The next time you get a notification from a credit card company asking whether you’d be interested in a credit limit increase, go ahead and say yes. Why? Because it’s one of the quickest and easiest ways to improve your credit score.Read more...
More like this (3)
A home equity loan could help you get the money you need for a renovation or emergency — here's how they work
Home equity loans allow homeowners to borrow against the value of their home. Many lenders...Home equity loans allow homeowners to borrow against the value of their home. Many lenders will allow homeowners to borrow up to 80% of their home's current value. While home equity loans are often used to pay for home renovations, the money can be used in whatever way the borrower chooses. Sign up to get Personal Finance Insider's newsletter in your inbox » Your "home equity" refers to how much your home is worth minus the remaining balance on your mortgage. If your house has increased in value since you purchased it or you've paid off a solid portion of your mortgage (or a combination of both), you could have a significant amount of equity built up in your home. Home equity is a valuable tool that gives you a lot of financial options. On one hand it means that you would net a profit if you were to sell. But what if you have no interest in moving? In that case, you may still be able to tap your home equity by taking out a home equity loan. Whether you're looking to fund a home renovation, pay for unexpected medical bills, or consolidate debt, borrowing against your home's equity could be a good way to get your hands on a large chunk of cash. But there are some risks that you'll also want to consider. Here's how it all works. How does a home equity loan work? Home equity loans and lines of credit (HELOCs) are both considered second mortgages. After you take out a home equity loan, you'll have two loans that use your home as collateral —- your original mortgage and the home equity loan. The first step towards deciding if this type of loan would be a good option for you would be to calculate how much you'd be able to borrow. To estimate your home's current value, you can use online tools like Zillow, Redfin, or Realtor.com. Or, to get a more accurate estimate, you may want to give a local real estate agent a call. Once you've estimated your home's value, subtract your mortgage balance to calculate your home equity. Let's say your home is worth $400,000 and you owe $160,000 on your mortgage. In this case, you'd have $240,000 of equity built up in your home and a 40% loan-to-value ratio. Many lenders limit homeowners to a combined loan-to-value ratio of 80%. In this example, 80% of $400,000 is $320,000. When you subtract your remaining $160,000 mortgage balance from $320,000, you find that you could potentially borrow up to $160,000 with a home equity loan ($320,000 - $160,000 = $160,000). What are the differences between a home equity loan and a line of credit (HELOC)? While the terms "home equity loan" and "home equity line of credit" (HELOC) are often used interchangeably, they're actually two different types of home equity debt. With a home equity loan, you borrow the entire amount at one time in a lump sum. Then, you'll immediately begin making equal monthly installment payments to repay the loan. With a HELOC, you receive a revolving line of credit as opposed to a lump sum loan amount. HELOC borrowers are approved for a maximum loan amount that you can borrow against as needed during the draw period (usually up to 10 years). As you pay your balance down, more of your available credit becomes available to borrow against. During the draw period, HELOCs work, in many ways, like credit cards. You have complete control of how much you borrow and you can borrow against your credit limit multiple times. However, after the draw period ends, you won't be able to borrow any more and you'll start making equal monthly payments. Home equity loans tend to come with fixed interest rates while HELOCs generally use variable rates. A home equity loan could work well if you know exactly how much you need to borrow and want to lock down your rate. But a HELOC could be a better option if you want flexible access to your home's equity over time. What are the borrower requirements for a home equity loan? It may seem obvious, but your lender will want proof that you actually have equity in your home before they'll approve you for a home equity loan. Most lenders will send a home appraiser to determine what your home is worth and how much equity you have available to borrow against. If you do, in fact, have equity in your home, the borrower requirements will essentially be the same as what lenders use for first mortgages. That means most lenders will require a credit score of at least 620 and a debt-to-come ratio below 43%. Proof of employment and income records will likely be required as well. What are the benefits and risks of a home equity loan? The fact that a home equity loan would be secured by your home limits your lender's risk. And, because of this, they may offer better interest rates or easier borrower requirements with home equity loans than unsecured forms of debt like credit cards or unsecured personal loans. In addition to getting access to attractive rates and terms, you may be able to get your hands on a lot more cash with a home equity loan than you'd be able to borrow with an unsecured loan. And homeowners are allowed to deduct the interest paid on a home equity loan as long as the money is used for home improvement. The downside to taking out a home