Credit score Archives

August 17, 2022August 22, 2022

Pay Off Debt or Build Savings? Prioritizing Your Financial Goals

Deciding whether to save or pay off debt is a very personal choice — and one that depends on many different factors. However, there are a number of ways to weigh your options in order to pick the best one for you. Below, we’ll cover the pros and cons of each route so you can more confidently answer the question: should I pay off debt or save?

Option 1: Pay Off Debt

Advantages to paying off debt include reducing the amount of interest you’re paying over time, improving your credit score, and lessening the stress and psychological burden that comes along with having the cloud of unpaid financial obligations hanging over your head. It also might make more sense to focus on getting rid of debt if it can help you accomplish some long-held financial goals.

In terms of choosing whether to pay off debt or invest, it may help to know that experts generally advise that if the total interest rate on your debt is greater than 6%, you should pay it down first before focusing on savings or investing.

When it comes to how to pay off debt, there are a couple of different approaches you can take. They’re grouped into what’s known as the avalanche and snowball methods.

With the avalanche method, you make minimum payments on all of your debts, and then use any remaining funds to pay off the debt with the highest interest rate. This plan for paying off debt can make the most sense if you’re working toward a long-term goal rather than a short-term financial need.

The snowball method, on the other hand, means that while you make minimum payments on your debts, you then address the smallest debts before taking care of the larger ones. If you’re someone who is inspired to work toward goals by seeing smaller signs of progress along the way, this route might be more appealing to you.

To get a quick idea of which debts may make the most sense to prioritize, a calculator for debt payoff can help. You can plug your current debts, including interest rate and remaining balance, into our Cost of Debt Calculator and get a better idea of how much your obligations are setting you back — as well as how long it will take you to pay them off at your current rate. This tool is also helpful for figuring out which debts to pay off first.

Should I pay off my credit card in full? When should I pay off my credit card?

It’s typically best to keep your credit card paid off for a couple of different reasons. Not only will it help save you money you would be paying in mounting interest payments that add up each month, but unpaid credit card debt can also negatively affect your credit score. If you already have an outstanding balance that you’re able to pay off, it’s a good idea to start here as a first step.

Option 2: Build Your Savings

Choosing to save also has its benefits, however. You may be able to take advantage of compounding interest — the more time your money is in savings, the more your money grows.

You also have better control over your timeline this way, as you don’t have to wait until your debts are repaid to begin getting closer to your bigger goals.

You’ll want to consider what you’re saving up for and whether right now is the best time to pursue it. If it’s your first home, other factors like the current market conditions and the cost of a mortgage versus renting come into play as well, and it may make sense to hold off and handle debts right away.

In any case, setting a target savings goal works toward either a debt payoff or savings strategy, so it often makes sense to begin here no matter what your ultimate objective is — and creating a savings account or emergency fund is a sound decision to avoid debt in the future.

One fairly quick and painless way to begin building your savings is to set up a direct deposit account that automatically puts a percentage of your paycheck into a designated account. If you’re able to afford it, even if it’s a small percentage of your paycheck to start, this can be a smart move.

Another way to save that might seem a bit counterintuitive is to spend money on home improvements that will improve your energy efficiency and cut costs down the road. Even if you don’t make full-scale updates, taking a look at your daily habits with respect to heating and cooling (for example, turning your thermostat down a few degrees or keeping the air conditioner off unless absolutely necessary) can slash ongoing bills and make a difference.

Should I pay off student loans or save?

It can be especially tricky to decide whether to prioritize student loan payments or begin saving, but the most important thing to consider is whether you currently have a comfortably padded emergency fund that will provide a safety net in case of an emergency, or even just a solid cushion in place to handle any major upcoming life events like a move, wedding, or higher education. You should also look at the current interest rates on your loans. If they’re pretty low, you can feel more comfortable starting to save and place your focus back on loans at a later time.

Should I use savings to pay off debt?

Again, it depends. While it can be tempting to dip into your savings to pay off debt, it’s recommended that you maintain a certain amount of emergency funds first before using savings towards debts. Otherwise, you might find yourself unprepared and without enough money to cover an unexpected or emergency situation that arises.

If you decide that paying off debt could help you take steps toward financial freedom, there’s an alternative option to traditional solutions, a home equity investment, that may be a fit. You’ll receive cash in exchange for a share of your home’s future value, and unlike loans for paying off debt, there’s no interest or monthly payments to worry about, so you can start eliminating it more quickly.

Are you a homeowner who could use some extra money to begin chipping away at debt or even add to your savings? Take our five-minute quiz to see if a Hometap Investment might be a good fit for you.

