Tag: credit score

Posted on by

How To Prevent Your Card Being Canceled By Credit Grantor

Not everyone uses their credit cards on a regular basis. Imagine the shock of needing to use your credit card only to find that it has been canceled by a credit grantor. You hear horror stories of people vacationing overseas and discovering this problem, then spending hours trying to fix it.

Unfortunately, the credit card grantor reserves the “right” to cancel or change the terms and conditions at any time. While they are supposed to notify you, this could be lost in the mail, sent to your email spam folder, or simply overlooked.

There are a few main reasons why your credit card might be canceled by a credit grantor. Let’s review the most common ones to prevent this from happening to you.

Not Using Your Credit Card Enough

A credit card company issues a card to you so that they can make money. Not only will they make money when you pay interest and fees, but they do make a small amount of money on each transaction that you use the card for.

This is the most common reason for a credit card to be canceled.

When you do not use the card at all, or only for emergencies, the credit card company makes no money from having you as a customer. Fortunately, this is a problem that is extremely easy to avoid. Simply use the card for the occasional purchase. Try to use it at least once every few months so your account will remain open and active.

You can always use one of the best credit cards with no annual fee to help you keep your account active without having to worry about coughing up the money for any fees.

New Debt

Have you recently taken on new debt? Bought an expensive car or a new home? These are changes that can quickly raise your debt level, change your credit utilization ratio (how much of your available credit you owe), and affect your credit score.

The credit card company may see this new debt and quickly cancel your card. New debt on a credit card changes your credit utilization. But taking out a large loan may affect you as well. The credit card grantor may determine that you have too much outstanding debt to pay promptly.

Changes in Your Credit Score

Any time that your credit score changes or drops, you are at risk for having your credit card canceled by credit grantor. This is one of the most important reasons to keep regular tabs on your credit score. You can avoid having your card unexpectedly canceled. It’s also good to know in case of identity theft.

They Don’t Need a Reason

As mentioned before, credit card companies have the right to cancel your card, for no reason, at any time. Having a credit card is not actually your “right.” The credit card company gets to decide who they want to extend credit to. While this might be you, it could change at any time.

They are supposed to give you notice, but, might not always do so. Sadly, getting a credit card canceled, for any reason, looks pretty bad on your credit report. You definitely want to try and avoid having this happen if you can.

What You Can Do To Prevent Being Canceled By Credit Grantor

First, make sure that you at least occasionally use your credit card so that the account does not go completely dormant. Second, make sure that you keep an eye on how much you owe. Keep your credit utilization as low as you possibly can. Third, follow your credit report on a regular basis (at least once per year) to ensure everything is accurate.

Your credit is important and should be treated as such. You can prepare yourself for the unexpected by following all of the rules and staying on top of your debt carefully.

Posted on by

Does Applying For A Credit Card Hurt Your Credit?

It can be tempting to apply for multiple credit cards in a short timeframe. You can use them to rack up the welcome offers for a lavish vacation. Or they can be used to receive some nice statement credits when making large purchases.

Having a few financial goals in mind, an analysis of your spending habits, and knowing the different types of credit cards can help you make the right decision.

While the short-term rewards can be the deciding factor when comparing two different credit cards, applying for too many credit cards at once can have consequences. Does applying for a credit card hurt your credit? While there is no rule that states a person must wait a specified amount of time before applying for the next credit card, there are some general guidelines to follow.

credit_cards_stock_photo-100368939-primary.idge

Does Applying For A Credit Card Hurt Your Credit?

Let’s take a further look at how to avoid hurting your credit score and what you should do instead.

It’s All About The Credit Score

When applying for any type of loan or credit card (financial institutions consider it a form of revolving debt), they will look at your credit score. A credit score is a number that ranges from 350 to 850 (there are numerous variations in this scoring range). The higher the score, the more likely you are to repay your balance on time. There are several factors of short and long-term credit history that determine your credit score. Credit cards impact most, if not all, of those factors in one way or another.

Here is how your credit score is impacted by a credit card application. Ten percent of your credit score is comprised of “Hard Inquiries.” These occur anytime you give permission for a financial institution to run a credit check on you. It might be applying for a credit card, home loan, switching cell phone carriers, or applying for a new job.

Whether you get approved or denied, these inquiries cannot be erased from your report. If you haven’t checked your credit report in the last two years and you have had several life events occur, you might be surprised how many might have recorded on your report. Hard inquiries tell lenders if you have recently tried applying for similar financing and might have been denied.

Inquiries usually stay on your report for two years before dropping off. Normally, you do not want more than 5 inquiries on your report at any time, but three is an ideal number to aim for.

You can use one of the best Capital One credit cards for travel to build your credit so you can eventually upgrade to a premium travel card.

