Penalty APR, What is it and Why Does it Matter?

Credit cards are useful for managing finances and accruing rewards. If you have credit card debt, you may be wondering if a balance transfer can help with interest. In addition to the interest you’re paying, if you’re behind on payments you could be paying a penalty APR.

penalty aprWhen opening a credit card, you start with a baseline APR that applies to any unpaid balance you carry from one billing cycle to the next. Credit cards have an APR range. The better your score, the lower your APR in that range. If you make the minimum payment, you will stick with the baseline APR. If you are paying your balance in full, you’re just using the credit card for its rewards. You do not have to worry about penalty APR. At any point if you are more than 60 days late on your payment, your lender will move you up to the penalty APR. Any time you are moved to the penalty APR, your lender will notify you.

Why Does Penalty APR Matter?

Most who miss making their minimum payment on their credit card do it from necessity, not choice. If you have room within your budget, it’s a good idea to keep up with the minimum payment at least. This allows you to avoid paying the penalty APR. You want to avoid paying the penalty as this can be twice as high as the normal APR. The penalty does not go away soon as you make your first minimum payment. Instead the lender can continue to impose the penalty for up to six months. Once you make six on time payments in a row, then the lender must review your rate. Until that time, the lender can continue to impose the penalty.

The penalty does not just apply to the balance you had during your delinquency. It also applies to the future balance going forward. Until you are moved to the regular APR any balance you generate will be under the penalty.

Debt Burnout, How to Beat It

Paying off debt quickly is a great way to start getting rid of it. Cutting down to a barebones budget and speeding up debt payments will make great progress. However, most people cannot use such a strict budget for long before they begin to experience debt burnout. What is debt burnout? It is feeling exhausted with your day-to-day routine and the lack of flexibility in your budget. Many get tired of not having extra money in their food budget to out or to buy more of a variety at the store. Others feel tired from not having a budget for entertainment and fun. Burnout is going to leave you feeling tired, frustrated and ready to give up.

How Do I Defeat Debt Burnout?

It’s important to take steps to correct the burnout so you don’t end up undoing what you’ve accomplished.

  • debt burnoutReassess your budget. After you’ve paid down some debt, it’s common to start feeling burnt-out. This is a good time to reassess our budget and give yourself a little more money for the things you enjoy. Increase how much you spend on entertainment, or give yourself some extra to go out to eat occasionally. This will decrease the amount of money going to debt, but will help with feeling burnt-out.
  • Find support. When feeling burnt-out and unmotivated, seek out a partner to keep you accountable. People benefit from having someone to confide in and bounce ideas off of. Having someone to speak with can help you stay accountable and focus on your financial goals.
  • Plan a fun event. When paying off debt its common to give up vacationing, trips, and events. When you start feeling burnt-out planning one of these is a good way to stay motivated. It will give you and your family something to look forward to. It does not have to be an expensive ordeal. A short day or weekend trip, it is enough to look forward to while giving you some relief and relaxation.

Credit Mistakes to Avoid When Buying a Home

So, you decided that this is the year you’re going to buy a home. The first thing you need to do is check to see if your credit is in good standing. Since mortgage rates have risen, having an excellent credit score can work in your favor. Having bad credit, can keep you from buying a home. As you go through the home buying process, there are common credit mistakes you should avoid.

Common Credit Mistakes

  • Paying your bills late. Mortgage lenders always look at your credit score. Your score is based off the information in your credit report. This provides them with a snapshot of how responsible you are financially. While different scoring models use different factors to calculate credit scores, payment history does carry a lot of weight. Making a late payment can suggest you are unable to keep up with your bills. Making automatic payments each month will help avoid negative remarks.
  • credit mistakesNot checking your credit reports. When applying or getting pre-approved for a loan a lender is going to look at your reports. It is best to know what is going on before sitting down with a loan officer or broker. The best thing to do is to pull your credit reports from each of the three major credit bureaus (Equifax, Experian, and TransUnion). You can review your report to be sure all information is accurate and up-to-date. If there is a mistake, dispute it. While disputing won’t hurt your credit score, it can raise a red flag. You want to give yourself plenty of time to get the issue resolved before applying for a mortgage.
  • Co-signing on a loan. While co-signing a loan may not seem like a big deal, it does show on your report. If you sign with someone who pays their bill late or doesn’t pay at all, your score can fall.
  • Closing old credit cards. Don’t rush to close old credit cards you don’t use. Part of your score is based off the average age of credit accounts. Closing old accounts can make your credit history shorter. Wait to close accounts until after you have secured a mortgage.

Expenses to Avoid Using a Credit Card For

Using a credit card for day to day expenses is convenient. It’s only ok if you’re smart about how you use them. If you’re able to pay off the balance each month you may be able to take advantage of the perks credit cards can provide. While it can be better to pay some expenses with credit, you must use caution before doing so. Stop and think before you use your credit card to pay for all expenses.

What expenses to avoid paying with credit.