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We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

February 19, 2019June 17, 2022

Small Biz, Bad Credit: How to Build Your Business Credit

Small businesses are the heart of the U.S. economy. They make up an incredible 99.9% of all businesses in the country. What they share in common is the blessing—or burden—of a business credit ranking. The health of your score can determine your access to funds. But it’s not the be-all and end-all to your business growth. Read on to understand what business credit is, how to improve your score, and how you can still access cash with a less-than-stellar score.

What Is a Business Credit Score?

Similar to your personal credit score, every business is assessed and ranked. Factors that make up your score include credit utilization ratio (how much credit you have versus how much you’re using), length of credit and payment history, and any outstanding debts, among others. Your score signals to lenders your reliability to repay a loan, otherwise known as your creditworthiness.

Unlike personal credit scores, business rankings use a different scale. While FICO scores range from 300–850, business rankings generally use a zero to 100 range.

Boost Your Business Credit Score

NerdWallet advises the best and perhaps most obvious way to boost your score is to pay your bills on time. Here are some other options to lift your levels.

Pay early. If you’re the type of business that waits until the due date to hit “pay now,” consider breaking this habit. Paying bills early not only positively impacts your credit score but it also signals to your creditors that you’re committed to a good working relationship.
Increase your credit streams. When you’re in not-so-great credit shape, the last thing on your mind is opening a new line of credit. The key, however, is to open that new line of credit—and not use it. Having more credit available increases your attractiveness to credit agencies.
Manage cash flow with your credit card. Business credit cards have come a long way. They offer access to fast financing with low interest rates and flexible grace periods, according to Credit Karma. Business credit cards can also help you manage a positive cash flow. Similar to a personal credit card, charging regular expenses on your business card buys you time before actual cash is due for payment. Some cards will let you carry a balance or delay payment up to 60 days. And, of course, if you’re flush with cash one month, paying your bills early will offset those months when cash is tight.

Fund Your Business—Even With a Low Score

Bad credit doesn’t have to seal your small business fate. Here are three alternative funding sources to fuel your growth.

Borrow from a business credit card. Small businesses are often big spenders, especially when just starting out. That’s one reason why many business credit cards offer borrowing amounts up to $50,000. That may be more than enough to build your business or help you scale. Keep in mind, however, a minimum credit score may be required to qualify.
Explore small business lending platforms. Small business-specific lenders have exploded in recent years. They are a great option for businesses that intend to repay a loan within six to 12 months. Kabbage is one company that dispels with a minimum credit score altogether. Instead, Kabbage requires at least one year in business with a minimum of $50,000 annual revenue and personal guarantees.
Tap into your home equity. Business owners who just happen to be homeowners are in luck. Home equity loans offer an attractive alternative with fast application and flexible terms. Home equity loans are also less dependent on credit score and more dependent on the equity you have in your home.

Another way for near-immediate access to funds is a Hometap Investment, which gives homeowners access to the financial boost their small businesses need without debt, monthly payments, or interest.

Grow at Your Own Pace

Every business experiences financial highs and lows. Your immediate cash need may not match up with a lengthy loan process, however. And, with low credit scores, getting that loan in the first place may be difficult if not impossible. But, with the right strategy in place, you can increase your business credit score, opening the door to more financial options for your small business.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

January 7, 2019June 17, 2022

How Much Can You Save with an Improved Credit Score?

How much could you save on your mortgage with an improved credit score? A lot, it turns out.

According to BankRate, your credit score is one of the top factors that lenders consider when setting your interest rate. A solid score indicates to lenders that you present less of a financial risk and they reward that track record with generous loan terms. Credit.com reveals that loan officers also compare credit score and the loan-to-value ratio to determine interest rate adjustments.

It’s no secret that the closer your score is to 800, the odds of home loan approval go up and interest rates go down. But just how much of a score increase do you really need to see a significant difference?

Small Changes, Big Difference

On the vast scale of 800, a handful of points here or there may not seem like much. As such, most of us are focused on those big, hundred-point jumps that get us out of the garden-level apartment (500) and into the higher-rent districts (600, 700) or even the penthouse (800).

But it’s crucial to remember that the lending industry measures in 20-point increments and adjusts rates accordingly. This means a drop from 780 to 760 will likely result in higher costs that grow even higher for every level you go down. This system, as NerdWallet explains, is known as loan-level pricing. As 20, 40, 60 points start to rack up, you’ll find yourself talking about real money very quickly.

If your score drops by 100 points or more, the landscape can change completely. This is particularly true over the long view of 30 years when you may end up owing tens of thousands more in loan payments.

The following MyFico Calculator Results demonstrate how stark these differences can be:

In short, your credit score is money. The better it is, the more you’ll have. It, therefore, pays off in the long run to be vigilant—handle debt responsibly, don’t spend beyond your means, and do your best to pay all bills on time and in full.

