Will Closing a Credit Card Affect Your Credit Score?

It might seem odd, but closing a credit card can actually hurt your score, especially if it’s one of your oldest cards and/or carries a high credit limit.

There are a lot of myths out there surrounding credit scores and credit-related topics. But sometimes a thing that sounds like an urban legend turns out to be true! If you’re skeptical that closing a credit card could hurt your credit score, well, you’re in for a bit of a shock.

Yes, it will affect them—probably for the worse.

Credit scores are complicated, with a number of factors coming together to make up that single three-digit number. There are many different things you can do to hurt your score and many things you can do to help it. Plus, context matters.

“If you have multiple credit cards and cancel a card with a modest credit limit that you’ve only had for a couple of years, there may be very little impact on your credit score,” said Timothy G. Wiedman, professor emeritus of Management and Human Resources at Doane University (@DoaneUniversity).

“On the other hand,” he added, “if you only have two or three credit cards and cancel your oldest card that you’ve had for a dozen years that had a $15,000 credit limit (and that was the card with your highest limit), it may matter quite a bit.”

So what gives?

“Credit scores take into account how long you’ve had your credit card accounts and the percentage of your total credit limits that you utilize,” explained Wiedman. “So if you cancel your oldest account (especially if it has a healthy credit limit), it can matter a lot—especially if you only have one or two other (much newer) cards.”

How credit scores work.

In this piece, we cover two different parts of your credit score at length. We don’t want you getting lost, so here’s a brief refresher on how credit scores work.

Your FICO credit score—created by the FICO company—is a three-digit number between 300 and 850. The higher your score, the better your credit.

FICO credit scores are based on information taken from your credit reports, which track your history as a borrower and user of credit over the past seven years. (Some information, however, will stay on your report for longer.)

You score is made up of five different categories of information:

  • Payment history: This makes up 35 percent of your score. Basically, do you pay your bills on time?
  • Amounts borrowed/credit utilization: This makes up 30 percent of your score, and it tracks how much money you’ve borrowed.
  • Length of credit history: This makes up 15 percent of your score. The longer you’ve been borrowing money, and the longer you’ve had revolving accounts (like credit cards) open, the better.
  • Credit mix: 10 percent of your score. What different types of credit (credit cards vs personal loans vs home/auto loans vs student loans) do you have? A more diverse mix is better.
  • New credit inquiries: 10 percent of your score. Have you recently made a bunch of inquiries for new loans or lines of credit? If you have, maybe that’s a sign that you’re desperate to borrow more money …

If you have bad credit and you want to know why, you should order a free copy of your credit report, which you can do by visiting AnnualCreditReport.com. To find out where you need to do better, look at your payment history and your credit utilization. Together, they make up 65 percent of your total score.

Closing a card hurts your credit utilization ratio.

“Whether you get stung when you close a credit card account depends on a measurement known as the balance-to-limit ratio or credit utilization ratio. This compares how much credit is available to you to how much credit you actually borrow,” explained Stephen Hart, CEO of Cardswitcher.

“A high balance-to-limit ratio, where you borrow a large amount of money, is usually considered a sign of increased financial risk by lenders and a low balance-to-limit ratio is considered good.”

Still not sure how your credit utilization ratio works? Here’s an example from CPA Logan Allec (@moneydoneright), owner of personal finance website Money Done Right:

“Let’s say you have a total credit balance of $4,000 across all your credit cards.  Now let’s say you have a total credit limit across all of your credit cards of $20,000. In this case, your total utilization rate is 20 percent—or $4,000 divided by $20,000.

“Now, what if one of your credit cards has a $10,000 credit limit, and you cancel it? In this case, your total credit limit across all of your credit cards would go down to $10,000. What would happen to your total utilization rate?  It would skyrocket to 40 percent—or $4,000 divided by $10,000, which could adversely affect your credit score.”

For the sake of your credit score, it’s best to keep your credit utilization ratio below 30 percent. Even if you’re paying off your cards every month, you should try to avoid accruing more than 30 percent of your total limit at any one moment in time.

And if you’re thinking about closing that one card that has a super high credit limit, maybe don’t.

Closing old cards dings your credit history.

Remember, the length of your credit history doesn’t just measure how long you’ve been using credit, it also tracks how long you’ve been using specific accounts. The longer you’ve had a credit card, the more it helps your score.

“While it’s not as weighty a factor as payment history or credit utilization,” says Allec, “it’s still worth paying attention to.” And he’s right! Closing your oldest card will lower the average age of your accounts, likely dropping your score.

“This is why I keep my oldest credit card—the one I opened in college—open,” added Allec. “Even though I don’t use it because its rewards structure is a boring one percent back on everything.”

And if you’re not certain which of your credit cards is the oldest, Allec offered this tip: “Make a list of all of them and see if you can see online which one is the oldest based on their statement dates.”

Looking to erase past mistakes? Not so fast.

One of the reasons that someone might look to close an old card is because they think it will remove any bad information related to that card from their report.

Unfortunately, it will not.

“Bear in mind that the credit card isn’t erased from your credit record straight away,” said Hart. “Negative entries usually stay on your credit record for around seven years—so it isn’t necessarily a quick fix for making your credit history appear rosier than it actually is.”

“The good news,” he added, “is that positive entries stay on your credit record for much longer—usually a decade.”

Keep them open—just don’t use them.

As you can see, the reasons for keeping an old card open are generally more compelling than the reasons to close it. Still, in case you’re not convinced, here are a couple more common reasons that people close their old credit cards—and ways that you can get around them:

“If your newer cards provide better “reward” deals, just use them as your main cards while using the older, longstanding card once in a while to keep that account active (and keeping its high credit limit as part of your credit file),” said Wiedman.

“If you have high balances on other credit cards, you might find that you’re faced with charges when you try to close your credit card account. A way to avoid this to make sure that you pay off the balances of all your accounts in full before you try to close any,” offered Hart.

“If your reason for wanting to cancel a credit card is its high annual fee, call the credit card company to see if they will waive it for the year,” advised Allec.

Just make sure you don’t do one thing, and that’s to start using the card to spend beyond your means and rack up excess debt! To learn more about managing your debts responsibly, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Logan Allec (@moneydoneright) is a CPA and owner of the personal finance website Money Done Right.  After spending his twenties grinding it out in the corporate world and paying off over $35,000 in student loans, he dropped everything and launched Money Done Right in 2017.  His mission is to help everybody—from college students to retirees—make, save, and invest more money.  Logan resides in the Los Angeles area with his wife Caroline.
After working in the financial industry for several years, Stephen Hart left his role as Chief Financial Officer at WorldPay to launch the UK’s first payment processing comparison site, Cardswitcher. Nowadays, he helps SMEs save money on their payment processing costs.
After 13 years as a successful operations manager working at two different ‘Fortune 1000’ companies, Dr. Timothy G. Wiedman spent the next 28 years in academia teaching college courses in business, management, human resources, and retirement planning.  Dr. Wiedman recently took an early retirement from Doane University (@DoaneUniversity), is a member of the Human Resources Group of West Michigan and continues to do annual volunteer work for the SHRM Foundation. He holds two graduate degrees in business and has completed multiple professional certifications.

