The Different Types of Loans and How They Affect Your Credit

Most people believe that, when it comes to debt and credit, all debt is created equal. They think that mortgage debt is categorized in the same way as credit card debt and that, the reason mortgages are harder to get than credit cards is because of the amount of money being loaned is larger than that of a typical credit card. This is not true.

There are several different types of credit and loans that a person can apply for and obtain. Each of those different types of credit is weighed differently.

Installment Accounts

Installment accounts are sometimes called “closed end” accounts. These are loans or lines of credit that come with a definite “pay in full by X” date. The most common types of these loans are mortgages, car loans and student loans. These are weighed heavily on your credit score and are scrutinized by banks and other creditors and lenders because they tend to be larger. The larger the loan the more your debt to income ratio comes into play. How you perform with one loan could very well determine whether or not you are approved for the same type of loan in the future.

Revolving Accounts

Revolving accounts are often called “open ended” accounts. These are credit cards, store lines of credit, etc. These are debts that can be carried, well, forever if a person manages them well. Unlike a mortgage which is for a set amount and that must be paid in full, with every payment working to bring the loan amount to zero, a credit card is more flexible. A line of credit can be increased or decreased and every payment made goes (after interest payments) toward restoring the amount of credit available to the credit holder.

These are also very closely scrutinized by banks, lenders and creditors. In fact, the credit bureaus and other lenders/creditors often give these types of loans and lines of credit more weight than the larger installment plans like mortgages and student loans.

Why?

It’s All About Collateral

When you take out an installment loan, it is usually to get something incredibly valuable like a home or a car (an education is the exception that proves this rule). If a person fails to pay these loans properly and on time, they risk losing that possession. Defaulting on a mortgage will result in foreclosure and having to find a new home. Defaulting on an automobile loan will result in having the car repossessed.  Because of this, most borrowers make installment loans their highest priorities. They almost always pay these properly because they don’t want to wind up homeless or without a means of transportation.

Revolving accounts, on the other hand, are the first to be put off in favor of installment plans, food, and other expenses. While people’s intentions toward them might be good, they rarely fly into a panic at the idea of being a few days late on a payment.

For many banks and creditors, it is how people handle these “optional” payments that tells them what they need to know. If a person has a perfect record on their mortgage but has a dozen credit cards in collections, they are unlikely to be approved for future loans and their credit scores will likely be low. They may be so low that getting even small unsecured lines of credit become impossible.

This is when, if you are in financial trouble you might be tempted to turn to two other types of loans. One of these will have an impact on your credit score, the other likely will not.

PayDay Loans

PayDay loans are predatory loans. They are short term loans that come with outrageously high fees and terrible interest rates. They are designed to keep borrowers dependent on them for survival. For example, taking out a $50 PayDay loan will usually cost you at least $75. $50 goes to pay back the loan and the other $25 is for the fee you pay for the “privilege” of short term borrowing. If you fail to pay the loan back on time, the lender will likely tack on another $25-$50 or even more on top of what you already owe. So, even if you are just a day late, you could wind up paying $125 to borrow $50. Many states have banned PayDay loan companies from operating within their borders because of the lenders’ predatory practices.

Consolidation Loans

Consolidation loans, on the other hand, are usually viewed the same as any other installation agreement…if you apply for and use them privately. A consolidation loan, when borrowed privately, is usually borrowed as a private loan. Lenders do not care what you used it for, as long as you pay on it responsibly (though they will be able to see how your debt shifts from one account to another).

If you go through a consolidation service, however, this may have an affect on your credit score. This is because credit consolidation companies usually work simply as “middle men.” You pay them one lump sum and then they distribute that payment across your accounts.

A Quick Word About Credit Repair

If you have a lot of loans or discharged debts or credit accounts on your report, that can also be a huge ding against your score. While it is true that very few things stay on your credit history and report forever (like student loans), it is also true that you not have to wait for them to fall off naturally. Some people work with their previous creditors and lenders to have closed accounts removed from their records. According to a video from the Creditrepair.com YouTube Channel, some people have great luck hiring a credit repair service to help them get rid of mistakes and other bad data–like an installation agreement that has been classified as a revolving account, which can help raise their credit scores and improve their credit histories.

Understanding the difference between the different types of loans and credit is a big part of solving your credit score puzzle. Use the information contained here to help you get started!

Low Income Living Requires Planning

If you live on a low income and expect to continue to pay your bills, feed your family and make it through unexpected emergencies without going into debilitating debt, you absolutely need a plan. This plan will need to explore the support organizations near you as well as teach yourself how to maximize your budget. Without good personal finance awareness and a plan you may find yourself in stressful financially situation – where one unexpected expense such as car repairs can send you over the edge.

Maximize Income, Lower Expenses

The first thing you need to do is maximize your source of incomes and look for ways to lower your monthly expenses. In order to increase your income, you may need to look at taking a second job or developing a hobby that can help add some money to your income. If those are not viable options you can look at government or non-profit organizations grants, loans and entitlements. Ensure that you are receiving income from all available sources. First look at your entitlements from disability, unemployment income, old age or social security payments and ensure you are receiving the maximum benefits that you are allowed.