  • Medical Bills. Not having health insurance can make paying for medical care outexpenses of pocket a challenge. More so if you’ve been treated for a serious injury or illness. When you have bills piling up it can be tempting to pay with credit. This will only ease the burden temporarily. It can lead to a bigger headache in the future. Rather than paying the interest rate to your credit card company, you should try working out a payment plan with the medical provider. You’re likely to pay less in interest and they may provide a discount if you’re trying to get rid of the debt.
  • Mortgage Payments. If you can pay the bill of each month, making your mortgage payment on a credit card is not a bad idea. However, if you can’t you’re setting yourself up for a disaster. Charging the card with your payment once can be a quick fix, but it can lead to a bigger problem in the long run. The rate you’re getting from your mortgage is more likely to be lower than what you pay for your credit card.
  • Taxes. Having a big tax bill can be stressful. Using your card to pay the bill may seem like a good idea. While, owning the IRS money may make you nervous, you’re better off paying them directly rather than a credit card. When you pay using a card you typically pay a 2-3% convenience fee. Add that to the regular interest rate of your card and you’re going to end up paying more than your tax debt. The IRS offers several different payment plans. Even though you pay interest, it’s usually a much better rate than a credit card.

A Perfect Score, Why It’s Not Necessary

There is a small percentage of people who have ever hit 850 for their credit score. Having a perfect score is a lot of work. While this opens doors for loans and credit cards, a perfect score isn’t necessary to qualify for financing. If you’re focused on getting a perfect score, you may want to rethink your strategy.

Why you don’t need a perfect score.

perfect scoreOne think people assume is that with a perfect score, you’ll get the lowest rates. Lenders don’t distinguish between someone with an 850 score and someone with a score between the high 700s and low 800s. Once you get to a certain point, you fall into the best credit risk category. This means even if you don’t have an 850 you still qualify for the best rates. Having an 850 score does not put you above someone between 770 and 800.

Your score can change overnight. They are not fixed, they can change from day to day. Under the FICO scoring model, payment history and the amount of debt you have make the most impact. If you miss a payment or carry a high balance on a card, your score is going to dip. Even applying for a new card, or taking a loan can knock your score down. In reality, you have more than one score. Each of the credit reporting bureaus have their own version of the FICO score. So, your score can vary widely. The chances of getting an 850 on all three at the same time is very slim.

You score reflects how you are at managing your money and handling your debt. The lenders goal is not to pick borrowers who have a perfect score but to find those who are most likely to pay their debt. Paying your bills on time, keeping a low debt balance and using a mix of debt types show that you’re a good candidate for a loan.

Celebrate Paying Your Debt

While you’re paying your debt, it’s common to restrict yourself. You stop any vacations and tighten the belt. No more going out, nothing extra at the store. It’s important to remember to treat yourself. You need to celebrate small milestones. Paying off a credit card or even just paying off $1000 in debt. It is important for you and your family’s sanity. Often kids do not understand. They don’t understand the sudden need to cut back, or how they could help contribute. Simple expenses that used to be normal can no longer be done, like going to the movies or going out to eat. Allowing you to celebrate financial wins as you work down your debt will help them understand that you’re on a different budget now, but that it’s still ok to enjoy things.

Little things you can do while paying your debt.

  • paying your debtTake a day trip. The most expensive part of taking a trip is the hotel. Save expenses and take a day trip. Drive to the beach, have a picnic in a park in another town. Visit a local landmark. These are ways to spare expenses while getting away from the norm.
  • Go out for dessert. Going out for dessert after a nice home cooked meal can seem like a real treat. This can be a great, inexpensive way to celebrate a milestone.
  • Buy a book. Buying a book is an inexpensive way to keep yourself entertained.
  • Rent a movie. Renting a movie may not seem like a real treat if it’s in your budget. However, if you’re a very tight budget that may have been one of the first things to go. Make it a full experience. Soda, popcorn, candy, etc. Renting a movie and having popcorn at home is a lot cheaper than going to a theater.

Loan-to-Value Ratio, What is Best

It can take years to save for a down payment on a home. The more money you put down, the less you need to borrow. This affects your loan-to-value ratio or LTV. So, what is loan-to-value ratio? This is how much you’re borrowing from a lender as a percent of what your home’s appraised value. If you bought a home valued at $150,000 and your loan is $125,000 your LTV would be 83%. The higher the ratio, the riskier you appear during underwriting. With a lower down payment, you have less equity. Should you get behind on payments and end up in foreclosure, the lender may have a harder time earning enough to pay off your remaining loan balance. This is generally why homebuyers with a higher LTV have higher mortgage rates.

What is a good loan-to-value ratio?

You may be asking yourself, what is a good LTV ratio. This ratio varies depending on the type of loan you’re applying for. If it is a conventional mortgage a good ratio is 80%. loan-to-valueMost lenders do expect borrowers to have at least 20% as a down payment. However, if it is a loan that is backed by the Federal Housing Authority, also known as the FHA, there are different rules. For homebuyers who are trying to qualify for an FHA loan, an acceptable LTV ratio is 96.5% if your credit score is at least 580. If your credit score is between 500 and 579 your LTV cannot be higher than 90%. There are other types of loans that allow your LTV ratio to be as high as 100%.

