How to Money, Episode Four: Debt to Income Ratio

Debt to Income Ratio

So far on How to Money, we’ve covered credit cards, credit scores, and annual percentage rates (APR), all of which pretty commonly known.

That’s why on this week’s episode we’re going tackle something that’s a little more obscure: the debt to income ratio, also know as DTI.

Enjoy!

What is the debt to income ratio?

Your debt to income ratio is a pretty simple measurement. It shows you how much of your income goes towards paying off debt.

The ratio is measured on a monthly basis. So if you had a monthly income of $3,000, and $1,000 of that money went towards debt payments, then you would have a DTI ratio of 33.3%.

Included in the ratio are any payments made towards personal loans, credit cards, student loans, auto loans, and home loans. If you do not have a mortgage, it also includes the money you put towards rent.

The basic equation for calculating your DTI is:

Monthly Debt Payments / Monthly Income = DTI.

When you’re shopping for a mortgage, it’s important to remember that your potential mortgage payment will replace your rent payment the calculation. When adding up your monthly debt obligations, make sure to account for that.

What is the debt to income ratio used for?

Your DTI is used by potential lenders to help determine whether or not you can afford a given loan.

Basically, the ratio a good idea of whether or not your debt burden is sustainable. If your DTI is already too high, it tells a lender two things:

  1. You have taken out too much debt
  2. If you added this loan on top of the loans you’re already paying off, you might have trouble making your payments.

When applying for a home mortgage, a DTI of 43 percent or below will make you eligible for a Qualified Mortgage.

What’s a Qualified Mortgage?

A Qualified Mortgage is a home loan that meets certain specific benchmarks designed to make the loans safe and affordable.

According to the Consumer Financial Protection Bureau (CFPB), a lender that offers a Qualified Mortgage has to make a “good-faith” effort to determine a borrower’s ability to repay their loan.

(Lenders that do not do this are usually predatory and should be avoided.)

In addition to the 43 percent DTI cap, other requirements for a Qualified Mortgage include a loan term no longer than 30 years and no features like negative amortization or an interest-only period of loan payments. Qualified mortgages also can’t include balloon payments at the end of the loan’s repayment term.

What is a good debt to income ratio?

The ideal DTI would be zero. This would mean that the person in question does not have any debt whatsoever.

However, that’s not really feasible for most people.

As a general rule, it’s best to keep your DTI below 33 percent. That means paying less than a third of your monthly income towards debt payments.

A ratio in that range will show most lenders that you are handling credit responsibly. It will mean more approved applications and lower interest rates. Read more about debt to income ratio in our post What is the Debt to Income Ratio?

What would you like us to cover on future episodes of How to Money? You can email us by clicking here, or you can get in touch with us on Twitter at @OppLoans.

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Want to Raise Your Credit Score by 50 Points? Here Are 4 Great Tips

opploans-raising-credit-score-2

These aren’t overnight solutions. But with a little planning and a lot of dedication, following this expert advice can help you rebuild your credit score.

Having a bad credit score is kind of like having a serious nut allergy. People wouldn’t know it to look at you, but there are a whole bunch of things that this condition is holding you back from doing.

With a nut allergy, it might be eating certain types of candy bars or a nice PB&J sandwich. With a bad credit score, it’s taking out a personal loan or a credit card that doesn’t require a cash deposit.

Either way, both these things put real limits on the kinds of decisions you can make. Luckily, while a nut allergy is something you’re pretty much stuck with, a bad credit score is something you can fix.

For someone who has a mediocre credit score—say it’s in the 670 range—raising their credit score is pretty easy. But if you have bad credit, like a score that’s 630 or below, rebuilding your credit is going to take a lot more effort.

But just because it’s hard, doesn’t mean it isn’t worth doing. Your financial well-being is worth it. If you’re looking to raise your credit score by 50 points or more, here’s what you should do.


1. Check your credit report and dispute any errors you find

This step is a lot like filling up your gas tank before going on a long car trip. It’s kind of a no-brainer, but it’s also absolutely necessary. Skip this step, and you’re not going to get very far at all.

Jeff Hunter is the Editor of Simple. Thrifty. Living., a personal finance site. He says that “More than 42 million people in this country have errors on their credit report, and 10 million of those have errors that affect their credit score.”

He recommends that you “Make sure you are regularly checking your credit report to make sure there are no mistakes and that you haven’t been a victim of identity theft.” You can read more about identity theft in our post 3 Identity Theft Warning Signs.

But who wants to spend money just to order a copy of your credit report? No one, that’s who. That’s why it’s so great that you won’t have to pay a dime!

“You are entitled to one free credit report per year from each of the three major credit reporting bureaus, so you should be able to order one every four months,” says Krystal Rogers-Nelson, a freelance writer and contributing Safety & Security Expert for ASecureLife.com (@ASecureLife).

“It won’t affect your score as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.”

To order a free copy of your credit report, just visit www.AnnualCreditReport.com.

2. Make your payments on time

There are five different categories of information that the FICO corporation uses to create your credit score. Of those five, the most important one is your payment history. It makes up a whopping 35 percent of your total score.

The most important thing to remember is to keep your credit report clean from here on out,” says Hunter. And if you’re serious about a clean report, paying your bills late is not an option.

First, this will mean automating as many bills as you can. If you can outsource the hassle to an e-bill, then go ahead and do it. Just make sure that you check in at least once a month to make sure everything is going smoothly.