Other Considerations Regarding Credit Score

Two other factors are Types of Credit (10%) and Length of Credit History (15%). People with excellent credit scores normally have credit accounts that are at least 4 years old. A credit card issuer uses these two factors to find out how many credit cards and loans you currently have and how long you have had them for.

If you were recently approved for 2 or 3 new credit cards within the last 18 months, your length of credit history is going to be rather young. Even if you have never missed a payment and maintain a low debt-to-credit utilization ratio, your score will most likely be lower than when you applied for your first credit card.  You may still be approved for new credit cards, but the card issuer might authorize a smaller credit limit to offset the risk of having so many new types of credit.

Every time you apply for a new credit card or loan, your credit score will drop a few points. If you have a good or excellent score (720 or above) you can afford a few dings in your score and still qualify for the best rates. If your score is near 700 points or lower, each application will be a relatively harder hit.

Typically a score in the mid to upper 600s is still considered a “prime” score but these users are either recovering from credit history blemishes or have a minimal credit history. If you fall in this range, you should primarily concentrate on having one or two cards that allow you to gradually increase your credit score.

Does Applying For A Credit Card Hurt Your Credit?

How Often To Apply

Let’s talk about the temptation of credit card welcome offers. You might be contemplating churning credit cards for one of two reasons: balance transfers or travel rewards. There are more credit cards available than any one person can count on both their hands and feet. Just ask anybody who has done travel hacking for any period of time.

Once again, the guideline comes down to your credit score. The general rule of thumb for most people is to wait for six months between credit card applications. This allows you enough time to establish a credit history with your new card with on-time payments and the average monthly balance (debt-to-credit ratio).  The six-month period also provides an opportunity for your credit score to recover from the new inquiry.

When You Should Apply Depending On Your Credit Score

If you have an excellent credit score (800+), you will probably only have to wait three months before applying again.

As was mentioned earlier, these are “rule of thumb” guidelines. You will likely be able to apply for two credit cards simultaneously. You may get approved for both of them with a high credit score of 750 or above.

If you were recently approved for a credit card and are getting pre-approval offers in the mail for other cards, your score is high enough to receive another card. Should it be an offer that you like, apply for it. If not, wait the six months before applying for the credit card you do want.

There are certain times you will not want to apply for a new credit card. The most obvious time might be right before you are planning to buy a home and need to apply for a mortgage or during the application process. Lenders and underwriters do not like surprises and a new application may force them to rewrite some of the paperwork due to adjustments in your credit report.

The same can be said when applying for a car loan or any other type of loan for that matter. A new type of credit is perceived as an increased risk of default due to the lack of payment history. Lenders are looking to make secure investments with their money.

What If My Credit Card Application Is Denied?

Sometimes applying for several credit cards in a short time frame will cause an application to be declined.  What you shouldn’t do is apply for another credit card. It will count as another inquiry on your credit report for the next two years. Instead, call the card issuer that denied your application and find out the reason why your application was rejected.

You chose to apply for this particular credit card for a reason, so exhaust all options before moving on. If you have another credit card with the same issuer, you might be able to reduce your credit limit on your existing card to qualify for the new one. Sometimes it just takes a phone call to resolve an issue.

Another possible reason your application was denied could have been due to a low credit score. If that is the case, make sure you pay all your bills on-time. Pay them in full for several months and do not “max out” any account.

Ideally, keep your debt-to-credit utilization ratio below 20% for every credit card you own. To help determine when your score is high enough to apply for a new credit card, you can use a credit monitoring service that might provide you with a free credit score.

Does Applying For A Credit Card Hurt Your Credit: Final Thoughts

So, does applying for a credit card hurt your credit? It can. Knowing your credit score and being aware of your financial responsibilities can help. If you can manage your finances, you can bring up your credit score. Then you won’t have to worry about applying for a credit card.

Posted on by

Tips to Raise Your FICO Credit Score

Your FICO credit score is one of the major factors a lender will consider when determining whether or not to approve you for credit. There are many things that go into your FICO score, which means that there are things that you can do to improve it. Careful attention to your FICO score can help you build your credit.

Here are tips that can help build and raise your FICO score

Apply for credit cards

You may be wondering if applying for credit cards can hurt your credit, but, just the opposite is true when you use them responsibly. The same goes for installment loans. Those with no credit will be a higher credit risk than someone who has demonstrated responsibility by making payments regularly and on time.

Make every payment on time

When you make your payments late, this shows up on your credit report. Lenders do not like to see you making a habit of late payments. As your FICO score is computed, 35% of the score is dependent upon you making timely payments for credit cards and loans. Never missing a payment is the best way to get the most from this factor. The longer the history that you have of making payments on time, the better this part of your score will be.

