manage debt

Apache is functioning normally

Apache is functioning normally

Buying a house and getting a mortgage is a big investment– and not only for you.

When you choose a mortgage lender and are approved for your home loan, your lender is agreeing to lend you all funds necessary to cover your home purchase. Because a house is a high-cost purchase, lenders want to guarantee that you’re not a “risky borrower.” Lenders want to know that you’ll be able to make your monthly payments on time and in full.

How do lenders decide whether you’re a risk?

In most cases, mortgage lenders, or their underwriters, to be exact, will take a look at how well you’ve managed debt in the past, and how well you’re managing debt currently.

So, having debt can be a good thing. 

This may seem counterintuitive because if you’re buying a house, you’d want to save as much money as you can. And you probably wouldn’t want your money tied up in other debts, right?

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Yes, saving money is always a good idea. But having some debt before buying your house can actually be an important factor in getting approved for a mortgage.

Why Debt Matters

To see how well you manage your debts, mortgage underwriters will take a detailed look at your credit score/credit history and your debt-to-income ratio (DTI).

Generally, you’ll want to have a high credit score and a low DTI. A high credit score indicates that you manage your debts responsibly. A low DTI indicates that you don’t have too much of your income tied up in paying off those debts.

Let’s take a closer look at both factors:

Your Credit Score

Each factor in your credit score is defined by debt. And to create and increase your credit score, you need to take on debt and manage it responsibly.

Your credit score is usually impacted by the following five factors:

  • Payment history — Your payment track record is the most important factor considered in your credit score. Lenders want to know if you’re a trustworthy borrower. And so, they want to see if you make on-time payments on other debts.
  • Credit utilization (or amounts owed) — Owing money on your credit cards, in particular, is not a bad thing. But, if you’re using too much at one time, underwriters might take that to mean that you’re overextending yourself financially.
  • Length of credit history — A longer credit history is favorable. But if your credit history is limited, you won’t necessarily be disqualified from borrowing money.
  • Credit mix — Underwriters want to see how you manage different types of debt.
  • New credit — If you’ve opened multiple credit accounts at one time, this is a red flag for underwriters because it can suggest that you’re in financial distress.

For a mortgage, you’ll typically need a credit score of at least 620 for a conventional loan. But, it could be best to shoot for a credit score of 700 or above. A higher credit score increases your chances of approval, and also increases the loan amount that you’ll be approved for. But a high credit score could also help you secure a lower mortgage rate, which could save you a significant amount of money over the life of your home loan.

Your Debt-to-Income Ratio (DTI)

Your DTI is a percentage representing how much of your income is put towards paying down debts. Since a mortgage is such a large investment, and your monthly payments could be fairly substantial, underwriters want to make sure that you’ll be able to make those payments. So, the lower your DTI, the better.

In general, a DTI of 36% or lower is ideal. In fact, a DTI above 50% most likely won’t be approved (although there are exceptions).

To calculate your DTI, simply divide your monthly debts by your monthly gross income. If your resulting percentage is higher than 50%, you’ll want to work on paying off some of your debts.

Debt Management Tips

Whether you’d like to reduce your debt before buying a house or just want to maintain a solid credit score by making consistent credit payments, knowing how to manage your debt could help you qualify for a mortgage. And it can also reduce your own stress levels.

The following tips can help you manage debt before buying a house, and could also be helpful once you’ve purchased your dream home and are in the thick of making mortgage payments:

Look at Your Credit Report

Your credit health is an important qualifying factor for a mortgage. So, it can be a good idea to take a look at your credit report to ensure that everything has been reported correctly and that there aren’t any errors. You wouldn’t want your credit score to be negatively impacted because of mistakes in your credit report.

You can order your credit report from any of the three major credit bureaus: Equifax, Experian, and TransUnion using annualcreditreport.com. Or you can even get your free credit report card here on Credit.com.

Once you have your credit report it is important to look at the following:

  • Your personal information
  • Your credit accounts
  • Credit inquiries

If you see any errors or inconsistencies anywhere in your credit report, these can be challenged with the credit bureau that created the report.

Consolidate Your Debt

If you find that you’re making payments on various loans and/or credit accounts, it could save you money (and save you from stress) to consolidate your debts into one. This way, you’re only paying interest on one debt instead of multiple. Therefore, you won’t have multiple payments to keep track of.

Related Read: What Is a Debt Consolidation Loan and How Can You Get One?

Don’t Make Drastic Changes to Your Credit

It can be tempting to pay off debts right before applying for a mortgage. However, doing so could actually hurt your credit score. When you pay off a debt, your credit score will actually drop temporarily.