Second, this will mean budgeting your money properly so that you always have the funds in your account when a bill comes due. An e-bill doesn’t do you much good if it’s zeroing out your account and racking up overdraft fees.

(Just make sure that your zeal for on-time bill payment doesn’t lead you to take out a payday loan in order to make ends meet. The potential debt trap that awaits you just won’t be worth it.)

When it comes to your credit score, improving your payment history is a bit of a long game. Most information stays on your report for seven years, so it’ll take awhile for the old bad info to drop off.

Don’t worry. though. The wait will be worth it.

3. Pay down your debt, and do it as aggressively as you can

When it comes to fixing your credit score, “Your “Payment History” and the “Amount Owed” categories make up 65 percent of your FICO Score calculation, so those are the categories you should focus on first,” says Rogers-Nelson.

Paying down your debt is critical to improving your score, but it can also feel like one of the most overwhelming obstacles to good credit. That’s why you should start small. Going too big too fast is a surefire way to fail.

Make sure you are paying the minimum balances every month,” says Rodgers Nelson, “then make adjustments in your budget to increase your payments, even if it’s only $5 or $10 per month. If you can, start making two payments per month.”

Once you get comfortable with your debt repayment, you can start getting more aggressive. Remember, the faster you pay down your debt, the faster you’ll see your score start to rise.

A truly aggressive debt repayment plan is going to require three things: a strict budget, an extra source of income, and a plan. Luckily, these are all subjects we’ve written about before:

If you need help starting a budget, try these five great budget apps or check out the OppLoans App Directory.

To start earning some extra cash, read these six expert tips for getting your side hustle going, then peruse our list of 10 awesome side hustles for quick cash.

Lastly, the two best debt repayment strategies out there are the Debt Snowball and Debt Avalanche methods. You can read about the Debt Snowball and the Debt Avalanche.

4. Use your credit cards responsibly

As you pay down your debt, it’s important that you try and use your remaining credit cards in a smart and strategic manner.

“Credit cards can help you build your credit, but the key is to show that you can manage them responsibly,” says Rodgers Nelson. “Keep your balances low on credit cards–set a limit for yourself on spending to make sure you are not going over budget–and pay your balance in full every month.”

The unique thing about credit cards is that they carry a one-month grace period before interest starts to accrue on any purchases that have been made.  Paying off your credit card balance in full every month ensures that you’ll get all the card benefits–like points and rewards–without paying any extra money.

Basically, never spend money on your card that you don’t already have in your bank account. So long as you always have the money to pay off your balance you’ll never be in danger of racking up additional debt.  

Rodgers-Nelson has some other great credit card tips:

“Make sure you’re not maxing out your credit limit every month; shoot for no more than 30% credit utilization ratio. 10% is even better. This means that if your credit limit is $2000, your spending would ideally be between $200 and $600 per month.”

The great thing about your credit utilization ratio is that, as old credit card debt is paid off, you should start to see those old cards slip to levels where your score will be positively affected.

Two last quick tips for raising your score

  • “This may seem counterintuitive,” says Hunter, “but canceling credit cards actually lowers your credit score. Part of your credit score is based on how much credit you utilize (your credit utilization score), so the more credit you have available, the higher your credit score.
  • Hunter has one last seemingly counter-intuitive tip: raising your credit limits. This is another way to try and improve your credit utilization ratio. Instead of only paying down the balances you already have, you could contact your credit card company and request that they raise your total credit limit. If you have a good history with the company, they’ll be pretty likely to agree!

Don’t let your bad credit get you down. Instead, get serious about fixing it. Raising your credit score 50 points is totally doable–even if won’t happen overnight.

Do you have a story about how you raised your credit score by 50 points or more? We’d love to hear about it! You can email us by clicking here or you can let us know on Twitter at @OppLoans.

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Contributors
KR_NelsonJeff Hunter is the Editor of Simple. Thrifty. Living. (@simplethrifty) and is an avid believer in personal finance education, especially for children and young adults. He started his career as a business journalist, where he decided to focus on personal finance. Since then, he has focused his overall personal finance education on all things credit and savings. As Editor of Simple. Thrifty. Living, he feels he can reach everyday readers who have questions about smarter ways to handle their money.
PIG
Krystal Rogers-Nelson is a freelance writer living in Salt Lake City, Utah. She is a contributing Safety & Security Expert for ASecureLife.com
(@ASecureLife), specializing in financial security, home security, and family safety. As a homeowner and mother, she is committed to empowering others with the knowledge and tools needed to live secure and comfortable lives at home and abroad.

How to Finance a Medical Emergency

An OppLoans E-Book

OppLoans: Paying medical debt with a credit card


Paying medical debt with a credit card.

In order to avoid taking out a high-interest loan from a predatory lender, you may feel compelled to use a credit card to finance a medical emergency. However, you still need to be careful. While most credit cards offer much lower interest rates than predatory lenders, credit card interest can still accumulate quickly, worsen your financial state, and eventually lower your credit score. Rob Berger, a contributor to Forbes, compared credit card usage to heroin because “they are both extremely dangerous and addictive.” 32 Rather than maxing out your credit card, consider applying for a safe installment loan to cover your medical debt.

Using personal installment loans to pay medical debt.

Predatory lenders are bad, that much is clear. But if you find yourself without savings or family to fall back on, what are you supposed to do about that emergency surgery? How are you going to pay to fix your son’s broken leg?

