Sometimes, we get into serious financial binds. Bills are due and you don’t have the money, or there’s an emergency and you need cash immediately to deal with it. You could be under threat of being evicted or foreclosed on. Life sometimes hits all at once and we might be tempted to turn to the easiest source of cash: payday loans. Payday loans are bad for your finances. Here are some payday loan alternatives.
Of course, most people know how bad payday loans are. They charge astronomical interest rates and demand payment (plus interest, plus fees) quickly. Many payday lenders don’t even do a credit check: they verify your employment and that’s all they need to give you the cash. Payday loans are targeted at the most vulnerable who are expected to pay dearly for their situation.
But there are better ways to get cash than payday loans, even if you have bad credit. Here are some good payday loan alternatives.
Best Payday Loan Alternatives
Please read the below details for your attention:
Peer to Peer Lending
Peer to peer lending is a relatively new trend which was kickstarted by organizations looking to figure out how to provide funding for small businesses that cannot otherwise get funds. The way it works is that individuals put up money for others to borrow, then those funds are pooled and lent out to those who need the funds. They then pay the loan back, with interest, and the individual who lent the money gets their money back along with a percentage of the interest accrued.
Companies such as Peerform and Lending Club offer peer-to-peer loans for those who need them for a variety of purposes. They could be a good alternative to payday loans. However, your credit score will still affect the kinds of loans you can get. Interest rates tend to be high.
Credit Card Cash Advance
If you have a usable credit card, you can get a cash advance by going to an ATM and using your credit card to withdraw money.
Interest rates are slightly higher on credit card cash advances than on regular credit card purchases, and these cash advances may also have other fees associated with them. However, this is far cheaper than a payday loan. Interest rates range from 15-30%, depending on the card.
Personal Loan from a Credit Union
Large banks offer personal loans to those who qualify, but did you know that credit unions can sometimes have better interest rates and lower requirements? Many credit unions make a large amount of revenue from personal loans and will promote them heavily. You can even get special deals on personal loans if you ask!
Interest rates are lower than credit card cash advances, and personal loans may not be available to those with no credit history.
Help from Family/Friends
This might be difficult, and it’s a last resort for many, but if you’re truly in a financial bind, try calling in a favor. You might be able to get the relief you need with some help from friends or family.
Of course, don’t overuse these favors and don’t take them for granted. Other people have money problems as well, and if you don’t pay them back, it could cause problems down the road.
If you’re at the end of your rope, there are still better ways to come up with cash than a payday loan. If you owe utilities, try negotiating with the utilities company to see if you can pay your bills on a payment plan. If you owe rent, ask your landlord if you could pay at a later date.
You may also be able to refinance, consolidate, or negotiate payment plans on debts you owe. For many people, student loan refinancing is a popular way to pay less per month on student loans. If you can’t do that, try and negotiate a forbearance on outstanding loans.
Do your best to avoid turning to payday loans. In many cases, it’s better to take the hit to your credit score than to get trapped in a debt spiral with payday loans.
5 Things You Can Do Now To Improve Your Credit In The Long Term
Many people ask “how can I improve my credit now” looking for tips that will help them put 100 points on their credit score in a month. Now, depending on your credit score situation, you may be able to do this. However, if you’ve got a 680+ credit score, it’s highly unlikely that you’re going to be able to add so many points in such a short amount of time.
Instead, think about how you can improve your credit in the long term in order to get closer to that coveted 850 credit score. Here are some tips to help you improve your credit.
Start snowballing your debt.
Snowballing your debt is a debt elimination strategy espoused by personal finance expert Dave Ramsey. This strategy essentially has you pay off your debts starting with the smallest balance. What you do is simple: set up minimum payments for all your current debt except your smallest debt balance. You pay as much over the minimum as you can afford on your smallest debt balance. This way, you start eliminating debt one at a time. When one piece of debt is paid off, you take what you were paying on that debt and allocate it toward the next smallest balance.
