financing

Debunking 8 Common Credit Score Myths

Paul Michael — Fri, 08 Sep 2017 09:00:06 +0000

Credit: Like it or loathe it, most of us need it to survive. And the kind of credit we have access to is dependent on our credit scores. A mortgage, a car payment, credit cards, and even health care financing all impact and depend on our credit score.

The problem is, there's a lot of misinformation out there, and if you believe it, you could be doing yourself a disservice. Here are the top myths about credit scores that we have debunked for you.

1. Closing a lot of credit accounts will improve your score

It seems logical, but it's completely incorrect. Credit scores are calculated in part by something called a debt-to-credit, or credit utilization, ratio. The agencies calculating your score are looking at how much debt you have, and how much available credit you can tap into.

So, if you have 10 credit cards with a combined credit availability of $100,000, and you've only used $15,000 of that available credit, your credit utilization ratio is 15 percent. This is considered good: You have 85 percent of your credit unused.

Now, let's say you close seven accounts, because you just aren't using them. You still have $15,000 in debt, but now your overall available credit drops to $30,000. Your credit utilization ratio just skyrocketed to 50 percent, and that means your credit score takes a dive.

Do not close credit card accounts like this. Simply put the cards you aren't using somewhere safe. And if you get the chance to increase your credit limit, do it. As long as you don't plan to max it out, it will help your credit score. (See also: Stop! Don't Cut Up Your Credit Cards)

2. The amount of money you make has an impact on your score

Your credit score lists credit accounts, not income from employers. So, whether you're a CEO making $3 million a year, or an entry-level worker earning $30,000 a year, income is not a factor in determining your credit score. In fact, a rich CEO might actually have a terrible credit score, despite the money, because of a bankruptcy or series of late payments in the past.

The only way income can have an impact on your credit score is if you live a Champagne lifestyle on a beer budget. If you are maxing out your cards, making minimum payments, and missing payments altogether, you will see your score take a big hit.

3. Credit scores change just a few times a year

Credit scores are changing all the time. The information used to calculate your score comes from the financial institutions you do business with. If you miss a payment, that will be reflected pretty quickly. If you close several accounts, that information will impact your score a lot sooner than in three to six months.

In fact, if you look at your credit score right now, you will see when the last updates were made. Sometimes, it will be a matter of hours, rather than days or weeks. For this reason alone, you should be checking your credit score on a regular basis. When something negative happens, you can jump on that issue quickly and get it resolved.

4. A bad credit score makes it impossible to get credit or loans

This is a myth that comes from years of advertising messaging about needing a good credit score to get financing. Actually, most people can get financing, whether their score is up in the 800s or down in the 400s.

A credit score represents a level of risk to financial institutions, and this will dictate the terms of any loan or credit your receive. For example, someone with a credit score of 800 is considered very low risk to the financial institution. They know this person pays on time, has a lot of available credit, and has longevity with his or her accounts. This will result in a low interest rate, and more available credit.

Someone with a 450 credit score, on the other hand, is considered a very high risk client. Loans and credit offers will be available, but they will have oppressive interest rates for very little credit.

5. Checking your credit report damages your score

This is rooted in truth. A "hard inquiry" on your credit will have an impact on your score, albeit a small and temporary one. This happens when you apply for a loan, credit card, or other form of financial assistance. The hard inquiry dings your credit a little because if you do it a lot, say applying for 10–12 new accounts every month, you could be setting yourself up for some financial ruin down the line.

However, if you, yourself, are examining your credit report, that is considered a "soft inquiry." It will not have any impact on your score, and you can do it daily, or even hourly, without any consequences. (See also: How Credit Inquiries Affect Your Credit Score)

6. If you don't have credit, you'll have a great credit report

Not in the U.S. In some countries, a lack of credit is considered a good thing. If you've never had a credit card or a car loan, you must be financially responsible. But in the U.S., you don't get a good credit score unless you have a good history with credit.

The fact is, credit scores are built. Financial institutions want to know that you will borrow money and pay it back on time, with interest. If they can see you have done that well, and often, you are not a risk. If you have never had any kind of loan or credit card, you represent an unknown quantity. And unknown quantities do not sit well with people putting a stamp of approval on a credit line. (See also: How to Use Credit Cards to Improve Your Credit Score)

7. Carrying a balance on your credit card helps your score

No, it doesn't. To be fair, it doesn't hurt it either. But if you are under the impression that keeping money on your card is helping your score, you are not doing yourself any favors. Ideally, you want to pay off the balances on your cards in full every month, to avoid paying interest on purchases. If you are only paying the minimum, you are basically throwing money into the trash. Most of that minimum payment is going to the credit card company; very little pays down the balance.

Whenever possible, don't carry a balance. And if your balance is more than 30 percent of the card, consider transferring half to another card. When you are using more than a third of the credit on one card, you can actually hurt your score. Ideally, your balance will be below 30 percent of the available credit — the lower, the better. This is a good time to request a credit line increase. If you get your line increased a few thousand dollars, so that your balance drops below 30 percent, that can increase your score. (See also: 4 Questions to Ask Before Getting a Credit Increase)

8. A bad credit score will stay with you for life

If you are currently looking at a poor score, it's not the end of the world. You won't be paying exorbitant interest rates forever. However, it does take time to rebuild it.

The score will change, for the better, if you open new lines of credit and pay your credit card bills on time. Never miss a payment. Keep your balances low. Maintain a very low credit utilization ratio. Try not to apply for too many cards or accounts in one year. If you continue to be a model credit citizen, even after financial difficulty, your score will rise.

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This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Should You Buy a Car With a Credit Card?

Holly Johnson — Wed, 05 Jul 2017 08:30:12 +0000

While most people rely on cash or bank financing to buy a car, it may be possible to make all or part of your vehicle purchase with a credit card instead. This might seem like a risky proposition, but there are real, tangible benefits that can come from using this payment method if you're careful.

With the right credit card strategy, you could earn rewards for your car purchase, save money on interest, and potentially pay your car off faster. Obviously, there are also a lot of things that can go wrong with this strategy. If you can't afford a car and are looking at a credit card as your way to finance it because you have no other options, forget it. You'll end up worse off if you can't make payments on your credit card.

Even if you can afford the car, you'll need to answer a few questions. Let's talk about whether charging it makes sense — and when it's possible.

Is it possible to buy a car with a credit card?

First, you need to determine whether the dealership or car lot you're buying from will allow it. There are instances when a car lot may let you pay for your entire car purchase with credit, but those situations are rare.

More likely, if a dealership lets you pay with a credit card at all, it will cap the amount at, say, $5,000. The main reason dealerships hesitate to let you charge tens of thousands of dollars to your card is that, like other merchants, they pay interchange fees to accept credit cards. These fees are usually around 2 percent, sometimes higher. So, if you charge a $30,000 car, your dealership could be on the hook for at least $600 in processing costs.

The other thing you need to note is your available balance. Obviously, you can't charge more than your credit limit, so you'll need to be aware of that limit.

Earning rewards with a car purchase

While there is more than one way charging your car to a credit card can leave you ahead, the most intriguing opportunity is the rewards you could earn. You can get cash back or travel rewards. You might even want to use a co-branded car credit card (yes, they exist!). This can provide you a hefty discount when you are ready for your next car.

Obviously, this strategy is only worth pursuing if you have the cash in the bank to pay your card off right away. While the cards with the most lucrative rewards programs help you earn "free money" on large purchases, the interest rates they offer tend to be higher than average. If you put $30,000 on a credit card that charges 15 percent and it took you five years to pay your loan off, you would fork over $12,822 in interest alone.

Saving interest on a car purchase with a 0% APR card

This leads to the second reason some people may choose to charge their car purchase — to save money on interest. While many rewards cards charge higher interest rates than most, an array of cards charge 0% APR for new purchases for 12–21 months.