On the flip side, if you’re trying to build credit and try to open multiple credit cards, or take on other debt before applying for a loan, this will also take a hit on your credit score. Not to mention that seeing a lot of change and new debt before applying for a mortgage is a red flag to underwriters. It can indicate you might not be financially prepared to take on a mortgage.

Make a Budget

Whenever a financial discussion is taking place, budgets are bound to come up. While the concept of making a budget might seem obvious and over-shared, it’s a great way to track your expenses and ensure that you’re meeting all your financial expectations and needs. There are a lot of costs involved with buying a house. So, you’ll want to make sure that you can afford them.

In this case, creating a budget can help you map out your current debts and other expenses in relation to your income. This allows you to see what’s happening and adjust as needed. A budget can give you the peace of mind that you’re not overspending, and are still able to meet all your other financial responsibilities.

Build Your Emergency Fund

Building your emergency fund before getting a mortgage may be one of the most important things you can do. You never know what expenses might arise once you purchase your house, and you don’t want all your money tied up in your mortgage payment and other monthly payments if, for example, your roof needs to be repaired or you encounter water damage.

It’s often encouraged to set aside three to six months worth of expenses in an emergency fund.

The Bottom Line

Buying a house is a big purchase, and it can be daunting to think of getting a mortgage if you are trying to pay down student loans, an auto loan, credit cards, etc. To help you save money and save you from stress, work on paying down other debts so you can be confident in your ability to make mortgage payments and enjoy your new home.

However, you don’t need to be debt-free to buy a house. In fact, some well-managed debt can boost your credit score, showing mortgage underwriters that you are a responsible borrower.

That doesn’t mean that you need to dig yourself into a hole of debt that you’ll never crawl out of. By taking the time to create a budget or analyze your credit report, you can see how you’re doing financially and where some changes can be made. Perhaps you could consolidate some of your existing debt, or you could completely pay off some of your debts. 

In the end, you just want to make sure that you’re comfortable taking on a mortgage and can afford to do so. 

Source: credit.com

Apache is functioning normally

Both home equity line and indirect auto loan delinquencies reached the highest levels ever recorded during the third quarter, according to the American Bankers Association’s Consumer Credit Delinquency Bulletin.

Home equity line delinquencies increased seven basis points to a record high 1.15 percent during the quarter, while indirect auto loans, which account for 90 percent of auto loans, saw lates increase to 3.25 percent from 3.07 percent.

Home equity loans also worsened, with delinquencies climbing from 2.56 percent to 2.63 percent.

The ABA composite ratio, which includes eight closed-end installment loan categories, climbed 22 basis points to a seasonally adjusted 2.90 percent, the highest level since 1980.

Interestingly, bank cards, which are simply credit cards provided by banks, saw delinquencies fall 34 basis points to 4.20 percent of all accounts.

Bank cards were one of just two categories that saw delinquencies fall during the quarter, with direct auto loan delinquencies slipping from 1.77 percent to 1.71 percent.

“While some people are relying on credit cards to meet daily expenses like food and gas, many are being careful not to add new debt,” said ABA Chief Economist James Chessen, in a statement.  “Reducing debt and building up cash reserves are good strategies right now.”

“If you’re under financial stress, credit cards can be a bridge to meet daily expenses.  And, unlike other loans with fixed payments, credit cards let you adjust monthly payment amounts.  This flexibility is certainly helping people manage debt better during this difficult economic period,” Chessen added.

It looks as if consumers are keeping daily expenditures in check and making sure basic accounts are being paid, while letting loans tied to their homes fall into default.

Perhaps because they can seek assistance for delinquent homes loans, or maybe because they’ve simply given up as they’re so far underwater at this stage.

“The number one factor in rising consumer credit delinquencies is job losses.  With one million jobs lost in the first three quarters and two and a half million expected for the year, delinquencies of all types of consumer loans will likely increase in the coming quarters,” Chessen said.

The ABA defines a delinquency as an account that is 30 days or more overdue.

(photo: jm3)

Source: thetruthaboutmortgage.com

Apache is functioning normally

Credit scores are a measure of your overall financial health and how responsibly you manage debt. If you’re curious about which entries on a credit report will decrease your credit score, the biggest culprits are late payments, missed payments, collection accounts, foreclosure proceedings, and bankruptcy filings.

Are those the only things that can negatively impact your credit scores? Not necessarily. Can you do anything about entries on your credit that decrease your score? Perhaps, if you’re able to dispute them. Filing a credit report dispute may help to add points back to your score.

Credit Report Basics

A credit report dispute allows you to challenge information that you believe is inaccurate. If you’d like to initiate a dispute, you’ll first need to know how to read a credit report.

