Tag: loans

Credit Scores: What’s in a Number?

You’ve probably heard a lot about your credit score over the years, but have you ever actually looked under the hood and try to better understand it? If you’re answer is no – don’t worry, you’re not alone. Surveys have shown that Americans simply don’t know enough about how credit scores work and the effects their score can have on their lives. We’re here to help. Here are your credit score basics.

Your credit can influence whether or not you can rent an apartment, what kinds of credit cards you qualify for, and what your interest rate on those cards will be. You could also be leaving money on the table if your score is not as high as it can be. That means paying hundreds or even thousands of dollars in extra interest charges on a home or auto loan over time. So if one 3-digit number carries this much weight, isn’t it time to understand exactly how it works and what you can do to improve it?

Credit Score Basics

Think of your credit history like a school transcript that includes all of your financial decisions over the years. Your credit score is your GPA. A single number that is calculated to represent how you’ve done and show a potential lender how risky of a borrower you would be in the future. The higher the credit score, the better.

Your score can range from 350 to 850. There are three credit bureaus, Experian, Transunion, and Equifax, who all collect information about your credit history and calculate scores. Each does this a little differently so you may notice your score differ slightly between the three bureaus. Even within each of the bureaus, there are different algorithms (the most commonly known is FICO) for calculating your score.

Confused yet? Here’s the bottom line: don’t stress about the differences between one score and another. Focus on one score and monitor it over time. You can get your credit score for free (with no negative impact) from CreditSesame or it may even be offered by your credit card company.

For a more in-depth review of credit scores and credit report, read our guide called Know Your FICO.

Related: A Guide – Know Your FICO

What Affects Your Score?

One of the biggest points of confusion when it comes to credit scores is what factors cause it to move up or down. Some may seem obvious, like paying your bills on time, but others can be less intuitive.

Payment History

The most important factor of your credit score is whether or not you pay your bills on time. Even one late payment can have a significant negative impact on your score. If you do happen to be late on a payment, your score will go down the longer you wait to make the payment: 30 days, 60 days, 90 days, or if the amount owed was sent to collections. Bankruptcies, judgments, or any other part of public record will also affect your score.

What to do about it: Automate your bills, credit cards, and other loan payments so you never have to worry about being late.

Amounts Owed

This is often referred to as your credit utilization and represents the percentage of your available credit that you actually use. For example, if the limit on your credit card is $10,000 and your balance is currently $5,000, your credit utilization is 50 percent. The higher the utilization, the more negative an impact this will have on your credit score since it may indicate that you are stretched too thin and may be riskier to lend to.

What to do about it: Keep your utilization below 30 percent of your available credit at all times on both your individual credit cards and overall. Create a balance alert on each of your cards to make sure you are aware if your utilization goes beyond 30 percent.

Length of Credit History

This factor is calculated by averaging the age of all your open accounts including credit cards, mortgages, student loans and any other line of credit. The longer your credit history the better, since it provides more information to a potential lender. There is no magic number here that will give you the best credit score, but some studies have shown that credit scores that top 750 have an average age of 7.5 years for open accounts.

What to do about it: Do not close old credit cards since it will shorten the average age of your credit accounts.

Credit Mix

This factor includes the number of different credit accounts you have as well as different types of credit. A greater number of accounts can boost your score since it indicates more lenders were willing to give you a line of credit in the first place. Having both types of credit, revolving (credit cards) and installment (auto loan, student loan, or mortgage), can also increase your score.

What to do about it: Do not take out a line of credit you don’t need to try and improve your score. This factor is weighed less heavily than others and there are easier ways to boost your score!

New Credit

This factor considers how many new credit accounts you have recently opened and how many hard inquiries were made on your credit. Hard inquiries result from a lender or credit card company pulling your credit information in order to decide whether or not to approve you for a loan or credit card. The more inquiries and new accounts you have, the lower your score because it may indicate that you are having cash flow problems and are a greater credit risk.

What to do about it: Limit the amount of new credit inquiries to 1-2 per year in order to avoid a significant negative impact on your score.

Related: How credit utilization and reporting dates can credit score

The Bottom Line

There’s a lot that goes into your credit score and no one factor alone can cause it to tank (or soar). Rather than stressing about whether or not you have the magic number of accounts, aim to manage your credit responsibly by paying your bills on time and never taking on more debt than you can handle. Your credit history won’t be made overnight, but a solid score built up over time can really pay off in the long run.