The key to making a 0% APR card work in this scenario is making sure you can pay the balance in full before your introductory offer ends. Once it's over your rate will reset to a regular credit card interest rate, which is almost certainly higher than the rate you'd get on a car loan.

Before you pick a 0% APR card for your car purchase, make sure you can pay the balance in full before the introductory offer ends. That way, you can truly save money on interest — and not end up potentially paying more in interest than if you'd just gone with a loan.

Buying a car with a credit card

If you're dead set on charging your car to a credit card, it's important to think through several important scenarios first. Here are four tips that can help you get the most out of the situation.

1. Don't talk about payment until you've negotiated a price

While there's nothing wrong with using credit for a car, your car salesman may want to make up for their fees by charging you a higher sales price. That's why you should never reveal that you intend to pay with credit until you've negotiated the terms of the sale. By slow-rolling your credit card payment plan, you can get the best price possible while also gaining the benefits of using a card.

2. Make sure you're getting the best deal possible

As with any car purchase, you should research the cars you're interested in online before you ever step into a dealership. Websites like Kelley Blue Book can help you figure out exactly what a car is worth based on its make, model, and condition. If the dealership wants you to pay more than a car is truly worth, the rewards you're earning probably won't be worth it, especially if they decide to tack on a fee for using a credit card.

3. Do the math before you buy

While getting 0% APR on your car purchase can pay off, it's important to do the math if you don't think you'll pay off the entire purchase before the introductory offer ends. If you need several years to pay your car loan in full, for example, you will be better off with bank or dealership financing — even if the ongoing APR seems high.

4. Decide what you want — 0% APR or rewards

While a slew of popular credit cards offer rewards or 0% APR for a limited time, few cards offer the best of both. Before you charge your car to a credit card, make sure you have defined goals and a plan to reach them. And if you don't have the right credit card to meet your needs for this purchase, explore your card options and apply for a new card before you step into a dealership.

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Most Common Mistakes When Doing a Balance Transfer to Eliminate Debt

Jason Steele — Fri, 24 Feb 2017 10:30:36 +0000

Many credit cards offer 0% APR promotional financing on balance transfers, allowing you to move debt from high-interest cards onto one that offers zero interest for an introductory promotional period. These promo periods are nothing to sneeze at. They can last as long 21 months.

So what's the catch? The truth is that balance transfer offers can be incredibly valuable, but only when you use them properly and avoid making some common mistakes.

1. Assuming You'll Get the Best Balance Transfer Deal

You might not always be approved for the balance transfer card you want. For example, the best 0% APR deals are only given to those with excellent credit. While you may have had excellent credit in the past, having a large balance for a long time might have caused your credit score to slip. (See also: One Ratio Is Key to a Good Credit Score)

Even if you are approved for the card, it may come with a credit line that's substantially lower than you need. If that's the case, you may want to consider applying for a second balance transfer card.

2. Trying to Transfer a Balance From the Wrong Card

Consumers sometimes don't realize that you can't transfer a balance between two cards issued by the same bank. So if you have an outstanding balance on your Chase Freedom Unlimited card, you can't open up a new Chase Slate card and expect to transfer your balance to it.

Keep this in mind before you apply for a balance transfer card. Every time you apply for a credit card your credit score takes a little hit. It can usually recover fairly quickly, but there's no need to ding it unnecessarily for a card that doesn't even serve your needs. (See also: How to Choose a Balance Transfer Card)

3. Overlooking Balance Transfer Fees

Almost all credit cards charge a fee when you make a transfer, except for a few notable cards that don't charge balance transfer fees. Typically the fee is 3% of the transfer amount, but it could be as high as 5%. If your balance is small enough that you can pay it off within a few months, you're probably better off not transferring it to a new card.

4. Delaying Your Balance Transfer

You'll usually have 60 or 90 days to transfer your balance to the new card. After that the deal expires. Transfer the balance as soon as you can to get the most use of the promotional 0% period and cut down on the number of days your balance is accruing interest on your old card. Transferring your balance early will also ensure you don't forget about the deal and miss it altogether.

5. Misunderstanding How New Purchases Are Treated

If you make a new purchase on a balance transfer card, it will be subject to the card's regular interest rate unless the card specifically offers 0% interest on purchases, too. That means you've got two balances on the card: the interest-free transferred balance and the new purchase balance.

By law, credit card issuers must apply any payments above the minimum to the balance with the highest interest rate first. But they can apply your minimum payment to whichever balance they choose, which of course will be the one with no interest charges. As a result, you'll still incur interest on your new purchases.

Bottom line: It's best not make new charges on the balance transfer card unless it offers interest-free financing on new purchases as well.

6. Paying Late

It's always important to pay your bills on time, but it's even more so with promotional balance transfer offers. Pay late and you may find your 0% offer revoked, subjecting you to the card's regular higher interest rate way before you're ready for it. Add to that late fees the card may impose, and you've got an expensive mistake.

7. Stopping Payments on Your Old Card Too Soon

What some cardholders don't realize is that your balance transfer may not be completed immediately. It can take up to two weeks to process the transfer. Even if you've initiated a balance transfer, you will still need to make payments on your old card until you've confirmed that it's been paid off. Don't worry about overpaying — credit cards are very good about refunding you any overage you might have submitted during the transition.

8. Using a Balance Transfer Offer to Rack Up More Debt

Those 0% APR balance transfer offers are your chance to get out of debt, but unfortunately, many people squander that chance and continue to rack up debt. They can't resist the temptation of having an empty balance on their old card, so they keep making charges on it that they can't pay off right away.

Instead, use balance transfer deals as part of a comprehensive debt repayment plan. You should view the end of these limited time offers as a deadline for paying off your entire balance, knowing that 100% of each payment you make during this time will go toward your principle.

This article is from Jason Steele of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Same-As-Cash Store Offers vs. 0% Intro APR Credit Cards — Which Is Right for You?

Jason Steele — Thu, 09 Feb 2017 10:30:36 +0000

We've all shopped for appliances, furniture, or other big ticket items and seen the signs for interest-free or "same-as-cash" store financing. At the same time, plenty of credit cards offer 0% APR promotional financing for new purchases.

These two are not the same, and it can be a challenge to sort through the fine print of these offers. If you need to find financing for a large purchase, which type of offer should you choose?

How In-Store Financing Typically Works

With most financing programs offered by retailers, customers are presented with so-called "same-as-cash" offers. For example, a financing offer from a furniture or electronics retailer might say something like, "Three years same as cash," or "Make no payments until 2020." Of course these offers sound great, but they are full of a hidden dangers.

These kinds of programs are called deferred-interest financing, and they allow you to avoid interest on your purchases if, and only if, you pay down the entire balance in full before the promotional financing period expires. To do so, you will have to pay more than just the minimum payments. You'll need to pay enough every month to clear the balance before that expiration date — and ideally, a month in advance, just to be safe.

If there is any remaining balance, no matter how small, at the end of the specified time period, you will owe interest on the entire balance going back to the date of purchase. This means that making your last payment a day late, or just a dollar short, could result in hundreds of dollars of interest charges.

Another way of looking at deferred-interest financing is that interest is always being accrued during the promotional period, but it can be waived if you have a zero balance on the last day of that period. (See also: What You Don't Understand About Credit Card Interest Rates)

How a Credit Card's Promotional Financing Offer Works

When you open up a new credit card account that offers a promotional 0% APR on new purchases, you will always avoid interest charges on those purchases for the entire length of the offer. If you pay off your balance before the promotional financing period expires, then you don't pay any interest at all. And if you have a remaining balance when the 0% deal ends, you begin to incur interest charges only on your remaining balance. Unlike the deferred-interest financing option, you'll never have to pay interest on previous balances, regardless of whether you are able to pay off your entire balance during the promotional financing period.

Some retailers offer credit cards and store charge cards that feature promotional financing with terms that are similar to other credit cards, instead of deferred-interest financing, so don't necessarily lump all store financing deals together.