Next, look to local organizations that help out low income families or individuals in different ways. This could include helping you with monthly heating bills in the winter, providing a special grant for fruits and meats on a monthly basis or other essential item loans or grants for daily living necessities. These can all lower your monthly expenses helping you budget for a better quality of living. Many states have heating aid programs for low income families during winter months; use it to your advantage. Look at other ways to lower your expenses such as taking mass transit instead of paying for a car. Local food and furniture banks can help lower expenses significantly and avoid those large one time payments that throw any budgeting out the window.

Plan and Budget

The problem with low incomes is there is just not enough money to go around. You will need to expertly plan and budget every dollar you have to enable you to make it through each month without giving into the temptation of getting a pay day loan. Planning and budgeting combined with the advice above will be one of the only ways to avoid the dangerous cycle of getting short term loans that only harm your financial position.

If you look at all your money coming in and all that goes out in a month that is budgeting. When you have more going out than coming in, you have a problem. This is when increasing your income, lowering expenses and budgeting properly will save you from these nefarious short term loans. The interest rates, deferral and rollover fees are simply too much to even consider them a viable option. Instead focus on planning for every dollar made to be spent wisely. Also, plan for your impulses; this allows you to treat yourself thus ensuring that you do not over indulge and spend money unnecessarily.

Through careful planning you can make it on a low income if you also seek the help of programs meant to aid those in your position.

Start 2015 Smart and Financially Balanced

So, it’s the New Year. A month and a half in, and you’re probably still mourning the inevitable chunk that holiday shopping bit out of your budget. You planned well but if it puts a smile on Grandma’s face to get her that beautiful expensive scarf she had her eye on, you’re going to go the extra mile, dig into your emptying pockets and do it. We all would! And now that Valentine’s Day has come and gone, the realization that you have to save more throughout the rest of the year might be starting to kick in. (And if you really messed up on Valentine’s Day- you might already be in the market for another gift).

You’ve all read about the “disposition effect” before. As humans we don’t like to admit when we’ve made a mistake and, oh say, overspent because it makes us sad to acknowledge that. But rest assured that while admitting there is a problem is the first step, not beating yourself up is the second. You don’t have to deprive yourself or the ones you love from the necessities or treats. We just have to be smart about creating a financial balance and clever in how we pick to do our special shopping.

For example: have you been hounding your hubby to get someone to fix the patio deck? Why not take advantage of the array of coupons that Home Depot provides, get yourself the materials at discounted prices and make a date of it? Working with your hands, together, will be a great and economical way to bond. And hey, if anything goes hilariously wrong you’ll have a great story for the grandkids. Just make sure to use safety equipment (which you can also get at Home Depot) and save the champagne toast for after all the carpentry!

The same principle applies to our label loving Grandma. Next time she spots something fancy she loves, you don’t have to balk at getting it for her or agonize on the financial hit you’ll take to do it. Just drop her off at a talkie and run on over to Nordstrom or Sears. It’s at retailers like these that a smart shopper can take the most advantage of the deals they offer to still get top quality at a fraction of the cost. Not only will you be able to bring that much coveted smile to Grandma’s face, you’ll make 2015 the year of savings for you and those you love.

How to Choose a Beneficiary for Life Insurance

Taking out life insurance is an important financial matter everyone should attain to. However, what’s next on the agenda is selecting the appropriate beneficiary for your policy. Here are four tips on choosing the right beneficiary for your insurance policy.

Determine What the Money Should Be Used For

A major part in deciding who your beneficiary is, is to determine what the money should be used for. Will this be used to:

  • Take care of your children?
  • Pay off your medical expenses?
  • Pay off other debts such as your mortgage or auto loan?
  • Take care of your spouse?
  • Pay off an old business debt?

Consider the person best suited to take care of this matter. You know if you have medical expenses to finalize that your beneficiary should not be someone who feels the government can cover it.

Be Careful if the Beneficiary Receives Government Benefits

Next, consider if this person currently receives any government benefits. Benefits such as disability or social security continue only if a person’s income remains at a certain level. Your life insurance death benefit would be considered income, and put their income over the top. They could lose their government benefits at that time.

Know That You Have Options

Also, know that you have options before selecting just whom you think is best. You determine while you are alive whom you want to receive the death benefit. Otherwise, the government may make up your mind for you.

  • You can name multiple people to be your beneficiary
  • You can set up a trust of which the trustee will      administer the benefits
  • You can donate it to a charity
  • Your estate can inherit it all

Also, remember, that nothing in life is guaranteed. It’s always best to set up a primary and secondary beneficiary in case something happens to your first choice.

Name a Guardian to Distribute the Money on Your Childs Behalf

Finally, if you have children, do know that leaving your underage child as the beneficiary, your child will not receive the money until they are of legal age. Their legal guardian will have the say, and the court will appoint one if one is not set up already. So this person would make the necessary decisions such as paying for their education and if they continue the quality of life you provided.

Use the above four tips to carefully designate the best beneficiary(s) for you. This will impact exactly how you want your wishes to be carried out.