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5 Ways to Lower Credit Card Utilization

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Credit card debt can be an expensive burden to carry. Consider the average annual percentage rate – the interest rate, plus any fees – of credit cards in the U.S. News database, which ranges from about 15% to 23%.

But credit card debt can cause serious problems beyond money wasted on interest charges. If your cards have high credit utilization rates, this could hurt your credit score – even if you make all of your payments on time.

What Is Credit Utilization and Why Does It Matter?

Your credit utilization rate takes two figures, your credit limit and your current balance, to calculate the percentage of how much of your credit limit you are using.

For example, if you have a credit card account with a $10,000 limit and a $5,000 balance on the card, your credit utilization rate is 50%.

The lower your credit utilization, the more attractive you are to lenders. “A low credit utilization illustrates to lenders that you’re responsible with your credit,” says Leslie Tayne, debt resolution attorney and founder and managing director of Tayne Law Group. “A high credit utilization can hurt your credit score.”

Credit scoring models such as FICO and VantageScore analyze your debt-to-limit ratio when calculating your credit score. With FICO scoring models, credit utilization accounts for 30% of your credit score. So, when you lower your credit card utilization, your credit score might increase.

What Is a Good Credit Card Utilization Rate?

If you want to earn and keep good credit scores, it helps to know what scoring models consider a good credit card utilization rate. The answer to the question, however, depends on the credit scoring model that’s being used and your goals.

VantageScore experts often advise maintaining a credit utilization rate of 30% or lower. Still, a debt-to-limit ratio that’s as close as possible to 0% is best.

Fair Isaac Corp., the creator of the FICO score, also recommends maintaining a low credit card utilization rate – the lower, the better. Are you aiming for an excellent FICO score? According to the company, consumers with scores between 800 and 850 have an average revolving utilization rate of 4% to 5%.

Chad Kusner, president of credit rehabilitation company Credit Repair Resources, provides a good rule of thumb to follow. You want to show that you’re using your credit cards, “but also keeping the lowest possible balance,” he says.

How Can I Lower My Credit Card Utilization?

There are several ways you can lower your credit card utilization rate.

1. Pay down your credit card balances. The simplest way to lower your utilization rate is to pay down your balances. That’s easier said than done.

The good news about paying down your credit cards is that you don’t have to reach 0% utilization before your credit score has a chance to improve. As you pay down your debt and lower your credit card utilization in increments, your score may start to increase little by little.

2. Learn your statement closing date. Another tip for lowering your credit card utilization is to learn your account’s statement closing date and pay your balance before then. “The balance we owe on the statement date is what’s reported to the credit reporting agencies,” says Kusner.

You might charge $5,000 on your credit card account throughout the month. But if you pay off that balance before the statement closing date, your credit report will show a zero balance. That’s a 0% credit utilization rate.

3. Don’t add to credit card balances. “Avoid spending more than you can pay off at the end of the month” if you’re trying to lower your credit card utilization, says Tayne.

Worried about temptation? Consider locking your credit card away in a safe place instead of carrying it in your wallet. You can also implement a 24-hour rule, taking 24 hours to think over unplanned purchases.

Just be careful not to close credit card accounts in an attempt to curb your spending habits. Closing a credit card will raise your overall credit utilization rate and might harm your credit score.

4. Ask for a credit limit increase. Increasing the gap between your credit card balance and your limit lowers your utilization rate. Aside from paying down your balance, the other way to gain distance between these two figures is with a credit limit increase.

Let’s say you have a credit card with a $10,000 limit and a $5,000 balance. Your credit utilization rate is 50%. If you increase your limit to $15,000, your utilization rate would fall to 33%, even though the balance remains the same.

Asking your credit card company for a limit increase can help you to keep your utilization rate within reason, Tayne says. A higher limit may prevent a hit to your credit score if you need to make a large purchase you can’t pay off immediately. But Tayne cautions consumers not to go overboard with their spending, even if a request for a higher credit limit is approved.

5. Become an authorized user. An out-of-the-box way to lower your overall credit card utilization requires a favor. If a friend or family member adds you on the right credit card as an authorized user, your credit score might benefit.

“You could have someone add you as an authorized user on a credit card account that has a low balance and a high limit and a great pay history,” says Kusner. “Now your aggregate or overall utilization will be lower.”

Of course, Kusner maintains that paying your credit cards on time is an essential element to earning a good credit score. He also encourages consumers to use credit cards responsibly and not charge more than they can afford.

How Much Will Lowering Credit Utilization Affect My Score?

In credit scoring, specific actions don’t have exact point values. Reducing your credit utilization rate by 10% won’t raise your credit score by 10 points (or any other guaranteed number, for that matter). That’s not how credit scoring works.

Everyone’s credit, Kusner says, has a unique DNA. The same action, like paying off a credit card, can influence individual credit scores differently. It depends on your profile how much lowering your credit card utilization rate has on your credit score.

If your utilization rate is already less than 30%, you might not see much of an improvement from paying off a credit card. But if you’ve been hovering at or near your credit limit, you should see a larger positive shift by improving your credit utilization.

You should expect at least some benefit to lowering your credit utilization, even though there’s no guarantee of how much you can improve your credit score. Remember, this factor is second only to payment history when it comes to calculating scores, so improving your credit utilization rate can make a big difference.

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Are Sallie Mae Student Loans Federal or Private?

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When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.

However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.

What is Sallie Mae?

Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.

In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.

However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.

In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).

At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.

What is the difference between private and federal student loans?

When you’re seeking financing to pay for college, you’ll have a big choice to make: federal versus private student loans. Both types of loans offer some benefits and drawbacks.

Federal student loans are educational loans that come from the U.S. government. Under the William D. Ford Federal Direct Loan Program, there are four types of federal student loans available to qualified borrowers.

With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.

On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.

Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.

As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.

Are Sallie Mae loans better than federal student loans?

In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.

However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.

If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.

With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.

The bottom line

Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.

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Tips to do some fall cleaning on your finances

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Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.

PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have. 

1. Analyze Your Finances Quarterly or Biannually

You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.

With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.

The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.

4. Savings and Retirement Accounts

The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.

RELATED: Financial lessons learned through the pandemic

A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies. 

RELATED: Overcome your fear of finances

To learn more about Abrahamsen Financial, click here

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How to Get a Loan Even with Bad Credit

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Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan. 

Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito. 

For more finance tips, visit Moneymax.

 

 

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