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Before you make any big financial decision, it’s crucial to learn how it may affect your credit score. If youâre looking to refinance, itâs natural to wonder if it might hurt your credit.
Typically, your credit health will not be strongly affected by refinancing, but the answer isnât always black and white. Whether youâre still considering your options or already made your choice, weâve outlined what you need to know about refinancing below.
What Is Refinancing?
Refinancing is defined by taking on a new loan to pay off the balance of your existing loan balance. How you approach a refinancing decision depends on whether itâs for a home, car, student loan, or personal loan. Since refinancing is essentially replacing an existing debt obligation with another debt obligation under different terms, itâs not a decision to take lightly.
If youâre worried about how refinancing will affect your credit health, remember that there are multiple factors that play into whether or not it hurts your credit score, but the top three factors are:
1) Having a Solid Credit Score
You wonât be in a strong position to negotiate refinancing terms without decent credit.
2) Earning Sufficient Income
If you canât prove that you can keep up with loan payments after refinancing, it wonât be possible.
3) Proving Sufficient Equity
Youâll also need to provide assurance that the payments will still be made if your income canât cover the cost. Itâs recommended that you should have at least a 20 percent equity in a property when refinancing a home.
How Does Refinancing Hurt Your Credit?
Refinancing might seem like a good option, but exactly how does refinancing hurt your credit? In short, refinancing may temporarily lower your credit score. As a reminder, the main loan-related factors that affect credit scores are credit inquiries and changes to loan balances and terms.
Whenever you refinance, lenders run a hard credit inquiry to verify your credit score. Hard credit inquiries typically lower your credit scores by a few points. Try to avoid incurring several new inquiries by using smart rate shopping tactics. It also helps to get all your applications in during a 14â45 day window.
Keep in mind that credit inquiries made during a 14â45 day period could count as one inquiry when your scores are calculated, depending on the type of loan and its scoring model. Regardless, your credit wonât be permanently damaged because the impact of a hard inquiry on your credit decreases over time anyway.
Changes to Loan Balances and Terms
How much your credit score is impacted by changes to loan balances and terms depends on whether your refinanced loan is reported to the credit bureaus. Lenders may report it as the same loan with changes or as an entirely new loan with a new open date.
If your loan from refinancing is reported as a new loan, your credit score could be more prominently affected. This is because a new or recent open date usually means that it is a new credit obligation, therefore influencing the score more than if the terms of the existing loan are simply changed.
How Do Common Types of Refinancing Affect Your Credit?
Refinancing could help you pay off your loans quicker, which could actually improve your credit. However, there are multiple factors to keep in mind when refinancing different types of loans.
Refinancing a Mortgage
Refinancing a mortgage has the biggest potential impact on your credit health, and it can definitely affect your FICO score. How can you prevent refinancing from hurting your credit too much? Try concentrating your credit inquiries when you shop mortgage rates to a 14â45 day window â this will help prevent multiple hard inquiries. Also, you can work with your lenders to avoid having them all run your credit, which could risk lowering your credit score.
If youâre unsure about when to refinance your mortgage, do your research to capitalize on the best timing. For example, refinancing your mortgage while rates are low could be a viable option for you â but it depends on your situation. Keep in mind that losing your record of paying an old mortgage on time could be harmful to your credit score. A cash-out refinance could be detrimental, too.
Refinancing an Auto Loan
As you figure out if refinancing your auto loan is worth it, be sure to do your due diligence. When refinancing an auto loan, youâre taking out a second loan to pay off your existing car debt. In some cases, refinancing a car loan could be a wise move that could reduce your interest rate or monthly payments. For example, if youâre dealing with an upside-down auto loan, you might consider refinancing.
However, there are many factors to consider before making an auto loan refinancing decision. If the loan with a lower monthly payment has a longer term agreement, will you be comfortable with that? After all, the longer it takes to pay off your car, the more likely it is to depreciate in value.
Refinancing Student Loans
When it comes to student loan refinancing, a lower interest rate could lead to major savings. Whether youâve built up your own strong credit history or benefit from a cosigner, refinancing can be rewarding.
Usually, you can refinance both your federal and private student loans. Generally speaking, refinancing your student loans shouldnât be detrimental in the grand scheme of your financial future. However, be aware that refinancing from a federal loan to a private loan will have an impact on the repayment options available to you. Since federal loans can offer significantly better repayment options than private loans, keep that in mind before making your decision.
|If the cost of borrowing is low, securing a lower interest rate is possible||Credit scores can drop due to credit checks from lenders|
|If your credit score greatly improved, you can refinance to get a better rate||Credit history can be negatively affected by closing a previous loan to refinance|
|Refinancing a loan can help you lower expenses in both the short term and long term||Refinancing can involve fees, so be sure to do a cost-benefit analysis|
How to Prevent Refinancing from Hurting Your Credit
By planning ahead, you can put yourself in a position to not let refinancing negatively affect your credit and overall financial health.
