Interconnect Financial Group

What is a Good Credit Score

admin — Thu, 16 Mar 2023 20:29:00 +0000

What is a good FICO Score?

FICO Scores range from 300 to 850. They serve as a way to evaluate the risk a lender will take in extending credit to you. The more likely you are to pay on time, the higher your FICO Score will be.
In the United States, 90% of lenders use FICO Scores to evaluate new financing applications. Some lenders use VantageScore credit scores as well, a competing credit score brand created by the three major credit reporting agencies.
Just as beauty is in the eye of the beholder, the interpretation of your FICO Score depends on who you ask. In general, a FICO Score of 670 or above typically qualifies as “good.” If your FICO Score climbs to 740 or higher, it’s “very good,” and FICO Scores in the 800-850 range are “exceptional.”

FICO Score Ratings

What is a good VantageScore?

VantageScore is a credit-scoring company that is generally considered to be FICO’s chief competitor. While FICO is still the industry leader, it’s worth paying attention to your VantageScore credit score, too. Over 2,600 companies use VantageScore credit scores to evaluate creditworthiness.

Like FICO Scores, VantageScore features a score range of 300 to 850. A VantageScore of 661 or higher is usually considered a good score, while anything 781 and up may be deemed as excellent.

VantageScore Ratings

What impacts your credit score?

Your credit score is calculated based on the information in your credit reports from the three major credit bureaus: TransUnion, Experian or Equifax.

Understanding the scoring factors can help you determine the actions that could impact your score, and what you can do to improve your credit.

The general categories examined when calculating your score are:

Payment history (35% of your FICO Score):

On-time payments are the most important factor in determining your credit score. Late payments, bankruptcies, foreclosures and other indications that you don’t pay your bills on time will hurt your score.

Current credit use or credit utilization ratio (30% of your FICO Score):

Using only a small portion of your available credit can help your score, while maxing out credit cards can lead to a lower score. Financial experts recommend not using more than 30% of your available credit at any time.

Length of credit history (15% of your FICO Score):

Having a lengthy credit history with a high average age of accounts could help your score. Generally, the longer your credit history, the better your score.

New credit (10% of your FICO Score):

Opening a new account could help your current credit use and payment history, if you make on-time payments and keep your credit utilization rate low. But applying for or opening too many accounts in a short period of time will hurt your credit score, as each hard inquiry negatively impacts your credit score.

Types of accounts or credit mix (10% of your FICO Score):

Showing that you can responsibly handle different types of accounts, such as credit cards and loans, will positively affect your credit score.

Why a good credit score is important

Building a good credit score can help you in many ways. It could be a requirement for renting a home, and in some states, good credit may lead to lower insurance premiums.

But the biggest benefits of good credit come when you apply for a new loan, line of credit or credit card. Having a high credit score can increase your chances of getting approved, as well as lower the interest rates you’re offered when you borrow money.

Another thing to keep in mind is that increasing your credit score could save you money when applying for new credit.

For instance, in a September 2022 study, LendingTree found that raising your credit score from fair to very good could save you nearly $50,000 in interest charges and fees. This isn’t a lump sum of money — instead, this figure shows the difference in the total cost to borrow for a consumer with a fair credit score and one with a very good score.

How to get a good credit score

Whether you’re brand new to credit, have established credit or you’ve made a few mistakes and are trying to rebuild your credit, the same principles and practices apply to building and maintaining a good score.

PAY YOUR BILLS ON TIME, EVERY TIME

Your payment history accounts for 35% of your FICO Score. Having a history of on-time payments shows other creditors that you’ve been responsible in the past. Late payments can drag down your score and make you look riskier to future lenders.

KEEP CREDIT CARD BALANCES LOW

The current credit use category accounts for about 30% of your FICO Score. A large part of this category depends on your utilization rate — how much of your credit limit you’re using on your revolving credit accounts. A lower utilization rate is better for your score, and if you can pay down debts, your score should rise.

HAVE A MIX OF CREDIT ACCOUNTS

Ten percent of your FICO Score is based on the mixture of account types on your credit report. But you shouldn’t rush out to apply for a mortgage or auto loan just to mix things up. However, adding a credit card or an installment account to a credit report that’s missing these types of accounts may be worth considering in certain situations.

DISPUTE INCORRECT INFORMATION

Unfortunately, it’s not uncommon for incorrect information to show up on your credit report. These mistakes could cause your credit score to drop, so it’s important to dispute credit report errors when you catch them.

START YOUR CREDIT JOURNEY EARLY

If you’re building credit from scratch, it may help to:

GET HELP IF YOU NEED IT

If you’re struggling with bills, collection accounts or finances in general, you may want to reach out to a nonprofit credit counseling organization that’s accredited by the National Foundation for Credit Counseling (NFCC). A reputable credit counselor could help you create a manageable budget, offer suggestions for your best next step and may even be able to negotiate a new payment plan with your creditors.

How to check your credit score

In many instances, checking your credit score is free. Here are several ways you can access your credit score at no cost:

Go through your bank

Your bank may offer you free monthly access to your credit score as a customer service benefit. For example, if you have a bank account through Bank of America, Chase, U.S. Bank or Wells Fargo, you may be able to access your credit score through your online customer portal.

Ask your credit card company

Credit card issuers often offer free credit scores to cardholders, but some offer them to the general public as well. At Discover, cardholders can access their FICO Score for free online with a Discover card, but Capital One offers a free VantageScore 3.0 with CreditWise to everyone. American Express also released MyCredit Guide and Score Goals, which offers a free VantageScore 3.0.

Check with the credit bureaus

You can get your credit score from all three credit bureaus. Visit Experian online to access a free copy of your FICO Score. The other two major credit bureaus, Equifax and TransUnion, also offer free credit scores. For Equifax, you’ll have to enroll in Equifax Core Credit to get your free monthly VantageScore 3.0. TransUnion also provides Vantage 3.0 updates.

Frequently asked questions

What if I don’t have a credit score?

If you’re new to credit, it can take some time to build up your score. When it comes to your FICO Score, you’ll need to meet the following requirements to get on the radar:

A credit account that is aged at least six months
An account with activity within the last six months

However, with VantageScore, all you need is an active credit account.

If you don’t have much credit history, it may be time to apply for a new credit card or look into a credit builder loan.

What credit score do I need for a personal loan?

Lenders that offer unsecured personal loans often share their minimum score requirements. Generally, bad credit loans still require a FICO Score of around 600 or higher. However, some lenders may approve an applicant with a score in the 500s.

Qualifying for the best rates may require a very good to excellent credit score, a high income relative to your debt and a clean credit history (e.g., no recent late payments).

What is a good credit score to buy a car?

If you want an auto loan below 10%, you’ll need a credit score of at least 660.

Getting an auto loan can be a little different than a home loan. Auto lenders may choose from a variety of different credit scores when evaluating applicants, such as a VantageScore, a base FICO Score or an auto industry specific FICO Score.

You may be able to get approved for a new or used car loan with a poor credit score, or no credit score, but your interest rate is likely to be in the double digits. If your score is very good or better, you may find auto loans with an interest rate around 4% or maybe even lower.

Is 740 a good credit score to buy a house?

The minimum credit score you need to qualify for a mortgage can vary based on the type of mortgage you’re trying to get.

Some government-backed mortgages have clear minimum score requirements.

FHA loans require a credit score of at least 580 with a 3.5% down payment, but if you’re able to offer a 10% down payment, you may qualify with a score as low as 500.
USDA loans may require a 640 unless there are extenuating circumstances.
VA loans don’t have a preset minimum, although lenders that offer VA loans may have their own minimum credit score requirements (often 620 or higher).
For a conventional, non-government-backed loan, you may need a credit score of at least 620 to qualify.

The post What is a Good Credit Score appeared first on Interconnect Financial Group.

How to improve my credit score

admin — Thu, 16 Mar 2023 20:29:00 +0000

How to Improve Your Credit Score

Whether you’re working to repair your credit after some financial missteps, or preparing to apply for a new mortgage or loan and want to make sure you get the best interest rate, taking steps to improve your credit score is a smart decision. We’ll walk you through the factors that affect your credit score, seven ways you can improve your credit score and what to consider if you’re thinking about hiring a credit repair company.

Why does a good credit score matter?

When applying for financial products, a higher credit score can literally save you hundreds, even thousands of dollars in interest charges. Whether you’re taking out a mortgage, an auto loan or a personal loan, a good or excellent credit score means you’ll be offered lower interest rates than someone with poor or fair credit.

For example, the FICO Loan Savings Calculator estimates that on a $20,000, 48-month loan in New York for a used automobile, someone with a 590–619 credit score would pay $4,885 in interest over the life of the loan, but someone with a 720–850 credit score would pay just $1,617 in interest. That’s a $3,268 savings.

What’s considered a good credit score?

Your FICO Score — the credit scoring model that’s typically used when lenders are deciding whether to extend your credit — ranges from 300–850. Within that range, scores are separated into five credit bands.

In short, a FICO Score of 670–739 is considered good credit, and above that is very good or excellent.

Your FICO Score is generated from information on your credit reports, which are maintained by the three major consumer credit bureaus: Experian, Equifax and TransUnion. Note, however, that the bureaus themselves do not create your FICO Score. In addition, under federal law, each bureau is required to provide one free copy of your credit report per year which can be obtained at annualcreditreport.com.

7 ways to improve your credit score

The factors that impact your FICO Score (the scoring model typically used by lenders.

What Makes Up a FICO Score?

Your credit score is determined by each of the three credit bureaus using complex algorithms that haven’t been made publicly available, but we have a basic idea of the elements that make it up, and how much each one accounts for. Here are the components that make up your credit score, and the approximate percentage that each represents:

Payment history – 35%

Simply put, payment history evaluates whether or not you pay your bills on time. If you regularly make your payments when they’re due, you should be good to go.