Here’s the good news: you don’t have to fall victim to predatory lenders. No, not even if you have a short-term medical crisis.

If you have good credit, you have you a number of options. You may qualify for personal loan from a bank, or a personal line of credit from a credit union. 33 These will typically have low APRs, which are sometimes even lower than credit cards. 34

If your credit’s not so hot, you might look for a safe personal installment loan from a loan company. Installment loans are paid back in fixed increments, typically monthly, over a set period of time.

This might sound a little like those troublesome no-credit-check loans we mentioned earlier. But most lenders who offer personal installment loans are a lot more careful than the no-credit-check guys. Your credit history will be scrutinized, and you’ll need to provide information about your income before you’re approved for a loan. Plus, they won’t push you to borrow more than you can really afford. APRs for these kinds of loans can vary, so you should shop around to make sure you’re getting the best possible rate.

Play your cards right, and taking out an installment loan could actually improve your credit score. If you make payments on time, your lender will report that information to the bureaus that calculate your credit score. Just six months of prompt payments on an installment loan could lead to a 35-point credit score increase. 35

If you’re a member of the military, you can also apply for emergency financial assistance through a service relief organization. Note that if you’re an active-duty service member, you are entitled to special protections under the Military Lending Act (MLA). Under this law, lenders can’t charge you APRs higher than 36 percent on most loans. The MLA also prohibits prepayment penalties. 36

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How to Finance a Medical Emergency

An OppLoans E-Book

How to finance a medical emergency


Introduction

We’ve all been there. Even when you’re budgeting carefully and spending responsibly, life can throw you some ugly financial curve balls. Maybe your kid falls off his bike and breaks his arm, or that cough you’ve been ignoring turns out to be more serious than just a seasonal cold.

Sadly, most of us will someday experience an illness or injury that requires medical attention, and even if you have health insurance, medical bills can pile up fast. Depending on what your plan covers, you could still be forced to pay out of pocket for more than you have in savings. If you’re uninsured, something as seemingly mundane as a few hours in the emergency room can turn into an expense that haunts you for years.

Medical debt can cause serious stress, but if you’re in the midst of a crisis, take a deep breath. There are many safe and responsible ways to handle a financial emergency. No matter your credit score or financial situation, you have options, and we’re here to help you explore those options.

next >

How to Money, Episode Three: Credit Scores

how to money video

Your credit score is just a simple, three-digit number, but it has a super powerful effect on your financial health. It determines what kind of loans and credit cards you can apply for, what sorts of interest rates you can get, and could even decide where you live or work.

For more on how these scores work—and what you can do to improve your own score—check out the video below.

Enjoy!

What is a credit score?

Your credit score is a three-digit number that expresses your “creditworthiness”, or how likely you are to repay a loan based on your past borrowing behavior. Lenders use them to help judge whether or not to accept a person’s loan application and what kind of interest rates to charge them.

When it comes to your credit score, you don’t actually have just one. You have several. The most commonly used kind of score is the FICO score, which was created by Fair, Isaac and Company in 1989. (The company has since changed its name to FICO.) But even with your FICO score, you don’t have just one. You have three!

That’s because your credit score is based off information from your credit reports. The reports are compiled by the three major credit bureaus: TransUnion, Experian, and Equifax. The information on the reports can vary from bureau to bureau, which means that your FICO score can change depending on which credit report is being used to create it!

What do credit scores mean?

FICO scores exist on a scale from 300 to 850. The higher the score the better your credit.

The exact criteria for what makes a “good” credit score versus a “fair” or even a “bad” credit score will vary from lender to lender (check out our other resources for more information on bad credit loans). That being said, there are six basic ranges of credit scores:

  • 720-850 = Great Credit
  • 680-719 = Good Credit
  • 630-679 = Fair Credit
  • 550-629 = Subprime Credit
  • 300-549 = Poor Credit

If you have a great credit score, you are going to get approved for pretty much any loan you apply for–especially if you have a score of 750 or above. Not only that, but you’ll also receive the very lowest interest rates and the best credit cards perks and rewards.

The lower your score goes, the more likely you are to be turned down for a loan–especially if it’s an “unsecured” loan that isn’t backed by collateral, like a car or a house. You’ll also see your interest rates go up and the kinds of credit card rewards you’re being offered start to dwindle.

If you have a score below 630, that’s when you’re going to find real difficulty getting a loan from a traditional lender. In this range, you’re much more likely to fall prey to a predatory payday loan or title loan. Predatory lenders offer no credit check loans that can seem like a great solution for folks with bad credit–when in reality they can trap those borrowers in an unending cycle of debt.  

How are credit scores created?

In order to create your credit score, FICO first has to get a look at what’s in your credit reports. These reports are basically a history of how you’ve used credit (aka how you’ve borrowed money) over the past seven years.

After that period of time, information on your score usually drops off. This means that poor decisions you’ve made—ones that have lowered your score–will eventually drop off your report and stop hurting your credit. However, some information, like bankruptcies, can stay on your report for 10 years.

Your credit report contains information like how much money you’ve borrowed, how much of your total credit limit you’ve used, what kinds of credit you’ve used (like credit cards, mortgages or personal loans), whether you pay your bills on time, how long you’ve been using credit, whether you’ve recently applied for more credit, and if you’ve ever filed for bankruptcy.

