A minimum payment is generally calculated as 2-3% of your balance, or 1% of your balance plus interest and fees. This minimum payment is specifically calculated to maximize the amount of interest you pay, and the length of your repayment. Keep in mind, the interest you pay is profit for the credit card companies.

To put this into perspective, a consumer paying $10,000 in credit card debt at the national average industry rate of 19.24%, would end up paying roughly $19,500 for that debt when all is said and done.

Surprisingly, this information is shown right on your statement, just very small and quite difficult to understand. The CARD Act requires statements to now show how long it will take you to get out of a given debt if making just the minimum payment, and it’s shocking.

For high balances, it will take decades to repay the debt. And, you will have paid nearly double for the credit spent. All of this because debt is a business. For creditors and collectors, the longer you stay in high interest debt, the more they make.

You have debt collection rights

Very few people know about the Fair Debt Collection Practices Act of 1977 awarded significant rights to consumers against creditor and collector harassment. For instance, did you know that if you ask a creditor to stop contacting you, they must comply?
If they don’t, they can be fined for every phone call, and it can even result in compensation for the debtor.

Of course, telling your creditor not to contact you by no means the debt is forgiven or forgotten, you still owe it. A collector can still pursue legal action to collect this debt. They simply can’t contact you regarding it. This is a good tactic for aggressive collectors that harass consumers into making a payment.

Whatever you do, avoid late payments.

Late charges on credit cards can be as high as $75 – not to mention the additional struggle this causes when you fall behind. A late payment, when quickly corrected can be no big deal. But when it becomes common, or you’re not able to quickly rectify, the problem can snowball.

How many times have you said, I’ll push it back a week and just pay it then? A week goes by, another bill has taken precedence – but don’t forget, you’ve committed to paying last week’s bill, too. This compounding effect can be felt quickly, and is very difficult to dig out from.

Make sure you don’t gracefully miss the end of your grace period.

A grace period can be a blessing… and a curse. While it can afford you some much needed time to realign your finances, it has to be managed. When a grace period ends, you could be facing some pretty tough repayment terms.

For many consumers, they simply forget they’re operating in a grace period. You’ll quickly realize it when you receive the first statement with accrued interest.

Credit card cash advances are paid last.

People sometimes use their credit card for a cash advance. typically this function of a credit card carries a higher interest rate than your standard purchase rate.

When you make a payment towards your card balance, you don’t get to choose which part of your balance the payment goes toward. Credit card companies will save your cash advance for last, after all, it’s garnishing the most interest.

If you must take a cash advance from your card, it’s wise to do so on one without an existing balance. This way you’re certain your payments on that card are going towards the higher interest advance balance.

High interest and credit cards go hand in hand.

Credit cards carry high interest. This is a fact. While some may reach 30% or more, the national average as of 2019 is 19.24%. This fact is what makes credit card debt some of the most dangerous kind.

With this type of interest, making minimum payments will lead to years of repayment, and more than double your original balance. Unless you’re making additional payments directly to the principal, you’ll find yourself in an endless cycle of interest payments.

Interest is profit for credit card companies, and profits are up.

Credit card companies want you to make the minimum payment. It usually represents about 1-3% of your balance, with the majority going to interest. For instance, the average credit card debt in the states is currently $8,402 per household. Using the average interest rate of 19.24% and making minimum payments, this debt would take 93 months to pay off, and you will have paid a total of $16,275.

As you can see, it is very much in the card companies interest for you to continue making minimum payments. If you find yourself in this position, it’s best to explore debt relief options. Obviously if you’re spending recklessly and able to make some lifestyle changes, this should be entertained first.

The post 7 Things the Credit Card Companies Don’t Want You To Know appeared first on Consumer Credit News.

A credit card balance transfer is a common way of avoiding interest rates. This is done by frequently moving your debt to new sources, chasing low introductory rates. While this can be an effective way to avoid excessive interest rates, it can be equally dangerous.

