Credit9 - Personal Loans

Check Your Credit Before Buying a Home

What is a Credit Score?

Imagine that a friend asks to borrow money from you. Assuming you had the money to loan, you might then ask yourself, “Did he pay me back the last time he borrowed money? Did he pay me back the full amount? On time?” When you approach banks and lenders for a loan, they go through a similar analysis, but since they don’t know you personally, they use your credit history to determine whether you will be a responsible borrower. Lenders learn about your credit history by looking at your credit report. You can get a free Credit Report Card that includes your free credit score right now!

Credit reports are developed by three separate credit agencies. These agencies (Equifax, Experian, and TransUnion) gather information about your credit history, and, using a formula developed by Fair Isaac Corporation (FICO), each assigns you a credit score. You will end up with three slightly different credit scores, each from one of the three agencies. Lenders typically look at your middle credit score (as opposed to the highest or the lowest), and you must provide all three of your credit scores (one from Equifax, one from Experian, and one from TransUnion), when applying for a loan.

Why are Credit Scores so Important When Buying a Home?

Your credit score helps determine the rate and conditions you receive on a loan. If your credit score is high, meaning that your credit history indicates that you’ve paid your credit card bills on time, haven’t “maxed out” your credit cards, etc., then lenders believe it’s a fairly good bet that you won’t have difficulty paying off your loan. They will see you as a low-risk investment and offer you a low rate on your loan with good conditions.

If your score is lower, lenders will think you’re a riskier investment, and charge you (by loaning you money at a higher interest rate, often including hidden charges) to take on the perceived risk. Get your free credit score now.

How do Credit Scores Affect You When Applying for a Loan?

Most lenders have a baseline credit score by which they largely make their decision to approve or deny mortgage applicants. The maximum credit score is 850 (though a score of 850 is rare, indeed. Only about 10% of applicants have a score over 800). Any score in the 700s or above is excellent and will get you a loan with the lowest interest rate. When you get into the 600s it starts getting dicey. A score of 680, for example, is still considered good, but when you get below 660, some lenders start saying, “No.”

For others, 640 or 620 is the line at which you won’t be considered for their better programs. Once you get into the 500s, you are a candidate only for what the industry calls subprime loans, those with interest rates that are a couple of percentage points higher than those offered to prime borrowers. Subprime loans also often come with a lot of hidden charges.

So you can see the importance of keeping a good score. It used to be okay to miss a credit card payment deadline. You might pay a $15 late fee. Big deal! But if you do this on a regular basis, it can savage your score and cost you many, many times that amount when you want to buy or refinance a home. That’s the bad news.

 

The good news: your credit score isn’t fixed in stone. If you have bad credit scores, there are ways to improve your credit health. If you find your scores are lower than you expected, you’ll need to engage in credit rehab. This is different from credit repair, defined as going to an outside company that promises to cure your problems and raise your scores. There may be some good ones out there (along with some disreputable ones) but they can’t do anything you can’t do yourself and you shouldn’t waste your time or money going to them for help.

From a financial standpoint, it is almost always better to take the time to improve your credit health, and make yourself eligible for a better interest rate, than it is to apply for a loan with a credit score that will only make you eligible for a subprime loan.

Find Out Where You Stand

You can check your credit score each month using Credit.com’s free Credit Report Card. This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt and other factors affect your score, and you’ll get recommendations for steps you may want to consider to address problems. In addition, you’ll also find credit offers from lenders who may be willing to offer you credit. Checking your own credit reports and scores does not affect your credit score in any way.

So, You’re Getting Married! Will You Need a Wedding Loan?

Congratulations, you’re engaged! Of course, unless you’re planning to elope, you’re going to need a lot more than luck to get through your wedding day. How you decide to pay for your wedding will be one of the first important decisions you make as a couple — and there’s a chance you’re thinking about getting one of those wedding loans you’ve seen advertised. You know the ones with rates “as low as 7.49%” to cover all the expenses associated with the dream version of your big day. Of course, you don’t have to go into debt just to get married — and, in fact, it may be a good idea not to, given the stress financial troubles can put on a marriage. But if you decide to go that route, it’s important to know exactly what you’re signing yourself up for. Here, we break down what you need to know if you’re thinking about getting a wedding loan.

