What Is Your Debt-to-Income Ratio?

If you’re applying for a mortgage loan, an auto loan, or even just a regular personal loan, lenders will be looking at your DTI to see whether or not you can afford it.

When it comes to the numbers that rule your financial life, you’re probably familiar with the big ones like your credit score: Even if you don’t have good credit, you still know that you should try to keep your score as high as possible.

But there’s another important number that you might not be so familiar with: your debt-to-income ratio. And while it’s luckily one of the simpler money metrics out there—unlike, say, your credit score—it can have massively important implications for your financial future.


What is the debt-to-income ratio?

“Your debt-to-income ratio (known as DTI) is an important financial metric that you really do need to understand,” explained CFP Patricia Russell, founder personal finance blog, FinanceMarvel. And while some financial terms—like “amortization” for instance—can be slightly opaque, your debt-to-income ration is not one of them.

“In simple terms, your DTI ratio is all of your monthly debt payments divided by your gross monthly income (expressed as a percentage),” said Russell. “This metric or ratio is heavily scrutinized by lenders to assess your ability to service your monthly repayments on the money you have borrowed.”

It’s important to emphasize that your DTI doesn’t measure your total debt load to your total yearly income. Instead, as Russell laid out, it measures the amount of money you’re obligated to pay towards that debt every month against your monthly income.

“It’s a ratio that affects your ability to access a loan,” said millennial money expert Robert Farrington, founder of TheCollegeInvestor.com (@CollegeInvestin). “The basic idea is if you have too much debt relative to your income, lenders might hesitate or refuse to give you the credit you need for a large purchase.”

“Your debt-to-income ratio (DTI) most often comes up when buying a house,” he continued, “but it is also considered by potential landlords or lessors of cars. By pulling your credit report, someone can calculate your DTI and decide whether to loan, rent, or lease to you.”

What kind of debts and income count?

According to Farrington, the debt obligations factored into your DTI are those that fall under the category of “recurring” debt, or debts that you can’t simply cancel at any time.

“This includes mortgage, rent, car loans, personal loans, monthly minimum credit card payments, alimony, child support, and, of course, student loans. These are debts that are not going to go away until you’ve fully repaid them,” he said.

And which debts do not count towards your DTI?

“Despite the fact that you may have contracts with your internet, cable, or phone provider, you can technically pull the plug on these services any time, so they do not count. Nor do other kinds of utilities like electricity and water,” said Farrington.

He also went to explain which sources of income count towards the other half of the ratio. In short, it doesn’t just have to money that you earn from a job. “Your income can include not just wages, salary, and tips, but also alimony and child support, Social Security benefits, and pension,” he said. “Pretty much any money you take in on a monthly basis on the books can be considered income.”

How can you calculate your DTI?

Knowing what a DTI is won’t do you a ton of good if you can’t figure out how to calculate it. Luckily, figuring out your DTI is pretty simple and doesn’t require a financial advisor.

“To calculate, one simply takes all debt payments and divides by gross monthly income,” said Robert R. Johnson, Professor of Finance in the Heider College of Business, Creighton University (@CreightonBiz). “This includes all debt payments—mortgages, student loans, auto loans, credit cards, etc.”

To give you an idea of what this process looks like, Farrington helpfully provided the following example: “If you have $1,000 per month in debt obligations and $3,200 per month in income, divide 1,000 by 3,200 and your answer is .3125. Round that to .31, multiply by 100, and you have a 31 percent DTI ratio—Meaning that 31 percent of your income is taken by debt obligations per month.”

What is a good debt-to-income ratio?

When lenders are looking at your DTI, it’s to help them determine whether or not you can pay back the loan you’re applying for—the same goes for landlords. As such, you want to try and keep your DTI fairly low. But the thresholds for what is an acceptable ratio can change depending on what kind of loan (or lease) you are applying for.

When it comes to applying for a mortgage loan, Farrington cites Fannie Mae guidelines that say 50 percent is the acceptable DTI ceiling for prospective homebuyers. But just because 50 percent is the ceiling, doesn’t mean you shouldn’t aim lower. And the data backs that up.

“According to the Consumer Financial Protection Bureau (CFPB), the highest ratio a borrower can have and still be eligible for a Qualified Mortgage is 43 percent,” said Johnson. “And, a Qualified Mortgage is a category of loans that have certain, more stable features that help make it more likely that the borrower will be able to afford the loan.”

“According to the CFPB, evidence from studies of mortgage loans suggests that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments,” he added.”

If you’re looking to take out an auto loan, Farrington says that a DTI of 36 percent or below is ideal to get a reasonable deal. Meanwhile, if you’re applying to rent a house or an apartment, he cautioned that DTI will vary, largely by location and property owner.

“Many landlords will require that the rent will amount to no more than 33 percent of your income. Some may be more lenient and go up to 45 percent or 50 percent,” he said.

If you’re looking for a good overall ratio to set as your goal, aim for something just south of 30 percent. “An ideal ratio is generally around 28 percent although as mentioned above lenders will accept a higher ratio depending on other factors including your credit score, your savings levels, other assets you own,” advised Russell.

But she also warned that folks shouldn’t necessarily count on a good credit score saving you from a high DTI: “Whilst credit bureaus don’t look at your DTI ratio, often a borrower who has a DTI ratio also has a high credit utilization ratio which does count for around 30 percent of your credit score.”.

Johnson agreed with 28 percent figure, while also reiterating that the lower your ratio was, the better off you’ll be.

How can you improve your DTI?

If you’re looking to take out a big loan and you have a high debt-to-income ratio, it’s probably best to wait. In the meantime, Russell shared three ways that people can tackle their debt and improve their DTI.