Amounts owed – 30%

This refers to how much you owe relative to how much credit you’ve been given, which is measured by your credit utilization ratio. That number is the proportion of your balances to the maximum credit your lender has allowed you to borrow. For example, if you have a $10,000 loan and a $2,000 balance remaining, your credit utilization ratio is 20%. A lower credit utilization ratio is better, because it demonstrates discipline and shows that you’re at a lower risk of default. As a general rule, you want to keep your credit utilization ratio under 30%.

Length of credit history – 15%

The longer you have an account on your credit file, the better the score. There’s not much you can do to improve this aspect of your credit, but there is one little-known loophole: if you can convince a family member to add you to one of their older lines of credit as an authorized user, their account will be added to your report. This isn’t an option that is available for everyone, but if you can swing it, it’s a good hack. Otherwise, get started with opening lines of credit now, and let time do the rest of the work.

Credit mix – 10%

There are different kinds of credit, including revolving credit and installment loans. (See below for more information.) Having a variety of different types of loans contributes positively to your credit mix.

New credit – 10%

When you apply for a loan or credit product, most lenders will do a “hard pull” on your credit file, otherwise known as an inquiry. A few of those aren’t a big deal, but having too many inquiries on your file will start to impact your credit score negatively.

What’s a VantageScore?

The VantageScore is a credit scoring system developed in a joint effort by Equifax, Experian, and TransUnion to create a more predictive and consistent credit scoring system. It works similarly to a FICO score, but it’s used less often. FICO and VantageScores evaluate credit with most of the same data points, but they’re weighed differently. Since 90% of lenders use the FICO model to evaluate creditworthiness.

Bearing these factors in mind, here are seven tips for how to improve your credit score.

1. Check your credit reports for errors

It’s smart to check your credit reports from time to time at annualcreditreport.com and look for errors. For instance, if you spot an account you didn’t open, it’s possible your personal information was used fraudulently, or that someone else’s information has become mixed up with yours. In cases like these, you can file a dispute to remove the account.

You’ll want to file a dispute with each of the three credit bureaus, assuming the error shows up on all three of your credit reports. The Consumer Financial Protection Bureau (CFPB) provides information on how to initiate disputes for each credit bureau online, by phone or through the mail.

After you’ve filed a dispute, the credit bureau you’ve filed it with has 30 days to investigate your claim.

Note that you can only dispute inaccurate information. If there’s a negative mark on your credit reports for something you actually did, that isn’t grounds to file a dispute.

2. Pay down any credit card debt you have

One of the fastest ways to boost your credit score is to reduce the amount of revolving debt (such as credit cards) you’re carrying.

This can impact the “amounts owed” factor of your FICO Score, due to something called utilization ratio. In short, utilization ratio refers to how much of your available credit you’re using. So, if you have a $500 balance on a credit card with a $1,000 credit limit, that’s 50% utilization.

A good rule of thumb is to keep your utilization at or well below 30% — as such, on that hypothetical credit card with a $1,000 credit limit, avoid letting your balance exceed $300 at any given time. You should also note that utilization is calculated both on a basis of individual accounts and across all your accounts as a whole.

So, what exactly is revolving debt? In addition to credit cards, other examples include personal lines of credit and home equity lines of credit (HELOCs). Revolving accounts allow you to borrow as you need and repay as you go. By contrast, mortgages, auto loans and personal loans are examples of installment credit, where you borrow a set amount and have a set repayment date. Installment credit doesn’t factor into your credit utilization ratio.

If you can, pay off your credit card balances frequently. These balances often get reported to the credit bureaus around the end of the statement period, which is about three weeks before the bill’s due date. Thus, even if you pay your bill in full each month, you could still have high utilization hurting your score.

Finally, if you’re struggling to get a high balance under control, consider using a personal loan to pay off credit card debt. The application will generate a hard inquiry, which will temporarily ding your credit score, but it should rebound and improve over time as you use the loan proceeds to pay off your revolving debt, and the loan won’t count against your utilization.

3. Get a credit card if you don’t have one

It’s true that you don’t need a credit card to build credit. But, if used responsibly, a credit card is a powerful tool to help you improve your credit score — whether it’s already in pretty good shape and you want to reach even greater heights, or if you need to rebuild credit after some missteps.

The primary consideration when looking at a new card is whether your issuer reports the account and payment activity to all three consumer credit bureaus — most do, but not all. If you’re using a card that only reports to one or two credit bureaus, that’s a missed opportunity.

If you have poor or fair credit, consider applying for a secured credit card. With a secured card, you’ll submit a deposit to the issuer in the amount of your desired credit limit, and this protects the issuer in case you don’t pay back what you owe. But in other respects, a secured card functions just like any other credit card and can help add positive information to your credit reports.

And if you have good-to-excellent credit, you’ve got options. A cash back credit card can reward you while you build credit, while a card with a 0% introductory APR period can give you some breathing room if you need to finance a big-ticket purchase or transfer high-interest debt you’re carrying on another credit card.

4. Consider signing up for Experian Boost

Offered by the credit bureau Experian, this free service lets you build credit with payments that normally might not count toward your credit score, like your phone bill, utilities and for eligible streaming services.

The average credit score increase with Experian Boost is 13 points (based on a FICO Score 8 model), according to the credit bureau. It’s worth noting this service will only help your credit score in cases where lenders pull from Experian, but it can still be worthwhile for consumers with limited credit history.

5. Wait for negative items to fall off your credit reports

It’s natural to want to improve your credit score fast, but some things take time. Many negative items can stay on your credit reports for seven years or more. But eventually, they’ll fall off your reports and won’t hurt your credit score anymore. Here’s how long it takes certain types of negative marks to disappear:

Chapter 7 bankruptcy: 10 years
Chapter 13 bankruptcy: 7 years
Collection account: 7 years
Late payments: 7 years
Hard inquiries: 2 years

6. Apply for new credit sparingly

Though applying for a new credit card can help boost your credit score, it’s important to note that you should limit how often you apply for new credit products. Applications can hurt your situation in a few ways:

Generating hard inquiries. When you apply for credit, this typically generates a “hard inquiry,” where the lender pulls one or more of your credit reports to evaluate your creditworthiness. A hard inquiry will typically hurt your credit score by 5 to 10 points, and will stay on your reports for two years (though the negative impact ceases after one year).
Reducing your average age of accounts. Length of credit history accounts for 15% of your FICO Score, and part of this is the average age of all your accounts. Opening new accounts reduces that average age, particularly if you’re new to credit and don’t have many other accounts to balance things out.

Signaling that you’re desperate. If lenders see a lot of recent inquiries on your credit reports, it might signal that you’re desperate for credit and unlikely to pay back what you borrow — and that means lenders will be more likely to reject your applications going forward.

7. Pay your bills on time, every time

Your payment history accounts for 35% of your FICO Score, making paying on time, every time, the most important thing you can do to build a good credit score.

If you struggle to keep track of payment dates, you may want to set up autopay through either your card issuer or your bank. You may also be able to set email or text message reminders for when a due date is approaching.

It can also help to use a budgeting website or mobile app — especially if you have multiple credit cards, because then you can easily see when charges appear.

The good news is that if you do miss a payment by a day or two, it typically won’t be reported late to the credit bureaus until it’s at least 30 days past due. That said, you may still face a late fee and an increased penalty interest rate, so it’s best to avoid missing your due date even by a little.

Should you hire a credit repair company?

There’s no way to raise your credit score overnight, and any credit repair company that offers fast solutions is likely trying to pull the wool over your eyes. In fact, the Federal Trade Commission (FTC) even has a webpage dedicated to warning people against credit repair scams.

There are legitimate steps you can do yourself — without having to pay a credit repair company — to repair your credit. These steps include reviewing your credit reports for errors, paying down debt and getting a credit card that reports on-time payment activity to the credit bureaus. In other words, taking steps to fix your credit on your own is likely to be safer and cheaper than looking for a credit repair company.

For those situations where managing your debt and fixing your credit seem impossible on your own, a nonprofit credit counseling agency may be a better choice than a for-profit credit repair company.

When choosing a nonprofit credit counseling agency, check that they’re affiliated with either the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA) as a way to ensure they’re legitimate. These agencies can help you assess your financial situation and create a budget that works for you, and may even put you on a debt management plan. For a reasonable monthly fee, you’ll make one monthly payment to the credit counselor, who will then disburse that payment to your creditors. Plus, the counselor may be able to negotiate lower interest rates with your lenders and waived fees.

If you decide to go with a credit repair company rather than fixing your credit yourself or working with a nonprofit credit counseling agency, it’s important to know your protections under the Credit Repair Organization Act (CROA). The law requires these companies to explain the following:

Your legal rights in a written contract and the services the company will provide
That you have three days to cancel without any charge
How long it’ll take for the company to get results for you
The total amount you’ll pay the company for credit repair services
Any guarantees the company makes to you

And if a credit repair company doesn’t fulfill its obligations, you have options in the courts:

Suing the company in federal court for your actual losses or for what you paid them
Seeking punitive damages against the company for violating the law
Joining other people in a class action lawsuit against the company

Again, it must be emphasized that repairing your credit on your own or with the help of a nonprofit credit counseling agency should be higher on your list of options than hiring a for-profit credit repair company.

Credit Scores'

Frequently asked questions

Does carrying a balance on your credit card help build credit?

No, this is a myth. As long as you’re using your credit card responsibly and the issuer reports the account and payment activity to the credit bureaus, you can improve your credit score without rolling over a balance month to month. Plus, carrying a balance can be expensive due to the interest charges you’ll incur if you’re not in a 0% intro APR period.

Will paying off accounts sent to collections help your credit score?

This depends on the scoring model a lender relies on when checking your score. Older models will weight collections accounts as a negative impact on your score even if you’ve paid off the debt. Newer models disregard paid collections accounts and put less weight on unpaid medical collections, though the latter will still have a negative impact. However, you can’t guarantee that a lender will use a newer scoring model when you apply for credit, as older models are still widely in use.