The Cost of a Wedding

The average cost of a wedding in the United States is $26,645, according to the website, Cost of Wedding. Couples typically spend between $19,984 and $33,306, excluding a honeymoon. That’s a big chunk of change to cover out of pocket, but your wedding can easily be much less expensive — without eloping. (Many couples do pay less than $10,000 for their wedding, the website says.)

For instance, you could get your wedding dress at Goodwill, tell invitees that you’re registered at your bank, and throw a helluva buffet-style reception on a shoestring. There are thousands of articles on the internet about how to throw a frugal wedding, but if those approaches make your eyes cross and you’ve decided you want to go all out on your big day, there are options when it comes to borrowing money.

What’s a Wedding Loan?

You may have seen the ads: “Have the wedding of your dreams!” “No assets required.” “No hidden fees.” “Pick up your check tomorrow.”

Well-known lenders, as well as some that seem more fly-by-night in nature, offer wedding loans, which are really ordinary personal loans when you remove the window dressing. Personal loans are installment loans, meaning you pay a predetermined monthly payment at a set interest rate over a specified period of time.

According to a 2015 survey from The Knot, 32% of couples believe having access to credit and/or loans will allow them to spend beyond their budget. If they are opting to take out personal loans, there’s a good chance they’re paying double-digits for them. Rates on personal loans can vary by lender, location and credit score, among other factors, but to give you an idea of the costs, one online lender lists the average annual percentage rate (APR) on all its personal loans at 12.76%, as of the second quarter of 2016.

Hopefully you won’t have to borrow the whole amount you’ll need for your wedding and can draw on savings, income and family contributions for many expenses, especially the ones where a deposits expected — for example, the place where you’ll be having the reception and the caterer, each of which may require a 50% down payment.

Let’s say you decide to borrow $15,000. If you take out a wedding (read: personal) loan in that amount and are charged 12.76% for four years, your 48 monthly checks will be $400 each. You might be able to chip away at that rate if you have excellent credit (more on that below), borrow from the bank or credit union where you have your checking or savings account, and allow automatic withdrawal of loan payments.

Other Borrowing Options

You’ll likely get a better rate if you have some serious security to put up as collateral, such as your home. In that case, you would be better off getting ahome equity line of credit (HELOC), in which the average interest rate is much lower. (As of late 2016, it was hovering just below 5%). Not only would you get a lower rate, there will probably be some tax deductions you could take, which wouldn’t be possible with a personal loan. If you were to take out $15,000 at once, at 5%, you’d have to send in about $345 a month to pay it off in four years (not including any closing costs).

Only you can judge whether it makes sense to put your house or condo on the line to finance this one day (because, yes, if you default on the HELOC, the bank can technically start foreclosure proceedings). Many personal finance experts will encourage you not to go that route – and virtually all of them will be horrified by the notion of borrowing against your 401K or other retirement savings.

All In the Family?

Perhaps there’s a family member who could loan you the money. You may be able to create a win-win situation: You can offer the lenders – say, your parents — an interest rate that’s less than you would have to pay a bank or credit union, but more than they are currently earning. (Five-year CDs are currently paying about 1% on average.) If you borrow $15,000 at 3% for four years, your monthly payment would be $332.

Approach family and friends with a specific plan, including the interest rate you’d pay them and how much you’ll repay each month. Put the agreement in writing so you won’t be tempted to put that bill low on your priority list. Propose late charges if you miss payments by more than a certain amount of time, and have a plan for what will happen if you default on the loan. Watch out! You could be putting family relations in jeopardy if you can’t live up to the terms.

Should You Charge It?

Another option to consider adding to the mix is a credit card that offers a great introductory APR on new purchases. There are plenty of them out there offering 0% for a year or more. Credit.com makes it easy to find cards that fit this bill.