FICO takes all that information and uses it to create a snapshot of your creditworthiness. There are five general categories of information, some of which are weighted more heavily than others:

  • Payment History – 35% of your total score
  • Total Amounts Owed – 30% of your total score
  • Length of Credit History – 15% of your total score
  • Credit Mix – 10% of your total score
  • New Credit Inquiries – 10% of your total score

As you can see, your payment history and your total amounts owed are the two most important factors.

How can you fix your credit score?

If you’re trying to improve your credit score, the two best things you can do are:

  1. Pay your bills on time.
  2. Pay down your existing debt.

Taking care of them will have the biggest impact on your score.

It’s a good idea to take a look at your credit reports to see what information is on there. Sometimes, the credit bureaus make mistakes that can impact your score! Luckily, the credit bureaus are all legally obligated to provide you one free copy of your credit report per year. To get a free copy of your credit report, just visit www.annualcreditreport.com.

Is there a financial topic you’d like to see us cover in a future episode of How to Money? Let us know! You can email us by clicking here or you can find us on Twitter at @OppLoans.

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Affordable Phone Plans to Avoid Bad Credit

Affordable Phone Plans

Smartphones are more essential than ever these days. You might even be reading this article on one right now! Unfortunately, they can also get pretty expensive.

And if you don’t pay your phone bill on time, it can actually end up making your credit score worse. So how can you get the vital phone services you need without risking bad credit?

Thankfully, there are likely affordable phone plans within your budget, but you have to be careful! Some potential providers may attempt to take advantage of your situation. That’s why we spoke to the experts to make sure that your phone plan isn’t a PHONY plan (sorry) (just kidding, we’re not sorry).


Consider lesser known carriers.

You probably see a lot of ads from the major cell phone carriers. Your Verizons and Sprints and AT&Ts, if you will. But what about the carriers that might not be able to afford massive advertising budgets? The ones who never had the chance to ask if you could hear them now. When comparing pricing possibilities, it can be worth looking at the carriers less often considered. That’s what Gabe Lumby of Cash Cow Couple (@CashCowCouple) did.

We really like Republic Wireless as a cheap phone plan option and have written a detailed review on our site about the service,” Lumby told us. “I’ve personally used the service for over 3 years and outside of some occasionally spotty coverage, I have no complaints. We only pay $31 and change for both my wife and I’s cell phone plans. Here is a link to their pricing page.

“Regardless of which carrier is chosen, it is smart to look at some of the new players in the space when looking to save money. Some other options include Straight Talk and Virgin Mobile.

“There are other competitors as well, but my advice would be to look at some of these lesser known options instead of your large carriers.”

Cut down on data usage.

This is a pretty obvious tip, but it’s still important. Unless you have an unlimited data plan, which can be a huge expense in and of itself, you have to be very careful about not going over your data or you’ll face grim punishment (in the form of higher fees). But you don’t need to take our word for it. Here’s what Lumby said: “Also, try hard to curb your data usage. Many people have large data plans when they could be using free wifi at their work, restaurants, etc. Data is the huge money drain.”

Beware the “free phone”.

There’s no price better than free, which is why you should be immediately suspicious of anyone offering you a free phone. We aren’t experts, but we’re pretty sure there are all sorts of expensive electronics and tiny computers that go into the creation of a phone, so no one is going to be giving you one unless they’re expecting to get something out of it.

Brett Graff (@BrettGraff), The Home Economist and author of “Not Buying It,” offered this warning: “If the phone is for an elderly person, you can apply to the FCC for a credit towards a landline or a cell phone. Otherwise, don’t fall for the free phone. God it’s tempting, I know. But prices for cell phone and wireless services are dropping constantly and you’re in a better position to negotiate without a contract.

“Many times, that ‘free’ phone isn’t free at all, it’s divided into monthly payments tacked on to your bill. What’s more, if you want to really save, you can buy an inexpensive phone that matches your plan almost anywhere. Then you must shop around to find the lowest prices but remember what those prices include and always—always—check your bill. Third party providers are excellent at slipping fees on, so look for anything unusual such as ringtones or horoscopes that you didn’t order. The most common cramming fee is for $10.99, so if you’re charged that amount for a service you don’t want, call and complain because you’ve likely been scammed.”

Curtis McCoy, CEO of BestCellular.com, (@BestCellular) had his own list of hidden dangers “free phone” providers can try and trick you into:

“In the United States, smartphone plans can range upwards of $100/mo. Many companies advertise a great price or ‘free phones’ but it has become almost an industry standard to charge hidden fees (on top of what the customer knowingly agreed to when signing the contract).

“Some of the common hidden fees can include:

  • Finance charges on ‘free’ devices.
  • ‘No contract’ cell phone plans that lock the customer into an ‘agreement’ when financing the new phone.
  • Many larger carriers charge up to $40/mo. in what they call a ‘line access fee.’ This is literally an additional fee to have a phone number (above and beyond the advertised price).
  • Many prepaid wireless stores are now charging a ‘Service Convenience Fee’ to pay your bill in-store with a live agent.
  • Other carriers and Mobile Virtual Network Operators offer, ‘Unlimited Data’ that is capped or throttled when you hit the LIMIT a.k.a. ‘Reasonable Usage Policy CAP.’”