Pay off balances in full each month

While this is difficult for some, especially those who have accumulated large amounts of debt, making the largest payments you can afford is smart. This will help you lower the balances. Once you get your credit cards paid off, try to pay the entire amount that you owe each month. Never make less than the minimum payment required. The lower your overall balance, or credit utilization, the better your FICO score will be.

Communicate with creditors if there are problems

If you fall on hard times financially, contact your creditors before you begin to miss payments. Often they can work out a temporary solution, or negotiate a payment plan with you before your credit is adversely affected. When you are making regular payments, even when you are struggling financially, you can often keep your credit score from dropping too far.

Don’t rush to close credit cards to raise your FICO score

Closing credit card accounts can actually have a negative impact on your FICO score, especially if you have had the credit card for a long time. If you close credit cards that are paid in full, yet you still have others open that you carry a balance on, then you are going to see your credit score drop because your credit utilization will increase. This means that you will be using a higher percentage of your available credit. You are going to be better off keeping cards open when they have a zero balance, particularly if you have a long history with that creditor.

Keep track of your credit utilization

If you have a high credit utilization or a high debt-to-credit ratio, contact your creditors to see if you can have your credit limit raised. This can help improve your ratio and also your FICO score.

Don’t open too many accounts too close together

This is especially important for new credit users. When you are just starting out, one or two cards is plenty. Even if you have well-established credit, opening too many credit cards in too short a time period will have a negative impact on your FICO score.

Make sure your creditors know how to reach you

Always notify your credit card companies if you have an address change. If you miss a bill because they moved, it will not be their fault. You will likely see a change in your FICO score as a result. This is a common mistake, and one that is completely avoidable.

Immediately report if your card is lost or stolen

Reporting a lost or stolen card as soon as you are aware of it is crucial. Most credit card companies will not hold you liable for unauthorized purchases under these circumstances. If you do not promptly report it, you could be held responsible for large purchases. This will also affect your FICO score.

Check your credit report regularly

You should check your credit report at least once a year. Make sure that there are no inaccuracies. Most free credit reports will get information from the three major credit bureaus—TransUnion, Equifax, and Experian. Checking your credit report will not hurt your credit score. It will help you keep tabs on any accounts that you are responsible for. If you notice any inaccuracies, contact those creditors immediately to have the issue resolved.

Your FICO score is important. You should know what it is and make efforts to keep it solid or improve it. Use these tips to keep your credit great!

Posted on by

How to improve your credit score through credit cards

Trying to clean up your credit score just before applying for a loan is a lot like working out to get 6-pack abs just a few days/weeks ahead of your beach vacation!

Such shortsighted efforts won’t be good enough to undo months of reckless mistakes. However, people who know how to discipline themselves and who can get into the habit of making well-informed decisions, can definitely see some improvements. That sort of discipline is all the more important for people who’re about to apply for a loan within the next 2-6 months.

Good credit score

While there are some tried and tested methods that can help you build a long-lasting healthy credit score, you can also make some small-small changes into your credit card habits right away and see an improvement in your score in some time.

Just by changing the frequency and timing of your monthly payments, apart from using the right credit cards for your purchases, can lift up your score by around 20 points or even more, in a matter of two months! The extent of improvement will depend on your present financial habits and some other factors. Following are some useful ways in which you can use your credit cards to improve your credit score:

Pay your monthly card bills on time

This is easily the best thing you can do to improve your credit score. The payment history of your credit cards carries a 35% weightage in calculation of your FICO score (used by most lenders). That weightage is higher than any other factor that makes up your credit score. So, ensure that every credit card of yours is paid on time, every month.

Keep your account balances low

The amount of money you owe on your different credit cards carries the second biggest weightage (30%) in calculation of your FICO score.

A good way of understanding this factor is by paying heed to something known as credit utilization ratio. This ratio is the percentage of credit you’re actually using, from the total credit available to you. For instance, if the total credit limit on all your credit cards combined is $ 20,000 and you currently carry a collective balance of $ 4000 on them, you’re using 20% of your available credit.

Normally, people pay off all their cards in full, or to the maximum extent possible, to keep this ratio closest to zero. However, anyone who can’t afford to keep a zero balance must ensure that his/her credit utilization ratio is well below the 10% mark. At any cost, he/she should never exceed 30%.

And that applies to all of your cards. Many times people who’re looking for a loan in the near future, opt for balance transfer cards for bringing their card balances well below the 30% threshold, but they often do so without paying heed to the balance transfer fees involved. This fee can be 3% or more, often resulting in a fee amount that may not be worth paying for a credit score boost.

Make frequent payments

Paying your credit card bill only once every month may not be good enough for improving your credit score. The balance appearing on your credit report is normally the balance from your last statement/s. And people running up high balances on their credit cards may get penalized in terms of their credit score, even if they do clear those balances in full every month.

