Say you’re interested in getting your first car. Or your first house. Your credit score plays a significant factor in these decisions. And a difference of just 25 points could save you tens of thousands of dollars. Moreover, a low score can make it impossible to get approved. 

You might want to work on building your credit score. However, the task can be daunting. Getting a credit card is one of the best ways to improve your score. But if you can’t get approved for one because of your score, then how can you even work on your credit score? 

Here arrives the secured credit card. Lenders are more likely to offer secured credit cards since they are much less risky than normal cards. Getting a secured credit card helps kickstart your credit-building journey.

What Is A Secured Credit Card?

A secured credit card is a credit card protected by a deposit. This deposit acts as the “collateral,” protecting the lender from any risks that you don’t repay your card. 

For example, say you open a secured credit card and deposit $500 towards your account. Your lender will let you spend up to $500 on your credit card. Say you end up spending up to $500 of your limit and now can’t pay the lender back. The lender essentially hasn’t lost any money since you paid $500 beforehand.

Since secured credit cards are basically no risk for lenders, they are usually willing to issue them for anyone. Even as someone with poor to no credit history, you’ll likely be able to open one. 

If you show good repayment habits with your secured card, you’ll eventually graduate into a standard credit card and get your initial deposit back. This deposit simply serves to protect the lender until you either (1) graduate or (2) close your card. In both cases, you’ll get your money back. 

However, if you fail to repay your secured credit card, you won’t be getting that deposit back.  

Why Are Secured Credit Cards Useful?

Remember that credit cards are one of the best ways to start building your credit score. By getting a credit card, you can possess good repayment habits, increase your total credit limit, and improve your credit mix. These factors all help to improve your score. 

However, if you have poor or no credit history, it can be hard to get a standard credit card.

Secured credit cards are so useful because they allow anyone to get back on their feet even if they have a poor credit score. Since lenders face virtually no risk in giving these cards out, it’s really in your hands to use them wisely. 

You control your destiny once you get your first secured credit card. They are the first steps you take in setting your credit score in the right direction for the future. 

Secured Credit Cards Vs. Unsecured Credit Cards

The main difference between the two is the collateral. You don’t need a deposit to open an unsecured credit card. However, secured credit cards require some initial investment to begin. Simply put, unsecured credit cards are your typical, run of the mill standard credit cards. 

The reason comes down to risk. The higher your credit score, the less likely you are to default on your credit cards. Thus, lenders are more likely to approve top of the line credit cards for those with good or excellent credit. 

However, with a poor credit score, lenders fear you might not pay back the money you owe. Thus, they’re not as likely to approve you for a standard card. Instead, they’d like to minimize their risk by approving you for a secured credit card instead. 

Broadly speaking, secured credit cards are for those with poor to no credit history. Unsecured cards are for those with good to excellent credit. 

Other differences between them are that secured cards almost always have fewer perks than unsecured cards. Some of these standard credit cards even offer 5% cashback for your purchases or free flights. You won’t get any of these fantastic benefits with a secured credit card. 

Unsecured credit cards are worth the effort.

Secured Credit Cards Vs. Debit Cards

If you know how debit cards work, they should sound eerily similar to secured credit cards.

In brief, a debit card is just cash in the form of a plastic card. For a debit card, you can only spend up to the amount of money you’ve deposited into your checking account. Similarly, for a secured credit card, you can only use up to the amount you’ve placed into your account beforehand. 

So, if they work the same in principles, what differs?

The primary thing you need to remember is that secured credit cards can help improve your credit score. Your debit card doesn’t influence your credit score. Remember that when you use your credit card, you’ll still have to make monthly repayments. These behaviors factor heavily in your credit score. 

In fact, timely payments take up 35% of your FICO Score 8 calculations. Maintaining good habits with your secured credit card can help your credit score over time. 

Who Are Secured Credit Cards Best For? 

Secured credit cards are best for those with poor to no credit history. Remember that lenders are willing to approve secured credit cards for even those with little credit history. 

If you’re looking to start your credit score rebuilding journey, secured credit cards are one of the best ways to begin.

Wait—Why Is My Credit Score So Important Again?

Your credit score plays a critical role in deciding your approval odds and interest rates. For example, a minor 25 point credit score boost could save you thousands of dollars on your mortgage. 

Let’s glance at the table below, showcasing the average fixed interest rates for a 30-year $100,000 mortgage at different credit scores.

As we can see, bumping your credit score up just 25 points from 640-659 to 660-679 could save you thousands of dollars. That’s a lot of savings! And a pretty small improvement overall. 

Now, say you worked hard and pushed your score up somewhere to 760-850. This move alone could save you about $20,000. 

Does this logic apply to credit cards? Absolutely. 

Credit card issuers will award the best credit cards to those with top credit scores. These amazing credit cards can grant you free gift cards, hotel stays, and even flights. However, you’ll never be able to tap into these excellent benefits with a poor credit score. 

Also, a low credit score makes it challenging to get approved for a mortgage, auto loan, and more. It might even make it difficult to rent an apartment. Thus, monitoring and improving your credit score is vital. 

You can start building your credit score with a secured credit card today!

Best Secured Credit Cards

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Frequently Asked Questions

John Ta

John Ta is an undergrad at the University of Pennsylvania and the founder of Penn’s first undergrad personal finance club, Penn Common Cents. As a first-generation college student, he had to learn everything about personal finance on his own and seeks to mend the financial literacy knowledge gap seen almost everywhere. John is currently studying for an MS in Chemistry and a BA in Physics (business & tech concentration), Biochemistry, and Biophysics and is interested in the intersections of finance and healthcare.

The post Secured Credit Cards appeared first on Finance Plan Today.

What Is A Credit Score?

Your credit score is a number that lenders use to gauge your credit risk, or how likely you are to repay your loans. A high credit score shows lenders that you will probably pay back your debt, whereas a low credit score suggests the opposite. 

A low score also indicates that you have a high risk of default, which is when you decide that you can’t pay back the loan you took out. Defaults are bad for both you and the bank. They will ruin your credit score, and the lender loses a lot of money—a lose-lose situation.

Defaults and missed payments can cost lenders a lot. Thus, they are willing to give extra benefits to those with high credit scores because of the low default risk.

Your credit score plays a significant role in your life, especially when you’re about to apply for student loans, mortgages, auto loans, or credit cards. 

What Credit Scores Exist?

Unfortunately, there’s not just one magical credit score out there. That would make life too easy.

Lenders tend to focus on three:

• FICO Score 8
• VantageScore 3.0
• Their own credit score models

The FICO Score 8 is the gold standard credit score and is used by about 90% of the top lenders. Comparably, the VantageScore 3.0 is newer and isn’t used as much as the FICO Score, but has gained prominence in recent years. 

Moreover, most lenders also have in house credit score models that are hidden from the public eye. Therefore, we will only cover the FICO Score 8, and VantageScore 3.0 since information about these models are public.

While a 700 FICO Score and 700 VantageScore don’t mean the same thing, changes to one score will likely cause similar changes in the other. 

Why Is Your Credit Score So Important?

Your credit score plays a critical role in deciding your approval odds and interest rates. Furthermore, in terms of mortgages, a minor boost of 25 points to your credit score could save you thousands of dollars. 

Let’s glance at the table below, which showcases the average fixed interest rates for a 30-year $100,000 mortgage at differing ranges of credit scores.

Bumping your credit score just about 25 points from 640-659 to 660-679 could save you about $8,000. That’s a lot of savings for such a small bump to your credit score.

Now, say you pushed your score to somewhere to 760-850. This move could end up saving you about $20,000. Crazy!

We’ve been talking about mortgages, but what about credit cards?

The best credit cards are available to those with higher credit scores. Lenders are willing to reward their consumers with the lowest risk of default since the defaults cost far more than a few more cashback percentage points.

Moreover, a low credit score could make it hard to get approved for a mortgage, credit card, and student loan. It might even make it difficult to rent an apartment or get a job. Consequently, being proactive about your credit score is vital. 

What Is A Good Credit Score?

What defines a “good credit score” honestly differs from lender to lender and from model to model. However, a good score is typically considered “middle-of-the-pack.” Not as good as an excellent score, but better than a poor score.

What Is A Good FICO Score?

FICO Scores are subdivided into the following five tiers:

• Exceptional: 800-850
• Very good: 740-799
• Good: 670-739
• Fair: 580-669
• Very poor: 300-579

In 2019, the average FICO Score in the United States was 703, meaning the typical American had a good credit score. According to Experian, only 8% of those with good scores are likely to default on their loans. Thus, those with good scores generally start tapping into some of the better products available on the market. 

What Is A Good VantageScore?

VantageScore 3.0 is also similarly divvied up into groups:

• Excellent: 781-850
• Good: 661-780
• Fair: 601-660
• Poor: 500-600
• Very poor: 300-499

Notice that the range for good VantageScores varies much more than that for good FICO Scores. Despite both scores ranging from 300 to 850, this differentiation just goes to show just how much the two models differ from one another. 

Since good VantageScores seem to take the upper end of the spectrum, it’s no surprise that applicants with these scores can get approved for more competitive products. 

Wait, Aren’t There More Credit Scores? 

Yes, there are many more types of credit scores with their own definition of “good.” However, given that these models’ scoring systems are kept under wraps and aren’t as widely used as the FICO and VantageScore, it’s not worth worrying about them too much. 

Most major swings in your FICO or VantageScore will reflect across all your scores. Don’t start watching every score possible with eagle eyes. It’s not worth your time and energy.

What Is A Good Score For A Mortgage?

Lenders typically see FICO scores above 760 as enough to qualify for the best rates and terms available. At this level, you’ll get the lowest interest rates. Lenders view you as a safe investment and treat you nicely.

Any score above 760 won’t help you that much. It’s just extra credit at that point. 

Mortgages also come in all shapes and sizes, and your credit score still plays a significant role in influencing factors. For example, FHA loan down payments depends on your credit score. 

• Credit score greater than 580: 3.5% down payment
• 500-580: 10% down payment

Moreover, you can apply for USDA mortgages with a good credit score. USDA loans offer low-interest rates, don’t even require a down payment, and have other great perks.

A good credit score will save you money and help you qualify for the best mortgage options available. 

What Is A Good Score For An Auto Loan?

Most people will need to take out a loan when getting their first car. Thus, your credit score unsurprisingly plays a significant role in deciding your approval odds and interest rates.

Generally speaking, having a credit score of 660 at minimum will qualify you for competitive rates. A bad credit score will lead to much higher interest rates and make car insurance premiums skyrocket. 

Once again, a good credit score will save you thousands of dollars in the long run.

What Is A Good Score For A Credit Card?

Although it’s hard to quantify precisely what score is needed to get the top credit cards available, the trend is that the higher your score, the easier it is to get the best cards around. 

However, you’re eligible for some great credit cards once you start hitting a score around 700. 

What Affects My Credit Score?

Several factors are involved in calculating your credit score. However, since the FICO Score and VantageScore are different models, they use various components and weights. 

Though drastic changes to one score will lead to similar changes in other scores. For example, making a late payment 30 days past the due date will hurt your FICO and VantageScores. 

FICO Score

The FICO Score is the oldest and most widely used credit score model. It’s broken down into five different categories:

• Payment history (35%) – have you missed any payments?
• Credit utilization (30%) – do you use less than 30% of your total credit limit?
• Average account age (15%) – how old is the average age of your credit? 
• Credit inquiries (10%) – how many credit cards have you opened in the past year?
• Credit mix (10%) – do you have a good combination of credit cards, loans, and other accounts?

One of the biggest factors differentiating between the FICO and VantageScore models is that your FICO Score factors in all open and closed accounts in your account age. The VantageScore 3.0 only looks at open accounts. This factor can lead to stark differences between the two scores, especially after closing an older account. 

VantageScore

The VantageScore 3.0 is a model that has more factors and awards individuals for good debt-paying behaviors. For example, by paying off your mortgage, you’ll reduce your debt, boosting your VantageScore 3.0 but not your FICO Score. 

• Payment history (40%) – have you missed any payments?
• Average account age and type of credit (21%) – how old is the average age of your credit?
• Credit utilization (20%) – what percent of your total credit limit do you use? 
• Total balances/debt (11%) – how much debt do you owe?
• Recent credit behavior and inquiries (5%) – how many credit lines have you opened in the past year?
• Available credit (3%) – how much credit do you have?