Which Is Better?

Deferred-interest financing options offered in stores can be convenient, and they may even have longer promotional financing periods than most credit cards. Another advantage is that these in-store offers typically have lower credit score requirements than the most competitive credit card offers from banks. However, they can be extremely risky, as even the smallest mistake can be very costly.

It's safer to go with a credit card offering 0% APR promotional financing, assuming you're able to qualify. What's more, you can use an offer like this to make purchases from any retailer, whereas the deferred-interest deals are limited to purchases at the stores offering them.

But if you have less than perfect credit, you may not have a choice. If you can find a store that offers its own deferred-interest credit or charge card, it will be easier to qualify for than your typical credit card with 0% APR financing.

See Wise Bread's top picks for credit cards offering 0% APR on new purchases.

This article is from Jason Steele of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Ways to Buy a House Without a Mortgage

Mikey Rox — Thu, 06 Oct 2016 10:00:06 +0000

Although mortgages are a common way to purchase a home, you can only get one if you qualify. The qualifications include an acceptable credit score, a sufficient down payment, and meeting a bank's income and employment requirements. And let's not forget, every mortgage charges interest, which increases how much you pay in the long run.

The good news is that a mortgage isn't the only way to purchase a house. If you think outside the box, you can possibly pull off a home purchase without a costly loan.

1. Live Off One Income

Some people like the idea of paying cash for a house, but don't think it's a reality. If you're a two-income household, one method for getting a home without a mortgage involves living off a single income for a few years.

If you and your partner work and earn a decent salary — and live in an affordable area — you might be able to save enough for a cash purchase by keeping your life as simple as possible and subsisting off one income. This approach allows you to save 100% of the other person's take-home salary. So if you both earn $30,000 a year, rather than maintain a lifestyle requiring $60,000 a year, live frugally and save the other half of your combined income. In six years, you'll have approximately $180,000 cash for a home purchase.

Of course, living simpler is much easier said than done. To make it work, consider renting out a room in your house or apartment to help cover expenses, or you can rent a room from family or friends. Other options include skipping vacations, spending less on entertainment, and sharing a car. These are sacrifices that pay off in due time.

2. Sell Your Home and Purchase Another One

If you're thinking about downsizing and you have plenty of equity in your current home, another option is selling your home, taking the profit, and moving to a location with a lower cost of living.

This works if you're currently living in an expensive area but thinking of moving to a location where you can get more house for your money. Let's say you sell your current home and walk away with a profit of $150,000. This could be exactly what you need to pay cash for a new property in a different part of the country.

3. Get an Investor

Then again, maybe you're not looking for a primary residence, but rather an investment property. Getting a mortgage for an investment property is tricky. Many lenders require a higher credit score for investment properties, plus you'll need a higher down payment and cash to fix up the property.

What you can do, however, is seek out an investor to cover the expense of buying and improving the home. Some investors will pay cash for properties and provide funds to rehab the property. Once you fix up and flip the home for a profit, you split the proceeds with your investor.

4. Use Seller Financing

If you can't get a traditional mortgage loan, seller financing is another option. This can work if your credit score is too low to qualify for traditional financing, or if you have a short employment record and can't qualify for a bank mortgage. Even if you have enough income to qualify for a home loan, most banks require at least 24 months of consecutive employment before approving an application.

Sellers who offer seller financing are more flexible. You sign a promissory note saying you'll repay the loan and then the seller signs over the deed to the house. You become the owner of the house, but the seller is the bank, so you'll make payments to the seller every month. Since you're the legal owner, you can still sell or refinance the property.

This type of financing typically has a short-term of three to five years with a balloon payment for the remaining balance due at the end of the term. Seller financing gives you time to improve your credit or financial situation so you can refinance into a traditional mortgage, at which point the seller gets their money.

But while this mortgage alternative can work in theory, the hardest part is finding a willing seller. Not all sellers will agree to this type of financing. The ideal seller is someone who has plenty of home equity and zero mortgage.

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why Millennials Should Embrace Credit Cards

Ashley Eneriz — Thu, 21 Jul 2016 10:00:12 +0000

Millennials are avoiding credit cards more than any other generation. Perhaps this is because they have witnessed their own parents struggling with debt, or they are already feeling overwhelmed by student loan repayments. While debt is a good thing to avoid, especially if you don't want to live paycheck to paycheck for the rest of your life, credit cards aren’t always the enemy. (See also: 13 Awesome Credit Card Perks You Didn’t Know About)

In fact, credit cards can actually be beneficial toward your financial goals. Here are just a few reasons why you should embrace credit cards, after all.

Better Protection

If your credit card account information is stolen, and someone goes on a spending spree, you have some time to resolve it. Card charges you flag as fraudulent will be placed on hold while investigated, and you won’t be responsible for their payment or even interest accrual. While fraudulent charges are a royal pain, the silver lining is that none of your actual money has been stolen from your bank account.

This is not true if your debit card, PayPal, or Venmo account has been hacked, and funds are used without your permission. You would report the fraud to your bank, but those funds have already left your account. You’d have to wait for the bank to resolve this. In the meantime, if you have bills to pay, you’ll be left asking for an extension while your bank investigates.

Build Up Credit

Your credit score affects everything from your interest rate for a new vehicle, to whether or not you qualify to rent, and even your job, if your career requires a specific clearance. Even having zero credit can be very harmful for your finances. You will end up having to cosign your loan with somebody, or you could be hit with a high interest rate.

You don’t even have to use your credit card all the time to build a healthy credit score. Instead, start with one credit card, spend $100–$200 a month on it, and pay it off each month. Look for a card that comes with free credit score monitoring so you can keep track of your score.

Get Free Money

Even if you aren’t interested in the world of credit card rewards, it’s simple to get cash back for your purchases. Some cards will offer a higher percentage of cash back for certain types of purchases, like groceries, dining, or gas. Others have a flat rate cash back percentage on all purchases, so you don’t have to worry about bonus categories. Either way, you’re getting money back on purchases you’re already planning on making. (See also: Best Cash Back Credit Cards)

Get Free Travel

Collecting credit card rewards points for travel doesn’t have to be complicated. Get points or miles for the purchases you make on your card, redeem them for statement credits toward travel purchases, or use the points to purchase travel. The best part about travel rewards credit cards is the sign up bonuses that you can collect when you get a new card. My husband and I earned a free trip just by switching our regular spending to a new card for a few months. (See also: How Travel Rewards Credit Cards Really Work)

Take advantage of these promotions and bonus points to travel your dream destinations more affordably. Once you get married and have kids, it is harder to see the world.

Purchase Protection

Credit cards have an amazing number of protections in place. Purchase protection protects against theft and damage. Price protection allows you to get a difference on an item’s price if it goes down shortly after you’ve bought it. Extended warranty automatically extends the warranty on your item up to an additional year. Some even have return protection, which allows you to get a refund even if you’ve been denied a return from the vendor.

Interest Free Financing

Many cards offer 0% intro APR on purchases for 6-18 months. This means that you can pay off a large purchase over a year and half, with no interest. The important thing to remember though, is that you have to be committed to paying it off during that time. It’s never wise to accrue credit card debt, pay interest, and live beyond your means. But getting an interest-free loan for 18 months if you are certain you can pay it off, is a great deal.

Car Rental

Most car rental vendors will require a credit card. Even better is that many credit cards also come with rental car insurance, which will save you money on your rental.

Avoid Fees While Traveling

Instead of paying an exchange rate for cash when traveling abroad, use a credit card with no foreign transaction fees. It has the benefit of being safer than carrying cash, and has built in fraud and purchase protections.

Benefiting From Credit Cards While Staying Out of Debt

Even with all of the benefits a credit card can bring, “25% of Millennials describe credit cards as something that worsens their financial standing,” according to one study. It is true that credit cards can dig you deep into debt and financial problems if you aren’t careful. Here are three ways to reap the benefits without falling into debt.