For consumers with excellent money management skills, balance transfers are a staple of their financial plan. In fact, some people even view it as a game, consistently tricking the creditors by never paying interest.

If consumers go down this path and an unexpected loss of income occurs, things can go sideways quickly. Low interest introductory offers are followed by a hefty interest rate applied to the balance when they expire.

If your income is reduced, or credit damaged, you may not qualify for that next credit card. This is where consumers can get into trouble.

What is a Balance Transfer?

When you possess high-interest debt on one or more lines of credit, a balance transfer moves that debt to a new loan or credit card with a zero or low interest rate. This rate is introductory, and generally expires one year from signing up. This tactic ensures all your payments are going to principle, and never accruing interest.

To be clear, a balance transfer does not reduce the amount you owe in any way. Instead, its purpose is to get a lower interest rate, save money on finance charges and pay off the owed amount faster.

In order to qualify for an unsecured credit card with a 0% interest rate, you will have to maintain good credit.

Transfer-fee on balance transfer.

Many credit card issuers offer 0% interest balance transfers, but some of them also charge a transfer fee. This fee usually ranges from 0–5%. It’s very important to fully understand the scope of the promotion. Make sure you ask the right questions, and stay within the guidelines if you choose to transfer.

Some good questions to start with are:

• What is the introductory interest rate?
• How long does the promotional period last?
• Is there a balance transfer fee? If so, what is it?

How do balance transfers affect your credit score?

Balance transfers are generally deployed as a way to avoid high interest, late payments, or to try to improve credit scores. It can be a good way to pay down credit card debt. But, it can either help your credit score or hurt it depending on several factors.

Applying for credit cards with low introductory rates can negatively affect your credit scores. While a balance transfer saves money on interest in the short term, if you falter, the credit implications can be severe.

Is it effective to transfer credit card balances or does it just prolong the inevitable?

So, is a balance transfer really worth it. A credit transfer fee between 3 to 5 % of the balance is charged by most credit card companies. For example, if you’re repaying a $15,000 debt, some balance transfer offers will add 5% ($750) to your total as a charge for the balance transfer.

Once the promotional period is over, the full interest along with any fees will begin compounding. In short, it’s a strategy that can help you save extremely costly interest rates. But, you need to be careful about details like fees, interest rates and other restrictions on transfer amounts.

Transferring a balance, of course, does not mean the elimination of the debt. Instead, moving the balance to a low-interest credit card is a temporary reprieve. It typically comes with fees, and interest will surely have to be paid on whatever balance is transferred.

The hidden trick behind these balance transfers is consistency. Without it, you may find yourself in a bind when the introductory 0% APR period ends. In order to avoid this, it is vital to pay off the entire balance during the no-interest introductory period, or, continue your transfer plan if you can keep it up.

Bottom line

Balance transfers can prove to be a good subway to consolidate the credit card debts and more quick payments, provided close attention is paid to the terms and conditions.

The post Balance transfer: Beating high interest rates or path to perpetual debt? appeared first on Consumer Credit News.

Times are tough for the general population’s credit. Even those who enjoyed easy approvals and low interest rates in years past are starting to feel the crunch. The reality is, your credit card or other unsecured debt always catches up to you. When this happens, we enter a rebuilding phase. There are many tools a consumer should be using to rebuild their credit, secured credit is a great addition.

Here’s a secret: It’s designed to.

Interest is the cash value of the credit extended to a borrower. Many people obtain credit cards and begin a vicious cycle of minimum payments. These payments do little to lessen the actual balance, and primarily pay the interest.

Shouldn’t their credit be great after all this time?

The “average” American credit score doesn’t change much between millennials and generation X. In addition, older generations have taken on more housing debt than their younger counterparts.

The reality is, all generations are facing both credit and debt issues. Many of us will find ourselves rebuilding our credit multiple times through our lives. It’s important to know every tool available to you while rebuilding.

What is a Secured Line of Credit?