This debt elimination strategy is effective for several reasons. First, it focuses on getting rid of each debt item and freeing up more cash to pay down the larger debt balances. Second, it takes your mind off of the more expensive debt and keeps you focused on the long term goal: being debt free.
As an added tip: paying down credit cards will have a bigger effect on your credit score than paying down nearly any other type of debt. If you’re concerned with your credit score, get rid of your credit card debt as soon as possible!
Set up automatic payments for as many bills as possible.
35% of your credit score is determined by your payment history. Most people have a lot of different bills they need to pay, and it can get hard to manage. Automatic payments takes the brainwork out of paying your debt obligations. Whether you’re paying the minimum balance or you’re trying to get rid of the debt ASAP, automatic payments can help make sure that you never miss a payment.
A good payment history isn’t just important for preventing your score from dropping. The longer you go without missing any debt payments, the better it is for your credit score. Most people should see their credit score increase over time so long as they’re making all their payments on time and not being overzealous with their borrowing.
Request credit limit increases (but don’t change your spending)
Another part of your credit score is based on how much debt you owe in relation to your available credit, or your credit limits (when referring to credit cards). The ratio of your card balances and your credit limit is called your credit utilization ratio. If you have a credit limit of $5,000 and you currently owe $2,000, your credit utilization ratio is 40%. The lower this ratio, the better, and generally speaking you want a credit utilization ratio under 30%.
Increasing your credit limit is a way to “hack” this. Although getting a credit limit increase will reduce your credit score in the short term, the reduction to your credit utilization ratio will be beneficial in the long term so long as you don’t change your spending habits! For this reason, many financial advisors don’t actually recommend this because some people may believe that they have more money available at their disposal. You, however, should know that this is not true and that just because you have more credit doesn’t mean you should borrow more.
Dispute any items on your credit report that seem suspicious to you.
Sometimes, credit bureaus and lenders make mistakes. People often pay for these mistakes and don’t even know it because their credit report might have errors that they’re unaware of!
In order to have as much control over your credit as possible, you need to be aware of what’s actually on your credit report. If you haven’t, get your free annual credit report from each of the three credit bureaus. You’re entitled to receive a credit report from each credit bureau once per year by law. Learn more about the Fair Credit Reporting Act (FCRA)!
Once you’ve taken a look at each of your credit reports, look for items that you don’t recognize. If you see any, it’s time to start the dispute process. To do so, you’re going to need to call each of the credit bureaus that is reporting the item in question and file a dispute claim. This process can take some time. If the item in question is indeed incorrect or fraudulent, then you can have that item removed.
One ounce of prevention is worth a pound of cure, and the best way to prevent problems from occurring on your credit report is to make sure that nobody can take out debt in your name.
This tip isn’t really going to improve your credit score: instead, it’s going to prevent it from going down in case your identity gets stolen. If your credit is frozen, it means that nobody (not even you) can take out new debt in your name. This means that you can’t open new credit cards, get a new mortgage, or borrow any more money.
To freeze your credit, you will need to contact each of the three credit bureaus. To do so, click the below links to be redirected to the Equifax, Experian, and TransUnion websites and follow the directions provided.
If this sounds detrimental, don’t worry: it’s not. You can unfreeze your credit at any time by contacting each of the three credit bureaus, similarly to how you froze your credit initially. It takes some time before your credit can be unfrozen, but once it is, you’ll be able to take out loans and open new credit cards again.
How To Build Your Credit If Your Credit Is Bad
Bad credit affects millions of Americans and many of them don’t know how to get out of the hole. Having bad credit can prevent you from getting home loans, car loans, an apartment, and could even bar you from getting certain types of jobs. People with bad credit end up paying higher interest rates on loans, as well. Needless to say, bad credit could make your financial life much harder.
