The Credit Building Trick That Wont Help You Buy a Home
The Credit Building Trick That Wont Help You Buy a Home
With the back to school deadline looming, its not just the kids who are caving in to peer pressure, as almost half (47 per cent) of parents admit they feel the need to buy their children new items to keep up with other parents. Equipping the children with the right gear comes at a cost though – research by American Express finds that whilst two thirds (67 per cent) of parents have good intentions and set a budget for school items, 44 per cent still overspend.
Despite the tendency of many parents to break the budget, the good news is that the cost of getting the little ones ready for the new school year has dropped slightly to pound;177 from pound;189 last year. However, more than two thirds of parents (65 per cent) still feel the impact on their wallets and believe that the cost of going back to school is getting more expensive each year.
The UKs lsquo;back to school bill totals more than pound;1.7 billion, and the burden of meeting this cost takes its toll as half (50 per cent) of parents worry about how they will afford to buy everything their children require. Just one in five (20 per cent) parents prepare for this annual outlay by saving up though, while 43 per cent absorb the cost into their normal monthly outgoings.
When it comes to the list of items needed for the new term, over half (57 per cent) of parents feel that it gets longer each year. The American Express research finds that parents spend the following on the following items (average):
Electronic Gadget, eg mobile phone: pound;94.59
PE Kit: pound;16.12
Back Pack: pound;12.55
Personal Stationary: pound;11.19
Book Bag: pound;9.37
Nicholas Stefanovitz, Vice President of Consumer Cards UK at American Express, said: Its clear from our research that some parents feel the financial strain of getting the kids ready for the new school term, but they are determined to make sure that they have all the right kit. The annual back to school outlay is unavoidable, so parents should think about putting this spending on credit cards that offer rewards or cashback to ensure they get something back on their spending.
American Express has a range of credit and charge cards that offer benefits including cashback, Avios points, Nectar points and Membership Rewards that can be put towards school items, as well as leisure, travel and retail treats. For more information or to apply for an American Express Credit Card visit: americanexpress.co.uk/allcards
The caller hesitated.
That would be a no, I jumped in.
No, no, I pay them on time, she said.
I pressed because Ive been answering the question for years. And people dont seem to want to acknowledge the behavior that can affect their credit.
Really, you pay every single bill, on time?
Then she came clean. She mostly pays them on time. Only occasionally does she slip up, she admitted.
In her case, thats the score slayer.
Dont listen to the television ads promising quick fixes or the many junk emails with subject lines claiming secret ways to improve your credit. Paying your bills on time is the No. 1 way to fix your credit. Every debt. Every month. On time.
But when I say that, I get blank stares of disbelief or heavy breaths. It cant be that easy. Surely there is some trick to the system.
No secret. No trick. Go back and read my opening line – there are no shortcuts to strengthening your credit score. Thirty-five percent of your score under FICO is your payment history.
The other effective way to boost your score is to pay down your debt. Thirty percent of your score is derived from how much you owe. So all that credit-card debt you carry month to month is also dragging your score down. If you must carry debt, FICO recommends keeping your credit card debt at 30 percent or less of your available credit. So if you have a credit line of $1,000, you shouldnt have more than $300 outstanding at any one time. Same goes for all your cards collectively. Dont use more than 30 percent of the total available credit you have.
I was rejoicing recently when a survey found that young adults were largely shunning the use of credit. Turns out that 63 percent of consumers 18 to 29 say they do not have a credit card, according to a Bankrate.com study. They instead preferred debit cards.
But when I tweeted my joy that millennials werent embracing the credit culture, some people thought that wasnt a good thing. They were concerned they wouldnt be able to buy a home.
Heres what many people dont seem to get about the credit-scoring models. They are fluid, not static. As you pay your bills on time and pay off debt, you are contributing to the upward mobility of your credit as often as your creditors report what youre doing to the credit bureaus. Besides, more than half of millennials say they carry over balances from month to month. Not good.