For instance, if a person makes a $ 5000 purchase on a credit card (with $ 10,000 credit limit) in a specific month, his/her credit report may still show him/her as having used 50% of his/her credit limit on that card, even if s/he pays that card in full by the end of the month.

Such records may not matter much to someone who isn’t planning to apply for a loan anytime soon, but for an individual preparing himself/herself for a credit check, they may make or break the deal. Hence, it’s always better to make multiple credit card payments every month as and when you use your cards.

Put your credit cards to use

Although you should never run up your credit card balances to the extent that you can’t afford to pay them in full, you can’t help using your cards if you want them to be counted as a part of your payment history either.

It’s not necessary to use your cards every month, but make sure that you use them every once in a while, so that there are records of purchases and their timely payments. Furthermore, there is a risk of card issuers cancelling the cards that haven’t been used for many years. A cancelled card can reduce your total available credit, putting a dent into your credit score.

Keep your oldest accounts

Although it may seem tempting to get rid of your old credit cards that you’ve rarely used, people wanting to apply for new loans should hold onto such cards until the completion of their credit checks. Closing a credit card automatically reduces the total available credit to you. Such a step can be even more detrimental if you’re carrying hefty balances on some of your other credit cards, as it can increase your credit utilization ratio. However, such dips are only temporary in nature, and the credit score normally rebounds in the next few months as the credit agencies discover that you’ve actually not taken on more debt. But, even if temporary, such dips can indeed become the cause for loan rejections. So, avoid closing any credit card if you’re planning to apply for a loan in the next 2-6 months’ time.

Keeping or closing the old card accounts can also impact the length of your credit history, which carries a 15% weightage in your FICO score. Nevertheless, the impact is most likely to be minor in nature. Moreover, if you’ve been paying those cards in full every month, your credit score may not drop at all by their closure.

Following these basic suggestions, you can effectively use your credit cards to improve your credit score. Last but not the least, check your credit history at least once every year to ensure everything is in order and all the information in it is correct.

 

 

Posted on by

How Many Credit Cards is Too Many?

 

When it comes to your credit score, bigger, and more, is better. With the exception of how much debt you have (obviously you want that as small as possible if not gone completely), you always want bigger with your credit line. If you have more credit cards, then your credit limit rises, which means you can have that much more available credit to your name. Although more credit cards is a good thing, not being able to manage them wisely can end up being pretty devastating to your score. With all these pros and cons, how can you decide what the magic number of open and running credit cards is right for you and your situation?

Below are some factors to consider in deciding just how many active credit cards is right for you to have in your wallet at once.

 

Why would I want more available credit?

Credit lenders check to see that you are wise with the amount of credit you already have available and at your disposal, and you want them to see you as responsible as possible. A single credit card, for example, may give you $1000 in available credit, and if you are wise in your credit usage, you keep your usage to below 50%. That means that you only have about $500 dollars of for-the-most-part guilt free usable credit that won’t be too heavily scrutinized by credit lenders.

Now $500 dollars is not so bad in terms of guilt free credit for when you are first starting out, but as time goes by, the expenses that need to be immediately covered get taller and taller, and you may want to stretch out and use the other $500 dollars of available credit that you otherwise leave ignored and unused. Although it may seem that you are just using what it rightfully yours, if you spent $999 of an available $1000 credit limit, guess what that tells your lenders? “I like to spend as much money that isn’t mine as possible!”

Jokes aside, you don’t want to look like you abuse your credit. To avoid going over that sweet spot of 30% to no more than 50% of your credit, expand how much available credit you can use. You can do this by either appealing for a larger credit limit on you already existing credit card, or you can apply for more credit cards. For example, your already standing $1000 limit gets raised to $1500, and you add two more credit cards each offering a $500 limit, and you have $700 in expenses due. Your debt to credit ratio went from 70% of a $1000 limit, to 28% of $2500. By expanding how much credit is available to you, you dropped your ratio all the way from being in the danger zone (70%) safely into the green sweet spot (28%). Lots of numbers flying at you, we know. Just bear with us.

Your available credit works as a pool that you can constantly add to and grow, and if can realistically keep track of every available card that you add you your pool and keep accounts in balance and in check, then more cards can be a great help to you. However, the more cards you add, the more difficulty it becomes in keeping everything straight.

 

 

No one card is accepted everywhere

Keeping one single card is much easier to manage than five or six, to be sure. One single bill, one single payment, and one set of rewards to monitor and keep track of. The disadvantage of having a single card is that your limit can only get so high, and your credit service may not be accepted everywhere. Visa, MasterCard, Amex, and Discover are some of the major services, and as we’re sure you can recall from time spent out and about shopping for goods, not every location accepts the same cards.

