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A recent survey asked millennials how they felt about paying off all their credit card debt this year. The responses indicated a real lack of optimism: 25% felt not at all confident 28% felt slightly confident 20% felt moderately confident 28% felt very confident Nearly three-fourths of the millennials surveyed did not feel fully confident in their abilities and skills to pay off credit card debt. Are you part of this group too? Don’t let your stress or lack of understanding push you away from developing great personal finance skills; instead, embrace your misconceptions and learn where to go from here. Below is a list of myths that many millennials believe when it comes to handling credit card debt. If any, or all, of these myths have come across your mind, don’t stress — a panel of over 20 financial experts have shared their wisdom to help guide people just like you, a millennial struggling with debt. Go on, start clicking through the list of myths; I guarantee you'll walk away feeling a bit more financially confident. Myth 1: You shouldn’t save money if you are trying to pay off debt Myth 2: The “Keeping Up with the Joneses” mindset won’t hurt you Myth 3: “Don’t sweat the small stuff” — Convenience spending isn’t a big deal Myth 4: Millennials should know better than to go into debt Myth 5: All credit cards are created equal Myth 6: Millennials are lazy and irresponsible Myth 7: There is only one way to pay off credit card debt Myth 8: Your credit card company is out to get you Myth 9: Spend now, go into debt later Myth 1: You shouldn’t save money if you are trying to payoff debt Many millennials attempt to aggressively pay off all their debts, putting every extra dollar they can afford to credit card debt. What most don’t realize is that paying off debt is a balance of putting money towards credit debt and putting money towards savings. Kudos to paying off your credit card debt, but think about how a lack of savings could cause even greater financial instability. “Say your apartment floods, you get fired, need surgery, or face car troubles. You may fall back into credit card debt in order to pay for the unexpected emergency. You’re just continuing that cycle of debt when you don’t set aside money for savings, unable to ever truly breathe," warns Gideon Drucker, Certified Financial Planner. Solution 1: Saving is empowering — pay yourself The word saving needs a change of reputation — most associate the word with restrictions. However, many financial experts champion the notion that saving is paying yourself for the future, rather than depriving yourself today. A good savings plan is one that is specific, organized, and trackable: Specific — Choose a specific percentage of your income that you can put towards your savings with every paycheck. It is often recommended that 10 percent of your paycheck should be put towards your savings each month. Budget the rest of your expenses with the remaining 90 percent of your income each month. Organized — The Capital One Mind Over Money Study suggests, “Set up goal-directed banking accounts to help you focus on long-term goals. For example, name an account after a big life goal that you want to work towards, such as buying a house. Use this account exclusively for your savings pool.“ Trackable — Many online tools make it easy to automate and track savings. Automating your savings allows you to auto deposit money from your paycheck into your savings account, meaning you don’t need to worry about it. Apps allow you to track all of your expenses and income, making you accountable to your savings plan. It’s never been easier to track where your money goes. Myth 2: The “Keeping Up with the Joneses” mindset won’t hurt you What is a “Keeping Up with the Joneses” mindset anyway? Essentially, it is the idea that you should use people around you as the benchmark for your own material wealth expectations — If the Joneses are buying a boat, then you should too. As a millennial myself, I have found this mindset easily amplified through the use of social media, the ultimate comparison platform. It is now easier than ever to see so much of what others have, evoking feelings of material comparison. “Many millennials fall into this trap, spending money on “Keeping Up with the Joneses” type vacations, meals out more often than they should, etc. Money is so hidden, you only see what people do,” says financial coach Heather Albrecht. This attitude can lead to debt and dissatisfaction in the long run for those who cannot truly afford the luxuries that they are seeking out. Solution 2: Avoid minimum payments If you are capable of making more than the minimum payments on your credit card balance each month, do it! Those minimum payments end up costing you more in interest and give you a false sense of wealth. It is dangerous to get into the habit of spending credit that you cannot afford now with the mindset that you will pay it back later. Accountant Howard Dvorkin reinforces this principle expressing that, “millennials are so unique, even their debt is different. They run up big balances just trying to make ends meet. I’ve never seen a generation that puts so many daily expenses on their plastic. it’s too darn easy to slip into making just the minimum payments.” Avoid the temptation to run up your card with expenses that you cannot afford to pay in full every month. Myth 3: “Don’t sweat the small stuff” — Convenience spending isn’t a big deal Millennials have been raised in a world of new and enticing ways to spend money. Convenience spending and instant gratification put millennials in a unique position to spend money in a number of different ways — ways foriegn to previous generations. For example, “Amazon Prime, food delivery apps, Uber, you name it make it super convenient to say yes to immediate wants. Convenience is nice for saving time, but it isn't so friendly when it comes to saving money and avoiding credit debt. Additionally, the inability to say ‘No’ to not just ourselves, but social situations makes it easier to simply say yes to spending” explains finance educator Josh Hastings. Solution 3: Limit convenience spending You do not need to cut out all convenience expenses, time is precious after all, but consider cutting out a few. Pinpoint which convenience expenses truly help you save time, versus the expenses that stem from laziness or impatience. After you have pinpointed which convenience expenses you can live without, “be willing to make those changes to your lifestyle. Use that extra money from your cut down expenses as a way to help repay your debt,” advises Gladice Gong, personal finance blogger. That extra $50 saved from convenience spending each month can now get you one step closer to being debt free. Myth 4: Millennials should know better than to go into debt About one-fifth of the experts that contributed to this article explicitly expressed the concerning reality that millennials execute minimal personal finances skills. Millennials are blamed for being reckless with money, but everyone seems to agree that the previous generation did little to teach millennials good personal finances skills. Ken Rupert, author of "Financial Self Defense" explains, “millennials have become conditioned to supplementing their incomes with debt. This, however, is not entirely their fault since the generation before them set the example. Adding to this reality is the lack of financial acumen they have. Rarely in high school or college are they required to take a personal finance class. This lack of financial priority and understanding has led to increased values in consumer debt for millennials.” In addition, personal finance blogger, Freya Kuka expresses how student debt adds to the issue of credit card debt amongst millennials: “Salaries have not risen proportionately to student loans and we can not blame the youth for the nature of the economy. By the time they are done with their degrees, they are struggling to pay bills and meet their student loan payments. What is the answer? Credit cards. The evil piece of plastic that actually accounts for 25% of all millennial debt!” Solution 4: Start with the basics, take on your debt one step at a time For millennials who feel overwhelmed by credit card debt, here is the first thing that you need to drill into your mind. Tell yourself that while your debt won’t go away overnight, you can be debt free if you work little by little. This mindset shift is crucial. Believing that financial freedom comes with time and dedicated effort means that you are finally taking an honest, realistic step in the right direction. No quick fix, no loophole, just a determined plan to eliminate debt one step at a time. Millennial Kalyn Lewis shares her own personal experience and advice: “Don’t look at the overall debt and allow yourself to get overwhelmed and shy away from getting after it. Instead, look at it month by month and know that this is going to take you a bit of time. Once I got everything in my month-to-month plan, I started to pay off more each month, and the months needed to get debt to zero also became fewer. Rather than having debt paid off by April 2021, we'll now be credit card debt-free by the end of 2020!” Myth 5: All credit cards are created equal This myth is for millennials who are looking to apply for their very first credit card. Be aware that your status as a credit novice makes you a target for credit card companies. “College students are often targeted by credit card companies with “easy” money offers, i.e., credit card offers for those with little or no credit. When a college student needs some money, it’s hard to say no to one of those offers. College students may not be shopping around for the best rate making them more willing to take what is in front of them,” explains counselors from GreenPath Financial Wellness. Solution 5: Counter your credit card mistakes by improving your credit score If credit card mistakes have been the catalyst for your debt, then it’s time to take your credit score seriously. Your credit score determines your interest rates for loans, credit cards, mortgages, etc. so if you want to pay less, then you’ve got to have a higher credit score. “Payment history is the most important factor in determining your credit scores so make sure to develop responsible on-time payment habits every month. Late payments can last up to seven years on your credit reports — the last thing you’ll want to carry with you in your financial journey,” advises Nathan Grant of Credit card insider. For more information on the five main factors that influence credit score, read our article that goes over the in's and out's of credit score. Myth 6: Millennials are lazy and irresponsible Millennials seem to be an easy target for workplace jokes and internet memes. Every generation has its quirks, but the reality is that millennials were born into an era that makes it uniquely easy to fall into debt. Credit analyst Yvette Glover empathizes with the many millennials that find themselves in a troubling financial situation: "Millennials get a bad rap for being lazy or overly sensitive, but the reality for a lot of them is very different. Some face surmounting debt because of the high cost of college tuition. With a housing market that's even more expensive, millennials are paying more in rent while having fewer opportunities to own. Stuck with higher costs and lower-paying jobs than previous generations, a lot of millennials lean on credit cards to fill in the income gap. These circumstances add an enormous financial burden to a generation that's still just getting started.” Solution 6: Pay down debt using the Avalanche Method Out of the 25 experts that offered up tips for this article, nearly one-fourth of them suggested using the debt Avalanche Method, also known as the snowball method, as a strategy to climb out of debt. Finance expert Nathan Wade of WealthFitMoney gives an overview of how to implement the avalanche method today: Create a spreadsheet with a list of your debts organized from the smallest balance to the largest balance. Focus on clearing your smallest debt first while making minimum payments on the