How Bad Credit Can Make Your Mortgage More Expensive

For sales sign in from of home that had bad credit mortgage

Borrowers who come to the table with lower credit scores can find that their mortgage loan costs more because of their bad credit scores.  This is true for first-time buyers as well as people buying second or third homes. A loan costs someone with a bad credit score more because of higher interest rates and the resulting higher monthly mortgage payments imposed on those with less-than-perfect credit.

Here’s a rundown of why and what your options might be if your credit score is less than ideal.

What Is a Conventional Mortgage Loan?

A conventional fixed-rate mortgage is a home loan originated by a bank, lender or mortgage broker and sold on the primary mortgage market to Fannie Mae and Freddie Mac. Conventional loans are not guaranteed to a government agency where some loans are, such as FHA and VA loan. And the interest rate and terms are almost always fixed for the life of the loan. The majority of home loans are conventional loans.

A conventional loan’s terms and interest rate are determined using what mortgage lenders call “risk-based pricing.” That means that the costs are based on the apparent risk of the consumer’s financial situation. It also means that different people get different terms and interest rates based on how risky their financial situation makes them to the lender as far as paying back the loan and making payments on time.

If you have a lower credit score—from bad to poor or fair—lenders see you as a higher risk and, if they’ll approve you for a conventional mortgage loan, they’ll charge you a higher interest rate that will result in higher monthly payments and a higher cost for the total loan in the end.

The Added Cost of Bad Credit for a Conventional Mortgage

With a conventional mortgage loan, your credit score is the biggest driver of your costs.

If your credit score is between 620 and 679, you can expect to see higher costs when:

  • You don’t have at least a 20% down payment (or 20% equity if you’re refinancing)
  • Your loan size is more than $417,000-or whatever your county’s conforming loan limit is
  • You’re refinancing to reduce your monthly payment

Other factors that affect the price and rate of a mortgage include occupancy, property type, loan-to-value ratio and loan program.

Let’s say your home buying scenario looks like this:

  • Primary home
  • Single family residence
  • Conventional fixed-rate loan
  • 5% down payment
  • 630 credit score
  • $417,000 loan size

Due to your lower credit score, it’s not uncommon that you’d be expected to pay an interest rate that’s 0.375% higher than the average 30-year primary mortgage rate and higher than someone with a credit score above 800. If the 30-year primary mortgage rate is 3.875%, someone with good credit would pay 4.125% in interest (.25% above the primary rate) and you’d pay 4.5%.

Your monthly payment would be $2,112.88 compared to 2,029.99—that’s 82.99 more each month and $29,876.40 more over the 30-year life of the loan. Ouch!

Also, when you have less than a 20% down payment—so you’re financing 80% or more of the home price—your lender will require that pay a mortgage insurance premium. That private mortgage insurance (PMI) premium might be 110% of the loan amount on an annualized basis.

Here again, your creditworthiness factors into the PMI amount for a conventional loan—the lower your score, the more you’ll pay in mortgage insurance. For someone with a 630 credit score, that might be $4,587 per year or $382 per month. Another ouch!

For someone with a 700 credit score, the mortgage insurance premium would be approximately $3,127 per year or $260 per month—a $122 savings compared to your rate or $1,464 annually.

The Bottom Line

It pays to have a good credit score when applying for a conventional loan. If you expect to buy a home in the next year, now’s the time to check your credit scores and credit reports and get yourself on a plan to build your credit. A lender can guide you on the best steps to take, too.

Get your free credit score and credit report card on Credit.com. Your score will be updated every 14 days, so you can track your progress. And your report card will include tips on how to improve each of the five key factors that go into your credit score—payment history, debt usage, credit age, account mix and credit inquiries.

Don’t fear though. If you need to get a home loan now, you might be able to get one with poorer credit and improve your score after the fact and then refinance to get a better interest rate and monthly payment. There are also other loan options available to those with poorer credit scores.

How to Reduce Your Mortgage Costs If You Have Bad Credit

You may be able to raise your credit score simply by paying down credit card debt. Use the credit card payoff calculator to see how long it might take to pay off your credit card debt. Paying down debt decreases your debt-to-income ratio and makes you look less risky to lenders.

Know too that your overall credit history will affect how quickly paying off debts now will affect your score. If you have a long history of late payments, it will take longer for making payments on time now to improve your score.

Generally, a good rule of financial thumb is to keep your credit card balances at no more than 30% of the credit limits per credit card—this is also known as your credit utilization ratio which accounts for a significant portion of your credit score.

In addition to paying down debts, ask your mortgage professional if they offer a complimentary credit analysis. In addition to checking your score and getting your free credit report card on Credit.com, a mortgage-specific credit analysis can help you see just what factors are affecting your mortgage interest rate. You can then focus on improving those factors first.

Most mortgage brokers and direct lenders offer a credit analysis service. By having the mortgage company run the analysis, you can see how much more your credit score could increase by taking specific actions.

You may also want to consider putting more money down when buying a home to help offset a lower credit score, if that’s possible, of course.

Or, you may want to change gears and go with a different mortgage loan program. An FHA loan is another viable route in keeping your monthly mortgage costs affordable. It may also be easier for you to qualify for an FHA loan with a lower credit score.

The Federal Housing Administration or FHA grants FHA loans. It doesn’t weigh credit scores as heavily as private lenders who give conventional loans do. There is no sliding scale based on your credit score like there is with a conventional loan.

An FHA loan does charge an upfront mortgage insurance premium of 1.75% usually financed in the loan, but the effect of the payment isn’t a lot, which can make an FHA loan a lower cost monthly alternative to a conventional loan for someone with a lower credit score.

Other FHA loan tidbits:

  • FHA loans are not limited to first-time home buyers—they’re open to everyone
  • FHA loans can be used for the purchase of a home or to refinance an existing FHA home loan.

If you’re in the market for a mortgage and are trying to purchase or refinance a home, consider working with your loan officer to qualify on as many loan programs as possible upfront. This approach gives you the opportunity to cherry-pick which loan is most suitable for you considering your payment, cash flow, loan objectives and budget.

More on Mortgages and Home Buying:

This article was last published May 27, 2015, and has since been updated by another author.