There are a few important hitches:

  1. Never be late with a payment. Otherwise, you’ll be paying a lot more than 0% in interest.
  2. Be sure you can pay off what you owe by the time the intro period is over, when the rate is likely to go up significantly. (You may be able to find another card to transfer the balance to down the road, but you can’t really count on that. Plus, you’re generally charged a fee every time you transfer a balance.)
  3. Watch out for your credit limit. If you charge up to 30% of your available credit limit, your credit score could take a sizable hit, which might make other lenders nervous enough to jack up the rates on your other cards.

Credit Card Tips:

  • Call your current card issuers and ask for an increase on your existing credit lines.
  • Be careful not to use credit cards with high interest rates to finance purchases you won’t be paying off immediately.
  • Use credit cards as opposed to checks or cash when you can. That way, you’ll be able to take advantage of the cards’ purchase protection if you have a dispute with a vendor.

Check Your Credit

Remember, if you’re trying to get wedding financing with bad credit, it can really cost you. A stellar credit score will at least make personal financing more affordable since it will help you qualify for the best rates and terms. That’s why it’s a good idea to see where you stand before you apply. (You can view two of your credit scores, updated every 14 days, for free on Credit.com.)

Now What?

If you’re feeling as though there are no really good borrowing alternatives for your wedding … good! “Few things can put more stress on a relationship than financial woes,” as personal finance author Gerri Detweiler writes.

Go back to the drawing board and come up with a way to make your wedding day special without leaving you with a bill that will only cause trouble over time. After all, you have your debts, and your beloved’s probably got a few, too. The last thing you need is another big monthly expense.

When Wedding Insurance Makes Sense

While you’re taking another look at cutting expenses, you might want to consider adding one — for wedding insurance — especially if you’re going to have a pricey party. You wouldn’t buy a car without insurance, would you? Yet many a perfectly fine car can cost a lot less than many a wedding. And given all the other wedding-related expenses, this one is fairly modest:

“At roughly the cost of including one additional guest at your wedding, wedding insurance is a smart idea for couples who want to protect the significant investment that this important occasion represents,” says the insurer Fireman’s Fund to both straight and gay couples. “Inclement weather; flood, fire or power failure at the event venue; lost or damaged attire; photographers and videographers who lose the event images or video; and other vendors who fail to show up can all spell disaster.”

According to The Knot, a basic wedding insurance policy costs between $155 and $550, depending on how much protection you want. While some companies are now offering “cold feet” coverage, it’s not usually included. But if you pay extra, in some circumstances, you can even get protection from that.

USA TODAY personal finance columnist Sandra Block offers excellent advice on wedding insurance:

  • Liability coverage “will protect you from lawsuits if an exuberant guest slips and falls in the conga line,” she writes.
  • Sudden death or illness. “If the groom has an appendicitis attack the day before the wedding,” Block explains, “wedding insurance will cover the cost of non-refundable deposits.”
  • Lost or damaged formalwear. “If the bridal store files for bankruptcy before you pick up your Vera Wang gown, wedding insurance will cover the cost of a new dress.”
  • Photography mishaps. “Your wedding photos are supposed to provide a lifetime of memories, but what if they’re all out of focus?” Block asks. “Or the photographer simply disappears? Wedding insurance policies will cover the cost of reassembling your wedding party and retaking the photos or videos.”

As with other forms of insurance, it pays to shop around. Get recommendations from folks who have been recently married. Call your current insurers and see what they are offering. Discuss the “what ifs” that worry you most — for example, are you concerned that one of you may be called up by the military? It may be part of the policy, or you may be able to purchase additional coverage.

It all boils down to how much of a gambler you are — and how much additional stress you want to have or avoid.

All the best to the happy couple! May the celebrations be grand … and not cost you too much.

Life After Loan Denial

You went through the process — you filled out all the paperwork and were ready to land that financing, whether it was an auto loan, personal loan or something else. And then you got the results — your loan request was denied. But don’t feel bad; loan denial happens. So, now what? First, you should relax and take a deep breath. Believe it or not, being turned down for loans can be a good thing. Loan denial alerts you to a problem with your credit or your financial situation: The trick is to use this opportunity to get the problem(s) fixed. Here’s what you should do after loan denial so that next time it’s more likely you’ll be looking at loan approval.

Why Were You Turned Down?