Like weight loss, slow and steady wins the race, says Anthony A. Sprauve, FICOs director of public relations. The average consumer should start to see their FICO score improving three to six months after they begin positive behaviors such as paying down their credit card debts and paying all of their bills on time every time.
The same is true in building up credit. It doesnt take as long as some people think to establish good credit.
Tertiary Students Loan, a scheme that provides opportunity to get higher education from abroad, has been opened for applications.
Education Ministry said that loans would be provided for 125
education opportunities to study in Maldives; which include 75 opportunities to
study for a first degree and 50 opportunities to study diploma level courses.
Loans for education opportunities from abroad are to be
provided for first degree level courses. A total of 105 such opportunities will
be provided, said Education Ministry.
Loans will not be available to students already studying
under Tertiary loan scheme.
Application forms are now available, and they are to be
submitted between October 13 – 20th.
This is the third time this year for loans to be issued
under Tertiary Student Loan Scheme. Students who receive the loans are to pay
back the loan to government after 7 months of course completion.
Alaskans have consistently carried high credit card balances for the past few years, possibly due to the high cost of living in the state. According to data from the Experian-Oliver Wyman Market Intelligence Reports, sorted using Experians IntelliView tool, only Alaska residents have carried an average credit card balance greater than $2,000 in the past three years, making it consistently the state with the most credit card debt.
Alaska is a bit of an outlier with its average debt of $2,299 per card in the second quarter of this year the rest of the states carry an average balance between $1,366 and $1,817 but even with high balances, Alaskans followed the national trend and reduced that balance over the past few years. Heres how other states compare:
Average balance per credit card: $1,656
Change from Q2 2013: -$15
Change from Q2 2012: -$27
9. South Carolina
Average balance per credit card: $1,664
Change from Q2 2013: -$17
Change from Q2 2012: -$37
8. New Mexico
Average balance per credit card: $1,669
Change from Q2 2013: -$24
Change from Q2 2012: -$50
Average balance per credit card: $1,677
Change from Q2 2013: -$41
Change from Q2 2012: -$59
Average balance per credit card: $1,697
Change from Q2 2013: -$55
Change from Q2 2012: -$106
Average balance per credit card: $1,741
Change from Q2 2013: -$41
Change from Q2 2012: -$61
Average balance per credit card: $1,750
Change from Q2 2013: -$20
Change from Q2 2012: -$17
3. District of Columbia
Average balance per credit card: $1,793
Change from Q2 2013: +$3
Change from Q2 2012: +$26
Average balance per credit card: $1,817
Change from Q2 2013: -$9
Change from Q2 2012: -$4
Average balance per credit card: $2,299
Change from Q2 2013: -$55
Change from Q2 2012: -$21
The Missouri Economic Research and Information Center ranked cost of living by state as of the second quarter of 2014 (the same quarter used to pull the Experian data), and Alaska is the fourth-most expensive state to live in. From that perspective, the high average credit card balance makes sense, but Hawaii and Connecticut, the first and second-most expensive states, arent in the top 10 of average credit card balances. The District of Columbia is like Alaska: High cost of living (No. 3) and high average credit card debt (also No. 3).
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At the same time, Alaskans dont have exceptionally high credit limits. The average limit per card was $8,519 in the second quarter (second-highest after DCs $8,838), but it was only the 12th-highest the year before. Looking at those numbers, Alaskans credit utilization averaged about 27% to DCs 20% — theyre both decent numbers, but when it comes to credit scores, lower is better.
Its worth noting that credit card balances arent necessarily incurring interest: Its not a bad thing for a cardholder to have more than $2,000 on his or her card if he or she pays the balance in full each billing cycle. If youre carrying a balance, though, that debt will grow with time, increasing your credit utilization as well. If you want to get out of credit card debt, prioritize paying the balance, and make sure to rein in your spending, as well.
Credit card use contributes to regular changes in your credit score, so its important to monitor your balances and scores to see how they interact. If youre trying to make significant improvements to your score, reducing your credit utilization can be a good strategy. (One way is to make sure you keep your balance low relative to the limit. Another is to ask for higher credit limits, but keep your spending low.)