Balance Credit Cards Like Checkbooks: Past generations used to balance their checkbooks by writing down every expense, making sure they knew how much was in their checking account at all times. Modern technology has made this practice archaic, but it still can be useful. Every time you spend money on your credit card, subtract it from your checking account either with the help of an app or pen and paper.
Use Credit Cards to Pay for Usual Bills: You can earn points without spending more than you already do each month. Pay your bills online through a credit card or use one solely for gas or groceries. Take advantage of cards that offer extra points for spending in a certain category.
Don’t Let Credit Cards Change Your Spending Mentality: Credit cards can give us the false illusion that we have more money than we actually have to spend. Don’t fall victim to this. Still stick to a strict budget and only splurge what you have set aside specifically for spending.

It is great that Millennials are trying to avoid debt more than the other generations. However, avoiding debt does not mean you have to avoid credit cards. Use credit cards to your advantage to make your everyday spending go a little further. (See also: How to Save an Extra $1,000 a Year)

What is your favorite credit card to use?

This article is from Ashley Eneriz of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Self-Employed Person's Guide to Getting Credit

Dan Rafter — Thu, 14 Jul 2016 09:31:21 +0000

You work for yourself. And most times, that's great. But when you're trying to qualify for a mortgage loan or apply for a credit card, it can be a real struggle.

That's because lenders prefer loaning their dollars to borrowers who have a steady income that stays the same each month. That isn't what happens with most people who are self-employed. Your income can rise one month, and fall the next.

There is good news, though: Plenty of people who work for themselves finance homes and cars, and plenty have credit cards in their wallets. How can you join their ranks? Here are four tips for convincing lenders that just because you're self-employed doesn't mean you're a risk to default on your loans.

Prove That Your Income Has Been Steady for Years

It's far easier to qualify for financing or credit cards if you can show lenders that the income you've made as a self-employed worker has been steady or rising each year. If lenders see that what you made last year was similar or better to what you made the year before, they'll be less nervous about loaning you money.

To prove that your income is consistent, you'll have to provide lenders with at least the last two years of your income tax returns — returns that should show that your income during these last two years did not swing wildly up or down.

What if you haven't been working for yourself long enough to show at least two full years of self-employed income? Or what if your self-employment income hasn't been consistent and has soared high and fallen low? You'll struggle to qualify for a loan. It might be best to wait until you can show those two consistent years of income before applying.

Build a Top Credit Score

Your FICO credit score is a key number when applying for a loan or credit card. It's especially important for self-employed borrowers, who can rely on a high FICO score to help lessen the anxiety lenders often feel about loaning money to those who work for themselves.

Lenders today consider a FICO score of 740 or higher to be an excellent one. Such a score shows that you have a history of paying your bills on time. Such a history can put nervous lenders at ease and improve your odds of qualifying for a credit card or loan. (See also: Best Credit Cards for People with Excellent Credit)

Building a good credit score is simple: Pay your bills on time and pay off as much credit card debt as possible. Just don't close a credit card account after you've paid it off. That can actually hurt your credit score. (See also: 7 Ways to Increase Your Credit Score Quickly)

And if your FICO score is low? You might need to wait until you build it up to apply for a loan. Being self-employed and having a low score is no way to convince lenders that you're a good risk.

Build Your Savings

Lenders like all borrowers to have plenty of money saved. This way, if these borrowers should suffer a financial crisis, such as a job loss, they'll have some reserves to make at least a few mortgage or auto loan payments until they can resolve their financial struggles. Having cash reserves is especially important for self-employed borrowers. If you can show lenders that you have money in the bank, they'll be less nervous about the prospects of your self-employment income suddenly drying up.

How much savings you should have varies by lender. But most lenders want at least two months of mortgage payments saved up. If you're self-employed, saving even more than this can only help your efforts to qualify.

Come Up With a Larger Down Payment

If you're applying for a loan, coming up with a bigger down payment is one way to convince otherwise reluctant lenders to work with you. Lenders like to work with borrowers who have what they call "skin in the game," meaning that they are willing to invest more of their own money upfront when financing a home or car.

Consider applying for a mortgage loan: It's possible, depending on lender and loan program, to qualify for a mortgage while putting down just 3% of a home's final purchase price. If you're self-employed, though, you might have better luck convincing lenders to work with you if you can come up with a down payment of 10% or 20% of a home's down payment. Lenders think you're less likely to stop making mortgage payments if you've already invested more of your own money into the home.

Are you self-employed? Have you struggled to find financing?

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Money Moves to Make the Moment You Decide to Buy a Car

Dan Rafter — Wed, 13 Jul 2016 10:30:08 +0000

The beater you are driving now spends more time in the repair shop than on the highway. Or maybe you're sick of trying to time bus schedules or schedule Uber rides. Whatever the reason, it's time to upgrade to a new set of wheels.

Unfortunately for most people, a new car comes with a new monthly auto loan payment. And these payments can be high. Kelley Blue Book reported that the estimated average transaction price for new cars hit $33,845 in May 2016. That's an increase of 3.5% from the same month in 2015.

Fortunately, you can prepare for this added cost, and all it takes is a bit of research and planning on your part. Here are six money moves to make the instant you decide to buy a new car.

1. Check Your Credit Reports

You want an auto loan with the lowest possible interest rate, so that your monthly payment is as small as possible. And of course, you'll qualify for lower rates if you have strong credit.

But before you start shopping for a new car, check your three credit reports (one each maintained by the national credit bureaus of Experian, Equifax, and TransUnion). You can order one copy of each of your reports free from AnnualCreditReport.com. Check carefully for any mistakes — fixing a mistake could immediately improve your FICO credit score.

Knowing the information that the credit bureaus have on you and what your credit score is will give you an idea of whether you can qualify for a low interest rate now, or whether you should work to improve your score before you start hunting for a new car.

2. Call Your Insurance Company

If you are ditching an old car and upgrading to a new one, your auto insurance premium might rise. If you are buying a car for the first time, you'll need to purchase auto insurance before you can hit the road. And you'll need to know, for budgeting reasons, just how much you might expect to pay in auto insurance premiums.

Your premium will vary depending on a host of factors, including everything from your age and driving record to the type of car you buy and where you live. So call either your current insurance agent or, if you aren't yet driving, an insurer licensed to do business in your area to get at least an estimate of how much you'll be paying each month or year in insurance costs.

3. Tweak Your Household Budget

You should have a household budget that you follow each month. Adding a new car payment means that you need to tweak that budget. Study your current budget to determine how much of a car payment you can afford. When you start shopping for cars, don't look at any that will leave you with a monthly payment that exceeds that amount. Having a new car is fun. Having a new car that you can't afford is not.

4. Pre-Apply for Financing

When you buy a new car, the dealer will offer you its own financing plan, meaning that you can take out a car loan directly from the dealership that is selling you your vehicle. But the smarter move is to go to your dealership with a preapproval letter from an outside lender.

A preapproval letter states that a lender is willing to provide you with an auto loan. The letter will also state exactly how much money this outside lender is willing to loan you.

It's good to have another loan option when you're at the dealership. The dealer will still want you to take out a loan from its own finance department, so the dealer might offer you a loan with slightly better terms, including a lower interest rate, as a way to compete. And if your dealer can't come up with a better offer? You can simply finalize that loan from the outside lender.

5. Gather Money for a Down Payment

You'll want to come up with the largest down payment possible when financing a new car. The more cash you provide upfront, the smaller your auto loan will be. And a smaller loan means lower monthly payments.

So before shopping for a car, spend some time saving. It's long been recommended that consumers come up with a down payment of 20% of their car's final purchase price. For a car costing $25,000, that comes out to a down payment of $5,000. However, a smaller number of buyers today are actually providing that 20% down. Edmunds reports that consumers in 2015 provided an average down payment of just 10.5% of their car's final purchase price.

Don't be one of those consumers who skimps on the down payment. Wait to buy until you've saved up enough cash for a bigger one.