The first step is to figure out why you were turned down. If you haven’t already, you should receive a letter from the lender shortly that describes why you didn’t meet the lender’s criteria. Once you have that, you’ll want to review it so you have an understanding of what their reasoning was and you can get a game plan together for remedying the situation.

Reviewing Your Credit

Because the whole process can take a few weeks, it would be smart to get started now instead of waiting for that letter to arrive. When you first learn that you have been turned down for loans, it is a good idea to check your credit reports from the three major credit bureaus — Equifax, Experian and TransUnion — right away. You can see copies of your credit reports once every 12 months for free by visiting AnnualCreditReport.com. This will give you an idea of how lenders view your credit data. Keep in mind that checking your own credit does not harm your credit scores.

Once you have them, you’ll want to check your credit reports closely for any negative items such as late payments, collection accounts or bankruptcy filings. These negative records lower your credit scores and can make you appear riskier to lenders. Aside from noting the types of records on there, you’ll want to make sure everything appearing on your credit reports is accurate as well. If the records are correct, you can calculate their expiration date to see when they will age off your credit reports (usually after 7-10 years). If the records are inaccurate, you can file a dispute to have your credit report fixed.

If you believe your credit has been damaged by identity theft, it is important to act quickly. Reporting the case to the credit bureaus and law enforcement in a timely manner can make it much easier to remove the fraudulent records from your credit reports.

It’s important to note that each of the three main credit bureaus often report slightly different information, as not everywhere reports to each bureau and they don’t share information. If you find the same error on multiple reports, you’ll need to file individual disputes to each applicable credit bureau.

The Importance of Your Credit Scores

In addition to the finer details on your credit reports, it’s a good idea to take a look at your credit scores. There are five main factors that impact your scores— payment history, credit utilization (how much debt you have in relation to your total credit limit), average age of your credit accounts, the variety of credit accounts you have and the number of inquiries on your credit profile.

You can see where you stand on these credit score influencers by getting a free credit report snapshot, complete with two free credit scores, on Credit.com. With this credit snapshot, you can get insight into the factors impacting your credit standing in a positive way and what areas you may need to work on improving. You can use this analysis to figure out why you might have been turned down and what you can do to improve your scores. For example, you may need to reduce your debt balances, improve your payment behavior or work on your balance of accounts. Don’t wait to make these changes until the letter arrives — Now is the time to start making improvements, as it can expedite when you’ll see results.

Receiving the Explanation Letter

Once your loan denial letter arrives, you can use that information to see if the information you gathered while reviewing your credit (and your guesses as to why you were denied for your loan) matches up with the lender’s reasons for denial. If it does, great job — You’ve already started working on improving your credit and fixing the problems.

If it doesn’t, you may need to do some more research, including talking with your lender for more specifics. Aside from credit concerns, the lender could have rejected your application for many other reasons, including your debt-to-income ratio, an error in your application or lending restrictions for your state, which may not have been reflected in your credit. If you have questions about why you were turned down, call the lender’s customer service team for more information.

The loan denial letter also includes instructions for obtaining a free copy of the credit report from the bureau that was used for your application. You are still entitled to receive this free credit report if you have been turned down for a loan, even if you have already requested the three free credit reports you can get each year from AnnualCreditReport.com. It’s a good idea to make sure you use this free report opportunity. The letter will have instructions on how you can request your credit report. If you’ve already started working on improving your credit, you can use this free additional report to see if anything has changed since you started the process.

When It’s Time to Apply for a Loan Again

Ideally, you should only consider applying for a new loan after you’ve gone through the process of reviewing your credit, the loan denial letter and taking steps to improve the situation to help prevent another loan denial.

Each time you apply for a loan, your credit scores get dinged with a “hard inquiry,” lowering your scores. (Note: Inquiries remain on your reports for two years, but only affect your credit scores for 12 months.) This means you could damage your credit scores simply by applying for multiple loans that you know you may not get. If you can, wait to re-apply for a loan until you’ve worked on improving your credit and financial standing. This way, when you submit an application again, you’ll have better odds of loan approval and you won’t suffer the inquiry just to get denied again.

