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How the 2020 Pandemic is Affecting Credit Scores

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How COVID-19 is Impacting Credit ScoresThus far, during the COVID-19 pandemic, many businesses and individuals have felt the heat and are left struggling. Children are out of school and learning virtually in many parts of the nation, restaurants are closed, sporting events are canceled, bars are closed, and the entertainment industry is absolutely demolished. As a result, credit scores are at risk or taking a hit. This impact on credit scores may be felt for much longer than the pandemic ends up lasting.

Credit is an essential part of life and a huge financial tool. In purchasing homes, taking out loans, buying or leasing cars, or even getting an apartment, your credit plays a part in decisions banks make on whether or not to lend to you and at what interest rate.

The Financial Strain

Sure, all qualified individuals received a stimulus check to assist financially in the beginning month of the pandemic. However, with children not in school, because many school districts are deeming the pandemic to be too much of a risk to send children back full time, many parents are struggling to find child care and are forced to stay home and out of work.

Others have lost their jobs altogether, not to mention unemployment benefits are a struggle to obtain and may not be enough to cover their cost of living. Many have been furloughed, temporarily laid off, or laid off altogether. Work is scarce to come by, as the competition for a job is a little tougher with so many applicants.

The Impact on Businesses & Credit Scores

The huge drop in business revenue as many storefronts are closed and the loss of work altogether is making an impact. Many are turning to put necessities on credit cards and it is beginning to stack up. It is not a myth that the interest rates on plastic tend to be higher than those from bank loans. This just creates more of a problem as that debt to income ratio that highly affects your credit score goes up.

Wallethub, a large financial advisory website, conducted a survey: The Coronavirus Credit Score Survey. They found that 87 million people nationwide are fearful for their credit score as we endure the pandemic in 2020. According to Wallethub, the total US credit card debt was already at $1 trillion.

Prioritizing Your Finances to Avoid Damaging Your Credit Score

It only makes sense that priorities are maintaining your mortgage and keeping food on the table. Doing so without income can prove to be difficult, and paying credit card bills is last on the list for many Americans. Missing payments negatively affects credit scores. It is said that the longer you wait to pay the bill, the more the credit score drops. With no end in sight for the pandemic, credit scores are at risk for many.

It is a common misconception that being unemployed can negatively impact your credit score. This is not true. The fallout from unemployment, leading to missed payments, and high balances on cards and loans are what do the damage to credit scores.

Stay Informed & Find Ways to Protect Your Score

It is true that every component of people’s lives is affected right now, and credit scores fall into that. A “CARES Act” has been put into place to offer assistance in protecting coveted credit scores. Requesting creditors for “accommodations” allows you to possibly put a loan into forbearance, or some creditors may allow partial payments. CARES stands for Coronavirus Aid, Relief, and Economic Security and is aimed to provide Americans with economic assistance during the pandemic.

The best thing you can do to prevent a negative impact on your credit score is to stay informed and continue to check your credit. Do research on any assistance you may be able to acquire. Knowledge is power.

For Credit Counseling and Repair, Contact Credit Absolute today for a free consultation.

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Does Using Credit Cards vs. Cash Help My Credit Score?

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Cash vs Credit

Building your credit score is a lot like building a good reputation. It takes years of consistency and work. It can be disheartening news if you have a bad credit score, but that doesn’t mean you are completely out of options. The best way to take control of your credit score is to start good habits today, and by making a commitment to those good habits for years to come.

If your credit score is less than favorable, you’re probably looking for ways that you can improve it. You may hear a lot of conflicting advice about the use of cash or credit to help your credit score. We’re here to set the record straight.

How Credit Works

The very first step to understanding your credit score is knowing how it is reported. When you are given a credit line from a credit card company or loan from your bank, you are permitted to use it within the set limitations while paying it back. It is your credit usage, on-time payment history, and credit habits that get reported to three governing credit bureaus: Equifax, Experian, and TransUnion.

A credit bureau is a company that collects information reported by creditors, lenders, and consumers in the form of a report – ultimately determining your credit score. In addition to your payment history and credit usage, your credit score is determined by the number of credit accounts, type of accounts, credit age, and credit inquires. A complex algorithm is then used to determine your unique credit score, which is updated on a monthly basis.