6. Build an Emergency Fund

New cars come with a host of new expenses in addition to that monthly car payment. You'll face insurance costs, gas prices, and repair and maintenance bills. AAA estimates that the annual cost of owning and operating a vehicle in the United States is $8,558. That is actually a six-year low, but shows that owning a car is far from cheap.

Make sure that you can afford these extra costs by building an emergency fund before you start car shopping. It's a sounder financial strategy than paying for such unforeseen events as car repairs or emergency home repairs with a credit card.

What steps do you take when it's time for a new car?

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Things You Need to Know When Renting-to-Own a Home

Dan Rafter — Tue, 12 Jul 2016 09:00:09 +0000

Your credit scores are too low. Or maybe you've run up too much credit card debt. Whatever the reason, you can't qualify for the mortgage loan you need to buy a home. But there is hope: You can enter into a rent-to-own agreement and begin living in a home today — one that you might eventually be able to buy.

Just be careful: David Reiss, professor of law and research director for the Center for Urban Business at Brooklyn Law School, said that consumers need to be careful when entering rent-to-own arrangements. Often, these agreements end up with tenants losing money that they didn't need to spend.

"Potential homebuyers should be very careful with rent-to-own opportunities," Reiss said. "They have a long history of burning buyers. Does the law in your state provide any protection to a rent-to-own buyer who falls behind on payments? Could you end up losing everything that you had paid toward the purchase if you lose your job?"

These worries, and others, are why you need to do your research before signing a rent-to-own agreement. And it's why you need to know these five key facts before agreeing to any rent-to-own contract.

1. How Do Monthly Rent and Final Selling Price Relate?

In a rent-to-own arrangement, you might pay a bit more in rent each month to the owner of a home. These extra dollars go toward reducing a final sales price for the home that you and the owner agree upon before you start renting.

Then, after a set number of years pass — usually anywhere from one to five — you'll have the option to purchase the home, with the sales price lowered by however much extra money you paid along with your monthly rent checks. Not all companies that offer rent-to-own homes work this way. Some don't ask for more money from tenants each month, and don't apply any rental money toward lowering the eventual sales price of the home.

This latter option might be the better choice for you if you're not certain that you'll be able to qualify for a mortgage even after the rental period ends.

"A pitfall is if the tenant buyer signs into the program but will never be approved for financing, thus never purchases the house," said John Matthews, president of operations of Chicago Lease to Own. "That is how the scammers out there have used rent-to-own to hurt people. They sell it to those who should never have been in the program and take their portion of the rent every month used 'for the purchase of their home' knowing that the tenant will never qualify to buy the home."

Make sure you know — and are comfortable with — the home's final sales price and monthly rent payments before you agree to a rent-to-own arrangement. And if you don’t want to pay extra in rent each month for a home that you might never end up buying? A rent-to-own agreement might not be for you.

2. What Is the Timeline?

To start the rent-to-own process, you and the owner of a home sign a contract listing what the home's final sales price will be after the rental period ends. The contract will also list how long you will rent the home before you have to decide whether to buy the property. The document will state, too, how much you'll pay in rent each month, and how much of that money will go toward lowering the home's final sales price.

These are all key facts to learn before you rent-to-own. You don't want too little of your monthly rent going toward a home's final sales price. If it does, you'll barely make a dent in that final sales price.

3. What's an "Option Premium"

After you and the homeowner sign the contract, you'll pay what is known as an option premium. This premium is what gives you the right to purchase the home after the rental period ends. Be aware that this premium is nonrefundable, even if you don't decide to buy the house after your rental period comes to a close. You can expect to pay about 5% of the home's final sales price for your option premium.

4. What Happens to Your Extra Money If You Don't Buy?

If you don't end up buying the home after the rent-to-own period ends, you'll most likely lose the extra money that you paid each month to your landlord. Most landlords will include a provision in their rent-to-own contracts stating that tenants lose the extra rent they send in every month if they pass on their option of purchasing the home.

If you're not certain that you will end up buying the home — and after five years or so of renting a home you might decide that the property or neighborhood is not the right one for you — be wary of entering a rent-to-own arrangement. You might be throwing away all those extra dollars each month.

5. How Strong Is the Local Real Estate Market?

It pays, too, to study the market in which your rent-to-own home sits. Are housing prices rising in value each year? Or is the market a sluggish one? This is important information to know. What if the home in which you are living loses value during the five years you are renting it? Will you still want to pay that higher final sales price that you negotiated with your landlord?

If you signed a contract, you won't have any recourse but to pay more than what the home is worth or to walk away from the deal, meaning that you threw away all that extra rental money you sent your landlord every month.

Renters need to be careful, too, when negotiating a home's future sales price. A landlord might ask for a price that is unrealistically high for a specific market.

"The landlord will greatly inflate the purchase price of the home when the tenant can buy it," said Mark Ferguson, founder of Invest Four More in Greeley, Colorado. "The home may be worth $120,000 today, but in a year or two, the price for the tenant will be $140,000 or more. The landlord will justify this because prices always go up. Landlords won't tell you that the average appreciation of homes is 3% to 6% a year, and their price is 20% or 30% higher a year."

It pays to meet with a real estate agent or to study the local housing market on your own. You can never guarantee that a home won't fall in value, but by doing your homework, you can at least increase your odds of renting a property that has a chance to increase in value during the rental period.

Have you bought a home via rent-to-own? What was the process like for you?

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What You Need to Know Before Leasing a Car

Andrea Cannon — Tue, 01 Mar 2016 10:00:05 +0000

Leasing is now more popular than ever. In fact, Millennial car buyers are leasing 46% more over the past five years because they are able to afford their dream car at a much lower cost. If you've thought about leasing a vehicle, then we've provided what you need to know before visiting the dealer.

Benefits of Leasing

The benefit of leasing a vehicle is that it is a shorter-term option, as opposed to buying a car. A simple way to think of leasing is as a long-term rental option. You will pay for the car while you need it, and at the end of your lease, you'll simply return it.

There are a number of other benefits associated with leasing a vehicle, such as:

Lower repair costs, because the warranty will cover most of them.
Lower sales tax, since you'll only be responsible for paying sales tax on the portion of the car you finance.
Lower monthly payments compared to buying.
Typically, there is no down payment, or a very low down payment, required.
Fewer obligations — at the end of your contract, you simply turn in the keys and walk away.
New vehicles every few years. Once your lease term is up, you can choose a new lease and enjoy all the benefits and features of a new car. This also means that you can drive a better car for less money every month. On the other hand, you won't be able to customize your vehicle.

Length of Lease and Key Contract Terms

Lease terms usually last between two to four years. However, every leasing contract is different, so you want to find out specifics, like the length of the term and the mileage cap (which is typically between 12,000–15,000 miles/year).

Most drivers agree that leasing contracts can be very confusing, even more so than when buying a vehicle. If you'd like to go in as prepared as possible, consider reviewing some common contract terms. There's a long list of costs, terms, and fees on a lease contract, but the key items to look for are pretty clear.

Gross Capitalized Cost

This is the sticker price of the car. Like everything else in life, it's negotiable. Don't pay full price!

Adjusted Capitalized Cost

This is the price of the car less negotiation, rebates, trade-in, and down payment.

Residual Value

When you turn in the car at the end of the lease, the carmaker estimates it will still be worth something; the car's residual value. The higher this number, the lower the depreciation (and the lower your payments).

Depreciation

This is the value of the car over the months and miles you will be driving it. You can think of this as the rental fee for the car. Or you can think of it as Adjusted Capitalized Cost - Residual Value.

Money Factor

This is the interest rate you'll pay, but it's not a straight forward interest rate.To compare it with an actual interest rate, multiply it by 2400, so you have a better idea of the value of the loan. This is also negotiable.

