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Your Poor Credit Score Can Cost You at Least $21,000

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New Study Shows the Effect of Low Scores on Mortgage Loans

Your Poor Credit Score Can Cost You $21,000 New Study Shows the Effect of Low Scores on Mortgage Loans

A poor credit score can cost you a lot of money when you take out a mortgage.

A recent study by Zillow shows that the higher interest rates from a poor credit score can add at least $21,000 in additional interest to a mortgage, but often it’s even more than that.

Zillow analyzed over 100,000 mortgage quotes offered on Zillow Mortgages across the nation between March 25 and May 5.

It Doesn’t Take Much

Using the nationwide median home price of $213,100 and a 20 percent down payment as a reference point, Zillow found that potential borrowers with excellent credit (above 760) could qualify for a 4.5 percent interest rate on a thirty-year fixed-rate mortgage.

Borrowers with merely fair credit scores (640 to 679) could only qualify for a 5.1 percent rate. A change of 0.6 percent doesn’t seem like much, but the differences add up.

In this case, the drop from excellent to fair credit will cost you approximately $21,000 over the life of a thirty-year loan.

More Profound Effects

If you live in a market where homes are more expensive, the effect is even more profound. Apply the above example to San Jose ($1.3 million median home price), and the credit drop costs an additional $129,000.

Conversely, in a relatively inexpensive urban market like Pittsburgh, where the median home price is $135,465, the credit score drop only costs $9,000.

When you’re in the fair credit range, even a small increase has large positive effects. By bumping your credit score from the fair range to the good range (680-719), your interest rate offer for the national median home would decrease from 5.1 percent to 4.6 percent — bridging most of the gap between fair and excellent credit.

Save Money with Good Credit

According to Zillow’s data, on the national scale, simply moving up from fair to good credit would save you $16,000 over the life of a 30-year loan.

Not every market follows the national example. In Cincinnati, Zillow found that the rates for excellent, good, and fair credit were 4.7 percent, 5 percent, and 5.2 percent respectively.

In that market, going from fair to good credit saves $5,000 over the life of the median home loan while going from fair to excellent credit saves $12,000.

See the Impact

The Zillow study shows the credit score effects on median home costs for 53 urban markets. If you live in one of these markets, you can see the effects directly.

If not, you can estimate the effects by finding the median home price for your market and using an online calculator to run different interest rate scenarios.

You can see why a higher credit score is important – but do you know how to get one?

Make sure that you always make all of your monthly payments on time with at least the minimum amount due. Your payment history is the largest contributing factor to your credit score.

Keep Your Ratios Low

The second largest factor in a credit score is the total amount you owe. Keep your overall debt-to-income (DTI) ratio and your credit utilization ratio – the amount of credit you use versus the amount you have available – as low as you can.

Finally, check your credit report regularly to make sure there are no errors or signs of fraudulent accounts that could be inadvertently dragging down your score.

If you plan to buy a home, check your score three to six months before you intend to buy, and periodically until you do buy. You may need time to raise your score – and, thanks to Zillow, you now know how much you can save by doing so.

This article was provided by our content partners at MoneyTips. Photo ©iStockphoto.com/kosmin

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10 Best States to Live in with a Bad Credit Score

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Where You Can Make the Best of a Bad Credit Situation

10 Best States To Live In With A Bad Credit Score

It’s no fun having a bad credit score. You pay higher interest rates for your credit – if you can get credit at all. You have little room for financial error. A small, unexpected bill can cause big problems.

At least your hardships may not be as bad if you live in certain states.

RewardExpert, a site that helps users optimize credit and debit card reward programs, examined factors that affect residents with poor credit – such as typical expenses, usury laws to limit predatory lending, and the status of debt collectors – and how those factors vary in each state.

Where is bad credit more tolerable? Consumers with bad credit should avoid the coasts and stick to the Midwest – not surprising, given the typically high costs of living in coastal areas.

Top 10 States

Here are the top ten states to live in when your credit score is low.

1. Iowa

Iowa tops the list by doing well in all categories. Iowa is tied for the lowest maximum usury interest rate (currently less than 5 percent) and had the third-lowest number of complaints per capita with the Consumer Financial Protection Bureau (CFPB). Hawkeye state residents also have a low cost of living with reasonable household incomes.

2. Minnesota

Minnesota has the lowest delinquency rate and a strong economy. An average household income of over $80,000 combined with a low cost of living makes it more likely that consumers with poor credit can earn enough to stay ahead of bills.