  • Create a budget to track your spending: By keeping track of exactly where your money is going, you will often find unnecessary and extravagant daily expenses. This could be something as simple as a daily $5 coffee, which over a year is $1,825 that could go towards paying down your debts.”
  • Prepared a strategy to pay off your debt: My two favorite methods are the snowball and avalanche methods. How the snowball method works is that you start by paying off your smallest debt first whilst making the minimum payments on your other loans. Once you have paid off the smallest you then work your way onto the next one etc. With the Avalanche method, you focus on paying off the loan with the highest interest rate first. Whichever method you choose it’s important to stick with it.”
  • Don’t take on more debt: In order to get your debts under control, you need to avoid the temptation of taking on more debts. Don’t rack up unnecessary credit card debts and avoid major purchases like a new car on finance. New loans will really hurt your DTI ratio and won’t help your credit rating either.”

Paying down your debt is important for your financial health. But it might not be wise to throw yourself into debt repayment if it means foregoing other important financial priorities.

“Achieving financial security is not a linear process,” said Johnson. “By that, I mean that you often have to work on several competing goals at once. For instance, some people are so intent on extinguishing their credit card debt—certainly a worthy goal—that they choose not to participate in a workplace 401k plan.

“A 401k plan affords the participant many advantages,” he continued. “First, the contributions made reduce your income tax bill by reducing taxable income.  Second, if the employer matches contributions—essentially you receive an immediate 100 percent return on investment. When one doesn’t participate in an employee matching plan, one is essentially turning down free money.”

Your DTI is important, but so is saving for retirement, building an emergency fund, and a whole host of other financial priorities. Take things slow and steady, and you should come out a winner on the other end. And to learn more about how you can build a brighter financial future, 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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Contributors

​​​​​​​Robert Farrington is a Millennial Money Expert and Founder of TheCollegeInvestor.com (@CollegeInvestin). He focuses on helping people get out of student loan debt to start investing and building wealth early.
Robert R. Johnson, PhD, CFA, CAIA is a Professor of Finance in the Heider College of Business, Creighton University (@CreightonBiz). He is also Chairman and CEO of Economic Index Associates, home to a new paradigm in Index investing. Dr. Johnson is the co-author of the books Invest With the Fed, Strategic Value Investing, Investment Banking for Dummies, and The Tools and Techniques of Investment Planning.
Patricia Russell is a Certified Financial Planner (CFP) and the founder of the personal finance blog, FinanceMarvel, which provides free financial advice on managing credit, debit and savings. Patricia has more than 10 years experience in helping families and individuals take control of their personal finances and achieve financial independence.

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.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Instagram


Contributors

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.

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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How to Raise Your Credit Score by 100 Points

The two most important parts of your score are your payment history and your amounts owed, so those are great places to start.

For folks with bad credit, improving that score is step number one on their journey to financial fitness. Otherwise, when times get tough and they need to borrow money, they’re going to be stuck taking out predatory no credit check loans and short-term bad credit loans like payday loans, cash advances, and title loans to make ends meet (which probably won’t end well).

Raising your score means being able to secure lower interest rates and better financial products. Even if your score is just okay, taking that score from “good” to “great” could be the key to unlocking your financial future. If you want to raise your credit score by 100 points or more, here’s what you should do.


Check your credit report.

Your credit score is based on the information contained in your credit report. These are documents that catalog your history as a borrower, and they are compiled by the three major credit bureaus: Experian, TransUnion, and Equifax.

As such, the best place to start when fixing your credit score is with your credit report. Not only will it give you an idea of what areas you need to fix, but it might even contain mistakes that are artificially lowering your score.

“Carefully check your credit report and make sure there are no errors. If there are, dispute them,” said OverdraftApps.com (@overdraftapps) co-founder Uri Abramson, adding that you can get a free copy of your report once a year by visiting AnnualCreditReport.com.

And since you can request one free report from each credit bureau, that means you can get as many as three free credit reports annually!

“The credit bureaus process untold trillions in payments and accounts, and they make mistakes all the time,” said Brian Davis, co-founder of SparkRental.com (@SparkRental). “It’s your responsibility and your responsibility alone to make sure your credit report is accurate, and that you don’t have errors hurting your credit score.”

To learn more about disputing errors on your report, check out our blog post: How Do You Contest Errors On Your Credit Report?

Start building your payment history.

There are five different categories of information from your credit reports that make up your credit score. The most important category is your payment history, which makes up 35 percent of your score. When fixing your credit score, paying your bills on time is going to be key.

“Pay all accounts on time every single month,” said Davis. “Even if you can only make the minimum payment, make sure it’s on time because late payments mar your credit score.”

“Credit cards must be paid before anything else, like utility bills, (although not before the mortgage),” advised Abramson. “Wait for 30 days and your delinquency may be reported by your credit card issuers.”

They aren’t kidding; even one late payment that’s reported to the credit bureaus could dramatically lower your score. If you know you’re going to be late, call the company in question to see what can be done.

You can also take a look at your bill schedules to see if a certain cluster of due dates is causing financial strain. If you call your lenders or utility companies, the odds are pretty good that you can have those due dates changed to ease the pressure.

But what if you don’t have any loans or credit cards? How do you start building your payment history then? Don’t worry. There’s a solution.

“If you’re new to credit or have weak or poor credit, become an authorized user on someone’s credit card,” advised Debt Assassin RJ Mansfield (@DebtAssassin1). “As an AU you are never responsible for payments, but it will be reported on your credit report and help your score.”

And if you can’t become an authorized user, try taking out a secured credit card to start building a better payment history. Above all else, a good credit score begins with paying your bills on time. There’s no way around it!

Keep your credit utilization low.

The second most important part of your credit score is your amounts owed, which makes up 30 percent of your total score. If you have too much outstanding debt on loans and credit cards, your score is going to drop. Likewise, reducing that debt load will help improve it!

However, there one specific aspect of your amounts owed that you should keep an eye on, as it can have a huge effect on your score: And that’s your credit utilization ratio, which affects any debt like credit cards where you can borrow up to a certain credit limit.

“One of the metrics that determine your credit score is the ratio of credit used to credit available. Keeping all your balances below 30 percent of the limit keeps your score higher,” said Davis.

