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What is The Minimum Credit Score to Buy a House?

What is The Minimum Credit Score to Buy a House?

Probably one of your most considerable achievements, as you build your net worth, is buying your own house. When you finally approach a lender, your goal is to get approved. But it’s not always as easy as you think. Lenders go through a tedious process of credit analysis before they could decide whether to give you a loan or not. And that analysis starts with your credit score.

What is the Minimum Credit Score Required to Buy a House?

If you’re uncertain about your credit score getting a nod from mortgage lenders, you’ll be glad to know that the minimum required credit score to buy a house varies from lender to lender and loan type.

There are at least four most popular home loan types that require different minimum credit scores from borrowers:

Loan Type What It Means Minimum Credit Score Required
Conventional Not backed by any government agency, but must meet the Fannie Mae and Freddie Mac underwriting guidelines 620
FHA Loans backed by the Federal Housing Administration 580 for a 3.5% down payment

500 for down payments of at least 10%

VA Loans backed by the US Department of Veterans Affairs (for military members) No minimum
USDA Loans backed by the US Department of Agriculture (for low- to moderate-income families who buy homes in rural areas) No minimum, but with a credit score of at least

640 you could qualify for streamlined credit analysis

Note, however, that mortgage lenders are free to set their own minimum credit score required to approve a home loan depending on how they balance out the risk and reward in extending loans to borrowers.

Your Mortgage Rate Depends on Your Credit Score

Your credit score will have a major impact on the overall cost of your home loan, such that a good credit score will earn you a competitive rate, while a bad score will most likely make you struggle to keep up with the mortgage payments.

A credit score in the “good” range (670 – 739) serves as a starting point to qualify for a loan with a relatively good interest rate. But if you’re aiming for the lowest rate, your score must be within the “very good” range (740 – 799).

Your credit score helps your lender to determine your riskiness as a borrower. The lower your score, the riskier you are, hence the higher interest rate they will apply on your loan. A high credit score tells them that you’re a responsible credit manager, and thus merit a low-interest rate.

As of July 2020 using myFICO mortgage loan calculator, for example, a 30-year home would show a credit score and interest rate relationship like this:

  • 760 to 850: APR of 2.784%
  • 700 to 759: APR of 3.006%
  • 680 to 699: APR of 3.183%
  • 660 to 679: APR of 3.397%
  • 640 to 659: APR of 3.827%
  • 620 to 639: APR of 4.373%

How Does Bad Credit Score Affect Home Loan?

You may not be aware that your credit score does have the likelihood to predict how well, or not, you can keep up with a long term loan such as a mortgage.

Borrowers with bad credit will struggle to negotiate for a good rate, let alone be approved. Borrowers with a score below the 600 level may not even qualify anymore. If you get approved even with a bad score, you’ll be slapped with a high-interest rate that will only cause you higher monthly payments compared with someone with a good credit score for the same amount of loan.

On the other hand, lending money for the long term entails such risk, and lenders looking at credit scores provide them a glimpse of the borrower’s delinquency rate within that loan period.

FICO’s research shows how a credit score relates to the likelihood of delinquencies:

Credit Score Delinquency Rate
800 – 850 1 %
740 – 799 2 %
670 – 739 8 %
580 – 669 28 %
579 and below 61 %


credit score needed to get approved for a home loan

How to Get Mortgage Loan with Bad Credit Score

Luckily, some lenders provide loan opportunities for borrowers with bad credit. Those who have bad credit but still need to take out a mortgage loan could still work on some plans to improve their score and later restructure the loan for better terms and rates.

If you are safely forecasting an improvement in your financial situation in the short term and would not want to pass up a bargain on that dream house you’ve always wanted, then you might want to consider this list of creditors that lend to borrowers with bad credit:

Lender Minimum Credit Score Minimum Down Payment
Rocket Mortgage 580 3%
Quicken Loans 580 3%
Vylla 500 3%
Network Capital 600 3%
HomeBridge 550 3%
Mr. Cooper 620 3%
Citibank N/A 3%
Navy Federal N/A 0%
BNC National Bank 640 3%
New American Funding 640 3%

 

Your credit score is a highly significant factor to both you and your lender when it comes to a mortgage loan application. Taking out a loan at a time when your credit score is in a bad state also carries high financial risk to you – and eventually to your credit record. Take a hard look first on financial capacity and weigh carefully the pros and cons that come with a mortgage loan.

