FHA vs. Conventional Loans: Which Is Better?

When it comes to affording a new home, you have a few types of home loans to choose from. Prospective homebuyers often compare the FHA vs. the conventional loan when researching loans. Each loan type has certain stereotypes associated with them, but we are here to give you the facts about both FHA and conventional loans. This post will help you understand what each loan is, familiarize you with the differences between them, and provide some guidelines for how to pick which one is best for you.

What Is An FHA Loan?

An FHA loan is insured by the Federal Housing Administration (FHA). These loans are issued by private lenders, but lenders are protected from losses by the FHA if the homeowner fails to repay. FHA loans are generally used to refinance or buy a home.

What Is A Conventional Loan?

A conventional loan is supplied by a private lender and isn’t federally insured. Requirements for obtaining a conventional loan vary depending on the lender. When used to buy property, conventional loans are typically known as mortgages.

What Is A Conventional Loan?

Differences Between FHA and Conventional Loans

The main difference between FHA and conventional loans is whether or not they are insured by the federal government. Conventional loans aren’t federally backed, so it’s riskier for the lender to loan money. On the other hand, FHA loans are protected by the government, and as a result of less risk, they can typically offer better deals.

This difference in federal insurance is the reason why FHA and conventional loans vary when it comes to the details of the loan. Keep reading to learn the differences regarding credit requirements, minimum down payments, debt-to-income ratios, loan limits, mortgage insurance, and closing costs.

FHA Loan Conventional Loan
Minimum Credit Score 500 620
Minimum Down Payment 3.5% 3%
Maximum Debt-to-Income Ratio Credit score of 500: 43%
Credit score of 580+: 43-50%
Credit score of 620: 33-36%
Credit score of 740+: 36-45%
Loan Limits Low-cost counties: $356,362
High-cost counties: $822,375
Contiguous US: $548,250
High-cost counties, AK, HI, and US territories: $822,375
Mortgage Insurance Mortgage insurance premiums required. Private mortgage insurance required with down payments less than 20%.
Property Standards Stricter standards, property purchased must be a primary residence. Flexible standards, property purchased doesn’t have to be a primary residence.

Sources: FHA Single Family Housing Policy Handbook | Fannie Mae 1 2 | Federal Housing Finance Agency | Freddie Mac | HUD 1 2 | Consumer Financial Protection Bureau 1 2

Credit Score

Your credit score is a determining factor in your loan eligibility. Your credit score is measured on a scale of 300 (poor credit) to 850 (excellent credit). Good credit helps you get approved for loans more easily and at better rates. FHA and conventional loans differ in their credit score requirements and represent financial options for individuals at either end of the credit spectrum.

Minimum Credit Score for FHA Loan: 500

  • Accepts a credit score as low as 500, but usually with a 10% down payment
  • These loans accept lower credit scores because they are insured
  • Note: Some lenders may only issue FHA loans with higher credit scores

Minimum Credit Score for Conventional Loan: 620

  • Accepted score may vary from lender to lender
  • These loans are usually offered to individuals with strong credit because they present less risk to lenders

Minimum Down Payment

A down payment is the sum of money that is paid as a percentage of your purchase up-front.

Minimum Down Payment on an FHA loan:

  • 10% of your purchase with 500 credit score
  • 3.5% of your purchase with 580+ credit score

Minimum Down Payment on a Conventional Loan:

  • 3% of your purchase can be put down with good credit
  • 5% to 20% of your purchase price is typical

Debt-to-Income Ratio

Your debt-to-income ratio is the amount of money paid toward debt each month divided by your total monthly income. To be eligible for a loan, you must be at or below the maximum debt-to-income (DTI) ratio.

Maximum DTI Ratio Guidelines for FHA loans:

  • 43% with a credit score of 500
  • 43–50% with a credit score of 580

Maximum DTI Ratio Guidelines For Conventional Loans:

  • 33-36% with a credit score lower than 740
  • 36-45% with a credit score of 740 or higher
  • 50% highest allowed through Fannie Mae

Loan Limits

Both FHA and conventional loans have limits on the amount that you can borrow. Loan limits vary based on your location and the year your loan is borrowed. Find 2021 loan limits specific to your county through the Federal Housing Finance Agency.

2021 FHA Loan Limits

  • High-cost counties: $822,375
  • Low-cost counties: $356,362

2021 Conventional Loan Limits

  • Contiguous US (excluding high-cost counties): $548,250
  • Alaska, Hawaii, US territories, and high-cost counties: $822,375

Mortgage Insurance

Mortgage insurance is taken out to protect the lender from losses in case you fail to repay your loan. Whether you will pay private mortgage insurance or mortgage insurance premiums is based on your loan type and down payment percentage.

FHA Loan

  • Mortgage insurance is required for all FHA loans.
  • It is paid to the FHA in the form of mortgage insurance premiums and includes an up-front and monthly premium.
  • MIP payments last the entire life of your FHA loan.
  • To get rid of MIPs after paying 20% of your loan, you can choose to refinance into a conventional loan.

Conventional Loan

  • Private mortgage insurance (PMI) is only required when a down payment below 20% is made.
  • PMI comes in different forms: monthly premium, up-front premium, and split premiums.
  • PMI requirements stop once you have met one of three requirements:
    1. Principal loan amount is reduced to 80% before the loan term ends.
    2. At least 78% of the principal balance is scheduled to be paid down.
    3. The halfway point of your loan term has passed.

Property Standards

There are different property standards that must be met to use each loan. FHA loans have stricter requirements, while conventional loans have more flexibility.

FHA Loan

  • Property purchased with FHA loans must be your principal residence, meaning the borrower has to occupy the residence
  • FHA loans can’t be used to invest in property (e.g., renting out or flipping)
  • Title must be in the borrower’s name or name of a living trust

Conventional Loan

  • Property purchased with a conventional loan doesn’t have to be a principal residence — second or third residences are allowed
  • Conventional loans can be used to purchase investment properties

Pros and Cons of FHA vs. Conventional Loans

As a result of the various differences between FHA and conventional loans, each type has its respective pros and cons.

FHA Loan

Conventional Loan

Pros

  • Qualify with low credit and high DTI
  • Smaller down payments overall
  • More affordable with low credit
  • Lowest option for down payments with good credit
  • PMI cancellable
  • More affordable with good credit
  • Property doesn’t have to be your main home

Cons

  • Mortgage insurance premiums required for life of loan
  • Property purchased must be your main home
  • Need higher credit and lower DTI to qualify
  • Typically has larger down payments
  • PMI required with a down payment less than 20%

Pros and Cons of FHA Loans

FHA loans are government-regulated and insured to extend flexible opportunities for homeownership. They’re flexible regarding credit and DTI, but stricter about insurance and property standards.

Pros

  • Flexible qualification with low credit and high DTI
  • Smaller down payments overall
  • More affordable with low credit

Cons

  • Mortgage insurance premiums required for life of loan
  • Property purchased must be your primary residence

Pros and Cons of Conventional Loans

Conventional loans can also offer flexibility, but generally only if you have good credit and demonstrate reduced risk to the lender. These loans have stricter qualifications, but flexibility in other areas.

Pros

  • Lowest option for down payments (3% with good credit)
  • Private mortgage insurance can be canceled (must meet requirements)
  • More affordable with good credit
  • Property purchased doesn’t have to be a primary residence

Cons

  • Strict qualifications require higher credit and lower DTI
  • Larger down payments are typical
  • Private mortgage insurance required with a down payment less than 20%

Which Loan Is Better For You?