Sadly there is no universal currency out there that is accepted by all vendors with absolutely no fees (other than cold hard cash, but who uses coins and paper anymore??), but when you are out to dinner and are rocking a cashless wallet with only an Amex, and they only accept Visa, what are you going to do? We’ve all had this nightmare at one point in time, and the only way to avoid this scenario, besides asking right up front what cards they accept every time you go outside, is to get the most common credit card services.

 

Don’t open cards just for the rewards

A misconception that may be reached here is that you can just keep opening accounts and rack up a whopping pool of available credit that you can dip into at any time the mood strikes you. If this sounds like a great way to live to you, know that every time you open an account, a lender checks your credit, which dings your score. To that end, if your account goes unused for too long, or is deemed to be too risky to keep open by the lender, your account will be closed which also dings your score. So before you think about applying for 40 or so new credit cards so that you can soak up all the rewards, think about your already fragile and delicate credit score and the stress that it will endure as you go about opening new accounts and closing old ones.

 

So how do I know how many cards I should have?

The bottom line is that there really isn’t a set number of cards that blankets everybody’s financial and credit situations. Some individuals can keep track of an endless list of pending payments and billings, and others can’t even keep track of the one credit card they already do own, and even though it is set to “Automatic Bill Pay” online, it still causes them stress. It depends on how well you can keep track of your expenses and bills.

Opening and having access to more credit cards, such as two or three, or even as high as six or seven can have its perks, but if you cannot handle the mental strain that ensues to keep track and balance all of your accounts and not miss or be late for a single payment, then keeping your card count down may be best for you. Same goes for having less cards. One single bill and one set of rewards to keep track of can be freeing and stress-less, but it does limit where you can use your card and what kind of rewards you can have at your disposal.

 

How many can you manage best?

These factors in mind, consider if you can handle having two to three credit cards. Having different cards opens the door to varying rewards, raises your usable credit limit and also protects you from the embarrassing but at some point inevitable “I’m sorry ma’am, but we don’t accept that kind of card here”. Only acquire what you can realistically handle, but if you do decide to get more cards, learning how to balance your accounts and remain on top of the ball is a useful skill to obtain.

 

So as of right now, how many cards and accounts do you think you can honestly manage and manage well?

Posted on by

Why You Should Apply for a Business Credit Card

If you own a small business, you probably should consider establishing some credit in the name of the business, rather than relying entirely on your personal credit. You might be surprised to know that fewer than 50% of small business owners are using business credit cards that are in the name of the business and not their personal name! Keeping everything in your own name may put your personal assets at risk, so read on and consider these great reasons to apply for a business credit card!

Tips For When You Apply For A Business Credit Card

So what should you look out for when you apply for a business credit card? Here are a couple of tips to consider.

Keep Business Expenses Separate

Keeping business expenses separate not only comes in handy at tax time, but it helps you stick to both a business AND a personal budget. When you are simply comingling all of your money and spending it as needed, it can be difficult to know how much money you are making from your business and how much you may be investing towards the future.

When you carefully keep everything separated, you are protected by a “corporate veil,” which allows you to be separately responsible for profits and losses. Your personal assets will have protection. Having a business credit card helps you to reinforce that protection, and reduce the risk to your personal assets.

Details, Details, Details

When you use a business credit card, it is far easier to keep detailed records of any expenses related to running your business. Whether you keep your own books or use a bookkeeper, the tasks will be monumentally easier when you keep your finances seperate. Business credit cards often offer you special spending reports and graphs that can help you build a balanced budget and stick to it. It also makes it easier for you to quickly see your profits and losses.

Establishing Credit

One final, and very important reason for getting a business credit card is that you can establish a credit history for your business. When it comes time to apply for a loan or any other kind of financing, you will have a solid credit history and be able to show that your company is credit-worthy. You won’t have to worry about depending on your personal credit history. Plus, you will be eligible for different rates and terms for loans as they pertain to a business, rather than an individual.

Additionally, it is important to keep your business credit separate from your personal credit, especially if you are going to incur any significant business debt. You don’t want this appearing in your personal credit history and bringing down your credit score.

Here’s what you need to know before you apply for a business credit card:

Consider the type of business credit card that you need.

How much of a credit limit do you need? Will you be considering a secured or unsecured card? Are you hoping to get a rewards credit card? There are many things to think about before applying!

Find out your credit score.

This means you need to know your personal credit score, as well as any credit score for your business if you have any credit established yet.

Don’t be blinded by perks.

Sure, special benefits and great perks can draw you to a particular card. But, don’t rely only on the perks. Know the actual terms of the credit card—annual fees, APRs, any other charges, and fees, etc., before applying. Make sure you know whether or not any special offers are going to expire after an introductory period, too.

Be selective.