This goes beyond paying off your credit card balances every month. To make sure you don’t get caught flat-footed by the start of the billing cycle, you should try and keep your balances below thirty percent at all times.

“Try to pay your credit card bill BEFORE your statement is cut rather than by the due date,” said Abramson. “Most credit card issuers report your balances to credit bureaus around the time your statement closes.”

And in terms of maintaining lower balances, Abramson went even further. “Try to keep your utilization ratio (the ratio of your debt to your line of credit) below 10 percent for each of your credit cards,” he said. “That’s an aggressive goal, but your utilization ratio is the second most important component of the FICO score.”

Let’s be clear: 30 percent isn’t some kind of magic threshold; dropping underneath it won’t magically “fix” your score. It’s a good place to start, but you should be getting your balances as low as possible—on the way to paying them off entirely.

In order to bust some myths surrounding the 30 percent line, Mansfield conducted a personal experiment using his own credit cards. Here’s what he found:

“Popular advice from ‘so-called’ credit experts is that it’s fine to carry up to thirty percent of your available credit lines. It is not. I did it. I carried twenty-nine percent to test the theory and my score dropped from 811 to 730, a drop of 81 points. Only carry a balance if you can’t pay it in full to maximize your score.”

Keep those old cards open.

Paying down your debts is good—and be good we mean “pretty necessary to maintaining a good credit score”—but there are other actions you can take to make sure that your credit utilization remains as low as possible.

Remember, there are two sides to your credit utilization ratio: The balances owed, and the total available credit. So while you pay down your balances, why not make sure that your total available credit remains as high as possible?

“Avoid closing down a credit card even if you don’t need it anymore (unless it has an annual fee).” said Abramson. “When you close a credit card, your available line of credit shrinks, which can negatively impact your utilization ratio.”

And that’s not the only reason you should keep those old cards open. “Credit bureaus look at the average age of your accounts,” said Davis. “The older, the better.”

Be patient.

This is the hardest part of building your credit score. But if you’re really serious about the project, it’s something you can’t avoid.

“Time is the best credit-builder,” said Abramson. “If you handle your credit responsibly and avoid any derogatory remarks on your credit file, you will easily increase your score by a large margin within a year.”

These changes aren’t going to happen overnight. In order to fix your credit score—whether you want to raise it by 50 points, 100 points, or 150—you’re going to need to be patient. Just remember: The reward waiting for you on the other end will be worth it!

Here’s a story from someone who did it.

Before you set out on your own financial journey to improve your credit score, we figured you might like to hear a real-life story from someone who pulled it off. In his own words, here’s how Brandon Ballweg, founder and editor of the photography and tech website ComposeClick (@ComposeClick), managed to increase his credit score over 100 points over the past two years:

“I verified any collections that were showing on my credit report. I had several. One was reporting incorrectly, which was removed when brought to the creditor’s attention. The others I paid off, a couple of which I was able to get a pay for deletion agreement. I just did this over the phone with the collection agencies—there’s no reason to send them letters or try to get anything in writing.

“I started with a secured card and opened up a few regular credit cards and have paid them all off when the statement comes. I keep at least a small balance for most of my cards before the statement to show utilization. I keep my overall utilization under 20 percent, usually lower.

“I still have a ways to go because there are some missed payments showing on my credit report from a student loan provider. I hope to get these removed by communicating with the provider and pointing out the fact that I haven’t missed a payment in over a year and a half.

“That’s it. I don’t think anyone should be using expensive credit repair services that only do things that you would be able to do more effectively yourself. It’s all about getting as many negative marks removed from your credit reports and showing consistent responsible credit use.”

To learn more about how you can improve your credit score and your long-term financial outlook, 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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Contributors

Uri Abramson is the co-founder of the growing personal finance blog OverdraftApps.com (@overdraftapps), which specializes in transparent and honest reviews of financial products for low-medium credit score population and debt resolution advice.
Brandon Ballweg is a photographer and entrepreneur. He is the founder of ComposeClick (@ComposeClick), an educational site for photographers that provides information on the technical aspects of photography and how to succeed in the photography business.
G. Brian Davis is a landlord, personal finance writer, and co-founder of SparkRental.com (@SparkRental), which provides free video courses and rental investing tools for landlords. He spends most of the year overseas, splitting his time between Abu Dhabi, Europe, and his hometown of Baltimore.
RJ Mansfield (@DebtAssassin1) is a consumer’s rights advocate and author of Debt Assassin: A Black Ops Guide to Cleaning Up Your Credit.

Loans With No Credit Check Sound Great; Here Are the Risks

It’s all about finding the right loan for you … and also avoiding the many no credit check loans out there that could trap you in a predatory cycle of debt.

When you have bad credit and you need a loan, the last thing you want is some lender running a credit check on your application. You already know your score is lousy, and you don’t need a hard credit check dropping it even further.

That’s where no credit check loans come in. But while they might seem perfect for someone who needs money now and has bad credit, they come with significant risks. Before taking out a loan with no credit check, you need to know exactly what you’re getting yourself into and what potential pitfalls to avoid.


What are no credit check loans?

The most common types of no credit check loans are payday loans, which are also known as “cash advances.” These are small-dollar short-term loans that rarely run more than a couple of hundred dollars and that come with an average repayment period of two weeks.

Title loans are another type of short-term no credit check loan; they come with slightly higher principals and longer repayment periods. Unlike payday loans, title loans are secured, using the title to the borrower’s car or truck as collateral.

No credit check loans are oftentimes much easier to obtain than regular personal loans. Even though they don’t run a credit check, some lenders will verify a borrower’s income before lending to them, while others simply ask for as little as an ID and a valid bank account.

Why don’t these lenders check credit scores?

When you apply for a loan from a traditional lender like a bank, they will check your credit history as a part of the application. This involves running a “hard check” on your credit, which returns your credit score and a copy of your credit report.