What is the fastest way to increase your credit score?

One of the fastest ways is to reduce your credit utilization ratio. If you have one or more credit cards close to being maxed out, paying them off (or at least paying to below 30% of your credit limit) is likely to cause your credit score to go up once the issuer reports the lower balance to the bureaus.

The post How to improve my credit score appeared first on Interconnect Financial Group.

Strategies to Become Debt Free

admin — Thu, 16 Mar 2023 20:29:00 +0000

Strategies for Becoming Debt-Free

1. Debt avalanche: Pay off your highest-interest debt first

The debt avalanche method involves paying off your debt with the highest interest rate first, then working your way down from there. For example, you might consider paying off debt in this order:

25% APR store credit card
22% APR rewards credit card
7% APR auto loan
6% APR student loan
5% APR mortgage

With this method, you’re paying less in interest charges over time. You’ll continue making minimum payments on your other debts, and you’ll allocate extra cash toward your priority debt.

2. Debt snowball: Pay off your smallest balance first

Tackle your debt in baby steps using the debt snowball method. You’ll target your debt with the lowest balance first, while making the minimum payment on your other debts. Once your low-balance debt is repaid, you’ll move onto the next lowest debt.

When you’ve finished repaying the first debt, take the amount you were previously paying each month and begin applying it to your next-smallest debt. The amount of money you’re putting toward debt each month won’t change, but you’ll begin paying the debts off with increasing speed.

This repayment method helps you cut down the number of debts you owe and gives you small wins to keep you motivated on your repayment journey. Using the same example above, try the exercise with debt amounts:

$1,000 rewards credit card debt
$1,500 store credit card debt
$10,000 auto loan debt
$35,000 student loan debt
$150,000 mortgage debt

Compared to the above example, you’ll notice that this list didn’t change much. That’s because low-interest debts like car payments and a mortgage are paid over a longer period of time than credit cards, which would ideally be paid off monthly.

3. Build a budget to pay off debt

It’s easy to lose control of debt when you’re not tracking your spending. Budgeting is a big part of staying out of debt, but it can also help you pay off debt faster.

Creating a budget gives you a clear idea of how you spend and save your money. Particularly if you have excess credit card debt, budgeting can give you valuable insight into where your income goes each month. Use a budgeting spreadsheet like the one below to track your spending for a month and see where you can allocate more income toward repaying debt.

Click here for a free budgeting worksheet

In addition to a manual budgeting spreadsheet, you can also incorporate one of these budgeting strategies:

50/30/20 budget: Split your income into three categories: 50% goes toward needs, 30% goes toward “wants” and 20% goes toward savings and debt repayment.
Zero-based budget: At the end of the month, your income minus your expenses should equal zero. This helps you account for every dollar earned, including debt repayment and savings.
Envelope budget: Categorize your spending into virtual “envelopes,” such as food, utilities and housing. Allocate your budget at the beginning of the month to cut down on superfluous spending.
Minimalist lifestyle: Cut regular but unnecessary expenses, such as dining out or gratuitous shopping trips, to maximize savings. Dedicate any remaining income to debt repayment.

Tip: Utilize an online debt payoff calculator to determine how much you should allocate toward your debt in order to pay it off within a certain time frame. This gives you a clearer image of how much you’ll pay every month and how much you’ll pay in interest in the long run. You can customize your strategy to pay off debt based on how much you can put aside each month.

4. Dedicate unexpected windfalls to your debt

When you receive an unanticipated sum of money, it’s easy to imagine fun ways to spend it: Take a vacation or buy that latest smartphone model you’ve been wanting. But if you’re in a lot of debt, it may be wiser to use your windfall to pay down debt.

Don’t think of a monetary windfall as “extra money” that you can use for discretionary purposes. Use an inheritance, tax refund or work bonus to cut down on your debt and save yourself money on interest in the long run.

Money typically doesn’t just fall into people’s laps, so if you’re anxious to pay off your debts quickly, here are a few ways to earn some extra income.

5. Meet with a credit counselor to form a repayment plan

Nonprofit credit counseling organizations offer low-cost or free debt counseling. A certified credit counselor will:

Offer money and debt advice
Help you create a budget
Give you educational materials on money management

Depending on your circumstances, a counselor may put you on a debt management plan, which sets a clear timeline for your debt repayment. Debt management plans come at a cost, typically a monthly fee.

You can find a certified credit counselor by searching the U.S. Department of Justice website.

6. Negotiate debt settlement with your creditors

When unsecured debt becomes too much to handle and you’re delinquent on payments, you may consider negotiating debt settlement with your creditors or a debt collector. Your creditor, like your credit card company, may agree to set you up on a payment plan, reduce your monthly payments or settle your debt for less than what’s owed.

Follow these tips for settling your debt:

Take notes. Write down the name of the person you spoke with, when you called and what they said. Compile all of this information in a follow-up email.
Get it in writing. Before you make any payments, get your proposed repayment or debt settlement plan in writing.
Be honest. Don’t commit to a debt repayment plan if you can’t keep up with the monthly payments. Explain your financial situation to the creditor.
Check the statute of limitations. If your debt is time-barred, you can’t be sued over it. However, you still owe the debt and it will show up on your credit report.

It’s worth noting, however, that debt settlement can negatively impact your credit score. Be sure you understand the implications before making a final decision.

7. Consolidate debt with a personal loan

A debt consolidation loan can help you repay your debts at a lower interest rate, saving you money over time. This repayment method also allows you to combine multiple debts into one, allowing you to make just one monthly payment instead of multiple payments.

When shopping for a personal loan, you’ll want to find a lender that is willing to give you a lower APR than what you’re currently paying. Keep in mind that the shorter your loan term, the lower your APR may be.

Similarly, you can also consolidate debt by moving it to a balance transfer credit card.

8. Transfer debt to a 0% intro credit card

Another way to consolidate debt is to use a balance transfer credit card. Ideally, you’ll want to find a 0% intro credit card so you can avoid paying interest for the first several months. This way, any payments you make on the card will go directly toward reducing the principal. Keep in mind, however, you’ll typically have to pay a fee when utilizing a balance transfer credit card and once the 0% intro period is over, you’ll have to start paying interest on the remaining balance.

Credit cards and personal loans are both popular ways of consolidating debt. However, these debt repayment options may be out of reach for consumers with subprime credit. You’ll have a hard time securing a good rate on a personal loan with bad credit, and you’ll find it difficult to qualify for a balance-transfer credit card without a good credit score.

If debt consolidation or a balance transfer credit card seems like the right money move for you, compare your options below.

Debt consolidation: Personal loans vs. balance transfers

	Personal loans	Balance transfer cards
How it works	Repay multiple types of debt by opening a personal loan	Transfer the balance of one or multiple credit cards into a new credit card with better terms
Credit required	Varies by lender	Very good
Benefits	Fixed APR and monthly payments May offer lower APRs than your current debts Consolidate many types of debt	May be able to pay off debt at 0% APR Get all your credit card statements in one place
Risks	Subprime borrowers may not qualify May be subject to origination fees and prepayment penalties APRs vary widely depending on credit score	Any remaining balance will be charged interest when the 0% APR period expires Can only be used to consolidate credit card debt Not all borrowers will qualify
Best for…	Borrowers with good credit who have multiple types of debt.	Borrowers with good to excellent credit who can pay off the debt within the intro APR period.

9. Use a cash-out refinance to put money toward debt

If you own a house, you may be able to use cash-out refinance to pay off debt.

In short, if you have been paying your mortgage, you’ve most likely built equity into your home. A cash-out refinance allows you to borrow against that equity and use the money to do a variety of things, including pay off debt.

In most cases, you’ll only be able to take out up to 80% of your home’s value. For instance, if your home is worth $500,000 and you still owe $250,000, you currently have $250,000 of home equity. Since you’ll typically only be able to utilize 80% of your home’s value, you’ll probably only be able to borrow up to $150,000 of your home’s $250,000 equity value.

Keep in mind that if you go this route, you are using your home as collateral for the debt, meaning you risk losing your home if you default.

10. Consider bankruptcy (as a last resort)

Should you find yourself overwhelmed by your finances, you may be able to discharge your debts by filing for bankruptcy. While this can be a relief for some borrowers, keep in mind that bankruptcy can remain on your credit profile for years and may make it difficult for you to take out credit or a loan afterward. Aside from that, bankruptcy proceedings can take several months or years before your debt is discharged, and some debts are not dischargeable.

Typically, most people file for Chapter 7 or Chapter 13 bankruptcy. In fact, in 2021, there were 399,269 non-business bankruptcies, according to the Administrative Office of the U.S. Courts. Chapter 7 made up 70% of all non-business bankruptcy filings, while Chapter 13 comprised nearly 30% of filings that year.

If you believe bankruptcy may be the best option for you, here are a few of the biggest differences between Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 bankruptcy vs. Chapter 13 bankruptcy

Chapter 7	Chapter 13
Once you successfully file, your debts are discharged; however, this may require you to liquidate valuable assets	Once you are approved, you’ll get to keep your assets but you will have to remain on a payment plan for three to five years
Chapter 7 bankruptcy can stay on your credit profile for up to 10 years	Chapter 13 bankruptcy can stay on your credit profile for up to seven years
There is no capped limit on debt in order to be eligible for Chapter 7	Cannot have more than $465,275 of unsecured debt or $1,395,875 of secured debt to be eligible

Which debt should you pay off first?

When deciding how to best tackle your debt, it’s important to become familiar with your financial obligations and which you want to repay first:

Credit card debt
Student loan debt
Auto debt
Mortgage debt
Medical debt
Tax debt

It’s important to take stock of what you owe because some types of debt will open new doors for your debt repayment strategy. For example, you may be able to negotiate medical debt. With mortgage and auto debt, you could consider refinancing. If you have credit card debt across multiple accounts, you could consolidate.