Cash vs. Credit

As you can see, cash is not directly involved in determining your credit score, but that doesn’t mean it should be avoided. Depending on your personal financial standing it might be better to operate with cash over credit. For example, if you have high balances on your cards or you don’t have a particularly positive credit history, it’s better to pay your bills in cash and make payments to get your balances down.

While this doesn’t directly affect your credit score, limiting your credit usage and paying your balances down will help you start down the path to repairing your credit and do wonders in raising your credit score. In general, your lenders and creditors like to see a credit usage less than 30% of your credit limit. This shows responsibility and self-control when it comes to being given credit.

On the other hand, you can’t have a credit score without some type of credit history. If you have no history with lenders or creditors, the three bureaus will not be able to determine your creditworthiness, therefore they will not be able to generate a credit score. If you have never been given any credit, it’s recommended that you start with a secured card or a secured loan, typically meaning they are backed by your savings, to start building good lending habits and trust. Just remember to adhere to all terms of your credit agreement and practice good credit habits in order to prove yourself to lenders when the time comes. It’s also a good idea to start monitoring your credit report to see where you stand financially and develop a strategy to get to where you want to be.

Conclusion

So, is cash or credit better at helping improve your credit score? The answer is, it depends on your personal financial situation. While it is true that you cannot build your credit score without having some type of credit from lenders, cash might be the right choice to take control of the debt that you already have and start displaying positive financial habits. Regardless of the strategy you choose, the first step is knowing exactly what’s on your credit report and monitoring it on a monthly basis.

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What is a Mortgage Pre-approval & What Are the Benefits?

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When shopping for a mortgage, you need to have any and all information that will expedite the process. Knowing what limits you are working with can also help you during the negotiation process; this is where mortgage pre-approval comes in.

Mortgage pre-approval is a certified letter from a lender indicating how much you can borrow. It also states the different kinds of loans that you may be eligible for and the interest rates that you should expect. The letter is valid for around 60-90 days, after which you need another pre-approval assessment for your mortgage shopping.

Mortgage Pre-Approval

Requirements for a Mortgage Pre-approval

Being a financial assessment of your mortgage eligibility, the pre-approval process involves looking at the health of your credit. Among the requirements that lenders will ask for include;

  • Social Security Number
  • Permission to access your credit report
  • Recent pay stubs
  • W-2s
  • Federal Tax Returns
  • 2 months bank statements (all accounts types)

It’s important to note that a pre-approval letter is not a contractual agreement between you and the lender. It’s just an assessment and not a commitment to give you the loan.

Benefits of Mortgage Pre-approval

  1. Saves on time

Pre-approval provides you with an overview of the amount of loan that you qualify for. It also helps you to narrow down the types of mortgage programs that are available to you. This comes in handy in shortening the time that you may have spent on mortgage shopping.

Think of it this way; without a shopping list, you waste time by going up and down the aisles in a supermarket trying to locate what you might need. With a list at hand, you pick specific things, and in a short while, you are done. Pre-approval works in basically the same way; you spend time rate-shopping only on the specific loan(s) that you qualify for.

  1. Lenders take you seriously

Real estate is a very competitive industry. Lenders don’t want to waste time on people who are not serious about homeownership. It’s easy for them to dismiss your application if they are not confident in your commitment.

A pre-approval letter goes a long way in adding weight to your loan application. It shows that you a prospective client and that your offer demands serious consideration.

When a lender takes you seriously, your approval gets a boost. They will speed up the process since you have already demonstrated the ability and serious intent of purchase. Yours becomes a done deal and your application gets a head-start in closing. The appraisal can begin immediately which can lead to a shortened closing period; by a week or two.

  1. Gives you negotiation power

When a lender is negotiating with you, he will offer rates depending on the seriousness of your application. This means that he may offer somewhat prohibitive rates because he is banking on someone else who might also be lined up for the home. This is a genius business move on his side since it’s all about making the sale.