McCoy also offered some additional tips for saving on your cell situation:

“Tips that can save you a LOT of money on your phone bill:

  • If at all possible, save up and pay cash for your phone instead of making payments. If you’re convinced that you must have a new phone but can’t afford it, even a high-interest credit card is cheaper than financing through a cellular retailer.
  • If you can make due with a used/refurbished phone, you can save a lot of money as well.
  • If you have a working phone from another carrier, some companies let you bring your own phone or activate online: https://BestCellular.com/Activate
  • Just connecting to WiFi when you’re at home, work, school or the local coffee shop can save you money!
  • Mobile Data is the most expensive part of your phone bill. Use these tips to Save Mobile Data and you can also save a lot of money: https://BestCellular.com/SaveData/”

You should also read about and see if you might qualify for the Lifeline Program, which offers subsidized phones based on need. Remember that getting some help is never wrong if you need it, especially if it keeps you from getting bad credit or turning to payday loans.

Take all of this advice together, and you’ll be talking on the phone, without losing your home!

Do you have some tips of your own for finding an affordable phone plan? We’d love to hear about it! You can shoot us an email by clicking here or you can find us on Twitter at @OppLoans.

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Contributors
Brett Graff (@BrettGraff), has been seen writing and reporting on money and personal finance in The LA Times, Yahoo! Finance, Cosmopolitan, The New York Times and the Fiscal Policy Institute, to name a few. Brett also provides her insight in the column, The Home Economist, which is nationally syndicated and published in newspapers all over the country. Her book “NOT BUYING IT: Raising Happier, Healthier & More Successful Kids” is now available!
Gabe Lumby is the CMO at Cash Cow Couple (@CashCowCouple) where he helps get the word out on how readers can build their best financial life. In his free time, he enjoys spending time with his family and crappie fishing the local waterways of Southwest Missouri.
Best Cellular (@BestCellular) is a Quad-Carrier Mobile Virtual Network Operator that uses Every Tower from Every Major Carrier in the USA. This allows us to offer the best possible prepaid wireless coverage to almost every customer in America. Extensive technical resources and cutting edge developments like these allow us to offer unmatched service to dealers and customers alike!

Know Money, Win Money! Episode One: Credit

opploans - know money, win money

We here at the OppLoans Financial Sense Blog want to make sure you have more money in your pockets by any means necessary. Normally that means giving you advice about saving money, but starting today, it also means running around on the street and asking you (or people like you) questions about money, and then giving you money if you get them right.

It’s called Know Money, Win Money, and it’s our hot new game show. The first episode is all about credit, and you can check it out right here:

The first question we asked was pretty simple: What’s the definition of a credit score?

Even though most people have some sense of why their credit score is important, they may not totally realize what it is. Simply put, it’s a measure of your “credit-worthiness,” or how good you are at taking on debt and paying it back. Your credit score determines what kind of interest rate you’ll get on your loans, or if you can qualify for a loan at all.

Our next question asked was what would be considered a “good credit score.”  If you’re wondering, it’s 680 to 719. Anything more than that and you’re golden but anything less than that… well, your interest rates aren’t going to be so hot. Or they’ll be too hot. The point is you’ll have high interest rates.

Finally, Most people are aware of the FICO company that creates the most common type of credit score. But we wondered if people knew what the company’s name actually stands for? For the most part, they did not. And we can’t blame them. Few people do! If you’re wondering, it stands for Fair, Isaac, and Company.

So we got to give away money, and teach people about credit. Hopefully next time we’ll run into you!

What financial topics would you like us to cover in future episodes of Know Money, Win Money? Let us know! You can email us by clicking here or you can find us on Twitter at @OppLoans.

 

Secured Credit Cards: 3 Ways to Use One to Rebuild Bad Credit

secured credit cards
Secured credit cards are available for folks with bad credit, and using one responsibly can help fix your credit score.

There’s a saying in sports that “the greatest ability is availability.” Basically, if you aren’t available to play—usually because you’re either injured or suspended for fighting/using PEDs/refusing to like your coach’s Instagram posts—then you’re not of much use to your team!

The same feeling can hold true for folks who have bad credit and are trying to apply for a loan or credit card. Who cares if this American Master Double Obsidian Super Card gives you 10,000 miles for every dollar spent? If your credit score won’t let you get approved for it, then it’s pretty much useless.


Meanwhile, being able to use credit responsibly is an important part of fixing your credit score. Making payments on time on a loan, credit card, or utility bill will show up on your credit report, which will, in turn, be reflected on your score. In fact, your payment history makes up 35 percent of your total score—more than any other factor!

That’s where secured credit cards come in! They are a much more limited product than your traditional credit card, but you’re much more likely to qualify for one—even with bad credit. The best ability is availability, and secured credit cards are available as all heck.

What is a Secured Credit Card?

A secured credit card is like a combination of a credit card and a debit card. Whereas unsecured credit cards approve you for a credit limit based on your creditworthiness, a secured card has you make a cash deposit to back up that limit. If you deposit $500, you get a $500 credit limit, etc. Many cards simply link to your savings account to use those funds as your deposit.

These cash deposits allow lenders to make these cards available to people with not-so-hot credit. Remember, a low credit score means that you have a history of using credit irresponsibly. By using your deposit as collateral, a lender is able to greatly reduce their risk in approving you. If you fail to make a payment, they can just take the payment out of your deposit.

“When you’re shopping around for a secured card, don’t expect to see lots of rewards or other benefits,” says John Ganotis, founder of CreditCardInsider.com (@CardInsider). “A secured card serves a very specific purpose: to help you build credit.”

“A secured card won’t help you build credit faster than an unsecured card or vice versa, but a secured card may be a good option if you can’t get an unsecured card.”