equity loan is that you could lose your home if your financial situation changes and you aren't able to make your payments. This is one reason why it can be a dangerous move to consolidate unsecured debt (like credit card debt) with a home equity loan. Credit card issuers can't take your home without first winning a judgment in court. But if you pay off your credit cards with a home equity loan, your home would then be at risk if you were to default on the loan. This doesn't necessarily mean that moving high-interest credit card debt to a lower-interest home equity loan is always a bad move. But you'll want to carefully weigh the pros and cons. While consolidating unsecured debt can be a risky use of home equity loan funds, using the money to renovate and increase the value of your home can be a really smart move. Other good reasons to take out a home equity loan could include paying for college, starting a business, or covering an emergency expense. How can homeowners shop for a home equity loan? Before you start the home equity loan shopping process, you'll want to check your credit. You can check your credit score for free with tools like Credit Karma or Credit Sesame. And at AnnualCreditReport.com you can check your credit reports with all three credit bureaus for free once per week through April 2021. If you see errors on one of more of your credit reports, you'll want to dispute them to have them removed before you start submitting loan applications. You can shop for home equity loans at most banks, credit unions, or with online lenders. Many will allow you to check your pre-qualified rate without impacting your credit score. But even if a few hard credit inquiries hit your credit report within the span of a few weeks, the credit scoring models will generally consider them as one inquiry. What are some alternatives to a home equity loan? If you're sure you want to tap your home's equity, but you're not thrilled about the idea of having two loan payments to manage each month, you may want to consider a cash-out refinance instead. You'll typically need to meet the same equity requirements if you go this route. But after completing the cash-out refinance, you'd be left with only one monthly payment to worry about instead of two. If you're looking for a way to consolidate high-interest debt without putting your home at risk, you may want to apply for a 0% balance transfer card. Or if you'd prefer to borrow a lump sum that repay over time, unsecured personal loans often offer better interest rates than credit cards. More personal finance coverage 4 reasons to open a high-yield savings account while interest rates are down Here's the average auto loan interest rate by credit score, loan term, and lender The best high-yield savings accounts right now Here are the banks with the best CD rates The best rewards credit cards 7 reasons you may need life insurance, even if you think you don't Join the conversation about this story » NOW WATCH: What makes 'Parasite' so shocking is the twist that happens in a 10-minute sequence
Your credit score is an important measure of your financial health that can be a...Your credit score is an important measure of your financial health that can be a deciding factor in getting approved for a new credit card or loan. Popular credit score models from FICO and VantageScore use a 300 to 850 scale to measure your credit. There are many misconceptions about what shows up on your credit report and influences your credit score. Activity on credit-related accounts like credit cards or loans generally shows up on your credit report. On the other hand, things that aren't related to lending — like checking and savings accounts — don't affect your credit score. Your income and assets don't affect your credit score either. See Business Insider's list of the best credit cards for average credit. Your credit score is one of the most important numbers for your personal finances. Your credit score can be a determining factor in getting approved for a new loan. And if you're approved, it can decide your interest rate. For a mortgage, for example, that difference in interest rate can be worth tens of thousands of dollars over the life of a loan. Understanding what goes into your credit report — which reflects all the information factored into your score — is important for your long-term financial health. However, there are many common credit report and credit score myths and misconceptions — let's separate fact from fiction to make sure your finances move in the right direction. Here's a list of what can and can't affect your credit score. What affects your credit score Payment history The biggest factor in your credit score is your payment history. Paying on time every month is the single best thing you can do for your credit. Under the most popular credit score model, your payment history is 35% of your FICO credit score. It takes seven years for a late payment to fall off of your credit report. Setting up automatic recurring payments can help you avoid an accidental late payment. Credit balances Your credit balances and utilization are the next biggest factor in your credit score, making up 30% of your score. As a general rule, to get the best results from this part of your credit score, you should keep your credit card and line of credit balances as low as possible. Your credit utilization is your total outstanding credit card balances divided by your total credit card limits. Try to use less than 20% to 30% of your credit for a good credit score. Keeping it as close to 0% as possible is best for