Both FHA and conventional loans have their advantages and disadvantages. Here are some general guidelines for when to use an FHA loan or a conventional loan.

When To Use an FHA Loan

  • You have a low credit score (500–619)
  • Your DTI ratio is on the higher side (between 45–50%)
  • You can only afford a small down payment
  • You plan to use the property as your primary residence

When To Use an FHA Loan

When To Use a Conventional Loan

  • Your credit score is fairly good (620 or above)
  • Your DTI ratio is on the lower side (33–36%)
  • You can afford a larger down payment
  • You want flexibility with insurance and repaying your loan

When To Use a Conventional Loan

It’s important to thoroughly research your options before choosing a loan. A key takeaway when comparing FHA vs. conventional loans is that FHA loans are federally insured and conventional loans aren’t. This distinction results in different qualification and payment requirements for each loan.

Use the information in this post to carefully compare the differences in accepted credit scores, minimum down payments, loan limits, maximum debt-to-income ratios, mortgage insurance and property standards. In doing so, choose the loan that works for your circumstances and helps you best afford the home of your dreams.

Sources: FHA Single Family Housing Policy Handbook | US Dept. of Housing and Urban Development | Federal Housing Finance Agency | Freddie Mac

The post FHA vs. Conventional Loans: Which Is Better? appeared first on MintLife Blog.

Source: mint.intuit.com

How Long Does It Take To Buy A House?

How long does it take to buy a house? The answer is: it depends. You can buy a house in a matter of weeks or it can take you anywhere from 4 to 6 months. The question is how ready are you? It can take a long time, and that’s just learning about various mortgage options or improving your credit score.

So understanding the various factors involved in buying a house can give you an estimate of how long it will take you to buy the house

Check out now: 5 Signs You Are Not Ready To Buy A House

How long does it take to buy a house? A step-by-step guide.

It can take a homebuyer a few weeks to several months to complete the home buying process. But when determining how long it will take you to buy a house, you first have to find out if you will be pre-approved for a mortgage. There is no sense of shopping for a house to then realize you can’t afford it.

If you are interested in comparing the best mortgage rates through LendingTree click here. It’s completely free.

I. How long does it take to get a pre-approved mortgage letter in order to buy a house?

If you’re serious about buying a house, it’s important to get pre-approved for a mortgage. So when it’s time to make an offer, the seller will know you’re serious. If you don’t have one handy, the seller will likely move to the next buyer.

Getting pre-approved for a mortgage in order to buy a house can take longer. That is because you have to make sure your financial situation is in shape. For example, your income-to-debt ratio, your down payment, and your credit score must be good. That’s exactly what a mortgage lender will look at.

Even when these things are in order, shopping and comparing mortgage rates and fees can take several weeks.

Let’s take a look on how long it will take you to get these things in shape before buying a house.

Click here to compare mortgage rates through LendingTree. It’s completely FREE.

A. How good is your credit score?

A low credit score can make buying a house take longer, because it can take months to a year to improve a bad credit score.

A conventional loan will usually require a 640+ credit score.

In fact, your credit score is the number 1 item mortgage lenders look at to decide whether to offer you a mortgage. And if it is not where it’s supposed to be, you might get rejected.

Luckily for you there are other ways to get a loan with much lower credit score: FHA loans.

FHA loans only require a credit score of 580 with 3.5% down payment. You may get qualified with a 500 credit score, but you’ll have to come with a 10% down payment.

So before you get into the fun part of shopping for a mortgage or visiting homes, it’s best to know what your credit score is and take steps to improve it.

You can get a free credit score at Credit Sesame.

B. Fix errors on your credit report.

Fixing errors on your credit report in order to get pre-approved for a loan in order to buy a house can take 30 days.

According to Transunion, “most investigations are completed within 2 weeks, but some may take up 30 days.”

Again, we recommend you get a free credit report at Credit Sesame. A credit report will give you a detail analysis of your credit history, how much debt you owe, and how creditworthy you are, etc. If there are any errors or inaccuracies, fix them immediately so there’s no surprise when you’re actually applying for a mortgage.

The best way to do that is by filing a Transunion dispute or Equifax dispute.

C. Do you have a down payment for the house?

How long it will take you to buy a house will also depend on whether or not you already have money saved up for a down payment.

Unless you’re going to buy the house with outright cash, you’ll need a down payment. And saving for a down payment can take a long time. Depending on your income and expenses, saving for a down payment on a house can take years.

Assuming, for example, you want to buy a house that will cost you $450,000, and you’re using a conventional loan to finance the house. With a 20% down payment, you will need to come up with $90,000.

Let’s say again, because of other monthly expenses, you can only save $1500 a month for the down payment.

You see how long it will take you to save for a down payment to buy the house? 5 years. And that doesn’t even take into account other upfront costs of buying a house, such as closing cost.

While it’s possible to get a mortgage with a down payment as low as 3.5% of the home purchase price, it’s advisable to put at least 20% down. The reason is because you will avoid paying private mortgage insurance (PMI), which protects the lenders in case you default on your mortgage.

Home buyers with a down payment below 20% are usually charged with PMI.

Another reason for a larger down payment is that it reduces the cost of the mortgage, grows equity much faster, and saves you on interest over the life of the loan.

As you can see, it can take you as much as 5 years from the time you’re thinking about buying the house to the time you’re actually ready to start the process.

But once you have taken care the things above, buying a house can go a lot faster.

II. How long does it take to find a real estate agent?

Average time: 1 day to a month

Once you have been pre-approved for a mortgage, the next step is to find an experienced real estate agent. Finding a good real estate agent can take a day to a month. Websites such as Zillow and Redfin list real estate agents you can use.

III. Shopping for a home.

Average time: a few weeks to a few months

With the help of a real estate agent and your own due diligence, finding a home can can go faster or take longer depending on available homes, the season and your desired location.

But experts say on average it can take a minimum of three weeks to a few months.

IV. Making an offer, negotiation, and inspection.

Average time: 1 to 10 days

Once you have found the home of your dream, the next step is to make an offer. You and the seller can go back and forth negotiating the price.

Once your offer has been accepted, you and the seller sign something called a purchase agreement. Then, the next step is to hire a professional to inspect the home for defects. Depending on your state, a home inspection must be completed within 10 days. And if the inspection finds some defects in the house, that could delay the process.

V. How long does it take to close on a house?

Average time: 30 to 45 days.

Once the inspection is done, your lender will need to officially approve you for the loan. And depending on the lender, it can also affect how long it takes to buy a house. You may need to provide additional documents. But the lender will need to assess the home for its value. And depending on the program (whether it’s conventional loan or FHA loan) it can take anywhere from 30 to 45 days to close on a home.

Bottom line

When asking yourself this question: “how long does it take to buy a house?” The answer is : it depends. If you have your credit score, your down payment, your other finances under control, you can buy your house in two months or less. But if you have to save for a down payment, fix errors on your credit report, raise your credit score, the whole home buying process can take years.