And if you want to use a secured card to improve your score, there are three things you need to do

1. Make your payments on time

Rod Griffin is the director of public education for Experian (@Experian), one of the three major credit bureaus. These are the companies that create and maintain your credit reports.

According to Griffin, “A secured credit card can help you improve your credit scores by giving you a chance to demonstrate that you can manage credit responsibly. By making all your payments on time, you will be able to start building a positive payment history.”

“In time,” says Griffin, “your lender may be willing to convert your secured card to a traditional credit card account.”

While a secured card can help you build up your credit score, Grifin says that the rate at which your score improves will depend on how much negative information is already on your report:

“Just how much a secured account will impact your credit rating depends in part on your unique credit history. If you are just starting out and this is your first credit account, it will be easier to establish a positive credit history than if you have had credit difficulties in the past.

“If your report shows negative credit history such as delinquencies, collection accounts, or bankruptcy, it could take longer to see substantial improvement in your credit scores.”

2. Keep your credit utilization low

Remember, when you get a credit limit on a card, it’s not an invitation to spend up to that limit. You don’t have to spend that much. In fact, it is highly encouraged that you do the opposite.

According to Ganotis, “The percentage of your credit limit that you’re currently using can have a big impact on your credit scores.”

In order to maximize your score, Ganotis recommends that you maintain a credit utilization no higher than 10 percent:

“For example, that means if you have a $1,000 credit limit and you want to maximize your credit scores, make sure you don’t have a balance of over $100 when your statement period closes. You could achieve that by either not spending more than $100 over the statement period or by paying down part of your balance early.”

People who practice strong financial discipline are able to spend a lot on their credit cards and then pay off the whole balance immediately before any interest is due. They never spend more on their card then they have in their bank account. They just use their card to rack up points and maintain their high credit rating.

Someday, you might be able to be like them. But until then, it’s best to focus on keeping your credit utilization ratio low—if not paying off the card entirely.

3. Make sure your payments are being reported

Your credit score is based on the information in your credit report. Any time you missed a payment, took out a new loan, or got sent to collections, those actions got reported. Similarly, every bill you paid on time and every credit card you paid off got reported as well.

If you have a secured card with a company that doesn’t report to the credit bureaus, then it won’t matter how many on-time payments you make and how low you keep your balance. None of that will end up on your credit report, so none of it will help your credit score.

“If you are considering opening a secured account,” says Griffin, “first make sure it will be reported to at least one of the national credit reporting companies. While most lenders do report secured accounts, you may come across some that do not. If the account is not reported, it won’t help you build a credit history.”

And before you get too clever, it doesn’t really work the other way around. While late payments might not be reported to the bureaus either, an extremely delinquent account will likely end up getting sold to a debt collector… a collector who will then report you to the credit bureaus, hurting your credit score even further.

Secured credit cards can be a great tool for fixing a bad credit score, and they’re a much better option than bad credit loans. But that’s all they really are: a tool. Just like a hammer that can’t work without someone to swing it, a secured card can’t fix your credit all by itself. It’s still up to you to use the card responsibly.

Have you used a secured credit card to improve your credit score? We’d love to hear about it! You can shoot us an email by clicking here or you can find us on Twitter at @OppLoans.


Contributors
John Ganotis (@CardInsider) is the founder of CreditCardInsider.com John comes from a diverse background of software development, web publishing, and personal finance. He knows firsthand what it’s like to accumulate credit card debt, pay it off completely, and then start using credit to his advantage. His passion for technology and attention to detail have made Credit Card Insider one of the premier credit resources on the Internet, and he is eager to help others tackle debt and use credit as a powerful tool rather than fear it.
Rod Griffin(@Experian) is Director of Public Education for Experian. Rod oversees the company’s financial literacy grant program, which awarded more than $850,000 in 2015 to non-profit programs that help people achieve financial success. He works with consumer advocates, financial educators and others to help consumers increase their ability to understand and manage personal finances and protect themselves from fraud and identity theft. He works to help all consumers be better prepared to get the credit they need, at the time they need it, and at rates and terms that are favorable to them.”

 

Style on a Budget: Get Trendy Clothes Without a Payday Loan

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They say you should dress for the job you want, but unless the job you’re looking for is “professional schlub” you won’t be able to get by with cheap sweatpants and t-shirts. It’s a bit of a chicken and egg situation, trying to afford the clothes you need for the job you want that will allow you to afford the clothes you need for… well, you get it.

And if you have bad credit, there’s no reason to risk applying for a payday loan just to get a better wardrobe. No outfit is worth getting yourself trapped in a cycle of debt. Instead, use these tips from our experts to get the clothes you need on a budget that lets you feed (yourself).


Advice from sales experts…

You don’t need us to tell you about retail sales… but we’re going to anyway! Sure, you know sales exist, but are you a sales expert? Because we talked to some sales experts and they have advice for you.

PR executive Amanda Maxwell (@amkmaxwell) told us her approach: “I always try to wait for sales first of all. Depending on what store you are at, almost everything drops to sale after the first three initial weeks of the item being on the rack. I also wait for special promotion days when you can get extra percentages off. Another trick is signing up for an email for a specific store. Most companies offer a 15-30 percent off coupon when you sign up for their emails for the first time! So always look! Or have your friend sign up.”