Don’t apply for a ton of business credit cards. In most cases, one is probably sufficient. If you have employees, then make sure you look for a business credit card that offers low cost or free additional users, because these are the kinds of charges that can add up quickly.

Always be careful when applying for credit, whether for business or personal use. You need to protect your personal—and business—assets and maximize profits. When you are educated about the various terms and conditions, and understand what you are getting into, you will be able to make the right decision for your company.

Posted on by

What Is Needed To Buy A Car?

best deals on car insurance

Let’s face it, most people need to borrow money to buy a car. Only 1 out of 10 new car buyers buy with cash. This is one reason why auto loans are the third most common loan in America, trailing home mortgages loans and student loans. Because so many people need to take out an auto loan, it is very important to have a high credit score to qualify for the lowest interest rates.

What Credit Score Do I Need To Buy A Car?

Pay In Cash

If you are able to pay for your next car with cash, pat yourself on the back! Whether you are the first owner or the third owner of your new vehicle, not having a car loan can be a great feeling. By not having a car loan, the money you would be putting towards a monthly car payment can be invested in a Roth IRA account, pay down other loans, or just about anything else.

When paying in cash, keep in mind that you will also need to pay an additional amount of money above the sales price of the vehicle for registration fees and taxes. Each state charges a different amount, but you can expect to pay more for a $20,000 vehicle than a $5,000 vehicle.

Your Credit Score Determines The Interest Rate

There are several factors that contribute to securing an auto loan. This includes your income and credit history, but your credit score is also important. This three-digit number is what tells the lender and the finance guy at the dealership whether you have good or bad credit. The higher your score, the lower the interest rate on the auto loan.

Here is a breakdown of what type of interest rate you can expect with your credit score if you decide to finance a new car loan:

Estimated Interest Rate For A New Car Loan (Newer than 2 years)
Creditworthiness Credit Score Range Estimated Interest Rate
Excellent 740-850 1.49%
Good 680-739 3.35%
Fair 620-670 4.59%
Credit Needs Improvement 619 or lower 6.99%

The above table is only a guideline to show how interest rates increase as credit scores decrease.  Interest rates will be higher for a used vehicle that is older than two years. Also, lenders will rate credit scores differently. One bank might require you to have a credit score above 750 to get the lowest interest rate, while the dealer might offer the same interest rate if your credit score is around 720.

FICO

Another factor that makes it difficult to estimate your interest rate is that auto lenders use the FICO Auto score instead of the traditional FICO credit score that you can access. Only lenders & dealers have access to this credit score, so it’s impossible to obtain this score before visiting the dealership. You probably will not find out the score until you are signing paperwork to initiate the car buying process.

The FICO Auto score has a similar score range (350-900) to the traditional FICO but puts greater emphasis on payment history with previous auto loans and installment loans. It’s not uncommon for the score to be a couple points different.

What If I Have A Low Credit Score or No Credit History?

Most lenders will only offer decent interest rates to “prime” borrowers with a credit score of 620 or higher. A credit score between 500 and 600 normally falls into the “sub-prime” category with most lenders. The interest rates will be higher than the rates paid by prime borrowers. Also, some traditional banks might not consider lending to “subprime” borrowers. You may have to find an alternative company or dealership.

Don’t worry, if your score falls into the “sub-prime” category you should be able to get a car loan. But, it will most likely have to be through a special financing service or a dealership that specifically advertises financing for those with low credit scores. Just remember that interest rates will be noticeably higher than those advertised to prime borrowers. If the interest rates are too high, you may have to consider a cheaper car to ensure you can make the monthly payments.

Co-Signor

If you have a low credit score or virtually no credit history (even with a good credit score), the lender might require a co-signor on the loan application. Having a co-signor reduces the lender’s risk in case a borrower misses payments. They have a backup source to pay the monthly installments. Having a co-signor might also allow you to get a lower interest rate compared to obtaining a loan outright. You can read more about co-signors and how to acquire an auto loan with a bad credit score here.

Credit History and Proof-Of-Income

Two additional factors that lenders look at is your credit history and employment history. Loan officers value both pieces of information as much as the credit score which is a short summary of your credit history. You might have an “Excellent” credit score of 770 but have not had any previous car loans. Lenders look at your credit history to see if you have made payments on-time for any type of loan or credit card in the recent past.

Because lenders look at the FICO auto score, they place the greatest value on prior car loans. They might give you some grief if the only loan payment history you have is student loans. It isn’t the preferred type of loan when determining an auto loan interest rate.

If you have a little credit history or are currently repairing your credit score, the lender will most likely ask for your two most recent paystubs for proof-of-income. If your take-home pay is high enough, this also will allow you to qualify for a low-interest rate and eliminate the requirement of a co-signor.