Credit reports include four categories of information:

•   Personal information. This section of your credit report includes your name and any other names that you’re known by, your date of birth, Social Security number, addresses you’ve lived at, and employment history. Your personal information does not affect your credit scores in any way.

•   Credit accounts. Information about your credit accounts is used to calculate your credit scores. Here, the most relevant details include what types of credit you’re using, when your accounts were opened, your available credit limit and current balance, the monthly minimum payment, and your payment history.

•   Credit inquiries. A credit inquiry can show up on your credit reports when you apply for a loan or line of credit if it’s a “hard” credit pull. The difference between a soft credit inquiry vs. hard credit inquiry is that hard inquiries can affect your credit scores, while soft inquiries do not.

•   Public records. Information that’s included in the public record about your credit accounts goes here. The types of things that can be listed include collection accounts, judgments from creditor lawsuits, and bankruptcy filings.

There are three major credit bureaus that compile credit reports: Equifax®, Experian®, and TransUnion®. Thus, you can have multiple credit reports. A tri-merge credit report compiles information from all three bureaus into a single report. As far as which credit bureau is used most, there’s no single answer as it depends on the lender.
💡 Quick Tip: Check your credit report at least once a year to ensure there are no errors that can damage your credit score.

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When Can I Dispute Credit Report Information?

Under the Fair Credit Reporting Act (FCRA), you have the right to dispute inaccuracies on your credit reports with the credit bureau that’s reporting the information. You can file a dispute at any time.

Examples of errors you can dispute include:

•   Credit accounts listed that don’t belong to you

•   Inaccurate payment history or balances

•   Current accounts that are erroneously reported as past due

•   Duplicated entries for the same account

Why would someone want to dispute a credit report? In short, doing so can help your credit score if you’re able to get inaccurate information corrected or removed.

Information from your credit reports is used to calculate your credit scores. FICO® scores are the most widely used credit scoring model. Simply put, it’s a three-digit credit score ranging from 300 to 850 that reflects your credit health. The higher your score, the less risky you appear to lenders.

A middling or “fair” credit score is anything between 580 and 669. Fair credit can get you approved for loans, but you’ll need a good to excellent score to qualify for the lowest interest rates.

Does Filing a Dispute Hurt Your Credit?

Disputing credit reporting errors won’t hurt your credit. Depending on the outcome of the dispute, it could even help your score. During the dispute process, the credit bureau is legally required to investigate your claim to determine if your reason for the dispute is valid.

Keep in mind that disputing credit report errors isn’t necessarily an instant fix for bad credit. If you have multiple negative items on your report, then getting just one of them corrected or removed may do little to improve your score. Disputing information could hurt your credit if a correction negatively affects your credit file.

It’s also important to know that disputing credit report information doesn’t guarantee its removal or correction. If there’s negative information on your credit reports but it’s accurate, you can’t dispute it. The upside is that most negative information falls off your reports after seven years, though it can take up to 10 years for a Chapter 7 bankruptcy filing to disappear.
💡 Quick Tip: An easy way to build your credit score? Pay your bills on time. Setting up autopay can help you keep your account in good standing.

Possible Outcomes of Disputes

When you file a credit report dispute, the credit bureau has 30 days to investigate it. That involves reaching out to the business that reported the information initially to confirm whether it’s correct. The business must review your account history and report back to the credit bureau that’s handling the dispute.

There are several ways your dispute might be resolved.

•   Scenario #1: Your dispute is deemed to be frivolous by the credit bureau. The investigation will stop and you’ll be notified as to why. You may be given an opportunity to provide additional information to support your claim.

•   Scenario #2: The business that reported the information acknowledges an error. It must send written notice to all three credit bureaus to have the information corrected. The credit bureau must send a correction notice to anyone who received your credit report in the previous six months. Notices must also be sent to anyone who ran a credit check for employment for you in the past two years.

•   Scenario #3: The business verifies that the information is accurate. No change is made to your credit report.

When your dispute is upheld, the credit bureau must correct or remove the inaccurate information. If a dispute is not resolved in your favor, you can ask the credit bureau to include a statement of the claim in your credit file. You can also ask the credit bureau to send a copy of the dispute statement to anyone who’s received your credit report but you might pay a fee for that.

Note that you can also add or update personal information to your credit file. For instance, you might choose to add a recent address or a job to your employment history. Changes to personal information won’t affect your credit scores.

