What Lenders Look for When Deciding if You’re Creditworthy

If you’re in the market for any type of loan or would like to open a credit card account, it’s important to know what factors lenders consider when deciding whether or not to give you credit. With that information in hand, you can work to put yourself in the best possible financial position before you apply.

 

  • Your credit history: The easiest way to define credit history is how long you’ve had credit and how well you’ve handled it. The longer you’ve had credit, the better.

 

Lenders look for a consistent history of paying your bills on time. They don’t just look at credit card or loan payments. Lenders may also check to see that you’ve paid your phone, cable, cell phone, rent and utility bills on time. A pattern of late or missed payments makes you less creditworthy in most lenders’ eyes. While some may still offer you a loan or credit card, your interest rate will be higher than a person with a better credit history.

 

  • How much money you make: Lenders compare how much you earn each month with your living expenses and debts, such as rent or mortgage, utilities, food, other loan payments and so on. How much money you have left after paying these bills helps them decide if you have enough income to take on more debt. Many lenders look for a debt ratio (how much you earn compared to how much you owe) of less than 40%. For some types of loans, you will need to provide proof of your income, such as pay stubs or tax W-2 forms.

 

  • How much credit you already have and how much you’re using: Another key factor lenders consider is the amount of available credit you have and how much of that you’re using. If you have several credit cards with high limits, even if you’re not using all that credit, a lender may consider you less creditworthy because you could use that credit and then have difficulty making payments on a new loan or credit account. Lenders are also wary if your balance is close to your credit limit. Some experts suggest using no more than 30% of the credit available on each card.

 

  • What types of credit you have:  Lenders like to see a mix of different types of credit, including mortgages, car loans, credit cards, school loans, and personal loans.

 

  • How many recent credit applications you’ve made: Some lenders see applying for several new credit cards at once as a sign that you may be in financial trouble. Many do not, however, worry about recent applications for mortgages, car, or student loans.

 

  • Available collateral: In some cases, a lender will allow you to use property you own, such as a car or home, to secure a loan. It’s important to remember, however, that if you use collateral to get a loan, if you do not make your required payments the lender can take your home or car as payment on the loan.

 

If you’re not quite up to par in any of these areas, before applying for credit, take some time to get your finances in better shape. Pay down credit card balances, make all your payments on time, and cut your expenses if possible.

National POW/MIA Recognition Day

In the United States, National POW/MIA Recognition Day is observed on the third Friday in September. It honors those who were prisoners of war and those who are still missing in action.

This day was established by an Act of Congress, by the passage of Section 1082 of the 1998 Defense Authorization Act. It is one of six days that the POW/MIA Flag can be flown.

The POW/MIA flag was first recognized by Public Law

Why What You Don’t Know About Credit Scores Can Hurt You

Ads hawking for-profit credit score services and some so-called financial gurus on the Internet make credit scores sound simple. They suggest this one number reflects all you need to be concerned about when building good credit. Unfortunately, that overly simplified information can lead to misunderstandings about credit scores that could have a negative impact on your financial wellbeing.

Credit Score or Credit Report?
Some people think a credit score and a credit report are the same. That’s not true. A credit report is an in-depth record of your credit history. It includes a wide range of information, including:

  • Who you are (your name, Social Security number, date of birth, and sometimes employment information)
  • Your credit (credit card accounts, mortgages, car loans, school loans, and other loans, how much credit you have taken out, and your payment history)
  • Your public record (information about court judgments against you, tax liens, and bankruptcies)
  • Inquiries (a list of companies and people who recently requested a copy of your credit report)

A credit score, on the other hand, is a number that is supposed to sum up the information in your credit report. The information that goes into figuring a credit score can include:

  • The type and number of credit accounts you have (loans, credit cards, mortgages)
  • If you pay bills on time
  • How much of your available credit you are using right now
  • Whether there are any collection actions against you for unpaid bills
  • How much outstanding debt you have
  • How long you’ve had your credit accounts