Try to prepare by reading your credit reports closely, making sure there are no errors that could keep your credit application from being approved at the best possible rate. Stay one step ahead of any errors so you still have time to dispute them. As long as you take preventative measures in the refinancing process to save yourself time and money, you shouldnât find yourself struggling with the refinancing.
If refinancing makes sense for your situation, you shouldnât be concerned about it hurting your credit. It might not be the most ideal situation, but itâs extremely common and typically relatively easy for your credit score to bounce back.
If you notice that your new loan from refinancing causes alarming changes when you check your credit score, be sure to reach out to your creditor or consider filing a dispute. As long as youâre prioritizing your overall financial health through smart decision making and budgeting, refinancing shouldnât adversely hurt your credit in the long run.
The post Does Refinancing Hurt Your Credit? appeared first on MintLife Blog.
Spouse Has Bad Credit? How It Affects You
It wasnât until a few months after my husband and I got married that I decided to check both our credit scores. While my husbandâs credit score wasnât horrible, it certainly didnât qualify as âexcellent.â This got me thinking about how newlywedsâ financial histories can affect both spousesâ finances moving forward, and how critical it is to acknowledge this realityâideally before getting hitched.
Why Itâs Important to Have a Good Credit Score
Manisha ThakorÂ cuts right to the chase in her bookÂ On My Own Two Feet:Â âYour credit score is essentially your financial reputation in numeric form.â
Aiming for an excellent credit scoreâgenerally defined as 750 or moreâis a worthy goal, owing to the range of ways in which it can save you money. Credit scores are critical when applying for loansâfor instance, car loans and mortgages. In addition, many employers consider prospective employeesâ credit scores during the hiring process.
A high credit score means you can access lower interest rates when borrowing, because creditors will view you as reliable. The perceived risk that youâll default on your loan is lower compared to those with poor credit scores. Lower interest rates, especially on large amounts borrowed over significant timeframes, can save you thousands and thousands of dollars!
A poor credit score can indirectly hurt your financial efforts as well; consider the fact that when youâre paying over the odds in debt repayments, youâre committing fewer dollars to saving and retirement planning.
photo credit:Â LendingMemoÂ via photopin cc
Till Debt Do Us Part
Marriage makes you one combined financial unit.
However, that doesnât mean your credit scores are merged; your credit history continues to be maintained on an individual basis. One spouseâs poor credit cannot directly damage the individual score of the other spouse.
That being said, if you apply for a loan as a married couple, creditors look at both your credit scores to determine your eligibility and terms. So, if one of you has the credit of an angel whereas the otherâs credit history is limited or even littered with missed payments and liens, you may find your application is denied.
But, this is not just about loan applicationsâpoor credit can belie more than just a few bad credit card habits. Other financial follies, like paying taxes late, not focusing on saving, and day-to-day overspending, could be lurking in the closet.
What Do You Do After Youâve Said I Do?
While bad credit isnât good news, itâs not necessarily a reason not to get married. And, itâs not necessarily the precursor to divorce! It is, however, an alarm signaling that it is time to get clear on your joint financial situation and start communicating. Make sure you do thisÂ respectfully and compassionatelyÂ to minimize blame and financial stress. (If youâre the type of person whoâd like to know this information from prospective partners before things get serious, there are nowÂ dating sites catering just to you.)
Once youâve identified that one of you has less-than-optimal credit, itâs time to take action. Here areÂ four top tips for taking immediate action:
1. Check your credit report for mistakes:Â Errors are, unfortunately, pretty common and can be really detrimental. CheckÂ your reportÂ at least once per year.
2. Make payments on time:Â Yes, this is stating the obvious, but it needs to be said!Â Mary Beth Storjohann of Workable WealthÂ says, â35% of your credit score is based on how you pay your bills (making this the biggest determining factor for your score)! Are you often late of missing payments? The impact of just one 90-day late payment goes way beyond the three months you took to pay, so set up automatic bill payments.â
3. Lower your debt-to-credit ratio:Â This is how much debt you have as a proportion of your overall credit limits. 30% of your credit score is based on the amount of money you owe versus the amount of credit available to you. The higher the amount of credit youâre utilizing, the more negative the impact on your score. Keep the debt level as low as possible (30% of your limits, or less).
4. Pay down your debt faster:Â Make more than the minimum payments wherever possible by utilizing the snowball method or targeting the balance with the highest interest rate to pay down first.
photo credit: natloans via photopin cc
Alongside these tips, itâs super important to remember that improving your credit score wonât happen overnight. The length of time it takes for your score to improve is directly related to reasons for the drop. It can take anywhere from a few months to several years for your credit report to reflect the positive changes youâre making. As Mary Beth notes, âThe most important thing is to be proactive in clearing up any issues.â In addition, two of the criteria factored into your score are the length of your overall credit history and the average age of your accounts.
So, donât be discouragedâbe patient and give it time.
And, Finally, Some Tips on What Not to Do!