A secured line of credit is a loan funded by depositing money into a “credit” account to serve as full or partial collateral. It can be the most reliable option for a young borrower or post-bankruptcy borrower to build or rebuild a credit score.

This card has a fixed credit limit that is partially collateralized by funds in a savings account. Specifically, card-holder deposits a certain amount of money into savings account with the credit card company. This is used to protect the company from the card-holder’s security deposit.

Pertaining to the cardholder’s credit history, a deposit of 50% to 100% of the credit limit into the savings account. These funds truly belong to the card-holder only, and he can retrieve it if he pays off or cancels the secured credit card. Since it reduces the risk to the credit card company, they charge a lower interest rate. Secured cards especially prove useful to people with bad credit history.

Secured credit cards.

When you get a secured credit card, you “fund” it through your bank account. While credit score doesn’t play as large a factor in these types of loans, having a valid bank account does.

A certain amount is deposited in the account, and money can be borrowed up to that amount using the card. If the borrowed money cannot be repaid, the account can be accessed to cover the debt. The creditor can also charge substantial fees for a secured card.

Secured credit cards look just like any other credit card, so no one can identify it differently. If you have trouble qualifying for unsecured credit, you can use a secured card to establish a record of using credit responsibly.

A secured line of credit is a tool to help rebuild your credit.

Acquiring a secured credit card is useful in many ways like renting a car, reserving an airline flight and online payment of purchases. These cards provide a credit line that matches the same amount of cash you deposit with the lender as collateral. While it may not seem like true credit, it’s money being spent using the credit system. Because it’s flowing through the credit system, you’re receiving positive reporting by using it and paying it off regularly.

Benefits of using a secured credit card.

Re-Building your credit score: Banks that provide secured credit cards report any and all payment activities to the credit agencies. If your account is managed responsibly, it may be favorable to rebuild your credit score.

Getting a credit card under “impossible” conditions: Secured lines of credit are available to those with major derogatory items, such as recent collections, who would normally be rejected straightaway for a normal card.

Spending discipline: A secured credit card does not allow you to go on unlimited shopping sprees. Your limit is the amount available in credit at the moment. It basically forces you to live within your means.

Qualifying for an unsecured card: If you pay your payments timely every month, some lenders may convert your credit line to an unsecured one after a certain period of time.

Earning interest: Some lenders may pay a small amount of interest on the amount you have deposited to secure your line.

Disadvantages.

Small credit limits: While regular credit cards offer credit lines in the tens of thousands, most secured credit cards only allow credit lines of several hundred dollars, limiting your purchasing ability.

Higher rates and fees: These credit lines costs you more to own. A higher rate of interest and annual fees from most lenders is common. Some may charge a monthly fee also just to keep your account activated.

Deposits at risk: If you are not able to repay the balance, your lender may claim the money deposited.

Predatory lending: Many lenders offering secured lines of credit are legitimate, but look out for these warning signs: They offer terms grossly in your favor, or tempt you to purchase items as a condition for issuing the card

To conclude, a secured credit card may act as a tool used to improve your finances, if utilized responsibly. This type of credit is one of several tools all consumers rebuilding credit should have access to.

The post Rebuilding with secured credit. One of many tools consumers should use. appeared first on Consumer Credit News.

In order to pay off your loan sooner, you ought to make extra payments towards your principal balance. Most people are not aware that extra payments do not always go directly to the principal, but are applied to the interest instead.

Remember, the interest is the lenders profit. If you make a $250 payment on a $100 minimum due balance, where does the $150 go? For you, it makes sense to go directly towards the principal, which reduces your debt much quicker than paying interest. For the bank, they’d prefer to apply it towards the principal and balance just like a normal payment.

It looks like a very simple and straightforward process, but there are things you can do to make sure the extra payments go directly to the principal amount not interest.

How Are Extra Payments Applied to Your Loan?

When you make extra payments, your intention is to lower the original amount of debt. You can get rid of your debt sooner by doing this because no portion of your payment is removed for interest.