You can check your credit score for free on Credit.com, as well as get an idea of how much of your available credit youre using.
More on Credit Cards:
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Note: Its important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.
Have you ever spent sleepless nights worrying about your finances? Between battling debt, working to pay off a mortgage and planning for retirement, there is plenty to think about. But dont let these worries keep you up at night –take action. Check out some moneydecisions that will help you rest easy.
1. Track Your Spending amp;Create a Budget
Examine your recent bank and credit card statements. Be sure your current expenses are less than your income and make changes if you are spending more than you earn. Formulate a budget that covers all of lifes essentials without being so stringent that you cannot follow it. By creating a plan that will work for you and tracking your spending with a budget program (or even simply on an Excel spreadsheet) in the future you can quickly assess if you are veering off course.
2. Plan Your Retirement
It can seem overwhelming thinking so far into the future, but we all know that the key to retiring is saving your money smartly and investing well (or winning the lottery!). Its a good idea to determine how much you need to save for retirement and decide how you plan to get there, through a 401(k), some type of individual retirement account or both. The sooner you think about the future, the better prepared you will be when it comes.
3. Create a Path to Zero Debt
It may get you down paying off your debt in small amounts each month. You may feel like youre not making much progress. Getting organized and making a course toward financial freedom can help you make smarter payment decisions. You can pay down your debts in a number of different ways including smallest to largest or highest interest to lowest interest. Paying off your smallest debt can give you some momentum on your debt journey, but paying off your highest interest debt first can save you money in the long term. Whatever your strategy, its important to form a plan and get started.
4. Establish an Emergency Fund
No matter what keeps you tossing and turning at night, there is always the chance that an unexpected expense is waiting around the corner. Growing an emergency fund of three to12 months expenses will help you tackle whatever comes up in your life. Its a good idea to keep this money separate and do not use it for home buying, travel or education –those savings should be established in a different place.
5. Monitor Your Credit
If you have a credit report — or even if you dont think you do — its important to check your free annual credit reports (you are entitled to at least one per year from each of the three credit reporting agencies). Anything that looks unfamiliar is worth investigating. It could tip you off to possible identity theft. If, like most of us, you do use credit, youll want to keep yours in good shape because higher credit scores often mean lower interest rates. (You cansee your credit scoresfor freeon Credit.com, as well as get an action plan for improving or maintaining them.)
6. Communicate Your Plan
It could be your family, your significant other, your parents or even a close friend –telling another person about your plan can help keep you honest. Financial stress can originate or worsen when you are trying to hide the truth from other people in your life. Sharing your plan and budget will help you stick to it and help others know how to be a positive influence.
Whether you are doing some late night calculations, meet with a specialist by day or work slowly to get your finances in order, a few changes can make a big difference. Going to bed each night knowing you are taking the necessary steps for your finances means you can rest easier.
More from Credit.com
AJ Smith is an award-winning journalist with more than a decade of experience in television, radio, newspapers, magazines and online content. She currently serves as the managing editor for SmartAsset. AJ has a passion for meeting new people, sharing stories and helping others. She has degrees from Princeton University and Mississippi State University. AJ and her husband also write and illustrate educational childrens books. More by AJ Smith
Thats pretty good, if you want to join up with ATamp;T! And its especially good if you own an iPhone 4, which is about to be obsolete. Presumably this applies to working handsets only, but weve asked ATamp;T for clarification on just how messed up your device can be. If you trade in an iPhone 5S, youll get $300 in credit. You can also get an extra $100 in bill credit with the purchase of any iPhone when activating a new line of service with a smartphone on ATamp;T Next, a plan that lets you pay for your phone over monthly installments.
This is a good deal, but not necessarily the best out there. T-Mobile and Sprint promise to meet or beat any other trade-in deal. T-Mobile will also give you an extra $50, if you can find someone that will offer as much as they will. In a phone call with Gizmodo last week, a T-Mobile representative said that theyre offering as much as $350 for the iPhone 5S. Which is super good. So trade wisely.