There are ways for people to repair their credit, even if they are having trouble keeping up with their debt. Here’s how you can start over and rebuild your credit, even if your credit score is currently in the dumps.
Get your credit reports and read them in detail.
Your credit report has all the information you need to start repairing your credit now. It’ll include your payment history, as well as any items that are past due, in default, or in collections.
There are three major credit bureaus in the United States: Equifax, Experian, and TransUnion. All three of these bureaus are required by law to provide you with a free credit report once per year. If you’re ready to start repairing your credit, then get all of these reports and read them.
Without reading your credit report in detail, you can’t possibly know what is affecting your credit score. The biggest problems that you might find on your credit report are items in collections, items in default, past due items, missed payments, and high utilization ratios on your credit cards.
Other issues that can affect your credit score drastically are tax liens, foreclosures, and bankruptcies. However, these are almost never a surprise to anyone. If you unexpectedly find these items on your credit report, or any other item that you don’t recognize, then it’s time to start the dispute process.
Dispute any items on your credit report that you don’t recognize.
Credit bureaus are run by people who get information from other people who work for loan servicers and lending institutions. For this reason, it’s not uncommon for people to have items on their credit report that should not be there.
Typically, these amount to clerical errors or mistaken identity. If you see anything that shouldn’t be on your record, it’s time to start the dispute process. Before you do, we recommend that you contact the loan servicer and ask them about the loan in question. They should be able to confirm whether or not the loan belongs to you, and if it doesn’t, then you can start the dispute process with the credit bureau with confidence that it will eventually be removed.
However, you may find debt on your credit report which DOES exist in your name, even though you may have no recollection of taking out that debt! This is a tell-tale sign of identity theft, and in this instance, it’s time to take action. Contact the credit bureaus that are reporting the fraudulent debt and have them begin the dispute process. In the meantime, ask them to freeze your credit so that no more loans can be taken out in your name.
Settle any items in default or in collections.
Items in default or collections can have a major negative effect on your credit score. As a result, it’s important to make sure that you get the debt settled right away.
Settling the debt does not necessarily mean making payments toward it! Making those payments won’t make any difference to your credit score as you’ve already got a black mark on your report. Instead, you want to make sure that you have an agreement with the owner of the debt. You’ll have to negotiate these items with the lender by calling them directly. If an item is in collections, it means that the original lender is no longer servicing the debt and you’ll have to go to the collections agency that is responsible for collecting the money.
In general, companies would rather get some of the money back rather than none, which gives you some room in negotiations. They’re generally understanding of a difficult financial situation and simply want to get as much of their money back as possible. By negotiating with the agency you may be able to reach an agreement to pay off the debt for less than you owe.
You may be able to get some of these items removed by asking the creditor, but in general, items in default or items that go into collections will stay on your credit report even after you settle them. They go away after 7 years, though, so they won’t be around forever, and the more time that passes from the original date of delinquency, the less weight it carries.
Calculate the remaining debt that you have.
Now that you understand the contents of your credit report, it’s time to get an estimate of how deep in debt you really are. Your credit report will also have some important information about your debt balances. They may not be 100% accurate, but that’s okay: simply contact the lender responsible for the debt and they will be more than happy to tell you how much you owe them.
Tally up all your debt and see how much you owe. You can only move forward when you know exactly what you owe. From here, it’s time to make a plan to pay it off.
Make a plan to pay off your remaining debt.
Paying down your debt is the next step to improving your credit score. Your credit score is based in large part on your payment history and the amount of debt you owe. By creating a good payment history and reducing your overall debt burden, you will see positive changes in your credit score that add up over time.
One popular strategy is called snowballing. Made popular by financial guru Dave Ramsey, snowballing your debt is when you pay the minimum payments on all your debt except for the smallest balance, which you put as much money into paying off as possible. Once that balance is done, you move onto the next smallest balance. Keep repeating this until all your debt is paid off. This process can take years for some people.
