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Debt Management

Will Too Many Credit Cards Mean A Bad Credit Score?

With the holidays recently passed, it’s a fair guess that you were overrun with offers to sign up for credit cards, whether you’re at the cash register or checking your mail at home. Let’s take a look at two offers that always seem to make an appearance on a regular basis.

  • Clerk: “Hi, Would you like to open a credit card with Best Buy to save 15% today?”
  • Commercial Mail Offer: “Get 30,000 American Airlines Miles by signing up for the Citi AAdvantage Credit Card!”

We’re going to discuss how to make sense of choices like those above. What effect does opening a new credit card have on your credit rating? And what does it mean for your wallet when your credit score sags?

It might come as a shock, but to our mind the most important variable for the next year is your own readiness to take on loans. Below, we’ll go into why.

What is calculated in a FICO score calculation?

FICO uses a credit scoring system, which operates on a spectrum between 300 and 850 points. The exact calculation is not available for public knowledge, but there has been some information made available. This is the set of weighted factors that determine your FICO score:

Factor Weighting
Past Payment History 35%
Credit Utilization 30%
Length of Credit History 15%
Type of Credit Used 10%
Recent Credit Inquiries 10%

FICO focuses more on the recent past than the distant past

While the table above provides the basic picture of what goes into your FICO score, it’s also important to consider that your score is weighted towards your recent history overall, rather than the more distant past. If you’ve been making on-time payments on your credit cards for the last year or so, this can help minimize damage caused by past delinquencies. In the same vein, a pile of credit card payment notices that are a year old or more will do less harm today, but just a couple in recent months can be a big problem.

What is the impact of a new credit card on your credit?

A new credit card benefits your credit utilization since it lowers your total debt in proportion to available credit lines. On the other hand, it can decrease the duration of your credit history and increase your number of new credit inquiries. While it’s not fully clear how much each aspect of this choice will impact your score, its our opinion that this generally points to a small negative effect in the short term, while its long term effects have strong positive potential. In sum, opening a new credit card won’t have too much of an effect at all if you’ve got a score of 800 or more, but if you have a more limited credit history, this could push your score from the mid-range into “poor” and make it harder to obtain credit in the future.

What are the benefits of opening a card account?

Exercise careful judgment in how you use your credit card applications. Each airline mile is typically worth about a penny, so getting 30,000 of them by signing up for a new credit card means about $300 in real dollars. At the same time, the Best Buy 15% discount requires some very distinct math because the 15% savings probably won’t come out to be more than $300 unless you’re spending well over a thousand dollars on electronics.

Turn down all rewards credit cards that don’t offer some kind of immediate reward. The market is flooded with cards, like the Chase Freedom, that pay $100 or more for signing up, so unless you’re going to be getting some kind of incentive it’s not worth applying.

And how about the drawbacks of a lower credit score?

While most conversations about credit center around APRs and interest rates, the loan rate that a good FICO score can make available isn’t the most important thing to consider when thinking about the benefits of good credit. Even more important is how much money you plan on borrowing in the next year or so.

That is to say, if you’re going to be seeking a $45,000 home equity loan in the near future, having a good FICO score will be a much more significant factor than if you’re going to be looking for a $5,000 loan for your car. That’s because getting stuck with a higher interest rate on a smaller loan translates to a difference in interest payments that’s small enough to be negligible.

Input 1: Your FICO score and your interest rate

When seeking out a loan, your loan officer will base your interest rate off of a combination of criteria. A shorter loan duration and putting up collateral, as with a mortgage, can lower your rate. But the factor most within your control is your FICO score.

For instance, take a look at the table below, based on information from LendingClub’s average rates for a 36-month “debt consolidation” loan (note: these are not LendingClub’s actual rates, but our own estimates for illustration purposes only).

Credit Score Fico Score Interest Rate
Awesome 780+ 5.98%
Excellent 750-779 6.36%
Really Good 714-749 9.25%
Good 679-713 12.41%
Average 660-678 16.32%

Input 2: Loan Size

In terms of actual money that you’ll be paying, the most important factor is the amount you’re seeking to borrow. In the next table, you can see how a smaller loan minimizes the overall impact your FICO score has on how much your loan will cost you.

Loan Size Fico Score Interest Payment per Year FICO Score is 30 Points Higher FICO Score is 30 Points  Lower
$5,000 730 $483 Save $155/yr Pay extra $223/yr
$10,000 730 $965 Save $654/yr Pay extra $446/yr
$25,000 730 $2,413 Save $777/yr Pay extra $1,114/yr

Go for that new card if you’re not going to be seeking out any big loans in the near-to-middle future

In our opinion, opening 1-2 credit cards each year won’t have much impact on your credit score over the forthcoming year. In fact, it may raise your long-term credit score if you don’t have a very long credit history and keep the amount of credit you use at a low level.