How Do I Get a Credit Report?

How Do I Get a Credit Report?

When managing your credit accounts, you may find yourself all too concerned only with your credit score. However, it is necessary for you to also pay attention to the more substantial information from which your credit score is derived – your credit report.

What is a Credit Report and Why is it Important?

Your credit report is an important piece of information that sheds light on your overall credit background and how you handle it. It summarizes your creditworthiness or lack of it. Each time you take out a loan or open a new credit account, lenders will base their decision to grant you the loan and the terms involved in your credit report.

Your credit report is built upon the information of the credit behaviors you have done over the years in all your credit accounts. This report is stored in an electronic file and managed by the national credit bureaus. The summary of this report is mathematically represented by a 3-digit number known as credit score. Just by knowing your credit score, lenders can safely assume the potential risks involved in lending you money without going through the details of your credit report.

How is Credit Report Made?

Your credit report is made and maintained by the three major credit bureaus, namely Equifax, Experian, and TransUnion.

Credit bureaus gather credit information regularly from the lenders, businesses, and government agencies you deal with. There are several types of credit information bureaus consider important in order to accurately map out your credit history. how to get a credit report from the bureaus These include:

  • Bills payment
  •  Missed payments
  • Delinquencies
  • Opening and closing accounts
  • New purchases
  • Charged-off loans
  • Discharged or forgiven debts
  • Settlements
  • Foreclosures
  • Repossessions
  • Bankruptcies
  • Court judgments

While the three major credit bureaus gather similar credit information about you, they organize, store, manage, analyze, and format the data differently. Hence, the varying ways in which your credit report is presented in a readable document.

When lenders need to make a background check on your credit thoroughly, they will purchase a copy of your credit report from any or all of the credit bureaus. However, as the law mandates, the bureaus will limit the credit information that the report will contain only the most relevant to the inquirer to protect you from identity theft and other types of fraud.

How Do I Get a Credit Report?

You have a legal right to access your credit report. And as a responsible credit manager, you need to monitor the accuracy of the data collected by the credit bureaus from the lenders that send to them. Not obtaining a copy of your credit report and not fully understanding what data should be there is putting your financial health at risk.

You also cannot overestimate the legitimacy and accuracy of the information credit bureaus collect from lenders and businesses. With millions of credit reports being handled, human error is always possible. Any wrong information on your report may result in a downtick of your credit score leading to high interest on loans, disapproval from the tenant screening process, or fewer job opportunities from prospective employers that also look at the status of your credit report.

Likewise, lenders and businesses are not required to send credit information to all major credit bureaus, causing varying credit reports at any given time when you obtain it or when a hard pull is made during a credit check. Because the three credit bureaus are highly independent business entities, they do not have a system in place that syncs data amongst themselves. By monitoring your credit reports from each bureau, you’ll be able to update it as necessary by disputing any wrong information or update it by providing any missed information.

Keep in mind that you can access your credit report for free every 12 months from each of the credit bureaus. You can request a copy of your credit report through phone, mail, or online. When accessing your credit report online, be sure to use only platforms that are legitimate and safe. Annualcreditreport.com is a website put up by the 3 major credit bureaus through which you can order your free credit report.

Here are the ways you can get a copy of your credit report. When making the request, you will need to provide your name, social security number, and date of birth.

Via Phone

You can call the Annual Credit Report Request Service toll-free at 1-877-322-8228 and make the request. Your request will be processed and mailed to you within 15 days. 

Via Mail

To request by mail, visit the www.annualcreditreport.com and complete the Annual Credit Report Request Form. You can print a copy of the form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Your report will be sent to you within 15 days from the date of receipt of your request.

Via Online

For immediate access to your credit report, log on to www.annualcreditreport.com, and follow the procedure for reviewing your report. You can download and print your report for your hard copy. You will repeat this process for each credit bureau report you request.

what to look for in a credit report

What to Look For in Your Credit Report?

There are several sections of your credit report that summarizes your credit history and information. Go over each section and look for any data that is inaccurate, incomplete, or not supposed to be there.