Get Pre-Approved

Another proactive action you can take is getting pre-approved for an auto loan through your bank. You might already be receiving the e-mails and brochures periodically from your bank about these pre-approval offers. While obtaining an auto loan isn’t as rigorous as getting a home loan, getting pre-approval can only help you. Dealers will take you more seriously during negotiations. The pre-approval also gives you a starting point with an interest rate and loan limit. For example, you are pre-approved for a 36-month loan at 2.49% interest up to $25,000.

Shop Around

Just as you will probably visit several different dealerships to find your ideal car at the right price, you should also compare interest rates from different banks. If you are pre-approved, you already have a baseline to compare to other bank rates. If you know your credit score, most banks have a detailed breakdown similar to the table earlier in this article. Most do not publish the credit score ranges (i.e. 720 is “Excellent” at Bank A but Bank B requires a 750 to get the “Excellent” interest rate), so you will have to ask if they can disclose that information to you. Interest-rate shopping will allow you to get the lowest rate for your credit score.

Down Payment

Depending on how much you can get a car loan for, you might have to pay a down payment as well. One approach is that the down payment can be the registration taxes and dealer fees. These can finance the cost of the car or put down 5% of the selling price. Each person has different financial circumstances. Keep in mind that the less you borrow, the lower your monthly payment.

Car Insurance

Another expense to think about before purchasing a vehicle is car insurance. If you take out a car loan, the lender will require that you carry collision and comprehensive insurance for the duration of the loan. If your current vehicle only has liability insurance, your monthly bill will be significantly higher carrying these additional policies. Insurance companies will give you a free quote if you buy a particular vehicle. If you are not pleased with the quote, you can “insurance shop” and try to find a lower quote for similar coverage.

Also, car insurance is cheaper for drivers older than 25 years old. So if you are an 18-year old eyeing a nice sports car but can only buy one with a loan, you should probably get an insurance quote first. You might be able to afford the monthly loan payment, but not the monthly insurance payment. If that is the case, you should probably wait a couple years before buying this car as the rates will drop if you have a clean driving record.

Summary

Buying a car is more complex than simply going to the dealership and driving home in a new vehicle.  While obtaining a car loan is less complex than applying for a mortgage, banks still put great emphasis on your credit score, credit history, and current income earnings. The better prepared you are beforehand (knowing your spending limit and how much you can borrow), the better you can get the best deal.

Posted on by

You May Be Eligible For A Credit Card Retention Bonus

Earning miles and points from your credit card is fun—especially when the annual fee is waived for the first year. Once that anniversary comes around, however, you may be required to pay an annual fee—which might not be what you planned. Since you have earned tons of points, you don’t want to simply cancel the card. Let’s talk a little bit about your options and what might be available to you.

Consider the Retention Bonus

Many of the bigger credit card companies will offer you a special “retention bonus” on your anniversary date. This can range from a tidy sum of extra bonus points to a free baggage check, to a free night in a hotel, and more. Often the value of the retention bonus is far greater than the cost of the annual fee—so consider this part carefully when you are thinking of canceling the card. It might be well worth it to keep the card. While there are some cards that have pretty hefty annual fees, taking a look at what you get is a wise move. See if it is worth it to keep.

Consider the Credit Impact

Closing a credit card can negatively affect your credit score, so consider this move carefully. Now, this doesn’t mean that you should automatically keep a card with an expensive annual fee just because you don’t want a short-term ding on your credit. But, you should not be opening and closing credit cards on a whim if you want your credit to stay clear and clean.

Take an inventory of all of the cards you have and consider the fees and benefits. Also, consider your history with them and your available credit. Then, and only then, should you determine whether or not to close a card when your annual fee is up. Don’t rush to close a card simply because the fee is due.

Make Your Plea

You may not realize this, but you can actually request that the fee is waived for another year. Keep in mind that if you are a good customer, the credit card company will not want to lose your business. They may agree to waive the fee for another year. Sure, that will put you in the same position next year, but that gives you time.

Ask for a Downgrade

Many credit cards offer no-fee versions of their more expensive cards. The perks are fewer, but you don’t have to close the card and take the hit on your credit score. If you have a good history with the credit card, consider this option. When you can keep the line of credit open for free, and not have a hit on your credit card, this is really a win-win.

Final Thoughts

You will hear about loopholes and how you can exploit the system by getting a retention bonus just before the anniversary and canceling. Alternatively, you can pay the annual fee for a huge retention bonus and then cancel and keep the bonus. But the reality is, many of the best credit cards out there will offer you some sort of incentive to stay.

Whether you get a companion certificate, bonus points, or something else, it is up to you to determine if that is worth it for you to stay. Don’t impulsively cancel a credit card. You may regret it when it hits your credit score. As with any decision related to your credit, be careful and do your homework to figure out what is going to be the best decision for your personal situation. Often you won’t be able to reapply for a card once you cancel, so make sure it’s really what you want to do!