Checking your credit history allows these companies to assess how you’ve fared when borrowing money in the past, and it also gives them a window into how much debt you currently owe. Both of these factors help them make their decision. If you have a poor credit score, the odds are very high that you’ll be rejected.

But with no credit check loans, the process is quite different. These are bad credit loans, which are most often used by people who already have low credit scores. This makes checking the borrower’s credit a little beside the point.

When a lender runs a hard credit check on a person’s credit history, that check is recorded on the borrower’s credit report and can temporarily lower their score—even if the application is denied. One of the main advantages to no credit check loans is that applying for one won’t impact the borrower’s credit score at all.

However, there are also many downsides …

They’re more expensive.

Since most no credit check loan borrowers have lower credit scores, the default rate (or the percentage of customers that fail to pay back their loan) is much higher than the default rates for regular loans.

As such, no credit check loans come with much higher interest rates than standard personal loans. And some of them, including payday loans and title loans, come with rates that are way, way higher! (This is true for both online loans and loans from a brick-and-mortar lender.)

But it can tricky to see just how much higher they really are. Standard personal loans come with interest rates below 36 percent—and oftentimes well below that for borrowers with prime credit scores. Meanwhile, the average rate for a payday loan is 15 percent, while the average rate for a title loan is 25 percent. Those numbers seem a little on the higher side, but generally fine.

Except here’s the catch: The interest rate for those personal loans is assessed on an annual basis, while those interest charges for payday loans are only assessed over periods of two weeks and one month, respectively.

Whenever you’re shopping for any kind of loan or credit card, make sure you check its annual percentage rate (APR) to get a similar comparison between products. The APR for a two-week payday loan with a 15 percent interest charge is almost 400 percent, while the APR for a one-month payday loan with a 25 percent interest charge is 300 percent!

As we said, the interest rates for some of these no credit check loans are way, way higher!

It won’t help your credit score.

The most important part of your credit score is your payment history, which makes up 35 percent of your total score. Every time you make a credit card payment, a loan payment, or even pay your rent (in some cases), that information gets recorded on your credit report. So much as one late payment can dramatically impact your score.

For folks with bad credit, building a positive payment history is one of the best things they can do to improve their score. But with short-term no credit check loans, most lenders don’t report payment information to the credit bureaus, meaning that on-time payments can’t help borrowers build their payment history and improve their overall score.

This is the flipside of no credit checks. These lenders don’t care if their customers have poor credit, but they don’t take steps to help customers improve their credit, either.

But this isn’t true for all bad credit lenders. Some companies, like OppLoans, do report payment information to the credit bureaus. Before you take out a loan, check and see whether it could help you build better credit!

You risk entering a cycle of debt.

Here’s how a cycle of debt works: A borrower has so much debt that they can’t afford to pay it off. All they can afford to do is make their minimum payments—which isn’t nearly enough, but still adds up to quite a bit of money every month.

Because they’re putting so much money into their debt, they can’t afford to save any money either. When an unexpected bill arises, all the person can do is …. take on more debt to cover it! This means they have to start putting even more money towards their monthly minimum payments. And so the cycle continues.

Here’s a slight variation on that: A person takes out a $300 payday loan to cover a car repair and has to pay back $345 two weeks later. When their due date arrives, they find that paying $345 all at once will leave them with no money to buy groceries.

This person then pays off their loan and immediately takes out a new payday loan, once again paying $45 in interest on a $300 loan. Two weeks later, the same thing happens. This time, they roll over their loan, paying off the $45 owed and receiving a two-week extension … in return for an additional $45 interest charge.

Two weeks after that, they still can’t afford to pay back their loan, and so the cycle continues.

A study from the Pew Charitable Trusts found that well over 80 percent of payday loan borrowers didn’t have the money in their monthly budgets to cover their loan payments. This is partly because payday loans (and other short-term no credit check loans) require borrowers to pay their loans off all at once.

If you’re looking for a no credit check loan, look into the benefits of an amortizing installment loan. These loans are designed to be repaid in a series of smaller, regularly scheduled payments—and their amortizing structure means that every payment goes towards both the interest and the principal amount owed. Each payment you make will bring you one step closer to zeroing out your debt.

Look into a “soft credit check” loan.

Folks with bad credit who need to borrow money to bridge an unexpected financial gap—and who can’t borrow it from friends or family—should look into a variation on no credit check loans called “soft credit check” loans.

A soft credit check returns less information than a hard credit check, but it still gives a lender some idea of a borrower’s history with credit. Along with other underwriting factors, like income verification, a soft credit check can help a lender determine whether or not a person can actually afford the loan they’re applying for.

And that’s really the key. When you have bad credit and you need a loan—especially in times of financial emergency—it’s all too easy to borrow a loan that you can’t really afford to pay back. That’s how people end up trapped in a cycle of debt, with their financial outlook looking dimmer by the day.

Credit-building. Manageable, amortized payments. Soft credit checks. Reasonable interest rates. Find a lender who can offer you all of these, and you’ll be well on your way to finding a no credit check loan that works for you.

Other than building an emergency fund, the best way to avoid no credit check loans is to … improve your credit score! To learn more about how you can fix your credit, 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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How Will a Cash Advance Loan Affect Your Credit?

One of the many annoying things about cash advances is that they can’t help your score, but they can definitely hurt it.

When you have zero money in savings and a surprise car repair or emergency room bill is suddenly plopped in your lap, you’re probably thinking about only one thing: How you can get the money you need fast. The last thing on your mind is how that cash advance loan’s going to affect your credit score—especially if your score is already pretty lousy.

But that sort of short-term mindset is going to come around and bite you later on. Aside from finding a loan that has reasonable interest rates and, even more importantly, payments you can afford to make, you should be taking into consideration how that loan affect your credit score.

There are plenty of reasons why should think twice before taking out a short-term cash advance, but the effect (or lack thereof) that that loan will have on your credit score shouldn’t be forgotten.


What is a cash advance loan?