Personal Information Section

  • Name, address, or phone number
  • Prior address if you have not lived long at your current address
  • Social Security number or birth date
  • Previous and current employment information
  • Marital status

Public Records Section

  • Lawsuits you were and were not involved in.
  • Bankruptcies filed by your spouse or ex-spouse with a specific chapter
  • Bankruptcies you recently filed, or you filed more than ten years ago that are not identified by the specific chapter of the bankruptcy code
  • Lawsuits or judgments reported more than seven years after the judgment was entered, or after the expiration of the statute of limitations.
  • Tax liens you paid more than seven years ago, or criminal arrest records more than seven years old.
  • Paid tax, judgment, mechanic’s, or other liens listed as unpaid.

Credit Accounts Section

  • Commingled accounts—credit histories for someone with a similar or the same name.
  • Account listed as joint, when only or your spouse is responsible for it
  • Premarital debts of your current spouse attributed to you.
  • An account due to an identity thief’s actions.
  • Accounts in which you are an authorized user but are not included in the report
  • Incorrect account histories
  • Discharged debts that still  appear to be owed, such in the case of bankruptcy that you filed or forgiven debts
  • A voluntary surrender of your vehicle incorrectly listed as a repossession.
  • A missing notation when you disputed a charge on a credit card bill.
  • Accounts that incorrectly list you as a cosigner.
  • Closed accounts incorrectly listed as open
  • Accounts you closed that does not indicate “closed by consumer”
  • An account delinquency that occurred more than seven years ago or that does not include the date of the delinquency.
  • Incorrect date of delinquency on an account that was charged-off or sent to a collection
  • Overdue child support that is more than seven years old.
  • Other adverse information that is more than seven years old.

Inquiries Section

  • Hard pulls by creditors without your written permission 

How to File For Dispute on Negative Information in Your Credit Report?

When you see erroneous information in your credit report, take action immediately by filing for a dispute. A pending dispute also shows up in your credit report and gives a negative impression to lenders that see it. The sooner a dispute is resolved, the better. And because errors in credit reports exist, be sure to always keep and secure important copies of your credit transactions so you can easily refer from them when the need arises.

Here are the steps that you should take:

  • Identify credit report errors. Even a single mistake on your report can impact your credit score.
  • Contact the furnisher of the report. Contact the company that provided the wrong information and verify their record in conjunction with yours. The error could be resolved at this point, and they will send the bureaus your updated credit information with the necessary corrections.
  • Dispute your credit report’s error. If the error remains unresolved with your report’s furnisher, contact the credit bureaus to inform them and file for dispute. Keep all copies of your dispute letter and other correspondences.
  • Allow time for investigation. The dispute process takes at least 30 days or less.
  • Follow up after the investigation. When the investigation and dispute have been completed, you will receive a copy of the results of the investigation from the bureaus, as well as a free copy of your corrected credit report. The law also requires that credit bureaus should send out corrected copies of your credit report to any company or anyone who accessed it in the last 6 months or received it in the past 2 years.

Regularly monitoring your credit report is a wise financial habit. You need to protect not only the information that sums up your creditworthiness but also your financial background and identity that is prone to consumer fraud.

What do Mortgage Lenders Look For in Credit Report?

What do Mortgage Lenders Look For in Credit Report?

When you have finally decided to buy a house, approaching the mortgage lender could be a make or break situation. Lenders will go through a process of credit analysis using your credit report and other financial information before they could decide to grant you a loan and on what terms.

Therefore, it is important for you to know how mortgage lenders determine your creditworthiness so that you may prepare yourself for such scrutiny.

What Do Mortgage Lenders Look for in a Credit Report?

Lenders will need more information about you in order to give you a pre-approval. In this case, your lender will make a hard pull on your credit report to look for pertinent data about you and determine the best loan program to offer you.

Here are the things they look for in your credit report:

Recent Applications

They want to know if you’ve recently applied for a loan or the number of times you’ve made hard inquiries. Too many of these indicate that you may be in financial trouble. 

Payment History

They look for details indicating that you’re a responsible borrower with no missed or late payments. When they see one, they may ask you for some explanation.

Credit Utilization what lenders look for in credit reports

This is an important factor for mortgage lenders, as this indicates how much of your available credit you are using. If your credit utilization is more than 30% at any given time, it’s a sign for the lenders that you’re a risky borrower.