If your future need for loans ranges from small to nonexistent, you should give some serious thought to the merits of an airline miles card. It’s likely that signing up for this type of card will net you a 30,000 mile reward, which translates to about $300 and thus ultimately cancels out much of the cost that comes from borrowing, according to our calculations. There are many rewards cards that have comparable deals.

But, if there is going to be a larger loan in your future, you should hold off on applying for a card or any other loan for around a year previous. In the context of taking out a loan over $25,000, its quite possible that whatever rewards your potential card offers to incentivize signing up will be outweighed by the increased interest rate that can come with a lower FICO score.

This post comes from the NerdWallet.com team of personal finance bloggers and experts in helping consumers find the best low APR credit cards.

Do you have too many cards?

Debt Management

Mistakes People Make When Taking Out A Short Term Loan

Taking out any quick loan is difficult. That is especially the case when people want to take out such a loan from the internet. They are drawn in by the simplicity and can easily end up faced with more problems than they initially had. In order to help you make a proper financial decision, let us consider those mistakes that most people often make at the moment. That will aid you in avoiding them.

Taking Out The First Loan That You Find

You can be lucky to find a short term loan with good rates or one that has a really high interest rate. The differences noticed between lenders do tend to vary a lot and it is usually a very bad idea to just settle for the first offer you locate. Our recommendation is to make a list of the most reputable lenders that service your country. Use the internet because the best deals are available online.

After your list is complete, try to learn all that you can about the lenders. That will help you to understand what financial entity is honest and what company tries to take advantage of people that are in need. Stay focused only on those with really good reviews. You should always avoid those that have various complaints written about them on the internet.

Not Talking With Friends And Family Members First

We have to understand the fact that these loans do have high interest rates. You can find one that would offer the amount you need with a payday repayment schedule but you can expect to pay much more back than with any other loan type. With this in mind, all financial advisors recommend that you first ask friends and family members. Try to get as much as possible from other sources and then focus on short term loan lenders. That will help you to repay less when you give the money back.

Not Reading The Contract Before You Sign It

Even if you conduct a really good and lengthy research, you may still end up in talks with a dishonest lender. Make sure that you read every single line of the contract that is sent to you. That will aid you a whole lot more than you may imagine since nobody can take advantage of you unless you sign such a document. You have to see all the facts that were promised in writing and you need to be extra careful with the repayment terms.

Conclusions

The biggest mistake that you can make when you need to take out a short term loan is to hurry. This may sound weird but in the event you use the internet, you can easily learn all that you need about the lenders and end up making a suitable choice in just one day. It is really easy to find all that you have to know and it is not difficult to receive the money in just a couple of days from the moment you make a decision.

Debt Management

Facts about Debt Relief and Money Savings

Personal debt has increasingly become a serious problem in most of the developed nations during the last few years, as a result of the credit bubbles. For example, it has been projected that an average US household has a non-mortgage debt worth $19,000. With such huge debt loads, many people are finding it difficult to make the repayments and are in perpetual financial distress and crisis.

Need for Debt Relief

Ever since the economic recession in the year 2008, countless individuals in the USA have turned to national debt relief as an effective way to find solutions to their mounting debts. However, many consumers are skeptical about debt relief or debt settlement, since companies came up overnight and promised fantastic ways for paying off the debts and also, offered to slash your debts by as much as 75 per cent. But then, when consumers have no other way to get rid of the ever-increasing debts, they turn to debt relief companies as they are their last hope for survival in financially distressing times.

The debt relief companies are forced to take on more and more clients as more and more people are finding themselves in debt and with no capacity to pay the ever rising monthly bills. Debt relief companies do not only haggle over and negotiate the amount you owe to your creditor. You get a host of advantages if you hire a debt relief company.

Money Savings Due to Debt Relief: Biggest Advantage

  • Debt relief helps to lower your interest rates on the loans. Settling your debts implies you have to pay lower overall rate of interest on your debt. This ultimately helps you to save money.
  • Debt relief or settlement results in reducing the total amount you actually owe to your creditors. Unlike a credit counseling plan, debt settlement helps you to pay definitely much lower amount than the original amount you actually, owe to your creditor. This definitely implies money savings due to debt relief programs.
  • Debt relief companies come up with effective plans and concrete goals for eliminating debt. Expert debt resolution professionals educate you and create an effective plan for eliminating your debts strategically, instead of just concentrating on paying off your debt. This makes you well equipped to take wise decisions in future so that you are not in any financial problems ever again.

Steps to Try Debt Reduction on Your Own

Here are a few important DIY steps for reducing your debts. Arrange all your important financial documents and ask for copies of your credit reports. Evaluate your debts accurately. Examine your monthly budget. Add up your mortgage payment or rent and all other monthly payments such as student loan payments, childcare, insurance, groceries and utilities. Deduct all your monthly payments from your income and see how much you are left with. If the amount is very small and not adequate to pay off your monthly bills, look for ways to cut down your spending. Now formulate a plan for reducing your debts. Next step is to negotiate with your creditors and try to work toward an improvement in the terms relating to your debts. Try your level best to achieve your repayment objectives every month. If all these steps do not work, it is the time to contact the debt relief specialists.