If you’re familiar with payday loans, then you’re familiar with cash advance loans, as those are simply two names for the same thing. It’s a short-term high-interest loan designed as an advance on the borrower’s next paycheck, usually with a due date set for their following payday.

Cash advance loans have an average repayment term of only two weeks and an average interest charge of $15 per $100. Unlike installment loans, cash advances charge interest as a flat fee, with the entire amount (principal and interest) paid back in a single lump sum.

A 15 percent interest charge might seem reasonable when compared to standard personal loans, but the cost for cash advance loans is actually far higher. When measured as an annual percentage rate (APR), the interest for a two-week cash advance is almost 400 percent!

Cash advance loans are a type of bad credit loan, which means that they’re aimed at people whose poor credit scores lock them out from borrowing with traditional lenders. While the cost for most bad credit loans is higher than the rates for traditional personal loans, the cost for cash advance loans is especially high.

How do personal loans affect your credit score?

Your FICO credit score is a number between 300 and 850 that’s based on information in your credit reports. You actually have three different credit reports, one each from the three major credit bureaus—Experian, TransUnion, and Equifax. Since information can vary between your reports, and your credit score can vary depending on which report was used to create it.

FICO scores are built on using five different categories of information: payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), credit mix (10 percent), and new credit inquiries (10 percent).

Your payment history relies on lenders, landlords, and utility companies reporting to the credit bureaus. When you make on-time payments, those help your score; when you pay your bills late—or don’t pay them at all—that hurts your score.

Traditional lenders like banks, credit unions, and credit card companies all report their customers’ payment information to the credit bureaus. With bad credit lenders, however, things aren’t so simple.

Are your cash advance payments being reported?

Most bad credit lenders offer no credit check loans, which means that they do not check a person’s credit score when evaluating their loan application. For people with bad credit, this can be nice, because hard credit checks will temporarily lower their score; that’s the last thing they need!

But there’s a flipside to this: Those same lenders often don’t report payment information either. This means that the payments you make on your loan won’t get recorded on your credit report and, thus, won’t affect your score.

This is especially common with short-term bad credit loans, including cash advances. If you take out a cash advance loan and then pay it back on time, there isn’t going to be any effect on your credit score.

Here’s the annoying part: Paying off your cash advance loan won’t help your score, but failing to pay the loan back will hurt it. So how does that work?

Debt collectors report to the credit bureaus.

Whereas most no credit check lenders don’t report to the credit bureaus, the vast majority of debt collection agencies definitely do report to them. And if you fail to pay back your cash advance loan, the lender will very likely sell that outstanding debt to a debt collector.

Once the debt collector has purchased the debt, it will be reported to the credit bureau as a “collection account” which goes into your payment history as a record that you failed to pay back a debt.

It takes a long time to build up a solid positive payment history, but all it takes is one late payment to wipe out much of that hard work. And the same is true for collection accounts. Even if your score is already in the tank, that account is going to make sure it stays there—or might drop it even further.

If the debt collector ends up taking you to court over the unpaid debt, the decision could result in your wages being garnished—and that garnishment will also be reported on your credit report. Cash advance loans may not be able to help your credit score, but there are several ways that they can hurt it.

To learn more about credit scores, 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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What’s The Most Important Part of Your Credit Score?

There are five different categories that make up your credit score, and one of them makes up over one-third of your score all by itself.

Welcome to the Score Countdown, where we’re counting down the most important scores!

Score number 5? The score for Star Wars: A New Hope, which was labeled the number one greatest movie score on AFI’s list of greatest film scores. And how could it not be?

Score number 4? That would be 370, which was the combined score of the highest scoring NBA game in history on December 13, 1983, when the Pistons beat the Nuggets 186 to 184.

Coming in at score number three is 1,247,700, the current high score for the “Donkey Kong” arcade game, set by Robbie Lakeman on February 2018.

The second most important score is the “four score” of Gettysburg Address fame.

And coming in at number one, the most important score there is … your credit score! Yes, your credit score is very important if you’re looking to get a personal loan, an apartment, a car, or any number of other things. And it’s made up of different parts.

But let’s just ask the question you came to have answered: What’s the most important part of your credit score?


The most important part of your credit score is …

Of the five factors that make up your credit score, the most important one is payment history. We’re glad we could answer that question for you. Have a nice day! Keep warm!

Wait, how do you improve your payment history?

Don’t worry, we weren’t just going to leave you to fend for yourself. We spoke to the experts to find out how you can improve your payment history. The first piece of advice may seem obvious, but it’s also very important.

“Start making payments on time,” urged Leslie H. Tayne Esq. (@LeslieHTayneEsq), Founder and Head Attorney at Tayne Law Group (@taynelawgroup). “If your credit score is hurting because of your payment history, this likely means you haven’t been making your payments on time. In order to begin to remedy this, you need to start paying on time.”

“Paying as much as you possibly can by the due date will be the fastest way to improve your score, but even making the minimum payment on time will help. Do whatever you need to do to remember to make a payment.

“I write all of my due dates on my desk calendar in red pen so I don’t forget. Or perhaps set a calendar reminder in your phone or leave yourself notes where you’ll see them and remember. You can’t erase late payments from your history. The only way to repair it is to change your habits.”

“Be patient: One on-time payment won’t erase years of damage from late payments. Boosting your score will be a gradual process, particularly if it’s very low. Late payments appear on your credit report for seven years. You will need to establish a consistent pattern of paying on time to help counteract late payments. Late payments affect your credit more the more recent they are, so working to pay on time consistently will help lessen the damage.”

Request a (free) copy of your credit report.

“Aside from the obvious answer of pay your bills on time, there are a couple other things you can do to help your payment history on your credit score,” explained Joyce Blue (@EmpoweringYouLEC).

“The first thing is to get a copy of your credit report from all three credit bureaus and make sure the information reported is accurate. You’d be surprised to find out that it isn’t always right. Since this category of your score is 35 percent of how your credit score is calculated you want to make sure that the reports are correct.”