This interest rate will be charged to the sum of Adjusted Capitalized Cost and Residual Value. It seems like double counting, but you're paying for both the use of the car and money the finance company "loaned" you to lease the car. It may appear on your bill as Finance Charge or Rent Charge.

Monthly Lease Payment

Finally, this is what you'll pay each month. It's simply the Depreciation + Finance Charges + Sales Tax.

A good lease deal is one with the lowest Adjusted Capitalized Cost, the highest possible Residual Value, and the lowest possible Finance or Money Factor. Be sure to negotiate for all three!

Financing and Payment Options

As is the case when purchasing a car, you will have a number of financing options available to you when leasing. Make sure to research lease specials and financing options in your area before visiting a dealership. Use Edmunds' Price Promise tool to find special offers near you.

Leasing can be difficult if you don't have good credit. If you aren't getting the financing terms you're after, then the DMV recommends first working on raising your credit score, offering a higher down payment, or lowering the annual mileage of your lease. If you have a vehicle trade-in, this can be a great start for your down payment.

Remember, the higher your down payment is, the lower your monthly payments will be. On the other hand, some experts recommend putting as little down as possible because if your vehicle is wrecked shortly after leasing, you will be out of any money you invested upfront.

The Risks Involved

A leased vehicle is basically a rental, so it's even more crucial that you follow maintenance requirements on time because you could be charged extra fees if you don't. You will also need to be more careful when driving the vehicle around, because you'll be responsible for paying wear-and-tear charges for any damage — even small cosmetic issues.

Leasing agreements can have additional fees involved, such as lease drive-off fees and fees when turning in the car. A drive-off fee is a deposit that needs to be made upfront and includes your first month's payment, and usually adds up to about $1,000 extra.

If you go over your mileage cap and have driven more than your leasing agreement specified, then you may be subject to another fee. Consumer Reports estimates an excess mileage penalty of $.10–$.25 for every additional mile. Review your lease agreement and ask the dealership about any additional fees you should know about.

It Will Never Truly Be Yours

Another downside to leasing a vehicle is that you will never truly own it. You will only pay for the use of the car (as long as you drive it). However, at the end of your leasing agreement, you may have the option to purchase the vehicle for a discounted price.

Once a car buyer pays off the car they've purchased, they can drive it around for years without making a payment. But a person that leases will have to keep paying for their vehicle month after month. This can mean big savings for a car buyer after they've finished paying off the auto loan.

Ending Your Lease Early

So, what happens if you decide to turn the car in early? An innocent mistake like this can result in thousands of dollars in termination fees. Often, with early termination, you will still need to return the car and pay what you still owe, which results in a lot of wasted money. Your leasing contract should specify the early termination penalties and conditions, so you'll know what types of fees to expect.

There are other options for breaking the lease early, but they can be difficult undertakings. For instance, you can find someone to take over your lease and assume the payments, but this can be a time-consuming and stressful process. You can also work with a company or lease-trading site that can help you sell your lease to interested buyers (for a fee). Your dealership may also be willing to trade in your vehicle for another vehicle. Lastly, you might be able to buy the vehicle from the dealership or sell the vehicle to a private party.

What to Ask at the Dealership

There are several questions you'll want to ask at the dealership, including:

Is GAP insurance included? GAP insurance will protect you in the event that the car is stolen or totaled in an accident.
What do the warranties cover? You'll want to find out about extended warranty information and what's included in your coverage. Then, you'll know which maintenance services and repairs you'll be personally responsible for.
Can I transfer the lease later? In the event that you need to terminate your lease contract early, you'll need to make sure that your leasing contract will permit this. Asking upfront if the dealership allows lease transfers will save you a lot of time and frustration later.
What will the total cost be? You might get sidetracked by the lower monthly payments, but in the end, leasing may be more expensive than you think. Inquire about the total cost so that you can get a better picture of what you will be paying in the end (not just per month).

Do you have other tips for leasing a car? Please share your thoughts in the comments!

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This article is from Andrea Cannon of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Money Mistakes Everyone Makes When Buying Their First Car

Dr Penny Pincher — Tue, 02 Feb 2016 10:00:09 +0000

It's easy to make money mistakes anytime you buy a car — but your first car is especially risky. Here are some expensive first-time car buying mistakes and how to avoid them.

1. Buying the Wrong Kind of Car

When shopping for your first car, it's easy to overlook how you're going to actually use it in the long term. You might think about picking up friends to go out, but overlook routine chores such as hauling groceries home. Your car needs can change rapidly. You don't want a two-seater if your family could grow to three or more within a couple short years. The best way to save money on car expenses is to drive the same car for many years, so choose wisely!

2. Buying a Car With Poor Fuel Economy

If you are buying your first car, you probably aren't used to experiencing pain at the pump, and consequently you may not consider the cost of keeping gas in a pick-up truck. With the current low gas prices, you may not feel that fuel economy is a major consideration — but don't fall for this expensive mistake. If you choose a car that gets half the fuel economy, you'll pay twice as much for gas — no matter what happens to the price of gas. And just because gas prices are low today doesn't mean they'll stay low forever. If you buy a fuel hog and gas prices go up, it could seriously impact the resale value of your vehicle down the road.

3. Surprise Maintenance Required

Used cars are much less expensive to buy than new, and are a great choice for a first car. But sometimes a used vehicle can have expensive problems that are not obvious until after you have driven off in it. Never buy a vehicle with a check engine light on unless you understand what maintenance is required to resolve the issue. The problems indicated by a check engine light can cost only a few dollars to repair — such as replacing the gas cap — or thousands. The only way to know is to get the car checked out by a mechanic who can read the diagnostic codes, investigate the trouble, and provide an estimate for repairs.

Even if the check engine light is not on, I recommend having any used vehicle checked over by a mechanic before you buy it. Getting a vehicle inspection can be a bit inconvenient and costs around $50, but you could save thousands by avoiding a car with expensive maintenance needs. You can also use the inspection report as a bargaining tool to get a better price. Do you really want to risk buying a used car without knowing what could be wrong with it?

4. Buying to Impress

Start your car search by thinking of the things you need a car to do. It needs to be reliable, get you to where you are going, and hold the things you need to haul. That's pretty much it. There are all kinds of options and upgrades available, but these do not change the basic functionality of a car.

It is easy to think that a nice car will impress people and make your life better, but any reliable car provides the same basic utility. Try to approach buying a car as you would buying a tool, and don't let emotion overcome your judgment about what a car can do for you.

5. Thinking of a Vehicle as an Investment

Just because cars are expensive doesn't mean they are an investment. Almost any car you buy will drop significantly in value after only a few years. Dealers may encourage you to buy a more expensive car so it will have better resale value later. It is true that certain options such as automatic transmission and all-wheel drive improve resale value, but other options that add thousands of dollars to you car cost may bring only a few hundred dollars of resale value years later. Buying a car is an expense, not an investment. Try to minimize how much you need to spend to obtain safe, reliable transportation.

6. Not Negotiating on Price

Price negotiation can be a new concept for first-time car buyers. Car prices are not like prices for other items for sale — the sticker price is only a suggestion, and the seller is almost always ready to sell it for less. If you pay full asking price for a car, you are likely paying hundreds, or even thousands, more than you need to pay. With a few minutes of research on the Internet, you can arm yourself with the information you need to confidently negotiate a lower price. (See also: Speed Past Car Debt With This Simple Timing Trick)

7. Getting Tricked Into Dealer Financing

At the end of the car buying process, there is one more chance to make a costly mistake — dealer financing. The dealer may try to convince first-time car buyers that it will be difficult for them to get financing at all. After taking down some information and working some magic, they will appear with a financing offer and say that you were lucky to qualify. Just sign and the car is yours — along with its big monthly payments. The problem is that the interest rate from the dealer may be substantially higher than the rate you could get elsewhere. Avoid this trap by getting prequalified for financing at an online lender, credit union, or bank before you go car shopping. This way, you will know how much you can borrow and find a good interest rate before you fall in love with the car.