If you’re not sure which debt to pay off first, consider factors like the annual percentage rate (APR). A loan’s APR is a measure of your borrowing cost over a year and takes the interest rate plus fees into account. Consider each debt’s outstanding balance, as well. In general, paying off the debt with the highest APR is your best bet for saving money, especially if you’re locked into your terms and can’t refinance for better terms.

Once you’re debt-free: How to stay out of debt

Becoming debt-free is a difficult task, so it’s important to build better habits going forward so you don’t find yourself in the same situation again. Stay out of debt by monitoring your budget, building your savings and working on increasing your income. Here’s how:

Build your emergency fund

It’s important that you don’t sacrifice your emergency savings for debt repayment. You should always be saving at least some money in an emergency fund equivalent to six months of living expenses. That way, when you’re hit with a big, unexpected expense, you don’t need to resort to taking out debt again.

Many professionals advise that you have between three and six months’ worth of expenses saved up in case of emergency. If that seems like a lot, start small; create your emergency fund by saving up one week’s worth of expenses, then one month, and build from there.

Find a way to increase your income

Paying off debt on a low income is difficult, but staying out of debt when you don’t have a lot of extra cash is even harder. You don’t have to work your body to the bone to find creative ways to pay off debt.

Ask for a raise. It’s common to ask for a raise, so don’t be afraid to ask. Research the average income for your position online, and use that as leverage. Be prepared to advocate for yourself and your accomplishments in your role.

Take a certification course. See if your company will pay for the course, and they may increase your income once you receive your new credentials.

Start a side gig. If you have a car, you could consider working for a ride-sharing service. You could also rent out your home as a vacation rental or participate in paid surveys.

Sell unused items. Bring your old clothes and accessories to a consignment shop to make some quick money. You can also sell home goods, electronics and other clutter on online marketplaces like Nextdoor, Craisglist or Facebook Marketplace.

Utilize a budgeting app

Creating a budget can be hard work, but it’s worth the effort when you’re paying off debt. Even when you’ve repaid all your debt, it’s important to keep budgeting so you don’t slip into old habits.

If you’re having trouble keeping up with a budget in the long term, you should at least download a budget app for your smartphone or on your computer. Budgeting apps can link with your bank accounts to track your spending automatically, so all you have to do is log on to see where your money is going.

Monitor and build your credit score

The credit score system isn’t perfect, but it’s one measure of your overall financial wellness. Plus, lenders and other financial institutions rely on your credit score to determine if you’re a good candidate for a loan or credit card.

In addition, you can request a full copy of your credit report from all three credit bureaus on AnnualCreditReport.com. Doing so won’t affect your credit, and it can give you a better picture of your finances, including:

Who you owe money to
How much money you owe
Your payment history

The post Strategies to Become Debt Free appeared first on Interconnect Financial Group.

Hard vs. Soft Credit Pull

admin — Thu, 16 Mar 2023 20:29:00 +0000

What’s the difference between a hard and soft credit pull?

Credit pulls are when someone — even you — checks your credit. Lenders run hard checks when you officially apply for credit, which can cause your credit score to drop slightly. Soft checks, on the other hand, are for pre-approval or when you check your own credit, and they don’t affect your credit score.

Your credit reports are managed by the three credit bureaus — Equifax, Experian and TransUnion. Your credit history, such as on-time or late payments, is in your credit reports and visible to anyone conducting a credit pull on you.

Soft credit pulls	Hard credit pulls
Performed by creditors to provide pre approved credit offers	Performed by creditors when you apply for a form of credit
Previous soft pulls are visible on your credit report to only you	Previous hard pulls may stay on your credit report for any creditor to see for up to two years
May be done without your prior approval	Must have your written approval
No impact to your credit score	Can cause your FICO Score to drop by up to five points

What is a hard credit inquiry?

A hard inquiry is when a lender or other entity requests access to your credit reports before approving your application.

This can be triggered when you apply for a loan or credit card, or even when you sign a lease for a new apartment. For example, if you’re financing a car or applying for a mortgage, those lenders will perform a hard pull on your credit before providing final approval for your loan.

The following activities may require you to allow a hard credit pull:

Credit card applications
Any type of loan application (auto, mortgage, personal and student)
Line of credit applications
Rental applications (housing, car rentals)
Credit limit increases
Utility services
New cell phone contracts

Hard inquiries are recorded on your credit reports and visible to anyone checking your credit. This is so lenders know that you may have more loans coming. In other words, it can demonstrate potential new debt that hasn’t popped up on your credit report yet.

Hard inquiries affect your credit score, but not by much. When it comes to your FICO Score (the most commonly used scoring model), a single inquiry will usually shave up to five points and stay on your credit report for two years. That could be detrimental if you also have a number of other negative items — such as late payments or big debt loads — that are weighing down your score. These are other factors that determine your credit score.

If you’re wanting to improve your credit score before applying for an important loan, such as a mortgage, you may want to limit hard pulls on your credit report.

What happens if you have too many hard inquiries?

If you have good or excellent credit, hard inquiries likely won’t bring down your credit score too much. However, if you have bad credit, they may have more influence on your overall credit health. Consider taking a break from applying for credit and instead focus on improving your score.

It can feel challenging to get your score up to a decent position. However, building your credit score is an important part of maintaining your financial health and can help you access things such as low interest rates and lines of credit.

Rate shopping exception

Numerous inquiries in a short time for the same type of loan probably means you’re rate shopping, so credit scores usually take this into account and your score shouldn’t be docked. This is called a rate shopping exception. Just be sure to shop fairly quickly because the exception is limited. You could have anywhere from 14 to 45 days to shop around for a home or auto loan and compare rates without your score dropping.

What is a soft credit inquiry?

A soft credit inquiry is when lenders look at your credit to gauge whether you’re pre approved for credit, when you check your own credit or when entities like insurance companies, medical providers and prospective employers check your credit before providing you with a rate quote or hiring you.

Soft inquiries are listed on your credit reports, but only you can see them. They also don’t affect your credit score.

What if my credit is pulled without permission?

Regularly checking your credit reports for any errors and unusual hard credit checks is important for your overall financial health. If a hard pull was performed without your consent, it could be attempted identity theft.

If you find your credit was pulled without your permission, you can:

Reach out to the creditor. Speak to the creditor directly to learn more. According to the Federal Trade Commission (FTC), 1 in 5 people find errors on their credit report, so there is a chance the credit pull was made in error.
Submit a dispute to the credit bureaus. If you find the credit pull was done in error or without your permission, you can submit a dispute to whichever of the credit bureaus reported the inquiry. Typically, the dispute process is completed within 30 days.
File a complaint. You can submit a complaint to the Consumer Financial Protection Bureau (CFPB) or visit IdentityTheft.gov (which operates under the FTC) if you believe your credit was fraudulently used. The FTC also provides a recovery plan in the case of fraudulent activity.

Get your credit reports for free at AnnualCreditReport.com.

How to prepare for the impact of a credit check

If you’re concerned about the impact an inquiry on your credit may have on your score, there are a few ways you can keep the effects to a minimum.

Check if you prequalify: An important first step when it comes to shopping around for credit is to confirm if lenders allow you to prequalify. Prequalifying for a credit card or loan with a soft inquiry will not impact your credit. Prequalifying will also allow you to see what kind of rates, terms, amounts and fees you may receive from a creditor, so you can compare lenders more easily before committing to one.
Improve your score: Making sure your credit score is in a healthy place before you apply for credit can not only limit the impact of a credit check but also help you get lower interest rates and better terms. To do this, you can consult with a credit counselor who can help you navigate the ins and outs of improving your credit score.

Frequently asked questions

Why do hard credit pulls matter? The number of hard credit pulls on your report can play a role in determining your creditworthiness in the eyes of lenders. Many hard pulls on your report might suggest that you have or are about to take on a lot of debt. As a result, creditors may assume you have (or will have) a high debt-to-income ratio and could be a credit risk.

What does a soft credit pull show? A soft credit pull can show information such as credit accounts, late payments, collection activity and hard credit inquiries. Only you can see what soft credit inquiries have been run on your credit report.

How many points does a hard credit inquiry cost you? On the FICO Score model, a hard credit inquiry can bring down your score by up to five points. Since the FICO scale ranges from 300 to 850, this amount is typically a small drop in the bucket. Hard credit pulls can remain on your credit report for up to two years.

The post Hard vs. Soft Credit Pull appeared first on Interconnect Financial Group.

Good Debt-To-Income-Ratio

admin — Thu, 16 Mar 2023 20:29:00 +0000

Good Debt-to-Income Ratio?

Your debt-to-income (DTI) ratio is a comparison of your monthly debt payments with your monthly income before taxes. When you apply for a loan (a mortgage, for example), lenders look at your DTI ratio to determine if you can keep up with payments. As a general rule, the lower your DTI, the better a candidate you’ll be for a loan.

What is a good debt-to-income ratio?

DTI ratio	Grade	What lenders see
35% or lower	Good	You have money left over after paying bills and can likely afford additional debt.
36% to 49%	OK	You’re able to manage your bills, but unforeseen circumstances could put you in financial trouble.
50% or higher	Bad	Money may be tight for you. Your ability to afford debt likely isn’t feasible.

How to calculate your debt-to-income ratio

Debt-to-income ratios are calculated with this formula: Monthly debt payments ÷ Monthly gross income = DTI ratio.

For example, let’s say you owe a total of $500 in debt payments every month, while your pre-tax monthly income is $2,000. Simply divide 500 by 2,000 (and multiply by 100 to turn the decimal into a percentage), and you’ll see that your DTI ratio is 25%.

