, as well as other demographics.

I always find it fascinating to have a look at how I stack up as compared to my peers.

Geographic Trends

First of all, I looked at the report’s map showing the cities with the best and worst credit scores. I found it interesting that almost all of the best credit scores are located in the upper midwest. Minnesota and Wisconsin had most of the cities with the top credit scores, with a some sprinkled in North Dakota, South Dakota, and Iowa.

The 10 cities with the worst scores are all below the Mason-Dixon line, with most of them located in the Southeast, with Riverside, CA and Las Vegas, NV as the two in the Southwest.

None of the cities with the worst or best credit scores are located in Utah, my home state.

state-of-credit

state-of-credit

Generational Data

The Experian report divides the generational data into four categories: Greatest Generation (66 +), Baby Boomer (47 – 65), Generation X (30 – 46), and Millennial (19 – 29). I’m firmly in Generation X for the purposes of this report.

According to the report, the Millennials need the most help figuring out how to build their credit. This isn’t exactly surprising. After all, few schools teach financial literacy, and lessons many kids get about credit from their parents often consist of this advice: “Don’t get credit!”

This doesn’t prepare young adults to head out into the world and begin building their credit in meaningful ways. Instead of trying to scare kids about credit, I think it makes more sense to teach them about responsible credit use in combination with solid financial skills.

You have a great chance when you’re in your early 20s to create a solid credit profile, and learning how to do that effectively can mean a better financial result down the road.

National Averages

No report of this nature would be complete without national averages. According to the Experian report, the average debt in the United States is $27,887. The good news is that debt isn’t mostly credit cards. Indeed, the average balance on bank cards is $4,501. I remember a few years ago when the average was higher than that, so it’s clear that progress has been made in terms of the average person paying down debt.

The average number of bank cards that consumers have in the United States is 2.19. This is one area in which I am above average. My husband and I have six credit cards between us. This probably isn’t the most efficient use of our credit, though. I need to re-evaluate the cards and their rewards programs and make sure that I’m sticking with some sort of plan. I tend to get lazy and drift off the program if I’m not careful. We pay off what we spend, but I don’t always use the card to give maximum results if I’m not paying attention.

Take a look at the data, and figure out how you stack up. Are you average for your location and generation? Where do you fit with the national average? Answering these questions can help you figure out whether or not you need to make changes.

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Source: biblemoneymatters.com

How Does Credit Card Interest Work?

Credit card interest occurs when a user doesn’t pay their card’s monthly balance in full. The amount you pay on top of each dollar that remains unpaid is considered a card’s “interest rate.” This amount must be stated in the terms and conditions of a card’s application so that you have the information readily available. 

To calculate the dollar amount you’ll pay in interest for any given month, follow these steps (which we expand on below):

  1. Find your average daily rate 
  2. Find your average daily balance 
  3. Multiply your answers from step 1 and step 2
  4. Take this number and multiply it by the number of days in the billing cycle

Follow along below to dive into a detailed look at how credit card interest works.

What Is Credit Card Interest?

Credit card interest is the amount you’ll pay if a balance isn’t paid off by the due date. This is how credit card companies make money. Think of this as the “subscription fee” to borrow their money.

Some cards have high interest rates and some have low rates. Typically, the lower your credit score, the higher the interest rate will be. You should be wary of using cards with high interest rates, as this can quickly compound into high amounts of debt should balances not be paid off in a timely manner. If that’s the case, you may want to consider canceling your credit card

How Is Credit Card Interest Calculated?

There are two key elements to factor in when determining your card’s interest rate: average daily rate and average daily balance. When multiplied together, you’ll get the given period’s interest payment — that is, the extra dollar amount you’ll owe should you not pay it off in full.

Here’s an in-depth look at calculating your credit card’s monthly interest payment. We also walk through an example calculation you can easily apply to your personal finances.  

1. Calculate Your Average Daily Rate

First, you’ll need to calculate the amount of interest you’re paying daily throughout the entire year. Simply divide the annual interest rate (this is usually the percentage a card company will give you in the contract) by 365. 

Example: For an annual interest rate of 15%

  • Take .15 (annual interest rate) and divide it by 365 (total days in a year)
    • .15 / 365 = .00041096 
    • Average Daily Rate = .00041096 

Write this amount down for use in a couple of steps.

2. Calculate Your Average Daily Balance

To calculate your average daily balance, you’ll need your latest credit card statement. Next, follow these steps below:

  1. Write down your ending balance day by day
  2. Add each daily balance together
  3. Divide the total by the number of days in the current billing cycle

Example: 

  • Add each daily balance together
    • Day 1 ending balance: $100 
    • + Day 2 ending balance: $105 …
    • + Day 30 ending balance: $1,000 
    • = $6,100
  • Divide by the total number of days in the billing cycle
    • $6,100 / 30 days = $203.33
    • Average Daily Balance = $203.33

3. Multiply Average Daily Rate by Average Daily Balance

This step is simple. Multiply your answer from step one and step two.

Example:

  • Average Daily Rate (from Step 1): .00041096
  • Average Daily Balance (from Step 2): $203.33
    • .00041096 x $203.33 = .084

4. Calculate This Cycle’s Interest Owed

Finally, to find the interest payment for a given billing cycle, you’ll want to multiply your answer from step three by the number of days in the billing cycle (this is the same number you used in step two to find your average daily balance). 

Example: 

    • Answer from Step 3: .084
    • Number of days in the billing cycle: 30
      • .084 x 30 = 2.52
      • Interest to be paid for this billing cycle = $2.52*

*Note: This amount starts compounding each day if the balance is not paid in full. 

Interest Rate vs. APR

When it comes to credit cards, interest and APR are the same. With other loans, the interest rate determines the cost of borrowing the amount you request. APR, then, is an annualized rate of interest that includes certain fees as “finance charges.” APR is intended to allow consumers to comparison shop based on the true cost of credit and can give a more accurate view of what to expect.

How to Find Your Credit Card Interest Rate

To find your card’s annual interest rate, look at your contract or application. Remember, it may be listed as APR as the two are interchangeable when referring to credit cards.

The amount will be expressed as a percentage, and this is how much you’ll pay on top of any balance should you not pay off the full amount.

3 Ways To Avoid Paying Credit Card Interest

There are a few strategies that can help you avoid paying high interest on your credit card payments, and in some cases, pay no interest at all. 

It’s important to know these tactics to avoid spiraling into uncontrollable credit card debt. Rember, balances carry over month-to-month and can get exponential in a short period of time.

Pay Balance In Full

The best way to avoid credit card interest is to pay your balance off completely at the end of each billing period. Because interest is built on remaining balances, without one, there’s nothing to charge for (think of it as multiplying by zero).

Never Overspend

Only charge what you can realistically pay off at the end of each cycle on your credit card. Even missing one payment can start a domino effect of interest-heavy payments down the line. Stick to a budget and know what you can afford, especially when dealing with credit cards. 

Use Your Card For Necessities

To help budget with your credit card, only use it for needs (e.g. groceries). This money will have to be spent regardless, so make it much easier to avoid interest by paying off the balance at the end of the cycle. This practice also encourages a healthy credit score. 

Thoroughly understanding your contract with a credit card company is the best place to start when determining how credit card interest works. Many times it’s a uniform process, however, each company will tack on their own terms and conditions. By understanding the basics highlighted above, you can make more informed decisions about which credit cards are best for you.

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