* – The deal doesnt start until Friday, September 12, so dont be concerned if you dont see it on ATamp;Ts website before then!
AFTER eight years of running an unelected military government, and seemingly against the odds, Voreqe Bainimarama (Leader of the FijiFirst party) has now become an elected Prime Minister, and by a large margin.
Based on 73 per cent of the provisional votes counted, FFP has won some 33 seats out of a 50-seat parliament, with SODELPA only receiving 14 seats, and National Federation Party (NFP) with only three seats.
Four small parties, including the once powerful Fiji Labour Party (FLP) and the Peoples Democratic Party (PDP), and 2 Independents did not make the 5 per cent threshold, and hence they and their votes were all discarded.
While the usual cliche is the people have spoken the real question is, why did they speak thus?
The result is astonishing to the opposition voices who have been highlighting the many negative aspects in the eight-year record of the Bainimarama Government: it started with a coup, it issued numerous decrees reducing the basic human rights of people in freedom of speech, muzzled the freedom of media, freedom of assembly, the right to go to court for perceived grievances, abolished Fijian institutions recognised by the 1997 Constitution, refused to release the Auditor General Reports, unilaterally reduced pensions, broke many environmental laws, stifled wage increases by the Wages Councils, etc.
Perhaps these factors had very little impact on the outcome of the election because of the abject failure of the educated leaders of both Fijians and Indo-Fijians to enlighten the less educated voters.
But I suggest that it is not useful to blame liumuri (betrayal) factor for both indigenous Fijians and Indo-Fijians, as some in the opposition parties may be inclined to do.
I suggest that bread and butter issues had a most powerful impact on the poorer voters (who comprise the majority of all voters of all ethnic groups) while emotional and physical security were also additionally important to Indo-Fijian voters, afraid of Fijian ethno-nationalism and SODELPAs campaign strategy.
The rich of course were in total support of FFP in many concrete ways, not the least through their influence on the media and the financing of the FFP election campaigns.
The ethnic components of FFP support
I roughly estimate that FijiFirst party received more than 85 per cent of Indo-Fijian votes, even more than FLP had in 2006.
Undoubtedly, a powerful factor was the Bainimarama Governments repetition of the mantra, that under them, all races are equal in Fiji.
This otherwise nebulous claim was given substance by the freeing up of scholarships and loans for education, which Indo-Fijians value most highly, and in which Indo-Fijians have been the largest beneficiaries.
Then there was the fear factor: most Indo-Fijians were afraid that a SODELPA government would unleash the same forces that had led to the 1987 and 2000 coups against Indo-Fijians.
These Indo-Fijians felt that Bainimarama and FijiFirst party, with clear control and support of the military, whatever their roles in 1987 and 2000, were today the only ones capable of protecting Indo-Fijians, not the alternative parties NFP, FLP or PDP.
But Bainimarama could not have won by this majority had it not been of the support of a large proportion of indigenous Fijian voters.
I estimate, by working backwards from the mostly indigenous Fijian votes received by SODELPA and that going to the small parties, that more than 40 per cent of indigenous Fijian voters also voted for FFP (almost as many as voted for SODELPA).
Freebies were probably the most powerful factor for them, and may have led to the alleged liumuri of SODELPA who expected to win far more than 25 seats based on what indigenous Fijians had told them before the election.
For the majority of ordinary Indo-Fijians and indigenous Fijians, a massive factor in their vote for Bainimarama was undoubtedly the benefits of free education already delivered, and the promise of many further benefits to come. Released in the FFP manifesto a mere ten days before the main polling on 17 September, Bainimarama promised voters from low income families free electricity, water, medicines, and milk for Class 1 children throughout Fiji, as well as first home grants.
There was $10million promised to indigenous Fijians to help develop their lands.
There have also been roads, water, and sewerage developments in many rural areas that indigenous Fijians and Indo-Fijians have also been grateful for (whatever the costs in public debt).