There are always two sides to every coin so, while youâre following the tips above, make sure that youâre not unwittinglyÂ hurting your scoreÂ and negating your good work.
Be mindful of the following ways that you could be hurting your credit score:
1. Opening too many new accounts:Â This comes back to the point that the average age of your accounts is a key factor. Opening lots of new accounts reduces that average.
2. Closing too many old accounts:Â Older accounts indicate that you have managed payments for a long time and increase the average age of your accounts. When you close credit card accounts, this also decreases the amount of credit available to you, which can reflect negatively if you have other accounts that are still carrying high balances (it essentially increases your debt to credit ratio).
3. Signing up for lots of retail incentive programs:Â Every time you apply for credit, the company issuing the credit will request information about you from the credit bureaus. Too many of these requests can reduce your score.
4. Over-utilizing your credit.Â Mary Beth advises, âIf youâre depending on your credit cards to fund your daily expenses and lifestyle needs, but arenât able to pay them off in full at the end of each month, something needs to change. Start tracking your spending and get a handle on your expenses.â
In summary, start taking positive steps, be aware of actions that can hurt your credit, and focus on building solid financial foundations for the future.
This post was written by Erika Torres of GoGirl Finance.Â GoGirl FinanceÂ is a fast-growing community of women seeking and providing financial wisdom across money management, lifestyle, family and career. For more finance tips, follow GoGirl Finance on Twitter @GoGirlFinance
The post Spouse Has Bad Credit? How It Affects You. appeared first on MintLife Blog.
3 Reasons To Use Cash (and 3 Reasons To Choose Credit)
Credit and debit cards have become so ubiquitous, you’d be forgiven for thinking physical cash is just a couple years away from being declared obsolete and worthless by the government.
Well, as it turns out, the death of dead presidents is greatly exaggerated, asÂ over $1.25 trillionÂ still circulates around the United States alone.
Way too many people use cash for it to ever go away completely, regardless of how much plastic gets wiped every day.
So why in the world would anydiv still pay with Georges and Bens? Here are a few good reasons why:
Less Chance of Identity Theft
Few things are scarier than hearing that the store you regularly swipe your card at just had a security breach, and that some anonymous criminal may have your identity at their disposal.
Paying cash eliminates that issue — chunks of metal and pieces of paper stacked in a register tells fraudsters absolutely nothing, while the information sent to vulnerable computers via your bank card can reveal everything.
Easier to Watch and Control Your Spending
Actually seeing the cash you owe, as opposed to simply staring at a generic card with no monetary value of its own, can remind you to spend less overall, since all of a sudden the money is real, and real valuable at that.
Financial guru Ramit Sethi, for example, lost his credit card, and spent nothing but cash until a replacement came. He reportedÂ spending 18% lessÂ when forced to watch his green wad dwindle in real-time.
Some Places Still Don’t Take Plastic (or Require a Minimum Purchase Amount)
Amazingly, overÂ half of all small businessesÂ won’t take cards, likely because they can’t afford the fees.
It’s always good to keep at least some cash on you in case you need to make a purchase from one of these places.
Even if they accept cards, some of these businesses might only do so if you spend X amount, in order to override the fee.
If you entered the store to spend more than the minimum amount, then swipe away. But if you only want a loaf of bread, and they want you to spend $10 before they’ll accept your card, just pay for your bread with bread.
That all being said though, there are several cases where plastic owns cash. Here are a few of those:
Increasing amounts of items can now only be purchased online and with a credit card, or at the very least are extremely difficult to cover with cash.
Plane tickets, while still technically available at a travel agent’s physical office, are usually much, much cheaper online, where you can’t obviously use cash. The same thing goes for e-books, MP3s, subscriptions to streaming sites, and the like.
The more you shop online, the more reliant you will become on cards in your everyday life.
ATM Fees Can Pile Up
Unless your bank’s ATM is everywhere, then you may often find yourself forced to withdraw your cash from the competition’s ATMs, which will cost you anywhere from $2-4 per pop.
This adds up to a ridiculously high amount, as it’s estimated that the use of cash costs Americans overÂ $200 billion per year.
While not all of that amount is ATM-related, a large chunk of it is, and could easily be saved with the use of cards.
Smart Card Use Can Help You Build Your Credit Score
Finally, while cash is great, it does absolutely nothing to improve how companies and lenders look at you. Responsible credit card use, on the other hand, not only helps you purchase what you want and need, but helps build up your credit score.
There’s a good chance that not having using a card could negatively affect your credit score orÂ nullify it altogether, since you’re not giving the credit agencies any information about your financial habits.
So get a card or two, use it when necessary, use cash every other time, and you should achieve a pleasant balance between the two that can only bode well for your fortune going forward.
Whether you use cash or plastic, Mint.com can help you budget every penny of your finances.Â Click hereÂ to find out how!
The post 3 Reasons to Use Cash and 3 Reasons to Choose Credit appeared first on MintLife Blog.