Note that some lenders will include your housing payments when adding up your debt payments, while others will leave it out. To determine what to include in your monthly debt payment amount, you need to know if lenders are evaluating your front-end ratio or back-end debt-to-income ratio. The difference lies in whether they include housing costs:

Front-end debt-to-income ratio: Your housing expenses, such as rent payments, mortgage payments, homeowners insurance and property taxes.
Back-end debt-to-income ratio: Excludes housing expenses. Most lenders use this type of ratio in their calculation.

Calculating your DTI ratio: Start by adding up all the debt payments you make in a month, including student loans, car payments, credit card bills, alimony, child support and others. If you’re calculating your front-end debt-to-income ratio, only include what you pay for your rent or mortgage, including property taxes and insurance. (Do not include other monthly expenses, such as your electricity bill, gas or groceries.) Once you have the total, divide that number by your gross monthly earnings, which is the amount you make before taxes and other deductions, to get your DTI ratio.

High debt doesn’t always mean a high DTI ratio

Owing a large amount of money doesn’t necessarily mean you’ll have a high DTI ratio; it depends on what you earn and how much of your income goes toward debt repayment.

As an example, if you owe $1,000 in monthly debt payments and have a gross monthly income of $2,000, your DTI ratio will be high at 50%. However, if your gross monthly income is $10,000, your DTI ratio is only 10%.

In other words, your debt payments need to remain in proportion to your monthly income to remain affordable. But if your income is on the low side, it’s easier for your DTI ratio to creep up quickly.

Why does your debt-to-income ratio matter?

Your DTI ratio comes into play in a number of circumstances.

You need a good debt-to-income ratio to buy a house or finance a car

Your debt-to-income ratio measures the portion of your monthly income that is taken up by debt payments — as such, it gives lenders insight into your financial habits and your riskiness as a borrower, and can make a difference in whether you get approved for a mortgage or other types of financing.

Typically, in the case of a mortgage, your debt-to-income ratio must be no higher than 43% to qualify. That is the highest ratio allowed by large lenders, unless they use other factors to determine that you can repay the loan. A small creditor may offer mortgages to borrowers with higher DTI ratios, however.

While your DTI ratio is almost always a factor in whether you qualify for a mortgage, it might not be as important for other types of loans. Borrowers with high credit scores may be able to qualify for a personal loan or auto loan just by showing proof of employment and income. However, if you have a low credit score, your DTI ratio may need to meet requirements that are even stricter than those of a mortgage, depending on the lender.

A high DTI may make it difficult to juggle bills

Spending a high percentage of your monthly income on debt payments can make it difficult to make ends meet. A debt-to-income ratio of 35% or less usually means you have manageable monthly debt payments. Debt can be harder to manage if your DTI ratio falls between 36% and 49%.

Juggling bills can become a major challenge if debt repayments eat up more than 50% of your gross monthly income. For example, if 65% of your paycheck is going toward student debt, credit card bills and a personal loan, there might not be much left in your budget to put into savings or weather an emergency, like an unexpected medical bill or major car repair.

One financial hiccup could put you behind on your minimum payments, causing you to rack up late fees and potentially put you deeper in debt. Those issues may ultimately impact your credit score and worsen your financial situation.

Does your debt-to-income ratio impact your credit?

Your DTI ratio doesn’t directly impact your credit, since your income isn’t a factor in the calculation of your credit score. However, a high DTI often goes hand-in-hand with a high amount of debt, which does impact your score. In fact, “amounts owed” makes up 30% of your FICO Score.

“Amounts owed” refers to how much debt you owe, as well as how much of your available credit you’re utilizing. If you owe $2,000 on your credit cards and have a $4,000 limit, for example, then your credit utilization is 50%. It’s usually considered best to keep your credit utilization at no higher than 30% if you’re applying for a mortgage.

If you can lower your amounts owed, you’ll also likely boost your credit score and lower your DTI because you’ll be paying down debt.

How to lower your debt-to-income ratio

If your DTI is too high, consider these strategies for lowering it:

Work on paying down debt

Paying off loans and bringing down debt balances can improve your debt-to-income ratio. To free up cash flow you can use to pay down your debt faster, give your budget a second look.

You may find ways to cut down on monthly expenses such as by:

Calling your car insurance provider and asking for a lower rate
Shopping for a lower-cost cell phone plan
Reducing how often you get food delivery or takeout
Canceling streaming services you no longer use

When deciding which debt to pay down first, borrowers often use one of two strategies. The debt avalanche method involves targeting your highest-interest debt first, while continuing to make minimum payments on all other debts. This strategy helps you save money on interest over time. The other method, debt snowball, has borrowers focus on the debt with the lowest balance first, while keeping up with the minimum payments on other debts. It helps borrowers stay motivated by giving them small wins on their path to getting out of debt.

If you’re unsure how to approach your debt, you could sign up for free or low-cost debt counseling with a certified credit counselor. These professionals can provide personalized financial advice, help you create a budget and provide useful tools that can teach you about money management. You can search for a certified credit counselor through the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC).

Focus on increasing your income

Boosting your income can also help you work toward an ideal debt-to-income ratio. If you’re overdue for a raise, it might be time to ask your boss for a salary increase. You could also pick up a side job, such as tutoring, freelancing in a creative field or working as a virtual admin, to increase your earnings. Those looking to make a more extreme change might seek out a new company or career path.

Finding ways to make more money will not only help you get the right debt-to-income ratio for a personal loan, mortgage or another type of financing, it can also give you more financial stability. You may have more wiggle room in your budget to build an emergency fund and avoid taking on new debts.

Open a debt consolidation loan or balance transfer credit card

Debt consolidation may help you get a better interest rate and pay down your balances sooner, ultimately helping you bring down your debt-to-income ratio.

Two common strategies of consolidating debt is with a personal loan or a balance transfer credit card:

Debt consolidation vs. balance transfer

	Debt consolidation loan	Balance transfer credit card
Definition	A personal loan used to pay off multiple existing debts	A credit card that allows you to transfer existing debt from another credit card
APR	9.58% on average	As low as 0% APR if you pay off the balance within the introductory period, then 14.61% on average
Terms	Typically 12 to 60 months	Typically 12 to 18 months for 0% interest period
Fees	Origination fee is typically equal to 1% to 8% of your loan amount	Typically a one-time balance transfer fee of 3% to 5%
Benefits	One fixed monthly bill makes your payments more predictable May get a better interest rate No prepayment penalty	May save a lot in interest if you can pay off the full balance within the introductory rate grace period The card may offer rewards
Risks	No 0% interest period, so you’ll start paying interest right away May need to pay a nonrefundable origination fee Loan eligibility is heavily dependent on your credit	Balance transfer fee may counteract interest savings May get charged a high interest rate if you have an outstanding balance after the promotional period New purchases may incur interest at the regular, higher APR, not the 0% rate

The post Good Debt-To-Income-Ratio appeared first on Interconnect Financial Group.

Debt Settlement

admin — Thu, 16 Mar 2023 20:28:59 +0000

How debt settlement affects your credit

While settling an account is better than not paying it at all, it can still hurt your credit history. Keep the following in mind:

Settled accounts may stay on your credit report for up to seven years

An account that was settled remains on your credit report with a status of “settled.” This entry will appear for seven years from the date the account first went delinquent.

Like with declaring bankruptcy, this could potentially make it challenging to get approved for obtaining credit for some time.

Missing payments while your debt is settled will ding your credit score

Most debt settlement companies require you to stop making payments on your debt while they work with creditors to settle the amounts. This is because some creditors may not settle for less than the full amount unless you’ve already fallen behind on your payments.

If you stop paying your creditors, however, this can bring your credit score down because payment history is one of the most important factors when determining your score.

By the time most consumers even consider debt settlement, they are likely already in deep financial debt. Therefore, it’s possible you may already be missing payments.

Make sure you work with a debt settlement company that is reputable since you are taking a risk by stopping payments on the accounts.

Fees can stack up with no guarantee your debt will be reduced

There are certain risks that may come with working with a debt settlement company.

Debt settlement agencies may require you to make payments for three years or more before your debts are settled. Be sure to review your budget before agreeing to work with a debt settlement company so you don’t end up quitting the repayment program.

Debt settlement companies may try to settle smaller credit accounts first, which can cause fees and interest to stack up on your larger debts.

You may have to pay taxes on your settled debts

Credit card companies and other creditors may report debt settled for less than the full amount to the IRS. Depending on the type and amount of debt, you could then potentially be liable for taxes on the difference, as the IRS considers this to be taxable income.

How debt settlement works

When it comes to debt settlement, you can work with a company to negotiate on your behalf or you can work with your creditor yourself.

To work with creditors yourself, you’ll need to contact your creditors and explain your financial situation. You may need to be patient but determined during this process, and you’ll want to continue making payments to your creditors. If you choose to go through a debt settlement company, it will work on this process for you, though your creditors may not be willing to work with your debt settlement company.

You can start by offering to pay a certain amount of cents for every dollar you owe. For example, you can begin the bargaining by offering to pay 25 cents on the dollar, then 50 cents and so on until you agree on a settlement. Or you could negotiate a payment plan or lump sum settlement.

In some cases, your creditors may not be willing to settle if they believe you can still pay the full amount of your loan. They may prefer to wait until your accounts are in default. However, you could meet in the middle with your creditor in the meantime to reduce your interest, eliminate fees and/or decrease your minimum monthly payment.

If you’re unsure about whether debt settlement is the right choice for you, consider other options such as debt consolidation, which pulls together all your debt into a single loan.

Which debts should I settle?

Because creditors are less likely to settle debts that are current or just delinquent, it may be best to approach creditors about old, past-due debts, especially ones that have been turned over to a collection agency. Creditors may be more willing to work with you on these types of debts.

You may also want to address your largest debts first, as these could be hurting your credit score more than your smaller debts.

If you’ve defaulted on your debt: If you’re more than 180 days behind on your payments, your creditor has likely reported your account as “default” to the credit bureaus and sold your debt to a collection agency. If you’re still unable to pay and want to avoid bankruptcy, you may be able to settle your debts for less than you originally owed and avoid some fees.