Related: How to avoid credit repair scams

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How to Save for a Home Down Payment

Have you ever dreamed of owning your own home? Whether that be a condo in the city or a colonial in the burbs, even the most die-hard renters may find themselves peaking at online real estate listings every now and then, thinking of what life would be like. Sure, the housing crisis was scary, the stress of the home buying process is legendary, and the fact that there’s no landlord to call is a lot of responsibility but despite it all, the attraction is still there.

Taking charge of your financial future involves a lot more than simply opening a savings account or signing up for a budgeting app. It requires taking your dreams, translating them into concrete goals, and creating a plan to help you get there. So if buying a home is on your bucket list, it’s time to get started. And the best place to start: a down payment.

Down Payment Details

Unless you happen to be one of the lucky buyers who qualifies for special loan programs through organizations like the VA or USDA, every home purchase normally requires some sort of down payment. We typically hear about down payments of 20 percent of the purchase price of a home, but buyers have the option to put down more or less in order to secure their dream house. Most lenders require a downpayment of at least 3 percent depending on your credit history.

Making a down payment of less than 20 percent can be a big help to get you into a home sooner, but it comes with a catch. Actually, a few catches. In the eyes of a lender, a lower down payment increases the risk they will need to take on by giving you a mortgage. In order to compensate for this risk, you will likely pay a higher interest rate on the loan.

Your lender will also likely require private mortgage insurance (better known as PMI). This insurance policy is used to protect the lender in case you default on your loan. However, the monthly premiums will be paid by you, in addition to your mortgage payments. PMI rates vary, depending on the size of the down payment and the?loan, from around 0.3 percent to 1.15 percent of the original loan amount per year. The less you put down, the higher the PMI.

Kickstarting Your Savings

Now that you know more about the ins and outs of down payments, how do you actually start saving for one?

  • Determine how much house you can afford and how much down payment makes sense for you. Crunch the numbers using Zillow’s Affordability Calculator given your income and the amount of debt you have. Based on the prospective purchase price from an online calculator or the average price of homes in your area, calculate how much a 20, 10 or even 5 percent down payment would be. Which is the most reasonable for you? Also consider how this will affect the monthly payment on the loan (click on the “payment breakdown” tab in the Zillow calculator for details).
  • Get intimate with your budget. Light a candle, open a bottle of red wine, and get to know the ins and outs of where your money is going. Identify specific areas where you can cut back or eliminate spending all together to make room for extra saving. Of course consider small changes like downgrading to a cheaper gym membership or cutting out your daily Starbucks run, but also think about big moves. Selling your car and using public transit or moving to a cheaper apartment can get you into your home even sooner.?
  • Give yourself a reality check. Think about your current housing costs versus the prospective monthly payment on your dream home. For instance, you may be paying $1,500 in rent but think you’d like to buy a home whose monthly costs will be more like $2,500 each month. Aim to save the difference between the two. In this case, save an extra $1,000 monthly. Not only will you get comfortable with the budget necessary to afford the house you want, but, you’ll also be building your down payment as you go. If you’re not able to make this savings target on a consistent basis, then you may need to readjust your expectations of how much house you can afford.?

Even if you’re not 100 percent sold on home ownership, that’s okay. It’s a big decision and there’s no rush. No matter what you mother-in-law, best friend or realtor tell you, there is no perfect time to buy. But even if you’re still on the proverbial fence, preparing for the possibility of purchasing a home down the line is never a bad thing. Who ever regretted learning more about the home buying process, improving their credit score or saving something extra in their bank account?


Photo by Bernadette Gatsby

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The Week’s Best Money Reads

ICYMI: This week’s best personal finance and career posts from around the web.

3 Airfare Hacks for the Committed Penny-Pincher — NY Times

It’s a gamble, but booking airfare the day before – day of — your trip can cut flights costs in half.

Hotel Bookings at Donald Trump’s Hotels Are Way Down — Time?

Too bad, so sad.

Better Than a Raise: How Companies Are Giving Employees More Money — CNBC

Your financial wellness can be just as important to your boss as your health.

This Is Why Loaning Money To Your Significant Other Is Never A Good Idea — Elite Daily

As if.

Will Switzerland give every adult $2,500 a month? –CNN

Plus, it’s untaxed and unconditional. *Checks flights to Switzerland*

 

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