How Can I Monitor My Credit Score?

Watching your credit score is one of the best ways to start improving it. By keeping your eyes on your credit score, you can:

1. See your credit score building efforts come to life
2. Guard against identity theft
3. Find mistakes in your credit score

Some credit monitoring companies like Credit Karma and Credit Sesame offer their services completely free of charge. They also provide additional services and tools, such as debt monitoring, credit score simulators, and free tax filing.

How Can I Get A Good Credit Score?

We all want to improve our credit score, but it can seem like a daunting task. 

If you’re trying to increase your credit score, it’s essential to make sure you first fully understand how your credit score works. Then, make sure you have looked into tools such as Credit Karma and Credit Sesame to ensure you have ways to watch your credit score. 

Once you’ve done those two steps, you can start exploring ways to help your credit score.

Getting your credit score up to a good range could save you thousands of dollars and give you lower interest rates. You can use a few techniques to easily boost your credit score, but they vary by how much time you have before you plan on using your credit score. See the timeline below! 

Check Your Credit Report For Errors

Sometimes the credit bureaus make mistakes on your credit report. The Federal Trade Commission estimates about 20% of consumers have errors in their credit scores. 

Unfortunately, it takes months for errors to be corrected.

Thus, if you plan on using your credit score, make sure to thoroughly examine your credit six months beforehand. This timeframe will give you plenty of time to file a dispute.

Pay Off Your Credit Cards

Your credit card utilization is worth 35% of your FICO score. This ratio is representative of your credit use divided by your total credit limit. 

The lower your credit utilization, the higher your credit score.

The great thing about this utilization ratio is that it resets every month. Therefore, you can minimize your utilization in the months before using your credit score.

One to three months beforehand, pay off all your credit cards weekly. This move will keep your utilization ratio near 0% when your card company reports your utilization to the credit bureaus.

A 0% utilization ratio makes the FICO and VantageScore algorithms very happy, and you’ll see your credit score quickly rising. 

Become An Authorized User

Say you have a poor credit score, but your dad has an excellent one. He has had a credit card for over 30 years, hasn’t missed a single payment, and has a giant credit limit.

If your dad adds you as an authorized user (AU) to his credit card, all of his credit cards’ history add to your credit report. This excellent history will give your score an enormous boost. Simply put, your credit score will piggyback off of other’s excellent credit histories. 

Becoming an AU will affect your credit score either immediately or in a few weeks. Given that AUs can really help your score, it’s best to become one at least a month beforehand to ensure the effects settle down. 

Use Credit Score Boosting Tools

Disclaimer: some of these tools may cause unintended consequences. For example, Experian Boost has been noted to worsen your debt-to-income ratio.

Experian Boost is a free tool that factors on-time utility and telecom payments that aren’t typically used in credit score calculations. This method will likely give your VantageScore 3.0 an immediate boost.

Experian Boost effects aren’t permanent, and you can remove them from your score at any time.

What Can I Do To Get Excellent Credit?

You’re shooting for the stars now. If you want to achieve an excellent credit score, make sure you have read the previous section first. The techniques here will hopefully help you fill in the cracks. 

Open A Credit Card With Good Habits

Opening another credit card on your history can be beneficial. Presuming you maintain excellent credit card habits, you’ll rake in credit score boosts.

Firstly, your credit utilization ratio will decrease. This new card will increase your total credit limit and increase the denominator in your credit card ratio. Thus, your ratio becomes smaller. 

Next, if you maintain a good repayment history, then the payment history portion of your credit score will also improve.

Finally, adding a credit card could improve your credit mix.

However, opening too many credit cards could hurt your credit score. Every time you apply for a credit card, the lender will do a “hard pull” on your credit report, which will temporarily ding your score for 24 months.

Getting a new card has a tangible effect on your credit score after just a few weeks, but positive effects increase the longer you wait. Note that everything we’ve just described also applies to secured credit cards.

Ask For Credit Limit Increases

Remember that your credit utilization comprises 35% of your credit score. 

By contacting your existing credit card issuers and asking for a credit limit increase, you will effectively decrease your credit utilization ratio. The lower your ratio, the higher your credit score.

It also doesn’t hurt to try. The worse they can say is no, and these few extra points could help bump your credit score.

Do Lenders Only Look At Your Credit Score?

Definitely not. Depending on what you’re applying for, lenders will typically ask for more information. Other factors include your debt-to-income ratio, income history, down payment, and loan-to-value ratio, which are critical additional measures to gauge your default risk. 

For instance, when applying for a mortgage, lenders will request for everything. Considering they’ll be giving you hundreds of thousands of dollars, they want to make sure that they can get that money back. 

Whereas when applying for a credit card, the lender typically won’t be giving you too much money. Thus, they’ll generally only delve into your credit score and income. 

Frequently Asked Questions (FAQ)

John Ta

John Ta is an undergrad at the University of Pennsylvania and the founder of Penn’s first undergrad personal finance club, Penn Common Cents. As a first-generation college student, he had to learn everything about personal finance on his own and seeks to mend the financial literacy knowledge gap seen almost everywhere. John is currently studying for an MS in Chemistry and a BA in Physics (business & tech concentration), Biochemistry, and Biophysics and is interested in the intersections of finance and healthcare.

The post What Is A Good Credit Score? appeared first on Finance Plan Today.

In 2016, over 10% of people over the age of 16 reported that they were victims of identity theft last year. In fact, identity theft can ruin your life. Having the ability to watch your credit score is vital to fight identity theft. 

Free tools such as Credit Karma and Credit Sesame have come out in the past decade providing robust credit score tracking. However, which one comes out on top? What are each’s pros and cons? Are they safe to use? 

In this article, we’ll compare the two platforms and decide if either is better than the other.

Overview: Credit Karma Vs. Credit Sesame

	Credit Karma	Credit Sesame
TransUnion Reports
Equifax Reports
Experian Reports
FICO Score Updates
VantageScore Updates
Monthly Credit Score Updates
Identity Theft Insurance
Tax Filing Service
Credit Simultator
Credit Improvement Tool
Debt Analysis Tool

Read our full Credit Karma review!

Read our full Credit Sesame review!

What Is Credit Karma?

Credit Karma is a personal finance company offering robust tools and benefits such as:

• Free monthly TransUnion and Equifax credit scores 
• Yearly free full credit reports
• Credit cards, loans, and other product recommendations
• Free-to-use tax filing tools
• Credit simulators 
• Calculators
• High-yield savings account

Founded in 2007, they’ve since then amassed over 100 million users and established a firm footing in the personal finance world. You’ve even probably seen some of their ads on TV. Moreover, all of their products are entirely free to use. 

What Is Credit Sesame?

Launched in 2010, Credit Sesame is a rapidly growing credit and loan company that provides:

• Free monthly TransUnion credit score (VantageScore 3.0)
• Alerts when your credit score changes
• Free credit monitoring
• Free identity theft insurance covering up to $50,000
• Debt tracking and recommendations

Their tools are handy, helping to both safeguard and estimate your credit score in a pinch. 

What Types Of Credit Scores Exist?

Unfortunately, there’s not just one magical credit score out there. Though, lenders typically focus on three:

• FICO Score 8
• VantageScore 3.0
• Their own personal credit score models

The FICO Score 8 is the most widely used credit score. Comparably, the VantageScore 3.0 isn’t used as much as the FICO Score but has gained prominence in recent years. The most important takeaway here is that they use entirely different models and weights to calculate your numerical credit score. 

For example, FICO weighs payment history at 35%, whereas VantageScore only holds it at 32% of your credit score.

Furthermore, many lenders also have in house credit score models that are hidden from the public eye. Therefore, we will only cover the FICO Score 8, and VantageScore 3.0 since information about these models are public.

While a 700 FICO Score and 700 VantageScore don’t mean the same thing, changes to one score will likely cause similar changes in the other. 

Pros & Cons Of Credit Sesame

Credit Sesame offers useful and free-to-use credit monitoring services. Moreover, their unique identity theft insurance helps differentiate them from their competitors. 

However, their free version only offers VantageScore 3.0 credit scores, which aren’t used as often as the FICO Score 8. Moreover, they only offer credit scores from one of the bureaus, TransUnion. Since each bureau is independent of each other, you can’t see mistakes on your Experian and Equifax credit reports.  

They also don’t offer FICO Scores, but this is a problem almost every free-to-use credit monitoring platform faces. 

Pros:

• Free to use
• Mobile app is user friendly
• Excellent credit score update features
• Identity theft protection
• Provides information about your debt

Cons

• Only provides information from TransUnion (VantageScore 3.0)
• No FICO Scores
• Only one TransUnion credit report a month

Pros & Cons Of Credit Karma

Generally speaking, Credit Karma is a great way to monitor your credit score. Though, not only do they offer a wide variety of tools for you to use to build your credit score but also provide countless other perks.

Even their cons are some problems that almost every other free-to-use credit monitoring company faces. For example, no free-to-use credit monitoring company has free FICO scores. 

However, one of Credit Karma’s flaws is its advertising. Since targeted ads help them make money, they will put them in front of you until you bend. A small price to pay for their endless free-to-use tools.

Moreover, they only offer credit scores and reports from two of the bureaus. You won’t be able to catch mistakes on your Experian credit report here. 

Pros:

• Free credit score monitoring and reports
• Robust and free-to-use credit score tools 
• Free tax filing software
• Calculators
• Personalized product recommendations
• Premium version has a lot of benefits

Cons

• Relentless advertising
• Doesn’t provide Experian scores
• No FICO scores

Head-To-Head: Credit Karma Vs. Credit Sesame

Credit Karma and Credit Sesame both have their fair share of strengths and weaknesses. 

Where Credit Karma Bests Credit Sesame

Credit Karma offers far more perks and benefits for using their platform. For example, while both provide excellent credit monitoring tools, Credit Karma also has Penny, the robo personal finance advisor, and a credit score simulation tool. 

If you’re looking to buy a home, open a credit card, or save money, Penny can help guide you. Likewise, if you plan on making financial moves that you think could impact your credit score, the simulation tool can give you a sense of what’ll happen. 

Moreover, Credit Karma has free-to-use tax filing. Credit Karma Tax lets you electronically complete your federal and state tax returns. They even provide tips and tricks, audit defense, and a tax support team, all for no additional costs. 

Credit Karma also has a unique feature where you can search your name through government databases to find unclaimed money. According to Credit Karma, there’s more than $40 billion sitting with state governments, and it’s up to you to claim that money.

Considering they even offer a high-yield savings account that’s FDIC insured up to $5,000,000 just goes to show the wide variety of free products Credit Karma offers. This deposit account has an APY that is much higher than a standard savings account, charges no annual fees, and integrates well within Credit Karma’s platform. 

Where Credit Sesame Beats Credit Karma

Credit Sesame’s most unique feature is its free identity theft insurance. Once you sign up for free credit monitoring, Credit Sesame automatically grants you $50,000 identity theft insurance and access to speak to identity restoration specialists. This insurance is a fantastic feature that no other credit monitoring company offers. 

Also, Credit Sesame focuses on your debt, offering automated advice on managing your debt, and providing debt tracking tools. Your “Debt Analysis” screen also breaks down your current debt into its various categories, where you can also click on each to learn more. Credit Sesame gives you detailed information on your debt and tips on improving your current situation.

It might be worth noting here that Credit Sesame is currently developing its own high yield savings account. Although you can’t sign up now, you can join their waitlist to be among the first. 

How Much Do They Cost?

The theme of this article is that Credit Karma and Credit Sesame literally cost zero dollars to open an account and receive free credit monitoring.

Though, Credit Sesame does offer a premium service in which you can receive a lot more impressive benefits.

Premium Options

Credit Sesame offers three premium paid tiers. 

Are these premium tiers worth their price tags? Personally, I don’t think the average Joe needs any of the paid subscriptions. 

However, if you fear your identity might or will be stolen, it wouldn’t hurt to invest a little money to help keep peace of mind.

Advanced Credit ($9.95/mo)

For those looking for additional and more broad credit score monitoring, the Advanced Credit plan provides the following:

• Daily TransUnion VantageScore 3.0 updates
• Monthly full credit reports from all three bureaus (TransUnion, Experian, and Equifax).  