Some banks provide the option of applying the full amount to the principal of the loan or credit cards directly. Generally, in order to do this you need to call them directly to make a payment. This way you can verbally tell them you want the payment applied to the principle.

Are There any hidden Fees for Extra Payments or Principal Only Payments?

According to the terms of the loan, some banks charge a fee for extra payments on the loan. In other cases, they may charge on a principal only payment.

Though it might be frustrating to pay a fee, you will still save money on interest if you pay the loan or credit card off sooner. Interest payments for a few months will usually be less than a penalty of $1,000.

Choose the Best Strategy for Extra Payments

Now you understand the fees associated with extra payments and the way your payments are applied to the principal.  With this information, you can now work on the best strategy to pay off your loan. You may need to pay just one large monthly payment on the loan in order to avoid fees and to pay it off as quickly as possible. If you are paid multiple times a month, you may need to put the money for payments into savings so you will not be tempted to spend it.

If no extra fee is charged by the bank, you can opt for paying the extra amount received by bonuses or tax returns. This strategy will also help you to avoid overspending your money so that you don’t fall in an over-debt situation.

Making the Last chunk of Payment

When it’s time to pay off your loan, you ought to contact your bank and enquire about the final payment figure. The interest accrued will change daily. The bank may quote the amount of payoff for a set period. You can make the extra payment personally if you wish to, or you can do the same by email or pay it online.

Four alternatives to paying extra towards your mortgage principal

Before you plan to make extra principal payments on your mortgage, it’s best to plan to take into account your overall financial goals. Assess your current financial position and future goals to identify the ideal use for your funds.

1. Clearing off credit card debt

If you’re having a tough time with credit card debt like many Americans, it’s more than likely you don’t have enough available cash to pay extra on your mortgage. Your credit card rates are going to be significantly higher than your home loan interest rate so it makes sense to tackle credit card debt first.

2. Refinance to an affordable rate

This can prove to save you more and still let you keep the extra money you’d pay toward your principal for other alternatives.

3. Build up an emergency fund

It is recommended to save for an emergency and unexpected costs. Without those financial reserves in place, you could put your extra money to put toward it if you’re making extra mortgage payments.

Conclusion.

Focusing on clearing just one debt at a time will enable you to channelize your extra payments and also to clear your debt faster because this will lower the principal on one loan and reduce the amount of interest payment. Paying off your highest interest loans first can help you in saving money.

The post How do I ensure my extra payments are going to the principal and not interest? appeared first on Consumer Credit News.

Secured loans with negative equity

An example of a secured loan would be a title loan. Title loans use your automobile title as collateral. In case you don’t repay the initial loan amount the lender will take ownership of your vehicle. This is known as repossession.

Real estate property that is valued below the current amount owed is also considered to be a negative equity loan. Negative equity essentially refers to any asset which is valued at below the amount owed on said asset. You can have a negative equity loan with pretty much any physical asset if the value has decreased over time.

So, how is it affecting my credit?

Having an outstanding negative equity loan doesn’t necessarily directly affect your credit score, however you want to clear up any issues as soon as possible. You may have heard the phrase “upside-down” mentioned before in relation to auto loans. This is another term for negative equity. Having an upside-down loan can happen to anyone if you aren’t paying attention. Automobiles are the most common asset that people have negative equity on. This is because cars depreciate in value quite quickly.

Negative equity in real estate

For real estate owners, a significant drop in property value or market rates can seriously impact the value of your property. This leads to the initial loan becoming a negative equity loan. The really tough part to deal with when it comes to negative equity is that you don’t really have many options for resolving the situation besides simply paying it off. You can also wait for the asset value to increase however this very rarely happens in a sufficient amount of time that would provide any immediate benefit to you.

if you have an upside-down loan, it can affect the interest rate at which you pay the current loan amount. This puts the lender at a larger risk for losing money if you default, which leads to increases in interest rates over time. While your credit won’t be directly impacted by this situation, it can certainly become affected if the negative equity loan defaults or goes into collections.

Having a negative equity loan on your credit history can also affect how potential lenders will process your applications in the future. Seeing that you have a history of upside-down loans, many lending companies will charge you more interest upfront so it’s wise to always stay on top of the status of your loan.

Many people have negative equity loans

Negative equity is never a good thing to have. This is due to the possibility of loan inflation, credit denial, increased interest rates and a wide range of other potential hazards. The best way to avoid a negative equity loan is by contacting the initial lender to see if they offer refinancing options. By refinancing your initial loan, you’ll receive a new estimated value for the asset in question based on current market conditions and its value.

Refinancing your loan is basically like getting a new loan at current market value instead of being stuck paying the amount you were originally financed for. Banks, loan companies, mortgage lenders, and more offer refinancing services so if you suspect or know that you’re in a negative equity loan situation, you may want to consider contacting them to see what options are available to you.

The post What is negative equity? How does it affect my credit and buying power? appeared first on Consumer Credit News.

The average credit card debt in the U.S. is $5,331 on an individual level. But, if you’re new to the credit game, you’re not likely part of this statistic. For those of us that have been building and maintaining credit for a while now, we know there are some common techniques to keep balances and interest rates low. You’ve likely heard of balance transfers between credit cards. This is essentially chasing low or no interest initial offers, then moving your balance once the incentive runs out.

I know, this sounds great, right? Well, before you go any further and transfer your balance, we suggest you have a look at how it works and what the pros and cons are:

How does it work?

The process is pretty simple to understand. When you have a high interest rate on your credit card, you try to move that balance to a new credit card with a lower APR (annual percentage rate). This way, you reduce the amount of interest you are paying on all of your credit card debts. This is usually done by moving your balance as incentives expire.

Credit cards are a competitive business, and offering a 0% introductory interest rate is a common practice. After the first year, the interest jumps back up to a standard rate. Before this happens, the borrower opens a new line of credit, transfers the balance and closes the old line.
It seems like a solution to all of your debt problems like a messiah for your finances, right? Well, that’s because you don’t know its drawbacks yet.

Remember, if it is too good to be true, it sometimes is! If you want to know the common advantages and disadvantages associated with credit card balance transfer, then have a look at some below:

Pros of Credit Card Balance Transfers:

• Lower Interest Rate: A new credit card can provide you with as low as 0% APR for a temporary time.
• Get Better Terms: You may get better terms like lower fees, purchase rewards or more grace period.
• Consolidate Your Debt: You can combine multiple balances onto one credit card. This is good for credit utilization and simplicity of payments.

Cons of Credit Card Balance Transfers:

• Higher Interest Rate: You will only be able to qualify for the promotional lower APR if you have an excellent credit score. Otherwise you may end up with the regular higher interest rate. And even if you qualify, the lower APR won’t last forever; it will eventually expire, and at various times.
  Balance Transfer Fee: You may have to pay a balance transfer fee which is usually 3-5% on the amount you transfer and also a minimum of $5-$10.
• Your Credit Score Could Get Hurt: Applying for a new credit card hurts your credit score. Also, if your new card has a low balance limit and you transfer your debt to this card, and the total balance goes 30% above the limit, you will get a decrease in your credit score as well. Credit utilization is a major factor in your credit score.
• You May Get More Debt: When you transfer the debt to a new credit card, you will have more credit available. This means you can spend more money now and if you are not self-disciplined. Our advice, close the card as soon as the balance is transferred. Otherwise you may end up with more debt than what you originally had.

In Conclusion

Now you may be wondering, is it a good idea to transfer balance? In short, NO! Not only it can it hurt your credit score, it’s a slippery slope to more debt. With that said, if you have excellent credit and money management skills, then yes, you can use this method to your advantage. Just tread carefully, it can be a full time job to manage finances using advanced techniques like this successfully.

The post Is transferring my credit card balance for a better interest rate a good idea? appeared first on Consumer Credit News.

Whether you’re looking to improve your credit score, or building it from scratch, we’ve got some tips for you. Building and maintaining good credit is no easy task, but often times consumers are overwhelmed by the information they encounter online. A low credit score is not the end of the world. Read that sentence again if you need to.

Remember, you started with no credit and built it once. Believe it or not, even with bad credit, it’s easier to rebuild than it is to build from scratch. The trick is to rebuild correctly, and avoid the temptation of payday loans and high interest credit. These things can help get you through a tough spot, but in the long run can cause massive damage.

With that said, we’ve put together some relatively easy tips to help you get started.

5 Ways to Get an Improved Credit Rating – How to Improve Credit Score?

Reduce Your Overall Card Balance:

If you pay more than the minimum monthly payment on your unsecured debt, you will be improving your credit utilization ratio. Your credit utilization ratio or Balance to Limit Ratio is the second most important factor when calculating your FICO score and accounts for 30% of the total credit. Make sure to keep your available balance less than 30% which is ideal if you want to improve credit rating. This article will shed some more light on the factors making up your FICO score.

Avoid Having Hard Inquiries:

A hard inquiry is usually made when you apply for more credit. The lender first checks your history and credit score to ensure if you are eligible to take on more debt. This hard check can also put a negative score on your credit score by 5 points for each inquiry (Source: FICO). So this may not actually improve your credit score, not having a hard inquiry will not decrease your score either.

Make Payments on Time:

Want to know the easiest way to build your credit? Pay your bills on time. I know, this should be obvious, but you’d be surprised how many Americans pay their bills late. This is true even for those with high income and can make their payments. Paying on time consistently will improve your payment history. This is the largest detriment of your credit score and accounts for 35% of your whole rating. So, your best bet is to make a budget and stick to it. When you get your paycheck, first pay all due bills before spending.

Monitoring Your Credit:

If you want to maintain credit, it is imperative that you learn to monitor it. If you know and understand the variance in your credit score, you’ll be in a better position to keep your credit in the green. This will ultimately help you improve your credit utilization. And don’t worry, getting your own credit history through a credit reporting agency won’t decrease your credit score like hard inquiries do. (Source: FICO)

Once you have access to your credit report, monitoring is pretty straight forward. You want to ensure all data is accurate, that you’re not being held accountable for any debts that aren’t your own, and that your credit hasn’t been compromised. With the increase in identity theft year over year, monitoring your credit is more important now than it ever was.

Managing Your Expenses:

Make sure to reduce your expenses where you can, at least until you have paid off your debt. This is because if you don’t put a top to useless spending, not only will you be out of money to pay your debt, you may also need more credit. And both, not paying on time and getting more credit, will decrease your credit score. So people who need to improve their credit score should consider not applying for more credit unless they absolutely have to. This will come under your recent credit history that accounts for 10% of your FICO score.

Over to You:

So now you have a pretty good idea of how to build and maintain a good credit score. Always try to pay more than the minimum each month, pay on time, avoid hard inquiries, keep a check on your credit and manage your expenses and you will surely improve your credit rating.

The post Simple Ways to Improve Your Credit Score appeared first on Consumer Credit News.

Debt to income (DTI) ratio confuses a lot of people. Unfortunately, these people are often the ones in need of some kind of financial assistance. Many consumers aren’t aware of the simple calculation they can do to find their DTI, or the affect it has on their buying power.

As consumers, we’re generally taught about the factors that directly effect our credit score. Often consumers can feel reduced to a number because of the importance placed on this score. It’s important to know that other factors play a role in your approval chances. One of the most important is debt to income ratio.

If you’re good at making money and even better at spending it, it’s likely your debt to income ratio is too high. We tend to view credit cards as extensions of our income. While they do come in handy when the paycheck doesn’t last through the week, we forget how costly they are to use. In addition to their cost, credit card balances increase your debt to income ratio. Once your debt has surpassed 50% of your income, you’re in the danger zone.