3. Nebraska

Nebraska’s story is like Minnesota’s, with a slightly higher delinquency rate and cost of living. The strong state economy and low unemployment show low risk to creditors.

4. North Dakota

The overall debt load of North Dakotans is low, and those who do incur debt, seem to handle it well. North Dakota trails only West Virginia in the fewest number of CFPB complaints per capita.

5. Wisconsin

Good state financial health, low credit card debts, and relatively high credit scores help badger state residents overcome a relatively high cost of living.

6. Arkansas

Welcome to Arkansas, where the cost of living is one of the lowest in the nation – including low home prices. Maximum usury rates are a tolerable 6 percent.

7. Kansas

Kansas doesn’t top any category, but it does reasonably well in all. The sunflower state has one of the better household incomes compared to the cost of living.

8. West Virginia

As noted above, West Virginia has the fewest number of complaints lodged with the CFPB. Housing prices are the lowest in the nation, keeping overall mortgage debt under control.

9. Wyoming

Certain costs are quite low in Wyoming, especially tuition costs. Given that student loan debt is second only to mortgage debt in America – and debt collectors are few – Wyoming makes it into the top ten.

10. Oklahoma

There are many debt collectors in Oklahoma, but the cost of living is relatively low, and the maximum usury rate is 6 percent – making debt manageable for most Oklahomans.

It Could Be Worse…

If you are struggling with debt in one of these states, remember that things could be worse – you could be living in one of the ten worst states for bad credit.

Regardless of where you live, take steps to improve your credit score. Pay all your bills on time and control your spending to keep your debt load down.

When you have bad credit, it’s imperative to keep your balance down and patiently chip away at debt with on-time payments. Your credit score will improve – eventually.

This article was provided by our partners at moneytips.com.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

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Higher Credit Scores Needed For Home Purchases

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Average Homebuyer Score Rose from 700 in 2005 to 732 in 2016

Higher credit scores needed for homebuying in 2018.
Welcome to the 2018 home-buying market: Rising demand and an extremely tight supply of homes, especially in the critical starter-home market, make it difficult to realize your goal of home ownership.

In this market, you’ll need two important things to land your dream home – more money and a higher credit score.

Data from the Joint Center for Housing Studies (JCHS) at Harvard University highlight the credit score issue.

According to the 2017 JCHS study, “The State of the Nation’s Housing – 2017,” the median credit score for successful mortgage loan applications increased from a FICO score of 700 in 2005 to 732 in 2016.

Lenders are still conservative in their risk assessments – aided in part by regulations put in place during the housing crisis.

In the pre-crisis market of 2005, around 10% of conventional first lien mortgages went to borrowers with a credit score below 620. That number fell to nearly zero by 2009, and as of 2016, it was still at 0.1 percent.

Just over 3 percent of 2016 loans were issued within the 620 to 659 credit score range, while approximately 67 percent were issued to borrowers with credit scores of 740 or higher.

Other Metrics

Along with your debt-to-income (DTI) ratio, your credit score is one of the most important metrics that lenders use to evaluate your ability to repay a mortgage loan. A good credit score can help you overcome a poor DTI.

According to the Wall Street Journal, Inside Mortgage Finance reports that in the fourth quarter of 2017, approximately 78 percent of loans with DTI ratios above 45 percent went to borrowers with credit scores of 700 or greater.

A DTI of 45 percent is generally considered the upper limit for issuing conventional loans, but mortgage backer Fannie Mae changed the limit to 50 percent last year as long as other criteria are met.

Other Options

What can you do if your credit score isn’t sufficient? You can consider a Federal Housing Administration (FHA) loan that allows lower credit scores and a down payment of as low as 3.5 percent. If you qualify, the FHA will back your loan – reducing your risk to lenders.

Generally, the minimum FICO score for an FHA loan is 580, although it’s possible to go as low as 500 with extenuating circumstances.

Some lenders will require a higher credit score in the 620 to 640 range to accept an FHA loan.

More Alternatives

For those who qualify, Veteran’s Administration (VA) loans are a similar alternative.

Your other option is to work on improving your credit score and building up a larger down payment over time.

Control spending in a way that allows you to pay down your debts, make sure that you pay all your bills on time, and keep your credit card spending below 20 percent of your credit limit if possible. You’ll eventually meet your loan qualification target.

Loan Quality

It’s not just about baseline qualification, but also about the quality of the loan offers.

Jordan Goodman, the personal finance expert and author known as “America’s Money Answers Man,” advises, “Sometimes it makes sense to wait to get your credit score up to a higher level to be able to get a lower interest rate … when you are getting a mortgage, it’s a long-term commitment.”