Financial Basics: How to Use Credit Responsibly

To help celebrate National Financial Literacy Month, we’re getting back to basics: If you want to use credit responsibly, you should start by focusing on the right kinds of debt.

If you want to get credit, you have to show that you can use credit. And specifically, you have to show that you can use credit responsibly.

That means you’ll have to figure out how to get some credit in the first place. And you’ll want that credit to be good credit. And then you’ll also need to know how to use that good credit properly.

Phew! Someone should gather all of that information relevant to proper credit use and stuff it into one easy-to-read article!

Guess what? They did. And the “they” is “us.” And you’re reading that article right now!

How to get credit when you have none.

This topic deserves an entire article of its own. Which is why we gave it one. But we’ll still address it briefly here.

Two of the best ways to start building credit are to either get a secured credit card or become an authorized user on someone else’s card. A secured credit card requires cash collateral, but you’ll be able to get one even if you don’t have a good credit score or any credit at all.

Becoming an authorized user on someone else’s card will allow you to start building your credit off of theirs. You could also mess up their credit, however, so be sure to take it seriously.

Now let’s get into good and bad debt.

Try to focus on good debt.

This is the credit you want. The credit or debt that, if used properly, will bring your credit score up.

“Potentially good credit involves no fees or interest,” explained Todd Christensen, education manager for Money Fit by DRS, Inc. (@MoneyFitbyDRS). “It has a positive impact on your credit rating but does not lead to overspending. Good credit also leads to growth in your net worth. Good credit is directly tied to potentially beneficial debts, such as a mortgage or a business loan.”

Certified financial educator Maggie Germano (@MaggieGermano) provided some additional markers of what makes debt good: “Good debt is considered an investment that will typically grow in value or generate income over time. Good debt also tends to have low interest rates. An example is student debt. The idea is that this debt will eventually result in higher income over the course of your life.”

And do your best to avoid bad debt. 

And now for the credit and debt you want to keep away from. Unsurprisingly, it pretty much has all the opposite qualities of good credit.

“Bad debt is any debt that is taken out to pay for things that lose value over time and don’t result in higher income,” clarified Germano. “This type of debt also usually comes with high interest rates. Basically, you end up paying more than the cost of the original purchase. An example is credit card debt. If you keep a balance on your credit cards, the interest grows and makes it difficult to pay off the amount. You can get caught in a cycle that feels like it will never end.”

And Christensen offered his take as well: “Bad credit involves fees and interest. It does nothing to improve your household finances, or it leads to smaller net worth.”

Additionally, and while this may seem obvious, good credit instantly becomes bad credit once you take out more than you’re able to pay back.

“With most credit accounts, whether they are good or bad depends on each situation, and most often when the debt is bad, it’s because the individual borrowed too much for the start,” advised  Jacob Sensiba, financial advisor with CRG Financial Services (@CRGFS).

“The amount you spend on total housing should be less than one-third of your take-home monthly pay. You can get a decent, reliable car anywhere from $5,000 to $10,000. Nobody needs to spend over $20,000 for a car.

“Before you even start borrowing, it’s important to evaluate your credit health/score. If it’s below average, you should take the necessary steps in boosting it before borrowing money. People with healthy credit scores tend to get better interest rates and loan terms than those with poor credit.”

Here are some tips for using credit responsibly.

So you’ve got that good credit. But now that you have it, what do you do with it? How do you use it properly?

“Only charge what you can afford to pay back in full every month,” urged Mike Pearson, founder of personal finance website Credit Takeoff. “The number one factor that goes into calculating your credit score is your payment history. Basically, if you miss even one payment, it will seriously lower your credit score.

“So if you plan on using credit, you need to make sure that you’re only spending what you can actually afford—because if you charge too much and end up missing a payment, it will hurt your credit score.

“Keep your credit utilization under 35 percent. The #2 factor that goes into determining your credit score is something called your ‘credit utilization.’ This simply means the amount of credit you’re using compared to your total credit limit. For example, say you have a $10,000 credit limit on your credit card. You’d want to keep your balances below $3,500 (35 percent) at any given time so you don’t damage your credit score.”

Another way to improve your credit utilization is by gaining a greater line of credit.

“Call current creditors and ask if they will increase your credit line,” suggested real estate broker, loan broker, and credit consultant Julie Marie McDonough (@juliemarie0711) “Example: current credit limit on a credit card of $1,000 with a $900 balance is using 90 percent of the credit line. The amount owed or utilization ratio can be reduced to 45 percent of the credit line just by increasing the credit limit from $1,000 to $2,000.

“Now you owe the same $900, but with the credit limit increased to $2,000 you are only using 45 percent of the credit limit. Thus increasing your credit score up to 30 percent in 30-90 days. The hard part is not charging more on the credit card. Have a little self-discipline and know you have just created a sort of emergency fund if needed.

“Don’t make things worse, just one ‘30 day late’ will stay on your credit for up to seven years. If you can’t pay on time, pay the minimum monthly payment as soon as possible, but make sure the payment is posted on the 29th day after the due date. You will owe a late fee in the following month, but that is still better than a bad mark on your credit for seven years and the decrease in credit score.”

Building good credit habits is the hardest part. But eventually, it’ll be like second nature to you. May you and your credit soar! To learn more about managing your finances responsibly, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Author and Accredited Financial Counselor®, Todd R. Christensen, MIM, MA, is Education Manager at Money Fit by DRS, Inc. (@MoneyFitbyDRS), a nationwide nonprofit financial wellness and credit counseling agency. Todd develops educational programs and produces materials that teach personal financial skills and responsibilities to all ages. Having facilitated nearly two thousand workshops since 2004 on the fundamentals of effective money management, he based his first book, Everyday Money for Everyday People (2014), on the discussions, tips, stories and ideas shared by the tens of thousands of individuals and couples in attendance.
Maggie GermanoMaggie Germano (@MaggieGermano) is a Certified Financial Education Instructor and financial coach for women. Her mission is to give women the support and tools that they need to take control of their money, break the taboo of discussing debt and income, and achieve their goals and dreams. She does this through one-on-one financial coaching, monthly Money Circle gatherings, her weekly Money Monday newsletter, and speaking engagements. To learn more, or to schedule a free discovery call, visit MaggieGermano.com.
Julie Marie McDonough (@juliemarie0711) has more than twenty-eight years’ experience as a real estate broker, loan broker, and credit consultant. She started her career in the mortgage lending industry and later added a Real Estate division and Credit Consulting. Julie is known as “The Credit Lady” and is the author of “How to Make Your Credit Score Soar”. She has been featured on SiriusXM, Corporate Talk, The Answer and written articles for Credit Karma, Credit.com and many others. Julie is a consumer advocate and speaker who has helped countless people correct errors on their credit reports so they can optimize their credit scores and get the best mortgage rates possible when purchasing a home. Some of her credit-consulting clients refer to her as a miracle worker. Julie is recognized for her vast knowledge in the industry and is sought out for her expertise.
Mike Pearson is the founder of Credit Takeoff, a research-driven personal finance site for people looking to improve their credit. A proud member of the 800 Credit Club, Mike writes about practical steps that everyday consumers can take to increase their credit scores. His advice on credit repair and credit scores has appeared in QuickBooks, Go Banking Rates, and MortgageLoan.com.
Jacob Sensiba is a Financial Advisor. His areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. His process entails guiding my clients through their financial journey and educating them along the way. Sensiba’s goal is to make the public more aware of their finances and to improve their level of financial literacy. Visit their website for our disclosures: CRG Financial Services (@CRGFS).