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Source: credit.com

What are Micro Loans?

small business owners apply for micro loans

A micro loan is a small, short-term loan that you can use to meet financial needs for your busienss. If you’re self-employed, you may need cash quickly, but not enough to justify taking out a big loan. Maybe you need the money to pay your workers or to pay for a marketing campaign you think will increase your sales margins. Whatever the case, there’s a good chance that you’d rather consider taking a short-term loan-a loan that is easy to get and has a low interest rate. A short-term loan like this is typically referred to as a micro loan.

What are Micro Loans Used For?

Typically, micro loans can be for anywhere from $500 to about $50,000. Borrowers can use the money for different purposes including:

  • Buying inventory
  • Buying or servicing machines
  • Buying office supplies and equipment
  • Paying employees’ wages

Micro loans are typically faster to apply for than a traditional business loan. One of the most significant advantages that come with applying for a micro loan is that you may still be able to qualify for one, even without a business credit score. This is because micro loans are typically used for new businesses to help get them up and running. Not only are micro loans designed to help small business owners and entrepreneurs make ends meet, but they are also available to minority-owned businesses and borrowers that can’t get any other funding for their start-ups.

SBA micro loans can be used for a variety of purposes such as working capital for your small business, buying inventory and general funding for sectors of the business that need the boost. A business owner can use micro loans to provide their businesses with the liquidity they need to remain afloat.

How to Apply for a Micro Loan

Like any other type of loan, there are certain standards you have to meet to be approved. Eligibility standards vary from lender to lender but there are still some things to consider. If you think a micro loan might be the best thing for your business right now, here are a few steps on how to apply for one:

  • Find a local intermediary micro loan The SBA suggests that you find a local intermediary micro loan provider in your community. There are intermediary providers all over the country, but a locally based one may be better placed to understand your financial needs as per the general local business environment.
  • Complete and submit your application. Now is the time to be in close touch with your intermediary micro loan Most lenders have specific application requirements and paperwork. Try to keep your intermediary loan provider in the loop as you apply to ensure that you have completed all the necessary paperwork as required.

To improve your chances of qualifying for a micro loan, you need to:

  • Complete your business plan-lenders will want to know that you have a solid plan on how to use the money they give you.
  • Prepare evidence of your financial cash flow and statements.
  • Give a solid plan and personal guarantee on how you intend to use the money if approved and how you will pay it back.
  • Identify any assets you might be willing to use as collateral should that be required by the lender.

Once you’ve done everything, all you can do next is wait for the approval. The approval process might take a while since it has to go through the intermediary provider as well as the SBA. It typically only takes a few days to get approved, but may take longer if you need to supply more documentation.

How Does a Micro Loan Affect Your Credit?

The SBA says that on average, small business owners take up about $13,000 in micro loans at interest rates that fall between 8% - 13%. Micro loans are underwritten by non-profit organizations and as such, don’t have the same eligibility requirements you may find with traditional loans.

That, however, doesn’t mean that you shouldn’t pay close attention to your credit. Micro loan lenders place more weight on other qualification criteria, but your personal credit and business credit scores can come into play when deciding what interest rates you’ll end up paying.

Typically, micro loans are short-term loans, but some lenders will give you up to six years to pay it back depending on their terms and conditions. While these loans may not be as strict as traditional loans, you still need to pay them back. Failing to do so will negatively impact your credit score just as any other defaulted loan would.

Every small business owner needs a helping hand now and again, and micro loans are a great way to fund your small business.

The post What are Micro Loans? appeared first on Credit.com.

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What Is a Soft Credit Check?

a soft credit check won't hurt your credit score

A soft credit check is when someone looks at your credit, either for informational or promotional purposes. Your credit score has a great deal of impact on your life. That’s why it’s a good idea to stay on top of your credit. This means you should take full advantage of the fact that the three major credit bureaus-Experian, TransUnion and Equifax-offer one free credit report each year for consumers.

However, you aren’t the only one who checks that information. Whenever a business checks your credit, it shows up on your credit reports. Have you ever received a credit card offer in the mail? Have you ever wondered how those credit card companies knew that you qualify for a certain credit card with a specific credit limit? The chances are that the credit card did a soft credit check of your credit.

Why a Soft Credit Check?

The Fair Credit Reporting Act requires the major consumer credit reporting bureaus to keep a record of all the businesses that look at your credit score.

A soft credit check is usually when your credit is pulled without you knowing about it. These inquiries aren’t initiated by you, such as when you apply for new credit. The only exception is when you check your credit yourself. A soft inquiry may include:

  • Reviews of your credit score or history by an existing lender with whom you have an existing line of credit
  • Reviews by potential landlords
  • Reviews of your credit for insurance purposes
  • Preapproved credit offers

Soft credit checks also include those instances when you view your own credit score.

Typically, soft inquiries remain on your credit reports for two years to give a clearer picture of all the institutions that have checked your credit. These soft credit checks don’t hurt your credit.

What Is the Difference Between a Soft Check and a Hard Check?

A hard credit check occurs when you apply for a line of credit such as a credit card, a mortgage, personal loan or an auto loan. Once these credit applications have been submitted, the potential lender makes an inquiry into your credit score and history to see whether or not you qualify for the account.

Unlike soft inquiries, hard inquiries do negatively impact your credit score. This is because hard inquiries indicate high credit risk to lenders when you apply for credit. This is especially true if you already have multiple inquiries. Lenders assume that applying for more credit means you’re having a hard time managing your finances.

Soft inquiries, on the other hand, are not factored into this risk calculation because these inquiries are done without your knowledge and are made for informational purposes only.

No matter how many soft inquiries appear on your credit report, your credit score will not suffer in any way. That is not the case with hard inquiries. The more hard inquiries you make, the more your credit score will be affected by those inquiries.

What Are the Benefits of a Soft Credit Check?

Soft inquiries have very few disadvantages. Here are some of the benefits that come with soft inquiries:

  • You can get offers for better credit cards.
  • You could get pre-approved for better mortgage loan terms.
  • Regularly checking your credit score can help you maintain or increase it.
  • Landlords who have a strict policy on their tenants can use these soft inquiries to differentiate you from other applicants. You stand a better chance of landing that wonderful apartment with controlled rent if you have a better credit score than other applicants.

Soft credit checks allow you to see how many people have looked at your credit. There’s a section on your credit reports that allows you to see who has looked at your credit and when. If you want to check your credit, don’t be afraid to do so because you won’t be penalized for it.

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A 15-Year Mortgage Can Save You $154K—But Can You Get One?