Here’s the good news: you can get one free copy of your credit report from all three credit bureaus once a year! To request a free copy of your credit report, visit www.AnnualCreditReport.com.

“Make sure to dispute anything on your report that is not correct,” Blue continued. “Payment history stays on your report of 7 years. If you have anything reported that is older than seven years you can request that it be removed as well. You can also request things to be removed that are not quite seven years old, and sometimes you will be successful in having those removed as well.”

Ask your landlord to report your rent.

“Are you great at paying your rent, but not all your other bills? You can go to your landlord and ask them to report your on-time payment history to the credit bureaus,” said Blue.

“Usually, the larger apartment complexes will be more apt to do this for you, but it never hurts to ask even with a landlord with a single rental. If you don’t ask, the answer will always be no.

“This will help show your on-time payment history and can be a boost to other things you might not have as good a track record paying.”

Use a credit card … carefully.

If you don’t really have a payment history to speak of, the best way to build one is through limited and responsible credit card use.

“Whether with a standard or secured card, just make one small purchase a month and pay it off in full,” advised Todd Christensen, education manager for Money Fit (@MoneyFitbyDRS).

“Best examples are Netflix and cell phone bills. They are small and typically the same every month. Do NOT carry the card with you into a consumer purchase situation (store).”

While payments you make on an installment loan can also help your credit score, this isn’t true for all types of personal loans. If you have lousy credit, be warned that most short-term bad credit loans like payday loans, cash advances, and title loans can’t help your score; they can only hurt it.

That’s because most lenders who offer no credit check loans don’t report payment information; they basically opt out of the credit check ecosystem altogether.

Of course, there are four other factors besides your payment history.

The other four factors.

Even though payment history is the most important part of your credit score, you don’t want to neglect the other four factors, which are, in descending order of importance: amounts owed or credit utilization, length of your credit history, credit mix, and new credit inquiries.

“Aside from your payment history, your credit utilization ratio is another major factor in your credit score,” Tayne told us. “This is the amount of money you owe versus your total credit line, and it includes all of your credit cards and loans.

“Keeping a low credit utilization ratio—under 30 percent is preferred, but you should aim for even less than 30 percent—can also help to offset a negative payment history. Working to get under or stay under that ratio, while also making payments on time, can help repair your credit.”

OK, now you have some solid advice to help you build up your credit score. Stay warm! And to learn more about credit scores, check out these other posts and articles from OppLoans:

Do you have a question about credit scores? Let us know! You can find us on Facebook and Twitter.

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Contributors

Money relationship expert and self-empowerment coach, Joyce Blue is a certified Rapid Results coach. Joyce is passionate about empowering others to master their relationship with money, so all of their relationships thrive, they step into their power and fall in love with their lives. Contact Joyce at joyce@joyceblue.com or on Facebook and Instagram @EmpoweringYouLEC.
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.
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 Use an Installment Loan to Pay Off Your Credit Cards?

Consolidating all of your credit card debt into a single installment loan will likely save you money, but it’ll probably mean larger monthly payments.

Spending yourself into credit card debt is fairly simple: You spend more money on the cards than you currently have and repeat until you’re maxed out. Getting yourself out of credit card debt, on the other hand, is a bit more complicated. You have many options, and none of them are easy.

One of the ways you could pay off that debt is to consolidate all those cards into a single debt: a personal installment loan. You use that loan to pay off all your credit cards, leaving you with only one easy payment to make each month. Is this the best method for you? Read on to find out …


Here’s how installment loans work.

When you take out a personal loan, it’s going to be structured as an installment loan. This means that you pay the loan off in a series of fixed, regular payments. You’ll be borrowing a single lump sum of money that you will repay plus interest.

The interest rate on your personal loan will vary depending on your credit score. The higher your score, the more creditworthy you will be to a potential lender and the less interest they will charge you. The lower your score, the riskier you will seem and the more interest they will charge you in order to account for it.

Interest on installment loans is accrued over time. The longer a loan is outstanding, the more interest it will accrue. However, that interest will accrue based on the remaining principal, so the actual amount of money you accrue in interest will grow smaller over time.

Lastly, installment loans are amortizing, which means that every payment you make goes towards both the principal owed and the interest. The amount that goes towards each is determined by the loan’s amortization schedule, but you can rest assured that every on-time payment you make will bring you one step close to being out of debt.

Will the loan save you money?

Okay, so this question is actually pretty simple to answer: Yes, paying off your credit cards with an installment will almost certainly save you money in the long run.

Here’s why: The standard term for a personal installment loan is anywhere between one and five years. And no matter how long the loan’s repayment term is, it’s pretty much guaranteed to be shorter than the length of time it would take you to pay off your credit cards making only the minimum payments.

The monthly minimums for credit cards are often very small, with each payment only accounting for something like one to three percent of the amount owed. When interest rates are factored in, it could take you well over a decade to pay off those cards.

Remember, the longer a loan or credit card is outstanding, the more money you will end up paying towards interest. All things being the same, the shorter repayment option will always be the one that saves you money overall.

What’s the interest rate?

As we mentioned up above, interest rates for both personal loans and credit cards will vary depending on your credit score. So if you have good credit, you’ll probably be able to qualify for some personal loans at a reasonable interest rate.

Furthermore, the interest rates for personal loans are generally lower than the interest rates for credit cards. So even if the rate is higher than you might prefer, it’s still probably lower than the rate you’re paying on your credit card.

However, racking up a lot of excess credit card debt is going to lower your credit score, as the amount of debt you owe is the second most important factor in your credit score. This decreases the likelihood that you’ll find an online loan or a loan from brick-and-mortar lender with a great rate.

It’s a bit of a Catch-22 scenario: You want to find a low-cost personal loan to pay down your credit card debt, but you need to pay down your credit card debt in order to qualify for the low-cost personal loan.

If you have a lousy score, you might be stuck with bad credit loans that actually have a higher interest rate than your credit cards. Way higher. Even if these loans don’t have rates as high as no credit check loans like payday loans, title loans, and cash advances, you’re still probably best off skipping debt consolidation and just trying to pay down your credit cards outright.