If waiting simply isn’t possible because you need money now (and can’t qualify for a personal loan), you can investigate other ways to borrow money. Credit cards and emergency loans could provide you with the money you need. You can also consider using savings, borrowing from a family member or friend, or asking your employer for an advance and working out a payment plan.

Being turned down for a loan isn’t fun, but it can be a good opportunity to take a hard look at your credit and financial standing and improve your situation.

The Best Ways to Loan Money to Friends and Family

Most of us are fairly generous people, and we want to help a family member or friend when we can. But the fact is, a person who can’t get a personal loan from a traditional source often has damaged credit or no credit, both of which make such a borrower a greater credit risk. (There are also loans for bad credit, but perhaps this person has yet to apply for one.)

For the record, I believe that lending money to friends and family is far preferable to cosigning a loan for someone who can’t qualify on his own. Cosigning creates a false sense of security: You think the primary borrower is responsible for the loan, and that you, as a cosigner, are not. In fact, when you cosign a personal loan, for example, you are on the hook for the whole cost. Even if it is paid on time, your credit score will be affected by the loan if it is reported to the credit bureaus.

All warnings aside, there are times when you may be asked to loan money to someone you know for any number of reasons. These can include:

  • Capital to start or grow a small business
  • A down payment or loan so your child or relative can purchase a home
  • Money to help someone get back on his or her feet after a divorce, illness or other catastrophe

If you are going to lend money to someone you know, you might as well increase your chances for success. But before we get into that, let’s make one thing clear: Your friends and family do have some options.

Can You Get a Personal Loan With Bad Credit?

If they’re in need of extra funds, but their credit is not in great shape, they can try to apply for personal loans for bad credit. This will entail gathering personal information, including their credit score, as well as proof they can pay the loan back. After spending some time researching minimum credit score requirements for personal loans from lenders in their area, they may feel confident enough to apply for a loan. (Note: if they have a good relationship with their bank or credit union, they may want to start their search there.)

Of course, these personal loans will likely carry higher interest rates, so your loved one may want to try brushing up their credit before applying. To get started, they can pull their free credit report snapshot, updated every 14 days, on Credit.com. The snapshot provides two free credit scores, along with notes on what they can do to improve their scores. However, in general, you can raise a credit score by paying down high credit card balances, disputing credit reports errors and using a starter line of credit, like a secured credit card or credit-builder loan, to establish a solid payment history.

If directing your friends and family to a personal loan is out of the question, here are some tips for lending money the smart way.

  1. Set a Fair Interest Rate

This can work in your favor as well as the borrower’s. The interest rate you charge can still be competitive with the rate your borrower can get from a traditional lender but high enough that you make more money than you would if you parked your money in a safer bank account. If your borrower balks at being charged interest, you might want to blame it on the Internal Revenue Service. That’s because if you give someone more than $12,000 in a year, it will likely be treated as a gift and subject to gift tax. To avoid this potential complication on a larger loan, you must charge an interest rate that is at least as high as the IRS’ Applicable Federal Rate, which is set monthly.

  1. Get Your Agreement in Writing

When you loan money to friends and family, it’s best to get your agreement in writing. But if you think it is “uncomfortable” to insist on a written loan agreement, think of how uncomfortable you will be trying to collect if your borrower falls behind. If you must, blame it on your spouse, accountant or someone else who “insists you get it in writing.” You can find a sample promissory note online or in a legal forms book, or if the amount is large enough, you can ask an attorney to draft it for you. Spell out the terms, including how much is being borrowed, the interest rate, late payments and when they will be assessed, and how and where payments will be made.

  1. Set up a Formal Payment Arrangement

Let’s face it: It will be easier for your borrower to make a late payment to you than to his or her other creditors. And I doubt you want to become a debt collector. So include in your agreement the details of when payments are due, late fees that will be charged and how you want payments to be made (by check or PayPal, for example). I don’t recommend taking cash, which is harder to track. I do recommend that you set up a copy of any checks or money orders in a file in case there is a disagreement about payments that were made later. Go a step further to arrange automatic deductions from the borrower’s bank account to yours, and you won’t have to worry about whether the check is in the mail.