If you’re delinquent on debt: Delinquent debt is considered to be between 30 and 90 days late. At this point, your creditor may not be willing to negotiate a debt settlement.

If you haven’t missed any payments: If you haven’t missed any payments, it’s unlikely your creditor will be willing to settle your debts. It’s best to keep up with your minimum monthly payments and pay down the balance by as much as you can afford.

Why debt settlement may be worth it

For all of the potential negatives of debt settlement, it still might be worth doing.

Your credit score should recover

While your credit score will likely take an initial hit, it should recover over several years. It will happen faster if you can show you’re a responsible borrower by doing things such as paying on time and not using too much of your credit limit.

A settled account is better than a defaulted one

A settled account is viewed more favorably than one that has been defaulted on and written off by a credit card company or another lender.

You could pay less

If you’re successful in your settlement ventures, you’ll end up paying less than what you originally owed. This can free up your cash flow as well as allow you to build up your savings or pay down other debts.

You may avoid bankruptcy

While debt settlement and bankruptcy, specifically Chapter 13 (aka the “wage earner’s plan”), have some similarities, one of the biggest differences is that bankruptcy is a matter of public record. On the other hand, your credit report and score are more personal.

The advantage of bankruptcy, however, is that some forms (such as Chapter 7) allow borrowers to completely eliminate their debt.

How to spot debt settlement scams

If you’re searching for a debt settlement company to work with, beware of predatory debt relief scams that target consumers with large amounts of debt.

Per the Federal Trade Commission, you’ll want to watch out for the following red flags:

Requires that you pay fees up front before negotiating with your creditors
Claims it is working with a “new government program”
Makes guarantees up front
Advises you to stop all communications with your creditors and doesn’t explain the impact that can have on your case
Promises it can stop all lawsuits and collection calls
Asserts that debts can be settled for very cheap

If you want to avoid scams, consider instead working with a credit counseling organization. You can find a list of reputable credit counseling agencies on the Department of Justice’s website.

Frequently asked questions

Can debt settlement hurt your credit?

Because creditors report debt settlement to the credit bureaus, it can indeed have a negative impact on your credit score and can stay on your credit report for years to come. However, chances are, even before your debt was settled, your credit score likely took a hit from missed payments.

Can your credit score go up after debt settlement?

While your credit score may suffer for a bit when you first settle your debt, your credit score can eventually go up over time. After you settle your debt, it’s important to be intentional about rebuilding your credit by making sure you keep your credit use low and making on-time payments.

How long does debt settlement stay on your credit profile?

Similar to Chapter 7 bankruptcy, debt settlement can stay on your credit report for up to seven years. While this may seem like a long time, the impact of this event on your credit report will lessen over time. Your credit score can improve as long as you are making wise financial decisions and being intentional about rebuilding your credit.

The post Debt Settlement appeared first on Interconnect Financial Group.

Debt Payoff Methods

admin — Thu, 16 Mar 2023 20:28:59 +0000

Debt Avalanche Method vs. Debt Snowball:

What’s the Difference?

What is the debt avalanche method? The basics

The debt avalanche method, also referred to as “debt stacking,” is a popular repayment strategy. It involves putting extra money toward your outstanding debt with the highest interest rate as you make the minimum payment on your other debts.

Once you’ve paid off the targeted debt, you’ll move on to the second-highest APR and so on until all of your debts are paid off. If two of your debts have the same APR, you should prioritize the one with the higher balance.

How the debt avalanche method works

If you have several debts, creating a debt avalanche worksheet can keep you organized as you repay debt.

List out all your debts in order of the highest APR rates. If more than one debt has the same APR, list those debts in order of the highest amounts.
Next, write down the monthly minimum payments for each debt that you owe.
In the next column, write out your current payments. If you’re just paying the minimums due, these will be the same as your minimum payments column.
Following that, document the balance that is owed on that credit.
In the final column, list out each debtor’s interest rates and be sure to organize your list in order of highest to lowest interest rates.

Here’s an example of a debt avalanche method worksheet:

Type of Debt	Minimum Payment	Current Payment	Balance	Interest Rate
Credit Card No. 1	$100	$100	$2,000	22%
Credit Card No. 2	$139	$139	$4,000	15%
Personal Loan	$50	$50	$1,000	11.5%
Car Loan	$365	$365	$25,000	6.5%

In the above example, it would take you 86 months to pay off your debt if you only made the minimum monthly payments.

However, let’s say you have an extra $250 to put toward your debt each month. Using the debt avalanche method, you’d begin by repaying credit card No. 1, followed by credit card No. 2, then the personal loan and finally the car loan. If you were to stick to this plan and pay off your debt using the debt avalanche method, it would take you just 40 months to get out of debt — or about half the time.

Pros and cons of the debt avalanche method

A debt avalanche can go a long way toward shaving interest costs, so financial experts generally consider it to be the most financially sound way of paying off debts.

However, it’s possible that the debt with the highest APR is also the debt with the highest balance, which means you could lose motivation spending months or even years chipping away at the same balance.

Here’s a quick look at what to consider before taking on this payoff strategy:

Debt Avalanche Method

Pros	Cons
Because you pay off higher interest rate debts first, you save money on interest over time. You will be out of debt more quickly than if you were to prioritize paying off debts according to balance.	You could lose motivation if your highest APR debt is also your biggest balance since it may take a long time to pay off. The debt avalanche requires more discipline than other debt repayment strategies, like the debt snowball.

Debt snowball method vs. debt avalanche method

Wondering what’s better for you — a debt snowball versus a debt avalanche? Here’s what you need to know if you’re choosing between the two:

The debt snowball method is arguably more popular and involves paying off debts from smallest balance to largest balance without taking APR into consideration. Because you start by paying off debts with the smallest balance, you often knock out entire balances more quickly than you would with the debt avalanche method.
For most people, a debt snowball works best when they have a steady amount of extra cash to pay off debt. That’s because this repayment method assumes that as soon as one debt is paid off, you’ll take the minimum that you would have paid on that debt and apply to the debt with the next smallest balance — in effect “snowballing” the amount you owe.
Many people like the debt snowball method because of the motivation that comes from paying off a debt once and for all — often in as little as a few months. While the debt avalanche method will help you save more money on interest and pay off your overall debt sooner, research has shown people tend to be more successful with the debt snowball method because of the psychological boost that comes from eliminating an entire balance.

Debt avalanche method	Debt snowball method
Pay off debts in order from highest to lowest interest rates	Pay off debts in order from smallest to largest balances
May save you more money in the long run since you would pay less interest	May cost you more on interest since you’re focused on balances rather than rates
Can dampen motivation since it may take longer to pay off balances	Can inspire motivation as you see the loans with smaller balances paid off

Choosing a repayment method that is right for you

When it comes to choosing a debt repayment method, it’s more important to pick the strategy you know you’ll stick with. Go for the debt avalanche method if you know you’re disciplined, as it makes more sense financially. If you think you’ll struggle staying motivated with the debt avalanche method and know you’ll benefit from the small “wins” associated with clearing entire balances, go for the debt snowball method.

What matters most isn’t the strategy you choose, but rather your commitment to sticking to a repayment plan for most likely months, if not years. Both the snowball and avalanche method are known to help pay debt. You’ll become debt-free with both approaches — and that’s the most important thing.

The post Debt Payoff Methods appeared first on Interconnect Financial Group.

Credit Counseling vs. Debt Consolidation

admin — Thu, 16 Mar 2023 20:28:59 +0000

Credit counseling vs. Debt Consolidation

What is credit counseling?

Credit counseling is the process of working with a certified credit counselor to help you overcome financial challenges. A counselor can advise or educate you about your money, credit and debt; create a budget for you; talk to creditors on your behalf; or help you explore bankruptcy.

Credit counseling may be best known for their debt management plans. Under a debt management plan, counselors can help you consolidate unsecured debts (debts without collateral, like student loans) into manageable monthly bills that you can pay off within three to five years.

Pros and cons of credit counseling

Pros	Cons
Won’t directly impact your credit score in a negative way	May have to pay a setup and monthly fees for services
Debt management plans don’t have tax implications	Debt management plan can take anywhere from three to five years to complete
Counselors can help you budget or communicate with your creditors on your behalf	Can’t use credit cards during debt management plan process

How does credit counseling work?

When you choose a credit counseling agency to work with, you’ll schedule an initial credit counseling session, which is often free. This session may take place in person, over the phone or online.

Before meeting with your credit counselor, gather recent pay stubs, bills, and credit card and bank statements. It’s also helpful to list out all of your monthly expenses, especially variable spending like utility bills, food and gas.

During your meeting, your counselor will review your finances and speak with you to better understand your needs and challenges. If you choose to enroll in services, your counselor may:

Walk you through the process of setting up a personal budget, often via a customizable worksheet.
Suggest a debt management plan to help you lower or stop interest, consolidate select monthly bills and repay enrolled unsecured debts within three to five years.
Offer student loan counseling to help you identify your available options (repayment plans, forgiveness, etc.).
Provide you with educational materials or access to workshops on various financial topics, such as bankruptcy, money management and using credit responsibly.

Where can you find a credit counselor?

The majority of reputable credit counseling companies are nonprofit. Organizations may charge a setup fee plus a monthly fee depending on your debt and location if you enroll in services. Always ask about fee structures upfront, as they can vary among organizations.

These credit counseling organizations can help you locate a trustworthy credit counselor in your area:

Is credit counseling bad?

Working with a credit counselor isn’t bad, but it’s not right for everyone.

Debt management plans won’t work for most secured debts and services may cost up to $75 per month or more. Other services, such as for bankruptcy counseling, can come with their own fees.

Credit counseling doesn’t directly impact your credit. But a debt management plan may affect your credit in other ways. For example, a credit counselor may require you to close credit cards enrolled in the plan, which can impact your credit utilization ratio.

What is debt consolidation?