How to Get a Free Copy of Your Credit Report

The three major credit bureaus are required by federal law to provide you with one free copy of your credit report per year. Just make sure you go to the right website to order them.

Hop into our musical time machine and let us take you back to a legendary era of sound. No, we’re not talking about the New Orleans Jazz clubs of the 1920s. Nor are we talking about the Beatlemania of the 60s. We’re talking about one of the hottest musical crazes in human history.

We’re talking about the “free credit report” songs of the late 00s. Yes, you could hardly turn on a television without hearing one of the catchy FreeCreditReport.com jingles. The commercial would normally begin with an unfortunate soul in some negative position because they didn’t know what their credit report said. Then you’d get a little song about how easy it is to get a free copy of your credit report at FreeCreditReport.com. Why don’t you see those ads anymore?

Well, unfortunately, FreeCreditReport.com should have been called FreeCreditReportWithASignificantAsterisk.com, as customers who used the site were signed up for credit monitoring services that cost $14.95 a month. Admittedly, that name would be harder to write a song about, but it would also be more accurate.

So how can you avoid misleading credit report sites (and even outright scams) and still get a proper credit report of your own?

There is one website that’s legitimate.

There is one website you can go to if you want your credit report, totally free, once a year.

“It’s very easy to get a no strings attached credit report,” explained attorney Eric Klein. “Simply go to AnnualCreditReport.com and follow the instructions for obtaining a credit report from each of the three credit reporting agencies.

“They offer online access to your reports or they will mail them to you via United States Post Office. AnnualCreditReport.com is a truly free way to obtain your credit reports and not be bombarded with advertisements and hundreds of drip emails in your inbox all day.”

By federal law, all three of the major credit bureaus—Experian, TransUnion, and Equifax—must provide you with a free copy of your credit report once a year, so long as you request one. AnnualCreditReport.com is the site where they make good on that offer.

“There certainly are scams you should avoid and almost every other site out there that offers free credit reports simply wants to obtain your email address and personal data so they can bombard you with advertising,” added Klein.

If you go to any other website—especially ones that have the word “free” splattered across their homepage—the odds are high that you’re getting taken for a ride. Whether they’re selling your personal data or trying to sign up for a separate (and expensive) service, you should steer clear of these sites and stick with the AnnualCreditReport.com.

There are other ways you can get a free credit report.

You can also get your credit report directly from one of the credit bureaus even if you’ve already received your one free credit report for the year. It’ll just require certain conditions to have been met.

“If you have recently been denied credit, send the bureaus the denial letter in addition to a request for an updated credit report and they will send you one,” recommended Nathalie Noisette, owner of Credit Conversion (@credconversion).

“The credit bureaus do this to let you explore the reasons why you may have been denied. If you were denied a job due to your credit, request a form stating so and send it to the bureaus requesting your credit report. The bureaus will send one for free.

“If you’re currently unemployed and are looking for work, let the bureaus know your current situation and they will send you a report. The idea is that if your potential employer is going to be running a credit check, you want to preempt what might be on your report.

“If you believe you are a victim of identity theft, file a police or credit card fraud report and send the information to the bureaus. They will send you updated reports with recent information for you to challenge what accounts may or may not be for you.”

Here’s what you should look for on your report.

So you got a copy of your credit report. What’s actually going to be on it?

“It will provide a summary of your credit history, and certain other information, reported to credit bureaus by your lenders and creditors,” outlined financial coach and author Karen Ford.

But there’s one thing that won’t be on it. Well, more than one thing. It won’t have the scores to last night’s MLB game or a list of the top ten most adorable skateboarding puppies. It actually won’t have a lot of things. But there’s a significant thing you might assume would be on your credit report that won’t be.

“There is a difference between a credit report and your credit score,” clarified Klein. “If you want to obtain your credit score, you’re going to have to go through a company such as Discover for your free FICO score. Again, beware of the email blasts; but Discover is a reputable credit card and if you unsubscribe from their email advertising, they will honor your request.”

(Also missing from your credit report will be any no credit check loans like payday loans, cash advances, or title loans that you’ve taken out and paid off. While some lenders that offer bad credit loans report your payments to the credit bureaus, most no credit check lenders do not.)

But regardless of whether you can see your credit score, you’ll want it to be higher, rather than lower. That’ll provide you with better access to credit at better rates. And you can use the information on your credit report to that end.

“The best way to improve your credit score is to be sure that the total amount of money you carry month-to-month on your credit cards does not exceed 31 percent of your total available credit on your cards,” suggested Klein.

“Another way, although obvious, to improve your credit score is to be sure that you make your payments timely. Further, another way to improve your credit score is to obtain your three credit reports, go through them, look for any mistakes, and dispute the mistakes you find.

“One should know that there are roughly 19,000,000 mistakes on peoples’ credit reports at any one time, so it is not uncommon that peoples’ credit scores are lower than they should be.”

Hopefully, this post has taught you not to trust every catchy song you hear. Now if you’ll excuse us, we have a coconut with a lime in it, and we need to drink it all up. To learn more about credit scores, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Karen Ford is a Master Financial Coach, Public Speaker, Entrepreneur, and Best- Selling Author. Her #1 Amazon Best Selling Book “Money Matters” is a discovery for many.  In “Money Matters” she provides keys to demolishing debt, shares how to budget correctly, and gives principles in wealth building.
Eric Klein is the Principal Attorney and President of Klein Law Group, P.A. He has spent over 22 years practicing law and guiding clients through some of the most challenging times of their lives. Although his firm has multiple practice areas of law, most of his clients’ legal needs come at a time in their lives when they are experiencing a major change. Eric pursues his client’s interests zealously and his philosophy of aggressive representation is practiced by all of his associates.
Nathalie Noisette is the Founder of Credit Conversion (@credconversion), a credit counseling, and repair company located in Avon, MA. Credit Conversion uses principles of behavioral change to not only allow clients to improve their score but understand the habits that lend to poor credit.

Student Loans: To Pay or Just to Save

by Amanda Finn
Paying off your student loans is good, but you don’t want to pay them off so aggressively that you don’t build up a nest egg.