your credit.If you have high credit card balances, one of the fastest ways to raise your credit score is to pay off your cards. That's often easier said than done, but it's a smart strategy if you're able to do it. Credit account age A long history of well-managed credit accounts is evidence that you are a responsible borrower. The average age of your credit accounts is the third-biggest factor in your credit score, with a 15% weight. A bunch of new accounts lowers your average account age, while accounts that you've had the longest help your average account age. Avoid opening new credit accounts unless you need them, and avoid closing old accounts unless to get the best results here for your credit. Keep in mind that if you want to stop paying for a card with an annual fee, you can downgrade your card to a no-annual-fee option instead of canceling it. This will preserve the age of your original card's account, avoiding any damage to your credit score. Mix of credit accounts Just as a long credit history shows you can handle credit well, a mix of different types of credit account types helps your credit score. That means you're best off if you have credit cards and installment loans, like a mortgage or auto loan. More unique types of loans is best for your credit. However, that doesn't mean you should get a new loan just to help your credit in most cases. Instead, just apply for the credit you need and watch as your score slowly rises over time when you manage your loans well. Your credit mix makes up 10% of your credit score. New credit The last main category is the pursuit of new credit. As a general rule, new credit is bad for your credit score, but only temporarily. New credit applications lead to an inquiry on your credit report, which slightly hurts your credit score.In addition, if you're approved, a new credit account lowers your average age of credit. This negative impact goes down over time and eventually becomes a positive factor. But in the short term, new credit is bad for your credit. What doesn't affect your credit score Bank accounts Contrary to popular belief, bank overdrafts don't hurt your credit. In fact, nothing from your check or savings accounts directly shows up on your credit report or in your credit score. Banks use a different system, known as ChexSystems, to track overdrafts and other banking information. You can request a free ChexSystems FACTA report here. Utility and phone bills Your power, water, gas, and phone bills don't generally show up on your credit report. These companies may check your credit when you open a new account, but they typically don't send your payment information to the credit bureaus for credit reporting. That's slowly starting to change, however, as optional credit-boosting programs like Experian Boost start offering to give you "credit" for paying non-credit bills on time. Your income and assets It doesn't matter to the credit bureaus if you make $1 per year or $1 million per year. Your credit report is all about paying your credit-related bills on-time and managing the balances well. Even if you have a ton of money in the bank, you can have a bad credit score if you miss payment due dates. Checking your credit score yourself Services like Credit Karma, Credit Sesame, and personal credit-reporting tools from your bank don't hurt your credit score. These are considered soft inquiries, which are visible to you but not to lenders. When you apply for new credit, the hard inquiry on your credit report does impact your credit score. Rate-shopping If you're buying a new car or home, it's not a bad idea to shop around for the best interest rates. While each application will generate a new inquiry, the credit bureaus typically bundle inquires from a short period of time and treat them as a single inquiry for credit scoring purposes. Anything from a non-credit account Investments, insurance, and other accounts that don't involve any borrowing generally don't show up on your credit report in any way. Credit reports and credit scores have the word "credit" right in the name. Non-credit means it's a non-factor for your credit score. Actively manage your credit for an 800+ credit score While you should avoid opening new accounts regularly, particularly if you plan to get a mortgage in the next six months, it's a good idea to keep tabs on your credit and work to improve your credit score over time. Good credit is extremely valuable for your financial health. Now that you know what's involved, and what isn't, you can work to join the 800+ club of excellent credit scores where you get the best rates and credit cards available. You might not need your credit today, but it's a good asset to have while managing your financial life. More personal finance coverage 4 reasons to open a high-yield savings account while interest rates are down It took less than 10 minutes to open a high-yield cash account with Wealthfront and earn more on my savings How to buy a house with no money down When to save money in high-yield savings Best rewards credit cards 7 reasons you may need life insurance, even if you think you don't Join the conversation about this story » NOW WATCH: How waste is dealt with on the world's largest cruise ship
Your credit history can be one of the more confusing parts of a credit score. Even...Your credit history can be one of the more confusing parts of a credit score. Even if you practice good credit habits, your age can seem to work against you. But beyond waiting patiently to graduate to expert level, is there anything you can do to boost your score?Read more...