The Real Reasons Retailers Push Branded Credit Cards

When shoppers hit the counter of their favorite retailer this holiday season, they may be asked to sign up for the store’s branded credit card in exchange for a discount on their purchase. The cards are often a better deal for the stores than they are for consumers.

There are some perks to consumers—store cards, or private label cards as they’re known in the industry, are a good starting point to build up credit score, and there can be rich rewards for frequent shoppers. In general, though, these branded cards carry higher interest rates than general purchase cards and have lower limits. That makes them more expensive for consumers.

For retailers, however, store cards are a growing profit center. Private label card use by consumers grew nearly 12 percent per year from 2009 through 2012, according to the most recent data from the Federal Reserve. They’re an easy way for stores to build loyalty, collect data, and—of course—earn revenue from consumers. Retailers are so invested in turning customers into private-label cardholders, that they often offer their sales clerks cash incentives for signing people up.

One big reason that retailers like store credit cards is that they encourage customers to spend more. More than 60 percent of consumers say that they shop more often with retailers with whom they have a store card, and they’re also more receptive to communication about events and promotions by that retailer, according to a market research report from Packaged Facts.

Not only do store cards encourage more spending and build loyalty for merchants, but they also give the stores access to valuable consumer data. Plus, they cost less to process than other forms of payment. They’re also often compatible with mobile pay systems, which are expected to grow more dominant in future years.

Since retailers often control the approval process, they’re able to give cards to consumers who might not qualify for general-purchase cards, and to charge them interest on the balance.

In 2014 private-label credit and debit cards generated $254 billion in sales, according to Business Insider. They account for a large share of purchases at major retailers, used for nearly 60 percent of sales at Kohl’s and nearly 50 percent of sales at Macy’s last year, per an analysis by credit card consultant Ryan Douglas at First Annapolis.

The growing importance of private-label and general credit cards reflects a shift among consumers, who shied away from credit in general after the Great Recession. The average number of credit cards held by consumers has been ticking up in recent years according to the Consumer Financial Protection Bureau. Those numbers could continue to increase as cashiers suggest new credit cards over the coming months.

Clear Language Establishes Trust, Minimizes Anxiety

How financial concepts are presented can have a big impact on how people feel about their bank statement. In August, Credit Karma worked with Qualtrics to survey over 1,000 people about their reactions to two descriptions of adjustable rate rules, one technical and one conversational. Their responses were highly correlated with their attitudes toward money and their credit score. In short, the closer the fine print was to language they would use to talk to their friends, the more likely they were to find it not just helpful, but trustworthy. This was particularly true for those with lower credit scores who were more negative about financial disclosures overall.

These findings mirror a Federal Reserve Board study in 2011 that concluded, “When reading disclosure documents, consumers are best served by terms that are straightforward. Small wording changes can significantly improve consumer understanding.”

Credit Karma Head of Consumer Insights Greg Lull is passionate about making managing money as stress-free as possible for everyone. “When we communicate in everyday language, we help people take control of their financial future. That is powerful.”

Technical paragraph

Your variable rates may change when the Prime Rate changes. After the initial introductory 0% interest rate period, the variable rate is calculated by adding a percentage to the Prime Rate published in The Wall Street Journal on the 25th day of each month. Variable rates on the following segment(s) will be updated quarterly: Non-Introductory Purchase APR: Prime plus 9.74%, 14.74% or 19.74%; Non-Introductory Transfer APR: Prime plus 9.74%, 14.74% or 19.74%; Cash Advance APR: Prime plus 19.74%.

Conversational paragraph

You’ll have an introductory interest rate of 0% for the first 12 months. After that, though, you’ll have a variable interest rate – meaning your rate will change based on the Wall Street Journal’s “prime” rate (here’s more about the prime rate). We’ll calculate your interest rate for purchases and balance transfers based on your credit. We’ll let you know the percent (prime plus 9.74%, 14.74% or 19.74%) after you’re approved.

Overwhelmingly, the conversational language was seen as more positive. In addition to being seen as easier to understand, helpful and less anxiety-inducing, it was also seen as more trustworthy than the technical language.