Woman looking at laptop ealizing how a 15 year fixed mortgage will save her money

Is a 15-year fixed mortgage worth it? The answer, absolutely. A shorter term mortgage—15 years versus 30 years—is one of the best ways to reduce mortgage debt and can save you thousands of dollars in interest payments.

For instance, consider the staggering difference between a 30-year mortgage and 15-year mortgage, both for $400,000. At 4% interest on a 30-year mortgage, you’ll pay an extra $154,903 in interest over the life of the loan compared to a 15-year mortgage term. You’ll pay total interest of $287,478.03 over 30 years. With a shorter 15-year fixed mortgage, you’ll pay only $132,575 in interest. That’s a staggering savings of $154,903.1

Outside of the savings on interest, there are pros and cons for getting a 15-year mortgage instead of a 30-year mortgage. Here’s a primer on how to determine if a 15-year home loan is a smart move for you.

Pros and Cons of 15-Year Mortgages over 30-Year Mortgages

Pros 15 vs 30-Year Mortgage Cons 15 vs 30-Year Mortgage
·         Faster to pay off

·         Less accumulated interest

·         Faster buildup of equity

·         Lower interest rates

·         Faster pay down of principal

·         Higher monthly payments

·         Lower mortgage interest tax deduction

·         Equity is tied up

·         Less money for other investments

Should I Get a 15-Year Mortgage?

The concept of the 15-year mortgage for most is, “I’m going to bite, chew and claw my way through a short-term, higher mortgage payment to get to a brighter financial future.”

In today’s interest rate environment, a 15-year mortgage has undeniable appeal. Outside of the difference in interest costs between a 30-year and 15-year mortgage, there are the advantages that being mortgage-free means for your future. There is the reality too though, of a higher monthly payment.

Consumers who are in a financial position to handle a higher monthly loan payment are ideally suited for a 15-year mortgage. People who anticipate an increase in income or a decrease in debt income are also good candidates for a 15-year loan term. People who plan to retire within 30 years are also good candidates. Because carrying a mortgage into retirement isn’t ideal.

Consider a 15-year mortgage if any of the following apply to you:

  • You don’t want debt hanging over you into the future
  • You have a strong income
  • You expect to see an increase in income fairly soon
  • You expect a decrease in debt soon
  • You plan to retire in less than 30 years

How Do I Know I’m Financially Ready for a 15-Year Mortgage?

In most cases, you need a strong income to get approval for a 15-year mortgage—even a 30-year mortgage for that matter. When you switch from a 30-year mortgage to a 15-year fixed-rate loan, you pay down the loan in half the amount of time. But doing so can also double your monthly payments for that 180-month term. It can also lower your home mortgage interest tax deduction.

Your income will have to support the larger loan payments. If you have other debts with a monthly payment, like cars, installment loans or credit obligations, factor those in as well.

If you’re interested in a 15-year mortgage but don’t feel financially stable enough to take on the higher monthly premiums, don’t give. There are things you can do to improve your finances to take on a 15-year mortgage. And you can always start with a 30-year mortgage and refinance to a 15-year mortgage later.

How Can I Improve My Financial Stability for a 15-Year Mortgage?

There are at least three ways to improve your capacity to take on a 15-year mortgage:

1. Pay Off Your Debts

When your lender looks at your monthly income to qualify you for a 15-year fixed-rate loan, part of the equation is your debt load.

For a preview on how the lender sees your application, take your proposed total monthly payment for a 15-year mortgage payment and add that to the minimum monthly payments for all your other consumer obligations. Divide the sum by 0.45.

(total monthly mortgage payment + consumer obligations) ÷ 0.45 = minimum income

For simplicity, let’s assume your total monthly mortgage payment would be $1,000 and your consumer obligations are $500. 1,000 + 500 is $1,500. Divided by .45, your minimum monthly income needs to be $3,333.

This formula gives you the minimum monthly income you need to offset a 15-year mortgage. If you make anything less than that, you probably won’t qualify for a 15-year home loan.

Because your current debt factors into this formula, paying off debt can easily reduce the amount of income you need to qualify. And getting rid of debt can also cut down on how much you need to borrow because you can save up a larger down payment at a faster rate.

2. Borrow Less

Buying a home that requires a smaller mortgage payment or making a larger down payment to reduce your mortgage payment is a way to keep a lid on your monthly costs. You’ll maintain a healthy alignment with your income, housing and living expenses.

Got extra cash in the bank? If you don’t have an immediate purpose for the money in your bank account beyond your savings reserves, use the funds to put down a larger down payment and reduce your mortgage amount.

With a bigger down payment, your monthly payments are more manageable and still let you take out a 15-year loan and pay less in interest expenses over the life of the loan. Borrowing less and putting down a larger down payment are great ways to make your money work for you.

3. Generate Extra Cash

Do you have assets like stocks that you can sell or a money-market fund you can trade out of? With extra money, you can pay off debts or apply for a smaller mortgage by putting down a larger down payment as covered above.

You can also get additional funds from selling another property. If you have a property you’ve been planning to sell—like a previous home—any additional cash generated from selling that property puta you in a better position to take on a 15-year mortgage.

What Other Options Are There?

A 15-year home loan isn’t realistic for everyone. A 25-year or 20-year mortgage are both alternative options.

Another school of thought is to voluntarily make larger monthly payments on your 30-year mortgage. It’s a fantastic way to save substantial interest over the term of the loan, since larger-than-anticipated monthly payments go to your loan’s principal, so you owe less in interest in the end.

You can even start with a 15-year mortgage and refinance your home at a later date to a 30-year home loan should your finances change or vice versa.

What Are Mortgage Points and How are They Used?

Mortgage points are also known as discount points and are fees paid directly to the lender at closing. In exchange, the borrower—you—get a reduced interest rate. It’s similar to putting down a larger down payment, but instead, you’re paying for a lower interest rate. This is also referred to as a buying down the rate. Buying points lowers the amount of your monthly mortgage payment. One point typically costs 1% of the total mortgage amount.

Consider a loan amount of $400,000. The cost for one mortgage point is $4,000. That point would lower your APR a quarter point—from 4.5% to 4.25%. The point would lower your monthly payment from $3,059.97 to $3,009.11—a savings of approximately $50.86 a month and a savings of $9,154.71 in overall interest for a 15-year loan. The break-even point to recover the cost of the points in this scenario is 79 months.2

To calculate the break-even point, you divide the cost of the points you purchased by how much you save on the monthly payment. You can also use a mortgage points calculator if you’re unsure.