other debts. Once you’ve paid off the first debt, allocate the amount you were paying toward the first debt into the second smallest debt on the list. Focus on paying off this second debt. You then keep “snowballing” your payments until each subsequent debt is finally cleared. Myth 7: There is only one way to pay off credit card debt A very common, and typically ineffective, way to pay off credit card debt is to apply for several credit cards in an effort pay off already existing credit card debt. Financial expert Robert Farrington comments on this strategy, “It’s common for millennials to get into credit card debt due to a lack of experience in [credit cards]. It’s easy to max out one card, then apply for another, max that out, and then apply for another. Eventually, the bill comes due and it can be stressful to make multiple payments.” The reality is that if you can not afford to pay off your first credit card, what are the odds that you will be able to pay off your new lines of credit as well? Solution 7: Consolidate credit card debt with a personal loan Thousands of people use a personal loan to pay off multiple lines of credit card debt. If you are unfamiliar with what a personal loan is, here are a few benefits: Convenient — You can essentially consolidate any number of credit card debts into one large payment, eliminating the need to pay off several credit cards and instead just making one monthly payment. Affordable — Personal loans are characteristically known to offer lower interest rates than credit cards — especially those with great credit scores. Financial and law expert, Jennifer Jancosek advises, “Those with a high credit score can use a low-interest personal loan to pay off high-interest accounts, saving significant money over the course of debt due to the lower interest rates.” Strict — In order to pay off your personal loan you have to pay a complete monthly payment each month, you cannot only pay a minimum amount like a credit card. This is great because it forces you to pay off your debt, but can be difficult for those who are not able to financially commit to a set payment each month. Or, Compare the Best Personal Loan Companies. Myth 8: Your credit card company is out to get you Many bank and credit card companies aim to be transparent and trustworthy, offering free resources such as trained employees, personal finance guides, online courses, etc. to help out new customers like you. Don’t be afraid to take advantage of the free resources; it is all at your benefit. Reading customer reviews is a great way to gauge a company’s dedication to its customers. Do your homework to find the right company with resources that can help you out. Steer clear of the few companies that do not appear to be as transparent with its customers. For example, some credit card companies will “pop up on college campuses to nab students right after they graduate [with credit card offers],” warns Brian Hanly, finance educator. If you find yourself in a similar situation, disregard the persuasive offers and remember that some banks and credit card companies are truly willing to help you achieve your financial goals. Solution 8: Ask a favor from your credit card company Do not let credit card companies intimidate you. Credit card companies, unfortunately, are not always going to proactively go out of their way to save you money. However, you will be surprised how willing credit card companies are to waive fees or lower APR rates if you pick up the phone and talk with one of their representatives. For example, money hacker Dave Mason says that, “the easiest way to lower your credit card interest is to call the company and ask them for a lower interest rate. A huge percentage of card holders qualify for lower rates, but never think to ask and the card companies have no incentive to lower the rates on their own. In addition, credit card fees are often reversible. If you get charged a fee, just call your credit card company and ask them to remove it as a courtesy. Some card companies have a policy of removing one fee every six months. But again, they won’t do it unless you call and ask.” Myth 9: Spend now, go into debt later With credit card debt averaging around $8,398 per household, it is easy to fall into the trap to spend now and pay off debts later — isn’t that what everyone else is doing? “Many millennials have fallen in love with the idea of instant gratification. As a millennial myself, I have seen firsthand how easy it is to resort to credit cards to finance extravagant lifestyles — even when the income level can most likely cannot support it. With credit cards, individuals sometimes do things they really can’t afford to do” says James Lambridis, founder and CEO of DebtMD. Just because the joy of spending may have gotten you into debt before, it doesn't mean your relationship with spending always has to be a love/hate relationship. Solution 9: Create a budget Starting a budget may sound overwhelming and restrictive right now, but think about how less overwhelmed and restricted you will feel when you don’t have thousands of dollars in credit card debt. Freedom Debt Relief suggests to combat impulsive spending habits and debt by “starting with a motivating budget. Before you dive into the numbers, set and write down goals — and do so with your family/spouse as appropriate. Goals may range from taking a vacation to buying a house. Write down the goals, and then proceed to build the budget around those goals. Paying off debt is infinitely more doable when you are trying to achieve goals that matter to you.” Before you close out of this article, take a proactive step. Put this new found knowledge into action — make financial goals and formulate a plan that is tailored to your personality. If you need a quick recap of the advice given in the article, below list four key takeaways to help you begin your personal finance journey towards zero debt. Key takeaways 1. Avoid debt if you can “Realize that we live in an 'instant' society that encourages everyone to spend money now and pay it off later. Instead of procrastinating your credit card payments, pay more than the bare minimum of what you owe that month! It will save you in the long run.” Ethan Taub, CEO of Billry and Creditry. 2. Think towards the future “Millennials should begin financial planning with the end in mind — stop living for the moment with your dollars and instead consider the significant wealth that you could build up in your middle aged years. Build up the confidence to start investing, planning for retirement, and paying down debt.” Jeff Mount, President of Real Intelligence LLC 3. Back to basics: “Millennials should start paying off debt by instituting a budget, tracking spending, cutting back wherever necessary, and/or securing additional income opportunities. Paying down debt is not an overnight solution, but staying organized and being smart about spending are great ways millennials can reduce their interest liabilities and regain financial confidence and control.” Brittan Leiser, Founder/CEO of SavviHer 4. Consider professional debt help: “If you’ve accumulated debt on multiple cards consider a debt consolidation loan to consolidate your various credit debts into one manageable monthly payment with lower interest rates.” Jessica Vomiero, Editor of Lowest Rates. Don’t hope to get out of debt, prioritize it. To help consolidte debt: Compare the Best Personal Loan Companies.
Experts help engaged couples navigate their financial relationships Should you pay your fiance's debts? Are you obligated to? Is it even a good idea? I have recently come across several advice columns that dealt with the issue of helping a fiance pay off their debt. Having never been affianced, this totally blew my mind thinking that I could just get married and share my debt with another person. I always understood the idea of marrying rich, but never actually expected that someone I marry would be obligated to help me financially with student loans that I had accumulated before they even knew I existed. To help understand the different perspectives, obligations, and customs surrounding debt and finances during an engagement, we asked experts in several fields for their advice. Here's what they said: Consider both perspectives Matt Edstrom is the CMO of GoodLife Home Loans, a mortgage company based in Laguna Hills, California. Matt is an expert in finance and professional and personal development. "While there isn’t a standard form of etiquette that I’m familiar with when it comes to paying off your fiance’s debts, I do know that it's a general rule of thumb to keep some degree of separation between yours and your fiance’s finances. That isn’t to say that you should be hiding aspects of your finances with your future husband or wife. It’s a valid question to ask, and the answers will vary quite significantly, I’d imagine. It can be especially tough to ignore the elephant in the room which is the increasing rate of divorce. If an engaged friend came up to me asking me this question, I’d instinctively not want to bring up the possibility of a divorce, because that pessimism can drive wedges between people. Having said that, I’d also feel obligated to say something along the lines of 'I know you two plan on having a healthy marriage, but don’t you think the possibility of divorce should be taken into consideration in this particular scenario.' There is another side to this coin. Let’s say you were in a financially stable place in life that allowed you to help your fiance out with his/her debt. You wouldn’t do this unless you would still be in good financial standing after said debt has been paid off. So worst-case scenario is you help him/her pay off the debt, there is a divorce down the road, and you helped somebody pay off some debt. It doesn’t damage your credit or any other aspects of your future finances. Yes, there will be a sense of bitterness about the money you used to help with the debt, but in terms of financial health, the consequences are far less severe. Any relationship (even familial ones) can be severed and/or neglected by either party, so if you bring money into any of those relationships, there is always going to be a little more risk to it. It’s something that should not be decided on in a moment’s notice and needs lengthy discussions with both an advisor and your significant other." Don't keep secrets Tiiu Lutter has a master’s degree in psychology with a concentration in counseling and secondary guidance certification, and has completed the three-year ESFT Family-based Clinical Training, and writes for SR22InsuranceQuotes.org. Tiiu has worked in mental health for the last 15 years and co-owns a family and couples’ counseling center. "So you’re in love and in debt, well, half of you are in debt. It’s still a great idea to get married, but you definitely should talk about the debt before the wedding so it doesn’t get in the way. Disagreement about money is the top reason for divorce, so you need a plan ahead of time. If you are thinking of keeping your debt a secret, you should re-examine your relationship completely. If you don’t trust your partner enough to talk about money, there are significant issues there. As for paying it off, there isn’t really etiquette now that spouses are equal legal partners. However, the most successful money style (in terms of marital longevity) is the 'mostly ours, some yours, and some mine' method where most money is pooled, but you each retain a bit of your own to do with whatever you like. This doesn’t necessarily address the debt. For that, you need to set your financial goals and look at the total amount you owe as a couple. Look at interest rates and see what payment strategy gives you the best progress toward your goals. It could be that the debt holder contributes less to the common pot, or that you both chip away at the debt. Having a lot of debt doesn’t necessarily damage your credit rating, but if you have different credit ratings and you want to buy a house, it might be a good idea to keep everything separate so that you can get better interest on your mortgage. This assumes the better credit score also has enough income to get a loan. One last