Rachel D’Ruan a stylist with TRUE Model Management (@TrueModelMgt), offered her own sales advice: “I always advise clients to purchase what they may need when there’s a sale instead of waiting until they need it. My go-to is Chicmi.com because the platform has the most up-to-date list of sample sales as well as fashion events and online fashion sales. Each fashion trend lasts at least three seasons (16 months) and each also makes a come back every few years; thus, when quality products are purchased, they could last a lifetime!”

Know when to shop.

You should always be on the lookout for sales. They can strike at any time—like lightning that saves you money. But there are also more consistent rules you can follow to save money when shopping for clothes. The tides of shopping, rather than the lightning.

“One way that I have found is to buy clothes out of season,” advised Alayna Pehrson, digital marketing strategist for BestCompany.com (@BestCompanyUSA). “Although this may mean that you can’t wear it right after you buy it, you’ll have it to wear for the appropriate season AND you will definitely save money. There is a month-by-month guide that I found to be pretty helpful when trying to figure out which items are cheapest during which month of the year: http://time.com/money/4190173/month-guide-best-time-buy-everything/

And know where to shop.

Every reporter knows the 5 “W”s: Who, What, When, Where, and Why. We’ve already answered the Who, What, When, and Why (you, affordable clothes, off-season, and so you don’t end up with bad credit) so now it’s time to talk about the “Where.”

Maxwell shared some of her favorite affordable options: “There is also the obvious [choice] of shopping at discount stores like Saks Off Fifth or Nordstrom Rack where they offer clothing from their main stores at a discounted price. There’s always a rack of damaged stuff (etc missing a button) that’s AMAZING and totally unnoticeable. You can find amazing deals there and they take an extra 40 percent off usually.

“Another perk I LOVE to use and has become even more amazing over the last few years, is to shop secondhand. There are so many avenues and websites to go now from eBay to Tradsey, to local clothing resale stores. Here in New York we have amazing secondhand shops with stuff that people have never even worn! Marked from $800 to $100! If you buy online from eBay it’s also tax free! Don’t forget this method also applies to you selling your old stuff! This allows you to make some money and save on getting new clothing. It’s a win win!”

You should also check out coupon sites. As Pehrson told us, “Another way to save money when buying clothes is to search for online coupons. Sites like coupons.com, retailmenot, and Groupon are some great places to find online clothing coupons.”

Personal finance expert Kayla Sloan (@kaylarsloan) also has a site she relies on for fashion deals: “My biggest secret for looking great for less is using online thrift stores, like ThredUp.com. I always wait until they offer a coupon code for 10 percent off (or more) or free shipping. I also re-sell my clothes there after I’m finished with them so I can use my store credit to refresh my wardrobe. ThredUp is my favorite way to get brand name clothes for less!”

Some more tips for style on a budget!

We’ve got even more tips for you to use! Need something for a one-time event? “For special occasions, I would recommend renting an outfit (dress, tux, etc),” Pehrson suggested. “This will keep your credit, closet, and conscience clear as you will most likely only use that outfit once.”

She also had another good tip for keeping your spending in check: “A great way to not build up bad credit while shopping for clothes is to only use cash. With cash, there is no temptation to break out the credit card and spend more. Make sure to limit the cash you carry depending on your clothing budget.”

Got a big social media following? D’Ruan says you might be able to use it to your advantage: “If you are an aspiring fashionista, stop by stores like Dreams on Air and Flying Solo. Designers from curated fashion incubators don’t have the budget for top PR services or advertisement so they are more than likely to lend clothes to social influencers (10K+ IG followers) in return for free publicity. I can share more on this approach but it is as simple as filling out a ‘pull’ form, which also asks for credit card info and duration of the pull. As long as the items are returned in their original condition, you can rock clothes off the runway from fashion week for free!”

Looking for affordable stockings? Vienne Cheung, founder of VienneMilano (@VienneMilano) filled us in on her wares: “In a nutshell, the best way to save money and look fashionable is to shop for affordable luxury brands. For example, for women, instead of spending $50-100 for a pair of stockings, hip and young professionals can shop at VienneMilano.com – all of our products are made in Italy. Since VienneMilano is a small business that does not carry extra overhead cost, we can afford to offer fabulous and luxurious products to our customers at an affordable price. Our made in Italy stockings only cost $19.95 for a pair of hosiery, which is significantly less than some of our competitors who sell at $50 for a pair of stockings.”

Finally, Okera Banks (@OkeraBanks), celebrity stylist and founder of OTG Essentials, told us how you can switch things up without having to get a whole new wardrobe: “You can have a hip wardrobe without driving yourself into bad credit or bad debt. I call that living within your means, as you maintain your needs.

“The most important thing to do is first look at your day to day lifestyle and plan out your week. Create a budget that is realistic and include future spending. The idea here is to save, which means you may have to take advantage of discounts, warehouse sales, or outlets stores like Nordstrom’s Rack, who offer great products below market value and even online shopping opportunities.

“I always tell people who are creating a hip wardrobe or who are transitioning into a new look to review your current wardrobe and add cool accent and statement pieces for extra flare without having to completely replace your closet. And purchase items that are interchangeable and transitional, that way they can be worn for business, travel, business casual, fun, or cocktails.

“The idea is being a conservative shopper while being stylish and having a sense of duality with each purchase to accommodate your lifestyle. An essential garment piece is one that can create more than 3 good looks.”

Take all of these tips, and before you know it you’ll have a whole new look and a whole new improved credit score.