A fraction of a percentage point can mean thousands of dollars of interest savings over the life of a thirty-year loan.

In this market, it’s all relative. You may have a suitable credit score to secure your preferred home – but are you competing with somebody who has an even better credit score?

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/nzphotonz

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

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Politely Say ‘No’ to Cosigning Your Kid’s Student Loans

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cosigning your kid’s student loans

When it comes to debt, cosigning your kid’s student loans is one of the most dangerous things you can do.

You take on all of the risks of the liability, including potentially being sued, but personally reap none of the rewards.

And these types of loans are especially burdensome. The student loan default rate in the U.S. was 11.5 percent between October 2013 and September 2016.

Accelerating Problem

That means more than one in ten student loan borrowers end up ruining their own credit for at least seven years — but often much longer due to interest and penalties on the overdue amounts.

And for every one of those loans that had a parent cosigner, said party’s credit also gets dragged into unsavory territory by the borrower’s defaulting.

What’s worse: Experts have said that the proportion of student loans heading into defaults is accelerating due to a confluence of factors including perpetually rising tuition and — more recently — the resumption of interest rate increases.

Plus, the average student loan borrower owes over $37,000, making it clear why parents may not want to cosign.

Just Say “No”

But telling your child that you don’t want to be involved isn’t easy.

To help you manage that conversation, here are some tips for saying “no” to cosigning your kid’s student loans.

Children often aren’t aware how being a cosigner will impact you. For example, they might not know that it affects your credit score and restricts your ability to borrow.

You Can’t Afford the Payments

Additionally, they may need to hear that you can’t afford the payments if they default, something that is a real risk.

Further, if you don’t have a great credit score, being a cosigner might actually hurt instead of help them if they are looking at private loans.

Ultimately, informing them as to why you can’t cosign can help the situation.

It lets them know it isn’t personal, it’s just a matter of maintaining your financial well-being.

Be Definitive About Not Cosigning Your Kid’s Student Loans

While explicitly saying “no” isn’t easy, hedging on the matter won’t help.

If you aren’t clearly refusing, they may think there is hope and try to convince you. This can lead to an awkward conversation and even frustration.

Instead, make sure your position is completely understood. Actually use the word “no,” and don’t use phrases like “I don’t think I can” or “I don’t know if I should” that come off as ambiguous.

Let them know that you won’t change your mind, and reiterate your reasons if you feel that’s necessary.

Yes, it’s hard to blatantly refuse, but it can be the best approach.

Not A Parental Responsibility

Ultimately, it isn’t a parent’s responsibility to cosign for a student loan.

If your child is struggling to fund their education, recommend that they get a job, explore scholarships, or even choose a less expensive school.

Being a cosigner isn’t a burden you have to take on, so feel free to say “no” if that is in your best interest.

Have you considered cosigning your kid’s student loans — and if so, what did you ultimately decide? Tell us about it in the comments section beneath this post.

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This Lender Repos 1 In 3 Cars It Finances — How to Avoid This Cycle

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This lender repos 1 in 3 cars it finances.
You frequently hear about America’s crushing student loan debt , but cars are not far behind — especially subprime auto loans.

While student loans are approaching $1.5 trillion, outstanding auto loans topped the $1.2 trillion mark in the third quarter of 2017, according to the New York Federal Reserve.

Subprime borrowers (with credit scores below 620) hold almost one-quarter of the dollar value of auto loans. Given that level of risk, it’s no surprise that over 4% of auto loans are delinquent by 90 days or more and repossession is a real threat.

Subprime lenders are more likely to repossess autos since they service higher-risk clients. However, Jalopnik reports that one lender – Credit Acceptance – expects to repossess 35% of the cars that it finances every year.

Absorbing That Default Rate

It’s difficult to absorb that default rate without charging high interest rates to make up the difference. Borrowers who already have difficulty paying receive rates that make monthly payments even higher – leading to a cycle of defaults and repossession.

If you have subprime credit, how can you get a loan and avoid repossession? Start with an understanding of how much you can really afford to pay for a car. Review your budget (and if you don’t have one, make one).

Find out the highest monthly payment you can afford to make given your income and other expenses. Don’t forget to include gas, insurance, and maintenance costs. Online calculators are available to help you budget and estimate your total auto ownership costs.

Shop Around

Next, shop around for both cars and lenders (even with poor credit, you have options). Check with the Better Business Bureau and online reviews to see how other customers have fared. As you search, be realistic in your expectations for both the car and the interest rate of your loan.