Disputes Related to Accounts, Inquiries, and Bankruptcy

Disputes involving credit accounts, inquiries for credit, and bankruptcy cases can have the same outcomes as described above. Depending on what the investigation finds, your account may be:

•   Updated to reflect accurate information

•   Deleted entirely from your credit report

•   Unchanged, if the information is deemed correct

The outcome can determine what changes you might expect, if any, to your credit score. Having negative information corrected or removed can help your score, though the extent of the improvement depends on whether you have other negative items on your report.

If you’re interested in how to find out your credit score free, there are a few ways to do it. First, you might be able to get your credit score for free from one of your credit card companies. Many issuers offer free FICO scores as a cardmember benefit.

Signing up for free credit score monitoring is another option. In terms of what qualifies as credit monitoring, it generally refers to any service that automatically tracks changes to your credit reports that affect your credit scores. For example, that might include opening or closing credit accounts, late or missed payments, or paid-off accounts.

Recommended: Do Banks Run a Credit Check for Checking Accounts?

How Long Will Information Stay on My Credit Report?

Generally, negative information can stay on your credit report for seven years. That includes things like:

•   Late payments

•   Missed payments

•   Charge-offs

•   Collection accounts

•   Creditor judgments

•   Foreclosure proceedings

As mentioned, a Chapter 7 bankruptcy filing can stay on your credit report for up to 10 years. A Chapter 13 bankruptcy can linger for up to seven years. As long as information on your report is accurate, it can’t be removed prematurely, even if that information is negative. Once the time is up for reporting of a negative item, it will fall off naturally; you shouldn’t have to request its removal.

Credit inquiries can stick around for 24 months, while positive information about your credit accounts can remain indefinitely. If you close any credit accounts in good standing, they can stay on your credit reports for up to 10 years.

What Are Some Ways to Avoid a Credit Score Drop?

Practicing good financial habits is the easiest way to avoid a credit score drop. You can do that by:

•   Paying credit accounts on time

•   Keeping credit card balances low relative to your credit limits

•   Limiting how often you apply for new credit

•   Using a mix of credit types, including loans and credit cards

•   Keeping older accounts open

Reviewing your credit reports regularly for errors or inaccuracies is another way to prevent credit score hits. You can dispute those errors to have them removed or corrected, which can help your score recover if it’s dropped temporarily.

How to Dispute Accurate Information in Your Credit Report

Accurate information on a credit report usually isn’t up for dispute, unless the same account is being reported multiple times. In that case, you dispute the “extra” entries on your report to have them removed.

If there’s negative but accurate information on your credit report, then you might try writing a goodwill letter to the creditor asking them to remove it. However, they have no obligation to honor your request. If the account is past due and they’ve been trying to collect what’s owed, they may also ask you to pay before they delete the item.

Credit repair companies charge you to remove negative items from your report. However, the tactics they use are ones that are already available to you, including disputing negative information, goodwill letters, and paying for deletion. It’s important to weigh whether paying a fee to repair credit is worth it, especially if the company’s promises seem too good to be true.

The Takeaway

Keeping up with credit scores is important if you plan to borrow money. The better your score, the easier it is to get approved for loans and qualify for the lowest rates.

Take control of your finances with the SoFi Insights money tracker app. Connect all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

SoFi Insights helps you get your money right.

FAQ

What factor causes your credit score to decrease the most?

Negative payment history has the biggest impact on credit scoring under the FICO model. Late payments, missed payments, charge-offs, collections, foreclosure proceedings, and bankruptcies can all hurt your credit score more so than things like new credit inquiries or closing credit accounts.

What are negative entries on a credit report?

A negative entry on a credit report is anything that’s harmful to your credit score. That can include late payments, missed payments, collection accounts, and judgments. A high credit utilization ratio can also negatively affect your credit scores.

What are 3 ways to decrease your credit score?

Three things that can hurt your credit score are paying late, not paying at all, and running up high balances on credit cards relative to your credit limits. Letting accounts slip into collections, being sued by creditors for debt, and filing bankruptcy can also cost you major credit score points.

Photo credit: iStock/Daniel de la Hoz

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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Credit card debt gets tiresome quickly. You pay your monthly minimums, maybe a little more when you can afford it, but the balances on your cards never seem to go down. If you’re sick of juggling multiple high-interest payments, consolidating your debt can help. 

And if you’re a homeowner, you have a powerful tool that can help with debt consolidation: your home’s equity. A home equity line of credit uses your home’s equity to offer you a built-in line of credit you can draw on for various purposes, debt consolidation included. 

How to use a HELOC to Consolidate Credit Card Debt

A home equity line of credit, which the bank may call a HELOC (pronounced HEE-lock), is similar to credit cards in that you can draw on your credit line as often as you need to up to a certain limit. The difference is that you’re using your house as collateral, so you need a good credit score to qualify.