Debt consolidation involves rolling old debts into a single, new account. Banks, credit unions and online lenders typically offer debt consolidation through debt consolidation loans or balance transfer credit cards.

Debt consolidation can help lower your overall repayment costs, decrease your monthly payments and reduce the number of bills you juggle.

Pros and cons of debt consolidation

Pros	Cons
May be able to get a lower interest rate than your current ones if you have good credit	May have to pay additional fees such as origination fees or balance transfer fees
Only have to track a single due date and payment rather than multiple	Hard credit pull for new credit account can cause your score to go down
As you pay down on your debt, your credit utilization ratio will go down and your credit score may increase	If you’re unable to repay your debt, your credit score may suffer and your debt could be sent to collections

What does the debt consolidation process look like?

Compare lenders. Ideally, you should prequalify with several lenders or credit card companies so you can compare your options. Consider factors such as APRs, repayment terms, borrowing limits and fee structures.
Verify your information. Once you choose a lender you’ll need to verify your information by submitting documents such as pay stubs and a government-issued ID. You’ll also submit to a hard credit check, which will ding your credit.
Close on your loan. If you qualify, your lender may pay off your existing debts directly or you may need to apply your loan proceeds toward your original accounts. With a credit card, you’ll complete a balance transfer, which can come with a 3% to 5% balance transfer fee.

Tip: Review your credit scores and reports before you fill out any official financing applications to avoid surprises like credit reporting errors, and to get an idea of the current condition of your credit.

Is debt consolidation bad?

Debt consolidation isn’t bad, but it may only be a good fit for some people. If you have a good credit score, for instance, you may get low interest rate offers.

On the other hand, poorly managed debt consolidation can backfire. For example, if you’re unable to repay your newly consolidated loan or credit card, your account may be forwarded to collections and your credit may suffer. However, this is still possible with your old debts before debt consolidation as well.

Credit counseling vs. debt consolidation: Which is right for you?

Your specific financial situation determines whether credit counseling or debt consolidation is a good fit. If you fall under these categories, you may want to consider one of these options:

Credit counseling could be best for you if …

You prefer to work with a professional instead of working toward financial goals alone.
It’s difficult to afford your monthly debt payments and financial obligations.
You’re overwhelmed trying to juggle multiple accounts and monthly payments.
You want to understand your finances better, but don’t know where to start.

Debt consolidation could be best for you if …

You can afford your monthly payments, but you’re paying high fees on your current debt.
You want to reduce the number of bills you pay each month.
You have good credit and/or are comfortable with secured debt and can qualify for new financing with more favorable repayment terms.
Improving your credit score is important to you.

A third option: debt settlement

Debt settlement is an alternative to credit counseling and debt consolidation that involves negotiating your debts with creditors so you can pay less than what you owe. This can involve paying your creditors a single lump sum payment. Debt settlement may be best for you if your debts are long past due, you have money saved up and you want to avoid bankruptcy.

Typically, creditors aren’t willing to settle your debts unless they are in default. Your creditors may also not be willing to communicate with any debt settlement company you hire, so you may be better off negotiating yourself.

Pros and cons of debt settlement

Pros	Cons
May be able to pay less than what you owe your creditors	Stays on your credit report for up to seven years
You may be able to avoid bankruptcy or legal action from your creditors	Creditors may not be willing to negotiate with you
You can negotiate with your creditors yourself for free	Hiring a debt settlement company can be costly

Frequently asked questions

Is credit counseling worth it?

Credit counseling may be a good fit if you are overwhelmed by debt and aren’t sure how to manage it yourself. This route may also be worth considering if you want to enroll in a debt management plan or want bankruptcy counseling.

Does credit counseling affect credit score?

Credit counseling likely won’t directly impact your credit score. However, as you begin to pay off your debts, your credit utilization ratio will go down and your credit score may increase over time.

Do credit counselors charge a fee?

Yes — typically, credit counselors charge a setup fee as well as monthly fee. Monthly fees can range anywhere from $7 to $75 while setup fees can be as high as $100.

The post Credit Counseling vs. Debt Consolidation appeared first on Interconnect Financial Group.

Credit Check for Employment

admin — Thu, 16 Mar 2023 20:28:59 +0000

Credit Check for Employment: Can Employers See my Score?

Seeking a job takes plenty of preparation: polishing up your resume, finding promising openings, prepping for job interviews. But there’s one important part of your job application you might be forgetting to review: your credit report.

Many companies will conduct employment credit checks as part of their hiring processes. Although employers don’t have access to your three-digit credit score, the other information in your credit report could be the difference between getting your dream job and getting passed up.

Here’s what you need to know about when employers can check your credit, and how they might use the information when deciding whether to hire you.

Why do employers check credit?

Employers can legally check your credit report. Some employers may want this information to further inform their hiring decision and determine whether you’re a good fit for the position.

Employers may run a credit check for the following purposes:

Verifying your identity
Confirming your previous employment and experience
Assessing your ability to handle money
Evaluating your financial and personal stability

Background checks for employment often include checking the candidate’s credit history, as well as their criminal record and other public records. However, a potential employer must always obtain your written permission and authorization before it can perform a credit check.

Most often, a potential employer will work with an agency that runs employment background checks on job candidates. But not every job application will include a credit check, as these details will be more relevant for some positions than others.

Your credit information is likely to be important, however, if you’re seeking a position in which you’ll be overseeing other employees, dealing with financial transactions or managing company cash and financial accounts. Still, some employers will have a policy of running background checks on all employees, no matter their role.

What shows up on a credit check for employment?

While federal laws allow credit checks for employment, this only allows companies to see your credit report or history. Background checks often include pulling a copy of your credit report, but employers will receive a modified version called an employment report.

An employer credit check won’t include the following, for example:

Income
Credit score
Race/ethnicity
Religion
Political party affiliation
Medical bills
Marital status

The employment report will include several other details about you, however:

Can a credit check for employment hurt your score?

There are two types of credit pulls: hard and soft inquiries.

While a hard-credit pull can hurt your credit score temporarily, soft inquiries don’t have any impact on your credit score. Hard-credit inquiries are typically used to open new lines of credit, such as credit cards or personal loans.

An employer credit check is considered a soft-credit inquiry, since you’re not applying for credit. It won’t place a hard credit inquiry on your report, so it can’t affect your credit score.

What are your legal rights during an employer credit check?

Job applicants can reasonably expect to have a background or credit check run as part of the process of seeking employment. If you understand your consumer and credit reporting rights under the Fair Credit Reporting Act, however, you can make sure you’re treated fairly and legally by potential employers.

Here are the rights you have as a job applicant when it comes to credit checks:

Local and State Laws: Federal laws allow employers to check your credit report and use it for hiring and employment considerations, but you might want to research local laws about employment credit checks.

You can reach out to your state’s labor offices to learn more about how any local laws may impact you.

Currently, there are ten states that limit whether, and how, employers can use credit reports in their employment decisions:

California
Colorado
Connecticut
Hawaii
Illinois
Maryland
Nevada
Oregon
Vermont
Washington

In addition to state laws, cities such as Chicago, New York City, Philadelphia and Washington, D.C., have also passed legislation that limits how credit checks may be used by employers. New York City, for example, prohibits employers from checking your credit, asking about your credit or payment history or rejecting you because of your credit.

If you live in any of these places, look into the specific employment and credit rules that might grant you additional rights and protections.

Prior Notification and Written Permission: Employers who are pulling your credit report are required to notify you that they intend to check your credit and might use this information for hiring or employment decisions, according to the Federal Trade Commission (FTC). This notice has to be given in writing and as a standalone document, not hidden in the fine print of an application.

An employer must also get your written permission to run an employee background check or access your credit report. Make sure you review the authorization document carefully so you know if this is a one-time check or if the employer is asking for ongoing authorization to check your credit while you’re employed with it.

While you may tell a potential employer “no” when it comes to checking your credit, keep in mind that you may get rejected for the job as a result.

Adverse Action: If an employer pulls your credit report and sees something that gives them pause, it can’t immediately deny your employment because of it. If it wishes to reject you based on information in your credit report, it’ll have to give you advanced notice of their intentions to do so.

Specifically, it’s required to give you a full copy of the credit report that’s being used for these decisions. You will also receive a document from the FTC called “A Summary of Your Rights Under the Fair Credit Reporting Act.”

You will then have a few days to review the report and discuss the issues the potential employer found.

It must provide the name and phone number of the company that provided the consumer report. This gives you a chance to catch and correct any potential mistakes or errors on your report or provide relevant context for any negative details on your credit report.

If the company moves forward with an adverse action, such as rejecting your employment application, it must send you what is known as an “adverse action notice.” In this notice, the employer must officially notify you that it’s choosing not to hire you because of your credit check.

If you’re rejected for a job position due to your credit report, you are legally entitled to a free copy of that credit report within 60 days.

Unlawful Discrimination: You should also watch for any potential signs of unlawful discrimination against you.

Employers are required to hold all applicants to the same standard, regardless of “race, national origin, color, sex, religion, disability, genetic information (including family medical history) or age (40 or older),” according to the Equal Employment Opportunity Commission.

If your negative credit history is the result of a disability, for example, this could be a mitigating factor that the employer should consider when using your credit report to inform their hiring decisions.

How to prepare for a credit check for employment

The fact that your credit can affect how hirable you are makes it even more important to prioritize building and maintaining good credit. In fact, job seekers might want to give their credit reports the same attention that they would give a resume or another important hiring document.

Here are some ways that you can improve your credit to make the best possible impression on future employers:

CHECK YOUR CREDIT REPORT: You have a right by federal law to view your credit reports for free once every 12 months — note that access has been granted weekly since the beginning of the coronavirus pandemic — and can receive a free copy of your credit report from each of the three major credit bureaus by visiting www.AnnualCreditReport.com. You can also get free access to your credit file if you’re unemployed and planning to seek employment, or if you’ve had an adverse action taken against you by a potential employer based on your credit report. Review your report, including all account and payment details, to ensure that the information therein is accurate and error-free.