What are your monthly payments?

We mentioned earlier that the monthly minimum payments for credit cards are very small. It’s a double-edged sword; those small payments make it much harder to get out of debt but it also means they’re fairly affordable—especially relative to the amount of debt you owe in total.

This is where we arrive at the biggest issue with consolidating your debt through a personal installment loan: Even with a lower interest rate, those shorter repayment terms almost guarantee that your monthly payment will be larger than the monthly minimums on your credit cards.

If you’re struggling to afford your monthly minimum payments, this could make consolidation a non-starter for you. Saving money in the long run is great, but you still have to be able to afford your payments in the here and now.

Here’s the flipside: Any debt repayment plan is going to involve paying more each month than you’re currently paying towards your monthly minimums. Don’t let those larger payments discourage you: trim your budget, maybe pick up a second job or side hustle, and get crackin’.

What are other methods of debt repayment?

Consolidating your credit cards onto a personal installment loan is a viable method of debt repayment—especially if you’ve got a decent credit score—but it’s far from the only method out there.

The two most popular debt repayment methods are the Debt Snowball and the Debt Avalanche. Both of these involve putting all of your extra debt repayment funds towards one debt at a time, rather than spreading them around evenly. The difference comes in how they prioritize which debts to pay off first.

With the Debt Snowball, you pay off your debt with the lowest balance first, working your way up to the debt with the largest balance. This will actually cost you a little more money in the end, but it prioritizes early victories to help you get the encouragement you need to keep going.

The Debt Avalanche, on the other hand, keeps its eyes on the numbers. It has you prioritize your debts by interest rate, paying off the highest-rate debt first and then working your way down to the debt with the lowest rate. This saves you money compared to the Debt Snowball, but it could leave you waiting awhile before you notch your first debt pay-off victory.

Lastly, you could transfer your credit card balances onto other cards using a zero percent APR offer. This gives you an interest-free grace period to work with, but carries the sizeable risk of leaving you with more credit card debt than when you began.

To read more about getting out of debt, 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.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN |Instagram

Will a Bad Credit Loan Impact Your Credit Score?

The impact that a bad credit loan could potentially have on your score will depend on what kind of loan you’ve taken out.

When you’re borrowing money, you usually have more immediate concerns than whether or not it’s going to affect your credit score—doubly so if your score is already lousy and you’re taking out a bad credit loan. In cases such as these, the odds are good that you’re in the middle of an emergency; your credit score is the last thing on your mind!

But that doesn’t mean you should be ignoring it entirely. Your credit score is incredibly important to your overall financial wellness. With a strong score, after all, you wouldn’t have to be relying on bad credit payday loans and cash advances to bridge those gaps in your cash flow.

And when it comes to your credit score, some bad credit loans have advantages over others.


The three types of bad credit loans.

Before moving on, it’s important we cover the three basic types of bad credit loans. All these loans are made available to people whose low scores lock them out from traditional lenders.

Unlike traditional loans, these don’t require a credit check, which is why they’re also (very creatively) known as “no credit check loans.”

Since they are being offered to people whose scores make them less creditworthy, these loans come with much higher annual interest rates than traditional personal loans. This is to protect the lender from the much higher default rates that they’re going to encounter.

However, these rates can vary wildly depending on where you live and who you’re borrowing from. It might depend also on whether you’re applying for a loan at a local storefront lender or if it’s an online loan.

Payday loans.

Payday loans are the most common type of bad credit loan. They are short-term, small-dollar loans, with an average repayment term of only two weeks and average principal amounts of a few hundred dollars.

Your typical two-week payday loan has an interest rate of 15 percent, which seems pretty good until you realize that it adds up to an annual percentage rate (APR) of 391 percent!

Oh, and if you see an ad for a “cash advance” loan, then you should know that it’s basically just a payday loan being advertised under a different name.

Title loans.

Title loans are similar to payday loans; their one-month average repayment term is slightly longer and their average principal amount is higher, but their average 300 percent APR is right in line with their short-term cousins.

They do, however, come with one crucial difference: Title loans use the title to your car or truck as collateral. So if you can’t pay the loan back, this gives the lender the right to repossess your car and sell it in order to make up their losses. Yikes!

Installment loans.

Lastly, you have bad credit installment loans. These loans come with much longer repayment terms, usually anywhere between six to 36 months, and they often come with higher principal amounts as well.

Unlike payday and title loans, bad credit installment loans aren’t designed to be paid back all at once. Instead, the borrower pays them back in a series of regular installments. That’s how they got their name.

How do regular loans affect your credit score?

With regular loans, there are two ways that they affect your credit score. First, the lenders report the amount that you borrowed, which is added to the “Amounts Owed” portion of your score.

Second, lenders report whether or not you make your payments on time (or miss payments entirely); that information is included in your Payment History.

Both your Payment History and your Amounts Borrowed are incredibly important to your score. In fact, they are literally the two most important factors.

Your Payment History accounts for 35 percent of your overall score and your Amounts borrowed makes up another 30 percent. Together, they account for 65 percent of your score!

For reference, no other factor accounts for more than fifteen percent.

Do bad credit loans affect your score?

With payday loans and title loans, it’s almost guaranteed that your lender isn’t reporting any of this information. On the bright side, this means that you won’t get dinged for adding onto your total debt load.

On the not-so-bright side, any on-time payments you make won’t get added to your score, either. You won’t be getting credit for being a responsible borrower!

With installment loans, the odds are much better that your lender is reporting payment information to the credit bureaus, which means that those payments are being reflected in your score.

If you make all your payments on a bad credit installment loan from a lender like OppLoans, you could end up helping your credit score!

Defaulting on any loan will hurt your score.

Even if a payday lender isn’t reporting information to the credit bureaus, there is one way that those loans will end up affecting your score. Spoiler alert: It won’t be good.