When deciding if you should purchase points, you consider how long you plan on owning the home. If you have a fixed-rate mortgage, for example, buying discount points may be more sensible if you plan to keep the home past the break-even point.

Other Considerations fir Your Mortgage Term

Here are a few of the more commonly asked questions regarding mortgage points, mortgage terms and rates. Find more in 19 Confusing Mortgage Terms Deciphered.

Are Discount Points Tax Deductible?

You may be able to deduct discount points you purchase from your taxes as home mortgage interest. If you can deduct all your interest this tax season, then you may be able to deduct the total amount of your discount points as well.

Should I Pay Off My  Mortgage or Invest the Money?

If you plan on entering retirement, it’s best to pay off your large debts. In this case, a 15-year mortgage loan may be the right choice because it allows you to pay your loan off sooner and save the money for retirement.

Can I Save Money Making Extra Mortgage Payments?

Paying off your mortgage loan faster by making additional payments is a way to pay down the debt faster. But if you can afford extra each month, you may want to consider refinancing your loan to a 15-year mortgage instead.

Is It Harder to Qualify for a 15-Year Mortgage Loan?

If you have a higher income that proves you can afford the higher payments associated with a short term mortgage loan, then it’s easy to qualify. You may also find interest rates that are between .5 and 1% lower than they are for a 30-year mortgage.

What’s The Average Mortgage Rate?

Today’s average mortgage rate for a 30-year fixed rate mortgage is 4.375% (4.646% APR)  and 3.875% (4.323% APR) for a 15-year fixed mortgage per Quicken Loans.

What Mortgage Rates Can I Get with My Credit Score?

The higher your credit score, the better the interest rate you can get for your mortgage loan. Your credit scores are one of the most important factors mortgage lenders consider when determining if you qualify. A good credit score to purchase a home is above 620.

Keep in mind that to qualify for the best interest rates on a mortgage—which has a big impact on your monthly payment—you need a great credit score as well. You can check your credit score for free on Credit.com and you get free credit report card too.

Image: StockRocket

This article was last published December 11, 2017, and has since been updated by another author.

1 Based on calculations done at https://www.mortgagecalculator.org/ with no added property tax, PMI, home insurance or HOA fees.

2 Based on calculations done at https://www.money-zine.com/calculators/mortgage-calculators/mortgage-points-calculator/.

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Source: credit.com

Can I Get a Home Loan with Bad Credit?

hands holding green house cut out to show bad credit home loan

While a 20% down payment and a great credit history make buying a home easiest, there are ways to get approved for a home loan without them those golden assets. Programs, such as Federal Housing Administration or FHA loans, Veteran’s Administration or VA loans and United States Department of Agriculture or USDA loans can help those without great credit and a large down payment realize the dream of home ownership.

Why Mortgage Lenders Care About Credit Scores?

Your credit scores and credit reports are the primary information lenders use to determine whether you’re a good or bad risk for a mortgage. Assessing your creditworthiness also gives lenders an idea of the amount they can safely loan you with confidence you can pay it back and make payments on time.

Your credit scores and credit reports show a potential mortgage lender how you’ve handled past debt and payment obligations. Do you have several late and delinquent payments? Bankruptcies or other adverse judgments? Any of those items are red flags to a lender. And, because the lender is in the business of making money and not losing it, it wants to see you are not a risk.

Sadly, even if you’ve completely changed your credit habits, the lender will look at your past to assess whether or not it wants to enter into a future with you.

Even if you have a good credit score in the 750 range, a potential lender will look at your debt usage. If your usage is high, the lender might decide not to give you a loan. High debt usage is another red flag that loaning you money might be risky and result in a business loss for the lender.

Good and Bad Credit Home Loans

For first-time homebuyers and those looking for a second home, getting a traditional home loan with bad credit or a poor credit score can be difficult. But it’s not impossible. Even credit scores traditionally thought of as “bad” won’t necessarily stop you from getting approved for a mortgage.

Credit Score and Mortgage Approval

Credit Score Typical Lenders’ View of Score Ease of Getting a Mortgage
740–850 Outstanding High
720–740 Great High
700–720 Good Good
680–700 Risky territory Medium
620–680 Quite risky territory and less than perfect, but will likely still approve a home loan Medium
550–620 Wants improvement before approving a loan, but FHA loans are possible Low
300–550 Leery to approve a home loan, but FHA loans are possible Low

Mortgage Options Less than Good Credit

If you have a score lower than 620, it’s unlikely you’ll receive approval for a traditional home loan, also known as a conventional fixed-rate mortgage. However, you can likely apply for other programs, such as FHA loans, VA loans and USDA loans.

If one of those programs isn’t an option, take some time to improve your credit by paying debts on time before you apply for a loan. While you may be approved for a mortgage loan with a credit score between 620 and 680, such a score will affect your loan program and pricing. It will also result in your paying a higher interest rate. So it’s well worth your while to improve your score first if you can.

To get help improving your score, you can sign up for your free credit score on Credit.com. Your score includes access to a free credit report card that shows where you stand in each of the five areas that go into your credit score and how you can improve each area.

Credit.com dashboard of someone with poor credit

If you have bad credit, then the primary option for you to buy a home is an FHA loan. If your credit score falls between 500 and 579 and you can make at least 10% down payment, you likely qualify for an FHA loan.

If your credit score is 580 and 620, the golden score for qualifying for a conventional loan, you will likely qualify for an FHA loan and only need a 3.5% down payment.  Additional advantages of an FHA loan for people with lower credit scores include:

  • Shorter wait times after negative credit events, such as foreclosure, short sale, bankruptcy and divorce
  • Lower interest rates than conventional loans
  • Acceptance of a higher debt-to-income ratio than conventional loans

Disadvantages of an FHA loan compared to conventional loans include longer times to get approved and the requirement of mortgage insurance, usually a 1.75% upfront premium and 0.45%–1.05% annual premium too. But, given that you can buy a home with a lower credit score, those are minor if home ownership is your dream.

Learn more about how FHA loans compare to conventional loans.

VA loans and USDA loans are also options for some borrowers.

  • VA loans are available to active military members with credit scores of 620 or higher, require no down payment, offer competitive interest rates and can be easier to qualify for than conventional loans
  • USDA loans are available in rural areas to those with certain income levels and credit scores of 620 or higher, require no down payment, offer competitive interest rates and can be easier to qualify for than conventional loans

How Bad Credit Affects Your Home Loan

Your credit score determines two major things for a mortgage lender:

  1. The loan program or mortgage type
  2. Loan pricing, especially interest rate, which, if high, results in a higher monthly payment

Loan Programs

There are various types of loan programs, including conventionalFHAVA and USDA mentioned above.