What mistakes did you make when buying your first car?

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This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

10 Smart Ways to Get a Small Business Loan

Damian Davila — Fri, 28 Aug 2015 13:00:20 +0000

Money is the lifeline of any small business.

And using financing to maintain healthy cash flow can be essential for a sustainable operation. Still, when it comes to seeking financing, some business owners may not know where to begin. There are now more options than ever for the hopeful entrepreneur looking to get a bit of a boost to jump start a business. Here is a breakdown of some of the ways you can get financing for your business.

1. Business Loan

With over half of small businesses using them, traditional bank loans are still the most popular source of financing among small businesses. However, not every organization is able to secure one. According to a nationwide review of 10,000 loan applicants across 700 different industries, 82% of loan applications from small businesses are turned down by a bank.

There are two basic steps to increase your chances of landing a business loan.

First, you need to build and maintain a strong business credit score. Don't confuse your personal credit score with your business credit score. Two thirds of U.S. small business owners haven't checked their business credit report within the past two years. Before you apply for a business loan, find out your current business credit score, update any missing or incorrect information, and take steps toward improving it.

Second, you need to establish a solid business plan, which not only details how you plan to operate your business, but also provides projections of revenues and expenses for the next five years. The more that you can back up your claims and projections with factual information, the better your chance of landing a business loan.

2. SBA Loan Programs

The U.S. Small Business Administration (SBA) offers several loan programs for very specific purposes.

General Small Business Loans: 7(a)

This is the SBA's most common loan program, which is available to most small businesses that operate for profit in the U.S. and aren't delinquent on any existing debt obligations to the federal government. You can find more details about 7(a) loan program eligibility at the SBA website.

Microloan Programs

With an interest rate ranging between 8% and 13% and maximum repayment term of up to six years, the SBA Microloan program provides loans of up to $50,000 to help small businesses in securing working capital, purchasing inventory or supplies, acquiring furniture or fixtures, or investing in machinery or equipment. The average microloan is about $13,000.

Real Estate and Equipment Loans: CDC/504

A CDC/504 loan can be used for:

purchasing land, including existing buildings;
making substantial real estate improvements;
renovating or modernizing facilities; and
purchasing long-term machinery and equipment.

Disaster Loans

Most businesses whose real estate, property, machinery and equipment, inventory, or other business assets were destroyed in a declared disaster, may be eligible to a low-interest disaster loan. The SBA monies can be used to replace or repair the destroyed business assets.

3. Asset-Backed Loan

Trying to hire extra help during a busy season or taking advantage of a great opportunity to bulk up inventory for cheap can put your small biz in a cash crunch. One way to secure that much-needed capital is to use your accounts receivable or assets as collateral for a loan.

Before you run to the bank with a list of all your business assets, you should realize that lenders are only interested in specific high-quality assets:

accounts receivable under 60 to 90 days, depending on lender;
heavy equipment;
qualifying vehicles (e.g. trucks); and
business inventory.

To hedge the loans that they issue, banks generally appraise eligible receivables and finished inventory at 70% to 80% and 50%, respectively, of their market value. The reason is that if you were to default on your loan or miss several payments, then the bank would liquidate the assets as quick as possible at a lower price. If the sale doesn't cover your remaining loan balance, you're still liable for it.

By keeping in mind the lower asset valuations, associated loan fees, and applicable rules, asset-backed lending can be a useful source of financing for small businesses. This is why asset-based credit line commitments at the end of 2014 were nearly $216 billion, a 6.8% increase over 2013.

4. Kabbage

One of the main challenges of getting a loan for your small business from traditional lenders is that they base the majority of their decisions on a credit score. Even though small biz owners may lack the business credit score traditional lenders are looking for, they can still demonstrate a healthy cashflow through business data from connected sites, such as a QuickBooks, Square, Amazon, PayPal, or Etsy accounts.

Leveraging this second type of business data, Kabbage helps small businesses get the funding they need to grow. Through a fully automated, online platform, owners of small businesses can link their latest business data, allowing Kabbage to review the overall health of their business — not just a credit score — to approve and provide loans between $2,000 and $100,000 in minutes.

Kabbage loans aren’t for everybody. These are very short term loans that are payable within six months, requiring payment of one sixth of the total loan plus a monthly fee per month. Fees range between 1% and 12% of your loan for the first two months and 1% for each of the remaining four months. However, you can pay back your loan early without penalty and lower your financing costs.

5. Lending Club

The underlying idea of peer to peer (P2P) lending is to circumvent traditional lenders, such as banks, by crowdfunding funds from a large group of individuals. When one small business owner receives a P2P loan, his peers fund small portions of that loan and receive principal plus interest when the borrower repays the loan. In simple words: a peer lends to another peer. (See also: Prosper or Lending Club?)

Lending Club issues small business loans up to $300,000. Collateral is not needed for loans under $100,000 and no appraisals or business plans required. You must own at least 20% of the business and have fair credit. Their loans start at 8.05% and you can choose from 3-5 year terms. There is a one-time origination fee that ranges from 3% to 6%.

6. Prosper

The pioneer of P2P lending in the U.S., Prosper uses a credit score-based model for evaluating its P2P loans. Prosper has helped more than 900,000 with $16 billion in funded loans. Small business owners can apply for P2P loans between $2,000 and $40,000 and individual lenders invest as little as $25 in each loan listing they select. Unlike Lending Club which prefers businesses to have been operating for at least two years with 75k in annual sales, Prosper encourages budding entrepreneurs to apply.

7. CircleBackLending

CircleBackLending is also a P2P operator but uses institutional investors. Small business owners can borrow between $3,000 to $35,000 at CircleBackLending.

8. PersonalLoans.com

Here you can find three types of personal loans: peer-to-peer loans, personal installment loans, and bank personal loans. However, due to applicable laws and regulations that vary by state, some of those loans may not available for you. Each type of loan at PersonalLoans.com has specific requirements. For example, the minimum requirements to qualify for a bank personal loan ranging from $1,000 to $35,000 are a credit score of 580, monthly income of $3,000, proof of employment or self-employment.

9. OneMain Financial

Depending on your state of residence, you can borrow between $300 and $15,000 through OneMain Financial. An important advantage of using this lender is that you can cancel your personal loan for any reason and return the money within 14 days without any early payment fees or other types of penalties.

10. Small Business Credit Cards

By choosing the right small business credit card, you can avoid a cash crunch and meet your financing needs to secure future income. Choose the card that offers the best bonuses for your purchases as well as additional benefits like travel perks if you travel frequently. Some cards also offer a cash bonus for new cardmembers that can help pay for startup equipment and bills. (See also: The Difference Between Business and Consumer Credit Cards)

Responsible use of a small business credit card can also help you to separate your business and personal finances.

The Bottom Line

No matter the source of your financing, you should only seek a loan if you're experiencing a cash flow gap. This means that you need the money to meet the operating expenses for a guaranteed source of revenue. For example, you need the capital to buy a piece of equipment for an order that is double your actual capacity, or to hire additional employees during the Christmas season rush.

There are several financing options available, so don't jump at the first loan offer that you receive, and always shop around for better rates.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Unexpected Benefits of Secured Credit Cards

Damian Davila — Wed, 29 Apr 2015 11:00:28 +0000

"Nobody knows you when you're down and out," goes a famous blues song.

And when your credit score is bad — really bad — you'll definitely be singing the blues whenever you're trying to find financing options. (See also: How to Get a Credit Card When You Have Bad Credit)

While you may see secured credit cards as a financing option of last resort, you may be surprised by their unexpected benefits. Here are six of them. (See also: What Are Secured Credit Cards?)

1. No Credit Check Needed

This is at the top of any list of unexpected benefits of a secured credit card.

Secured credit cards are good options for those that have bad credit and are looking to avoid an additional hard inquiry on their credit histories and a potential denial. To open a secured credit card you make an initial deposit, which becomes your card's credit limit. That initial deposit can range from a couple hundred dollars up to about $5,000.