Click here to compare mortgage rates through LendingTree. It’s completely FREE

Still wondering how long it takes to buy a house? Read the following articles:

  • 5 Signs You’re Not Ready To Buy A House
  • 10 First Time Home Buyer Mistakes To Avoid
  • 3 Signs You’re Not Ready to Refinance Your Mortgage
  • The Biggest Mistakes Millennials Make When Buying a House
  • 7 Signs You’re Ready To Buy A House

Work with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). So, find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

The post How Long Does It Take To Buy A House? appeared first on GrowthRapidly.

Source: growthrapidly.com

Why Refinance Rates Are Higher Than Purchase Loan Rates

Mortgage interest rates dropped dramatically over the summer, to the point where home loans have never been cheaper in most of our adult lifetimes. With rates at historic lows, you might’ve considered taking advantage of them, either by purchasing a new home or refinancing your current mortgage.

Recent figures from Freddie Mac show that mortgage refinances surged in the first quarter of 2020, with nearly $400 billion first home loans refinanced. However, as it turns out, refinancing your mortgage might actually be more expensive than purchasing a new home. 

This surprised us, too — why would there be a difference at all? 

We investigated how refinancing rates and new purchase home loan rates are set, and found several reasons for this rate disparity. On top of the rate difference, mortgage refinancing is even more difficult to qualify for, given the current economy.

Before rushing to refinance your home, read on to gather the information you need to make the right financial decision for your situation.

Pandemic Effects on Home Lending

Just as mortgage rates have stumbled, banks and lenders have tightened the screws on borrowers due to COVID-19, requiring higher credit scores and down payment amounts. Chase, for example, raised its minimum FICO score requirements for home purchases and refinances to 700 with a down payment requirement of at least 20%. 

Low rates have also driven a massive move to mortgage refinances. According to the same Freddie Mac report, 42% of homeowners who refinanced did so at a higher loan amount so they could “cash out.”

Unfortunately, homeowners who want to refinance might face the same stringent loan requirements as those who are taking out a purchase loan. Mortgage refinance rates are also generally higher than home purchase rates for a handful of reasons, all of which can make refinancing considerably less appealing. 

How Refinance Rates Are Priced

Although some lenders might not make it obvious that their refinance rates are higher, others make the higher prices for a home refinance clear. When you head to the mortgage section on the Wells Fargo website, for example, it lists rates for home purchases and refinances separately, with a .625 difference in rates for a thirty-year home loan. 

There are a few reasons why big banks might charge higher rates to refinance, including:

Added Refinance Fees

In August of 2020, Fannie Mae and Freddie Mac announced it was tacking on a .5% fee on refinance mortgages starting on September 1. This fee will be assessed on cash-out refinances and no cash-out refinances. According to Freddie Mac, the new fee was introduced “as a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty.”

By making refinancing more costly, lenders can taper the number of refinance loans they have to process, giving them more time to focus on purchase loans and other business.

Lenders Restraining New Application Volume

Demand for mortgage refinancing has been so high that some lenders are unable to handle all requests. Reluctant to add more employees to handle a surge that won’t last forever, many lenders are simply limiting the number of refinance applications they process, or setting additional terms that limit the number of loans that might qualify.

Also note that some lenders are prioritizing new purchase loans over mortgage refinance applications since new home buyers have deadlines to meet. With the housing market also on an upswing in many parts of the country, many major banks and lenders simply can’t keep up.

Rate Locks Cost Money

Generally speaking, it costs lenders more to lock the rate for refinance loans when compared to purchase loans. This is leaving lenders disinterested in allocating resources on the recent surge in mortgage refinance applications.

This is especially true since many refinancers might lock in a rate with one provider but switch lenders and lock in a rate again if interest rates go down. Lenders exist to turn a profit, after all, and it makes sense they would spend their time on loans that provide the greatest return.

Tighter Requirements Due to COVID-19

According to the Brookings Institute, Fannie Mae and Freddie Mac have been asking lenders to make sure any disruption to a borrower’s employment or income due to COVID-19 won’t impact their ability to repay their loan. 

Many lenders are also increasing the minimum credit score borrowers must have while making other requirements harder to meet. As an example, U.S. Bank increased its minimum credit score requirement to 680 for mortgage customers, and it also implemented a maximum debt-to-income ratio of 50 percent.

This combination of factors can make it difficult to save as much money with a refinance, or to even find a lender that’s willing to process your application. With this in mind, run the math and to see if refinancing is right for your situation before contacting a mortgage lender.

How Mortgage Purchase Rates Are Priced

Mortgage purchase rates are priced using a similar method as refinance rates. When you apply for a home mortgage, the lender looks at factors like your credit score, your income, your down payment and your other debt to determine your eligibility.

The overall economy also plays a giant role in mortgage rates for home loans, including purchase loans and refinance loans. Mortgage rates tend to go up during periods of speedy economic growth, and they tend to drop during periods of slower economic growth. Meanwhile, inflation can also play a role. Low levels of inflation contribute to lower interest rates on mortgage loans and other financial products.

Mortgage lenders can also price their loans based on the amount of business they have coming in, and whether they have the capacity to process more loans. They might lower rates to drum up business or raise rates when they’re at or nearing capacity. This is part of the reason rates can vary among lenders, and why it always makes sense to shop around for a home loan.

Many people believe that the Federal Reserve sets mortgage rates, but this is not exactly true. The Federal Reserve sets the federal funds rate, which lenders use to ensure they meet mandated cash reserve requirements. When the Fed raises this rate, banks have to pay more to borrow from one another, and these costs are often passed on to consumers. Likewise, costs can go down when the Fed lowers the federal funds rate, which can mean lower costs and interest rates for borrowers.

The Bottom Line

Refinancing your existing mortgage can absolutely make sense in terms of interest savings, but don’t rule out buying a new home instead. Buying a new home could help you save money on interest and get the space and the features you really want. 

Remember, there are steps you can take to become a more attractive borrower whether you choose to refinance or invest in a new place. You can’t control the economy or the Federal Reserve, but you have control over your personal finances.

Improving your credit score right away, and paying down debt to lower your debt-to-income ratio are just a couple of strategies to start. And if you’re planning on buying a new home, make sure you save a hefty down payment amount. These steps help you improve your chances at getting the best rates and terms whether you choose to move or stick with the home you have. 

The post Why Refinance Rates Are Higher Than Purchase Loan Rates appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

Should You Refinance Your Student Loans?

Due to financial consequences of COVID-19 — and the broader impact on our economy — now is an excellent time to consider refinancing most loans you have. This can include mortgage debt you have that may be converted to a new loan with a lower interest rate, as well as auto loans, personal loans, and more.

Refinancing student loans can also make sense if you’re willing to transition student loans you currently have into a new loan with a private lender. Make sure to take time to compare rates to see how you could save money on interest, potentially pay down student loans faster, or even both if you took the steps to refinance.

Get Started and Compare Rates Now

Still, it’s important to keep a close eye on policies and changes from the federal government that have already taken place, as well as changes that might come to fruition in the next weeks or months. Currently, all federal student loans are locked in at a 0% APR and payments are suspended during that time. This change started on March 13, 2020 and lasts for 60 days, so borrowers with federal loans can skip payments and avoid interest charges until the middle of May 2020.

It’s hard to say what will happen after that, but it’s smart to start figuring out your next steps and determining if student loan refinancing makes sense for your situation. Note that, in addition to lower interest rates than you can get with federal student loans, many private student lenders offer signup bonuses as well. With the help of a lower rate and an initial bonus, you could end up far “ahead” by refinancing in a financial sense.

Still, there are definitely some negatives to consider when it comes to refinancing your student loans, and we’ll go over those disadvantages below.

Should You Refinance Now?

Do you have student loan debt at a higher APR than you want to pay?

  • If no: You shouldn’t refinance.
  • If yes: Go to next question.

Do you have good credit or a cosigner? 

  • If no: You shouldn’t refinance.
  • If yes:  Go to next question.

Do you have federal student loans?

  • If no: You can consider refinancing
  • If yes: Go to next question

Are you willing to give up federal protections like deferment, forbearance, and income-driven repayment plans?

  • If no: You shouldn’t refinance
  • If yes: Consider refinancing your loans.

Reasons to Refinance

There are many reasons student borrowers ultimately refinance their student loans, although they can vary from person to person. Here are the main situations where it can make sense to refinance along with the benefits you can expect to receive:

  • Secure a lower monthly payment on your student loans.
    You may want to consider refinancing your student loans if your ultimate goal is reducing your monthly payment so it fits in better with your budget and your goals. A lower interest rate could help you lower your payment each month, but so could extending your repayment timeline.
  • Save money on interest over the long haul.
    If you plan to refinance your loans into a similar repayment timeline with a lower APR, you will definitely save money on interest over the life of your loan.
  • Change up your repayment timeline.
    Most private lenders let you refinance your student loans into a new loan product that lasts 5 to 20 years. If you want to expedite your loan repayment or extend your repayment timeline, private lenders offer that option.
  • Pay down debt faster.
    Also, keep in mind that reducing your interest rate or repayment timeline can help you get out of student loan debt considerably faster. If you’re someone who wants to get out of debt as soon as you can, this is one of the best reasons to refinance with a private lender.

Why You Might Not Want to Refinance Right Now

While the reasons to refinance above are good ones, there are plenty of reasons you may want to pause on your refinancing plans. Here are the most common:

  • You want to wait and see if the federal government will offer 0% APR or forbearance beyond May 2020 due to COVID-19.
    The federal government has only extended forbearance through the middle of May right now, but they might lengthen the timeline of this benefit if you wait it out. Since this perk only applies to federal student loans, you would likely want to keep those loans at 0% APR for as long as the federal government allows.
  • You may want to take advantage of income-driven repayment plans.
    Income-driven repayment plans like Pay As You Earn (PAYE) and Income-Based Repayment let you pay a percentage of your discretionary income each month then have your loans forgiven after 20 to 25 years. These plans only apply to federal student loans, so you shouldn’t refinance with a private lender if you are hoping to sign up.
  • You’re worried you won’t be able to keep up with your student loan payments due to your job or economic conditions.
    Federal student loans come with deferment and forbearance that can buy you time if you’re struggling to make the payments on your student loans. With that in mind, you may not want to give up these protections if you’re unsure about your future and how your finances might be.
  • Your credit score is low and you don’t have a cosigner.
    Finally, you should probably stick with federal student loans if your credit score is poor and you don’t have a cosigner. Federal student loans come with fairly low rates and most don’t require a credit check, so they’re a great deal if your credit is imperfect.

Important Things to Note

Before you move forward with student loan refinancing, there are some details you should know and understand. Here are our top tips and some important factors to keep in mind.

Compare Rates and Loan Terms

Because student loan refinancing is such a competitive industry, shopping around for loans based on their rates and terms can help you find out which lenders are offering the most lucrative refinancing options for someone with your credit profile and income.

We suggest using Credible to shop for student loan refinancing since this loan platform lets you compare offers from multiple lenders in one place. You can even get prequalified for student loan refinancing and “check your rate” without a hard inquiry on your credit score.

Check for Signup Bonuses

Some student loan refinancing companies let you score a bonus of $100 to $750 just for clicking through a specific link to start the process. This money is free money if you’re able to take advantage, and you can still qualify for low rates and fair loan terms that can help you get ahead.

We definitely suggest checking with lenders that offer bonuses provided you can also score the most competitive rates and terms.

Consider Your Personal Eligibility

Also keep your personal eligibility in mind, including factors beyond your credit score. Most applicants who are turned down for student loan refinancing are turned away based on their debt-to-income ratio and not their credit score. Generally speaking, this means they owe too much money on all their debts when you compare their liabilities to their income.

Credible also notes that adding a creditworthy cosigner can improve your chances of prequalifying for a loan. They also state that “many lenders offer cosigner release once borrowers have made a minimum number of on-time payments and can demonstrate they are ready to assume full responsibility for repayment of the loan on their own.”

It’s Not “All or Nothing”

Also, remember that you don’t have to refinance all of your student loans. You can just refinance the loans at the highest interest rates, or any particular loans you believe could benefit from a different repayment term.

4 Steps to Refinance Your Student Loans

Once you’re ready to pull the trigger, there are four simple steps involved in refinancing your student loans.

Step 1: Gather all your loan information.

Before you start the refinancing process, it helps to have all your loan information, including your student loan pay stubs, in one place. This can help you determine the total amount you want to refinance as well as the interest rates and payments you currently have on your loans.

Step 2: Compare lenders and the rates they offer.

From there, take the time to compare lenders in terms of the rates they can offer. You can use this tool to get the process started.

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Step 3: Choose the best loan offer you can qualify for.

Once you’ve filled out basic information, you can choose among multiple loan offers. Make sure to check for signup bonus offers as well as interest rates, loan repayment terms, and interest rates you can qualify for.

Step 4: Complete your loan application.

Once you decide on a lender that offers the best rates and terms, you can move forward with your full student loan refinancing application. Your student loan company will ask for more personal information and details on your existing student loans, which they will combine into your new loan with a new repayment term and monthly payment.

The Bottom Line

Whether it makes sense to refinance your student loans is a huge question that only you can answer after careful thought and consideration. Make sure you weigh all the pros and cons, including what you may be giving up if you’re refinancing federal loans with a private lender.

Refinancing your student loans can make sense if you have a plan to pay them off, but this strategy works best if you create a debt repayment plan you can stick with for the long-term.

The post Should You Refinance Your Student Loans? appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

How Much Should You Spend on an Engagement Ring?

How Much Should You Spend on an Engagement Ring?

There’s nothing like falling in love and finding the person you want to spend the rest of your life with. But when it’s time to shop for rings, it’s easy to get discouraged by the price tags. Just how much should you spend on an engagement ring? We’ll dive into the topic and discuss ways to save on the big purchase.

Find out not: How much do I need to save for retirement?

What the Average Engagement Ring Costs

Maybe you can’t buy love. But if you’re in the market for an engagement ring, you’ll quickly realize that it won’t be cheap. According to the Knot’s 2016 Real Weddings Study, Americans spent an average of $6,163 on engagement rings, up from $5,871 in 2015. Wedding bands for the bride and engagement rings combined cost between $5,968 and $6,258.

If you want your wedding to happen sooner rather than later, keep in mind that on average, couples spend more than $30,000 to tie the knot. That’s roughly how much you can expect to pay for everything from your wedding reception and DJ to your cake and your photographer. Location matters when it comes to weddings, however, so you might be able to save some money by choosing a more affordable place to host your ceremony.

How Much Should I Spend?

How Much Should You Spend on an Engagement Ring?

Conventional wisdom says that anyone planning to propose to their partner should prepare to spend at least two or three months of their salary on an engagement ring. But spending too much isn’t a good idea for various reasons.

A recent study conducted by Emory University connected pricey rings to divorce rates. Men who spent more money on rings for their fiancees were more likely to end their marriages. That’s a possible long-term consequence of overspending on an engagement ring. In the short term, using a large percentage of your money to buy a ring might prevent you from using those funds to pay bills or stay on top of your debt, which can hurt your credit score.

If the marriage doesn’t work out and your ex-spouse decides to sell their diamond engagement ring, its value won’t be nearly as high as it was when it was first purchased. That’s why diamond rings can be such bad investments.

So exactly how much should you spend on an engagement ring? It’s a good idea to make sure that the price you pay doesn’t prevent you or your partner from accomplishing whatever you’re planning to achieve in the future, whether that’s buying a house or having a child. Rather than following an old-school societal notion that says you should spend x amount of money on a ring, it’s best to spend an amount that won’t compromise your financial goals or jeopardize the status of your relationship.

How to Save on the Ring

If you don’t want the engagement ring you’re buying to break the bank, it’s a good idea to learn as much as you can about the rings and what makes some more expensive than others. Diamonds are the gems most commonly used in engagement rings, and if you’re buying one for your significant other, it’s important to familiarize yourself with what jewelers refer to as the four C’s: clarity, cut, color and carat weight.

In terms of clarity, the best diamonds are flawless, meaning that they don’t have any blemishes when viewed under a microscope with 10 power magnification. Since no one’s eyesight is that powerful, you can get away with choosing a diamond with a lower clarity grade that costs less. Getting a diamond that has fewer carats (meaning that it weighs less) or getting one that isn’t completely colorless can also lower its overall price.

Or don’t get a diamond at all. Your partner might be just as happy with a simple band, a white sapphire or an emerald ring and it probably won’t cost as much as a diamond engagement ring. Shopping for your ring at a vintage store, looking for one online rather than in-person and getting a ring with a series of smaller stones surrounding the center stone (also known as a halo ring) are a few additional ways to save when buying a ring.

Final Word

How Much Should You Spend on an Engagement Ring?

There’s no need to spend a fortune on an engagement ring. And you don’t have to feel guilty about cutting corners in order to find one that you can afford to buy.

Like any other major purchase, it’s a good idea to take time to save up for a ring. If you have to take on more credit card debt or a personal loan in order to buy an engagement ring, it’s a good idea to find out how long it’ll take to pay off your debt. It isn’t wise to begin a marriage by digging yourself (and your partner) into a deep financial hole.

Tips for Getting Financially Ready for Marriage

  • If you haven’t already, start talking about money. It’s important to establish an open dialogue and make sure you understand and respect each other’s money values.
  • You might also consider sit down with a financial advisor before the big day. A financial advisor can help you identify your financial goals and come up with a financial plan for your life as a married couple. A matching tool (like ours) can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: ©iStock.com/sergey_b_a, ©iStock.com/svetikd, ©iStock.com/adamkaz

The post How Much Should You Spend on an Engagement Ring? appeared first on SmartAsset Blog.

Source: smartasset.com

Does Paying the Minimum Hurt Your Credit Score

Credit card bills can be confusing. If everything was straightforward and clear, credit card debt wouldn’t be such a big issue. But it’s not clear, and debt is a massive issue for millions of consumers. 

One of the most confusing aspects is the minimum payment, with few consumers understanding how this works, how much damage (if any) it does to their credit score, and why it’s important to pay more than the minimum.

We’ll address all of those things and more in this guide, looking at how minimum credit card payments can impact your FICO score and your credit report.

What is a Credit Card Minimum Payment?

The minimum payment is the lowest amount you need to pay during any given month. It’s often fixed as a fraction of your total balance and includes fees and interest.  

If you fail to make this minimum payment, you may be hit with late fees and if you still haven’t paid after 30 days, your creditor will report your activity to the major credit bureaus and your credit score will take a hit.

When this happens, you could lose up to 100 points and gain a derogatory mark that remains on your credit report for up to 7 years. Making minimum payments will not result in a derogatory mark, but it can indirectly affect your credit score and we’ll discuss that a little later.

Firstly, it’s important to understand why you’re being asked to pay a minimum amount and how you can avoid it.

How Much is a Minimum Credit Card Payment?

Prior to 2004, monthly payments could be as low as 2% of the balance. This caused all kinds of problems as most of your monthly payment is interest and will, therefore, inflate every month so that every time you reduce the balance it grows back. 

Regulators forced a change when they realized that some users were being locked into a cycle of credit card debt, one that could see them repaying thousands more than the balance and taking many years to repay in full.

These days, a minimum payment must be at least 1% of the balance plus all interest and fees that have accumulated during that month, ensuring the balance decreases by at least 1% if only the minimum payment is met.

Do I Need to Make the Minimum Payment?

If you have a rolling balance, you need to make the minimum monthly payment to avoid derogatory marks. If you fail to do so and keep missing those payments, your account will eventually default and cause all kinds of issues.

However, you can avoid the minimum payment by clearing your balance in full.

Let’s assume that you have a brand-new credit card and you spend $2,000 in the first billing cycle. In the next cycle, you will be required to pay this balance in full. However, you will also be offered a minimum payment, which will likely be anywhere from $30 to $100. If this is all that you pay, the issuer will start charging you interest on your balance and your problems will begin.

If you spend $2,000 in the next billing cycle, you have just doubled your debt (minus whatever principal the minimum payment cleared) and your problems.

This is a cycle that many consumers get locked into. They do what they can to pay off their balance in full, but then they have a difficult month and that minimum payment begins to look very tempting. They convince themselves that one month won’t hurt and they’ll repay the balance in full next month, but by that point they’ve spent more, it has grown more, and they just don’t have the funds.

To avoid falling into this trap, try the following tips:

  • Only Spend What You Have: A credit card should be used to spend money you have now or will have in the future. Don’t spend in the hope you’ll somehow come into some money before the billing period ends and the credit card balance rolls over.
  • Get an Introductory Interest Rate: Many credit card issuers offer a 0% intro APR for a fixed period of time, allowing you to accumulate debt without interest. This can help if you need to make some essential purchases, but it’s important not to abuse this as you’ll still need to clear the full balance before the intro period ends.
  • Use a Balance Transfer: If you’re in too deep and the intro rate is coming to an end, consider a balance transfer credit card. These cards allow you to move your full balance from one card (or cards) to another, taking advantage of yet another 0% APR and essentially extending the one you have.
  • Pay the Minimum: If you can’t pay the balance in full, make sure you at least pay the minimum. A missed payment or late payment can incur fees and may hurt your credit score. 

Why Pay More Than the Minimum?

You may have heard experts recommending that you pay more than the minimum every month, but why? If you’re locked into a cycle of credit card debt, it can seem counterproductive. After all, if you have a debt of $10,000 that’s costing you $400 a month, what’s the point of taking an extra $100 out of your budget?

Your interest and fees are covered by your minimum payment and account for a sizeable percentage of that minimum payment. By adding just 50% more, you could be doubling and even tripling the amount of the principal that you repay every month.

What’s more, your interest accumulates every single day and this interest compounds. Imagine, for instance, that you have a balance of $10,000 today and with interest, this grows to $10,040. The next day, the interest will be calculated based on that $10,040 figure, which means it could grow to $10,081, which will then become the new balance for the next day. 

This continues every single day, and the larger your balance is, the more interest will compound and the greater the amount will be due over the term. By paying more than your minimum payment when you can, you’re reducing the balance and slowing things down.

Does Paying the Minimum Hurt My Credit Score?

Paying the minimum amount every month ensures you are doing the bare minimum to avoid hurting your credit history or accumulating fees. However, it can indirectly reduce your score via your credit utilization ratio.

Your credit utilization ratio is a score that compares the credit limit of all available credit cards to the total debt on those cards. It accounts for 30% of your credit score and is, therefore, a very important aspect of the credit scoring process.

The more credit card debt you accumulate, the lower your credit utilization rate will be and the more your score will be impacted. If you only pay the minimum, this rate will become stagnant and may take years to improve. By increasing the payment amount, however, you can bring that ratio down and improve your credit score.

You can calculate your credit utilization score by adding together the total amount of credit limits and debts and then comparing the latter to the former. A combined credit limit of $10,000 and a balance of $5,000, for instance, would equate to a 50% ratio, which is on the high side.

Can Credit Card Fees Hurt My Credit Score?

As with interest charges, credit card fees will not directly reduce your score but may have an indirect effect. Cash advance fees, for instance, can be substantial, with many credit card companies (including Capital One) charging 3% with a $10 minimum charge. This means that every time you withdraw cash, you’re paying at least $10, even if you’re only withdrawing $10.

What many consumers don’t realize is that these fees are also charged every time you buy casino chips or pay for some other form of gambling, and every time you purchase money orders and other cash products. 

Along with foreign transaction fees and penalty fees, these can increase your balance and your minimum payment, making it harder to make on time payments and thus increasing the risk of a late payment.

Does Paying the Minimum Hurt Your Credit Score is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

Truth About Reward and Store Credit Cards

On the surface, reward cards are a great way to make a few extra dollars or grab some air miles without increasing your spending or your debt. If you spend a lot of money at a particular shop, store cards will seem like an equally beneficial prospect. But these cards exist for a reason—they’re there to make more money for the providers and the retailers, not you.

Sure, reward/store cards have other benefits if you use them properly, but there are a host of disadvantages and hidden terms that you need to be aware of before signing on the dotted line. 

What are Store Cards?

Store cards are tied to specific stores and offered by chains of retailers. These cards work just like traditional cards and are often branded by networks like Visa and MasterCard. The difference is that they can only be used in the issuing stores and their rewards are tied to those stores.

In essence, they are store loyalty cards that come with a lien of credit attached. 

What are Reward Cards?

Reward cards are also tied to credit card networks, including American Express and Discover, as well as Visa and MasterCard. They award points every time they’re used for qualifying purchases and these points can then be swapped for air travel and other benefits. 

Some reward schemes award a specific amount of cash back, often fixed to 1% or 2% of purchases made on specific items, such as groceries or utility bills.

How Can Providers Offer These Rewards?

If a provider offers you cash back every time you spend money on your credit card, someone has to foot the bill. Many consumers assume that the credit card network covers the cost, and to an extent, they do. But it’s not quite as simple as that.

Every time you use your credit card to make a purchase, the retailer is charged a fee, often between 1% and 3% of the purchase. This is the network’s charge. With reward cards, this fee increases, and the extra money is used to fund the rewards program.

As a result, retailers are not exactly happy with these programs as they drive their costs up and reduce their profits. The only way around this, is to increase the cost of the product or, more likely, to reward customers who pay with cash/debit. Retailers are not allowed to add a surcharge for credit card use, but there’s nothing stopping them from choosing which cards they do and don’t accept.

Your local Mom & Pop enterprise isn’t being antiquated and old-fashioned by refusing credit cards. They just can’t cover the costs. 5% may not sound like a big deal, but for retailers with minimal buying power and the massive overheads of running a brick-and-mortar store, 5% can be a deal breaker.

Smaller retailers are fighting back against reward cards while bigger ones are embracing them by adopting their own store cards. With a store card, they have more say, more control, and they know that those small losses will be offset by the increased purchases.

Issues with Store Credit Cards

Store cards carry a big risk and have far few benefits than reward cards. The advantages of these cards are obvious: If you shop a lot in a particular place, you can save money via the cash back schemes. 

They can also help with emergency purchases, providing you clear the balance in full. But, while the benefits are obvious, the same can’t be said about the disadvantages.

Con 1: They Have High Interest Rates

The average credit card interest rate in the United States is around 16%. The average rate for store cards is over 20%. That 4% may not seem like much, but if you don’t repay your balance every month that interest will compound, grow, and cost you a small fortune. 

At 16% with a $10,000 balance and a 60-month repayment term, you’ll pay $243 a month and over $4,000 in total interest.

Increase that rate to 20% and your monthly payment grows by $20 while your total interest increases by nearly $1,500. The longer you leave it and the smaller your monthly payments are, the greater that difference will be.

For example, if you repay just $200 a month on that balance, the difference between 16% and 20% is 26 extra months and close to $5,000. Of course, store cards rarely offer such high limits, but this is just as example to show you how much of a difference even the slightest percentage increase can cause.

It’s worth keeping this in mind if you ever apply for a traditional rewards card. Getting rewards in return for a higher APR is great if you repay your balance in full every month and terrible if you don’t.

Con 2: They Have High Penalty Rates

If you miss a payment on your store credit card you could be hit with a penalty APR as high as 29.99%, as well as a late payment fee of $39. The rates are high to begin with, but these penalty rates are astronomical and will make a bad situation worse.

That’s not all, as some providers are known to be very unforgiven when it comes to missed and late payments. In some cases, your account will default even if you underpay just once and just by a few dollars. 

Con 3: They Have Low Credit Limits

Retailers are not lenders. They don’t have the time, funds or patience to chase debts and deal with collection agencies. As a result, they don’t offer high credit limits and generally you’ll get a fraction of what an unsecured credit card might provide you with.

This might not seem like much of an issue. After all, a smaller credit limit means you’re less likely to accumulate large amounts of debts. However, this has a massively negative impact on your credit score that few borrowers consider.

30% of your credit score is based on something known as a credit utilization ratio. This looks at the total available credit and compares it to the debt that you have accumulated. If you have several cards with a combined credit limit of $10,000 and a balance of $5,000, then your ratio is 50%, which is considered to be quite high.

If a store card is your only account and you spend $450 on a $500 limit, then you have a credit utilization ratio of 90%, which will reduce your score. Your credit report is also negatively affected by maxed-out credit cards, a feat that’s much easier to achieve when you have a low credit limit.

Con 4: There Are Better Options

It’s better to have one good reward card than multiple store cards. The former will provide you with far better interest rates and terms, while the latter will hit your credit report with several hard inquiries and new accounts. 

A rewards card will still benefit you when shopping at those stores and will also provide you with a wealth of other benefits.

Con 5: You May Spend More

Store cards are not designed to make your life easier and give you a few freebies. Regardless of what the store tells you, they’re not made to reward loyalty, they’re made to encourage spending. 

This doesn’t always work, and research suggests that many individuals use reward cards just like they would normal cards. But for a small minority, the idea of acquiring points is enough to convince them to spend more than they usually would.

Some good can be good debt, such as when it’s used to acquire an asset or something that won’t depreciate. But very rarely do we use credit cards for this purpose and generally, if you’re spending more on a store card it means you’re wasting more money on things you don’t need.

Con 6: You Can’t Use Them Anywhere Else

A store card can only be used in that particular store. This renders it redundant as an emergency card and also means you’re encouraged to shop in that one place. You don’t have a chance to shop around and find the cheapest price; you may spend more just to use your card and get the benefits, with those benefits rarely covering the additional money you spend.

What About Reward Cards?

Some reward cards have very high rates as these rates are used to offset the rewards program. However, this isn’t always the case, because, as discussed above, networks often charge retailers more to offset these purchases and therefore don’t always need to cover the costs themselves.

Some credit cards, such as the Discover It, offer solid reward schemes and would also be included on any list of the best non-reward credit cards. It’s a solid all-rounder and it’s not alone. However, many reward cards charge high annual fees and penalty rates, just like you’ll find with a store card.

It’s important to study the small print and make sure the card is viable. If you’re going to clear the balance every month, a slightly higher interest rate won’t hurt, especially if it comes with some generous rewards. But if there is any doubt and even the slightest chance that you won’t clear the balance, it’s always best to focus on a low-interest rate first.

Even the most generous 5% cash back reward card will not offset the losses occurred by paying a few more percentage points of interest.

Will Reward/Store Cards Affect my Credit Score?

Credit cards trigger hard inquiries, which can reduce your credit score by up to 5 points. This is true for every credit card that you apply for. Rate shopping can combine multiple inquiries into one if they are for the same type of credit, but this doesn’t apply to credit cards.

A new account will also impact your score. This impact is often minimal and if you keep up with your repayments then it will vanish in time. However, if you miss a payment, max-out your card or increase your credit utilization score, it could have a detrimental effect on your score and your finances.

Keep store cards to a minimum and only sign up if you’re 100% sure you’re getting a good deal that will benefit you in the short-term and the long-term.

Truth About Reward and Store Credit Cards is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

5 Reasons for Credit Card Closure

Here are some reasons for credit card closure.

Having a wallet full of plastic can be a big temptation to overspend, which can lead to missed payments and a decreased credit score. If too many credit cards have you busting your budget, this might be a good reason for credit card closure. On the flip side, closing a credit card may hurt your credit score by messing with your credit history and credit utilization rate.

Depending on your situation, there are reasons for credit card closure. Canceling a credit card isn’t a bad idea if you close accounts that cost more to maintain than they’re worth and do it in a way that won’t significantly hurt your score.

Why Would a Credit Card Company Close Your Account?

While you’re considering your reasons for credit card closure, your credit card issuer might be doing the same thing. A credit card company has the right to cancel your card any time, and you may not get any warning it’s been canceled until it’s declined at the register.

A credit card provider will close your account if you quit paying the minimum monthly amount due. Missing one or two payments may only freeze your account until you’re caught back up, but your account will probably be closed after six months of nonpayment. Credit card companies have many other reasons for credit card closure.

Common reasons that may prompt a credit card issuer to cancel your account include:

  • Inactivity with a zero balance for several months
  • A drop in your credit score, especially due to late payments to other companies
  • Eliminating the type of card you have and closing everyone’s accounts
  • Going out of business because they’re no longer profitable

Do Closed Accounts Affect Your Credit Score?

Closing an account can affect your credit score because it can change your credit history and utilization rate, which are two major factors used to calculate your credit score. Your credit history is based on the amount of time all your credit card accounts have been open, so closing an older account can hurt.

Your credit utilization is based on the amount of available credit you’re currently using, so closing an account with a large credit limit and low balance can hurt even more. When deciding whether you should close a credit card account, consider some reasons why credit card closure makes sense.

1. You’re Getting Divorced

If you’re getting separated or divorced from a person who shares a joint account with you, close the account. Otherwise, you remain fully responsible for any bills your soon-to-be-ex might run up on the card. Even if your divorce decree says your former spouse will be responsible for the bill, you’re still on the hook as long as the account remains open. The credit card issuer is only interested in collecting the balance and will look to both accountholders for payment.

2. You Don’t Want to Pay the Fees

If your credit card company is charging an annual fee that you don’t want to pay, ask them to waive it. You can also ask them to waive a late fee if you’re accidentally late and you’re rarely late. If the credit card issuer won’t budge on a hefty annual fee, it could be a good reason for credit card closure and taking your business where there’s no annual fee.

3. The Card No Longer Makes Sense

Maybe you have a card you specifically opened to take advantage of frequent flyer miles because you traveled often for business. If your job no longer requires you to jet around the country or you move somewhere not serviced by the airline associated with this account, the card loses its appeal. Most airline rewards cards carry hefty annual fees after the first year, so it makes sense to close these accounts and switch to a card with a more useful rewards program.

4. The Card Has Been Used Fraudulently

Credit card fraud is the best reason for credit card closure. Typically, the credit card issuer automatically closes your account and issues you a new card when your credit card has been lost or stolen. However, this isn’t always the case when your card is used in other potentially fraudulent ways, such as:

  • You subscribed to a product or service online and, despite your best efforts to cancel the subscription, you keep getting hit with a monthly charge for something you no longer want.
  • You provided your credit card number for the collection of monthly payments on a debt, but the company is taking larger payments than you agreed to make.
  • You let your children use your account once for an emergency, and now, they use it every time another “emergency” occurs.

In these and similar situations, you may want to close your account. Otherwise, you risk having to fight to get future charges reversed.

5. You’re Done with Debt

You may have reached the point where you see no other way to get out of debt than to cancel your credit cards. It’s best for your credit score to keep a credit card or two open and just pay the balance in full each month, but this approach may not work for you. If you know you can’t resist the temptation of whipping out the plastic when you want something you can’t afford, it could be a good reason for credit card closure. However, before you make that decision, ask yourself two questions.

Is It Better to Close Unused Credit Cards?

Sometimes it can be better to close an unused credit card, especially if the card has a hefty annual fee. When you don’t use a credit card enough to outweigh the annual fee and come out ahead on its rewards program, the card is costing you money. It’s probably better to close an account in this situation.

Is It Bad for Credit to Close a Credit Card?

It can be bad for your credit to close a credit card if the card your closing is one of your oldest credit accounts and/or has a high credit limit with a low balance. As previously mentioned, closing older accounts hurts your score by lowering the length of your credit and payment history. Closing an account can also hurt your credit by changing the amount of your revolving credit utilization.

How to Exit Gracefully

If you’ve decided that closing a credit card account is the best course of action, try to minimize the damage to your credit score as much as possible. A credit card in good standing offers a lot of positive credit history that stays on your credit reports longer if you keep it open.

Although closing the account doesn’t make the card automatically disappear from your credit reports, you do lose the benefit of the available credit associated with that account. This changes your balance-to-available-credit ratio or revolving credit utilization.

To understand the credit utilization aspect of your credit reports, get a free credit report card from Credit.com. Calculate your balance-to-available-credit ratio by looking at your available credit compared to how much of this credit you’re using on individual cards and all your credit cards combined. When you’re using a significant portion of your available credit, you lose points when your credit score is calculated. Before closing an account, keep these factors in mind.

1. Keep Your Credit Utilization Ratio Low

An open credit line with a large limit and zero balance helps lower your overall revolving utilization, especially when you’re carrying balances on your other accounts. Keeping utilization at 10% is ideal, but you can still have a good credit score when using up to 25% of your available credit. Before closing an account, calculate how it changes your overall utilization to ensure losing that available credit won’t hurt your score much.