Conventional loans are best for borrowers with good to outstanding credit. But if you can make a large down payment, you might be approved for a conventional fixed-rate mortgage even with less-than-perfect credit.

Loan Pricing

When it comes to pricing, if you have lower credit, your mortgage interest rate for a conventional loan will most likely be higher than those of someone with good or excellent credit. You may also face additional premiums and more expensive insurance.

According to myFICO.com, the interest rate paid for 30-year conventional fixed-rate mortgage varies by credit score as follows:

Credit Score APR
760+ 4.058%
620–639 4.647%

 

That’s a difference in monthly payment of $289. The borrower with the lower credit score, pays the higher price.

Credit History and Your Home Loan

Your credit history is another factor a lender uses when deciding whether to approve your mortgage loan. Negative items on your credit report, such as patterns of previous credit delinquencies and balances on closed accounts, negatively affect your chances of getting approved for a mortgage.

Lenders look at credit scores first to determine which home loan you’re eligible for. Next, your complete credit overview, including credit history, is used to determine what the lender looks for in the underwriting process. During underwriting, the lender tries to figure out what happened in your credit history and why, as well as the likelihood that you’ll have credit issues in the future.

How to Overcome Credit Red Flags

Negative items can cause concern for lenders, but may not be total deal breakers. Here is a list of negative red flags and how to overcome them.

  • A pattern of delinquencies. Lenders can work around a record of late payments, but they’ll likely require a larger down payment and lower debt-to-income ratio to do so.
  • Late student loan payments. A late federal student loan payment within the last 12 months will make approval less likely for an FHA loan because government financing doesn’t look kindly at delinquent federal payments.
  • Late mortgage and other loan payments. Lenders usually overlook one late payment in the past 12 months, so long as you can explain and provide necessary documentation.
  • After a foreclosure, it takes 36 months to be eligible for a 3.5% down FHA loan and 48 months for a no-money-down VA loan. However, it takes seven years to qualify for conventional loan approval, no matter the size of the down payment.
  • Short sale. Mortgage eligibility after a short sale is 36 months for a 3.5% down FHA loan and 24 months for a no-money-down VA loan or a 20% down conventional loan.
  • With normal Chapter 7 bankruptcy, you have 24 months until you’re eligible for a 3.5% down FHA loan and 48 months for a VA loan or conventional loan.

To determine which red flags to overlook, lenders use mortgage overlays.  Overlays are explained by The Washington Post as “the mortgage approval standards that lenders and their investors place above the guidelines set by Fannie Mae, Freddie Mac, the Federal Housing Administration and the Department of Veterans Affairs.” In other words, overlays are the guidelines mortgage brokers and lenders follow to prevent potential mortgage losses.

Overlays vary from lender to lender, so while one lender might not approve your loan because of poor credit and a minimal down payment, another may. The key is to find a lender with minimal overlays who is willing to work with your situation. One way to shortcut the path to finding a lender who will work with you is to go through a mortgage broker who can do the legwork for you.

Ways to Qualify for a Home Loan with Bad Credit

Even with bad credit, there are things you can do as a potential homebuyer to help improve your chances of loan approval.

Larger Down Payment

If you can’t quality or for a non-conventional loan, try saving money for a larger down payment. Lenders view borrowers with a combination of bad credit and no money down as riskier than either factor in isolation. Typically, lenders like to see at least a 20% down payment.

Lower Your Debt Usage

It’s also important if you have bad credit and are trying to secure a home loan, to lower your overall debt-to-income ratio. The debt-to-income ratio is a way a lender calculates how much you can afford.

Use Your Rental History

Most credit reports don’t contain information regarding past rental payments. However, if you can, prove you made on time payments consistently over the last 12 to 24 months. A few alternative credit reporting tools can help, like Rent Reporters, Rental Kharma and RentTrack.

Before choosing any tool, research the fees and monthly charges. Also, ask if your personal data will be protected and what you have to do if you choose to cancel the service. Some of these tools only report to one of the major credit bureaus. But some report to all three, which will help more than just one.

Explain Your Credit History and Circumstances

It may be helpful to write a letter explaining your situation. Break down the negative items currently on your credit report and give the reason as to why the lender should trust that it won’t happen again. Provide any proof you have that you’re taking care of the situation, paying down debt or receiving benefits because of an unexpected layoff and loss of employment, for example.

When you talk to a lender, gather documentation to explain your credit challenges. If you can explain derogatory items in your credit history to a lender, you’re more likely to receive a mortgage.

Be specific when speaking to a potential lender or broker. Don’t be afraid to share details of your needs and concerns. You’ll save yourself a lot of headaches later by finding out up-front if they have any mortgage overlays that might prevent them from lending to you.

Conclusion

You don’t have to have perfect credit to buy a home. Just be prepared and search carefully for the lender or broker who can make your dream home a reality.

Not sure where to start looking for a mortgage? Start right here at Credit.com with a list of mortgage rates from lenders in your area.

Image: Jupiterimages

This article was last published July 17, 2018, and has since been updated by another author.

The post Can I Get a Home Loan with Bad Credit? appeared first on Credit.com.

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Buying Bitcoin with Your Credit Card

If you’ve been paying close attention to digital currency, then you’ve probably heard about how high the value of Bitcoin was. In 2018, the value of a single Bitcoin reached almost $20,000. That value has since gone down, but it still hovers around the $3,000 mark making Bitcoin one of the most valuable cryptocurrencies in the world.

Bitcoin and other cryptocurrency value can fluctuate. If you time it right, you can make a lot of money trading cryptocurrency.

What is Cryptocurrency?

Cryptocurrency isn’t easy to explain, but we’ll give it a shot. Basically, it’s a form of digital currency. Bitcoin is the most well-known one but there are lots of other ones.

In order to work, cryptocurrency uses cryptography to make sure that the transactions are secure. Cryptography is the process of converting ordinary text into unintelligible text, which is how it stays secure.

A Small History of Cryptocurrency

There have been lots of attempts to create digital currencies. In 2009 an anonymous programmer-or a group of anonymous programmers-known as Satoshi Nakamoto came up with Bitcoin. Satoshi Nakamoto said that Bitcoin was invented to be a “peer-to-peer electronic cash system.”

Cryptocurrency is decentralized. This means that there are no centralized servers involved. There is no controlling body or authority such as government to regulate it. This is one of the main reasons why Bitcoin has become so popular and is being touted as the currency of the future. It may be the first global currency.

Cryptocurrencies make use of Blockchain technology where every participant has access to the public ledger that records all the transactions within the network. If you were to buy or sell cryptocurrency today, you would be assigned a digital wallet where that currency is held. It also gives you a public and private key you can use to authorize transactions.

To complete a transaction, you input your private key. All the details of the transaction, except your private key, are available in a public ledger that can be accessed by everyone in the network.

In short, cryptocurrency allows you to trade online without third party involvement. It can be as anonymous as you want it to be.

Can You Buy Bitcoin with a Credit Card?

Yes, you can buy Bitcoin with a credit card, although it’s not as simple as providing your credit card information to the website. You have to go through a platform called an exchange where your real-world money is exchanged for Bitcoins. The problem is that many exchanges are just scams that are meant to steal your credit card information. That’s why it’s important to only use an exchange platform that you have thoroughly researched.

To use any one of these exchanges, you have to create a virtual wallet in the form of a Bitcoin address. It’s very similar to your PayPal address or your virtual bank account where your purchased Bitcoins will be sent. Here are the steps to purchasing Bitcoin with your credit card:

  1. Visit the chosen cryptocurrency exchange.
  2. Choose the amount you want to spend on cryptocurrency or amount you want to buy.
  3. Input your ID for verification.
  4. Create your virtual wallet.
  5. Input your credit card details.
  6. Wait for cryptocurrency to be sent to your wallet.

The Pros and Cons of Buying Cryptocurrency Using a Credit Card

Here are some advantages and disadvantages to buying cryptocurrency with a credit card:

Pros of Buying Cryptocurrency with a Credit Card:

  • It’s pretty straightforward.
  • You can buy cryptocurrency even when you don’t have cash.
  • You don’t have to go through other third-party sites.
  • You get to enjoy the rewards and benefits that come with spending money through your credit card-this only applies to your specific credit card and what rewards it offers.

Cons of Buying Bitcoin with Credit Card:

  • You can overspend.
  • You run the risk of your credit card information being stolen if you don’t use a trustworthy exchange.
  • You may go into debt for buying Bitcoins that have a highly fluctuating value.
  • You may have to pay a transaction fee.

Buying and selling cryptocurrency with a credit card can be a good way of making money. If you don’t max out your credit card, and are strategic, then you’ll also enjoy the rewards that come with purchasing it with a credit card.

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Understanding How Solar Tax Credits Work

understanding solar tax credit

The U.S has been grappling with the idea of making renewable energy the primary source of power for homes and industries. Solar energy is by far one of the most popular in the market today. As an incentive to ensure that as many homeowners as possible adopt the use of solar energy, the federal government came up with the Energy Policy Act of 2005 which first introduced the solar tax credit.

What is a Solar Tax Credit?

The federal solar tax credit allows you to deduct up to 30% of the cost of installing solar energy systems in homes and industries in the U.S. There is no cap to the value of the system installed, and this deduction applies to both residential and commercial solar system installations.

A Small History of the Solar Tax Credit

Originally established by the EPA in 2005, the solar tax credit was supposed to last until the end of 2007. However, due to its vast popularity, Congress has been extending that expiration date for over a decade now. It’s mostly because the solar tax credit has proven to be a highly effective incentive supporting the transition of the country’s economy into the renewable energy era.

Today, the solar tax credit is still available to both home and business owners. Here are some of the details:

  • 2019-The solar tax credit remains at 30%
  • 2020-Homeowners and commercial solar system installation will benefit from a 26% deduction
  • 2021-Homeowners and commercial solar system installation will benefit from a 22% deduction
  • 2022 onwards-Only owners of new commercial solar system installation will benefit from a 10% deduction of the cost of installation. There are currently no federal tax credits for residential solar system installations from 2022 onwards

There was a time when, as the owner of a newly installed solar system, you couldn’t claim your deductions until your solar system was up and running. Now you can file your claim as soon as the installation process for solar power begins and as long as your solar energy system is up and running by the 31st of December 2023.

What are the Benefits of the Solar Tax Credit?

The benefit of the solar tax credit for a taxpayer can essentially be boiled down to the benefits of installing a solar system in your own home or your business. The very first advantage is the fact that you get to claim 30% of the installation costs with no cap to how much your system costs.

For example, if you got a system that costs $10,000 you can claim 30% of that and have a tax credit of $3,000. Should your neighbor install a solar system worth $100,000, they get to claim $30,000.

The solar tax credit also has the following advantages:

  • It has made solar energy more affordable for many home and business owners.
  • It encourages home and business owners to buy their own solar panels-leasing disqualifies you from the tax credit.
  • It helps you save money both during the installation of the solar system.

Thanks to the solar tax credit, you start saving money from day one. Even the fees that go into consultations with a professional solar energy expert count as part of the installation costs.

How Do You Qualify for the Solar Tax Credit When Filing Taxes?

If you want to install a solar system, you can qualify for 30% thanks to the federal tax credit. However, to do so, you must meet a few requirements during the tax year:

  • Your solar system has to be installed by the 31st of December 2018.
  • You must own and not rent the home or business that you want to outfit with the solar system-a rental property doesn’t qualify.
  • You must own the solar panels. Leasing disqualifies you.

It’s understandable that you might want to lease your solar panels to save money. The problem with this is that the leasing company is the one that qualifies for the 30% tax credit, not you. You can, however, buy your own solar panels by taking out a loan and enjoy the 30% tax credit yourself.

How Do I Claim the Solar Tax Credit?

Assuming you qualify for the solar tax credit, here are some of the things that you can claim when filing your tax returns:

  • Solar consulting fees
  • Solar equipment
  • Freight shipping costs
  • Tools and equipment
  • Professional installer fees
  • Engineer fees
  • Electrician fees
  • Wiring, screws, bolts, nails, etc.
  • Permitting service costs
  • Permitting fees

You can do the installation yourself if you have the technical know-how but you can’t claim your own labor for installing solar panels as part of the tax credit on your return. When filing your tax returns:

  • Confirm that you qualify for the 30% tax credit
  • Gather all the necessary receipts
  • Complete IRS Form 5965
  • Add the credit to Form 1040

Once that’s all done, you will have effectively filed for the 30% solar tax credit. You can consult your tax preparer to ensure that everything is in order.