Top misunderstandings about your credit score

  1. Your credit score is a single number. In the U.S., there are three major credit bureaus that collect and maintain credit information: Experian, Equifax, and TransUnion. While the FICO score is the best known credit score, each bureau has several formulas they use to determine credit scores. Insurance companies, mortgage lenders, and banks also develop their own models for credit scores. That means your credit score could vary from situation to situation.
  2. If you make more money, you’ll have a higher credit score. Your income is not included when figuring your credit score. The score reflects how well you handle credit regardless of your income.
  3. A low credit score can keep you from being hired. Employers do not look at credit scores. They can look at your credit report to help them gauge if you are reliable and trustworthy, but they your need your permission to do so.
  4. Your credit score is affected by where you live. That information is not part of a credit score calculation, so what part of the country you live in and whether you own or rent does not change your score.
  5. When you check your credit score, it can go down.  The number of times you check your own credit score does not have a negative effect on your score. It will cost you some money to check your score, however. The cost is usually about $20 per inquiry.
  6. Credit cards are the best way to build your score. While having a credit card and paying your bill in full and on time does help raise your credit score, having and wisely using different types of credit like mortgages, car loans, or student loans is also factored into your score.

Online Resources Can Help You Manage Your Money Better

The key to a healthier financial life is to create and follow a budget and know where your money goes each month. But how do you get started? You can find in-depth information about how to build a budget, reduce debt, save for a home or education, and much more online.

A good place to start exploring money management tools is at www.mymoney.gov. The website, which was created by the government’s Financial Literacy and Education Commission led by the Secretary of the U.S. Department of Treasury, offers a wealth of information about saving, investing, getting a loan, and budgeting for every stage of your life. You can find:

  • calculators
  • budget and expense tracking worksheets
  • videos on a range of financial topics
  • links to other free money management information sites on the web

The website makes it easy to find the information you need by providing sections that focus on how different life events, such as the birth of a child or retirement, can affect your finances as well as sections for different groups of people, such as military families, women, young adults, and retirees.

If you want to do your budgeting and money management online, there are a number of different types of tools you can use.

  • Money management tools provided by your bank: Many banks offer free or inexpensive web-based tools that help you create an online budget planner to track your spending and divide it into categories so you see where your money is going.
  • Password-protected online tools that allow you to upload financial information: There are a number of well-regarded, free sites where you upload information from your bank accounts, credit cards, and other financial resources so you can track spending. Many include email or text reminders when you get close to your monthly budget in a spending category such as groceries, gas, or dining out. Some of these sites also offer additional money management tools for a small monthly fee.
  • Online tools that don’t require you to upload information directly from your accounts: If you have concerns about the security of using an online financial management tool, you could try a site like doughhound.com or wesabe.com. The sites offer free online budget building and money tracking tools, as well as communities where members share money management ideas.
  • Apps for your smartphone or tablet: Banks and app developers offer a growing number of tools that let you manage your money and track your spending on the go.
  • If you prefer not to manage your finances online, but would like to automate your budgeting, explore the many software options available for your home computer.

To find online resources for budgeting and money management, start by doing a web search for “free online budget planner or tracker.” And be a wary consumer. Some sites that claim to be free actually only offer a free trial or limited services, so read all the fine print before signing up

Happy Citizenship Day!

Constitution Day (or Citizenship Day) is an American federal observance that recognizes the adoption of the United States Constitution and those who have become U.S. citizens. It is observed on September 17, the day the U.S. Constitutional Convention signed the Constitution in 1787 in Philadelphia.

The law establishing the present holiday was created in 2004 with the passage of an amendment by Senator Robert Byrd to the Omnibus spending bill of 2004. Before this law was enacted, the holiday was known as “Citizenship Day”. In addition to renaming the holiday “Constitution Day and Citizenship Day,” the act mandates that all publicly funded educational institutions, and all federal agencies, provide educational programming on the history of the American Constitution on that day. In May 2005, the United States Department of Education announced the enactment of this law and that it would apply to any school receiving federal funds of any kind. This holiday is not observed by granting time off work for federal employees.

Is It Smart to Pay Bills with Your Credit Card?

Sitting down with your checkbook and a book of stamps to pay bills is becoming less common. Not only are an increasing number of people paying bills online through their bank or the biller’s website, more people are also choosing to pay bills with credit cards rather than direct debit from a checking or savings account. Before you decide to pay your bills with a credit card, it’s a good idea to consider the pros and cons.

The Pros

  • It’s quick, convenient, and you can do it almost anywhere. Once you’ve used your credit card online to pay a bill, most websites allow you to securely store your payment information so you don’t have to re-enter it next time. You can also set up automatic credit card payments to avoid late payments and interest charges. Most companies accept credit card payments for bills online and over the phone, so you can pay bills when and where it’s most convenient. 
  • You can earn cash back or other rewards. If your credit card pays you cash back or gives you rewards points or miles whenever you use it, paying bills can help you earn more cash or rewards. Check to see if your credit card offers these rewards and how big the reward is. While many credit card issuers only offer 1% back, some offer up to 5%, so if you choose to pay bills with a credit card to get cash back, choose the card you use wisely. 
  • Tracking your spending is easy. Many credit card companies provide you with free reports that divide your charges into spending categories. That can be a helpful budgeting tool, tracking how much you’re spending on bills like insurance, phone, cable, and internet service, utilities, and more.

The Cons

  • You could end up paying more. If you do not pay off your credit card bill on time and in full every month, you will be paying your bills plus any interest that accrues, which can cost you significantly more in the long run. In addition, some billers charge you a fee to pay with a credit card. In some cases, it’s only a few dollars, but in others it’s a percentage of the amount you charge. The bigger your charge, the higher the fee that’s tacked on. 
  • You could have a negative effect on your credit score. Adding your bills on top of the purchases you’ve already made could bring you too close to your credit limit, which in turn can have a negative impact on your credit score. You should strive to use less than 30% of your available credit on any card. For example, if your credit limit is $2,000, try not to use more than $600 of that available credit. 
  • Don’t pay huge bills with credit. Unless you can pay off your charges in full when the bill is due, it’s not considered wise to pay big bills like income taxes or tuition with a credit card. A better option is to talk with the IRS and arrange a payment plan, which is usually at a lower interest rate than credit cards. For tuition, ask about tuition installment plans that are available at most schools.

An Emergency Fund can be a Financial Lifesaver

Even if you lived a charmed life, you’ll eventually run into some unexpected large expense. Your car’s transmission could need to be replaced (an average cost of $1,800 according to Edmunds.com), your refrigerator could give up the ghost (between $1,000 and $3,000), or you could need a root canal (between $750 and $1,000 per tooth). And while the economy is improving, companies are still announcing layoffs. How would you pay your mortgage or rent and other essential bills if you lost your job?

 

The best approach is to build an emergency fund. The recommended amount of savings varies, with most financial experts suggesting saving 3 to 6 months’ salary. Another way to figure out how much you should save is to take a careful look at your budget and put away enough money to cover at least those expenses for up to 6 months.

 

 

How to Build Your Emergency Fund

Saving money may seem difficult, especially if your budget is tight, but it is possible. You don’t need to put a lot of money into savings at one time, just make consistent deposits and your emergency fund will grow steadily. Here are some strategies to help you get started:

 

  • Set up automatic deductions from your paycheck that are deposited into a savings account. Even if you only deduct $25 per weekly check, you’ll have saved $1,000 in less than a year.

 

  • Put at least half of your tax refund into your emergency savings. According to the IRS, in 2011, the average refund was $3,000. Adding $1,500 or more to your emergency savings is a quick way to build your financial cushion. Do the same with any bonus you get at work.

 

  • Cut your expenses and put the money you save into your emergency fund each month. Find a lower cost cell phone plan and bank the difference. Take the money you spend every week on take out and put it into your savings account instead. Raise the deductible on your car insurance and put away the money you save.

 

  • Keep the change. All the quarters and nickels weighing down your pocket can add up to hundreds of dollars over the course of a year, so collect them and put them into your savings. Another idea is to round up the cost of every purchase you make and put the difference into your savings. For example, if you spend $47.35, put the $2.65 into savings. Some banks offer programs that do this automatically when you use your debit card.

 

  • Consider refinancing your mortgage. If you can find a lower rate mortgage, you could put the amount you save each month into your emergency fund.

 

  • When you pay off a debt, take the amount you were paying each month and deposit it into your savings.

 

  • Even though it can be tough, do not raid your savings for non-emergency expenses like vacations or holiday gifts.

 

Although interest rates are very low, most experts advise keeping your emergency fund in a savings account because you can get the money immediately when you need it. They advise against putting your emergency savings into stocks or other investments with any risk because there is always a chance you could lose the money you’ve worked so hard to save

Happy Patriot Day!

In the United States, Patriot Day (known in full as Patriot Day and National Day of Service and Remembrance until 2012) occurs on September 11 of each year, designated in memory of the 2,977 killed in the September 11, 2001 terrorist attacks. Initially, the day was called the Prayer and Remembrance for the Victims of the Terrorist Attacks on September 11, 2001. When the new name was proposed, it received opposition from Massachusetts, which already had a holiday that is very similarly named, Patriots’ Day

U.S. House of Representatives Joint Resolution 71 was approved by a vote of 407–0 on October 25, 2001. It requested that the President designate September 11 of each year as “Patriot Day”. President George W. Bush signed the resolution into law on December 18, 2001. It is a discretionary day of remembrance. On September 4, 2002, President Bush used his authority created by the resolution and proclaimed September 11, 2002 as Patriot Day.

Starting Off on the Right Financial Foot

You’re in love, you’re engaged or about to move in together and you’re probably not thinking about budgets, taxes, and debts. But maybe you should. Many people are uncomfortable talking about money, but you’ll avoid the friction that money issues can ignite if you talk now about your current finances and how you want to handle your money in the near future.

What to Talk About It’s important to be completely honest with your partner, even if your finances aren’t in great shape. That’s not as easy as it sounds. A Today.com poll found that more than half of the people surveyed had lied to their significant other about money.

While what you include in your discussion will be shaped by your personal financial situation, there are some basics you should cover.

  • Disclose your debt: This is often one of the hardest topics. Many people are embarrassed that they’ve gotten themselves into debt, but the only way you’ll get out of debt is if you’re both aware of what you owe and put together a plan to pay your debts off. Make a list of all your debts (student loans, credit cards, personal loans, car loans, etc.) and how much each of you owes to each creditor. With that information, you can create a debt payoff plan. Some people decide that the person who built up the debt should pay it off, while others pool their resources and work on that goal together. If you’ve ever filed for bankruptcy, you need to let your partner know since it will affect your ability to get credit and qualify for a mortgage.
  • My money and your money or our money? Talk about whether you want to pool your money into shared checking and savings accounts or keep separate accounts. You’ll also need to decide how to share the financial chores like balancing the checkbook, bill paying, and so on. Both partners should be in the loop and aware of all the financial information the other handles.
  • Build a budget and start a savings plan. List all your income and expenses, including debts, and put together a budget so you know where your money goes and whether you need to trim expenses. It’s also smart to start saving, even if you can only put a small amount away each paycheck, so you have an emergency fund or money for a down payment on a home.
  • Talk about your investments. Share information about your current investments (mutual funds, stocks, 401ks and IRAs, etc.) and talk about how you’ll handle investments. Are you both comfortable putting the money you’re planning to buy a house with in stocks? Should you start a 529 plan to save for your kids’ college? What about retirement savings?
  • Update your beneficiaries and insurance. In most situations, couples name each other as the beneficiary on life insurance policies and investment and retirement accounts. You’ll also need to review your health, life, home, and auto insurance and decide whether your current insurance will meet your needs or whether you need to make changes.