Student loan debt in the United States is no joke. In 2019, the national student debt load is the highest it has ever been at $1.5 trillion. For undergrad students from the class of 2017, the average loan debt post-grad is over $28,000. So the question remains: Is it better to pay off loans more quickly or build up savings?

It’s a question new millennials in the workforce face for years after graduating as they hammer away at their debt while simultaneously trying to build their nest eggs. And many wonder if they’re doing what’s best for their financial future.

No easy answer.

According to Andrew Pentis (@andrewpentis), personal finance expert and certified student loan counselor at Student Loan Hero, this common query does not have a black and white answer.

“You might prioritize another financial goal because it makes more sense for your situation,” Pentis said. “It could be wise to save for a rainy day if your forecast shows the potential for, say, a stack of medical bills. Making minimum or lower student loan payments could give you the breathing room you need to handle other debt or routine expenses. On the other hand, you might prioritize repaying debt because it will lift the emotional strain.”

He suggested looking at the issue mathematically. He posited that if your loans are at a five percent interest rate and you can only get a 2.5 percent APY high-yield savings account or CoD, it’s better to pay off the debt first.

As one of her seven steps to paying off student loan debt, Casey Bond (@caseylynnbond) at HuffPost suggests bi-monthly payments instead of one monthly payment or putting any windfalls or extra income against the debt as well.

That isn’t to say that starting any kind of savings is a bad idea. The experts agree that putting funds aside for emergencies should be part of the plan regardless of how much you are putting towards your student loan debt.

With well-stocked emergency fund (and a decent credit score) you’ll keep yourself safe from predatory no credit check loans like payday loans, cash advances, and title loans that take advantage of people who need quick cash. No amount of student debt is worth getting stuck in a spiral of short-term bad credit loans with 400 percent APRs.

Prioritize other debt.

It’s also important to keep an eye on other types of debt—especially those with higher interest rates—before tackling student loans head on. If your credit card debt interest rates are higher than your loan debt, it makes much more sense to knock those out first.

And your credit cards probably are more expensive than your student debts! A 2018 article from CNN Money found that the average interest rate for credit cards is around 15 percent while the average for student loans is only 2.6 percent.

Two of the most popular debt repayment methods are the Debt Snowball and the Debt Avalanche. If you want to learn more about them, you can check out these posts:

If you’re up to your neck in personal debts, it might be worth considering a debt consolidation loan which can help you stay on track financially and rescue your credit score from the certain doom of unpaid minimums or past due balances.

Build a nest egg that will grow.

When it comes to building your savings, one option is investing that versus simply putting it aside. When paying down debts, it might not be possible to set aside a ton of extra money each week or month, but a little can go a long way if it grows in the market.

According to a CNN article from 2014, Mohammad Majd (@CNNMoneyInvest) suggests investing instead of paying down student loans. As with the rest of the advice, it all comes down to simple mathematics.

Majd explains his reasoning for investing simply, “One important concept that I came across was Opportunity Cost—the notion of quantifying what you give up when you chose one option over another. I asked myself: Why am I rushing to pay off loans with 3 percent to 6 percent interest rates when the S&P has historically returned 11 percent?”

You can also compromise!

So there isn’t an easy solution to this problem. But there are a lot of avenues to decide from. While each individual borrower will have their own idea of what’s best for them, Pentis gives some general guiding advice for choosing your own path with a potential compromise:

“A potential compromise: Be aggressive with your student loan repayment but keep your payment amount at a level that would also allow you to sock away a few extra dollars every month. Then you can work toward achieving both of your goals.”

To learn more about how can save more money and take care of your finances long-term, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Andrew Pentis (@andrewpentis) is a staff writer covering personal finance for Student Loan Hero. His work has appeared in 30-plus publications.

How Do Overdraft Fees Stack up to Bad Credit Loans?

Short-term bad credit loans like payday loans and cash advances have ridiculously high APRS—but overdraft fees can be even more expensive!

When faced with a surprise financial shortfall, you might find yourself having to choose between bad credit loans and overdraft fees to make ends meet. And while a $30 overdraft fee might seem preferable to short-term no credit check loans and cash advances, it might actually be the more expensive option!

Bad credit loans can be really expensive.

When you have bad credit and you need a loan—whether that’s an online loan or one from a brick-and-mortar lender—you aren’t going to be able to borrow that money from a bank or a traditional lender. You simply pose too high a risk.

Instead, you’ll have to take out a bad credit loan which—as the name suggests—is a loan that’s designed for people with lousy credit scores. These loans are oftentimes much more expensive than regular personal loans, but the right bad credit loan can still be a helpful financial too.

There are a couple of different types of bad credit loans. First, there are payday loans, which are small-dollar, short-term loans with an average principal of only a few hundred dollars, and an average repayment term of two weeks.

The average interest rate for a payday loan is $15 per $100 borrowed. But while that seems like a fairly reasonable rate, appearances can be deceiving. A two-week payday loan with a 15 percent interest rate actually carries an Annual Percentage Rate (APR) of almost 400 percent!

Title loans are another kind of popular, but highly risky bad credit loan. These loans are secured by the title to the borrower’s car or truck, which means that you can usually borrow more money with one than you can with a payday loan.

However, title loans are also incredibly expensive, with an average monthly rate of 25 percent that works out to a 300 percent APR. Furthermore, studies have found that one in five title loan borrowers has their vehicle repossessed after they can’t pay the loan back.

Lastly, there are bad credit installment loans, which function much like a regular personal loan, just with higher interest rates. Unlike short-term payday and title loans, which are paid back all at once, installment loans are paid back gradually over a set period of time.

But overdraft fees can be even more expensive!

Anyone who has ever maxed out their credit cards knows well that sinking sensation when the card is declined. Well, overdraft protection exists to prevent that same feeling from occurring when you use your debit card.

If you make a purchase that exceeds your bank account balance, overdraft protection covers the additional amount. However, the service will charge you quite the hefty fee in order to do so. While overdraft fees vary, they often average around $35 per transaction.

Oh yeah, that’s another thing about overdraft fees: They apply to every debit card transaction you make that overdraws the account. If you aren’t aware that your checking account is in the red, you could end rack up hundreds of dollars in overdraft fees on any number of small purchases.

(For an example of how a $15 McDonald’s outing can return a $120 bill—all thanks to overdraft fees—check out our recent blog post on ways you can avoid these fees altogether.)

Since overdraft fees are levied on a transaction of any size, so long as it exceeds the available funds, nailing down a relative APR for these charges can be difficult. But even the more generous estimates would still produce a rate that puts payday and title loans to shame.

In 2014, the Consumer Financial Protection Bureau published a study on overdraft fees. They found that the average overdraft transaction was $24, the median overdraft fee was $34, and that most of those fees were paid back within three days. If someone borrowed paid $34 to borrow $24 over three days, they reasoned, that would add up to an APR of 17,000 percent.