But, sometimes the debt you owe is simply too much. Your interest rates might be too high, or you might not be able to afford even the minimum payments. Don’t worry: you have options.
Options to help you pay down debt:
this is when you and the lender agree to a new loan with different terms, usually with a different payment schedule and interest rate. This can be a good option if your payments are high due to a very high interest rate.
this is where a company lends you money to pay off your previous loans so you’re only responsible for one large loan to the consolidation company. This can be a good option if you need lower payments on your debt.
Balance transfers (for credit cards):
Some banks allow you to put the balance of one credit card onto another, often with low introductory interest rates, so that you can more easily pay off that card. Make sure to read the fine print of the balance transfer agreement!
Pay any and all payments on time, no exceptions.
Once you’ve committed to making payments on your debt, make sure that you make those payments! Missing a payment could seriously harm your credit score. If at all possible, set up automatic payments with your lender and your bank so that you never miss a payment.
If you can’t make a payment due to lack of funds, make sure to speak with your creditor. They will likely help you, since they’d rather get something now rather than nothing. They may be able to change your payment date or agree to accept a larger payment later on. You never know until you ask, and it’s much better than simply leaving a debt to go into default.
If you’re wondering why you should spend the time and effort repairing your credit, learn about the benefits of having an 850 credit score!
What Credit Score Do You Need To Qualify For A Mortgage?
If you’re gearing up to purchase your first home, or you’re looking to move out of your starter home and into a larger place, you may have questions about how to qualify for a mortgage. Mortgages are one of the most common types of loans. However, they’re treated a bit differently than other loans, even those of a similar size such as business loans.
One of the criteria that bankers use to determine whether or not someone qualifies for a mortgage is their creditworthiness. Your credit score is a numerical value meant to indicate your level of creditworthiness, so it stands to reason that people with low credit scores are unable to qualify for a home loan.
So what credit score do you need to qualify for a mortgage? Is there a minimum credit score requirement for a mortgage? Let’s find out.
How Mortgages Work
What Is A Mortgage?
A mortgage is a loan backed by the property you’re purchasing. The home that you are buying acts as collateral and, in the event that you default on your mortgage, the lender can take back the house through foreclosure. Mortgages are paid back in installments with interest.
The first thing to understand is that we are referring only to mortgages in the United States. Other countries do mortgage loans differently, as they have different laws that govern how banks and other lending institutions can provide mortgages. If you live outside the United States, some of these won’t apply.
Mortgages are not a new invention, but they didn’t become commonplace for average citizens until the late 20th century. The mortgage as we know it was first created by the Federal Housing Administration (FHA), who created mortgages with low down payments in order to allow more people to afford a home. The down payment is a lump sum paid upfront to reduce the amount of the loan. A typical down payment is 20% of the value of the home, but there are mortgages that require lower down payments.
How Are Mortgages Paid?
When you pay for your mortgage, you pay for the principal (or the money borrowed), the interest, property taxes which are held in escrow, and insurance. Private mortgage insurance is also part of the payment if you put down less than 20% of the home’s value.
Mortgage loans, just like most loans paid in installments, amortize. Amortization is the gradual repayment of interest accumulated with the payment of the principal. You start by paying mostly interest, and then over time, more of the payment goes to the principal. This is important to understand because this affects how much equity you have in your home as you pay down your mortgage. Equity refers to your home’s value, minus the amount of principal (not interest) you still owe on your mortgage.
Mortgages and Interest
Mortgages tend to be very long-term loans. The most common mortgages are 15-year, 20-year, and 30-year mortgages. These mortgages are popular because your monthly payment gets lower the longer you stretch out the mortgage term. Because of this, though, many mortgage lenders will end up paying more than the value of the home (at the time of purchase) in interest.
There are generally two types of mortgage loans: fixed-rate mortgages, and adjustable-rate mortgages. Fixed-rate mortgages charge a flat interest fee that never changes throughout the life of the loan. Once you get a fixed-rate mortgage, your interest rate is locked in for the term. Adjustable-rate mortgages have interest rates that change with the market.