Choose a Competent Debt Relief Company

The top debt relief companies would follow a policy of transparency with its clients. You would have complete access to all important information. They will provide economical fees, offer clear information on company websites, comprehensive customer support, and savings rate at par with competitors or sometimes slightly better. Moreover, make sure that the debt relief company is accredited by AFCC, IAPDA and BBB.

Debt Management

4 Key Types of Debt Consolidation Loans to Choose From

If you have a lot of debt weighing down on you, you have several options for debt relief that can help you find financial freedom. Debt relief is amongst the better options that you have to get rid of your debt because it allows you to make manageable monthly payments at better rates than all the individual debts combined.

The different types of debt consolidation that you can choose from include the following:

  1. Personal Loan

By taking a personal loan that can cover all your debts, you can more manageably pay for all your original debts and remain with a single loan that you can pay off with more friendly terms.

Depending on your credit rating, a financial institution can give you quite attractive rates that may be better than your combined individual loans.

  1. Home Equity Loans

A home equity loan is an attractive option for debt consolidation because the loan usually has very low interest rates and its payment is over a very long period. With a home equity loan, the limit and basis for the loan is the value of your home.

The idea is to take a low interest home equity loan in order to pay off all your other debts and remain paying off just the home equity loan.

  1. Debt Consolidation Loans

You could also get a more direct debt consolidation loan from a financial institution or a debt relief company for the sole purpose of consolidating your loans.

  1. Credit Card consolidation

Credit card consolidation involves transferring debt balances from several credit cards to a single credit card that offers better terms.

Credit cards with interest rates as low as 0%, are usually promotional campaigns by credit card companies that seek new clients. These promotional rates are usually for a relatively short period.

If you are to use this option in order to consolidate your debt, you should make sure that you take note of the period when the promotion ends and when normal interest rates will take effect. You should also confirm if the limit of the promotional credit card is long enough for you to hold most or all of your debt.

It is important that you are able to settle all the consolidated debts transferred to the promotional credit card on or before the time when normal interest rates take effect, otherwise you may not benefit from this form of debt consolidation.

It is imperative to note that with a debt consolidation loan, you are actually just bringing together all your loans under a single roof, so to speak, so that you can gain control of your debt by benefitting from better payment terms for the combined loans.

You will need a lot of discipline to remember that you should avoid getting into further debt while still settling your debt consolidation loan. To help you stay on course with paying your debts through a debt consolidation loan, you should find out how others have managed to stay the course through reading debt consolidation reviews. These reviews should keep you focused on achieving your goal of being free from debt.

Debt Management

Bankruptcy Need not be Your First Choice

Debt and Bankruptcy Debt Advisory LineSerious economic challenges can exert a high degree of psychological pressure. Especially when expenses are exceeding the available income for extended periods of time, strain levels in a household can get insufferable. During this period, many will consider bankruptcy their only available option. In itself, this need not be a problem. After all, declaring bankruptcy means all financial obligations owed to lenders will be dismissed if your filing is decided in your favor. Choosing to file, however, is a serious matter and will seriously affect your life for years to come. Ahead of declaring bankruptcy you should therefore take numerous aspects into account – especially since debt and bankruptcy don’t have to go hand in hand.

The first question you should ask yourself is whether you may be able to restructure and get rid of your debt by yourself. When debts are too much to handle, after all, you are going to struggle to pay the lender commitments you agreed to. In this case, bankruptcy can be an option. Before arriving at that conclusion, however, you should take all available steps into consideration to improve your financial situation: Is there a car which can be traded in? Can the house be refinanced for a decrease in the mortgage payment? Are there higher paying jobs that can be added to the household income? There are also a variety of practical steps you can take to at least return to breaking even: Cut back on household expenses and instead of going on expensive vacations, go for cheaper alternatives. This can often help to relieve the stress of debt for you and your family. Try cutting back on extras like cable, cell phones and eating out before deciding to declare bankruptcy.

Mostly, though, bankruptcy is something best handled by experts and you should consider getting professional help. A debt consolidation company can help you negotiate with creditors to reduce the amount you have to pay each month, for example, and thereby avert bankruptcy. They can help create a plan to get you out of debt and back on the right path towards a sound financial situation. They will also assist you to determine how much debt you actually have. Although it may sound hard to believe, many people tend to hold an exaggerated view of their financial misery. You may be one of them.

The Debt Advisory Line have years of experience in helping you establish a precise picture of your debt and systematically reducing it. If you’re in need of debt management, contact us now to find out how we can assist you.