Yeah. Overdraft fees are really expensive.

Verdict: The right bad credit loan can be better than an overdraft fee.

When you’re facing a financial shortfall, you’ll often find yourself with a series of not-great to flat out bad options. And if you don’t have an emergency fund that you can dip into or friends and family that you can borrow money from, taking out a bad credit loan is probably your least-bad option.

But really, this verdict isn’t about taking out just any bad credit loan, it’s about taking out the right bad credit loan. Namely, one from a lender that cares about your ability to repay, that charges reasonable rates, and that reports your payment information to the credit bureaus—which could help improve your credit score over time.

This verdict also speaks to the extremely high costs of overdraft fees, which dwarf the rates on most bad credit loans, and also the way those costs can stack up in such short order. Once your account is in the red, any subsequent transaction racks up a new fee.

Of course, there are always exceptions The wrong bad credit loan can do just as much damage to your financial wellbeing as any overdraft fee could. And in certain circumstances, an overdraft fee might be a flat-out better option for you than even the best bad credit loan.

In the end, the best thing you can do for your long-term financial outlook is to create your own options. Building up a well-stocked emergency fund—maybe even one that’s linked to your checking account for a more affordable type of overdraft protection—lets you cover future financial shortfalls yourself. No borrowing required.

To learn more about managing your financial future, check out these other articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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So You’ve Maxed out Your Credit Cards … Now What?

First things first: don’t panic! Next, consider using the debt snowball or the debt avalanche methods to dig yourself out of debt.

Credit cards hold many advantages over cash. They’re much more convenient, both to carry and use. If you lose a credit card, you can cancel it and get a new one. If you lose cash, on the other hand, you don’t have too many options other than putting up “Lost Cash” posters with a picture of the cash you lost.

But credit cards also come with a major downside that can lead to other downsides. Because credit cards essentially allow you to take out loans on the spot, you can easily be spending money you don’t have. Even if you’re able to pay the minimum required amount on your bill, interest will start accumulating and the debt will begin piling up.

That only gets worse the more credit card bills you can’t pay. And it’ll be really, really bad if all of those credit cards are maxed out. So what should you do if you’ve maxed out your credit cards?

Don’t panic.

It can be easy to panic when you’ve maxed out all your cards. It is not good news for your credit score, and odds are those credit card bills are not the only bills you’re struggling with. But panicking, while understandable, is not going to be helpful.

“The first thing to do if you’ve maxed out your credit cards and you’re worried you can’t pay the bills is to not panic and make any rash decisions, like getting out more loans to meet your financial commitments,” cautioned Stephen Hart, CEO of Cardswitcher.

“Borrowing money to pay off what you owe will just end up trapping you in a vicious cycle of debt, where you end up owing more money in the long-term. Whilst it might solve problems in the short-term, in the long term this approach will just store up problems and amplify them.”

Leslie H. Tayne Esq. (@LeslieHTayneEsq), Founder and Head Attorney at Tayne Law Group (@taynelawgroup), offered a similar suggestion:

“Asking for a larger credit limit or applying for another credit card may seem like a simple solution. However, this is only a temporary solution that will only lead to more problems down the road when you’re in more and more debt that you can’t pay off.

“Both of these solutions will only enable you to continue your spending habits. Payday loans are another source that can be tempting in these situations, but once again, these will only lead to longer-term problems, because payday loans essentially thrive on trapping you in a debt cycle.”

Make a plan to pay it off.

Now that you’re not panicking, it’s important to start figuring out how you’re going to actually pay off your debt. One popular strategy is the “debt snowball” method.

“If you’ve maxed out your credit cards, a critical step to getting out of the red is paying off the highest-rate debt first,” advised Kimberly Foss (@KimberlyFossCFP), President and Founder of Empyrion Wealth Management. “This gives you a ‘snowball effect’: As you pay down the high-interest-rate debt, less money is required to feed the ‘interest monster,’ which allows even more money to be diverted toward other financial goals like reducing other debt, saving for retirement, investing, etc.

“The point I try to make to my clients is that every dollar paid as interest to someone else is a dollar that cannot compound for you. Paying off debt—especially high-interest debt—is like a double boost: You are improving your cash flow and directly increasing your overall net worth at the same time. Then, if you can leverage that extra cash flow by increasing investing and saving, it becomes a triple boost.”

But maybe you’d prefer to try a different method?

“There are two ways you can start to tackle this debt,” explained Marissa Sanders, personal finance expert at Simple Money Mom (@simplemoneymom). “One way is the debt snowball. This is where you will begin paying the smallest balance first. Once that card is paid off then you will apply that payment to the next smallest balance. Continue this cycle until you have paid off all your debt.

“The next method is called the debt avalanche. This is when you will pay toward the highest interest rate first. After it is paid off, you will apply that payment toward the next highest interest rate. Continue this cycle until you have paid off all of your debt.”

Consider getting additional help.

You might not be able to handle your credit card debt on your own. Fortunately, there are options you can consider for relief.

“If all else fails, seek professional help,” recommended Tayne. “If you are struggling to repay your debt on your own or find the process to be stressful, don’t be afraid to ask for help. Sometimes significant problems require bigger steps.

“If your debt is keeping you down, it may be time to look into other debt repayment options or visit a debt consolidation expert. Many companies and nonprofits are designed to help you resolve your debts and eventually be debt-free.

“Before signing up with any debt relief service, do your research and make sure they are reputable. While you can take on the task of settling credit card debt on your own, using a debt settlement attorney who understands how creditors work, will most likely bring you the best settlement results and savings in the negotiating process.

“A professional will be well-versed in what creditors are looking for and will be your best bet going up against large national banks, credit unions, collection agencies, and multiple legal representatives.”

You can also look into settling.

“Debt settlement programs are for people who are seriously struggling and often the debt prevents people from making serious changes to their spending habits,” explained Tayne. “Proper debt settlement helps people get a fresh start and enables them to get their life back on track.

“It’s important to note once you do have relief of debt, it is still imperative to take the necessary steps to stay out of debt. Carefully research the matter. Look for someone who you can go see who has been doing this a long time, and this is all they do.

“Try not to listen to other debtors since their situation is not necessarily the same as yours. Reputation and time in the industry are essential. Your gut feeling, too, is important. You need to make sure they are going to do right by you and not right by them.”

Follow these tips moving forward.

Proper credit card use is important. It’s how many people actually build their credit score. We’ve even got some tips for you to check out. But right now, you have to make some changes to keep from maxing out your cards again in the future.

“If you’re worried about paying your bills, you may need to take another look at your budget,” suggested Tayne. “Many times, the reason people fall into debt is that they are living beyond their means. Are there places you can cut back? If you’re having trouble finding full budget lines to cut out, see if there are spots where you can downsize.

“For example, are you using all the data you’re paying for in your cell phone plan? Can you cut back on your cable or cut it out entirely? Are you paying for subscriptions you’re not using? You may need to make some temporary sacrifices, but any money you free up can help you get closer to what you need.”