Pre-approval is a sure way to avoid this kind of frustration. The letter gives you an edge on the negotiating table. Your application will be carrying more merit and the lender will be more inclined to offer you cheaper rates. Pre-approval may also allow you to negotiate the rates to the lowest allowable for your loan amount and credit score.

  1. Knowledge of other costs

Apart from the principal amount and the interest that a mortgage will attract, there are other additional costs to contend with. Knowledge of these costs allows you to plan better and shop for a loan that you are able to sustain. Pre-approval allows you to have an idea of what these costs entail.

You will be provided with a list of additional costs that are to be expected. These include closing costs, homeowner’s association fees, taxes, and other government fees. This is important especially to those in the market for the first time. It will come in handy when you have to make a decision on a home that might require restorations or upgrades once bought.

The Take-Away

Getting pre-approved for a loan is an important step when shopping for a mortgage. It allows you to only concentrate on the property that you can afford. Lenders also get to take you seriously when you are bargaining on the rates. Your mortgage application also gets to be hastened since the pre-approval letter shows your income’s ability to pay off the loan.

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How Does Student Loan Debt Affect a Mortgage Approval

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Are looking forward to owning a house? You should know that mortgage companies comb through your credit history to evaluate how much of a risk you are. As such, if you have an outstanding loan, qualifying for a new loan facility can be tricky. So, exactly how does student loan debt affect a mortgage approval?

Basically, loan debts impact the two main factors that go into credit approval:

  • Debt-to-income Ratio (DTI)
  • Credit Score

How Student Loan Debt Affects Your Debt-to-income Ratio

Student Loan Debt Affects Mortgage ApprovalBefore your mortgage application can be approved, lenders check your financial records for your total debts against your income. This is what is known as the debt-to-income ratio. It factors your total monthly debt repayments and your pre income total.

Total debts include all income deductions that appear on your credit record. Such include child support, student loans, auto loans, personal loans, and credit card payments. It follows that the more indebted you are the higher your DTI will be and the riskier you are to lenders.

Suppose your monthly income is $3,000 and a recurring debt of $1,200 monthly. Your DTI is 40% ($1,200 divided by $3,000). Generally, lenders look for a DTI of between 36% and 43% or less. So, in this scenario, you will be in a prime position of getting approved.

However, if your student loan pushes your monthly debt to $1,500, your DTI rises to 50%  ($1,500 divided by $3,000), and getting a mortgage from a private institution becomes next to impossible. Your only reprieve is to try for a government-backed loan facility, such as FHA mortgages that accept up to a DTI of 50%.

Even then, you will be faced with stringent terms for the application to go through:

  • Large down payment
  • A large savings account or cash reserves
  • Extra income apart from the one used during loan application. This could be part-time payment or income from a seasonal contract.

How Student Loan Debt Affects Your Credit Score

If you are looking for a mortgage then you must have come across credit scores. These are 3-digit numbers that sum up your creditworthiness. One of the main credit scoring services, FICO, summarizes your financial risk on a range of 300 to 850 points.

Typically, lenders accept credit scores of 670 and above.

Below that score, you present too much a risk and creditors will be less likely to approve your mortgage application. Also, your credit score determines the rates that are available to you.

A score of 670 – 739 is good and will get you an ‘okay’ APR (annual percentage rate). Between 740 and 799, your score is indicative of ‘very good’ credit and gets you a mortgage at a much lower APR. However, for the best rates in the industry, you need a score of 800 and above which is considered ‘exceptional’.

So, how does your student loan debt figure into all this? The answer has to do with how credit scores are calculated. Your debt repayment history accounts for 35% of the score and lenders look for consistent on-time loan payments.

Further, 30% of your credit score factors into the total amount owed in all of your accounts. Seeing that a student loan debt represents credit that was utilized and never paid, means that your finances are overextended. As such, in the eyes of lenders, you are more likely to miss your mortgage payments, or worse still, default.

The Takeaway

Student loan debts present a challenge when shopping for a mortgage. For starters, you need to get on track with your payments so as to increase your credit scores. Also, consider getting a second job and keeping off new loans to reduce your DTI. Lastly, concentrate on growing your savings for when the time comes to put a down payment for your new home.

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