What is Debt to Income Ratio?

The debt to income ratio is the total of your monthly debt payments divided by your total gross monthly income. Your DTI is not among the credit score factors that are used to calculate the score, but it is still viewed by lenders as an important metric for your financial stability.

If you want to calculate your DTI ratio, it’s pretty simple. Let’s say that you pay $1000 a month to a mortgage payment, $200 to an auto loan and $300 to other debts. So your total monthly payments are; $1000+$200+$300 = $1500.

Now if your income is $5000 a month, you will divide the total monthly debt by it; $1500/$5000 = 0.3 which you will multiply by 100 to get a percentage so 0.3 x 100 = 30% debt to income ratio.

How Your Debt to Income Ratio Affects Credit Score?

Now that’s a question not many people know the answer to. Many consumers don’t even know how a credit score is calculated in the first place. You need to keep in mind that there are five different factors that account for an individual’s credit score and debt to income ratio is not one of them.

You may ask, why do I even need a good DTI ratio? Well, it is another thing that the lenders use in determining whether to give you a loan or not.

If it’s not part of my credit score, why does it matter?

Put yourself in the lenders shoes. The applicant has an average credit score, with a few delinquencies on their report. However, their income is good and current debt is low, resulting in a 11% DTI ratio. The lender may be more inclined to approve this loan simply because the ability to repay is well within the consumer’s current means. A good debt to income ratio is usually under 36% that can help you qualify for a loan or mortgage.

This is because the higher your DTI ratio is, the more you are paying towards bills each month. In a lender’s eyes, taking on more debts would result in an inability to repay. This is a risk for them, and lender’s of unsecured credit prefer to limit their risk when possible.

So in short, the debt to income ratio is not among the credit score factors. But, it can affect your ability to get new credit or financing.

Over to You:
To make sure that you can leverage your credit, whatever it’s state, you need to decrease your DTI ratio. When you do this, you increase your chances of lenders approving you. Make sure to spend less, save more and pay your debts quickly to decrease your DTI and keep it under 36%.

The post What is Debt to Income Ratio and How Does it Affect my Credit Score? appeared first on Consumer Credit News.

Many Americans are asking questions like, what is a good credit score or how to rebuild a credit score? Chances are if you’re asking these questions, your credit score could use some work.

According to Lexington Law; 12% of the U.S. population has a credit score below 550. This group of people will face a lot of restrictions on what they can do financially. This guide is meant to help you understand how your credit score affects your purchasing power. We’ll also cover the advantages of good credit, and the drawbacks of a bad one.

How Your Buying Power is determined by Credit Score.

Your credit score summarizes your whole financial history in numbers, with an algorithm used to calculate your score. This calculation factors in things like your debts, payment history, credit history, credit types and loan applications.

With a low credit score your buying power is reduced as a creditor can’t confidently extend you credit. This is especially the case if you’re looking to buy a home, which has the most rigid credit requirements. And, you’ll likely be paying higher interest rates on credit you can get approved for. This can result in thousands of dollars of loss throughout your lifetime, all because of a poor credit score.

Furthermore, there are some things other than loans that your bad credit score can impact. For instance, the cellular phone company first looks at your credit score before considering your one or two years of the contract.

Benefits of a Good Credit Score:

So if you’re wondering what is a good credit score? Well, a score over 700 is considered a good score, and a score over 800 is considered excellent. If you’re one of the lucky ones to be in this range with your score, you’re likely able to enjoy these benefits:

Better Chances of Approval: You can easily get approval on a new credit card or a loan.

Get More Negotiating Power: A good credit score will enable you to negotiate a lower rate of interest on a new loan or a credit card.

Higher Limits: You can get approval for higher borrowing capacity if you have good credit.

Approval for Rental Properties: More and more landlords are checking credit scores to screen potential tenants. Having a good score means more chances of getting approved.