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Understanding What to Do Unfiled Tax Returns

what you should do when you have unfiled tax returns

The IRS has taken down Al Capone, Wesley Snipes, Martha Stewart and other big names in the past for tax fraud. The federal government takes taxes very seriously.

Not filing your tax returns is a serious offense. Although there won’t be a nationwide manhunt for late returns, you may still see some hefty fines and possibly jail time.

What Happens When You Don’t File Tax Returns?

The IRS requires you to file your tax returns by April 15th every year. Filing your tax returns isn’t the most exciting think in the world but it’s important. Many people either put it off until the very last minute or fail to file altogether. Not filing your tax return can have costly consequences. Here are some of the penalties you may face when you don’t file your tax returns:

1. Late Penalties

The penalty for failing to file your tax returns or filing late takes effect on April 16th. You’ll owe the government 5% of the unpaid taxes in penalties for every month that they remain unpaid. That penalty, however, caps at 25%.

If you file by April 15th but owe the government and fail to pay the debt by that time, then a lesser penalty will be levied upon you. You can get charged between 0.5% to 1% of the unpaid tax debt for every month that it remains unpaid. Remember, you are required to file by the April deadline each year. In some cases, you can get an extension to file your taxes, but you’ll need to go through the proper channels and paperwork to do this.

2. You Could End Up Forfeiting Your Tax Refund

The IRS gives you three years to claim your back tax refunds. If you keep missing or failing to file your taxes, you will have effectively forfeited those back-tax refunds after the third year. You’re basically losing out on free money that you could most likely use.

3. Your Refund Can Be Delayed

The government can take time investigating your taxes when you consistently file late. Furthermore, the fact that you delayed filing your taxes means that there will be penalties levied. This can lead to your tax refund being delayed or forfeited altogether depending on the fines.

Even though the 5% per month penalty takes effect on the 16th of April, the IRS will still send letters with codes such as CP515, CP516, CP518 and CP515B. If you fail to act on these notices and don’t file your taxes or pay what you owe the government, you can end up facing jail time.

The fine for failing to comply with IRS can reach as high as $25,000. The jail time can be as long as one year for every year that you failed to file your taxes.

What Should You Do When You Have Unfiled Tax Returns?

When you don’t file your taxes on time and fail to heed the warnings sent by IRS, they will prepare a substitute tax return on your behalf. They base the information they use on the information they already have including W-2 and 1099 forms.

The letter you get from the IRS will state the sources of income that the IRS used to calculate the substitute returns.

Once the letter is prepared and sent, the IRS gives you 30 days from the official date of the letter to do the following:

  • Send in a completed tax return
  • Send in a letter consenting to the assessment and collection form
  • Send the IRS a letter explaining the reason you couldn’t file your returns

If, however, you want to file your back taxes to avoid further penalties, here are the steps that you need to take:

1. Get the Information You Need to File Your Back Taxes

You can start by requesting that the IRS send you your W-2 and 1099 forms. If, however, you are self-employed then you need to gather all the documents showing any sources of income that may not be on file with the IRS.

2. File Your Tax Return

Be sure to complete the tax return form as accurately as possible. You can even enlist the help of a qualified tax preparer to ensure that you don’t miss anything. If you need more time to complete unfiled tax returns or pay the money you owe, you can contact the IRS to see if you can get an extension or agree to a payment arrangement. This can help you avoid further penalties.

3. Monitor Return Processing and Compliance

You need to ensure that you monitor the return processing by asking for your account transcript to ensure that the IRS got your returns and that you have adhered to everything.

The IRS requires you to achieve tax compliance by filing all unfiled back taxes. In some cases, you may need to go back as far as six years. However, every account is different, and you need to be in open communication with the IRS. This will help ensure that you have fully complied to avoid jail.

There is some good news. Depending on your circumstances and how open you are with the IRS, you may qualify for IRS Amnesty or Reasonable Cause. This means that your penalties, fines and payment are either reduced or waived.

No matter the case, the IRS investigates unfiled taxes. To avoid the penalties, do your best to adhere to tax compliance by filing your tax returns by the April 15th  deadline.

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What Exactly Is Mortgage APR?

pen resting on mortgage APR document

Mortgage interest rate and mortgage APR (annual percentage rate) while related, are not the same. You’ll see both listed for mortgages. For example, you may see a 30-year fixed-rate mortgage with an interest rate of 4.250% and an APR of 4.385%. The interest rate is the interest you pay on your home loan. The APR is the interest rate plus other fees and costs associated with buying a home. APR is really what you’ll pay on top of the principal. It’s sometimes called the percentage rate.

The federal government supports the annual percentage rate (APR) disclosure as the benchmark barometer of a loan’s cost when mortgage shoppers begin their quest to find a good deal on a home loan. For this reason, it’s important to understand what goes into a mortgage APR and to harness this knowledge to find the best loan for you.

APR Decoded

The APR you pay on your mortgage includes:

If you have a higher APR, then you can expect to make higher monthly for the term of your loan. You also want to really compare APRs and not just the flat interest rate. You want a better interest rate and APR, but the APR is really what you’ll pay, so the better the APR, the better your mortgage.

APR Versus Interest Rates

The interest rate is a percentage against the total loan amount that the mortgage lender charges each year in exchange for loaning the money the borrower.

The APR, on the other hand, is that interest, plus some other charges. With a home, those charges include the items listed above. APR is used primarily for fixed-rate mortgages.  The APR on an adjustable-rate mortgage (ARM) is a forecast only, which is often inaccurate.

Say you loan your nephew $500 to buy a new bike. In exchange, he agrees to pay you back in six months. You charge him a 5% interest rate—each month—for the favor. The interest and payments break down like this:

  • Interest Rate—5%
  • APR—0%
  • Monthly Payment—$84.55
  • Total Cost—$507.32
  • Interest Payments—$7.32

So your nephew’s interest is $7.32. That’s simply the money he’ll pay you for your loaning him the money.