word of caution, if you are keeping your credit separate, don’t lovingly get an extra copy of your credit cards for your spouse to have 'just in case.' The instant you give them a card, that entire debt profile will now be attached to both of you! Just be patient with one another and know that you fell in love with the other person both because of, and in spite of, their saving and spending styles. Just as you developed your own money habits as a child, you will also develop your own money habits as a couple." Have open and honest discussions Dennis Shirshikov is a New York City-based financial analyst for FitSmallBusiness.com. He has a master's degree with a focus in Financial Risk Modeling and teaches Economics at Queens College. "There’s no one-size-fits-all approach when it comes to discussing finances with a significant other because so much depends on the people involved. Nonetheless, it’s crucial to establish concrete, transparent rules that achieve tangible goals and not damage the relationship. When discussing finances with a loved one, it’s essential to establish boundaries. For example, if a fiance suffers from poor spending habits, it’s disadvantageous for his or her future spouse to pay off that person’s debt as that will not solve the root problem. Avoiding resentment is equally crucial when discussing finances. Too often, a person will volunteer to pay on behalf of their significant other and wrongfully expect a form of repayment in the future. To avoid ‘financial resentment,’ it’s critical that both parties are transparent and forthcoming about their financial obligations early in the relationship. Although it may seem obvious, the essential step to a healthy, productive discussion about finances is to give it the time it’s due. Proposals and marriage constitute a significant commitment; therefore open and honest discussions are all the more crucial. How else would a couple be able to move in a unified direction? While discussing financial matters can be complicated, many people are surprised by how simple they can be when they sit down and simply talk about them." Follow the rules of L.O.V.E Angelique Hamilton, MBA, is a marriage and life coach with a background in human resources. She is the CEO and Founder of HR Chique Group. "Finance is the number one root cause of failed relationships and marriages. It's important for couples to effectively manage their funds. I have four tips to understand your partner's finances called LOVE: L- Learn/List as much as possible about your partner's financial obligations including monthly payments, spending, and debts. You need to understand the depth of liabilities that are owed. Document your monthly and annual bills, and any items that is reduced from your income. Make a decision about how will you conduct your banking either from a joint account or separate account. Budget management will soon become your responsibility as a married couple. O- Be Obedient in your planning and preparation of the household's planned budget. It's essential for couples to plan the household budget to allocate available funds appropriately. Think of it as the 'Bank of the House.' One of you will act as the CEO overseeing the budget and the other as the Operating Officer in care of all day to day financial transactions. You both should agree and approve your finances. V- Be Vigilant in your approach to managing your funds. You must become watchful financial stewards over your finance. Your finances will become a puzzle to you both, if you're not knowledgeable about what's being spent or what funds are coming into the household. It's always best to seek mutual approval prior to make purchases or spending the dedicated funds on anything outside of the budget. There will come a time where challenges like an illness, job loss, etc. will affect your relationship. Your vows of 'in sickness and in health' and 'for richer and for poorer' are created in love and honesty. Your finances should embody those principles too. Make sure to set a plan to save for an emergency. The emergency fund can start off as three months of your salary and then increase to six months of your salary. Define a plan for your future life events including wedding, auto purchase, home purchase, child(ren), retirement. Consider investing to diversify your income. E-Make the Effort to encourage each other that you're in this together. All financial decisions should be a mutual decision and not one controlling all. Keep all lines of communication open and regularly schedule time to discuss your budget. You are one team! LOVE is all about you and your relationship. Keep the Love in it to maintain a happy, loving, and enjoyable marriage." Set financial goals together Dwain Phelps is the owner of Phelps Financial Group in Kennesaw, Georgia. He has more than two decades of experience in financial services, wealth management, and retirement planning. "According to Insider, 36 percent of divorcees cite money as the cause. The key to any successful relationship in life is communication, especially about money. Effective communication solves most problems and prevents unclear motives. Communication also allows couples who are engaged to have healthy and productive conversations about their finances. The first order of business for couples who are engaged is to have an open and honest discussion on the level of education regarding financial matters such as saving, money management, budgeting, taxes, investing, and retirement planning. This open and honest discussion will allow each person to potentially to see areas of strengths and weaknesses as it relates to their knowledge on financial literacy. One person may have a stronger financial background than the other individual. Hopefully, this open line of communication will allow the couple to agree on who should take the lead as it relates to their finances and provide a platform for effective goal setting. One of my favorite lines to quote to clients is that you are only as strong as your weakest link. Debt can become a weak link in any marriage. The best method in approaching this is to have open communication that will allow engaged couples to discuss and develop a plan to deal with debt issues. I can’t stress how important and critical having this discussion is as it relates to debt before marriage. Let’s assume that one person has accumulated very high credit card debt and other debts, such as student and car loans. There should be an agreed-upon plan to eliminate that debt. This agreed plan should include discussing salaries and which debts will be eliminated first. In my opinion, the person with less or no debt should help their partner reduce their debt. Marriage isn’t always a 50/50 deal, it’s each person giving 100 percent. Having both individuals working towards the same goal will reduce the couple’s overall debt-to-income ratio and improve their ability to develop a savings strategy for their future. One other important point of emphasis for engaged couples is not to go into debt before the marriage even starts. Couples need to communicate effectively on minimizing the cost of the wedding itself. Most couples start off the marriage in debt due to paying for expensive weddings. My recommendation to engaged couples is to seek a financial advisor who specializes in budgeting and debt management. This will set the tone for the success of any relationship. My firm has perfected a debt management program to help couples not get into massive wedding debt, and one of the things we recommend is to set a dollar amount that both individuals can pay for with their savings. Resist the urge to acquire loans and to use credit cards to pay for weddings." Keep your debts seperate Adeodata Czink is the founder of Business of Manners, an etiquette consultancy based in Toronto, Canada. She teaches seminars and workshops on international business etiquette and social graces. "No, it is not your job to pay your fiance’s debt that occurred before you met. Make sure when you divide who pays for what, that the fiance has enough money to pay off their debt, but don’t make yourself responsible for it. It is not your debt." Don't let resentment enter the picture Adam H. Kol, J.D. is a Couples Financial Counselor. He helps couples who love each other make sure that the money conversation doesn't get in the way, leaving them with greater peace and partnership. "There's no one best way to organize or handle finances within a couple. What's most important is that each partner feels good and that it fosters a healthy dynamic. What's healthy is determined by each partner and what moves the couple towards the future they want. Even if there is a predominant custom etiquette-wise, I would be wary of it. Financial stress remains a top cause of fighting and divorce; our norms and ways of handling it need an overhaul. No matter what direction you go, it's essential to watch out for resentment, which is the intimacy killer. This must be done actively over time, as well. For example, imagine the partner who paid off the other's debt later being unable to make a certain financial decision. They may resent that they put money toward their spouse's debt and see that as part of why they are now hamstrung. I start my clients off by exploring their money story, i.e. their experiences and viewpoints around money growing up, as well as in prior and their current relationships. Each partner should then share what they discovered. This is a safer conversation, as it's more descriptive, leaving little to argue about. It also builds mutual understanding and helps get the money talk flowing. Here are a few key strategies, action steps, and tips: Seek first to understand, then to be understood Ask open-ended questions that encourage your partner to give more than a 'yes' or 'no' response Build partnership around the emotional parts of money and your shared vision first; once that's in place, the tactical piece will be much easier and more likely to stick." Learn about eachothers financial history Deborah Sawyerr is a financial literacy educator and founder of Sawyerrs' House. She teaches kid, young adults, and adults about being smart with money. "Engaged couples should not only create an atmosphere of open discussions about their wedding plans or where they will live after they get married, but also about their individual and joint finances. The etiquette could be to have a date where they specifically discuss their finances — after all, this is about their future as a couple. During such discussion, both parties should provide clear evidence of their financial circumstances in the form of their credit file. Doing it this way means that there are no secrets or surprises later on down the road. In addition, during these discussions, evidence should be provided of any repayment plan in place by way of a show of bank statements. These discussions should also happen over a period of time and on a regular basis. The discussion should focus on being non-judgemental because it is about finding a solution as a couple. The environment and atmosphere where such a discussion takes place should be relaxed — perhaps after a nice meal or over a glass of wine at home. The ambience plays a vital role in such discussions. If one party is financially stable and able to pay off debts, I absolutely suggest that they do so. This is because such a debt will eventually have an impact on them as a couple. For example, if the party with the debt is stressed out about the debt, it will have a knock-on effect on their relationship. It can cause a strain in their relationship. By the same token, if the party with the debt is paying off the debt, it will also have a knock-on effect on their financial contribution to household bills. It may be that they are only able to contribute a small amount towards bills whilst they clear such debts. Additionally, it makes perfect sense for the financially stable individual to pay off the debt because it will drastically reduce the amount of interest which is likely to accumulate over time. Why pay more towards interest when they can save that money for other things? Again, the process for paying off the debt by the financially stable