That means the interest rate is lower than your credit card interest rate, making it an ideal way to get out of credit card debt faster — if you qualify and have enough equity. For more information on that, read our article on how HELOCs work. 

As a brief overview, HELOCs have both a draw period and a repayment period. You can draw from the credit line for typically up to 10 years, and your repayment period can be up to 20 years

Once you get your HELOC, you can pay off your credit card debt in one lump sum (or several if you have more than one card). Then, you just pay off your HELOC according to the terms of your agreement. You can save money and pay down debt faster because you’re paying less interest. But if more time was what you needed, you have that too.

Once you pay off your debt, you can either keep borrowing against the HELOC for other purchases, such as home improvements, or close the account. Just don’t open any more credit card accounts while you’re paying it off, or you could compound the problem.

What Happens to Your Home if You Don’t Pay It Back

One important thing to note with HELOCS: Your home acts as collateral. If you can’t pay your credit line down, the bank can seize your home and use it to pay back your debt. 

That said, HELOCS are a valuable tool. If you’re 100% sure you can pay it back, consolidating credit card debt with a HELOC can save you a lot of money in the long run because HELOCs tend to have much lower interest rates than credit cards. 

Pros & Cons of Using a HELOC for Credit Card Debt Consolidation

HELOCs are convenient products for homeowners who’ve paid off a good portion of their mortgage. They provide an easy way to consolidate debt, but that doesn’t mean they don’t have some risks associated with them too. 

  • Lower interest rates
  • One lower monthly payment
  • Longer repayment terms
  • Potential increase in credit score
  • Potential tax deductions
  • Risky loan type
  • Potentially variable interest rates
  • Not free
  • Drop in home equity
  • Potentially more interest over time

Pros 

While HELOCs are only available to one specific audience (homeowners with equity in their homes), their benefits make them a worthwhile product. 

  • Lower interest rates. For those with good credit, HELOCs offer lower interest rates than credit cards, which often have rates in the 20% range. 
  • One lower monthly payment. If you have five credit cards, all with their own monthly payment date, consolidating these payments into a single monthly payment with a single due date can help you budget a lot easier. 
  • Longer repayment terms. Since the loan can span up to 30 years, depending on the draw and repayment periods, a HELOC can give you the time you need to finally pay off your debt. 
  • Potential increase in your credit score. Having multiple credit cards maxed out does a number on your credit utilization. If you free up those credit lines and opt for a single loan, you may see an increase in your credit score as your credit utilization drops. 
  • Potential tax deductions. The interest you pay on credit cards isn’t tax deductible, but the interest you pay on your HELOC might be if you use the funds to improve your home. If you want to use your HELOC for home improvement projects after you’ve paid off your credit card consolidation, you can qualify for a deduction. 

Cons 

HELOCs come with some serious risks and aren’t always the right choice when consolidating debt. So there’s a lot you need to understand first.

  • Risky loan type. You’re using your actual home as collateral, and that’s part of the reason HELOCs offer better interest rates. That results in less risk for the lender because if you don’t pay it back, the bank can just take it. 
  • Potentially variable interest rates. Some HELOCs have variable rather than fixed interest rates. That means your interest rate can fluctuate, leaving you paying more and more as time goes on. 
  • Not free. When you take out a HELOC, you’re essentially taking out another home loan. As such, you have to pay many of the same fees you did when you originally bought your house. That includes closing costs and appraisal fees. 
  • Drop in home equity. If you take out a HELOC, you no longer have that big chunk of equity you worked so hard to build. While consolidating your debt is a worthwhile endeavor, ensure that’s how you want to use your home’s equity. 
  • Potentially more interest over time. Since you’re extending the life of the loan, if you’re not careful, you could pay more in interest than you bargained for.

Factors to Consider Before Using a HELOC for Credit Card Debt Consolidation

Getting a HELOC isn’t an easy process. It takes time and a lot of paperwork, so before you jump in, prepare for the process. Various factors can help you understand whether a HELOC is the right financial product for you. 

Financial Situation & Goals

When you take out any loan or credit line, you need to look at your financial picture as a whole — the lender will. 

When considering whether a HELOC is right for your current financial situation, consider your:

  • Income. While a HELOC should theoretically make your debt payments easier to manage, there’s a lot more on the line if your income suddenly drops or you lose your job down the line. Consider your current and future income potential, as HELOCs are long-term loans.
  • Employment stability. You must consider more than the dollar amount of your income. Is your job stable? You may be in a high-paying position now, but will you always be? If you’re in a stable or growing profession that doesn’t have a history of layoffs, making payments 20 years down the line may not be an issue. 
  • Ability to repay the loan. Do you have too many other debts and bills you’re balancing? If so, is a HELOC worth the risk you could lose your home in addition to the same consequences you’d pay for not paying off your credit cards? 
  • Future financial goals. Using your home’s equity now means it won’t be there in the near future should an emergency or other financing need arise, such as a bad foundation or flood damage. 

Interest Rates & Loan Terms

Interest rates tend to be much higher for credit cards than HELOCs. While credit cards hover around the 20% mark, HELOCs average much lower rates in the single digits.  

Of course, interest rates aren’t the only thing that adds to your monthly payment. You’ll need to consider all features of the HELOC, including:

  • Appraisal costs. You need your home appraised to assess its value. Typically, you’ll pay a few hundred dollars to get an appraisal. 
  • Closing costs. Closing costs run anywhere between 2% and 5% of the total HELOC amount. 
  • Length of the loan. The interest rate you get varies by the length of your loan. A 10-year HELOC has slightly lower interest rates than 20-year HELOCs since the length of time the bank is taking a risk is lower. But you have to pay interest over the life of the loan, which is a long time on longer-term loans, so factor that into the final loan amount. 

Risk Tolerance & Homeownership

If the idea of putting your home up as collateral makes you nervous at all, a HELOC might give you more sleepless nights than it’s worth. You never truly know what your financial future holds, so putting your house on the line isn’t always the best move. 

So look at the reasons you got into credit card debt in the first place and address them. If you need to reign in your spending and can’t get a handle on managing your money, taking on additional debt — especially debt attached to your home — isn’t the right option. 

Defaulting on a HELOC isn’t like defaulting on other types of loans. Lenders simply send those to collections. With a HELOC, you could be at risk of losing your home. 

Should You Use a HELOC to Consolidate Credit Card Debt? 

If you meet every single one of the following requirements, a HELOC just might be the right choice for you:

  • You’re a homeowner with a substantial amount of home equity. 
  • You have a good credit score and can qualify for low rates. 
  • You have a stable income high enough to support long-term credit payments. 
  • You’re comfortable with the idea of your house being used as collateral. 

If you fall outside these parameters, it’s highly unlikely a HELOC is a good fit. You stand to lose too much. Homeowners who have just started paying down their debt simply won’t meet equity requirements. Same for those with poor credit scores. 

Additionally, anyone who doesn’t have a consistent income should opt out of HELOCs since keeping up with payments may be difficult. And if you’re not willing to pay the penalty (your house) for continued missed payments, think about other debt-consolidation options. 

Alternatives to HELOC for Credit Card Debt Consolidation

HELOCs don’t offer the right features to be a viable option for most people with credit card debt. Most borrowers with a mountain of debt just shouldn’t take the risk. Fortunately, many alternatives are less risky and tend to be more flexible. 

Balance-Transfer Credit Cards

While it might seem counterintuitive to put all your credit card debt on another credit card, balance-transfer credit cards can help responsible users pay off their debt. The biggest perk balance-transfer credit cards have over HELOCs and many other debt-consolidation options is the ability to pay off your debt interest-free. 

Most balance-transfer credit cards come with a 0% introductory offer for a year or more, giving you ample time to pay down your high-interest debt from other credit cards. If you can manage this repayment time frame and have at least fair or good credit, a balance-transfer card is a strong first choice.

Personal Loans

Personal loans can help you consolidate your debt into one easy payment, just like a HELOC does, but they don’t use your home as collateral. While personal loans tend to have higher interest rates than HELOCs, with good credit, you can likely still qualify for a loan that has a lower interest rate than your credit cards. 

You get your money in a lump sum, which you can then use to pay off your credit card balances. In their place, you’re left with one monthly payment to the personal loan lender. Personal loans typically have terms of one to five years. 

Debt-Consolidation Companies

There are debt-consolidation companies specially set up to help you pay off your debt. These companies accept a range of credit profiles, offer various term lengths, and offer lower interest rates for those with the credit to qualify.

The loan operates much like a balance-transfer credit card but is often a fixed-interest loan you have set monthly payments for. You take out a loan for the total cost of your debt, which you then use to pay off multiple debt payments.

Final Word

Generally, a HELOC is helpful when you’re consolidating debt since they come with low interest rates. But there are also closing and appraisal fees as well as the requirement of a high credit score for approval. You also need to be fully comfortable with your house being the collateral that guarantees your loan. 

But if you decide it’s the right option for you, watch out for scams. Be wary of companies that seek your business and require you to pay upfront or who make the process complicated. 

Reputable lenders offer options you can verify and have good reputations with companies like the Better Business Bureau. 

Never give your personal information without verifying who you’re speaking with and the company they represent. 

Christopher Murray is a professional personal finance and sustainability writer who enjoys writing about everything from budgeting to unique investing options like SRI and cryptocurrency. He also focuses on how sustainability is the best savings tool around. You can find his work on sites like Bankrate, Money Crashers, FinanceBuzz, Investor Junkie, and Time.

Source: moneycrashers.com

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Whether you like flashy sports cars or practical minivans, shopping around for cars can feel like a fresh start. The problem is, most people can’t afford to pay out of pocket.

So how do you get a car loan to help turn your motorized dreams into reality? Like most big purchases, creating a thorough plan is a must. Understanding all your financing options, how a car loan will affect your credit, and how you can get the most bang for your buck will save you headaches—and debt—down the road.

Have a specific question in mind? Use the links below to get straight to the information you need:

What Are the Steps for Getting a Car Loan?

Throughout the financing process, remember that you’re shopping for two different products: the car and the car loan. Before setting foot on a dealership, take the time to weigh all your options so you feel 100% certain that investing in a new car is the best decision for your financial health as a whole.

Start with a Budget

If you don’t have a monthly budget, it’s time to create one. Assess all the monthly debt payments you currently have—such as rent, student loans, and credit card bills—and then figure out how much you’ll be able to afford on a monthly car payment.

Your car payment calculations should include not only the amount paid back to the lender, but also gas, insurance, and maintenance fees. If you come up with a number that won’t work with your income, consider saving for a larger down payment so you won’t have to take out a large car loan.

Check Your Credit Score

Request a copy of your free credit report to determine how your score will affect the loan shopping process. When doling out the best rates, lenders look for a score of 760 or higher and will give you a better deal the higher your score. Payment history, debt-to-income ratio, and the history of your credit lines all affect that magic three-digit number.

Start by fixing any inaccuracies you find on your report that could be dragging down your score. Within a month or two, you should see the mistakes removed which may make your number rise. If you aren’t in a rush to purchase the car, work on bringing your score up to help you get more favorable loans when it does come time to apply.

If you don’t have the time or ability to raise your credit score before purchasing the car, you could find a co-signer for the loan. Consider asking a parent, friend, or family member with a good score to co-sign. It’s important to remember that the co-signer is responsible for paying back the loan if you’re unable to make the monthly payments, and the credit score of both you and the co-signer will be affected by late or missed payments.

Explore All Your Loan Options

There are two main ways to get a car loan: direct lending and dealership financing. After picking out the car you want to buy, consider which option makes the most sense for you.

Direct Lending

Direct lending entails receiving a loan from a bank, credit union, or online lender. You’ll agree on the amount of the loan and the finance charge, or interest rate, that you’ll pay on the loan. Some things to note about receiving direct lending:

  • Banks often offer competitive interest rates but are more exclusive about who they offer a loan to. It is more likely you will need to have a good or excellent credit score to obtain a desirable loan from a bank. You don’t usually have to be a member at the bank to apply for an auto loan or get pre-approval.
  • Credit unions may have an easier loan application process and lower interest rates. However, you must be a member to apply for a loan.
  • Online lending websites often contact several lenders at the same time so you can easily obtain competing loan offers. Just like a bank or credit union, you will determine the terms of the loan with the lender. Make sure to always do background research on each lender you contact to ensure they aren’t predatory lenders.

Dealership Financing

Some dealerships offer on-site financing, which means you agree on the loan amount and interest rate with the dealer. Here are some things to keep in mind:

  • The dealer will gather all your information and send it to one or more prospective auto lenders, who will then give the dealer a “buy rate.” This could be higher than the interest rate you negotiate because it could include a compensation fee for the dealer handling your loan.
  • Because you are treating the dealership as a one-stop-shop for all your car needs, you might be offered special deals or rebates that include low interest rates.

Get Pre-Approval

Whichever financing option you decide to pursue, don’t just take the first loan offer that comes your way. Take the time to shop around and get competing rates through the pre-approval process. This entails asking multiple lenders to look at your credit report and draft up the loan amount and interest rate they’d be willing to offer you.

Pre-approval may give you more bargaining power with a dealership than if you went in without a financing plan. You also might be able to hunt down the best deals because lenders are competing for your business. Remember, just because you receive pre-approval from a lender doesn’t mean you have to take their offer.

An important element of loan shopping is keeping your pre-approval applications and final loan applications within a short window of time. Every time a lender looks at your credit report, it triggers a hard inquiry. If you build up too many hard inquiries, it could lower your credit score.