Some think that the equalisation of lease money between commoners and chiefs has been important for Fijian landowners (but I doubt it).
In summary, the ordinary bread and butter issues were far more important to voters of all ethnicity, and emotional and physical security to Indo-Fijian voters, than issues of law and constitutionality and basic human rights which had been eroded for eight years, but out of sight.
This was also the case in the 1999 elections when Indo-Fijians voted for the FLP rather than the NFP which delivered to them the theoretical benefits of the 1997 Constitution and the multi-party government provision.
Perhaps Fijis choice is also not too different from the choice being currently made in Scotland between the importance of bread and butter issues as opposed to the dignity of independent nationhood after centuries of colonisation by England.
A step forward, with headaches to come
The people have spoken, provided there is no significant evidence of vote rigging (which some parties are alleging), and whatever one may say about the manipulative impact of the electoral system, the electioneering strategies, and the powerful impact of the media propaganda and campaigns (which deserve another article).
There is now an elected government, which may be made more accountable through an elected parliament, where questions may be raised by the opposition members and answers demanded of the government.
The opposition can now call for all the Auditor Generals Reports since 2006, to be tabled in parliament, so that the public can see how the taxpayers funds have been utilised (and how some ministers salaries and how much have been paid since 2006).
The Opposition can also call for further debates and judicial reviews of Fijis constitution, including the reconciliation of the current imposed own with the 1997 Constitution which was ruled by the Fiji Court of Appeal to be still extant.
It is going to be a major struggle for the Opposition to call for a fresh look at a range of decrees which have restricted the basic human rights of Fiji people, listed at the beginning of this article.
The proceedings of parliament may also enable the media and journalists to highlight issues and be a better watch-dog on government and society at large.
One light at the end of the tunnel is that with all international sanctions removed and external relations with Australia, NZ, EU and US normalised, there should also be a resurgence of investor confidence, and renewed economic growth.
Healthy rates of growth of over 6 per cent per year could make management of Fijis significantly increased public debt a little bit easier, create new jobs, and perhaps help improve standards of living which have taken a battering since 2006.
While the nave may proclaim that this is the dawn of a new era, the responsible civil society organisations and social leaders know that this is just the beginning of a long and painful struggle to re-establish a just society which our people deserve.
* Wadan Narsey is an academic formerly employed by the USP. The views expressed are his own and not necessarily that of this newspaper.
Its happened again. Home Depot (HD) has confirmed a massive breach of credit card data, possibly the biggest ever. Last night the company confirmed that hackers may have been stealing customer data since last April. People close to the situation say as many as 60 million credit card numbers may have been stolen. That would make this the biggest attack of its kind in history.
This comes less than a year after 40 million card holders at Target (TGT) were hit by similar attacks. While Home Depot has apologized for the frustration and inconvenience this is causing customers, no one seems to be in a forgiving mood. Home Depots stock is getting hit and analysts are frankly stunned at how nearly 2,000 stores in the US could process 750 million transactions without noticing the presence of hackers.
In the companys defense its not easy to lock down security with this countrys antiquated card reader systems. Were one of the few industrialized nations still using magnetic strips on the back of our cards. Experts say these hacks exploited the same systemic weaknesses found at Target to execute the Home Depot theft. In Canada, which like most of Europe uses a chip and PIN technology, customers face lower risk. Note use of the word lower. The truth is no payment system is un-hackable. The US is set to switch over to updated card systems by October of next year and retailers are going to do what they can to secure their systems, if only out of self preservation, but even after the switch your data will be at risk.
Heres what you can do: Always check your account statements. Dont wait for monthly statements. Go online and look for suspicious payments at least once a week. Home Depot says you wont be liable for unauthorized charges. Next, talk to your credit card company and see if they offer the new chip-based cards. If possible you should upgrade your card– but its still up to you to find merchants who will accept the new cards. It depends on the retailer and their point of sale systems.