Don’t be tempted to extend your loan term out extra years to lower your monthly payment. You’ll be tempted to overspend and you could be making payments beyond the car’s useful life.

What if you’re already bordering on default? You’ll need even greater fiscal discipline to make up the late payments along with the corresponding late fees and any other penalties.

Negotiate with Lenders

However, if you simply can’t afford to make the full payments, you may have to negotiate with the lender for payment terms that you can afford.

Your current lender may offer refinancing, but the terms are likely to be poor. Refinancing costs may neutralize any gains on interest rates and monthly payments.

If necessary, explore your options to downgrade to a cheaper car. Dealers and lenders would rather find affordable monthly payments than go through the expense and hassle of repossessing your car.

Stay Current

However, this may not be a viable option if you are behind on the payments on your existing car or your car is worth less than the amount that you owe. A lender may be reluctant to roll any of those negative values into your new car loan.

Long term, your goal should be to increase your credit score. Why is it subprime? Have you missed payments, racked up excessive credit card debt, or defaulted on a loan?

The cure is time and financial discipline. Cut back spending to where your budget creates an occasional surplus that you can use to pay down debt.

Subprime lenders know their clients are at high risk for default and missed payments. If you have subprime credit, be the exception to that rule. Budget wisely and you won’t have to worry about auto repossession – and you’ll also be on your way to better credit.

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/BERKO85

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

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Will Capital One Make Credit Karma Obsolete?

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Credit Karma vs Capital One free credit scores
First it was Discover. Now it’s Capital One that is throwing a wrench into the business model Credit Karma has created for its livelihood. There continues to be huge changes in the arena of free credit scores, and Capital One has taken a step closer to making Credit Karma (and other free credit score companies like Credit Sesame and Quizzle) obsolete.

What is the big change over Discover? A dedicated area where customers can learn how to improve their credit score, and learn how financial decisions they make can affect it. In other words, they aren’t simply giving their customer a credit score and letting them figure out what that means on their own. They are providing tools so the customer can monitor, improve and educate themselves about their credit score.

More credit cards are offering credit scores these days (these include Barclays, Capital One, Discover, First Bankcard, and Walmart). Many are doing so with FICO scores instead of FAKO scores, although Capital One is also offering a FAKO score. This trend has the potential to seriously shake things up in the world of free credit scores. As more credit cards are giving credit scores at no cost to their customers with their bills, it’s becoming less necessary for people to search for a place where they can obtain their score. In other words, instead of people having to go out looking for it, their score is starting to come to them.

This move by the credit card companies has the potential to become a major disruption to the business model of free credit card sites. Why would consumers seek out a place to get their credit score for free if they’re already getting it at no cost, delivered directly to them from their credit card company? One argument Credit Karma could make against cards like Discover was that it provided a score, but it didn’t provide the credit monitoring and educational material on what the score meant to the consumer. Capital One, with their Credit Tracker, has taken a big step to move even closer to providing exactly what Credit Karma provides.

Instead of just a score on a credit card statement, Capital One has created a destination area on its website they call Credit Tracker. The goal of this area is to allow their customers to view their score, track it, and then strengthen their credit standing. This area gives customers access to their credit score, but then takes it a step further. In addition to the score, customers have access to a credit report summary and credit history which includes such basics as monthly payment amounts, accounts opened and number of inquiries. It also provides credit monitoring by issuing credit bureau alerts which can help customers spot potential fraud more quickly.

To better educate their customers, they provide a credit report card which gives a letter grade to a number of key factors which help determine each individual’s credit score. This, combined with a credit simulator which shows how different decisions the customer is considering taking will impact their score, Capital One has built an educational portal with tools for those interested in improving their credit score. They’ve taken it several steps beyond simply providing a score on a monthly basis to their customers.

The question to Credit Karma is how much of a threat to their business model are credit card companies like Capital One? The mere fact that more and more people are getting a credit score at no cost without even to have to seek it out is already a disruption to sites which offer free credit scores. While Capital One isn’t currently going after their income source (Credit Karma makes its money by taking the information they have to make offers to its users, then earning money when customers sign up for those offers), it’s not hard to see with their Credit Tracker dedicated area, they are only a step or two away from being able to do this if they want. If they do, it could have a devastating effect on the current business model of all free credit score providers, and even potentially make them obsolete.

How this will all shake out is still anyone’s guess, but it’s becoming more clear that there are some major changes is store for all parties offering free credit scores, and those who don’t adapt and differentiate themselves may find themselves irrelevant in this sector in the coming years.

(Photo courtesy of Eric Hauser)