DISPUTE CREDIT REPORT ERRORS: If you find any erroneous information on your credit report, you have the right to dispute it. The credit reporting agency is then required to verify the disputed information and correct it if a mistake has been made.

PAY YOUR BILLS ON TIME: A history of consistent, on-time payments on your credit report will demonstrate good personal management skills and responsibility. It could also be wise to limit your borrowing to keep debt balances low and payments affordable.

BE READY TO EXPLAIN YOUR CREDIT REPORT: If your credit file contains negative information, be prepared to discuss this with prospective employers and provide details of mitigating circumstances. A hiring manager might view an account delinquency differently if it was caused by hardship — such as a health emergency, for example — rather than overspending or poor money management.

Even if you have a thin credit history, building credit and knowing your rights as a job applicant can help you put yourself in the best position to qualify for your next job offer.

Credit check for employment

Frequently asked questions

What do employers look for in a credit check?

When running a credit check on a prospective employee, employers not only confirm your identity, but also evaluate your reliability and ability to manage money. This may give some employers insight on whether your experience aligns with their goals as a company.

Can you be denied a job because of bad credit?

When employers run a background check, they receive a modified version of your credit report that does not include your credit score. However, if you’ve filed for bankruptcy or have any liens, employers may be able to see that.

While it is federally legal for employers to decline your job application because of your credit check, some states and cities have made it illegal to discriminate against someone based on their credit.

Is a credit check for employment a hard inquiry?

When a credit check for employment is run, there will be no impact to your credit score, since these types of pulls are known as soft-credit inquiries. You’re not opening a new line of credit, so there’ll be no need to perform a hard-credit pull.

The post Credit Check for Employment appeared first on Interconnect Financial Group.

Credit Utilization ratio

admin — Thu, 16 Mar 2023 20:28:59 +0000

What is Credit Utilization Ratio?

Your credit utilization ratio is a number showing how much available credit you’re currently using. It plays a significant role in determining your overall credit score.

Lenders typically favor credit utilization ratios below 30% since it shows you can manage debt effectively.

Here’s what you need to know about your credit utilization ratio, including how it’s calculated, how it affects your credit score and ways to improve it.

Typically expressed as a percentage, your credit utilization ratio looks at your current debt in relation to your total available credit. This shows lenders how much credit you’re actually using.

For example, a $2,000 balance on a single credit card with a $10,000 limit equals a credit utilization ratio of 20%. All ratios must be combined to calculate your final credit utilization score if you have multiple cards or lines of credit.

Your credit utilization ratio includes your revolving debt, such as credit cards, home equity and personal lines of credit. However, the balances on installment loans — like mortgages or personal loans, student loans or auto loans — aren’t included in your credit utilization ratio (although they are used to calculate other parts of your credit score).

Since your credit utilization accounts for 30% of your FICO Score, keeping your available credit limits high and your current debts low is wise. Maxing out your credit cards will increase your utilization ratio, and lenders may view you as a potentially risky borrower.

What is a good credit utilization ratio?

A low utilization ratio is best, which is why keeping it below 30% is ideal. If you routinely use a credit card with a $1,000 limit, you should aim to charge at most $300 per month, paying it off in full at the end of each billing cycle.

The 30% credit utilization rule:

While many credit experts recommend keeping your credit utilization ratio below 30% to avoid a significant dip in your credit score, the 30% rule should be considered the maximum limit, not your ultimate goal.

In reality, the best credit utilization ratio is 0% (meaning you pay your monthly revolving balances off). But keeping your utilization in the 1% to 10% range should help improve your credit score, as long as the other aspects of your score are within reason.

How does credit utilization help or hurt your credit score?

How does credit work? Basically, five main factors influence your overall credit score:

Payment history (35%): Payment history includes whether you’ve made past credit card and loan payments on time and helps future lenders determine the likelihood you’ll repay debt.
Amounts owed/credit utilization (30%): As discussed, this includes the amount of revolving credit (credit cards, etc.) you use compared to your total credit limit for all combined accounts.
Length of credit history (15%): This is how long your credit accounts have been open and how long it’s been since you used certain accounts. A high average age of accounts can help boost your credit score.
New credit (10%): Applying for new credit can result in a hard credit inquiry, which could lower your score by a few points each time you apply.
Credit mix (10%): Your credit mix looks at how many different types of credit accounts and loans you have. Maintaining a diverse range of credit accounts shows lenders that you can manage various financial obligations.

How do you calculate your credit utilization ratio?

To figure out how your credit utilization ratio stands up, you’ll need to know the total debt owed and the credit limit of each credit card or line of credit. Once you have this, divide what you currently owe by your credit limit to find your credit utilization ratio.

Because credit-scoring models consider your overall credit ratio, you’ll need to do this calculation with each card or line of credit to get a complete picture of how each account may help or hinder your credit score.

Credit utilization ratio example

Debt type	Credit limit	Amount owed	Credit utilization ratio
Credit card #1	$10,000	$5,000	50%
Credit card #2	$7,000	$2,000	29%
Home equity line of credit	$20,000	$7,000	35%
Overall totals	$37,000	$14,000	38%

As seen in the chart above, each per-card or line of credit utilization is relatively high, bringing your total utilization score to 38%. Remember, the goal is to stay below the 30% utilization threshold (with the 1% to 10% range considered ideal).

What is a bad credit score?

The FICO Score is the most popular credit-ranking system among lenders. Numbers range from 300 to 850, with a bad credit score typically falling below 580. Here’s a breakdown according to myFICO:

Exceptional: 800+
Very good: 740-799
Good: 670-739
Fair: 580-669
Poor: Below 580

You can check your most current credit score at AnnualCreditReport.com or by requesting a copy of your credit report from any of the three major credit bureaus: Equifax, Transunion and Experian. Accessing your credit report is free and won’t negatively impact your credit score.

Having a bad credit score might limit your current and future financial options. For example, lenders might view a low score as a sign that you’re an irresponsible borrower. As a result, getting a mortgage or an auto loan might be more difficult. Although bad credit loans exist, they often come with less favorable interest rates and terms.The good news is that you can take steps to improve your credit score and repair your credit history. Doing so may help open more doors while strengthening your financial health.

How can you improve your credit utilization ratio?

Lowering your utilization ratio is fairly straightforward, plus it’s one of the fastest approaches to increasing your credit score. Here are five ways to boost your available credit while reducing your debt:

PAY OFF YOUR DEBTS

Paying off your balances is one of the best ways to lower your utilization percentage. Getting your balance down to $0 is an excellent goal to have. Not only will this decrease your credit utilization ratio, but you’ll also avoid paying monthly credit card interest.

REQUEST A CREDIT LINE INCREASE

Increasing your current credit limits is usually easier than paying down balances. You can contact your credit card companies to request a limit increase on your existing accounts (some allow you to do this online with a few clicks).

While increasing your credit limit should help improve your credit score, it may result in a hard inquiry on your credit file. Again, a single inquiry is generally no big deal, but multiple inquiries could drag your score down.

Most importantly, try to avoid spending the extra funds since that will defeat the whole purpose of increasing your credit limit.

KEEP CREDIT ACCOUNTS OPEN

Because closing a credit card account will lower your available credit (as well as reduce the length of your credit history), it’s best to keep old accounts open whenever possible.

Additionally, make small charges on the account regularly to avoid an issuer closing your account due to inactivity. However, reach out to your credit card company if a particular card charges an annual fee — they might be able to downgrade it to a no-fee credit card, allowing you to justify keeping the account open.

CONSOLIDATE YOUR DEBT

Another strategy for reducing your credit utilization ratio is to consolidate your debt with a personal loan, or consider using a personal loan to finance a large purchase instead of a credit card. Unlike revolving lines of credit, a personal loan is considered an installment loan — allowing you to borrow money at a fixed rate with a predetermined repayment timeline. Once the funds are disbursed, you can spend them however you wish.

Debt consolidation loans can be worth it if you find a lower interest rate. Transferring your debts over to a personal loan can bring your credit utilization ratio down — but only if you avoid the temptation to charge those cards back up again. Crunch the numbers with our debt consolidation calculator to ensure you get the best deal.

Alternatively, you can also open a balance transfer credit card, which will increase your available debt while making it easier to manage your existing credit card balances with one combined monthly payment.

Try to find a 0% interest promotional offer or an interest rate lower than what you currently have. You may need to pay up to 5% of the transfer to move existing debts to the new card, which will cause a high balance at first — but once you begin to pay it down, your credit score will reflect the new ratio.

APPLY FOR A NEW CREDIT CARD

Adding a new credit card to your credit mix is another strategy for lowering your credit card utilization. In addition, you can take advantage of credit card sign-up bonuses and cashback offers.

However, this isn’t the best action plan if having access to more credit results in spending more. Ultimately, it’s worth creating a solid budget and sticking to it. Credit cards can be valuable tools if used responsibly.

Here are some pros and cons to consider before opening another credit card:

Pros

Cons

You can increase your available credit and lower your credit utilization ratio — assuming you don’t use the new card to fall into a destructive debt cycle.

You can consolidate debts into a balance transfer card, which may lower your credit utilization ratio, reduce your debt payoff timeline and save you money.

Applying results in a hard inquiry on your credit report, which could ding your credit score by around five percentage points.

A new card reduces your average age of accounts. This could hurt your credit score, as the length of your credit history accounts for 15% of it and lenders prefer borrowers with more substantial usage experience.

More credit means more opportunities to take on debt, potentially raising your credit utilization ratio and leading to higher interest charges.

If your credit utilization ratio is higher than it should be and your credit score is suffering, you can always make moves to improve it. Check out our guide to working toward a better credit score for more information.

The post Credit Utilization ratio appeared first on Interconnect Financial Group.