Having a high LTV ratio can affect a buyer in different ways. For one, if the LTV ratio is higher than 80% and you’re approved for a conventional mortgage, you will have to pay private mortgage insurance. You can eventually get rid of the insurance as you pay down your mortgage. If your LTV is too high, taking out a mortgage is going to be more expensive. In addition to paying insurance, you’ll likely have to pay more interest.

Why is your Debt-to-Income Ratio Important?

We all know that having more income than debt is a good thing. But the question is, what is ideal ratio between income and debt. This is where you need to consider your debt-to-income ratio. If you have to high of debt-to-income, and any thing negative effects your income, you could be swimming in debt. This does not mean you want to completely avoid debt. Debt-to-income ratio, also known as DTI, is the direct relationship between your monthly debt and your gross monthly income.

Every month you must budget with what you have coming in and what you have going debt-to-incomeout. You have recurring bills such as phone and internet. Regular expenses such as groceries. Then there is your debt. This includes rent, car loan, student loans, and any personal loans or credit cards you may have. If you feel like you’re living paycheck to paycheck, or that all your income goes to making credit card payments, you may have a high debt-to-income ratio. The formula is DTI = total monthly debt payment/gross monthly income.

Why is Debt-to-Income Important?

DTI is an extremely important number to keep an eye on. This is going to tell you about your financial situation. The higher the debt percent, the harder time you’re going to have making payments if your financial state changes in a negative way. From a creditor or lenders perspective, DTI is a measurement of risk. Those with a higher DTI are more likely to default on a mortgage or miss credit card payments. Assessing your DTI is part of the mortgage underwriting process.

So, what counts as a good DTI? Generally, you want this to be under 36%. The bottom line is, your DTI is an important measure of your financial security, and responsibility. The lower the ratio, the more affordable your debt is, and the more wiggle room you have should your finances change.

Debt-to-Credit Ratio, What is it?

Credit cards make shopping easy, you can go from store to store without having to carry cash. Not only do they make shopping in person easier, but they open new doors with online shopping. It can seem like you have an endless supply of money within this little plastic card, but you must remember that credit cards do have limits. Your debt-to-credit ratio does affect your credit score. Generally, when you apply for a credit card the lender will provide you a limit based on your income, credit score, and sometimes your debt-to-income ratio. When you max out your credit card, this means you’ve spent up to the limit. When you do this, you will see an impact on your credit score. Debt-to-credit ratio (sometimes known as credit utilization ratio) is one factor used to obtain your credit score.

debt-to-creditHow does debt-to-credit ratio affect my credit score?

Your FICO credit score is made up of five parts. Each one carries a set weight within the total score. How you’ve managed your debt and made payments is 35% of your score. The amount of new credit accounts you’ve opened as well as the different types of debt is 10%. The different type of debt is made up of credit cards, student loans, auto loans, etc. The length of your credit history is 15%. Finally, we come to your debt-to-credit ratio. This accounts for 30% of your score. What does this mean? This means you need to avoid maxing your card and stay clear of the credit limit. The lower the utilization, the better.

While other forms of debt do affect your score, they do not carry as much weight as credit cards. So, while you may have available credit you can spend, that does not mean you should. The best thing to is to keep your debt-to-credit ratio below 30%.

Pre-Approval vs Pre-Qualification, Which is Better?

Buying a home is something you will never forget. It’s important to make it a positive experience. This can be done by not only working with the right real estate team, but also understanding the process. While home buying can be complex, a few simple guidelines can help determine if it’s the right time. One thing most first time home buyers are not aware of is the difference between pre-qualification and pre-approval. While these terms are sometimes used interchangeably they are not the same. They sound similar but they are different processes with different purposes.

pre-approvalWhat is pre-approval?

Pre-approval is a written commitment from a lender. You would receive this after underwriting, where your income, debt, and savings are examined. This process is more formal. You are expected to provide your tax returns, bank statements, W2’s, and other documentation requested. Once this is complete you’ll have a bankable loan to work while searching for a home. This is extremely beneficial, it will allow you to determine the down payment, loan program, and monthly payment best for you. Once the process is complete, you’ll receive a letter from your lender. This is going to help you appear as a strong buyer when making an offer.

What is pre-qualification?

Pre-qualification is based off one phone call. Lenders will provide an estimate of your potential buying power based on your income, debt, and sometimes a credit check. This is nothing more than a quick check to see if you would qualify under their guidelines. Typically, you’re not required to provide any documentation. It is important to know, this is not a promise for a loan.

Therefore, when serious about buying a home, you always want to get pre-approved. Pre-qualification is not reliable or bankable when placing an offer. It does not allow you to appear as a strong buyer. This can delay the buying process.  Even in slow markets, pre-approval will help complete the process with less stress.