party should be asking the other party to put pen to paper by writing down ALL outstanding debt and any repayment plans. There should be evidence of this versus simply word of mouth! It is a known fact that some people with debt will underplay what they truly owe. Yes, accounts and credit profiles should be still be kept separate. Why? There is always the risk that the party with the debt can quite easily fall back into debt. There is, therefore, no point in dragging an innocent party down the slippery slope. To summarise, I would say that it is a very risky task paying off a fiance's debt. This is simply because the financially stable party may not know if they are being taken for a ride. How can they be sure that they are not dealing with a gold digger? Furthermore, couples should really be having discussions about finances way before they even get engaged." Whatever you do as couple, make sure you both agree Lisa Mirza Grotts is the Golden Rules Gal, a warm and no-nonsense expert on the thorny subject of manners. She helps her readers and clients deal with tricky business, social, and political situations by always putting their best foot forward. "There’s a reason why an engagement is a formal agreement to be married, as in pre-marital or pre-nuptial. Common sense would dictate not taking on someone else’s debt, as it's extra baggage! It can be a challenge combining money. There’s enough to deal with as a married couple; to start your life with this hanging over your head makes little sense. On the flip side, once you have the discussion, your spouse to be may be okay with taking on your debt. If you’re not able to have the discussion about finances on your own, it might be time to think about a marriage counselor. It takes a village to be married, so if you can iron out this important detail you’ll be all the wiser in the long run. Money Talks: Mergers and Acquisitions Agree to disagree about how you handle your monies. Separate or joint accounts etc. If one or both of you has means, then by all means, hire an attorney and get a prenuptial agreement! The keyword here is Pre, as in before you say 'I Do.' Marriage is a contract. Think we vs. me. You’re headed in that direction, so avoid the blame game and figure out how you will work through your finances. Communication is the key. Sometimes the un-discussion can do more damage. Assuming anything is asking for trouble and adding day to day expenses, investments, debts, retirement talks, saving and spending equals trouble when it comes to finances." Establish financial roles and responsibilities Emily E. Rubenstein is a Beverly Hills divorce and family law attorney. Her firm handles family financial agreements and she has written about financial infidelity. "Many of my premarital and postnuptial agreements involve these issues — one fiance paying off the debts of another, income/asset disparity, and how to best discuss and combine finances. Interestingly, studies show that clarity about financial roles, responsibilities, and expectations may actually deter marital conflict and divorce. It's critical to have these conversations prior to marriage. That said, there are many, many combinations and options for couples when it comes to combining finances. Couples need to have open and honest conversations about their values and finances, consider the laws in their state, and engage professionals (whether attorneys, financial advisers, accountants, etc.) to make sure they know all of their options to make fully informed, empowered decisions." You're in it together Robert J. Forrest is a financial advisor at Jacobitz Wealth Management Group. He helps clients and their families find financial security, based on current financial needs and long-term goals. "Ultimately this decision is up to every couple. Personally, my wife had three times the amount of debt as I did when we got married. But we firmly believe that what is mine is hers and what is hers is mine — that refers to good things and bad things. When discussing the matter of finances with a fiancé or spouse it’s important to understand the underlying conversation: How do each of you view your relationship now and in the future? Are you one unit? Are you cohabitating? Do you depend on each other? What is your fundamental belief about marriage and what that means for a relationship? Having that conversation will lay a great foundation for handling many other issues that will inevitably come up down the road. Regarding money specifically, be sure to come prepared with what you own, what you owe, and how much you make. Understand where each of you are in your financial journey, because your journey will become one. Understand that when you’re having this conversation, you’re both being vulnerable and that isn’t easy to do. Affirm your care and support for each other. Make sure they know that you don’t value them based on their financial picture — you care for them, not their money. If you decide to pay off one another’s debts (either simultaneously or because one party is financially very well off) I would approach each debt as if it were your own. For example, it makes sense to pay off high interest debt as fast as possible. So if your fiancé or spouse has credit card debt, crush it right away. When it comes to lower interest debt, or debt with tax-deductible interest, it may not make sense to pay that off fast. Bring that debt into the relationship and budget it in with all of the other expenses — you’re now jointly responsible. Some debts you cannot legally combine (i.e. student debt). Some debt you cannot combine due to credit — maybe one of you has a very low credit score. Practically, putting both of your names on the debt won’t provide any benefits unless you’re refinancing. In the long run, the most helpful thing is to repeatedly reaffirm your commitment to one another and to never hang anything over the head of your spouse." Talk about debts as soon as possible Randolph (Tré) Morgan III is a family law specialist in North Carolina. He has a B.A. in Psychology and a J.D. from UNC-Chapel Hill. He regularly handles prenuptial agreements and divorces that take into account marital finances. "In my experience, the large majority of couples treat all of their pre-marital debt (called 'separate debt' in my jurisdiction) as their joint obligation and pay these debts from funds they earn during the marriage. However, some couples feel a need to clearly delineate their obligations before they are married and enter into pre-nuptial agreements to clarify expectations as well as legal obligations. Typically, the larger the debt, the more interested one prospective spouse or the other (or one of their parents) is in addressing expectations and obligations before they are married. In my experience, three and four-figure debts don't trigger a couple's need to talk about the debt before marriage as much as five and six-figure debts. There can be important and surprising legal implications based on how and when these debts are paid. These issues come into play in divorce and can even come into play when debts are paid and then engagements are called off. So it makes sense to address these things on the front end. My experience working with couples both before and after a marriage has taught me that it is always better to address expectations on the front end rather than to discover that your expectations differed down the road. Many people don't want to ruin the fairy tale feeling of being in love with practical, legal, or financial conversations. But, if you cannot have good, calm, productive conversations about these things before you are married, how will you have them when the really big issues come up during the marriage?" Do not judge your partner Darren Straniero is a certified financial planner with OnPlane Financial Advisors. Darren has more than ten years of experience in financial services and helps professionals and families plan for their financial futures. "Couples who are engaged should certainly have a very frank, open, and honest discussion about finances. It should be a judgment-free zone and that's really all we can ask for here. Money is extremely emotional for a lot of people. If that requires meeting with a financial advisor, a therapist, etc. then make it happen. The first step is to lay out what each person has financially. Income, savings, investments, debts, and spending habits/requirements. From here, real conversations can take place in terms of how to accomplish financial goals as a team, as a partnership. In my experience, couples who merge finances tend to experience better financial results. Not always, but more often than not. Having everything owned together makes it harder to hide things like credit card debts, spending habits, etc. And it can also diffuse the potential for resentment. When it comes to paying off a fiance's debts, I think absolutely. You're about to come together as a team in all facets of life. Why not financially? Imagine your future spouse lost a job. Would you not support him/her financially? Or your future spouse unexpectedly lost a parent or a child. Would you abandon him/her during a time of severe emotional need? I don't think so. And so the financial journey should also be a joint or team effort. I don't think there's a right way to go about it. But I do think a wrong way to go about it is thinking of it in terms of 'Well, I'm going to do this for you so you owe me,' aka tit-for-tat. That can lead to resentment and harbor other ill-founded feelings. Unless we're dealing with things like income-based resentment on student loans and other factors, I think accounts should, for the most part, be owned jointly (save for a few exceptions) and credit profiles should also be shared freely."
Myth or fact? Credit cards and personal loans are practically the same. "Personal loans and opening a new credit card are, at the core, the same concept," begins Brett Holzhauer, credit card writer at FinanceBuzz.com, "you are borrowing money with the promise of paying it back. However, the purpose and application of both of these products are vastly different." In this article, we are going to explore the similarities and differences between these two financial products, as well as answer the big question: Should I get a credit card or a personal loan? But first, let's break down what credit cards and personal loans are and when it's best to use one or the other. What is a credit card? On the most basic level, a credit card is a plastic card issued by a bank or other financial institution that allows you to borrow money to make purchases - generally smaller, every day purchases. Obtaining a credit card is quick and easy, and in many cases it is easier for consumers to receive approval for a credit account rather than a personal loan. "Credit cards are meant for those with the financial means of paying their monthly statements," says Holzhauer, "while personal loans offer access to cash that you will pay off over a predetermined time in the form of debt." Similar to a loan, you will be given a set amount of money, called a credit limit, when you open a credit account. This money can be used for making purchases or paying bills, and it is expected that you will pay back any money spent from your credit limit each month. However, credit cards have revolving credit, meaning that you can borrow more money as you pay off your debt, which can be both a good and a bad thing for borrowers. Expanding on this point, Abigail Welles, content specialist at Credit Card Insider adds that “a credit card is considered 'revolving' debt, meaning you can continue to borrow money as long as you have not hit this limit. If you do not pay off your balance, you’ll get hit with interest, which can effectively keep [consumers] in debt." Credit card pros and cons Credit cards can be a great option for some borrowers, but perhaps not all. Before deciding on using a credit card for your spending needs, consider both the pros and cons. Opening a new credit card can help improve your credit score, and there are various credit factors that can contribute to this. Making on-time payments is one of the more important and efficient ways to build credit with a credit card. As you use your card and make payments, this activity is generally reported by the card lender to the national credit bureaus - Experian, TransUnion, and Equifax. Based on this information, the credit bureaus are then able to create your credit score. If you miss payments, however, this will not only impact your credit score, but you could get hit with high interest rates that can accrue on an outstanding balance over time, resulting in potential credit card debt. Thus, if you have existing debt, a credit card may not be the best option for you. Various types of credit cards offer rewards or points for travel, or even cash back on purchases. These benefits can be a great incentive to use the card, but may not be profitable if you don't make on-time payments. Some credit cards even have introductory offers, such as no interest rate periods that provide flexibility if payments are missed. Most personal loan providers do not offer introductory services. It is important to note that credit cards may also have fees, such as an annual fee, late fee, cash advance fee, and a balance transfer fee. Key Takeaway: Credit cards are best for smaller, everyday purchases. They are also a good option in the following circumstances: You need extra cash You are a responsible borrower looking for rewards You can pay the balance off before any interest accrues You want to make online purchases It's for emergencies or occasional spending Top credit card companies The top three credit card companies on BestCompany.com include: Capital One American Express Discover Based on customer reviews, each company is comparable, receiving high ratings. Customers generally highlight good customer service as well as competitive rates and rewards. Each company offers multiple credit card options, providing more flexibility for consumers of all credit levels. Top Credit Card Companies Compare top-rated credit card companies and customer reviews to see what would be best for you. Compare What is a personal loan? A personal loans is a type of installment loan that provide borrowers with a fixed amount of money which they are responsible for paying back throughout the life of the loan, or loan term, which could be as short as one year or up to five years and beyond. If you need a large loan amount, a personal loan would be the best option for you. Some personal loan lenders offer up to $100,000, which provides greater flexibility for whatever you are looking to finance. For large expenses such as home renovation, unexpected medical costs, or even debt consolidation, credit cards may not be the best choice, as you will not likely be able to get a substantial amount of money. Personal loans pros and cons Because personal loan lenders offer larger amounts of money, it can be more difficult to be approved than for a credit card. To this point, Dane Janas, an IRS-licensed Enrolled Agent, host of the Financially Boundless podcast and YouTube channel, and CEO of Boundless Tax adds, "Generally, the underwriting is more advanced as well, so you stand a lesser chance of actually being approved if you have less-than-stellar credit." Personal loans will generally require borrowers to have an excellent credit score to qualify, but they usually have a lower interest rate than credit cards. The higher your credit score, the lower rates you will be able to receive. It is important to note that credit cards generally only have variable interest rates, while personal loans offer fixed interest rates in addition to variable rates. The fixed interest rate option with personal loans is nice because you will know from the start what your fixed monthly payment will be, which will never change throughout the life of the loan. Personal loans do not have revolving credit, meaning that you will not have access to more funds as you pay off your loan. Instead, each monthly payment goes toward the entire loan amount. Take note that personal loans also have their own set of fees. Many lenders have a late fee and a loan origination fee, which is generally withdrawn from your total loan amount before funds are disbursed to you. In addition, you may be charged a prepayment penalty fee, which is applied if the borrower pays off their loan before the term is complete. Key Takeaway: Personal loans are best for large purchases. They are also a good option in the following circumstances: You have good credit and are confident in your ability to make payments You are looking to consolidate debt You have unexpected expenses You have a good credit score that can get you low interest rates Top personal loan companies The top three personal loan companies on BestCompany.com include: Best Egg FreedomPlus SoFi Although Best Egg is the highest rated personal loan company on BestCompany.com, customers have also been pleased with their experiences with FreedomPlus and SoFi. When deciding between each company, it is important to look at APR rates, maximum loan amounts, and the average credit score requirement for each company. Top Personal Loan Companies Compare top-rated personal loan companies and customer reviews to see what would be best for you. Compare Which is best? Depending on your financial needs, a credit card could be a better option than a personal loan and vice versa. More than anything, consider the reason for which you are borrowing money, as well as interest rates, fees, and your own credit history. In either case, be sure to make on-time payments, which can save you from future financial stress or difficulty. In addition, you can consider the following when deciding which is best for you: Purchase intent — Ask yourself what you will use the funds for. A big, one-time purchase? Or smaller, more frequent purchases? A credit card is better for everyday purchases, while a personal loan may be the best option for a one-off major purchase. Credit score — It is important to consider your current credit score when looking to borrow money either through a credit card or personal loan. If you have a low credit score you could have a more difficult time being approved for a personal loan, which may not be the case with a credit card. Personal loan interest rates are also contingent upon your credit score. The higher your credit score, the lower the rates you will receive. Interest rates — Credit cards generally have higher interest rates than personal loans. Consider filling out a pre-qualification form in either case to see what rates you will be offered, but it would likely only be wise to do so if a soft credit pull is performed. Spending behaviors — If you are prone to over spending, a credit card may not be the best option for you. Whether you choose a credit card or personal loan for your financial needs, be wise and consider making a payment plan to keep yourself on track. Spending too much money, missing payments, or not being able to make payments could have negative repercussions. The bottom line The decision between a credit card and a personal loan is entirely dependent on your financial needs and circumstances, and it is important to carefully consider those details before jumping in with either option. No matter which you choose, be sure that you will be able to manage and make payments, so you have an opportunity to grow your credit and make those important purchases in your life without creating any future financial stress.
Personal loans are increasingly popular as a debt consolidation tool. When you have lots of credit card debt, one way to improve your credit and your financial well-being is by taking out a consolidation loan with a lower interest rate than you are currently being charged on your credit cards. This is just one of the five most common uses of a personal loan, but is a good example of a personal loan’s usefulness. However, when you apply for a personal loan, not everyone gets accepted. Even when they do, the rates and terms for their loan may be much different from the "as low as" rates that are advertised (and only available to people with the best possible credit). So, what are the reasons that you might get rejected, and what can you do about it? Usually, if you are applying online, you will get an immediate rejection, but you will be sent a letter explaining which of the eligibility criteria caused your rejection in the mail within the next few business days. Rejection always stings, and rejection related to the very vulnerable topic of your finances can feel incredibly personal and painful. You're probably desperate to know what went wrong. For this article, we asked personal finance experts to explain why an applicant might be rejected for a personal loan application and what their next steps should be. Reason #1: Insufficient monthly income "Lenders want to ensure that you are able to repay the money you are seeking to borrow," explains Nathalie Noisette, Founder of Credit Conversion, a credit concierge company providing tailored credit educational resources. She says, "Repayment potential is determined by inquiring into your annual income. If it is determined you don't make enough money, you may be rejected." Helen Chen, Director of My Cash Online notes, " A lender wants to know that you will be able to comfortably make loan repayments every month, both for their own security and to comply with lending regulations. You need to show that your income will cover your daily living expenses plus the additional cost of monthly loan repayments." What can you do about it? "In addition to making more or asking for less, you could start off with a small loan request at first, establish trust, then ask for more later when you've established good faith with the lender," suggests Noisette. Another idea comes from Chen: "If your income falls short, consider extending the loan term which will reduce monthly repayments, or applying for a lower amount." Reason #2: Spotty employment history In conjunction with your income, Chane Steiner, CEO of Crediful adds, "Employment history can also be grounds for rejection. If someone changes jobs often the stability of their income is questionable." What can you do about it? If this is the case, Steiner emphasizes the importance of thoroughly listing all of your employment details: "Be sure to include ALL of your income on the application. Maybe you work a weekend or night job part-time. Include that. The additional income could be the difference in securing approval." Reason #3: Thin credit file or bad credit "Probably the most common reason personal loan applications are rejected has to do with the applicant’s lack of personal credit history or poor credit history," asserts Todd Christensen, Education Manager, Money Fit by DRS, a non-profit debt relief agency. "Many lenders use your credit score to determine how high of a default risk you are," explains Noisette. "The higher your score, the lower the risk. The lower your score, the higher the risk. If you are a high-risk borrower, lenders will likely decline your application." Along the same lines, "If you have missed repayments on other debts or utilities or have no prior credit history, it will be more difficult to get a loan," advises Chen. "Most lenders have options for borrowers with a low credit score, so speak to them about whether there are any other products that may be more suitable for you." If you don’t have a good credit score, can’t get approved for legitimate subprime credit options, as Chen suggested, or the cost to borrow is too high, you may be looking for more financial options. What can you do about it? Trying to get a personal loan with bad credit or no credit "can seem like a Catch-22," Christensen expounds. "How are you supposed to qualify for credit if you can’t get approved?" It’s time to "clean up your credit," according to Noisette. "Start to reestablish your credit-worthiness and ask for the loan when you have a better credit rating." But what is the game plan? As Christensen explains, "The standard methods of building credit (starting local and small, then moving step-by-step from tire store credit to retail and gas through bank or credit union card) typically take a year to build an acceptable credit history. Unfortunately, if someone is needing a personal loan, they probably need the money sooner than later, certainly within a year." If you have less than a year before you need to try to get approved for personal loan funding, Christensen suggests short-term credit-building strategies: check your credit, look into Experian Boost, see if you can become an authorized credit card user, or check out a credit builder loan, available from various financial institutions. "Pull your own credit report from AnnualCreditReport.com, check for errors that might be hurting your score (late payments, accounts reporting as collections, incorrect balances, etc.) and then dispute those errors directly through the credit bureaus homepages (Equifax.com, Experian.com, and TransUnion.com). Look at using Experian’s new, free Boost product to get you 'credit' for your monthly bill paying activities (ex. rent, utilities, cell phone). Experian is the only one of the three consumer reporting agencies (bureaus) to offer such a product, but it is boosting participants’ credit scores by an average of 15 points. Ask a family member with good credit to add you to their credit card account as an authorized user. Regardless of your own credit rating, being an authorized user has no impact on their rating. You don’t have to use or even see them to receive some of the benefits from your family member’s good credit. Some credit unions have $1,000 credit builder loans that can give you $500 upfront, place the remaining $500 in a secured savings account, and have you make monthly payments for a year (often requiring direct deposit from your employer) until the $1,000 is paid, plus interest. At that point, you also gain access to the remaining $500." Reason #4: High debt-to-income ratio (DTI ratio) Javier Martinez, from Zirtue, a relationship-based lending application that simplifies loans between friends and family explains, "consumers with excessive debt have a higher rate of denial due to their debt-to-income ratio, causing banks to feel concerned about extending additional credit to them." What can you do about it? "If you make a lot but owe a lot, a high debt to income ratio may scare a lender off," declares Noisette. In this case, the solution is to "Lower your current debt before reapplying for new debt." Another type of borrower with a high debt-to-income ratio could be in a different situation: too many existing debts. "A large number of small loans or credit cards spread across different providers can be a warning sign to new lenders," explains Chen. If that sounds more like you, "Consider consolidating your debts into just one or two personal loans and you will be much more likely to receive loan approval," the next time you apply. Reason #5: Too many declined loans in the last year "It's considered a ‘hard inquiry’ when you apply for a car loan, credit card, mortgage, or student loan," says Chris Michaels, Founder of Frugal Reality. " Whether you apply and get accepted or not, it is still considered a hard inquiry. Too many applications/inquiries make lenders very nervous you are trying to expand your credit too quickly. If your available credit expands too quickly, then they start to worry whether you can afford to pay each lender back if you maximize all available credit at once. All inquiries will remain on your credit report for 24 months, but hard inquiries only affect your score for the first 12 months of each inquiry." What can you do about it? "Before applying," stresses Michaels, "it's advised to ask each lender the likely outcome given your current income, total and monthly debt, and credit score. This will limit the negative impact to your credit score, help you shop better lending institutions, and provide better outcomes." This type of inquiry is generally considered a pre-qualification and will include a soft inquiry into your credit rather than a hard inquiry. This is better for your credit in the long run. Bonus credit recovery steps As a bonus for our readers, personal finance expert Carey Zielke from Realities & Dreams, a website dedicated to helping people chase financial freedom and their dreams, has some advice to share. "If your loan application was denied, the lender is required to send you a notice of adverse action which will detail the reason(s) for rejection," explains Zielke. Once you get that notice, whether by snail mail or email, you will know which factors are holding you back. If you are denied, Zielke suggests that your initial plan of action should be to "Fix errors on your credit report if there are any." Next, the intermediate action steps include using collateral, saving up for a down payment, and using a co-signer, although Zielke warns, "I do NOT recommend this, but if necessary use a family member if possible, rather than a friend as this can lead to issues!" Finally, Zielke's long term steps to help determine that you will be approved the next time you fill out a loan application, are difficult sounding, but pretty fundamental: build your credit, enhance the amount of income you bring in, and "pay down or pay off some of your outstanding debt." The bottom line Getting rejected for a loan stinks. There’s no way around it. However, there are steps that you can take to avoid this rejection in the future. Simply increasing your knowledge of credit scoring, loan eligibility, and where you stand credit-wise can go a long way to helping improve your eligibility. If you can follow the expert advice in this article, work on establishing or rebuilding your credit, you will increase your chances of approval and a happy ending the next time you fill out a loan application.
Are you considering a personal loan? Are you worried about how applying for or borrowing a personal loan will affect your credit? That is certainly a valid concern. Spoiler: It does. In America, it can feel like credit is the king, judge, and executioner. Almost all financial decisions you make either depend on your credit or affect it. To get to the bottom of this, we asked personal finance experts for advice about how and when a personal loan affects your credit, both in the short term and long term. Credit score recap Your credit score is critical when determining your personal loan eligibility. It provides lenders a snapshot of your spending habits and history of repaying financial obligations. A lower credit score is a red flag and signals a risk to the lender that an applicant might not have the means to fulfill his or her monthly repayment obligations with the loan. Conversely, a good credit score gives the lender confidence that you will make on-time payments every month. To start, let's recap about general credit scoring, with the help of Lisa Johanning, Vice President of Consumer Lending at Axiom Bank, N.A. She says, "Payment history has the highest impact on your score, so being on time with your payments has the highest positive impact on your score (35 percent). This is followed by amounts owed (30 percent), length of credit history (15 percent) and credit mix (10 percent), which describes what types of accounts make up your credit (installment loans, mortgages and revolving loans, such as credit cards). Requests for new credit (inquiries) only account for 10 percent of the FICO score." With that basic recap, let's jump into the personal loans. We will cover: Personal loan basics Short-term credit score effects from your personal loan Long-term credit score effects from your personal loan 1. Personal loan basics Personal loans, also known as personal installment loans, are increasingly popular in the lending industry, due to increased accessibility made available by FinTech companies and online lenders. Annastasia Kamwithi is an editor for Social Fish, a site dedicated to helping millennials take control of their finances. She shares some background on this type of loan: "A personal loan is a type of credit that is usually issued by banks, digital lenders, or credit unions to help you with some immediate needs such as making a big purchase, consolidating your small loans into one, starting a business, etc." What is the draw to borrow money through a personal loan, as opposed to credit cards or other loans? Personal loans generally have lower interest rates than short-term, payday loans, and even credit cards. While these are most often unsecured personal loans, though some lenders give the option to borrow a secured loan by putting up collateral. Another common factor seen in personal loans is the use of fees like an origination fee, built into the loan's repayment terms, and the total amount that you borrow and have to repay. On top of that, your repayment terms are built around a fixed rate. Meaning, your interest rate, and monthly payments are planned out in advance, to the penny, for the entire loan term. Your annual percentage rate (APR) won't change with fixed-rate loans. This is in contrast to most credit card accounts, which have a variable rate, depending on the market and financial institution. "The reason to get a personal loan is that you have credit card debt or other high-interest rate debt that you want to get rid of," explains Jake Sensiba, Financial Advisor for CRG Financial Services, Inc. He's right. Debt consolidation loans are a big deal. More than half of personal loans are taken out to consolidate or manage existing debt like high-interest credit card debt. The rest of the top five reasons that people get a personal loan are varied: Debt consolidation Home improvement Educational expenses Starting a business Medical expenses "Most personal loans," continues Sensiba, "though it depends on your credit score, offer lower rates of interest than credit cards. You save money on the interest. That's the draw." Especially when you are using it as a consolidation loan to pay off a high-interest revolving credit card balance. However, he warns, "Individuals with lower credit scores will get less favorable terms (interest rates)." This is especially true for those of us with "not good credit" who are just able to meet a lender's minimum credit score requirements. What else is new? Personal loan pre-qualification When you are looking into a personal loan, you should know that many lenders offer to do a preliminary check to see what kind of rates you may be eligible for, including your loan amounts and loan terms. "In general," explains Freddie Huynh, Vice President of credit risk analytics for Freedom Financial Network, "when someone calls an independent lender to inquire about a personal loan and wants to check rates, that involves only a soft credit check. Soft inquiries are inquiries that do not affect credit reports or scores. They happen when you check your own credit reports or when a company check your credit reports for background/reference." While "Most lenders will pre-qualify you for a personal loan by doing a soft credit check," warns Kamwithi, "Some lenders, however, will not do a soft-check. Therefore, ensure you look for one that does this, as it SHALL NOT AFFECT YOUR CREDIT SCORE." Look for wording like: check rates with no impact to credit score pre-qualify for a personal loan without affecting your credit score check your rate in minutes for free, without hurting your credit score checking rates won't affect your credit checking your rate will not affect your credit score soft credit pull soft credit check soft credit inquiry see if you qualify in minutes! no commitment — get your rate and monthly payment with no impact to your credit. check your rate online with no impact to your credit score find out if you prequalify for a personal loan without hurting your credit score. this does not affect your credit score! won't impact your credit score! When you are shopping for rates, if you don't see buzzwords like these, ask questions. You don't want to have an unnecessary, negative impact on your credit score. Personal loan application "Compared to loan pre-qualification, actually applying for a personal loan is a whole different ball game," explains Kamwithi. "When you apply for a personal loan, it will trigger a hard credit check." It's important to be aware that the very act of applying for a loan will have a direct impact on your credit. Let's check out the different ways that applying for a personal loan can affect your credit score in the short-term. We will break this down into the different credit score factors (as listed in the graphic above). 