It won’t be easy, but it’s possible to get past having all of your credit cards maxed out. Once you’re on the other end, you can start building your path to a better financial future. To learn more about managing your money responsibly, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Kimberly Foss (@KimberlyFossCFP) is the New York Times bestselling author of “Wealthy by Design: A 5-Step Plan for Financial Security.” She is also the founder and president of Empyrion Wealth Management™, where she brings both technical expertise and real passion to her work with clients, including affluent family stewards, women in transition, and thriving retirees. Kimberly began her career at Merrill Lynch as the youngest female account executive in its long history. She later left the commission-driven environment of a stock brokerage firm to found E&A Investment Advisory, which grew into the independent Empyrion in 2002. Kimberly is a thought leader in the financial industry and frequently shares her expertise on the markets, financial planning, and investing with leading media outlets—including The Today Show, Good Morning America, CNBC, Forbes, The Wall Street Journal, Fox News, Fox Business, MSN Money, Investor’s Business Daily, and U.S. News & World Report.
After working in the financial industry for several years, Stephen Hart left his role as Chief Financial Officer at WorldPay to launch the UK’s first payment processing comparison site, Cardswitcher. Nowadays, he helps SMEs save money on their payment processing costs.
Marissa Sanders is the founder and author of Simple Money Mom (@simplemoneymom). She is a personal finance expert and coach who aims to educate women about finances so that they can budget better, save more money, and become financially free. Her desire to teach others about personal finance came from her own success in becoming debt-free and building a net worth to over $100k in less than two years on one income.
Leslie H. Tayne, Esq. (@LeslieHTayneEsq) has nearly 20 years’ experience in the practice area of consumer and business financial debt-related services. Leslie is the founder and head attorney at Tayne Law Group (@taynelawgroup), which specializes in debt relief.

Should You Drive for a Rideshare as Your Side Hustle?

Ridesharing can be a source of regular side income, with the added benefit of a flexible schedule, but that road is not without its bumps.

If you’re reading this, then congratulations, you’re living in the future. Why? Because we’re all living in the future.

“Doesn’t that make it the present?” you ask. No. Just look around. The Internet exists. Smartphones exist. There are self-driving cars. Clearly, this is the future.

But while some parts of the future are nice, some parts can be tougher to manage. One example is the “gig economy,” which is truly an economy of contrasts. In some ways, it offers more flexibility by allowing you to work when you want to work. In other ways, it provides more instability because it tends to come without benefits or a regular paycheck. Are “gigs” worth the trouble—even as a side hustle?

It depends on the gig. Today, we’ll look at the ins and outs of driving for a rideshare.

How driving for a rideshare works.

There are many rideshare services these days. It’s easy to make one, after all. Just take a word related to driving, like “engine” or “manual transmission” and then remove some vowels, so it becomes something like “eng” or “mnulmiss.”

Once that’s out of the way, you just hire a bunch of programmers, make some deals with local governments, and bada bing bada boom, you’re in business! (Okay, we know, it’s slightly more complicated than that.)

Because different rideshares have different rules and because those rules could change from the time we’re writing this until its published, we’ll just speak in broad terms.

To qualify for most rideshare services, you’ll need to have certain qualifications. There tend to be age requirements, as well as a lack of a negative driving record. You’ll probably need your own car, though some services have partnerships that may give you a discount on acquiring one.

Once you actually start driving, the rideshare company will take a percentage of your fares. The percentage varies and may not be as advertised. Uber, for example, claims to take 25 percent, but some experts believe their cut is actually larger than that.

To drive …

We’ve alluded to most of the reasons that you might consider driving for a rideshare, but we’ll reiterate them.

The flexibility is a big one, as you’re pretty much free to set your own schedule and work as much or as little as you want. If you don’t have a regular day job, you can also have another or multiple other side gigs and weave them all together.

And if you do have a full-time job, you can drive for a rideshare in your off time. But please take care of yourself and get some rest if you’re able to. Working all the time is not good for your health.

If you do decide to drive for a rideshare, however, it’s extra important to make sure you aren’t too exhausted so as not to accidentally cause harm to yourself or others.

… or not to drive.

For folks without a steady day job, an uncertain or sporadic income makes budgeting very difficult. And driving for a rideshare means having a pretty irregular income. The amount you make will depend on where you’re driving when you’re driving—not to mention lots of luck.

Everything from surge pricing to tips to whether the rideshare app decides to start taking a higher percent of your fares is out of your hands. It’s these sorts of issues that have led some rideshare drivers to go on strike.

Additionally, if you had to purchase or lease a car to start driving for a rideshare, you may find yourself having trouble making payments if the fares start getting skimpier.

“Driving for companies like Uber and Lyft does not seem as profitable as even when I first started,” warned counselor and rideshare driver Willard Vaughn. “I think this is due to oversaturation, at least in my area. The companies also took away surge pricing for drivers, which was one of the ways we maximized our profits.

“With surge, the cost of the ride is multiplied by the amount shown. So an average ride that would be $3.75, with a good surge, could be three to four times that or more. Now we’re just given a set dollar amount, even though the customer is still paying the surge amount. So to answer if it is worth it: not really unless you’re just doing it extremely part-time and you have a fuel efficient vehicle.”

So should you?

It depends. Really, it does. But if you’re looking for a side hustle on nights and weekends, you can certainly give ridesharing a shot—especially if you enjoy driving!

If you want to make rideshare driving a principal source of income, on the other hand, you should probably, be a little more cautious. Take all of this into account, do more research that relates to your specific situation, and then see what makes sense.

Use that extra money wisely.

Once you’ve earned all that extra cash from your side gig, what are you going to do with it? While the urge to splurge is very real, you should resist! Using that money to build your savings, pay down debt, and improve your credit score is the wiser financial decision by far.

After all, folks with bad credit and no savings are the ones who end up relying on predatory no credit check loans and short-term bad credit loans like payday loans, title loans, and cash advances to make ends meet when an unexpected financial shortfall rears its ugly head.

And sure, choosing an affordable installment loan to cover that surprise bill is a pretty good solution, but having a well-stocked emergency fund (or even the ability to borrow a low-interest personal loan) is much, much better.

We can’t tell you what do you with your money, but we can sure tell you what we recommend: Use that extra cash to build your savings and pay down debt. Trust us, you won’t regret it. For more tips on how you can increase your income, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Willard Vaughn is a Licensed Counselor in Virginia and Indiana, and currently operates his own private practice specializing in delivering quality, compassionate care online. He has been driving part-time for Uber and Lyft for about two years and has somewhere around 2400 trips between them, with an average rating of 4.8.  He has a Bachelors Degree in Psychology from Longwood University in Virginia, and a Master of Arts degree in Counseling from Argosy University in Atlanta, GA. A native of Indiana, he now lives in the Hampton Roads area of Virginia with his fiancée, soon to be stepson, and Golden Lab named Elvis.