Posted on by

Why Your Credit Score Might Dip When You Pay off Your Debt

When you start reading the advice of financial advisors, you will discover that most of those experts agree that the first step toward getting out of debt is paying off your credit cards. This will make your budget more flexible when you do not have to make credit card payments each month.

But what they don’t tell you is that your credit score may drop a little as a result. Doesn’t make sense? Well, there are a few reasons why it happens. However, it is not usually a serious problem. Let’s discuss some of the reasons so that you can understand and be prepared if this happens to you.

How Good Your Credit Score Is Matters

If your credit score is already high (over 720), then you probably have nothing to worry about when you pay off your credit. You might see a slight, temporary dip in your credit score, but when you have a solid credit history you have nothing to worry about.

Having an 850 is not necessarily required. There is a range when it comes to “excellent” credit. Generally anything in the mid-700s and above will get you approved for any financing you need.

Why Does A Credit Score Drop?

It might seem strange to have your credit score drop when you show that you can pay off what you owe. But, when you understand the various things that go into figuring a credit score, and you understand the concept of credit utilization, it might make more sense.

For most of the credit bureaus, 30% of your credit score is based on credit utilization. While you should aim to keep this figure low—by owing no more than 30% of what you can borrow, having no credit utilization is not necessarily the best thing.

What Should I Do To Keep My Credit Score High?

For the best credit scores, it is wise to utilize your credit cards regularly. Do so within the appropriate credit utilization recommendations, and pay off your credit card monthly. When you do this, your credit score will stay high. Plus, you will show that you are responsible and creditworthy. You will not suffer by having to pay any interest charges.

Applying for more and more credit is not a good idea though. Keep a small number of cards, and choose them well (i.e., based on terms and conditions, rewards, or whatever factors are most important to you). Monitor your credit report regularly to ensure that it is accurate. Immediately address any problems should there be any.

What’s the Bottom Line?

The bottom line is that, when it comes to good credit, you have plenty of control. Make wise credit decisions. Don’t spend beyond what you can pay off. Make every single payment on time. Don’t have more credit than you need.

This is how you can get the best credit score, or raise a poor credit score most effectively! Don’t worry too much if your score dips slightly when you pay off your card. Simply get back to your good credit habits and you will be fine.

Posted on by

How To Improve Your Small Business Credit Score

It’s probably very likely that you know that you have a personal credit score, and, if you are really on top of things then you probably even know what that score is. But, as a small business owner, do you realize that your business also has a credit score?

Is a Business Credit Score the Same as a Personal Credit Score?

A business credit score does not follow the same index as a personal credit score, typically FICO. Your personal credit score is a three-digit number that ranges from 400-850 (ideally much closer to the top of that range!). Your business credit score is probably based on the most common business credit score system, called Paydex. This index gives your business a score between 0-100, with 75 or above being considered the “good to excellent” range.

Why Do I Need a Business Credit Score?

Building up your business credit score is just as important as your personal credit score. It will help you expand your business over time by being able to secure business loans or get financing for expansions, equipment, and investments. Instead of relying on your personal credit score to get loans and financing, you can get the financing you need based on your business credit score.

Also, it is important to be able to separate your business and personal finances. This is not only important for tax purposes, but also for liability and other reasons. In the event that your business fails, your personal credit will not be affected. That may allow you to head in a different business direction or rebuild, without harming your personal credit. If you had to file bankruptcy because of a failed business, you may have that follow you for up to 10 years.

How Can I Raise My Business Credit Score?

There are several important things that you should do if you want your business credit score to stay strong or improve. Here are four great tips:

  1. Make every payment on time. Just like your personal credit, your business credit score will be affected by your payments. Making every payment on time will help keep your business credit score strong. It will also help it continue to rise as your business looks like a good credit consumer. Not only does this help your credit, you also avoid penalties and late fees!
  2. Keep your debt at a manageable level. Even if you need to take out a loan, you want to make sure that you are not overutilizing your available credit. Monitor any revolving debt to make sure that your ratios stay in a healthy range. If your credit utilization becomes too high, your credit score will drop.
  3. Use the credit that you do have. Don’t just let your business credit card sit there and gather dust. It should not be reserved just for emergencies! Make regular purchases and payments. This will help you to establish and build credit. Plus, if you use the right business credit card, you can accumulate rewards points and get cash back or other rewards!
  4. Monitor your business credit report. Just like your personal credit report, you need to monitor your business credit report. Make sure that the information contained within it is accurate and current. Any inaccuracies should be immediately reported.

When you can build up a great credit score for your business, it becomes easier to separate your business and personal expenses, taxes, and liabilities. Build a stronger business by developing a credit history specific to the business. You will find it easier to invest, build, and watch the business grow.