Major Derogatories

These are likewise red flags to the lenders, especially when they see records of bankruptcies, foreclosures, repossessions, charged-off loans, accounts in collections, court judgments, and delinquent accounts.

Being an Authorized User

Unless you, as an authorized user of someone else’s credit account, are responsible for managing an account, this information will have less weight on their analysis. They would prefer to see how well you manage your own credit card accounts. 

A Dispute Statement

Pending dispute information that is currently in your report will obstruct your mortgage underwriting process. Lenders will not be able to see the true view of your credit until your pending dispute is resolved.

Your Income

Lenders want to know how stable your income is. If you have a stream of income from different sources, lenders would want to know what they are and how frequently you receive them. Knowing all of these will help them determine your debt-to-income ratio, which is also a critical factor for them.

Your Assets

Your list of assets, specifically when it includes high-value assets, will let lenders know how equipped you are in making a larger down payment. 

Your Collateral

Putting down a sizable amount as collateral tells the lender that you are sharing the risk involved in making the loan. A 20% down payment will also help you get the best mortgage loan rate. But if you are eligible for a federal-backed loan, you may only be required a considerable low down payment, usually ranging from 0% – 35%.

Your Credit History

Lenders typically require 12 – 18 months of positive credit history that shows modest balances and prompt payments across all your credit accounts.

good credit to get approved for a loan

How Lenders Use Your Credit Score to Evaluate Your Mortgage Loan?

Having the right credit score is crucial when applying for a mortgage loan, as your interest rates and monthly payments will be based on that. Having a low score, even if you qualify for the loan, can cost you more money for the duration of the mortgage.

FICO scores are the credit scores most mortgage lenders use to analyze your credit risk and the interest charge that will be applied to your loan. You have three FICO scores in each of the credit bureaus, and they all differ in number because:

  • The credit bureaus use different proprietary scoring systems
  • They have different ways of gathering credit information from lenders, merchants and other businesses you deal with
  • Lenders and merchants are not required to send your credit and transaction information to all credit bureaus, and they could choose which bureau they would only submit. This will cause different overall credit reports, thus further resulting in varying credit scores from the three credit bureaus.

For a conventional mortgage loan, the minimum FICO credit score required is within the range of 620 – 640.

The table below gives you a safe estimate of the mortgage rate based on your current credit score. 

If your FICO® score is… Your interest rate is…
760 – 850 2.74%
700 – 759 2.97%
680 – 699 3.14%
660 – 679 3.36%
640 – 659 3.79%
620 – 639 4.33%

How to Prepare Yourself for a Mortgage Loan?

Applying for a mortgage loan is a tedious process — from preparing for thorough credit analysis by the lenders to selecting the best lender for your goals.

To optimize your time and other resources, it is best to start your mortgage plans with a good amount of preparation.

Be Specific and Realistic

You need to manage your excitement in planning on buying a house so you can stay realistic with just how much you can afford. Your chances of getting a good rate are when you have a good credit score coupled with at last 20% down payment. If you are only capable of less than that percentage, make some calculations of the monthly payments based on the interest you’ll be able to get and see if this is something you can keep up to pay long term. Make use of free mortgage loan calculators available online to make your estimates. 

Get Your Credit Report in Order

You are entitled to a free credit report from the three credit bureaus every 12 months. Use this opportunity to look for erroneous information in your report that should not be there. If there are any errors, file for dispute right away because the calculation of your credit score is based on what’s in your credit report. Likewise, it takes a while before a dispute gets resolved thereby dragging your loan application plans.

Pre-Qualify for the Mortgage Loan

Pre-qualifying for a mortgage is quick, easy, and can be done online. It involves making a loan inquiry from different lenders without them making a hard pull on your credit report. You provide your prospective lender with some financial information about you – income, current debts, and assets – and they will review these to provide you with an estimate of how much you can borrow and some mortgage options. However, since pre-qualifying for a loan does not involve a complete analysis of your credit report, it does not mean you are pre-approved. Nevertheless, this is a good way to collect some figures, along with loan terms and conditions, for your further study.

Prepare Your Down Payment

The more money you put down upfront, the less monthly payments you have to pay for the duration of the loan. Determine which among your current assets can be used or liquidated to make up a good amount of collateral.

Decide How You’re Going to Pay

You shouldn’t be struggling to make ends meet even if you can keep up with your mortgage payments. There still should be enough money left to go about comfortably in your life. In this area of your planning, make a list of life events that you want to pursue within the 15, 20, or 30-year period that could negatively impact your finances and figure out how you will shield your mortgage loan from that possibility.

 

Finally buying a home and getting approved for a mortgage loan will feel very much of personal achievement. But with 15 to 20 years binding contracts down the line, it’s not always easy to predict financial stability or which direction your finances may go. It is important, therefore, to keep a realistic perspective and make careful thought on this major decision — so as not to risk losing the home you have always dreamed of to a possible foreclosure in the future. 

Is No Credit Worse Than Bad Credit?

Is No Credit Worse Than Bad Credit?

You may find it quite tricky to answer the question “is no credit better than bad credit?”, especially when there are actually good reasons to stay away from credit. However, part of building your net worth, personal or business, is taking on different types of credit. A good credit history opens you to a lot of financial opportunities that would otherwise be impossible if you don’t have a credit history of some sort.

No Credit vs. Bad Credit

A person with no credit, even with reliable income, has no history that lenders can use to predict their creditworthiness.

A person with bad credit, usually with a credit score below 630, means there is a credit history with a few mishaps; although it may take a while to bounce back.

Whether you have no credit or have bad credit, you’ll be dealt upon by lenders in much the same way — seen as a risky borrower. Because of this, while both types of people are not entirely the same, they may experience similar difficulties in certain situations such as:

  • Trouble finding a place to live
  • Having to pay higher utility deposits
  • Fewer loan options in case of emergency expenses
  • Higher interest rates or getting turned down if you want to take out a loan

What are the Advantages of Having No Credit? 

1 in 10 Americans have no credit history. Though the reasons why may vary, a good majority of these people still choose to build their net worth with very little or no credit at all. For these people, living a life without credit has it’s advantageous such as:

Having a line of credit does not teach self-control

Exercising restraint with a line of credit is often difficult, and in most cases end up in failure. Commercialism demands us to keep up with everything new in the market, that the impulse attitude toward buying creates a negative impact in many areas of life including relationships.

what to do if you have no credit

Relying on a cash budget keeps the budget under control

People with lines of credit think that they can afford a little bit of spending here and there, and realize later when bills add up that they couldn’t really afford it. Spending discipline always starts with a budget that you stick to. As the adage goes, “if you can’t pay it in cash, then you can’t afford it.”

Purchases don’t have to come with expensive interest rates

Avoiding added cost on even the most basic of purchases is the most practical thing a disciplined spender can do. Buying your basic goods on credit and having a habit of paying only the minimum balance each month, even after a year of paying interest you’d still owe a large portion of that purchase.

Financing leads to more spending

People with a line of credit miss the notion that they are spending now the amount of money they would still have to earn in the future. This is a common trap among those that do not think twice about unneeded or overly expensive items when they pay with credit instead of cash.

Bad credit management can lead to bankruptcy

Good credit management can’t be underestimated because as simple as it may sound, may people with credit end up in default. The census in 2019 is that there are 1 million people defaulting every year. Those who are unable to resolve this problem file bankruptcy without much choice.

Can You Still Get a Loan With No Credit?

People with no credit may be in a much better position in managing debt because they are fully aware of the problems that can arise when they aren’t careful.

If you have no credit and need to make a major purchase such as a car or home, you may be concerned whether you could still get a loan. The good news is you can!

Although the application process could be challenging, there are many loan options that are available for you. Your first step is to gather all your financial records to back your payment history in place of credit score.

Small / Personal Loans

Look for lenders that accept non-traditional credit history

Some smaller banks or credit unions offer loan opportunities to people that don’t have credit history. They use alternative data to analyze creditworthiness using bank account activities, record of timely payments with utility services and rent among others.

Apply for Payday Alternative Loan from credit union  applying for loans with no credit

Be a member of a credit union to gain access to Payday Alternative Loans for immediate cash needs. These are unsecured loans with terms of 1 to 6 months, with borrowed amounts ranging from $200 – $1,000. The maximum interest rate applied to such loans is 28%.

Obtain a secured loan by putting down collateral

If you’re able to put down something of value as collateral – real estate, vehicles, bank accounts, paper assets, insurance policies, collectibles, and precious metals – you are highly likely to be approved of a loan and with low interest.

Borrow from your 401(K)

If you have a secure job with the potential to pay back your loan quickly then accessing your 401(K) for a large amount of money would be a sound option. As long as you remain with your employer for the duration of your loan, you can pay it for as long as 5 years.

Add creditworthy cosigner to your loan application

Have a family member or a close relation who trusts your financial discipline to cosign a loan with you. Note however that mismanaging a loan with a cosigner also damages the credit of that person.

Home / Auto / Business Loans

Federal Housing Administration mortgages

The Federal Housing Administration offers the mortgage loans through accredited lenders and with much leniency to borrowers. You may be required a lower value down payment compared to the average conventional home loans. However, expect the interest rate to be much higher.

Dealer Financing

Car dealers have auto loan programs in place, and often prefer that you apply for it than to finance your auto purchase by another way. 

Community banks and credit unions

Smaller lenders such as community banks and credit unions are not short in service when it comes to home, auto or business loans. They are more adaptable and could offer you programs that fit your needs.

Marketplace loans

With a marketplace loan, you deal with a loan broker that takes your financial and loan profile and presents it to a host of investors. The investor interested in your profile may decide to make a counter offer. If you are taking this route, be sure to stay involved in the loan process in order to secure your data.

Angel investors

Angel investors are focused on providing loan assistance to business startups with a show of growth potential. These are typically individuals with spare cash who want to earn higher interest rates on their money than would be given by traditional investments. They too may decide to make a counteroffer, such as acquiring a stake in the startup instead of just providing a loan.

getting approved for a credit card with no credit

How Can You Build Credit if You Don’t Have Credit History?

Building your credit on a clean slate can be more successful with proper guidance. Your best options are:

1. Get a store card

Brand stores encourage you to apply for their credit card because you’ll be notified of their store promos and discounts that prompt you to make a purchase.

2. Apply for a secured credit card at a bank

Your credit limit will be based on the deposit amount that you put in your account.

3. Apply for a credit-builder account

This also establishes your credit but does not require upfront cash as secured cards do.

4. Become an authorized user of an established credit account

This will build your credit fast whether you actually use the account or not.

5. Report all your utility payments to credit bureaus

If you do not deal with lenders on a regular basis then no one will submit your credit information for you. In this case, you may submit your own payment information to the credit bureaus.

As a consumer, it is nearly impossible to go through building your financial life without needing to access credit in one way or another. When you have no credit report or have too little information to build a score, your credit opportunities become too limited thus hampering your financial growth.

What Happens if I Stop Paying My Credit Card?

What Happens if I Stop Paying My Credit Card?

There are many benefits to owning a credit card. Apart from it being a good instrument for credit building, it can provide you quick access to credit and cash advances when you need it. But not many people can keep a disciplined approach to credit card management; some of them end up with accumulated debt that becomes too hard to pay off.

Considering not paying your credit card debt will cause you more trouble. In the following article, you’ll learn how credit card debts compound and how to deal with it when it happens.

What are the Causes of Credit Card Default?

A credit default can happen when a borrower misses payments or avoids repaying debt that includes principal on loan and interest charges. Most people don’t realize the impact of credit default on their credit history until it’s too late. This can result in very difficult credit applications or financial dealings for at least 5 to 7 years following the default. 

Knowing the 3 major causes of default early on can help you avoid it and other financial troubles later on:

Unknown Missed Payments

You may only start to be aware of unknown missed payments when you apply for a new line of credit and you have been declined. Your credit report will show these missed payments that could come from mismanaged bills from utility services or phone contracts. For example, if you pre-terminate a phone contract, and have abandoned some fees that go with it, that could cause you $2,000 to $3,000 in unknown missed payments. The same is true when you move to another house and there is an unpaid outstanding balance in your utility services, that easily adds up to your credit default.

Known Missed Payments due to Financial Hardships

People who know the value of having a good credit record do not just decide to stop paying their obligations. But unfortunately, when they are faced with financial hardships they begin to struggle in paying their bills. Some of these instances are natural when dealing with finances, but even an emotionally devastating event can affect how a person operates mentally. These instances include: loss of a job, long-term illness, permanent disability, failed business, divorce, and death of a family spouse or family member. 

Overcommitted to High-Interest Debts

If you are suffering from credit card default, then you may have way too much credit and loans that you can’t really afford. Even when the loans were granted with ease, managing multiple credits and loans will eventually take its toll on your finances.

not paying your credit cards

How You Accumulate Credit Card Debt

You can easily accumulate credit card debts when:

  •  You don’t pay your outstanding balance each month. The interest applied to the unpaid balance will cause a spike in your next month’s outstanding balance.
  •  The annual percentage rate (APR) of your credit card and all your other loans go up as the prime rate dictates. This will cause a sudden ripple effect on the additional money you have to put out to pay your balances.
  •  You miss a payment even just for a day, a late fee is charged on your account.
  •  You have missed paying your balance for 60 days and thereafter, you’ll be charged a penalty APR considered to be one with the highest rate.
  •  You are 180 days late in your payments and your account will be turned over to the collection agency along with the accumulated fees.

 

What Happens When You Stop Paying Your Credit Card?

When you stop paying your credit cards you’ll have more problems to deal with that will definitely be so much harder to fix later on.

Your Interests and Late Fees Will Start to Accumulate

The amount you are due for payment every month will increase – unpaid amount plus the current month’s outstanding balance. After your account becomes 60 days past due, your interest rate will increase to a higher penalty rate.

Lasting Effect of Penalty Rate

The penalty rate is applied to your account until you have made 6 consecutive payments on time. 

Collection Efforts Increase

When your account has been finally turned over to the collection agency, you will start to be bugged by endless text messages, emails, and phone calls to remind you of your credit card payments.

Credit Score and Credit Report Impact

As your credit report gets updated on a monthly basis via reports sent by your creditors to the credit bureaus, you can expect your credit score to experience a swift dive. This bad credit may linger in your credit report, ruining your ability to access future loans.

What are Credit Card Debt Forgiveness and Debt Relief Options and How Do They Work?

If you are currently deep in credit card debt, know that there are options you can exercise to minimize the damage to your credit. But it is important that you act on the matter quickly.

being in credit card debtDebt Forgiveness

You may think about debt forgiveness as a 100% discharge of your debt. This isn’t true. Debt forgiveness is only a special payment arrangement or settlement with your bank before your account is turned over to the collection agency. If you are sure to miss several payments on your credit card down the line, call your credit card company and explain your situation. While you may not expect debt forgiveness early at this stage, you may be given a retrieve for the interest charges on the balance. Propose a clear plan on how you will pay your debt and stick to it.

Seek the Assistance of a Credit Counseling Agency

A credit counseling agency can help you draft a debt settlement plan and negotiate with creditors on your behalf. An example of this plan is allowing you to pay the full amount you owe for the next 3 to 5 years, with or without a reduced interest rate, while keeping your account active. Be sure to reach out only to legitimate agencies that are accredited by the National Foundation for Credit Counseling.

Negotiate with Debt Collectors

You can negotiate on your own once your account has been turned over to a collection agency. Just like with your bank, you need to be specific on how you’ll repay the debt, either on a reduced lump sum amount or on installment. Study and know your rights under the Fair Debt Collection Practices so you will spot early on any unfair practices against you.

Consolidate your Credit Card Debts

If the nature of your debt accumulation is due to feeling overwhelmed handling multiple accounts, then consolidating your debts in a single account may work for you. Take time in looking for the best credit card with lower rates to make the balance transfer.

File for Bankruptcy to Discharge the Debt

If you have exhausted all options and are certain that you can’t pay what you owe, then filing a bankruptcy may be the right move for you. There will be huge consequences of this move on your creditworthiness that will drag you for years, so be sure to seek the assistance of a bankruptcy lawyer before going through with it.

How Can You Avoid Accumulating Credit Card Debt?

These simple tips are the most important strategies financial experts recommend if you want to avoid accumulating credit card debt:

  1.   Set a strict spending budget
  2.   Always pay more than your minimum amount due each month
  3.   Keep a low debt-to-credit ratio
  4.   Improve your credit score to gain bargaining power for lower interest rates
  5.   Avoid too many loan accounts

Debt accumulation doesn’t happen overnight; it is a result of a series of bad credit behaviors that you can actually monitor, control, and avoid. If you are already in a similar situation, know that if you make the right choices now it will help lessen the negative impact on your credit.

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