Pro Credit ($15.95/mo)

For an extra $6 a month on top of the Advanced Credit plan, Pro Credit provides all the benefits of Advanced Credit and gives users the following:

• Access to 24/7 credit report help
• Credit monitoring with alerts from all three bureaus

Platinum Protection ($19.95/mo)

If you’re looking to secure your credit, then Platinum Protection is here to save the day. Not only do you get access to all of the Pro Credit perks, but you now also get:

• $1,000,000 identify theft insurance
• 24/7 stolen/lost wallet protection
• Black market, public records, and social security monitoring. 

How Do They Make Money? 

This question is likely something you’ve been thinking about throughout this article. 

Considering how many free products and services both offer, it must seem crazy to think that they even make money.

Turns out Credit Karma makes a lot, generating about $1 billion in revenue in 2019. Their primary source of income is through advertising and affiliate marketing. 

When you successfully sign up for a product through Credit Karma or Credit Sesame, they get paid a commission. And with over 100 million users combined, this money quickly adds up. 

This is why they charge nothing for their services. Both Credit Karma and Credit Sesame operate under the assumption that a free-to-use tool will attract more users that will eventually open up products that will generate revenue. 

It’s a brilliant strategy that even brought Intuit to acquire Credit Karma for $7.1 billion. Moreover, Credit Sesame has raised over $100 million in start-up funding as well. Something must be working if they’re raising this much money!

Are Credit Karma And Credit Sesame Safe?

Generally speaking, we believe both Credit Karma and Credit Sesame are safe and legitimate. However, as with providing personal and financial information online, there’s always an inherent risk. 

While Credit Sesame has had no problems, Credit Karma doesn’t have a clean track record with the law. In 2014, they settled charges with the Federal Trade Commission after failing to secure their users’ personal information. 

As a result of the ruling, Credit Karma must undergo security assessments every other year until 2034. Credit Karma knows that they are being watched, which is good to know as a consumer. Ironic that the credit score monitor is being monitored. 

Moreover, if someone were to hack your account and try opening a credit card, both Credit Karma and Credit Sesame ask personalized questions from your credit history to ensure it’s you. These questions are hard for hackers to answer since they cite specific details that only you’d remember. 

What’s The Verdict? 

Although Credit Karma and Credit Sesame both have their strengths and weaknesses, I believe the most sensible option is to use both of them. Why?

Well, consider the facts:

• Both are entirely free-to-use (unless you get Credit Sesame’s optional premium plans)
• Both offer robust and excellent credit score monitoring tools
• You can delete either if you don’t like them with no obligations
• Each offers unique perks that the other doesn’t necessarily have

For example, Credit Sesame has $50,000 identity theft insurance just for being a user, whereas Credit Karma has free tax filing software. Moreover, Credit Karma also has its free credit simulation tool, which can help you figure out the consequences of closing a credit card or signing up for a loan. 

I think it makes the most sense to use both since you can then cover all your bases. Furthermore, both are really easy to sign up for, taking only minutes to do so. There aren’t any downsides to downloading one or the other—only benefits. 

It also doesn’t hurt to have two tools providing you alerts in the case of any potential identity theft. However, if you’re looking for more in-depth identity theft insurance and protection, check out LifeLock. 

FAQs

John Ta

John Ta is an undergrad at the University of Pennsylvania and the founder of Penn’s first undergrad personal finance club, Penn Common Cents. As a first-generation college student, he had to learn everything about personal finance on his own and seeks to mend the financial literacy knowledge gap seen almost everywhere. John is currently studying for an MS in Chemistry and a BA in Physics (business & tech concentration), Biochemistry, and Biophysics and is interested in the intersections of finance and healthcare.

The post Credit Karma Vs. Credit Sesame appeared first on Finance Plan Today.

Lenders use the five C’s of credit to get a sense of your repayment capability. Remember: lenders want to make sure you can repay your loan. Whenever you default on your loans, lenders take heavy losses, and your credit history takes a hard hit. A lose-lose situation for everyone.

Primarily, lenders are looking to make sure that your business is stable, trustworthy, and can pay off the monthly payments. They’d rather not give money to those with businesses that aren’t making any revenue or just recently went bankrupt—that would spell disaster for the lenders. 

The five C’s of credit that lenders use to evaluate your creditworthiness are Capacity, Capital, Character, Collateral, and Conditions.

If you are ready to go, check out Fundera. Their service makes it super easy to apply for a business loan.

Capacity

What: Can you meet your monthly debt repayments?

Capacity is one of the key C’s of credit. Lenders will look through your cash flow, income, employment history, stability, and debt-to-income (DTI) ratio to see if you can pay off your debt. 

Why: If lenders feel like you can’t meet your repayment obligations, your lending journey will likely stop here. It won’t matter how good your other 4 C’s are if you can’t display the ability to repay your loan. 

Make sure your DTI ratio is within a reasonable range. The DTI ratio is your monthly liabilities divided by your gross monthly income, representing your ability to make monthly debt repayments. 

For reference, many lenders won’t approve mortgages for applicants with DTIs higher than 42%. Lenders such as Wells Fargo view different ratios to mean various risks:

• 35% or less: debt is manageable; you’re in a good place
• 36 – 49%: DTI ratio could improve
• 50% or more: debt is unmanageable and is taking over 50% of your income; bad!

The main idea here is that the lower your DTI, the more likely you will be approved. 

Capital

What: How much skin do you have in the game?

Lenders want to see that you’re putting something towards your loan. Capital generally refers to the “down payment” (similar to when you buy a house) or other personal assets and investments you have that can pay off the loan. 

Why: The more you have personally and financially invested in your business, the more risk you take on. This distributes the risk evenly, helping to reassure lenders that you are very serious about your project. 

For example, if you’re only willing to put down $1,000 and ask for $100,000, then lenders might question why you’re not confident in your own business. Differently, if you put down $20,000, then lenders will be more inclined to trust you.

Likewise, having personal assets and investments can help lenders feel a little safer about giving you money. Having investments, such as ETFs or individual stocks, that can be used to pay off the loan when you’re having trouble making payments comforts lenders. 

Character

What: What’s your reputation?

Character is basically a way to describe your credit history, credit score, education, experience, and integrity. Lenders want to see that you’re trustworthy based on your past and have a strong reputation in the field. They may even tap into your references or your employee’s experience levels as well. 

Why: Banks want to lend to trustworthy people that seem to possess the ability to repay their loans. For example, if you defaulted on your mortgage, then the lender might be hard-pressed to approve of you. What’s to say you won’t default on this business loan? 

Moreover, knowledge and experience play an enormous role as well. Say you have launched three enormously successful businesses and showcased an exact growth timeline before asking for a loan. That’s a fantastic track record that would make lenders feel a little more secure. 

Furthermore, relationships play a crucial role in these interactions. Being able to showcase your expertise, experience, integrity, and professionalism in your interactions with the lender is extremely important. 

Collateral

What: If you were suddenly unable to pay off your loans, do you have a way to secure the loan with something non-cash? 

For example, when applying for mortgages, your collateral is your house. If you defaulted on your mortgage, the lender would take possession of your home. 

Why: Lenders don’t want to simply give you money without having a way to secure it. A collateral is a fantastic way to reduce the lender’s risk because it gives lenders a way to feel a little safer with their decisions. 

Lenders use the loan-to-value ratio (LTV) to weigh their lending risk. LTV represents the amount you want to borrow relative to the value of your collateral. The lower the LTV, the less risk involved for the lender. 

For instance, if you want a $90,000 loan, and your collateral is worth $100,000, then your LTV is 90%. Comparably, a $50,000 loan would have an LTV of 50%. The lower LTV is favorable for the lender since they can take your collateral and sell it to cover their losses after default.

Conditions

What: How will external economic conditions affect your business? What do you plan on using the money for?

Why: Lenders will want to understand what their funds are being used towards. Being explicit about your intentions and goals is good because it will also build your (3) Character. 

Moreover, maybe your business has a strong competitive advantage breaking into a new market. These are exciting prospects for lenders who will be more inclined to help you out. 

Though, you won’t have any control over the surrounding economic or environmental conditions. During times of economic recession, lenders are hard-pressed to distribute loans due to credit crunches. Furthermore, your business might be in an area susceptible to earthquakes, which could scare lenders a little. 

Consider everything going on around you and see if now is the best time for you to apply for a loan. 

How To Improve The C’s

Capacity: Minimize Your Debt-To-Income Ratio

Your DTI ratio plays a vital role in deciding your Capacity. Consequently, planning ahead to reduce your DTI will help.

Recall that the DTI ratio is just your monthly debt obligations divided by your monthly gross income. Thus, there are two ways to reduce your DTI:

1. Pay off previous debt to reduce your monthly repayments
2. Increase your gross monthly income

The first of these two is generally easier for most people. We all wish we could magically boost our monthly income. However, you can plan ahead and pay off as much of your previous debt as possible. Doing so will help decrease DTI. 

Character: Boost Your Credit Score

There are several ways to improve your credit score, which will help your Character.

Though, if you’re trying to increase your credit score, you must first thoroughly understand how your credit score works. Make sure you have looked into Credit Karma and Credit Sesame to ensure you can monitor your score’s growth.

Once you’ve done these preliminary steps, then you can start exploring ways to help your credit score.

Check Your Credit Report For Errors

Sometimes the credit bureaus make errors on your credit report. In fact, the Federal Trade Commission estimates about 20% of consumers have mistakes in their credit scores. This is a stark stat considering how many people are likely affected.

Unfortunately, it takes months to fix errors. 

Thus, if you plan on applying for a loan, make sure to examine your credit at least six to nine months beforehand. This timeframe will give you plenty of time to file a dispute. 

Pay Off Your Credit Cards

Credit card utilization factors into 35% of your FICO score. This ratio represents your credit use divided by your total credit limit. 

The lower your credit utilization, the higher your credit score.

The nice thing about this ratio is that it resets frequently. Therefore, you can minimize your utilization before using your credit score.

One to three months before applying, pay off all your credit cards weekly. This move will place your utilization ratio near 0% when your card companies report your utilization to the credit bureaus.

A 0% utilization ratio makes the FICO and VantageScore algorithms happy.

Ask For Credit Limit Increases

Remember that your credit utilization comprises 35% of your credit score. 

By getting a credit limit increase, you’ll effectively decrease your credit utilization ratio. Sorry for sounding like a broken record, but the lower your ratio, the higher your credit score.

All you need to do is talk to your credit card issuer and see if they’d be willing to bump up your limit. This usually only happens if you’ve demonstrated strong repayment history and are generally qualified. 

It also doesn’t hurt to ask. The worse they can say is no, and that limit boost could help bump your credit score. 

Open A Credit Card With Good Habits

Opening another credit card on your history can be helpful. If you maintain excellent habits, you’re set to rake in credit score boosts.

Firstly, your credit utilization ratio will decrease. This new card will increase your total credit limit, which will lower your ratio. 

Next, if you maintain a good repayment history, then the “payment history” portion of your credit score will also improve.

Finally, adding a credit card could improve your credit mix, which plays a small role in your score.

However, simultaneously opening too many credit cards could harm your credit score. When you apply for a credit card, the lender will do a “hard inquiry” on your credit report, which will temporarily ding your score for up to 24 months.

Getting a new card will affect your credit score after a few weeks, but positive effects increase as time goes on. Note that everything we’ve just noted also applies to secured credit cards.

Check out Fundera if you want to apply for a business loan. Their service makes it super easy.

Frequently Asked Questions (FAQ)

John Ta

John Ta is an undergrad at the University of Pennsylvania and the founder of Penn’s first undergrad personal finance club, Penn Common Cents. As a first-generation college student, he had to learn everything about personal finance on his own and seeks to mend the financial literacy knowledge gap seen almost everywhere. John is currently studying for an MS in Chemistry and a BA in Physics (business & tech concentration), Biochemistry, and Biophysics and is interested in the intersections of finance and healthcare.

The post The Five C’s Of Credit appeared first on Finance Plan Today.

Credit Karma Review

Name: Credit Karma

Description: offers robust credit score monitoring, free-to-use tax filing, high-yield savings accounts, product recommendations, and various calculators to help you take control of your personal finances. 

Overall

4.6

• Price
• Credit Alerts
• Customer Service
• Extra Perks

Summary

Credit Karma offers robust credit score monitoring, free-to-use tax filing, high-yield savings accounts, product recommendations, and various calculators to help you take control of your personal finances. 

Pros

• Free credit score monitoring and reports
• Robust credit score tools 
• Free tax filing software

Cons

• Lots of in-app ads
• Only showed VantageScore 3.0
• Not 100% accurate

• Sign Up Now

I’ve used Credit Karma to track my credit for years and I’ve been very happy with it for many reasons.

What Is Credit Karma?

Credit Karma is the premier credit score company offering robust tools and perks for their users, including, but not limited to:

• Free monthly credit scores
• Yearly free full credit reports
• Credit cards, loans, and other product recommendations
• Free-to-use tax filing tools
• Credit simulators 
• Calculators
• High-yield savings account

Founded in 2007, they’ve amassed over 100 million users and established a firm footing in the personal finance world. You’ve likely seen their ads on TV and thought about their products a little.

You’ve come to the right place if you’re looking to learn more about this behemoth.

How Does Credit Karma Work?

Credit Score Monitoring

If you’ve ever tried applying for a credit card, auto loan, or mortgage, you probably know how vital your credit score is. Also, a low credit score can make it difficult to even rent an apartment and could prevent you from even getting a job. 

Consequently, keeping your credit score in a good range is critical. Understanding the factors behind a credit score is one of the best ways to start improving it. 

One of Credit Karma’s primary features is providing its users with free monthly VantageScore 3.0 updates from Transunion and Equifax. Furthermore, they display a breakdown of your credit score that can pinpoint areas of improvement. Unfortunately, they don’t offer FICO score updates. 

On top of these score updates, Credit Karma will immediately alert you when significant changes occur to your credit score and provide free, full credit reports every year. 

These perks don’t stop there. Credit Karma also suggests ways to improve your credit score. For example, their Credit Coaching tool provides tailored help based on your current credit history.

They even have a robot advisor named Penny that you can “chat” with you about various personal finance-related topics. If you’re looking to figure out how to buy a home, open a credit card, or save money, she can help guide you.

One of the coolest things Credit Karma has is its credit score simulation tool. If you plan on making any financial moves that you fear could affect your credit score, the simulation tool can give you a sense of what could happen. 

Free Tax Filing

Everyone loves tax season. 

Credit Karma Tax lets you electronically complete your federal and state tax returns free of charge. In addition, they even provide tips and tricks, a tax support team, and audit defense, all for zero dollars. 

In fact, once you’ve filed with Credit Karma, you can import the previous year’s return to make filing in the future even easier. 

Though, it’s worth noting that Credit Karma Tax doesn’t compete super well with some of the biggest names in the industry, such as H&R Block and Turbotax.

Product Recommendations

Credit Karma showcases a wide variety of products such as credit cards, auto loans, and mortgages. Their recommendations are tailored to your user behavior, credit score, and approval odds.

For example, Credit Karma lists cards that I am “pre-approved” for, meaning that I have over a 90% chance of successfully applying for it. Moreover, they categorize your approval odds by five tiers: excellent, very good, good, fair, and poor. These groupings can help give you an idea of your chances of getting your dream card.

Calculators

Credit Karma has a wide array of Financial Tools to get a grasp of your financial situation. For example, among their arsenal are:

• Debt repayment calculator: shows you how long it’ll take to pay off debt
• Simple loan calculator: predicts how much you’ll have to pay monthly for a loan
• Amortization calculator: displays total payment breakdown on debt repayments

These tools are free-to-use and help you figure out the nuances of debt repayment and your credit score. 

What Makes Credit Karma Unique?

Although competitors like Credit Sesame also offer free credit score updates and monitoring, notably, Credit Karma provides one-of-a-kind credit simulators and Penny the personal finance advisor. Moreover, their UI is beautiful and easy to use. Simply put, they offer many robust tools that place them as one of the best credit monitoring companies out there.

Furthermore, no other personal finance firm offers free tax filing software. This is a pretty cool addition, considering how Credit Karma started originally with giving away free credit scores. 

Considering they also offer high-yield savings accounts that are FDIC insured up to $5,000,000 in deposits just goes to show how far ahead Credit Karma is against its competitors. In addition, this deposit account has an APY that is much higher than a standard savings account and charges no minimum fees.

Pros & Cons Of Credit Karma

Generally speaking, Credit Karma is a fantastic tool to use to monitor your credit score. Not only do they offer a wide variety of tools for you to use to build your credit score, but they also offer countless other benefits for you to advance the state of your personal finances. 

Even their cons are some negatives that almost every other free-to-use firm faces. For example, no competitor offers free FICO scores. 

However, Credit Karma has two major flaws. First is their advertising. Since this is how they make their money, they will place things right in front of your face. A small price to pay for their endless free-to-use tools.

The second flaw is that the VantageScore isn’t as widely used as the FICO score. A 700 VantageScore is not the same as a 700 FICO score. Furthermore, most lenders use the FICO score to determine your creditworthiness.

This difference is substantial and is why you shouldn’t use Credit Karma’s credit scores as the be all end all. The main takeaway: use Credit Karma as a general indicator of your credit health.

Pros:

• Free credit score monitoring and reports
• Robust and free-to-use credit score tools 
• Free tax filing software
• Calculators
• Personalized product recommendations

Cons

• Relentless advertising
• Doesn’t provide Experian scores
• No FICO scores
• Not 100% accurate

How Much Does Credit Karma Cost?

The theme of this article is that Credit Karma costs zero dollars to use. 

Everything on their site is free-to-use with no strings attached. Not to sound like a broken record, but it’s worth trying out Credit Karma if you haven’t already.

Is Credit Karma Safe?

Generally speaking, we believe Credit Karma is safe and legitimate. However, as with providing personal identification and financial information online to even trustworthy companies, there’s always a risk. 

Credit Karma doesn’t have a clean track record with the law. In 2014, they settled charges with the Federal Trade Commission after failing to secure users’ sensitive personal information. 

On the bright side, as a result of the ruling, Credit Karma must undergo security assessments every other year until 2034. Credit Karma knows that they are being watched, which can be comforting from a security standpoint. 

Moreover, if someone were to hack your account and tried opening a credit card, Credit Karma asks questions from your personal credit history to ensure it’s you. These questions are hard for hackers to answer since they cite major personal transactions with specific detail that only you’d remember. 

Will Credit Karma Hurt My Credit Score?

Credit Karma can’t directly affect your credit score. Arguably, Credit Karma can only help benefit your credit score by providing insight into how you can improve it and ways to effectively monitor your score. 

However, while Credit Karma doesn’t play a direct role, by signing up for recommended products, you could hurt your credit score. Remember that Credit Karma acts as a middleman between you and the credit card issuer or lender. If they connect you to a bank, then the bank could do a “hard pull” on your credit score. 

“Hard pulls” will ding your credit score for up to 24 months. 

How Does Credit Karma Make Money?

This is likely a question you’ve been thinking about throughout this article. 

Considering how many free services Credit Karma offers, it must seem crazy to think that they even make money.

Credit Karma turns a pretty penny, generating about $1 billion in revenue in 2019. Their primary source of income is through advertising and affiliate marketing. 

Every time you sign up for a product through Credit Karma, they get paid a commission. And with over 100 million users, this money quickly adds up. 

This strategy is why Credit Karma can charge nothing for their services. They operate under the assumption that a free-to-use tool will attract more users that will eventually sign up for products. Moreover, it’s a brilliant strategy that even brought Intuit to acquire Credit Karma for $7.1 billion. 

How Is Credit Karma’s Customer Service?

Credit Karma’s customer service is online-based. 

To submit a help request, you sign in to your account and fill out an online form. This structure allows Credit Karma to keep help requests organized. 

Unfortunately, Credit Karma doesn’t have a phone-based helpline for consumers. 

What I Wish Was Different About Credit Karma?

Credit Karma, as a whole, is an excellent personal finance tool. There are only a few minor things in which it could improve on:

1. Options to look into your FICO score
2. Offer human-based customer service options

Even (1) is a problem that pretty much every other competitor faces. Credit Karma is truly an amazing, free-to-use technology. 

How Does Credit Karma Fare Against Competitors?

Credit Karma is not only one of the best personal finance tools out there, but might even be the best. Not much stands up against them, and they genuinely offer some premier products and tools.

How To Get Started On Credit Karma 

It’s effortless to sign up for Credit Karma. To create an account, you’ll need to enter your name, email, address, and last four digits of your SSN. Once you’re in, you’ll be greeted with Credit Karma’s beautiful user interface.

The dashboard displays the following tools mentioned earlier:

• Transunion and Equifax VantageScore 3.0 
• Credit reports
• Accounts under your SSN
• Free tax filing tools
• Auto and home advising
• High-yield savings accounts
• Recommended products
• Personal finance resources

Not to mention you also have access to more stuff like the credit simulation tool, mortgage calculators, and Penny the personal finance advisor. Credit Karma has countless benefits, perks, and machinery on its platform. 

Should You Use Credit Karma?

Credit Karma is 100% worth the free investment.

Since Credit Karma provides top-of-the-line credit score monitoring tools alongside countless free perks and benefits that can only better the state of your personal finances, there’s no real reason to avoid Credit Karma. Furthermore, having a tool to help keep an eye on your credit score and identify can help keep peace of mind.

We’d recommend making a Credit Karma account concurrently with Credit Sesame, Quizzle, or WalletHub to cast the widest safety net possible across your credit score. Each companies’ pros cover the other’s cons. Furthermore, they’re free to use, so there’s no real downside to getting all of them. 

John Ta

John Ta is an undergrad at the University of Pennsylvania and the founder of Penn’s first undergrad personal finance club, Penn Common Cents. As a first-generation college student, he had to learn everything about personal finance on his own and seeks to mend the financial literacy knowledge gap seen almost everywhere. John is currently studying for an MS in Chemistry and a BA in Physics (business & tech concentration), Biochemistry, and Biophysics and is interested in the intersections of finance and healthcare.

The post Credit Karma Review appeared first on Finance Plan Today.

The process can seem overwhelming, but if you take the time to understand the pieces involved, everything will be okay. In brief, throughout the home-hunting process, you most likely don’t have the cash to pay everything in one fell swoop. Consequently, you’ll need to borrow some money via a mortgage. 

Since a mortgage is a type of loan, all the typical loan terms arise. This is where your credit score plays a significant role. 

Your credit score determines the amount of money you can borrow, your interest repayment rate, and your loan term. An excellent credit score will give you the best options available, whereas a poor one could make things difficult. In fact, a poor score could make it impossible to be approved for a mortgage. 

Consequently, lenders need to look through your entire credit history to make sound judgments on your capability to repay. Some of the other documents you’ll need include your tax returns, W2, credit reports, and photo identification. 

This article will overview the importance of your credit score throughout the mortgage process.

Why Do Mortgage Lenders Need My Credit Score?

Your credit score is a number lenders use to determine risk.

When lenders give you some money to borrow, they risk you defaulting on the loan. Defaults are when the borrower fails to repay their debt. Defaults damage the borrower’s credit score and cause the lender to lose a lot of money. A lose-lose situation. 

In the case of buying homes, the lender insures against default through the home you’re purchasing. If you default on your mortgage, then the lender can take your home. 

For example, if you have a perfect credit score of 850, then lenders will view you as extremely low risk. Thus, they’re likely to give you loans with the lowest possible interest rates because they feel comfortable letting you borrow money.

However, if you have the worst possible credit score of 300, then lenders will be very scared to lend you money. A credit score that low suggests that, in the past, you might have:

• Defaulted on loans 
• Failed to pay your credit card bill on time multiple times
• Declared bankruptcy
• Fallen victim to identify theft

The list goes on, but lenders wouldn’t be likely to give you a loan in the first place since they’d be so scared to give you money. 

The point of emphasis is that your credit score and credit history gives lenders an insight into your risk of default.

What Type Of Credit Scores Do Home Loan Lenders Look At?

There are several types of “credit scores.” 

The three credit bureaus, Equifax, Experian, and Transunion, calculate credit scores based on the FICO and VantageScore models. The FICO score is the most commonly used credit score and is likely the one your lender is evaluating. The VantageScore is newer and is gaining prominence, but isn’t used as often as the FICO score. 

It’s worth noting that some lenders may have their own custom “credit score” models. A FICO score of 750 might not necessarily translate into the same credit score within these custom models. 

Does My Credit Score Matter THAT Much?

Yes. Simply put, increasing your credit score by 25 points could save you thousands of dollars.

Let’s take a look at the table below, which showcases the average fixed interest rates for a 30-year mortgage at various credit score ranges. 

With a FICO score between 620 and 639, bumping your score up to somewhere between 640 – 659 could save you approximately $11,000. That’s a ridiculous amount of savings for a relatively small increase. 

Say you instead worked your credit score up to 760-850. This time around, you’d save about $32,000 more than if you had a score between 620 and 639. 

Moreover, if your credit score were less than 620, you’d be hard-pressed to find a mortgage. Remember that lenders are taking a risk by giving you money, and they want to minimize that risk by finding people they think they can trust. 

Your credit score most definitely plays a pivotal role in deciding your rates and can easily save you lots of money.

Furthermore, the Federal Housing Administration (FHA) mortgage requires different down payments depending on your credit score. Individuals with credit scores less than 580 will have to put a 10% down payment. Comparably, those with scores higher than 580 can have a 3.5% down payment. 

Notice the trend here? The better your credit score, the more favorable your situation will be. However, it’s worth noting that your credit score isn’t the only determining factor involved. Your income history, loan-to-value ratio, and down payment can also affect your application’s success. 

What Is Considered A Good Credit Score For Lenders?

Lenders usually view FICO scores above 760 as good enough to garner the best loan rates available. 

At this level, you’ll have access to the lowest interest rates and best payment terms. Lenders will view you as a safe investment and will treat you nicely as a result.

Any score above 760 won’t help you that much. It’s just extra credit at that point. 

Wait, So Is My Credit Score The Only Thing That Matters?

No! Other factors, such as the debt-to-income ratio, income history, down payment, and loan-to-value ratio, are all involved in the application and approval process. They give lenders a better sense of your repayment capabilities. 

Debt-To-Income (DTI) Ratio

Your DTI ratio is a number representing your monthly debt payments divided by your gross monthly income. Lenders use this number to gauge your ability to make your monthly mortgage payments.

The lower your DTI ratio, the better off you are. Less debt means you have more room to pay for your mortgage. 

Lenders such as Wells Fargo have explicitly delineated different ratios to mean different risks:

• 35% or less: debt is manageable; you’re in a good spot
• 36 – 49%: DTI ratio could improve; unexpected expenses could put you in a bad spot
• 50% or more: debt is unmanageable and is taking over 50% of your income

The main takeaway here is that the lower your DTI, the more likely you will be approved and get a lower interest rate.

Income History

Lenders want to see that you have a stable employment history. 

For instance, if you are sporadically working jobs throughout the year for two months, then a lender might be concerned about your ability to repay your loans. Differently, if you have a steady income for the past two years, then the lender shouldn’t have much to worry about. 

In fact, a stable income could help lower your interest rates too. However, the contrary could lead to the opposite or even loan disapproval. 

Down Payment And Loan-To-Value Ratio

The loan-to-value (LTV) ratio is a number that represents the mortgage amount divided by the value of the home. The LTV ratio gauges how risky the loan is relative to the property you’re purchasing.

For instance, if you bought a $100,000 home with a $10,000 down payment and a $90,000 mortgage, then your LTV ratio would be 90%. 

Generally speaking, you want to strive to keep your LTV ratio below 80%. Pertaining to the previous example, if you had instead made a $20,000 down payment, then your LTV would be 80%. If you made a $30,000 down payment, then your LTV would only be 70%. 

The takeaway: the larger your down payment, the lower your LTV ratio. Lenders feel more comfortable loaning money to people with low LTV ratios because it shows them that you have invested a lot of cash.

What Types Of Loans Exist?

Prime Vs. Subprime Mortgages

Subprime mortgages are intended for individuals with poor credit scores. What is explicitly defined as “poor” usually depends on the lender but typically is a score less than 600-620. 

From a lender’s perspective, individuals with poor scores are more likely to default on their loans. Consequently, lenders will be more cautious with approving mortgages. Generally speaking, subprime mortgage interest rates will be higher than prime mortgages to cover the additional risk.

Comparably, prime mortgages are for those with good credit scores (higher than 620-650). Prime mortgages provide a plethora of favorable benefits relative to subprime loans, including lower interest rates. Prime mortgages can save thousands of dollars throughout a mortgage’s lifetime. 

Different types of loans exist beneath the “parent” categories of prime and subprime loans. 

Conventional Loans

These types of loans are the classic “loan” you think of when you think “loan.” 

You borrow money from the lender and make monthly repayments towards that debt over time. The mortgage rates for conventional loans vary wildly depending on your credit history, income, LTV, and DTI ratio. 

Conventional loans are usually only approved for those with credit scores higher than 620 and generally require a down payment. 

FHA Loans

These loans are for people with all ranges of credit scores. The difference lies in the required approval down payment.

Per the FHA website, your credit score determines the down payment:

• Credit score greater than 580: 3.5% down payment
• 500 – 580: 10% down payment

FHA loans are popular because they generally have lower down payments and credit scores. However, with this leniency comes some tight restrictions and more fees. 

These loans charge two additional insurance fees: 

• Upfront Mortgage Insurance Premium (UFMIP): one-time charge of 1.75% of the base loan amount
• Annual MIP: monthly payments (yes monthly, ignore the name) ranging between 0.45 to 1.05% of the base loan amount

Are FHA loans better than conventional loans? That isn’t a question that can be generalized to everyone. Make sure to look at all your options closely and carefully to determine your answer.

VA Loans

The United States Department of Veteran Affairs (VA) offers specialized loans. VA loans are geared towards veterans, service members, the National Guard, and reserve members. These loans typically provide nicer terms compared to some others but still require some degree of income and credit history.

About 90% of VA loans are made without a down payment. Comparably, all FHA loans require some degree of down payment. VA loans definitely have benefits.

VA loans split into two categories:

• Direct Loans: The government acts as your direct mortgage lender
• Backed Loans: The government stands behind your loan to minimize the lender’s risk. If you default on your mortgage, then the government will staunch the lender’s losses

USDA Loans

These mortgages were created by the United States Department of Agriculture (USDA) to “stimulate economic growth in rural and suburban communities.” USDA loans offer low-interest rates and don’t even require a down payment. If you can qualify, these mortgages offer a lot of perks.

However, while these benefits seem exciting, USDA loans are harder for individuals with lower credit scores. Furthermore, USDA loans require insurance payments alongside monthly debt repayments.

• Insurance: 0.35% of the loan principal

Don’t be discouraged by the word “agriculture.” You can check your eligibility for free at any time. In fact, over 100 million Americans are eligible by location. 

Can I Get A Co-signer For A Mortgage? How Do Co-signers Help?

You can generally get a co-signer when applying for a mortgage. 

While co-signers will help your mortgage application, they need to be aware of the burdens they face when placing their credit history on the line. 

Lenders are more inclined to give mortgages to co-signed applications because it alleviates a lot of risks. If you default on your loan, then your co-signer has to take responsibility. Your co-signer likely has shown the lender that they can pay off your loan if you can’t. 

For instance, say you have a credit score of 500. You’ll be hard-pressed to find reasonable mortgage rates, let alone even being approved. 

However, say your dad has a credit score of 850 with a steady income and a low debt-to-income ratio. Your dad could co-sign your mortgage application. Now, lenders would be more than happy to fork over a loan because they can chase your dad for money if you fail to pay your mortgage.

How Can I Improve My Credit Score Before I Buy A Home?

There are many ways to work on your credit score before buying a home. However, techniques to improve your credit score vary by how much time you have before you plan to apply for a mortgage. 

Pay Off Any Credit Card Debt

Your credit card utilization ratio comprises 35% of your credit score. The ratio is representative of your credit use divided by your total credit limit. 

For example, if you have a credit card with a credit limit of $10,000 and use $1,000 of your credit line, then your utilization ratio is 10%. The lower your credit utilization ratio, the higher your credit score.

The great thing about the credit utilization ratio is that you can quickly boost your credit score by minimizing your utilization. The utilization ratio can rapidly change if you play your cards correctly.

A month or two before you apply for a mortgage, pay off all of your credit card debt. This move will put your utilization ratio near 0%, tremendously helping your credit score.

Become An Authorized User

Say you have a poor credit score, but your mom has an excellent credit score. She has had a credit card for over 20 years, hasn’t missed a single payment, and has a low credit utilization ratio.

Your mom can add you as an authorized user on her credit card. This addition would give you a significant boost to your credit score by adding all that positive data to your credit history. Simply put, your credit score will piggyback off of other’s excellent credit histories. 

Becoming an authorized user will affect your credit score almost immediately. Consequently, if you need a quick boost, you could try finding someone willing to add you as an authorized user. 

Open A Credit Card With Good Habits

Getting another credit card on your history has multiple benefits if you maintain good credit card practices.

Firstly, your credit card utilization ratio will decrease. Since having another card will increase your total credit limit, the denominator in your credit card ratio will increase. This will then reduce your utilization, boosting your score.

Next, if you maintain a good repayment history, then the payment history of your credit score will also improve. Not missing a single payment across the year will give your credit score a small increase. 

Finally, adding a credit card could help your credit mix. The types of credit you own affect your credit score, and adding more variety can assist your credit score as well. 

However, opening a credit card could hurt your credit score. Don’t open too many cards in a short time window. 10% of your credit score factors in how many times you’ve opened new lines of credit, so the positive gains you might get could be offset by the negative hard inquiries. 

Opening a new card will probably have a tangible effect on your credit score after just a few weeks, but the positive results will increase the longer you wait. 

Find A Credit-Score Building Loan

These specialized loan products are offered for individuals with poor credit history but can help almost everyone.

Credit-score building loans can:

• Improve your repayment history if you make the appropriate monthly payments
• Diversify your credit mix even more by adding loans

The positive benefits will probably appear on your credit score after a few weeks or months.

Check Your Full Credit Report For Errors

Sometimes the credit bureaus make mistakes that can really hurt your credit score. 

According to the Federal Trade Commission, about 20% of consumers have errors in their credit score reports. Consequently, it’s essential to take a deep dive into your full credit report whenever you plan on applying for a loan or credit card to see if there are any errors there. 

Otherwise, an unknowing mistake could cost you thousands of dollars or failure to be approved.

Unfortunately, correcting errors can take a few months. If you plan on buying a home, it’s worth taking a look at your credit report several months beforehand to find any pesky mistakes.

Use Credit Score Boosting Tools

Disclaimer: some of these tools may cause unintended consequences. For example, ExperianBoost has been noted to worsen your debt-to-income ratio since the VantageScore isn’t universally used as much as the FICO score.

ExperianBoost is a free-to-use tool that factors in other on-time utility and telecom payments. You can leverage this to bolster your VantageScore’s payment history. 

The effects are factored into your credit score almost immediately and could help put your VantageScore in a better position. 

How Can I Track My Credit Score?

There are many ways to track your credit score for free.

Credit Karma and Credit Sesame are entirely free to use and provide reliable updates on your credit score. LifeLock takes credit score tracking to a whole new level by charging a monthly fee for identity theft protection and insurance. 

ExperianBoost also offers credit score tracking privileges alongside its credit score boosting benefits. 

Keeping an eye on your credit score is generally a good habit. You never know what could happen these days, and it’s always best to err on the side of caution. 

John Ta

John Ta is an undergrad at the University of Pennsylvania and the founder of Penn’s first undergrad personal finance club, Penn Common Cents. As a first-generation college student, he had to learn everything about personal finance on his own and seeks to mend the financial literacy knowledge gap seen almost everywhere. John is currently studying for an MS in Chemistry and a BA in Physics (business & tech concentration), Biochemistry, and Biophysics and is interested in the intersections of finance and healthcare.

The post What Credit Score Is Needed To Buy A House appeared first on Finance Plan Today.

A few highlights of the app include:

• Free to use
• Good TransUnion (VantageScore 3.0) credit score updates and monitoring
• Free and unique identity theft insurance covering up to $50,000

Credit Sesame Review

Name: Credit Sesame

Description: is a free-to-use personal credit management tool (PCM) that gives you free credit score monitoring, reports, and debt tracking. They stand out from their competitors by offering free identity theft insurance covering up to $50,000 in losses. 

Overall

4.4

• Service Fees
• ID Theft Protection
• Credit Score Updates
• Customer Service

Credit Sesame Review

Credit Sesame is a free-to-use personal credit management tool (PCM) that gives you free credit score monitoring, reports, and debt tracking. They stand out from their competitors by offering free identity theft insurance covering up to $50,000 in losses. 

Pros

• Free to use
• Good credit score update features
• Identity theft protection & insurance
• Provides information about your debt

Cons

• Only provides information about TransUnion (VantageScore 3.0)
• Only one TransUnion credit report a month

• Signup Now

What Is Credit Sesame?

Launched in 2010, Credit Sesame is a rapidly growing credit and loan company that provides free credit scores, reports, and monitoring. In fact, millions of users use Credit Sesame. Their products are useful, safeguarding and estimating your credit score in a pinch. 

Credit Sesame is accredited by the Better Business Bureau since 2011 and currently has an “A+” rating. 

How Does Credit Sesame Work?

Credit Sesame’s business model is quite simple. All you have to do is sign up for an account where you’ll receive:

• Free TransUnion credit score (VantageScore 3.0) updates once per month.
• Alerts when your TransUnion credit score changes
• Free credit monitoring
• Free identity theft insurance covering up to $50,000
• Debt tracking and recommendations
• Free Credit Sesame credit scores (Experian National Equivalency score)

Is there a catch-22? Well, not really. We’ll talk more about how Credit Sesame makes money below.

What Makes Credit Sesame Unique?

Credit Sesame’s free identity theft insurance isn’t seen anywhere else among its competitors. Similarly to before, once you sign up and enable Credit Sesame’s free credit monitoring, you’ll immediately be insured $50,000 against identify theft with access to live support to help with identity restoration. 

None of Credit Sesame’s competitors offer this sort of protection.

In addition, Credit Sesame focuses on user’s debt, offering automated advice on managing your debt, and providing debt tracking tools. 

Pros & Cons Of Credit Sesame

Generally speaking, Credit Sesame offers useful and free-to-use credit monitoring services. Besides, their identity theft insurance is one-of-a-kind, differentiating them from the rest of the market.

However, they only provide access to your TransUnion VantageScore 3.0 credit score, which isn’t used by all lenders. Lenders tend to use your FICO Score 8 to judge your creditworthiness.

Pros:

• Free to use
• Mobile app is user friendly
• Excellent credit score update features
• Identity theft protection
• Provides information about your debt

Cons:

• Only provides information about TransUnion (VantageScore 3.0)
• Only one TransUnion credit report a month

VantageScore vs FICO Score

VantageScore is a newer credit-scoring model used to calculate your credit score. Typically speaking, lenders may or may not look at your VantageScore, choosing to look at your FICO Score instead. However, the VantageScore is undoubtedly gaining in popularity as more lenders start to use it to assess creditworthiness.

Both systems scale from 300-850, but a VantageScore and FICO Score of 700 doesn’t mean the same thing. While the algorithms differ, if your FICO Score decreases, it’s more than likely your VantageScore will also fall, and vice versa.

Consequently, although the two models’ credit scores might not be precisely the same, you can still estimate your FICO score using your VantageScore. 

How Much Does Credit Sesame Cost?

Credit Sesame is completely free to use. Furthermore, you get access to credit score updates, monitoring, and identify theft protection without paying a dime. Since Credit Sesame focuses on debt, it also offers automated debt analysis and advice.

Credit Sesame also offers some paid plans for even more robust credit-related information and protection. 

Premium Options

Credit Sesame offers three levels of advanced credit reports that can be accessed for additional payments each month.

Advanced Credit ($9.95/mo)

For those looking for more credit score monitoring, the Advanced Credit plan provides daily TransUnion VantageScore updates and monthly full credit reports from all three bureaus (TransUnion, Experian, and Equifax).  

Pro Credit ($15.95/mo)

For an extra $6 a month on top of the Advanced Credit plan, Pro Credit provides all the benefits of Advanced Credit while giving users access to 24/7 credit report help and frequent credit score alerts from all three bureaus. 

Platinum Protection ($19.95/mo)

If you’re really looking to secure your credit, then Platinum Protection is here for you. Not only do you get access to all of the Pro Credit perks, but you now get 24/7 stolen/lost wallet protection with black market, public records, and social security monitoring. 

Are these premium tiers worth it? I honestly don’t think the average Joe needs any of the paid options. However, if you fear your identity might have been stolen, it wouldn’t hurt to invest a little to help sleep better at night.

Is Credit Sesame Safe?

Yes, Credit Sesame is safe. 

When you’re opening your account, Credit Sesame doesn’t even ask for your credit card information, and you only have to provide the last four digits of your social security number (SSN). While you also have to give your name, address, and other basic information, this information altogether can’t be used effectively in potential identity theft. 

Moreover, Credit Sesame has yet to report any significant data breaches (cough Experian cough data breach in cough 2017). Thus, Credit Sesame is relatively safe.

However, entering your information online in any fashion could be dangerous, but, given Credit Sesame’s positive track record, you should be perfectly fine.

Will Credit Sesame Hurt My Credit Score?

No! Absolutely not.

Credit Sesame’s credit monitoring tools are entirely independent of the ones used to determine your actual credit score. For example, their “Credit Analysis” tool on their dashboard provides information on each component of your credit score:

• Payment history (35%) – have you missed any payments?
• Credit utilization (30%) – do you use less than 30% of your total credit limit?
• Average account age (15%) – how old is the average age of your credit? 
• Credit inquiries (10%) – how many credit cards have you opened in the past year?
• Credit mix (10%) – do you have a good combination of credit cards, loans, and other accounts?

The firm only does a “soft pull” on your credit history, which is not factored into your credit score calculations. Furthermore, you could argue that Credit Sesame is actually helping your credit score indirectly by making you aware of what portions of your score you could improve on!

How Does Credit Sesame Make Money?

Since Credit Sesame’s services are entirely free for the consumer, a natural question is how the company makes money off its services. 

Credit Sesame mainly makes money using product referrals, advertisements, and affiliate programs. For example, when you sign up for one of Credit Sesame’s recommended credit cards, Credit Sesame gets a referral bonus.

Considering the firm’s user base of over several million individuals, Credit Sesame has been able to generate attractive revenues. As a result of their successful product, they’ve raised over $100 million in start-up funding. 

How Is Credit Sesame’s Customer Service?

Credit Sesame offers a few options for customer support:

• Online form to submit a written help request
• Customer help email: [email protected]
• Mail: 444 Castro Street, Suite 500, Mountain View, CA 94041

However, Credit Sesame doesn’t have a dedicated phone line for consumers to talk to real people. 

How Does Credit Sesame Fare Against Competitors?

If you’re looking to monitor more than just your credit score, you could also check out LifeLock, which helps guard and recover against identity theft.

How Could Credit Sesame Improve?

Credit Sesame could improve by firstly offering a direct customer phone line for their userbase. Although the intention is for customers to pay to access their full credit reports and other bureau’s credit scores, considering that some competitors offer free full credit reports, Credit Sesame might be losing out on potential customers. 

Considering that competitors like Credit Karma also offer Equifax and TransUnion VantageScores, Credit Sesame is missing out on that consumer base as well. 

Furthermore, Credit Karma provides free monthly full credit reports, whereas Credit Sesame doesn’t. 

In tandem with Credit Sesame’s unique identity theft insurance, the firm could potentially dominate the financial advocacy and management market with the right improvements. 

How To Get Started On Credit Sesame

It’s particularly easy to get started with Credit Sesame. Upon providing your name, address, and the last four digits of your SSN, you’ll immediately see all your relevant information on your dashboard.

The dashboard displays your credit score and has three separate sliding screens:

• Credit Analysis: breakdowns your credit score
• Debt Analysis: showcases your debt, payment history and debt-to-income ratio
• Credit Cards: consolidates all your credit cards

Moreover, Credit Sesame also has tools that explain and advise you on how to improve your credit history and debt. 

The firm has a pretty sweet repertoire of perks and tools to stay on top of your personal finances.

Should You Use Credit Sesame?

Considering that Credit Sesame can’t hurt your credit score, offers fantastic identity theft protection, and has excellent debt analysis tools, there are no real reasons not to sign up. Furthermore, nothing is stopping you from getting a Credit Karma, or WalletHub account that can cover all your bases simultaneously.

I’d recommend making a Credit Sesame account concurrently with its competitors to cast a wide safety net across your credit score. Each company covers the other’s weaknesses, creating a fantastic synergistic relationship.

However, if you’re looking to protect yourself against identity theft, then LifeLock might be a better choice for you.

John Ta

John Ta is an undergrad at the University of Pennsylvania and the founder of Penn’s first undergrad personal finance club, Penn Common Cents. As a first-generation college student, he had to learn everything about personal finance on his own and seeks to mend the financial literacy knowledge gap seen almost everywhere. John is currently studying for an MS in Chemistry and a BA in Physics (business & tech concentration), Biochemistry, and Biophysics and is interested in the intersections of finance and healthcare.

The post Credit Sesame Review appeared first on Finance Plan Today.

Experian Boost Review

Name: Experian Boost

Description: is a useful, free tool that can help boost your FICO Credit Score 8. Credit score updates appear real-time and can be immediately reversed with no repercussions. However, some lenders don't know what it is and can misinterpret your Experian Boosted score.

Overall

4.5

• Pricing
• Credit Help
• Credit Monitoring
• Ease of Use/Setup

Summary

Experian Boost is a useful, free tool that can help boost your FICO Credit Score 8. Credit score updates appear real-time and can be immediately reversed with no repercussions. However, some lenders don’t know what it is and can misinterpret your Experian Boosted score.

Pros

• Free to use
• Real-time credit score updates
• Boosts credit scores by average 14 pts.
• Non-permanent changes

Cons

• Might not be pertinent to lenders
• Enter bank account info online
• Can only use bank account-based bill payments for boost

• Sign Up

What is Experian Boost

Have you ever realized just how many payments you make for your water, electricity, phone, internet, and television bills? Typically, your FICO credit score doesn’t take these everyday life expenses into account, although they may reflect your ability to pay your bills on time. 

Remember that your payment history represents 35% of your credit score calculations. Experian Boost takes advantage of this credit score (FICO Score 8) section by taking your everyday utility and telecom payments into account—after all, they do represent timely payments, which is what this portion of your credit score reflects.

Features

• Boost your credit score using your on-time payment history via your water, electricity, phone, internet, and television; bills that aren’t generally factored into your FICO 8 credit score
• Free to use tool that has an immediate effect on your credit score
• Score outcomes can be reversed; Experian Boost doesn’t affect your credit score permanently

How Experian Boost Works

Experian Boost takes your paid-on-time water, electricity, heat, phone, and cable bills and adds them to the “payment history” portion of your credit score. This addition can help solidify your credit score, especially if you’ve had poor repayment history.

However, Experian Boost will only factor in payments made from your bank account. If you’re like me and use a credit card for all utility payments to get the 2% flat-rate cash back perks, then we are unfortunately unable to receive any significant boost benefits from this tool. Comparably, if you use your checking account to pay off bills, then Experian Boost might be able to help increase your credit score.

Who Can Use Experian Boost

Anybody! Really.

However, Experian Boost is more useful more to some people than other people. We’ll delve into the differences below. 

What Does Experian Boost Cost?

Experian Boost is completely free! The standard service offers credit score monitoring alongside monthly credit score updates.

A natural question that arises is how Experian profits off of this free-to-use tool. While Experian doesn’t say precisely how they monetize the service, it’s safe to assume that they will try to upsell you on some of their other paid products and services.

Furthermore, by linking your bank account to their service, you are also providing them with a lot of valuable information that they can use to target you for other products. For a lot of people with poor credit or a low credit score, that’s a small price to pay for a boost to their credit score.

In-app Purchases Can Give More Features

As an Experian user, you can also purchase CreditWorks Premium for $24.99 per month or $249.99 per year. If you simply want to try out this advanced feature, you can get a 7-day trial membership for only $1.

This subscription-based service will not only monitor your Experian credit score but also track across the other two major credit bureaus, Equifax and Transunion. In addition, this premium version will allow you to receive daily Experian and FICO score updates instead of the free monthly updates. CreditWorks Premium provides a plethora of other features as well.

Is this worth the cost? Generally speaking, I don’t think so—monthly credit report updates are usually more than enough. Other tools, such as CreditKarma, will give you frequent credit score updates to ensure that you’re aware of someone stealing your identity. 

However, if you’re about to get a new house or auto loan, it might be useful to see your FICO Home or Auto scores; only CreditWorks Premium allows you to see these numbers. 

Experian Boost Pros & Cons

Can Experian Boost Hurt My Credit Score?

Experian says that “only Experian can raise your FICO Score instantly.” Notice that they don’t say that Experian Boost will raise your credit score.

While Experian Boost will only pull your positive payment history, due to the FICO Score 8 algorithm’s complexity, there is an off chance that Experian Boost could hurt your score.

However, according to Experian’s website, the average user received a 13 point boost to their FICO Score 8. Furthermore, if you were one of the few users who took a hit to their score, one of the pros about Experian Boost is that you can more than easily remove any effects from your account instantly without any fees or problems.

So, in summary, Experian Boost is most likely going to help your credit score, and if it doesn’t, you can easily remove its effects at any time without repercussions.

What are other ways to build my credit score?

Let’s be realistic—Experian Boost’s average increase of 13 points isn’t much if your score is low. This tool is probably best used alongside some other credit score building instruments to maximize your credit score before you go in for your home or auto loan application.

If you’re looking to build your score, it’s probably a good idea to look into credit score tracking products such as Credit Sesame. Dual-purpose products like LifeLock also offer identity theft protection and insurance!

Secured Credit Cards

Generally speaking, credit cards are one of the primary factors in determining your credit score, because they affect your credit utilization and all of the other credit score factors.

As long as you pay all your bills on time, keep your credit utilization ratio low, and have a decent credit history, your credit score will be pretty solid in the first place. 

However, if you have poor or no credit history, secured credit cards will probably be your best bet to help give your credit score a substantial boost.

These cards work by having you provide collateral that serves as your credit limit. For example, you give the bank $500, and the bank grants you a $500 credit limit—the bank takes a lot less risk in opening the credit card for you since if you don’t pay off your bill, your initial $500 deposit insures the bank safely. 

Consequently, it’s pretty easy to open a secured card, and your maintenance of this card will help fix or start your credit history. However, keep in mind some of the golden rules of credit cards: treat your credit card like a debit card and pay your credit card bill weekly.

This strategy will allow you to use your credit card responsibly and help you get an excellent credit score. Having great credit can save you thousands when you buy a home.

Credit-builder Loans

In brief, credit-builder loans are loans offered by banks and other institutions specifically designed to help build your credit score. 

The basic idea behind this product is that your credit score breaks down by 35% on-time payments and 10% credit mix. 

To start, you’ll open a savings account (check out CIT Bank Savings Builder) in which your loan payments will go to. Then, you pay a portion of your loan over a 12 to 24 month period, and once you pay off that loan, you’ll get all of your money back. Usually, the bank will keep some portion of the interest charged on that loan or charge a one time fee.

Credit-builder loans can be used by individuals with poor or no credit as well since the lender takes little risk during the entire process of things as well.

Increase Your Credit Limit

Your credit utilization comprises 30% of your total credit score. Thus, it’s incredibly important to keep your credit card use at a minimum during the billing cycles to keep your score at a maximum.

If you’re in good standing with your credit card issuers, you can request a credit limit increase, which can effectively decrease your total utilization. Since credit utilization is calculated as the ratio of credit used to your total credit available, the bigger the denominator, the lower the fraction is as a whole.

Said differently, increasing your credit limit on existing credit cards will improve your credit score if everything else stays the same.

Is there any fine print?

Interestingly, although your credit score could increase a few points using Experian Boost, this boost may have minimal effect on lenders’ willingness to issue you a new credit line or lower your interest rate.

Why?

When you are shopping for a home and deciding on your loan, lenders may not even consider your FICO Score 8. Instead, they might use their own algorithms to calculate your home-loan based credit score, excluding any of the utilities and telecom payments Experian Boost uses to boost your score.

They could also use your Transunion or Equifax scores to determine your creditworthiness, both of which aren’t affected by Experian Boost. Consequently, your new and shiny score might not affect the interest rates of your loans.

These additional utility payments recorded by Experian Boost can also make lenders question your credit history. Debt-to-income (DIT) ratio is used by lending institutions to also determine your creditworthiness, and logging routine utility and telecom payments can increase the “debt” you owe, since the archaic credit reporting systems aren’t accustomed to this.

This additional “debt” could increase your DIT ratio, which could lower the amount of money you could have actually qualified for in your loan.

Experian Boost has a wide variety of outcomes, and your experiences with it will vastly differ from others. However, remember that Experian Boost‘s effects can easily be removed, so it’s definitely worth trying it out to see what happens!

John Ta

John Ta is an undergrad at the University of Pennsylvania and the founder of Penn’s first undergrad personal finance club, Penn Common Cents. As a first-generation college student, he had to learn everything about personal finance on his own and seeks to mend the financial literacy knowledge gap seen almost everywhere. John is currently studying for an MS in Chemistry and a BA in Physics (business & tech concentration), Biochemistry, and Biophysics and is interested in the intersections of finance and healthcare.

The post Experian Boost Review appeared first on Finance Plan Today.

Credit cards are often compared against their sibling, the debit card. The main difference is that using a credit card generates a loan with interest charges, whereas a debit card is a direct withdrawal of money from your checking account.

You might be asking yourself: why would I ever use a credit card if I have to pay back however much I just spent? Isn’t that just the same thing as a debit card, but with more steps?

Credit cards offer many distinct advantages over debit cards because they allow you to:

1.  Build your credit score
2. Defer loan payments from other loans
3. Fight against fraud
4. Get sign-up bonuses, and
5. Earn free perks and rewards.

Perhaps the biggest takeaway is that you cannot earn points, awards, or cashback using a debit card. By being smart with your credit card, you will essentially be getting free money.

Who doesn’t like free money?

What Are The Key Credit Card Terms?

Before we delve into credit cards, let’s make sure to define the jargon.

When you sign up for a credit card, the interest rate, or annual percentage rate (APR), is displayed front and center. The APR is simply the interest rate used to determine how much interest you’ll have to pay if you forget to pay off your credit card.

For example, if your card has an APR of 25%, and you owe $500, then after a year of not repaying that sum, you’ll owe an extra $125. Credit card APRs are usually really high —do not forget to pay your bill.

A credit card has a credit limit, which is the maximum amount of money you can spend on the card. Some cards might even have an annual fee, an extra charge that some companies charge for you to have their card. These fees usually appear in cards with rewards—it’s up to you to determine how much you might need to spend to offset those fees and to beat the system.

When you look at your credit card bill, you’ll see a billing cycle. At the end of the billing cycle, you will have until the start of the next cycle to pay off your bill to avoid paying interest on your expenses.

What Is A Cash Advance?

Credit cards allow you to withdraw money from an ATM in what is called a cash advance. One thing that you need to be aware of is that you should avoid doing this at all costs for two reasons.

The first is that most credit card companies will charge you a cash advance fee. It will either be a % of the amount withdrawn or a flat fee.

The second reason is that the APR interest rate on a cash advance is much higher than the purchase APR. For example, a friend of mine with an excellent credit score has a purchase APR of 15.99% on his credit card. However, the cash advance APR is a whopping 24.99%.

For that reason, you should always use a debit card to withdraw money from an ATM unless it is an absolute emergency.

Why Get A Credit Card?

Credit cards tend to have a negative stigma surrounding them, but I think this is partly because of misunderstanding and poor credit card practices.

If used correctly, these thin slabs of plastic (or metal) can be one of the best tools in your financial toolkit. Let’s go through some of the benefits of credit cards:

Building Your Credit Score

Your credit score is a number that can help you save a lot of money; in brief, a higher credit score qualifies you for lower interest rates on mortgages and loans.

By paying your credit card on time, keeping the amount of money you owe low, and owning credit cards for a long time, you can keep your credit score relatively high. However, generally speaking, if you don’t own a credit card, then lenders could see you as “untrustworthy,” leading to higher interest rates.

Thus, credit cards are one of the best ways to maintain a healthy credit score. You can check your credit score using free tools like Credit Sesame!

Defer Loan Payments To Your Card

Say you have $1,000 of debt with a 20% interest rate per year. If you don’t repay off that debt in a year, you’ll owe $200 to the lender. Ouch.

Thankfully, some credit cards offer balance transfers that allow you to move high-yield debt onto a credit card. This transfer is advantageous considering that when you open a new credit card, some issuers offer 0% APR for some period. 

Let’s reimagine the scenario above using a balance transfer. Say you still owe the same debt, but now you open a credit card with a balance transfer option and 0% APR for the first year. You then shuffle your debt onto your shiny new credit card. Now, after a year, you owe $0 in debt interest!

Using balance transfers appropriately can literally save you thousands of dollars.

Fight Against Fraud

More scenarios time! Let’s say a thief stole your debit card. If you report the theft within two business days, you won’t be liable for more than $50. However, if you wait any longer, then you could be responsible for up to $500. The worst-case scenario is that you don’t report it until after 60 days, after which you could have to pay for all of the damages.

On the other hand, credit cards offer some of the best protection against fraudulent use. 

If your credit card is stolen, you still need to notify your credit card company, but they deal with checking the transactions. Visa and Mastercard even offer “Zero Liability Policies” that guarantee you won’t be held against fraudulent charges. Consequently, credit cards give a bit more peace of mind since you’ll know that you’ll get your hard-earned money back. 

Get Sign-up Bonuses

Generally speaking, credit cards usually offer rewarding sign-up bonuses when you first open them. For example, the Chase Sapphire Reserve has a $750 signing bonuses while the Capital One Quicksilver has a $150 bonus after spending $500 in the first three months.

Earn Free Perks And Rewards

This is what you’ve been waiting for.

Credit cards offer some very lucrative rewards. Imagine spending $100 and getting $5 back. Think about how much money you spend on groceries every month; some cards reward you for using your card at supermarkets.

Not to push the envelope, but you can even earn free airplane flights over time. 

Reward cards are free money just waiting for you. Don’t miss out on them.

How Do Credit Cards Work?

If a credit card didn’t make the issuer money, then credit cards wouldn’t exist.

Unsurprisingly, credit cards are one of the most profitable products that institutions offer. Firms make money off of exorbitantly high APRs if you miss payments, and when you swipe the card for a transaction. Despite some cards even offering 5% cashback, credit card organizations still make money when you use your credit card. 

The exact details are a bit complicated and out of this article’s scope, but for simplicity, what you should take away is that credit cards exist since they make a lot of money for the issuer. The best cards out there exist because they can make a lot of money for the intuition offering the card.

How Does Credit Card Interest Work

When you use your credit card, you start to accrue a loan. At the end of the billing cycle, which is about 30 days, you will have until the end of your next billing cycle to pay off that loan. If you fail to pay off the money you owe by the end of the next cycle, you will be subjected to the credit card’s APR.

The higher the owner’s credit score, the lower the interest rate. Individuals with a fair credit score can face APRs around 20-25%, whereas those with excellent credit scores (800-850) can face APRs around 10-15%. This drastic difference in rates can save hundreds or even thousands of dollars.

How Do Credit Card Rewards Work

Credit card rewards vary from card to card, but the general idea is that when you use your credit card to pay for purchases, you’ll get some money back.

The better the card, the better the rewards system. Thus, if you maintain a high credit score, you’ll get extremely nice benefits on your credit cards.

I talk more about the different types of rewards in the next section!

Understanding Credit Card Billing Cycles

Credit billing cycles work very differently than debit card purchase cycles. When you open a credit card, you start with a zero balance and your billing cycle begins. Billing cycles typically range from 28-31 days depending on the card. During the cycle, all purchases made will be added to your statement balance.

At the end of the 28-31 day cycle, your statement will be finalized and you’ll know how much you owe. At the same time, another cycle will begin for all purchases in the new cycle. However, the payment due date on the first cycle is typically is 21-25 days after the close of your billing cycle.

That means that you might not need to pay the first statement balance until the second cycle is nearly complete! This can be confusing because your payments and balances might not align with how you thought you were spending your money.

It’s hard to remember what we did a week ago, much less 45-50 days ago.

You should note that your due date must always fall on the same day each month. This is mandated by law.

Let’s use an example to make the cycles more clear for you. Assume the cycle starts on the 2nd day of each month and the cycle ends on the 1st day of the next month. So if you open the credit card at the beginning of the year, the first cycle in this example would start on Jan 2. and end on Feb 1.

Let’s assume the due date is on the 20th day of the month. That means that a purchase you made on Jan. 2 won’t be paid for until Feb. 20, which is 49 days later.

The table below will highlight the relevant dates.

Different Types Of Credit Cards

Many different types of credit cards exist, so we’ll cover them in brief below.

Rewards Credit Cards

There are a variety of types of rewards-based credit cards, so I’ll cover most types of them using a table:

You might have also seen that cashback cards, for example, offer varying cashback rates depending on what you purchase. Let’s explore them in greater detail using a table again:

How To Get Approved For A Credit Card

Generally speaking, you usually have to fill out an application to open a credit card. Why?

Remember that whenever an institution opens a credit card account for you, they risk you racking up a lot of debt and then not paying it off—otherwise known as defaulting on debt. Credit card firms will only give you a credit card if they believe the default risk is low.

Since the best credit cards often provide the best incentives to the consumer, they are uniquely available to only those with top credit scores. This fact is because the cost of maintaining lucrative awards is less than the cost of an individual defaulting on their credit card debt. 

Thus, these applications serve as a way to gauge the consumer’s overall credit risk. 

How The Credit Application Works

A lot of lines in the credit card application make sense once you think about them.

Gross Income

Institutions ask for your gross income because they need to get an idea of whether or not (i) you can pay your monthly credit card debt and (ii) you can pay off the annual credit card fee. They also need (iii) to determine what your credit limit should be.

Think about it this way: if the annual fee for the credit card you’re applying for is $100 a year, and you predict that you’ll rack up $900 in credit card debt over the year, but you only made $500 throughout the year, then how would the credit card company feel comfortable with your ability to pay off even the annual fee? 

Co-applicants

Going back to the previous example, say your net income wasn’t enough to cover the underlying credit card expenses you accrue. However, your parents might be willing to be a co-applicant on your application, where you can list their income alongside yours.

Having co-applicants can help your credit card application. Let’s add a co-applicant to our story, where they make $2,500 net over the year. Now, your application’s total income is $3,000, covering the entirety of the predicted expenses.

Credit History

As part of your application, a lender will review your credit history to determine how likely you are to repay a debt. They will look at whether you pay on-time, the amount of existing debt you have, and the type of debt you have.

When Is The Best Time To Apply For A Credit Card

The best time to get a credit card is after you fully understand how they work and how credit card issuers make money off of them.

It is vital to remember a few critical rules before opening a credit card:

1. Treat your credit card like a debit card. If you only have $500 in your checking account, do not overspend and rack up $600 in loans with a credit card. Remember: this is how credit card companies make their money!
2. Pay off your credit card bills every week. This may seem like a nuisance, but I do this while walking to class, eating dinner, or when I wake up in the morning—it’s become second nature. The advantages of doing this are that you will seldom forget to pay your bills (since they’ve already been paid), you are more aware of how much money you have left in your checking account (following rule 1), and you keep the “total credit used” portion of your credit score at zero. 
3. Fully understand how your credit score works. There are many facets involved in determining your credit score, and credit cards play a significant role in them. Since one late payment on your card could take over seven years to fix, you probably don’t want to be thinking to yourself five years from now, “why didn’t I read more about this?”

If you can remember these rules of thumbs, you should be ready to open up a credit card to enjoy the benefits. You can get free tools like Credit Sesame or Credit Karma to check your credit score.

I will reiterate that credit cards are incredibly lucrative products when used correctly. Keep in mind that these credit card firms are hoping you forget to pay your bills to make money off your interest payments. However, if you can play their game safely, you will be rewarded extensively.

How Do I Pick The Right Credit Card

The best credit card for you is determined by what you are looking for in a card and your lifestyle. 

If you are just looking to earn easy cash back without much thought, then a flat-rate card is probably best for you. However, if you are savvier and want to maximize your cash back, you could get a few tiered or rotating credit cards to cover multiple sectors, using each card in its specific maximal cashback category.

Perhaps you travel a lot. Then travel or hotel based credit cards would be perfect for you.

Research the cards carefully and see if they fit your lifestyle!

What’s The Easiest Credit Card To Get

Secured credit cards are by far the easiest cards to get since they pose virtually no risk to the issuer.

For college students—even those without much credit history—college credit cards are also particularly easy to get and usually offer a plethora of perks. Firms are willing to invest in students since these people are likely to stay with their first firms for a long time, generating enormous degrees of revenue. Take advantage of the benefits of being a student!

How Many Credit Cards Should You Have

There is no magic number of how many credit cards you should have.

Having too many cards (10+) might make it extremely difficult to manage all the billing cycles, introducing a lot of stress. Though, if you can maintain all of them, your total credit utilization ratio will be low, your credit score will be great, and lenders will see you as a safer investment.

However, having too few cards (<3) could make it harder to keep your credit score high. Your credit utilization ratio comprises 30% of your FICO credit score.

A tangible example might make more sense. If you have two cards, each with $500 credit limits, and you spend $1000 over the billing cycle, your credit score is going to take a huge hit—your utilization ratio is 100% for the month. On the other hand, if you have ten $500 credit limit cards, your utilization ratio would have only been 10%, which is considered “excellent”. See how more cards could make a difference?

Furthermore, having a diverse set of cards allows you to maximize your rewards. For example, I have cards I specifically use for restaurants, online shopping, groceries, and flights. Since different rewards cards cover different categories, having multiple cards allows you to cover more sectors, maximizing your cashback.

It’s really difficult to say what the best number of cards is since everyone is different. Having more cards can make it hard to organize payments but could also help your credit score while giving you more access to a variety of perks and rewards. Having fewer cards makes it easier to manage your cards but limits the plethora of bonuses available. 

However, you can still have an excellent score with any number of cards! The FICO credit score doesn’t factor in the number of cards you own. 

What Are Credit Card Networks

When you order something online or in person, you might have seen the merchant say something like “we only accept credit cards from Visa, Mastercard, American Express, and Discover.” 

A credit card network serves as a way for institutions to communicate with the merchant about a credit card transaction. 

Be aware of credit card networks when you think about opening a credit card. For instance, you’ve definitely come across a shop that doesn’t accept a particular credit card network. If you only had credit cards within that network, you might not be able to pay.

As a side note, credit card networks are normally completely independent of credit card issuers. Discover and American Express are some exceptions, serving as both, but Visa and Mastercard are only credit card networks, whereas JP Morgan Chase and Capital One are only issuers.

How Do Card Networks Work?

These networks work by charging a fee on every transaction to appropriately process the information between seller and credit card issuer.

These transaction fees lead some stores to not accept particular types of credit cards or have minimum spending requirements to avoid losing money from these fees. 

How Do Credit Cards Affect My Credit Score

Credit cards play a significant role in determining your credit score. 

In brief, your payment history, credit utilization, and length of credit history are the most important factors in calculating your score. As long as you don’t miss payments, keep your utilization to credit limit ratio low, and own credit cards for a long time, your score will reflect your efforts.

However, if you miss even one payment, it could take over a decade of perfect payments to correct your mistake. Repeat after me: do not miss your payments. It’s worth noting that late payments are generally not reported until at least 30 days after they are due, so you do have some leeway. Note that this is still extremely dangerous territory to be in, and you’d be playing with fire. 

You can monitor your credit score using free-to-use tools like Credit Sesame and Credit Karma!

Are Credit Cards With Annual Fees Worth It?

This question depends entirely on the perks and rewards system of the card. Don’t ignore a card just because it has annual fees; rather, take a look at the benefits it offers in tandem to its annual fees to gauge if it’s worth it for you.

Let’s build an argument based on one of the world’s best credit cards: the Chase Sapphire Reserve travel card. This card offers exceptional perks and rewards but presents a hefty $550 annual fee. You might see this and want to skip over it, but the Reserve is a premier card for a reason. Let’s take a deeper look. 

The card offers $300 in annual travel credit each year, effectively cutting the cost down to $250 per year. Furthermore, for travel or restaurant purchases, you earn three points for every dollar you spend. These points can then be redeemed for a variety of rewards, such as gift cards and flights; when redeeming points for flights, points are worth 50% more. Consequently, according to Chase’s system, every point is worth 0.015 dollars, which means that you get 4.5% cashback towards flights for simply eating at restaurants or traveling.

This credit card also offers ridiculous perks, including top-tier travel insurance, Priority Pass lounge access at airports, and TSA precheck credit (valued at $100). More recently, they have ongoing deals that offer complimentary Lyft memberships (valued at $199) and DoorDash credit (valued at $120). 

We haven’t even mentioned the sign-up bonus of $750. Yep. This card is amazing for those who travel a lot.

Back to the original question: annual fee cards can be worth their face value, but there are certainly annual fee cards that are just bad. Do your research and think carefully about why you would want the card. 

What Are The Top Credit Cards?

My favorite section! There are many credit cards out there, so I’ll present some of my favorite cards for each type. Rewards cards are usually combined with the other credit card types, so you might see things overlap.

Before you take a look, let’s cover something very important: referrals.

Credit Card Referrals

Before you apply for your dream credit card, see if any of your friends, family, or colleagues own the card you’re interested in. Some credit cards offer referral perks that award both parties for referring people to the card. 

For example, the Discover student cards offer $50 for both the applicant and the referrer—mutually beneficial. A pretty sweet deal if I’d say so myself. 

Some other amazing cards that weren’t mentioned above include the Amazon Prime Rewards Visa Signature Card (5% cash back at Amazon and Whole Foods), the Blue Cash Preferred by American Express (6% cash back at U.S. supermarkets), and the Hilton Honors by American Express (earn points for a wide variety of purchases). 

John Ta

John Ta is an undergrad at the University of Pennsylvania and the founder of Penn’s first undergrad personal finance club, Penn Common Cents. As a first-generation college student, he had to learn everything about personal finance on his own and seeks to mend the financial literacy knowledge gap seen almost everywhere. John is currently studying for an MS in Chemistry and a BA in Physics (business & tech concentration), Biochemistry, and Biophysics and is interested in the intersections of finance and healthcare.

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Do credit scores even matter at all? Well, if you care about money, your credit score matters.

Let’s not be hyperbolic and say that bad credit will ruin your life, but it definitely does matter.

How much your score matters really boils down to how you want to live your life. Do you plan to use a mortgage to buy a home or are you going to buy a house in cash?

Put simply, if you plan to borrow to buy a home or a car, then your credit score matters, and an excellent credit score could easily save you thousands of dollars. If you don’t know what your credit score is, then that’s your first step.

Make sure to use Credit Karma or Credit Sesame to check your credit score for free! I use both.

If you need to increase your credit score quickly, it might be worth looking into Experian Boost. It’s a free service that can quickly improve your FICO 8 credit score by including recurring monthly bill payments on your credit report. Check out our full Experian Boost review to learn more.

Most people will borrow money to pay for school or a home. Fewer people decide to forego borrowing money altogether. There’s no right or wrong answer, but most people will have a strong preference.

If you’re part of the second group, have no debt and don’t plan on using loans of any type (including mortgages), then your credit score does NOT matter all that much.

Here at Finance Plan Today, we recognize that everyone is different. Some people have no problem with not owning (outright) the house they live in or the car they drive. For others, this drives them crazy. Let’s take a look at a few different areas where your credit score can make a difference.

How credit scores can affect: Personal Loans and Student Loans

In order to borrow money, your credit score is used by the lender to determine how likely you are to pay back debts. This is because a large component of the credit score is from on-time payments. If you have a high credit score, you have a good track record of paying your creditors. Good credit scores are rewarded with lower interest rates.

For student loans, this mostly applies to private student loans. Federal loans don’t have interest rates based on legislation passed by the government, not your personal credit score. In addition, if you ever plan to refinance your student loans in order to save money, you’ll get the best rates possible with a high credit score.

 

A post shared by Finance Plan Today (@thefinancetwins) on Jul 30, 2018 at 10:15am PDT

Related: read our full Upstart Review if you need a personal loan.