Contributors
Okera Banks (@OkeraBanks) is a Los Angeles based designer and celebrity stylist to some of Hollywood’s elite. As a creative designer and owner of Okera Banks OTG Essentials, OTG is the acronym for “On The Go,” her collection caters to today’s swagged out and sophisticated entrepreneur, fashion conscious trend setters and travelers on the go who want comfort and ease with impeccable style.
Vienne Cheung (@VienneMilano) followed her passion for fashion and travel to… fine hosiery. For years, she traveled the world seeking the best fashion and accessories. In Milano, Italy she fell in love with premium hosiery, then unavailable in the US. The rest is history: she left her cushy corporate job, and plunged her soul (and legs!) into VienneMilano.
Rachel D’Ruan (@TrueModelMgt) After half a decade strategizing publicity campaigns for major film studios in Los Angeles, Rachel ventured into fashion and lifestyle PR in New York City. Representing some of the most well-known talents and entrepreneurs in the business has enabled Rachel to obtain a wealth of contacts and diverse experience in image consulting, publicity, marketing and branding. Rachel’s expertise, persistence and tactical approach to her work serves her clients well.
Amanda Maxwell (@amkmaxwell) is a 23 year old PR Senior Executive residing in New York City. She’s mostly known for her contributions in the fashion world, fashion focused social media, and press related contributions. She’s also currently a writer for BossBabe.co sharing tips and tricks on all things Fashion, Life, and Beauty.  With her extensive relationships and industry experience, Amanda has always remained in style.
Alayna Pehrson(@BestCompanyUSA) is a Digital Marketing Strategist and Credit Repair Specialist at BestCompany.com
Kayla Sloan (@kaylarsloan) is a personal finance and small business expert. She has been featured in The Huffington Post, Time, Entrepreneur Magazine, and more. Kayla is passionate about helping people improve their finances so they can pursue their dreams with her blog at KaylaSloan.com.

 

Subprime Lending News 8/1/17:

How your spouse’s credit could affect your financial life, why banks are stressing about late credit card payments, and the ongoing fight over the Consumer Financial Protection Bureau.

By Caroline Thompson

Today’s subprime news roundup includes a potential threat to banking profits, a tale of unfair lending practices for workers in the legal marijuana industry, and a primer on why you should always know your partner’s credit score.

Banks fear major losses from late credit card payments.

According to Fitch Ratings, credit card charge-offs, or the percentage of outstanding consumer debt that banks deem unlikely to ever be collected, have risen to their highest level in four years, currently sitting around 3.29 percent. While this is still relatively low compared to the 10 percent charge-off rate hit in 2010, this trend is causing trouble for big banks. These losses mean suppressed bank earnings, and, if they continue going up, it will increase the potential for stunted corporate growth and profits. The increase in late payments is partially due to a switch in lending policy, which happened in 2014. After the losses garnered by the 2010 charge-off rate, most lenders lent only to people with good credit. But in 2014, many lenders began making riskier loans to people with bad credit, as subprime borrowers tend to bring in higher yields. This move boosted credit card spending overall, but also led to a spike in late or missing payments, which may never be collected.

Workers in the legal marijuana industry denied loans based on employment.

While marijuana has been legalized by several states, it still remains an illegal substance in the eyes of the federal government. This can make things difficult for the 20,000 Americans currently working in the industry in states where marijuana is either medically or recreationally legal. Regardless of their credit scores, their debt-to-income ratios, or their borrowing history, many workers in the legal marijuana industry are finding it difficult–if not impossible–to take out loans in their everyday lives. From car loans to mortgages, the vast majority of banks will simply refuse anyone working in the marijuana industry for fear of getting wrapped up in a messy fight with the federal government. This puts employees of this industry at a net disadvantage, forced to either lie about their employment on a loan application, or being unable to finance things that would normally be easy to attain. There’s a non-partisan effort in Congress to address these kind of banking issues in states where marijuana is legal, but it may not pick up much steam unless the federal government reverses its policy on marijuana, something which seems unlikely given the current political climate.

Trump advisor suggests gutting the Consumer Financial Protection Bureau.

Republicans have been battling with the Consumer Financial Protection Bureau since its inception in 2011. In recent weeks, they’ve pushed back against a rule issued by the Bureau, which would have banned banks and credit card companies from using fine-print arbitration clauses to stop consumers from filing class-action lawsuits. Now Corey Lewandowski, an advisor to the president, is calling for Trump and his new chief of staff to fire Richard Corday, who oversees the CFPB and is currently running for governor in Ohio. “It’s my recommendation to the president of the United States to fire Richard Cordray, and if he wants to run for the governor of Ohio, go do it, but my concern is, you’ve got an unelected bureaucrat sitting in an office right now, and I hope that the new chief of staff looks at him moving forward and saying it’s time to act decisively,” said Lewandowski on a recent episode of NBC’s “Meet the Press.”

Your spouse’s bad credit could affect you more than you think.

Love conquers all, but it still might be a good idea to ask your future spouse about their credit score. While it’s a myth that credit scores merge after marriage, couples who want to jointly buy a house, car, or take out a loan to start a business might find it more difficult when one of their credit scores is less than stellar. According to Katie Ross, Education and Development Manager for American Consumer Credit Counseling, lenders usually decide creditworthiness based on the lower of the two scores. “If one person has terrible credit, they more than likely will need to be left off the credit application, which can mean their income is not considered as well. This can be a real burden if the purchase in consideration is a large one, such as a home or car.”


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