Whether you need a loan to consolidate debt or pay down bills, Hometap can be a smart option for homeowners looking to cash in on their equity without monthly payments or interest.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

September 4, 2018June 22, 2022

Can You Access Home Equity with Bad Credit?

So many Americans struggle with debt. A survey conducted by Hometap in 2019 of nearly 700 U.S. homeowners showed that while many homeowners are house-rich, they’re also cash-poor, with little day-to-day liquidity. Survey takers indicated if they did have debt-free access to their home’s equity, such as a home equity advance, they’d use it to pay off credit card debt, medical bills, or even help friends and family pay off debt.

Many homeowners responded that they haven’t even considered available options to tap into their home equity. In short, they feel stuck because available financial options only seem to add more debt and interest to the homeowner’s monthly balance sheets. There’s also the issue of qualification and approval, as it’s hard to meet the requirements of many financing options, like a home equity loan, with bad credit.

The good news? This “house rich, cash poor” status quo doesn’t have to continue. Here, you’ll learn about the importance of credit, and how you can still access your home equity if yours is less than perfect.

What Is Credit and Why Does It Matter to Lenders?

Credit refers to the ability to to borrow money, obtain products, or use services while agreeing to provide payment at a later time. The term “credit score” refers to a three-digit number that indicates the level of trustworthiness you’ve demonstrated in the past through experience with creditors, lenders — basically, any company who has given you money. This information is gathered in a credit report through a variety of different sources, including the amount of credit cards you have, along with any outstanding balances on them, your history of loans and repayment behavior, timeliness of monthly bill payment, and significant problems like bankruptcies and foreclosures.

Simply put, lenders want to be as sure as possible that you’ll pay back any money they give to you, and checking your credit is an easy and relatively comprehensive method to gather this information.

If you’re carrying a lot of debt and are worried about your credit, you may think that your home equity is inaccessible. But with a new, non-debt financing option available to a variety of homeowners, you may be surprised at what you can access. Here are a few ways you can tap into your home equity to start using that liquidity to reach your financial goals. ‍

See the chart below for a quick overview of the options that might be available to you based on your credit score, then read on for more in-depth descriptions of each.

Cash-Out Refinance

A cash-out refinance is when you, the homeowner, take out a new, larger mortgage, pay off your current mortgage, and use the excess to fund your needs. This can be done through your existing lender or a new lender and is not considered a second mortgage. According to Bankrate, you typically need at least 20% equity in your property to qualify, and you’ll pay interest on the life of the loan (usually 15 or 30 years). Because of the long duration of a cash-out refi (as they’re commonly known), you’ll want to ensure the interest rate and your expected repayment plan fit into your monthly budget. Homeowners are typically required to have a credit score minimum of 620 to be approved for a cash-out refinance.

Home Equity Loan or Home Equity Line of Credit

Would you qualify for a home equity loan or a home equity line of credit (HELOC) with bad credit? First, you need to know the difference between these two home equity options.

A home equity loan allows you to borrow money using the equity in your home as collateral. A HELOC, on the other hand, works more like a credit card, in the sense that you can draw funds on an as-needed basis. With both home equity loans and HELOCs, your credit score and home equity value will play a part in how much you’ll be able to borrow and your interest rate.

The minimum credit score needed for a home equity loan and a HELOC are usually at least 620, though it depends on the lender. But even if you don’t meet this minimum credit score for a home equity loan or HELOC, you shouldn’t be discouraged. Julia Ingall with Investopedia says homeowners with bad credit should comparison shop for lenders open to working with borrowers like them. Additionally, Ingall notes that working with a mortgage broker can help you “evaluate your choices and guide you to reputable lenders.”

Home Equity Advance

A home equity advance offers homeowners the ability to tap into the future value of their home in order to access their equity now. A home equity investment is a smart way to do just that.

At Hometap, homeowners can receive home equity investments so that they can use some of the equity they’ve accumulated in their home to accomplish other financial goals . The homeowner gets cash without having to sell or take out a loan; and there is no interest and no monthly payment. . Another positive aspect of a Hometap Investment is that hundreds of factors are taken into consideration to approve an applicant — credit score isn’t the defining criterion.

Sell Your Home

For many, it’s a last resort, but homeowners with poor credit can access their home’s equity by selling it outright. Of course, this decision is predicated upon finding a more affordable house for your next home, including favorable mortgage terms for your new place, and ensuring you don’t spend too much on real estate fees or moving costs. You also may be able to improve your credit score before you reach this point. Monitoring your credit score to keep an eye out for potential disputes and discrepancies, maintaining a balance well below your credit limit, and keeping old accounts open are all good places to start.

If you’re feeling house-rich and cash-poor like so many Americans, you now have a host of options to access your home equity. As with any major financing decision, consult with a trusted financial professional to determine your best course of action, and get moving toward your goals.

See if you prequalify for a Hometap investment in less than 30 seconds.

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