Mostly consumers have to accept that these thefts are a price we pay for being part of the modern economy. That doesnt exonerate Home Depot, Target or the hand full of other merchants who have been hit. It just means shoppers need to follow the first ancient rule of retail: Caveat emptor or buyer beware.
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Your best client owes you $25,000 — you know theyll pay, but in the meantime, bills are due. You work on commission and your income, while excellent annually, is a roller coaster month to month. Bottom line: Your financial boat is temporarily swamped.
A personal line of credit may be able to bail you out, but its important to understand how it compares to other credit options.
A personal line of credit is an unsecured revolving account with a variable interest rate allowing you to borrow money as you need it, says Natalie M. Brown, vice president of consumer lending communications for Wells Fargo. A personal line of credit may be cheaper than a credit card cash advance, more flexible than a personal loan and wont require collateral as does a home equity line of credit. But its not for everyone.
How it Works
The maximum amount you can borrow varies widely based on your financial institution and credit qualifications. Citis top credit limit is $25,000, while SunTrust allows lines of up to $250,000. At Wells Fargo, the range is $3,000 to $100,000, Brown says.
You wont necessarily have to say what you want the money for when you apply, but you could. It will depend on the lender and the amount being borrowed, says Nessa Feddis, senior vice president and deputy chief counsel for the American Bankers Association.
You can access your personal line of credit by check, phone or online, Brown says, adding that your monthly payments depend on how much you owe. For example, the minimum payment at Wells Fargo is $25 or 1% of the balance owed, plus the total of all finance charges and fees. The bank charges a $25 annual fee, Brown says, an amount that CreditCards.com found to be typical.
Who Qualifies for a Line of Credit?
Because personal lines of credit are not secured with collateral, they are generally offered to customers with a strong credit history who not only have a strong credit score but also can demonstrate an ability to repay the line, Brown says.
The better your credit rating, the more likely you are to get a personal line of credit on good terms, says Mike Sullivan, director of education for Take Charge America, a nonprofit credit counseling agency based in Phoenix. Every institution sets rules and standards and those standards change rapidly based on competition and other factors, he says. I would guess that someone with a 650 FICO could find a willing lender, but I have no real knowledge of actual terms at multiple institutions, Sullivan says.
People who take out personal lines of credit usually are not in a situation with no other options. They often have assets such as certificates of deposit, bonds or stock accounts, or a retirement fund but dont want to cash out those assets, Sullivan says. For example, if you borrow from a retirement account and cant or dont repay it, youll have to take a penalty and pay interest, he says. Those options may cost you a lot more, he says.
Why you might need one
For people who work on commission or otherwise have irregular income, a personal line of credit can smooth out finances, Sullivan says. If you have uneven cash flow, occasionally you may have a cash flow issue, he says. A personal line of credit is something that a person can access on a regular or irregular basis to get from a bad month to a good month.
Sullivan once suggested a personal line of credit to a client who needed to close on the purchase of a vacation home a month before he could finalize the sale of another house. He was concerned about having to withdraw $15,000 from a retirement fund to do that, Sullivan says. I suggested a personal line of credit to him as a one-time option and it worked very well.
Another reason credit counselors might recommend a personal line of credit is to pay a tax bill, says Sheri L. Stuart, senior communications specialist for Springboard Nonprofit Consumer Credit Management, in Riverside, California.
When to Back Off
Student loans are a different story. Because of tight federal regulations on education loans, youd likely have trouble being approved if you tell the lending officer you want to use a personal line of credit to pay for college, Feddis says. The Federal Reserve Boards amendments to the Higher Education Opportunity Act stipulate that creditors that extend private education loans must provide disclosures about loan terms and about federal student loan programs that may offer less costly alternatives.As a result, banks are wary about offering lines of credit for such purposes.
In addition, a personal line of credit is not intended to allow you to buy things you cant afford, Sullivan says. If your problem is an imbalanced budget, a personal line of credit is not the answer.
If you lack financial willpower, a personal line of credit is a bad idea, Stuart adds. You have pretty quick access, she warns.
Comparing Borrowing Costs
Before you decide to take out a line of credit, compare the costs to other types of credit that may be available to you. Look at the annual percentage rate (APR), whether and how much the APR can change, any fees to access the line, annual fees, late payment fees and fees for other issues, Sullivan says.
Interest rates vary widely even from the same financial institution. For instance, Citis advertised rates range from 7.74 to 21.99% APR. Citi and other financial institutions offer interest rate reductions for borrowers willing to have payments deducted automatically from their bank accounts. At Citi, the reduction is 2.5 percentage points.
Wells Fargo, which is promoting personal lines of credit through September 2014, is offering rates as low as 7%, with a one percentage point reduction for qualifying customers with a Wells Fargo checking account.
Line of Credit Versus a Personal Loan
A personal line of credit allows you to borrow only the money you need and offers a variable interest rate that is generally lower than fixed loan rates, Brown says. Your payments are variable depending on the outstanding balance, she says.
In contrast, a personal loan is best suited for paying off a high-interest debt that carries a fixed interest rate and fixed monthly payment, Brown says. You receive the entire loan amount up front and it provides easy budgeting that can help you pay down high-interest debt at the end of the term, she says.Wells Fargo personal loans offer fixed interest rates over a fixed term, which allows a customer to know precisely when their loan will be paid off, Brown notes.
Although some people use a personal line of credit as a consolidation loan to pay off credit card debts, Brown and Sullivan recommend against it.
Its possible mathematically to save money, but thats highly unusual, Sullivan says. If you have already maxed out all your credit cards and youre thinking Where can I go to get more money? a personal line of credit is a bad idea. A person who has debt issues is unlikely to qualify for a personal signature loan or line of credit but even if they qualify, they are going deeper into debt. This is much like taking out payday loans because there are no other options. It represents uncontrolled borrowing and is a sign of impending default.
If youre not disciplined enough to avoid borrowing more than you can reasonably pay back, skip the line of credit, Stuart says.
Line of Credit Versus a Credit Card Cash Advance
Credit card cash advances are similar to personal lines of credit in that you get only the money you need when you need it. But credit card APRs tend to be higher than those of lines of credit. In my experience, credit cards run at least 13% APR even for consumers with good credit, Sullivan says. A personal line of credit is typically less and often under 10% for someone with good credit.
But thats not always the case, so be sure to check. Credit card cash advances also come with higher APRs than a cards purchase APR as well as extra fees, which youll need to compare with the fees on the line of credit youre considering.
Personal Line of Credit Versus HELOC
If you own a house, a home equity line of credit is another option you might want to consider instead of a personal line of credit. The interest rate on a HELOC generally will be lower because the home is used as collateral, Brown says.
However, whenever you use collateral you are putting that collateral at risk. If you cant repay the HELOC you can lose the house. A personal line of credit is not secured, so it is a safer loan for the consumer, Sullivan says.
A HELOC may also not be right for you if youre upside on your mortgage and thus have no equity. In that case, you likely wont qualify for a HELOC, Brown says.
Experts differ on whether a personal line of credit is a good idea in that situation.I dont think youd be a good candidate for a personal line of credit if youre already upside down on your home, Stuart says. A personal line of credit is not secured. You already look like a financial challenge [to a lender].
Not so, argues Feddis. A lack of home equity doesnt show up in your credit report, she says. Just because the value of someones home declined in a huge real estate bust, thats not predictive of whether they can pay a loan back. If you have a strong credit history, thats heavily weighted when youre seeking a loan.
Impact on Your Credit Score
One final point to consider when weighing a line of credit is the impact it will have on your credit score. In credit scoring, a personal line of credit is treated as an open line of credit, says Maxine Sweet, president of public education for the credit reporting company Experian.
If they havent used it, it should help their credit utilization and thus their score, Sweet says. If they have used a high percentage of the line of credit, it could negatively impact their scores due to high utilization.
See related: Landing and maintaining an unsecured line of credit for your business, Using personal loans to pay off credit card debt, Compare 8 home improvement financing choices