2. Short-term effects of a personal loan Payment history "As far as credit history," advises Jason Orlicek, Senior Vice President and Loan Manager for Signature Bank of Arkansas, "you must actually open a new loan account to create a new ‘history' item and then your ability to make payments on time will follow and have a more long-term effect on your score. There is a balance between having enough credit and too much." Opening a new personal loan helps to establish more payment history, but you will see this impact in the long term, rather than an immediate boost to your credit score. Amounts owed "Having a higher percentage of available credit used (credit cards, lines of credit) typically decreases the score," adds Orlicek. If you are using the new loan to consolidate debt, this can affect your score by reducing your utilization ratio. As Huynh explains, "One area in which a personal loan can have a positive impact on credit is when a consumer uses it to consolidate and eliminate credit card debt. Along with the greater simplicity of making just one monthly payment, personal loan interest rates are generally a bit lower than credit card interest rates. Some personal loan lenders even offer a discounted rate if you use the proceeds to repay credit card debt and transfer the loan proceeds directly to creditors." "Consolidating all of your personal debts can help in improving your credit by lowering your credit utilization," explains Kamwithi. "Your credit utilization ratio refers to the amount of credit available for you to use." Length of credit history "Opening a new credit account lowers your average credit age," explains Sensiba. "Older credit accounts are better for your score." Charlie Scanlon, President of Phoenix Credit Consultants explains how this works: "The loan, if approved, can impact your credit score by diluting your credit history, i.e., the average age of the accounts that are reporting on your credit report. The newer account is averaged in with your other accounts. Let's say you have a single credit card and you have had it for a year. When you add the new loan, it will dilute your credit history's age from a year to six months. As the new loan takes on age, it will help you in this scoring category." However, its immediate effect may be negative if you have few accounts open, especially if they are relatively new. New credit The New Credit category makes up only about 10 percent of your FICO score. This category is made up of several factors: Credit inquiries within the last 12 months How long since you opened a new credit account How long since your last credit inquiries were made How many new accounts, by type How many of your total accounts are new accounts How many recent inquiries If accounts previously in bad payment standing have recently bounced back According to FICO, "Inquiries remain on your credit report for two years, although FICO® Scores only consider inquiries from the last 12 months. FICO Scores have been carefully designed to count only those inquiries that truly impact credit risk, as not all inquiries are related to credit risk." So, new credit inquiries go straight to your credit report. The real question is: How much do they affect your actual credit score? "Applying for any type of loan will impact your credit, even if minutely," says Mike Scott, Senior Loan Originator at Independent Bank. "Why? When a creditor pulls your credit report, it can lower your credit score, typically by two points. The more inquiries on your report, the lower your score gets." "In the very shortest term," explains Scanlon, "the impact applying for a personal loan will depend upon whether [the lender] runs your credit and whether they obtain your credit from all three of the national credit bureaus or only one of the three. Credit unions, for example, will often only pull your credit from one bureau." This is important because it's common to have a different FICO score with each of the major bureaus: Equifax, Experian, and TransUnion; and if they only do a hard pull from one credit reporting agency, the hard pull will only affect your score with one of the agencies, not all three. You should know your credit score before applying for loans. If you are applying for a personal loan with local credit unions, it may be helpful to ask which they pull from, so that you can play to your strengths. "Every time your credit is pulled, there is typically a small decrease in your credit score in the short term as one of the factors in determining your score is how many times your credit is pulled," explains Orlicek. The effect of the hard inquiry hits you, whether your application is approved or denied. Johanning explains why: "The reason the credit score drops is based on the theory that as you take on more debt, the odds of failing to repay loans rise. So as the risk rises (more inquiries for credit), the score drops. " "While it does not affect your credit score much," says Logan Allec, a CPA and owner of personal finance site Money Done Right, "this can add up if you have a lot of hard inquiries." Additionally, "Too many new accounts opened in a short period tends to decrease the score," says Orlicek. "Be very cautious about applying for multiple loans at the same time," warns Jared Weitz, CEO and Founder of United Capital Source Inc., this will begin to drive your credit score down. After a hard inquiry has been pulled from a credit application, wait six months before applying again to ensure your score has had time to recover. " A hard inquiry doesn't affect everyone equally. Chad Rixse, CRPS®, Director of Financial Planning at Forefront Wealth Partners explains, "In general, hard inquiries are only detrimental to those with spotty credit histories, such as poor payment history, high utilization rates, and limited credit mix. For those with extensive credit histories, on the other hand, a single hard inquiry is unlikely to have any effect at all." Credit mix When it comes to credit mix, a personal loan can be a positive way to add some variety to your credit history. "If your new loan is a type of account that you don't presently have," Scanlon advises, "it can help your score by adding to your mixture of accounts, or diversity of accounts. If your loan is one that you are paying back in monthly payments, it will likely report as an installment account. This is different from a credit card account, which is a revolving account and will boost your scores because of the additional, new type of borrowing. The credit scoring algorithm likes to see that consumers can manage different types of accounts, therefore it rewards the consumer for having a variety of different types of accounts." As Allec explains, "If you add a personal loan, then you will increase your score due to a change in a variety of credit. This is a positive benefit of applying for a personal loan, and many people will take out small loans they lend to themselves to vary their credit and increase their score." 3. Long-term effects of a personal loan Just as there are short term effects to your credit report when you apply for and take out a personal loan, there are also long-term effects. These can be good or bad for you and your all-powerful credit score, depending on your behavior. Payment history "Obviously, the most important thing about a loan when it comes to your credit is repaying the loan in a timely fashion," says Scanlon. "Your payment history, or how timely your bills that report to the credit bureaus are paid, makes up 35 percent of your credit score." This is the category where the most potential benefits of a personal loan are located. "Most lenders will report your repayment history to all three credit bureaus, i.e., Experian, TransUnion, and Equifax," says Kamwithi. "Having a lender that will report to all of them means that you shall have a more consistent credit report, regardless of which bureau you use for retrieval." This is the biggest opportunity to improve your credit score with a personal loan. On-time payment It's important to establish a positive record of on-time loan repayment. Huynh elaborates, "If someone takes out a personal loan, making all payments as required, on time, is critical to maintaining and improving credit profiles – just as is the case with any loan (mortgage, car, student loan) or bill (utility, phone, etc.). One effect of making all personal loan payments on time may be a positive impact on credit profiles." Igor Mitic, Co-founder of Fortunly.com adds that this long-term boost to your score is helpful, "Especially if you consolidate debts — such as credit card or auto loans — into one personal loan that you pay consistently over time." Late payment Late payments can have a large impact on your FICO score. Kamwithi explains, "If you are going to miss your personal loan payment by a few days, that will not affect your credit report or score, but if you miss payments with more than 30 days, this will be reported to all the main credit bureaus, and there shall be notable damage to your credit score. " How much damage is possible? Weitz says, "It is possible to go from having excellent credit to a fair credit score (100 point drop) based on 30-day delinquency." On top of that, Scanlon says, "Payments which are 90 days late or more on the loan can do more substantial and longer-lasting damage." Life happens "Late payment on your account in the past 6–12 months will have a much harsher effect than some late payments 4–5 years ago," explains Scott. Sometimes life happens and we make late payments, but "What the bureaus are looking for is the pattern of payment." Amounts owed "The amount of debt one carries directly impacts credit profiles and scores," explains Huynh. "It's explained in terms of percentage utilization (which you want to minimize) and credit available (which you want to maximize). To explain, if you have a credit card with a limit of $9,000, and you owe $3,000 on it, that's a 33 percent utilization. Since credit card utilization can play an important part in credit score determination, consumers will be smart to keep credit card balances and utilization low. Therefore, if you can eliminate credit card debt through a personal loan, you should see a positive effect in credit profiles." According to Sensiba, in the long term, personal loans can be good for your credit, "as long as you are responsible. If you get a personal loan to pay off credit card debt and go right back to paying for items with your credit card, it didn't make much sense to do the personal loan then. It can be good because you get rid of the outstanding balance on your credit card, your credit utilization will improve (high-impact), and your debts are consolidated so they'll be easier to manage. " Length of credit history "Accounts that are open less than 12 months tend to pull a score down," explains Scott. "One of the factors impacting a credit score is how long accounts have been established. It is better to have only one account which was open for three years than it is to have ten accounts which were each open for four months. Credit bureaus want to see the LONG-TERM willingness to repay, with the idea that anyone can make a payment for a few months. Once the account has been opened for 12 months or so, the impact on a score tends to be more neutral, and the longer the account stays open, the more it can raise your score, at least if you pay it on time." New credit Once you have had your personal loan open for a year, it is no longer considered in the new credit factor and will likely not have any further impact. Credit mix If this is the only installment debt on your report, it may hurt your credit score just a bit when repayment is completed and closed, but the positive impact on your current debt balances, and the chance to improve your credit by establishing positive payment history should outweigh this temporary setback. The bottom line Once you finish paying off an installment loan, like a personal loan, information about the loan and your repayment stays on your credit report for up to ten years; seven years if you made any late payments, and ten if you were in good standing. It can affect you for good or bad, depending on your habits. It doesn't just disappear when you repay the loan. So, how do you decide whether a personal loan is right for you? Mitic suggests, "it's important to weigh the short- and long-term benefits of applying for a personal loan before you apply. If your goal is to build credit, take out a personal loan that you can realistically pay off to increase your eligibility for bigger personal loans and long-term financing options in the future." Evaluate whether a personal loan is in your best interest or if there are alternative ways to meet your financial needs. If a personal loan does indeed seem like your best option, do plenty of research in advance to ensure the lender you use is right for you. Check out our personal loan reviews to help in your decision-making process, whether you are looking into borrowing a debt consolidation loan, home improvement loan, or any other type of personal loan. *Josh McFadden also contributed to this piece.