If you default on a payday loan—which means that you fail to pay the loan back—then the lender will likely end up selling it to a debt collector. Once the loan is with them, that debt collector will report it to the credit bureaus as an open collection account.

This is going to hurt your score. The entire point of the credit scoring process is to express whether or not a person can be trusted to pay back the money they borrow. An open collection account on a person’s report is proof that they borrowed a loan that they then didn’t repay.

The only exception here comes with secured bad credit loans like title loans and pawn shop loans. If the lender is able to recoup their losses by repossessing your car or selling your pawned item, then they probably won’t need to notify a debt collector or report your account.

Take care of your credit score.

There is no miracle cure for a bad credit score. While paying down a large amount of your outstanding consumer debt (like personal loans and credit cards) will likely result in some immediate improvement, you’ll still need a solid payment history to shore things up.

While payday can only ever hurt your credit score, a bad credit installment loan can help, so long as you stick with the right lender and make all your payments on time.

You might not be thinking about your credit score when you’re looking for a bad credit loan, but ignoring it entirely is probably not the best idea.

To learn more about how you can improve your credit score, check out these related posts and articles from OppLoans:

Do you have a question about credit scores that you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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A Brief History of Credit Cards

Diners Club cards weren’t the first type of credit card, but they were the first to find success on a large scale—even though their inventor wrote them off as a “fad.”

Credit cards. Few items are as capable of both fixing and ruining a financial situation.

Properly using a credit card is one of the best ways to raise your credit score. By paying your bills on time and keeping your debt loads low—with balances that never exceed 30 percent of your credit limit—you can gradually build up better and better credit.

However, misusing a credit card by taking on more debt than you can handle and/or missing your payments will totally land your score in the tank. That’s how you end up in a situation where you’re taking out predatory no credit check loans like payday loans and cash advances to make ends meet during a financial emergency.

But how did these polarizing plastics come to be? This is the story of how the humble credit card came to rule over so many financial transactions.


Before money, there was grain and cattle.

Loans have existed for almost as long as civilization. In ancient Egypt, Sumeria, China, India, and elsewhere, early banking systems developed based on food loans. By borrowing cattle or seeds, farmers could breed or grow additional plants or animals. They’d then be required to pay back interest on the loan they took out.

This was one of the earliest forms of credit. But you couldn’t take your cows to a movie theater and swipe them in a machine to get some popcorn. There had to be another way!

Credit continued to exist and grow as coins and paper money became the dominant form of currency, edging out cows due to their greater portability. But the classic credit card wouldn’t hit the scene until the 20th century. We take you now to post-war Brooklyn …

The Diners Club card changed everything

The first “charge” card didn’t swipe or insert. And no, it wasn’t touchless either.

“Bank issued cards came on the scene in 1946, when John Biggins, a Brooklyn bank started the ‘Charg-It’ card,” explained financial coach and author Karen Ford. “The bank would pay the stores and be responsible for collecting the debt from the card-holders.

“Biggins’ idea was implemented on a small scale—only available for residents and merchants within a few blocks of the bank, but the idea caught on quickly. Four years later, the Diners Club Card was instituted by Frank McNamara.”

And now, to learn how McNamara came up with the idea for the Diners Club Card, let lawyer and author Steve Weisman of Scamicide (@Scamicide) take you back to a restaurant in New York City in the middle of the last century:

“The evolution of the modern credit card began in 1950 with the issuance of the first Diners Club cards. Diners Club cards were the brainchild of Frank McNamara who, while out for dinner with his lawyer Ralph Schneider and his friend Alfred Bloomingdale, was embarrassed to find he had forgotten his wallet.

“A short phone call later, his wife brought him the necessary cash to pay for dinner, but the proverbial light bulb went off in his head. He came up with the idea for the Diners Club card through which businesses could offer credit to customers with Diners Club billing the customers and paying the businesses.

“This business model was the basis for Diners Club and then all credit cards. Interest was not charged on the initial Diners Club card with payment in full required each month. Schneider and Bloomingdale jointed with McNamara to form Diners Club. Diners Club made its profit from annual fees to cardholders and a surcharge to the merchants on each purchase.

“The first businesses that accepted Diners Club cards were fittingly fourteen New York restaurants.  Diners Club rapidly expanded from an initial 200 cardholders to 20,000 in the first year. Within two years, Diners Club was profitable and Frank McNamara sold his interest in the company to his friends Schneider and Bloomingdale for $200,000 because he was convinced that credit cards were merely a fad.”

As you might have guessed, McNamara was not correct!

“American Express followed the lead of Diners Club eight years later, but the credit card boom really took off when the bank credit card system operated by MasterCard and Visa (then known as BankAmericard) got into the credit card business by setting up a system by which individual banks would set up accounts with merchants and pay the stores immediately upon receiving the bill,” explained Weisman. “The customer got a monthly statement and then could either pay the bill in its entirety or pay a minimum amount with interest on the unpaid balance.”

The Supreme Court gave interest rates a big assist.

Every good biopic needs a climactic court scene. Here comes the one for Credit Cards: The True Story. We’ll let Weisman present it:

“Another key year in the development of credit cards was 1978 when the Supreme Court ruled that credit card issuers would be able to charge their out-of-state customers the highest interest rate permitted in the bank’s home state. This enabled banks to set up shop in states like South Dakota, Nevada, or Delaware where they could charge interest rates that exceeded the usury rates in the states where their customers lived.”

That’s why credit cards became so widespread but also perilous to use if you aren’t careful. Now you understand a little more about the history in your wallet! To learn more about the financial side of history, check out these related posts and articles from OppLoans:

What else do you want to know about the history of money? Let us know! You can find us on Facebook and Twitter.

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Contributors

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.
Steve Weisman is a lawyer, college professor at Bentley University and author.  He is one of the country’s leading experts in identity theft.  His most recent book is “Identity Theft Alert.”  He also writes the blog Scamicide.com (@Scamicide) where he provides daily updated information about the latest scams and identity theft schemes.