How Are Cash Advances Different from Regular Credit Card Transactions?

Cash advances let you use your credit card to take out paper money—which can be handy—but the extra costs for doing so are going to add up fast.

Credit cards can be a great tool to help people earn rewards, manage their monthly cash flow, and maintain their credit score. However, they can also be a really great way for people to spend far beyond their means, rack up excess debt, and send their credit score plummeting. It all depends on how you use them!

Credit cards can also be used to take out paper money using a cash advance. And while the differences between a cash advance and a regular credit card transaction might seem pretty straightforward, it’s actually a bit more complicated than that—and a great deal more costly.

Here’s how credit cards work.

Credit cards work much like a traditional line of credit (LOC). Instead of taking out a set sum of money, as you would with a personal loan, a LOC gives you a set amount of money that you can borrow up to and then lets you withdraw funds at your own discretion. You are only charged interest on the funds that you actually withdraw.

With credit cards, the terminology works like this: The total amount you can borrow is referred to as your “credit limit” and the amount you’ve withdrawn is referred to as your “outstanding balance.” Every time you use the card to make a purchase, funds are added to that outstanding balance up to the total credit limit.

Credit cards have a “revolving” balance, which is an important distinction from some other LOC products. A revolving balance means that the amount you can borrow against your credit limit replenishes every time you make a payment.

For example: If you borrow $1,000 on a credit card with a $3,000 limit, you then have $2,000 left that you could borrow in the future. But if you pay that $1,000 off, you would then have the full $3,000 left available to you for future use.

Cash advances have a separate credit limit.

When you make a purchase on your credit card, not physical money changes hands. The merchant receives the funds for your transaction electronically, and that same amount is then added onto your card’s outstanding balance.

But if you absolutely need paper money, you can use your card to get cash. All you need to do is go to an ATM and use your card to make a withdrawal. While some credit cards might not have cash advance features, they are very common.

However, if you’re looking to borrow a lot of cash using a cash advance, you might run into trouble. Cards that have cash advance features have a separate, lower credit limit for how much you can withdraw in cash.

While these credit limits vary from card to card (and user to user), they’re often set as a percentage of your total credit limit. The higher your total limit, the more cash you can withdraw. As credit limits are oftentimes related to your credit score, bad credit borrowers might find themselves at a disadvantage.

Cash advances are way more expensive.

Then again, just because you can withdraw all that cash doesn’t mean you should. For one thing, you should refrain from spending beyond your limits on a credit card, regardless of whether you’re using cash or credit. Plus, the lower you keep your balances, the more it will help your score.

But if you find yourself facing an unforeseen bill or emergency expense and absolutely need to put the charge on your card, you should opt for credit instead of cash. Why? Because credit card cash advances are much more expensive than regular transactions.

To begin with, there are the interest rates: Cash advances almost always come with a separate, higher rate than regular transactions. Check your cardholder agreement to see what the cash advance APR is for your particular card.

Second, most credit cards come with a one-month interest-free grace period for normal transactions. If you pay off the transaction within that period, you don’t have to pay any interest at all! With cash advances, on the other hand, there is no such grace period; interest will start accruing the second that transaction is added to your balance.

Lastly, there are the fees. Not only do most cards charge you a cash advance fee purely for making the transaction—oftentimes, it’s two to three percent of the amount withdrawn—but you’ll very likely have to pay an ATM fee on top of that other charge.

If you find yourself in the middle of a true cash-only emergency, a credit card cash advance can be useful. But otherwise, they’re much too expensive to be worth it.

They’re still better than cash advance loans.

While we don’t recommend credit card cash advances in any situation that doesn’t absolutely demand one, we also can’t deny that they are a far better option than short-term cash advance loans like payday loans or title loans.

The high-interest rates for credit card cash advances aren’t great, but they are far preferable to the astronomical APRs for payday cash advance loans, which average almost 400 percent. (Title loans, which put you at risk of losing your car or truck, have an average APR of 300 percent.)

Due to their high rates,  their short terms, and their lump-sum repayment structure, no credit check loans such as these can be difficult for consumers to repay on time, which can lead them down the slippery slope towards a debt trap.

If you are unable to use a credit card cash advance to cover a surprise bill and you need to take out a bad credit loan, you should look into possibly taking out an installment loan that will provide you with more manageable payments.

But the best method to protect your money in situations like this is to maintain a well-stocked emergency fund. That way, you won’t need to take out any loans or cash advances at all! To learn more about you can improve your long-term financial situation, check out  these related posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Checking Your Credit vs. Checking Your Ability to Repay

If you have bad credit, then you have to be on the lookout for predatory lenders, so start looking for lenders who check your ability to repay the money you’re borrowing.

For people with good credit, any loan they take out is going to come with a credit check. They’re not too worried about it because, well, they have good credit! Check away, lenders and landlords! No skeletons in these here closets.

But for people with bad credit, the situation is totally different. The requirement that a lender checks their credit means they might as well not apply. Besides, a hard credit check will actually lower your score slightly, and a bad credit score needs all the help it can get.

When folks with bad credit need a loan, they often end up settling for bad credit loans and no credit check loans. These loans don’t come with credit checks, but they do come with much higher rates than standard personal loans. Some of them can be downright predatory, trapping borrowers in a dangerous cycle of debt.

That doesn’t have to happen, though! There are bad credit loans out there that can provide helpful bridge financing for someone who’s in a bind. If you have bad credit, it’s all about finding the right bad credit loan. And a good place to start is by finding a lender who, even though they aren’t checking your credit, still checks your ability to repay.

How do bad credit loans work?

Bad credit loans are a little different from regular personal loans. Since they’re meant for folks with poor credit scores, they see much higher default rates than loans that are aimed at people with prime scores. As such, bad credit loans come with much higher interest rates to counteract those higher rates of default.

Many bad credit loans, like payday loans cash advances, and title loans are extremely short-term loans, with average repayment periods of only two weeks. They’re small-dollar loans, too; while rates will vary from lender to lender and from state to state, short-term payday loans aren’t usually offered for more than a few hundred dollars.

These short-term loans are paid off in a single lump sum, and they charge interest as a flat fee at an average rate of $15 per $100 borrowed. (In terms of APR, that adds up to 391 percent on a two-week loan!) If you borrowed a $400 cash advance at a 15 percent interest rate, you’d pay it back in a single payment of $460 on the loan’s due date.

There are also bad credit installment loans, which are structured like regular personal loans, just with higher interest rates. The interest for bad credit installment loans is accrued over time, and they come with an amortizing payment structure, which means that every payment you make goes towards both the principal amount owed and the interest.

How do credit checks work?

When a traditional lender is assessing a loan application, they want to see whether or not the borrower in question is likely to repay their loan. One of the best ways that they have to determine this is by checking the person’s credit.

This doesn’t just mean checking their credit score, either. A “hard” check on a person’s credit score will return a copy of their credit report as well.