Both types of loans have pros and cons. Fixed-rate mortgages have higher initial interest rates, but they allow for a stable home loan payment that doesn’t change regardless of market conditions. Adjustable-rate mortgages tend to have lower at the outset, but if something happens (such as the Fed raising interest rates, or a credit crisis) then you can see your rates skyrocket.
Adjustable-rate mortgages have gotten lenders into trouble in the past when interest rate changes mean that they can no longer afford their payment. Home loan defaults were a major contributor to the 2008 financial crisis, and this caused many lenders to look at the riskiness of the loans they gave out. As a result, mortgages started to have more stringent requirements, one of which is good credit.
How Credit Scores Work
Your credit score is a 3-digit number between 300 and 850 that aims to assess how creditworthy you are to a lender. You don’t just have one credit score: you have multiple credit scores, all used by different lenders. However, the credit scores you’re given by credit bureaus and credit score sites such as CreditKarma will give you a good idea of what other lenders see.
Your credit score uses data from your credit report to calculate your score. Credit scores are calculated using 5 components, which are:
- Payment history. Have you made all your payments on time? Do you have past due payments? Are you currently in default? Lenders care most about whether or not their loans were paid on time.
- Amounts owed. How much of your available credit are you borrowing? How large are your loans in total? The more you’re borrowing, the less creditworthy you are.
- Length of credit history. How long have you been borrowing for? How old on average are your credit accounts? How old is your oldest and newest account? The older, the better.
- Credit mix. Do you have a variety of different types of loans? A wider variety of loans indicates creditworthiness, as it shows that the borrower can handle different types of debt.
- New credit. Do you have a lot of new credit accounts? Too many new credit accounts can hurt your credit score.
The higher your credit score, the more access to credit you have. There are benefits to having a perfect 850 credit score! However, your credit score is far from the only factor used in determining whether you qualify for a mortgage.
How To Qualify For A Mortgage
What Do Lenders Like To See?
- Stable income for at least two years. Employment is generally seen as a plus, although self-employment can be used if you have proof of stable income over the past two years. The more, the better, particularly during times when credit is tight.
- A low debt-to-income (DTI) ratio, which is the percentage of monthly gross income that is used for debt payments. Typically, mortgage lenders won’t give a mortgage to someone with a debt-to-income ratio above 43%, but that’s an absolute max with 36% being seen as more attractive. Mortgage lenders want to see a DTI ratio of much lower than that, particularly if you’re not making a substantial down payment.
- A clean payment history. If you’re missing payments, particularly credit card, rent, or previous mortgage payments, this could be a knock on your application and could prevent you from getting a loan. Generally, they’re looking at the past two years of your credit history (rather than the 7 years that your credit report keeps).
- A high credit score. We’ll discuss this further in depth in the next section.
What Credit Score Do You Need To Qualify For A Mortgage?
For most private loans, there is no absolute minimum credit score that you need to qualify for a mortgage. The best interest rates are given to people with credit scores above 760, or people with “excellent” or better credit. A good credit score can save you a significant amount of money on interest over the life of your loan.
There are some types of loans that do have a credit score requirement, though, and most of them come from the government.
To get a low down payment FHA loan (3.5% down) as a first-time home buyer, you need a FICO score of at least 580. You can qualify for an FHA loan with a lower score, but you’ll need to put at least 10% down. You can do this with properties that have 4 or fewer units in them, and you must live in the house you purchase.
VA loans don’t have a minimum credit score, however the government is not the issuer of VA loans. Instead, they simply guarantee them. A typical VA lender will look for someone with a credit score of at least 580 to 660.
If you want a home loan, but think your credit score is preventing you from qualifying for one, you may need credit repair. Check out The Credit Pros’ credit repair options to see if credit repair is right for you!
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