Using your loan to your nephew as an example. Let’s say, you’re a tough uncle or aunt and you tell your nephew that you’re going to charge him a $20 fee on top of the interest in exchange for giving him the loan. The interest doesn’t apply to that $20 charge, but that charge is paid out over the course of the loan as part of the monthly payment rather than up front or when the loan is paid off. The payments with APR breaks down like this:

  • Interest Rate—5%
  • APR—18.6916%
  • Monthly Payment—$87.93
  • Total Cost—$527.61
  • Interest Payments —$7.61

The same scenario applies to your home loan. You pay interest and you pay APR. But what you really pay is the APR, which includes the interest and is your total cost of borrowing.

Keep in mind that there are charges that don’t go into the APR category, such as closing costs, which aren’t included in APR.

How APR Affects Your Mortgage

The APR helps you evaluate the true cost of borrowing the money for buying your home. It actually also helps you spread the costs of that purchase out.

Let’s look at your nephew again. Say, he buys at the bike under the 18.6916% APR scenario. He decides after two months to sell it. At that point. He’s paid you $175.86 toward the loan, $6.76 of which covers the $20 fee you’re charging him for the loan. He sells the bike for $400. He pays you the remaining principal left on the loan, which is $334.72. But, because he spread the $20 fee out over the life of the loans, he’s actually saving $13.24 compared to if he had paid that and upfront $20 fee.

The moral of the story is that APR helps spread costs out across your monthly mortgage payments for the long haul and it benefits you if you if you end up selling your home earlier. You could pay less interest if you paid all the fees associated for the loan up front, but if you need to sell early, you lose money.

Knowing the APR lets you measure how much interest you end up paying in the long run. It also lets you compare loan products and fees to see how you can save money over the term of your loan.

APR Tips and Tidbits

APR is disclosed for a new loan or credit products. You won’t, however, see APR on your monthly mortgage loan statement as the APR is used as a cost measure when you first apply.  The sole purpose of APR disclosure is to make mortgage shopping easier. The APR doesn’t change the amount you borrow.

A loan calculator, or amortization schedule calculator, offers a simple way to estimate your monthly loan payments. It also shows how much of each of your payments go to the interest of the mortgage loan as well as the principal (the actual amount you borrowed).

Be attentive if the APR is more than 0.25% higher than the interest rate for a loan. If you receive disclosures that show a substantially higher APR than the interest rate and you don’t understand the disparity between the ARP on your disclosures and/or mortgage quote versus the interest rate, ask your loan officer. Don’t be afraid to ask questions even if they seem silly or redundant.

Keep in mind that one of the biggest factors in what determines the interest rate you end up paying is your credit score. Taking some time before applying for a mortgage to build a good credit score can save you thousands over the life of your loan from a lower interest rate. You can check your credit score for free on Credit.com to see where you stand and use the free credit report card that comes with your score to improve your score over time.

Ready to Shop for a Mortgage Rate?

You can browse and compare home loan rates and terms right here on Credit.com.

More on Mortgages and Homebuying

This article was last published May 20, 2015, and has since been updated by another author.

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What Does Your Relationship Mean for Your Credit?

couple is dealing with their finances and the effect on relationship

Relationships and finances seem to intermingle no matter how hard you may try to separate the two. The truth is that not very many of us like to talk about finances, especially during the early stages of our relationships. You shouldn’t avoid talking about finances though. Your relationship can help build or ruin your credit score.

How Different Types of Relationships Affect Your Credit

Think about it, how much student debt do you have? Nationwide, that number stands at an astounding $1.5 trillion. Most of this debt is held by Millennials who are now thinking about getting into serious long-term relationships and marrying. You or your partner can bring a whole lot of debt into a union. This will inevitably marry your finances as well as your romance.

While you can have excellent credit as an individual with separate accounts, getting married to and co-signing loans with a partner who has bad credit or bad spending habits can eventually negatively impact your good credit. Here are some common ways your relationships can affect your credit score:

Dating

It’s only natural that you want to impress your new partner during the dating phase. This means:

  • Going out to restaurants on dates
  • Splurging on gifts for their birthday, Christmas and so on
  • Giving yourself a makeover to show them that you have style

There are other things that you may even do such as paying some of their bills to show that you are capable and are a provider or helping them out by co-signing on a loan. This can be a financial strain. Also, if they default on the loan, you’ll be responsible for it and your good credit will suffer. Not to mention, if the relationship doesn’t last, you’ll end up deeper in debt.

Marriage

Once you get married, things get a little bit more complicated. The good news is that getting married doesn’t affect your credit score. You and your spouse continue to have separate credit reports and scores.

The problems often come when you decide to apply jointly for a credit card or a loan because this is when both your credit scores are checked. If one of you has bad credit, then your joint application will either be denied or the interest rates you get will be higher based on your spouse’s bad credit.

Additionally, the mere fact that running a home can be expensive will in one way or another affect your credit especially if one of you is not as financially responsible. The history pertaining to any joint accounts you have appears on both yours and your spouse’s credit reports. Should that account become delinquent, both your credit scores go down.

Divorce

Unfortunately, 40 - 50% of all marriages end in divorce. If you end up getting a divorce, your finances will be affected one way or another, even if your marriage ends on good terms. If you aren’t careful, it could also negatively impact your credit score in the following ways:

  • You can’t pay your bills on time. Since you now only have one income, you may find that some of your bills don’t get paid on time or at all because of your reduced financial capacity.
  • You had shared accounts. Joint accounts might go unpaid because the person responsible for them as determined by the judge doesn’t pay it. As such, both your credit scores will suffer because at the time the account was opened, you’re both responsible for it.
  • You have a vindictive ex. If you have a nasty split and your ex decides to harm you financially, they could max out any shared credit cards and maybe even clean out your joint accounts, financially crippling you.

How to Protect Your Credit Through a Relationship

It may seem like the logical thing to do to keep your finances separate from your partner and to avoid having any joint accounts. Bur you may not be able to do this, especially if you’re married. There are several steps you can take to ensure that your finances don’t suffer as a result of your relationships:

  • Have a candid conversation with your partner about your financial habits.
  • Maintain your financial discipline by managing money even through the dating phase. If you find that you can’t do that, then find a new source of income to offset the increased spending.
  • Let the spouse with the best credit score apply for loans and borrow money to get the better rates.

You can also decide to apply for joint accounts and pay higher interest rates with the aim of improving your spouse’s credit score in the long run. You can refinance later for a better interest rate.

Ideally, you should have a candid conversation with your partner. You both need to be honest with each other about your financial weaknesses, strengths and debt. Once you have everything out in the open, you can come up with a plan to ensure that neither of you is making poor financial decisions.

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