When you're sitting in the office of a mortgage lender or discussing with the local auto dealer the prospect of financing a new car, the words "We'll need to do a credit check" can either inspire you with confidence or leave you with sweaty palms, a racing heartbeat, and a knotted-up stomach. Calling up your credit score can have many ramifications. When you're financing a large purchase, when you are setting up installment payments, or when you are trying to apply for a credit card, line of credit or another retail credit card, your credit score and history will be strongly considered. A low score will make it more difficult to qualify for the size of loan you desire and will make the terms and rates more stringent and less in your favor. On the other hand, if you have a higher credit score, your worries and fears can be minimized, as your chances of securing the loan you want are greatly enhanced. If you currently have a less-than-ideal credit score, all hope is not lost. Rest assured that it is possible to raise your score and improve it. All that is needed is a little time, discipline, and hard work. Here are a few specific ways in which you can raise and improve your credit score: Make payments on time It may seem obvious, but this practice is critically important if you wish to keep your score on the high side or raise it up. If you do make your credit card, installment, auto loan, and mortgage payments on time, continue to do so. If you have struggled in the past with making your payments by the due date, make the commitment and the necessary changes in your finances and spending habits to ensure that you make the payments on or before the monthly due date. Late or missed payments will not only incur late fees, but they will negatively impact your score. When it comes to mortgage loans, payments more than 30 days late will cause a hit on your credit score. Keep credit card balances down and credit utilization ratio low Credit reporting agencies take into account a ratio between your current balances and the credit limit. Jeff Proctor, a personal finance writer over at DollarSprout.com, explains your credit utilization ratio "is how much credit you are using in relation to your maximum borrowing capability—and it’s the second most important factor in determining your credit score. In other words, if the maximum combined limit on all of your credit cards is $15,000 and you have $5,000 in credit card debt, your credit utilization ratio is 33%." Proctor continues, "Ideally, your credit utilization ratio should remain below 30%, and lower is even better. By aggressively paying off your existing debts, you will not only improve your credit score, but you will improve your ultimate financial situation (which is more important than your score, anyway)." Avoid closing credit cards Avoid closing credit card accounts, as that will lower your credit score. Nathan Grant, a Credit Industry Analyst with Credit Card Insider, suggests keeping credit card accounts open "even if you don’t use them and they are all paid off. The age of your accounts is another large factor in determining your credit score, so as long as you don’t have to pay an annual fee and you’re responsible enough to not rack up additional debt while keeping the card open," keep your credit card accounts open. Grant also notes, "Keeping a card open that is carrying no balance has a two-fold benefit. In addition to aging your accounts, it will also widen the gap between your total balances and your total available credit." Request a credit limit increase Increasing your credit limit has the ability to improve your credit score if you keep your credit utilization ratio low and make your payments on time. Joseph Allen, VP Mortgage Lending Officer at Quontic, gives this advice when looking to increase your credit limit: "When increasing credit limit, it’s important to know that most creditors will only allow one increase per year. Many creditors do not require a credit check in order to approve a credit line increase, however, some do. The best time to request a credit line increase is when you have little to no balance on your credit card. If your card is maxed out, then denial is more likely." Check your credit report You can request a credit report at no cost. The report will show all your current debts as well as any delinquencies or negative aspects of your credit. It's possible that some of these may be in error, so checking your reporting to find any inconsistencies or inaccuracies is vital. Manage credit cards with responsibility and prudence It's not necessarily a bad thing to have a credit card, but you must be vigilant in using it wisely. Plan to use credit cards for emergencies only. Or, if you decide to use it for incidental purchases, be dedicated to paying off the balance each month. Become an authorized user on a credit card You don't have to be the primary credit cardholder to get credit score benefits. Travis Holoway, CEO and co-founder of SoLo Funds, a mobile lending exchange connecting lenders and borrowers for the purpose of providing more affordable access to loans, recommends becoming an authorized user on a credit card. "This is an often overlooked non-traditional way to build credit but the major benefit is that a person with little or no credit can join ‘credit forces’ with someone that has more established credit. As payments are made to the credit card account, they will positively impact everyone associated and will help someone with no credit start to build indirectly." Practice responsible spending habits If you can't keep to a budget and spend responsibly, your financial situation will likely suffer and as a result, so will your credit score. Healthy spending habits typically equate to a good credit score, so make budgeting a priority. Don't spend more than you can afford and save when possible. Experienced in being frugal with her funds, Carol Gee explains an experience when she had to help repair her husband's credit after he wasn't budgeting correctly while overseas for the military. "He got behind on purchases I didn't know he had made, and his credit took a hit (I was the bill payer in our family). So when he returned and we received orders to a new base, I put a couple of our new utilities in his name and paid them on time monthly as usual. A year or so later when I checked both our credit scores, his was four points higher than mine." Gee's experience demonstrates that even if there is a time when you aren't budgeting correctly, your credit score isn't ruined forever. Just be sure to change course as soon as possible and to get back on track with your bills, and your credit score will slowly improve. Richard Best, a writer for dontpayfull.com (a savings, discount, and coupon aggregator that also provides tips and education for saving money and managing personal finances) with over 30 years of experience in financial services, echoes Carol's thoughts in noting that your payment history is one of the five most important factors that affect your credit score. Best explains that "payment history, which includes your on-time or delinquent payment record, accounts for 35 percent of your score." Do some credit house cleaning Best also suggests what he calls 'credit house cleaning.' Best explains, "The vast majority of credit reports contain errors—misapplied payments, incorrect credit limits, even wrong Social Security numbers—which can drag histories of other people into your own. By law, the credit bureaus must correct errors." Best concluded by saying that if you catch these inaccuracies, that "you can see your score improve instantly." Contact creditors or meet with credit counselors If you are behind on payments or are having difficulty making ends meet, speak with your creditors. In some cases, the lenders may be willing to renegotiate the terms and rates of your loan, and they may be willing to set up a plan with you to help you meet your obligations. You may also receive education on how to better manage your money and how to set up a plan for getting back on track. Your score will not automatically jump up to optimal levels, but abiding by these simple guidelines will improve your situation over time. A credit score will plummet if you fail to pay debts by the due dates and if you open several different lines of credit and assume several forms of debt. Also, when your credit cards are maxed out, your score will fall as well. *Josh McFadden also contributed to this piece.
Your credit score: That little three-digit number that is a key determining factor in so many important decisions, purchases and investments. You hear all the time the necessity of having good credit and of the dangers of having bad credit. Financial experts, mortgage professionals and economists alike preach against the dangers of bad credit and how low scores can hinder your opportunities and leave you shackled with debts and other restrictive obligations. So where is your credit score? In the imperfect world in which we leave, not everyone is going to have a glowing credit report. Just as all people come in different size and shapes, with varying personalities, backgrounds and experiences, so, too, will people be saddled with credit scores all over the board. Different credit scores and score ranges will qualify one for different levels of credit as well as various rates, terms and types of loans. For example, if you have diligently paid your installment loans, car payments and mortgage on time, and if you have kept credit card balances to a minimum, you likely have an excellent score in the range of 720 and above. This will enable you to receive favorable loan terms and qualify for higher amounts of credit. What about an average credit score? The typical American has a FICO score somewhere in the neighborhood of 690, which, according to the Fair Isaac Corp. teeters on the edge of average and good credit. The same institution reports that average credit-on the FICO scale-lies somewhere between 630 and 689. These numbers are based on a range from 300 to 850. Average credit is certainly nothing to be worried about, but an average score (particularly one on the lower end of the spectrum) does come with limitations, and it certainly would be advantageous to raise the score to the good or excellent level. Average scores can also vary from state to state. For example, it appears as though the Southern states seem to produce lower scores among its residents. Meanwhile, Minnesota has the highest average credit score at around 718. Other states with high average scores are North Dakota, South Dakota, Vermont, New Hampshire, Massachusetts and Montana. Be aware that there are definite levels within an average score. For instance, a person with a 635 score will have more going against him or her than a person with a 680 score. Though both are considered average, lenders will be more inclined to look at the score itself rather than the status of it being average, good, poor or excellent. Have more personal loan questions? Find answers on our Personal Loans FAQ page.