2. Keep Accounts Open

If you have several old accounts, closing one won’t impact your score as much as it would if you only had a couple. Keeping as many of your older accounts open as possible is better for your credit score. If you have only one credit card, it’s seldom a good idea to close your account. About 10% of your credit score is based on the different types of credit you have.

3. Keep Oldest Accounts

Whenever possible, keep your oldest accounts open. Most scoring models consider the age of your accounts, including your oldest and newest accounts, and the average age of all your accounts. A seasoned credit history helps keep your score healthy. A closed account also eventually falls off your credit report, and you lose all the positive history associated with the account.

After weighing the pros and cons, sometimes it just doesn’t make sense to keep hanging onto a credit card. Before you close that account, make sure your credit score won’t suffer too badly. Sign up for Credit.com’s Credit Report Card and receive the latest tips and advice from a team of credit and money experts. You also benefit from a free credit score and action plan that helps you determine whether closing a credit card account is right for your situation.

The post 5 Reasons for Credit Card Closure appeared first on Credit.com.

Source: credit.com

How to Contact a Real Person at a Credit Bureau

How to Talk to a Credit Bureau

The information that credit bureaus collect affects just about every aspect of your life. Whether you’re approved for a credit card, get a good mortgage rate, can rent an apartment or even get a job – they all can hinge to varying degrees on your credit score. So when a credit bureau has something wrong, it’s imperative that you tell them. The three major bureaus – Equifax, Experian and TransUnion – offer online services and prefer that you use their online forms instead of calling. But sometimes you need to talk to a live person. Here’s how to make contact.

Why Would I Need to Contact a Credit Bureau?

The three big credit bureaus or credit reporting agencies – Equifax, Experian and TransUnion – create credit reports that reflect consumers’ creditworthiness. The reporting agencies are for-profit businesses and sell their reports to other businesses, such as insurers, credit card companies, banks and employers.

These businesses in turn factor in these credit reports when making decisions such as whether to offer you a credit card and at what interest rate. So it’s  important to monitor your credit reports and make sure the information on them is correct. If you ever find a mistake, you should contact the credit bureau to correct the information. You may also need to contact to a credit bureau if you think that you’re a victim of credit fraud. That could mean placing a fraud alert on your account or freezing your credit so that no one can open a new line of credit in your name.

Talk to a Real Person at Equifax

talk to a credit bureau

Equifax has multiple phone numbers that you can use to speak with a real person. The number that you use will depend on what you need help with. We recommend trying to contact the correct number. If you call the wrong number, they will simply say they cannot help you and then direct you to call another number. You can find all of Equifax’s contact information on its website, Equifax.com.

If you want to contact Equifax with a general inquiry, you can reach the company via phone at the number 800-525-6285. Just make sure to call between the hours of 9 a.m. and 5 p.m. ET, Monday through Friday.

Equifax has also been in the news recently because it suffered a large data breach in 2017. If you have questions about whether your information was compromised in the breach, Equifax has a dedicated phone line at 888-548-7878. Again, be sure to call between 9 a.m. and 5 p.m. ET, Monday through Friday.

The table below has some common reasons why you might want to call Equifax and the number that you should call in order to speak with a representative.

How to Speak With a Real Person at Equifax Reason for Calling Phone Number General inquiries 800-525-6285 Canceling a product or service (Equifax customers) 866-640-2273 Request a copy of your credit report* 866-349-5191 Place a fraud alert on your credit card 800-525-6285 Dispute information in your credit report 866-349-5191 Place, lift or remove a freeze on your credit 888-298-0045 Dedicated phone line for information on the 2017 data breach 888-548-7878

*Don’t forget: You can get a free copy of your credit report three times per year.

Talk to a Real Person at Experian

Experian makes it relatively hard to talk to a real person on the phone. The company encourages people to use its website for most things. However, there are three main phone numbers that you should know if you want to talk to someone at Experian.

Call 888-397-3742 if you want to order a credit report or if you have any questions related to fraud and identity theft. The number 888-397-3742-6 (1-888-EXPERIAN) will also work. You can place an immediate fraud/security alert on your credit with this number.

If you have a question about something on a recent credit report (such as incorrect information), you will need to have a copy of the credit report. On the report you will find a 10-digit number. This number is different for each credit report and you will need it for the representative to help with any issues related to your specific report. Once you have that number ready, you can call 714-830-7000 with questions about your report.

If you need help with anything related to your membership account with Experian, you should call the company’s customer service at 479-343-6239. You will need to call while the Experian office is open in order to speak with someone. The hours are 9 a.m. to 11 p.m. ET, Monday to Friday, and 11 a.m. to 8 p.m. ET, Saturday and Sunday.

How to Speak With a Real Person at Experian Reason for Calling Phone Number Buying a credit report,

Placing a fraud alert on your credit file 888-397-3742 or

888-397-37426 (888-EXPERIAN) Question about a recent credit report 714-830-7000 Question about Experian membership account 479-343-6239 Talk to a Real Person at TransUnion

TransUnion has one general support number that you can use to talk to a human for help with your credit report (such as to dispute information, freeze your account, or report fraud), your credit score or any general questions. That number is 833-395-693800.

Note that a human representative is only available Monday through Friday 8 a.m. to 11 p.m. ET,  Monday through Friday.

You will hear an automated service when you first call this number. Press 4 in order to speak with a representative. Then you will need to press 1 if you have a TransUnion File Number or 2 if you do not have a number.

A TransUnion File Number is a unique identification number that you can find in the top right of your TransUnion credit report. You do not need a number to speak with a representative, but you will need it to do anything related specifically to your credit report. For example, the file number is necessary for disputing incorrect information.

The Takeaway

How to Talk to a Credit Bureau

If you ever need to buy a credit report or address an issue on your report, you will need to contact a credit bureau. Each of the three national credit bureaus, Equifax, Experian and TransUnion, has a website where you can do most things you may need to do. In fact, they prefer that you use online forms instead of calling. But sometimes it’s comforting to speak with a real person who can answer your specific questions.

The first step is figure out what phone number you need. The credit bureaus all have multiple numbers. Not all of the numbers will allow you to solve your specific issue. Of course once you have the right number, you will also need some patience. Hold times can be long, particularly during the coronavirus slow-down. The credit bureaus have also experienced higher phone traffic since the Equifax breach in 2017.

Tips for Using a Credit Card Responsibly

  • Correcting inaccuracies on your credit report by contacting a credit bureau can help to improve your credit score. Another potential way to improve your score is to get another credit card. It will increase your available credit and improve your credit utilization ratio. You can find the best card for you with our credit card tool. Of course, you should only get another card if you can responsibly handle the credit you already have.
  • One good piece of credit card advice is always to avoid as many fees as possible. Fees can make it harder for you to keep your spending down. Higher bills, in turn, could be harder for you to pay back in full. Here are 15 credit card fees that you should avoid.
  • It can be tempting to keep swiping your credit card, but make a budget and stick to it. A financial advisor can help you create a road map to make sure you’re hitting your goals and not getting into debt. SmartAsset’s free matching tool can help you find a person to work with. It will connect you with up to three advisors in your area.

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The post How to Contact a Real Person at a Credit Bureau appeared first on SmartAsset Blog.

Source: smartasset.com