Talking honestly about your finances can lay the groundwork for a more solid, less stressful financial life together.

Emancipation Day

Emancipation Day is celebrated in many former British colonies in the Caribbean and areas of the United States on various dates in observance of the emancipation of slaves of African origin. It is also observed in other areas in regard to the abolition of serfdom or other forms of servitude.

Are You a Smart Online Banker?

Nothing beats the convenience of banking whenever and wherever you want from your computer, tablet or smartphone without ever setting foot in your local bank branch. To get the most out of online banking, make sure you’re taking precautions to keep your online transactions safe and secure.

The reason it’s so important to ensure that you’re a careful, smart online banker is that as the number of people who bank online has grown to more than 400 million around the world, these types of transactions have become a top target for hackers and other criminals. Their goal is not only to steal money, but also to steal the information they need to commit identity theft.

What You Can Do to Make Your Online Banking Safer There are several steps you should take each time you bank online to keep your money and your personal information safe.

  • Check your bank’s security system: When you go to your financial institution’s online banking page, you should see either a closed padlock or a key icon on the page. That symbol means that the information you’re accessing and sending is encrypted or scrambled so it’s only accessible by the intended receiver, in this case, your bank. Most banks now have more than one level of security in their online banking to deter criminals. Not only do you need to log in with a user name and password, you may also have a site key (a picture you’ve chosen). This picture is displayed before you enter your password. If the picture is missing or isn’t correct, don’t enter your password. And remember to always log out at the end of your banking session.
  • Make sure your computer is virus free: Before banking online, install and run a reputable virus detection program. It’s smart to do a quick virus check before every banking session, especially if you download music and movies or spend a lot of time on social networks like Facebook, Twitter, LinkedIn and Instagram, which are the frequent target of hackers.
  • Don’t provide banking or personal information via email: Never respond to an unsolicited email that claims to be from your bank and requests your user name, password, address, account number or other personal information. Never click on links in an email even if it looks legitimate. Instead, go to your bank’s website by entering the web address in your browser.
  • Make sure you’re really on your bank’s site: It’s easy to mis-type a web address and end up at citigruop.com instead of the bank’s real site. Hackers use these misspelled addresses to set up fake sites and steal information, so double check the information you enter before logging onto online banking.
  • Be smart with your smartphone: If you bank with your phone, make sure you set a password screen lock and have a program that lets you remotely wipe all the information on the phone in case you lose it.
  • Avoid public Wi-Fi: Don’t use the free Wi-Fi in a coffee shop, hotel or library to bank. They’re not always secure and hackers can easily intercept the information you enter.

It’s also wise to review your banking statements carefully as soon as you receive them. If you spot a suspicious transaction, report it to your bank immediately.

Getting Your Finances Ready for Baby

If all those cute babies in the grocery store have you and your partner thinking about becoming parents, there’s something less fun, but equally important that you should think about first-how a family will affect your finances. No one decides whether to start a family based on the cost, but it’s smart to get a good understanding of how adding a new family member will affect your financial situation so you can plan ahead for a secure future.

  • Get your budget on track. If you haven’t made a budget yet or aren’t doing the best job of sticking with your budget, now is the time to get serious about living within your means. If you have credit card debt, include a plan to pay the debt down in your budget. Once you know what your income and expenses are pre-baby, you can do some research to estimate the additional expenses you’ll have once the baby arrives, like:
    • daycare (usually the biggest expense)
    • pediatrician’s visits
    • diapers
    • formula and food
    • equipment (crib, stroller, car seat etc.)

That information can help you decide how much you should cut current extra expenses like entertainment, dining out and cable to put money aside for your new expenses. Getting your budget in order can also help you decide how long you can afford to take off work after the baby arrives or if one of you can quit and stay home.

  • Build an emergency fund. Financial experts advise that you have three to six months’ worth of savings, whether you have kids or not. If you have a savings account, increase the amount you put aside each pay before your child arrives to reach that goal. If you don’t have any savings, start building that cushion. A good way to jumpstart your savings is to have your tax refund or work bonus directly deposited into a savings account.
  • Get the right insurance. Review your health plan to make sure maternity and well-baby care are covered. You need to add your baby to your plan within 30 days of birth or adoption. You should also check out your life insurance options. Term life, which pays a set amount if you die, is usually the least expensive option.
  • Explore flexible savings accounts and other employee benefits. If your employer offers flexible savings accounts for health care and dependent care, sign up and start making contributions to cover the cost of deductibles and co-pays associated with maternity care and the cost of daycare, which is especially high for newborns. If you’re adopting, check and see if your employer offers help with adoption expenses.
  • Make a will. If you don’t have a will, now is the time to make one. Be sure to choose a guardian who is willing to care for your child and oversee his or her finances. You should also check and update your beneficiaries on life insurance policies, retirement plans and other accounts.

Though you can find many articles that insist now is the time to start saving for your child’s college education, some financial specialists believe it’s far more important to build your emergency savings and put away money for retirement first.

Cosigning on a Loan? What You Should Know First.

There are many reasons why people are turned down for credit:

  • No established credit, a big factor for young borrowers
  • Past financial problems like bankruptcy
  • Poor credit history
  • Not enough income
  • Too much current debt

In some cases, when people do not meet a lender’s borrowing requirements, they may qualify for credit if they have a cosigner or a co-applicant. Both a cosigner and a co-applicant are responsible for repaying the debt in full if the primary borrower does not pay. A co-applicant, however, is usually someone who is making a purchase, like a home or car, with the other applicant. A cosigner is simply using his or her good credit to guarantee the repayment of the loan.

A family member or friend may ask you to cosign a loan if they’re not creditworthy in the lender’s eyes, but before you agree, it’s important to understand what your responsibilities are and how cosigning can affect your credit. And consider this-the FTC describes cosigning as taking a risk that a lender won’t.

Understanding What it Means to Be a Cosigner There are many misconceptions about what cosigning a loan means. It’s important you know exactly what you’re agreeing to before you cosign.

  • Cosigning is a character reference. Not true. As a cosigner, you guarantee repayment of the loan. If the borrower does not make the required payments, you must make them. You will also be responsible for paying any interest or fees, including court costs and attorney’s fees.
  • The lender will pursue the borrower for repayment first. Not true. If the borrower stops making loan payments, creditors can collect the debt from you without trying to get it from the primary borrower first. They can garnish your wages or sue you to get repayment of the debt.
  • If the borrower declares bankruptcy, the debt is forgiven. Not true. Even if the bankruptcy court discharges the debt for the borrower, you are still responsible for paying the full amount of the debt plus any interest and fees unless you also declare bankruptcy.
  • If the borrower stops making payments on the loan, the lender has to notify you immediately. Not true. Many lenders don’t alert the cosigner until the loan is in default, which can significantly increase the amount you owe through interest and fees and damage your credit report.

The Financial Effect of Cosigning a Loan Even if the borrower you cosign for makes all his or her payments on time and in full, cosigning a loan does affect your credit. The total amount of the loan is considered as your debt and factored into your debt-to-earnings ratio (how much you owe compared to how much you make) when you apply for credit on your own. That means that cosigning on a loan can lower your credit score and limit the amount you can borrow.

If the borrower does not repay the loan and you are not notified right away, the missed payments are recorded on your credit report as well and can hurt your creditworthiness.

Before you cosign on a loan, think carefully about the risks and what the loan can do to your good credit. It’s not just about helping someone out, it’s about your own financial wellbeing too.