Credit reports are documents maintained by the major credit reporting agencies that track your history as a borrower. The information on those reports is used to create people’s credit scores, and getting a copy of someone’s credit report allows a lender to get a full view of their credit history.

Recent credit inquiries make up 10 percent of your overall score. Anytime a hard credit check is made on your history, that check is, itself, recorded on your credit report. Applications for new credit usually temporarily ding a person’s score by 5 points or so, and many checks in a short-period can lower it even more.

“Soft” credit checks, on the other hand, return far less information than a hard credit check, but they also don’t get reported on a person’s credit report and they don’t affect their score.

Finding a lender who checks your ability to repay.

All of the loans mentioned in the first section of this post don’t require a hard credit check as a part of their application process. But some of these lenders don’t do anything else to verify whether a borrower can afford the loan they’re applying for. That’s where things get risky.

With short-term payday cash advances, it can actually be very difficult for many customers to pay these loans back on time. Those lump sum repayments can blow a large hole in many people’s monthly budgets, leading them to roll over their loan or take out a new loan in order to make ends meet.

This is how people end up trapped in a cycle of debt, continually incurring new interest fees and charges in order to, essentially, borrow the same amount of money over and over again. They throw money at their loan every couple of weeks without ever getting closer to getting out of debt.

Some lenders will issue a loan to almost anyone who applies, regardless of whether they can afford that loan or not. Other lenders will run a soft credit check, verify a borrower’s income, or perform other underwriting measures to ensure that borrowers can reasonably pay back the money they’re borrowing.

If you have bad credit and need a loan to cover emergency expenses, find a lender who checks your ability to repay. It’ll help you steer clear of a dangerous payday debt trap and stay on the road to getting debt-free.

Want to improve your score and stop worrying about credit checks? Then check out these related posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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5 Questions to Ask Yourself Before Taking out an Installment Loan

You need to find the installment loan that works best for you, and that begins with knowing exactly what questions to ask.

If you’re looking to take out a personal loan, then the odds are good that the loan in question is an installment loan. Even if you’re looking for a bad credit loan you should certainly be considering installment loans alongside the normal roster of payday loans, title loans, and cash advances.

Regardless of your credit score, finding the right installment loan for you means knowing the right questions to ask. Well, you’re in luck! Here are five questions you should be asking yourself before taking out an installment loan.

1. What’s the interest rate?

This is pretty basic stuff, but it never hurts to repeat: When shopping for an installment loan, you want to find the best interest rate you can. Don’t just go with the first loan you see. Do your research, and find the most affordable loan you can.

A loan’s interest rate measures how much that loan is going to cost. Whereas short-term no credit check loans like cash advances and title loans charge interest as a flat fee (say, $15 per $100 borrowed), installment loans charge interest as an ongoing rate. The longer your loan is outstanding, the more interest accrues.

The best measure to use is the loan’s annual percentage rate (APR), which calculates how much the loan will cost over the course of a full year, including both the interest and any additional fees.

One thing to keep in mind, however, is that you will likely be paying less money in interest than the stated rate would imply. This is because interest gets charged as a percentage of your outstanding balance, which grows smaller every time you make a payment.

One of the great things about installment loans (as opposed to short-term cash advance loans), is that paying off the loan early will save you money. Like we mentioned above, the longer the loan is outstanding, the more interest accrues. Happily, the reverse is also true: the sooner you pay the loan off, the less interest you’ll pay.

There is an exception to this last rule, which we’ll cover in question number four.

2. How much are the individual payments?

While interest rate and APR will determine how much your installment loan costs, they don’t actually determine whether or not you can afford the loan. That’s going to depend on the size of your payments.

Before you agree to take out a given installment loan, you need to look at the proposed payments and measure them against your monthly budget. Do the math and ask yourself: Am I going to be able to afford these payments? If not, then this is not the loan for you.

Installment loans have an amortizing repayment structure. This means that every individual payment goes towards both the principal amount owed and the interest. The ratio of principal to interest for each payment changes over the life of the loan according to the loan’s amortization schedule.

There are several factors that determine the size of your loan payments. Beyond the amount that you’re borrowing and the interest rate, there’s the length of the loan’s repayment period and the frequency of the payments themselves.

Obviously, the more money you borrow, the larger your payments. The same goes for interest rate: the higher your rate, the larger your payments. And the more infrequent your payments, the larger those individual payments are going to be.

But the total repayment period can be a little trickier. The longer a loan is outstanding, the more payments are made, and the smaller each individual payment is going to be. Borrowing a certain amount of money with a two-year installment loan, for instance, will mean smaller payments than borrowing that same amount of money with a one-year loan.

However, a long repayment period also means paying more for the loan overall. As we mentioned above, a loan that’s outstanding for a longer period of time is going to accrue more money in interest. You will have to balance affordability with the overall cost.

3. Do these due dates work for me?

One of the keys to balancing a monthly budget is to make sure that you always have the proper funds in your bank account to cover your different bills. Minimizing those bills as much as possible an important step, but so is making sure that those bills are evenly spread out.

So when you’re applying for an installment loan, make sure that you get a sense of when the proposed due date for each payment is. If that date is smack dab in the middle of a period when all your other bills are due, ask if it can be changed. Your lender will very likely be able to work with you on that.

What if you’re already making loan payments and you realize that your due date is causing you a hardship? If that happens, you should still reach out to your lender to see what can be done. Ideally, you would have enough money in your accounts to not feel the pinch in those couple days before payday, but many people don’t. And that’s okay.

4. Are there pre-payment penalties?

We mentioned earlier that paying off an installment loan early will save you money. But if there are prepayment penalties, it might not!

Prepayment penalties are fees levied by a lender on a customer who pays off their loan early. Since lenders lose out on extra accrued interest when a loan’s principal is paid off ahead of schedule, these penalties help their bottom line.

That’s understandable, but prepayment penalties also disincentivize responsible financial behavior! If you have the money to pay off a loan early and save yourself extra money, you should do that! Take it from us! We write about how people can save money all the time.

Prepayment penalties aren’t a deal-breaker by any means, but it’s certainly a “con,” not a “pro.” And if a lender is charging them, you’ll want to read your loan agreement extra carefully to make sure there aren’t any other surprises in store.

5. How do other customers feel?

When you buy a new appliance off Amazon, you read the customer reviews first, right? Well, why wouldn’t you do the same with an online loan? Or a loan from a brick-and-mortar bank, for that matter?

Before you put your signature on any loan agreement, you should do some digging on the lender to see what other customers are saying about them. You can do this by visiting sites like LendingTree, visiting their BBB page, checking out the company’s social media pages (including their mentions) and by scanning their Google reviews.

Don’t just trust what any lender tells you in their advertisements. Do your research and find out how they’re performing out there in the real world. That way, you can borrow with confidence, knowing that you’ve found the right installment loan for you.

To learn more about borrowing smarter, check out these related posts and articles from OppLoans:

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