Auto Insurance Rates: Another perk of having a good score is to get better rates on your car insurance.
No Security Deposit: With a good score, you can also avoid security deposits on cell phone contracts or utility services.

Disadvantages of a Bad Credit Score:

If you have bad credit, you’re more than likely going to face some struggles with finances. Obviously, you also won’t be enjoying the benefits outlined above. But, besides the aforementioned ones, here are a few more things you may not be able to do:

Business Franchise: You will not be able to get financing for an established franchise like Baskin Robbins or Subway with bad credit.

Cosmetics Surgery Financing: Not covered by insurance, which means you will either have to pay from your pocket or get ridiculously high rates due to bad credit. Or, they can also deny doing the surgery.

Dental Care Financing: Also not covered by insurance in case of major dental work which means you will not be able to get a loan for it due to bad credit.

Jewelry Financing: Jewelers sometimes allow the customers to pay for a piece of jewelry on installments. But a bad FICO score won’t let you have it either.

Some Jobs: The government jobs especially check your credit when doing background research and bad credit may only make your chances slim.

Marriage: When you marry, your debt and your partner’s debt become one, which means your bad credit will reflect on their finances too. This may discourage them from taking the plunge.

Higher Insurance Premiums: Besides auto insurance, you may also get higher rates for other insurances including homeowner’s insurance.

Clearly the benefits of a good credit score make life easier. Even if you have a bad score now, it’s a good idea to start thinking about how to rebuild your credit score. Make sure to spend less, save more and pay your bills on time. This is the simplest formula for slow but steady credit growth.

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When creating a budget, you’re told to keep your expenses as low as you possibly can, and it’s good advice. Unless of course you’re making credit card payments. Most people are tempted to make the minimum monthly payment on their credit card in an effort to offset other bills. In the long run this is an extremely costly mistake.

We’ve all been there. We make the minimum monthly payment on our credit card to avoid delinquency and tell ourselves, I’ll pay more next month. But, we end up putting ourselves in more long term credit trouble by doing this. This is because depending on your credit, most times the minimum payment barely covers the interest rate. You’ll find yourself accruing more interest on your balance than your minimum payment can keep up with.

Simply put, if you pay the minimum now, you will have to pay more later. Eventually, your minimum monthly payment will rise. Once the minimum payment exceeds what you can afford, you’ll find yourself making delinquent payments, the very thing you tried to avoid.

Reasons you should avoid minimum monthly payment

It will take you longer to pay off your credit

Finance website NerdWallet crunched the numbers and did the calculation on how long it will take you to finish paying your credit if you consistently pay just the minimum monthly payment. The amount used is $6,081, which is the average credit card debt for the a household in America. This is what they found out:

• If you pay the monthly payment only, it will take you 169 months (or 14 years and one month) to pay off the credit debt
• If you pay twice the minimum monthly payments, it will take you 65 months (or 5 years and five months) to finish the payment.

Note that these results do not show how long you will have to pay if you keep adding debt to your credit card every month, which is a common scenario.

You will accrue more interest

By dividing your Annual Percentage Rate (APR) by 12 months, you get your interest rate every month. That number multiplied by your balance will give you the interest payment you have to make every month to keep up. If you do this calculation, you’ll see that by paying just your minimum monthly payment every month, most (sometimes all) of your payment is going directly to interest.

Your credit score will take an eventual hit

While paying just the minimum is better than delinquent payments, it has its own problems. Eventually, it gets to a point when your debt will be more than half your yearly income. This is when consumers should consider other options such as the variety of debt relief methods, or in extreme cases, bankruptcy. Doing this will affect your credit score and it will take some time to bounce back.

In all you do, try to pay at least the minimum on your credit debt, but don’t do it for too long. It may feel like a short term relief to make a small payment, but remember how much it’s costing you down the road when you do this. Future you will past thank you.

The post How long will paying minimum monthly payments really cost me? appeared first on Consumer Credit News.