Fortunately, Turbo uses VantageScore, one of the common scoring models, which offers a 14-day grace period. If multiple hard inquiries are made during this time period for an auto loan, it will only be counted as a single inquiry—thus protecting your score.

Negotiate the Total Cost

Once you’ve found a lender that you want to finance your car loan, consider negotiating the final deal. This includes:

  • Length of the loan. Typically, a shorter loan will have higher monthly payments but lower interest rates. A longer loan will have smaller monthly payments and higher interest rates.
  • APR and interest rate. Depending on your pre-approval offers, you might be able to negotiate for a lower interest rate. This means you’ll pay the lender less to borrow the money over the length of the loan.
  • Additional add-ons. Extended warranties or additional insurance can raise the total cost of the loan.
  • Special offers or discounts. If you’re getting your loan through a dealership, use the negotiation process to ask about any manufacturer rebates that could get you a lower price on the car, therefore reducing the amount of money you need to borrow.

Close the Deal

Before driving off into the sunset, make sure to tie up any loose ends that could impact your car loan. Per the federal Truth in Lending Act, lenders are required to provide you with important information about your agreement so you can verify all the terms match what you discussed.

Sign all paperwork before taking your new car home, and make sure you have multiple ways to contact your lender if you ever have any questions. Whether you make online or by-mail monthly payments will be discussed during the negotiation process. It’s crucial that you pay these back on time every month to avoid severe late fees or repossession of your brand new set of wheels.

Will Trading In my Car Affect an Auto Loan?

If you plan to trade in your current car before purchasing a new one, it could lower the total cost of your car loan. The credit or cash you receive from the trade-in can be put to use as a down payment, thus reducing the amount you need to borrow from a lender.

Before trading in, make sure you know whether the total amount you still owe on your car is less than what it’s worth. Carrying an old auto loan onto a new auto loan may raise your interest rates and limit your options for the best deals. While trading-in can significantly help some buyers, it may not always be the best option if you want to get a favorable loan for your new vehicle.

Can I Get a Car Loan with Bad Credit?

Despite many lenders being wary of borrowers with poor credit scores, there are still options available to obtain a car loan. As mentioned earlier, paying off any existing debt, finding a co-signer, or saving for a larger down payment are all ways to help offset bad credit.

However, if the purchase can’t wait, lenders may still offer you a loan—but likely at a high price. Interest rates and additional fees skyrocket for borrowers with less-than-ideal credit scores, and it may dig you into a deeper hole of debt than you started with.

If you think you might be late on a payment, contact your lender immediately to discuss the possibility of adjusting your payment plan. While most of the original terms you negotiate will likely stay the same, you may be able to make a delayed payment. But if you consistently default on your payments, the lender is allowed to repossess your car, sell it, and use the money to pay off your remaining debt.

Despite its complexities, getting a car loan can be a straightforward process if you make a strategic plan. Assess your current financial health, loan shop, and negotiate a deal that suits your needs; in no time you’ll be able to hit the streets with a shiny new toy and feel confident in your abilities to manage debt.

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It turns out defaulting on the mortgage isn’t as bad as some made it out, per a study from credit bureau TransUnion.

The company noted that mortgage-only defaulters, those who stay current on other lines of credit while letting the mortgage slip away, perform better on new loans versus those with multiple delinquencies.

In other words, those who are late on all types of loans continue to exhibit high rates of delinquency, whereas those who only skip their mortgage payments tend to keep other bills in check.

For example:

60+ days delinquency levels on a new auto loan:
– 5.8 percent — mortgage-only delinquency
– 13.1 percent — multiple delinquencies

60+ days delinquency levels on a new credit card:
– 11.4 percent — mortgage-only delinquency
– 27.1 percent — multiple delinquencies

So basically those who were late on everything from credit cards to auto loans and leases continue to make missteps, while those who simply can’t handle their mortgages stay on top of other bills.

Perhaps these were the folks who thought they could afford a house during the peak years, while relying on interest-only home loans, option arms, and other payment-deferring home loan programs.

The study also debunked, or at least did not find strong support for, the “excess liquidity theory,” which suggests consumers who stopped paying their mortgage have increased cash flow to use for other debts.

“This recession was unique in that certain consumers who defaulted on mortgages would otherwise be good credit risks,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit, in a release.

“It appears their actions were driven more by difficult economic circumstances than by any inherent inability to manage debt.”

Good luck trying to explain this to their subsequent mortgage lender or loan underwriter…

Source: thetruthaboutmortgage.com

32 Financial Planning Books for 2023

You don’t have to make a new year’s resolution to make an effort to improve your financial wellness this year. Fortunately, a plethora of books are available to help you budget, save and develop sustainable financial practices. Whether you are … Continue reading →

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