Your initial deposit is insured by FDIC and is refundable, after applicable fees, if you decide to close your account.

2. Credit History for Credit Bureaus

Young folks starting out on their own, college students away from home, people recovering from a major life event (such as a divorce or major illness), and recent immigrants may also benefit from a secured credit card, because it helps them begin or reboot their credit histories.

When you have no recent pay stubs or tax returns available, some lenders may deny your credit application because you have no proof of income. Most secured credit card companies report your activity to the three credit bureaus (Equifax, Experian, and TransUnion), so that you can start building up (or rebuilding) your credit score.

Before signing up for a secured credit card, double check whether or not the lender reports to the credit bureaus.

3. Eligible for Higher Limits

Through responsible management of your secured credit card, you can score a higher spending limit. By turning in your payments on time and paying your balance in full every month, you improve your chances of getting a higher limit sooner. (See also: How to Get the Most Out of Your Secured Credit Card)

Also, you can contact your lender to make an additional deposit and increase your credit limit. Over time, your lender may raise your limit without requiring any additional deposits.

4. Grace Period

When choosing a secured credit card, it's key that you choose one with a grace period. A grace period is the window of time, often between the end of your billing cycle and the due date for that cycle, in which you pay no interest so long as your new balance in paid in full.

While most credit cards offer a grace period, some secured credit cards don't. Without a grace period, you'll owe interest on every purchase. This would make improving your credit history tougher than it should be.

5. Accepted Internationally

Most secured credit cards are accepted as a form of payment when traveling abroad. Given the several disadvantages of travelers checks, some international travelers may be happy to know that they can rely on their secured credit cards as a payment option.

It's a good idea to read the terms of your secured credit card in order to be aware of applicable charges when using it outside of the U.S. However, there are some secured credit cards that have no foreign transaction fees and no annual fee. (See also: Secured Credit Cards with No Annual Fee)

These six unexpected benefits from secured credit cards may be a welcome surprise to those trying to rebuild their credit histories. Stay focused and remain positive. By choosing the right secured credit card, you're taking the first step towards improving your financial situation. Ready to apply? See Wise Bread's favorite secured credit cards.

What steps have you taken to improve your credit history?

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Much Car Can You Afford?

David Ning — Mon, 25 Jun 2012 09:48:13 +0000

If you are interested in buying a car and you are set on leasing, it is very important that you maintain a good balance between the type of ride you desire and your ability to finance it. Remember that even though you may qualify for a car loan, burdening yourself with one that is beyond your payment ability can easily destabilize your financial status. To rightly determine what you can afford, it is important to create a budget. Here are some things to keep in mind when creating said budget. (See also: Guide to Buying a Used Car Without Going Crazy)

The 20% Rule of Thumb

The general rule on car payments is that they should not exceed 20% of your take-home or net monthly income. This value is inclusive of car insurance, repairs, and monthly payments. The value should also include every vehicle you own. Even if you do not take care of other major monthly expenses such as rent, you should still stick to the rule. Obviously, if you will be making a full cash payment for your new car, you will not need to apply the 20% rule. But the rest of you, take note.

Your Interest Rate Matters

Your credit rating will help determine the interest rate you will be required to pay. If you have a poor credit rating, you will most likely end up paying a higher interest rate than someone with a good credit rating. It is important that you factor your loan's interest rate into your budget, so that you can choose a car that truly matches with what you can afford. Different times of the year also have different market interest rates. If rates are lower, your monthly payment will be reduced, and you might be able to afford a car with a higher value than you initially thought (as long as it is still within your budget). This is also one reason why so many people talk about trying to achieve a perfect credit score.

You Should Make a Down Payment

Not so long ago, customers were required to make a down payment before getting a car. Today, however, many car dealers are willing to offer cars even with no down payment. In spite of this change, it will work out best for you if you make a substantial down payment, since you will be able to afford a car with a better value and still stick to the 20% limit.

Once you have determined how much car you can comfortably afford, it is important that you stick to your budget when you step into the show room. This is because you will most likely find persuasive salespeople, most of whom work on commission and are therefore only interested in getting the highest pay. Most of these salesmen are least concerned about whether or not you can afford a particular car. It is therefore important that you remain adamant in the midst of all the persuasion to avoid spending money that you do not have.

This article is from David Ning of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

3 Ways To Build Good Business Credit With Bad Personal Credit

Margie Fishman — Fri, 17 Jun 2011 21:09:14 +0000

Link:

http://www.openforum.com/articles/3-ways-to-build-good-business-credit-with-bad-...

Starting a business requires start-up capital, but creditors need to be persuaded that they’re taking a worthwhile risk. By some estimates, less than 10 percent of new small businesses are approved for loans from banks or other commercial lenders. A poor personal credit history is a common stumbling block for entrepreneurs, but it’s not the only factor. Lenders and credit bureaus can perform more than 2,000 checks on a potential borrower and the business before making a loan determination.

On a more uplifting note, bad credit doesn’t mean you can’t succeed in business and. It may make you more conscientious of your spending patterns moving forward. And it's never too late to start working on building good business credit.

Act Like a Legitimate Business

Legally separate yourself from the business to shield personal assets. Forming a corporation or limited liability company (LLC) disentangles personal debts from business debts.

Other steps include:

Obtain an EIN (the business equivalent of a Social Security number) from the IRS, along with a DUNS business credit profile number from Dun & Bradstreet;
Establish a physical address and separate phone line and bank accounts for the business, prepare a professional business plan, and acquire a business license;
Perhaps most important, maintain impeccable financial records, such as income and balance sheets, and tax return documents.

Creditors are looking for signs that a business is viable and profitable and getting all your ducks in a row suggests that you're a serious business person.

Get a Handle on Your Personal Credit

The right business structure won’t solve all of your problems, especially if you’re applying for larger loans. Business owners must stay on top of their personal credit scores even more than the average consumer to avoid higher interest and insurance rates. Most banks won’t deal with a business owner with a FICO score below 640 and some won’t look at you if you’re under 680. That includes loans backed by the U.S. Small Business Administration.

Get in the habit of pulling your free personal credit report from one of the three credit reporting agencies every few months at annualcreditreport.com and dispute any inaccuracies. This report is really a statement to lending institutions of your ability to honor your debts, but it also reflects your total amount of available credit, the length of time you’ve had a credit profile and the number of inquiries on your credit report.

While making timely payments and waiting for your personal credit to improve (which can take months), the types of loans available to your business may be limited to the “4 F’s – founders, friends, family, and fools,” says David Gass, founder of Business Credit Services, Inc., a credit consulting firm headquartered in Wilmington, DE. Other options include peer-to-peer lending networks, equipment financing, or accounts receivable factoring, which don’t rely as heavily on personal credit history. If a business partner has superior personal credit, encourage him or her to sign for the loan. Some lenders, however, will run credit checks on all partners with at least a 15 percent ownership stake in the business, says Gass, who has written extensively about personal credit and small business loans.

Take Advantage of Trade Credit

Trade credit, or business-to-business credit, is the single largest source of lending in the world and can be a valuable resource when furnishing an office or dealing with suppliers or vendors. Just be sure to pay it back on time and in full, encouraging the creditor to report a positive payment history to the business credit bureaus. While personal credit scores range from 300 to 850, business credit scores are on a scale of 0 to 100, with 75 or more considered an excellent rating.

If the business can operate over the Internet, payment processor PayPal doesn’t require a credit check and usually offers better transaction rates than high-risk merchant services.

After the business has built up some trade credit, you may approach a local lender for a small business loan. But don’t reach for the moon right out of the gate. Given the uncertain economic climate, Gass says, banks are applying more scrutiny to prior bankruptcies or tax liens, particularly on loans greater than $250,000. Over time, as you maintain a reliable payment history, your business credit rating will improve.

This article is from Margie Fishman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: