Author: Dan Francom

Credit Trends of Each Generation

Credit Trends

The effect of generational gaps is far more significant than mere music taste or avocado preferences. The American economic landscape is in a constant state of flux, and as a result, the financial divide between individuals and their parents, or even their grandparents, is growing.

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Retail Store Credit Cards and How They Impact Your Credit

retail credit cards and credit

We have all been there: you get up to the register at a store in your local mall, purchase in hand, and the associate begins ringing things up, but then they pause.

“Do you want to put this on your XYZ Store card?”

You automatically tell them you don’t have an XYZ card, even though you know what’s coming next:

“Would you like to apply? Approval takes 20 seconds, and you can get 20 percent off of today’s purchase.”

Now you’re presented with a choice. At first glance, it seems a pretty simple one to make. After all, you are buying something anyway, and now you can get it for less. But, slow down a moment and consider what you are actually doing.

You are applying for a brand new credit card and have not even had a chance to consider what impact it will have on your credit score, whether or not it has a competitive interest rate, or if there are any sort of hidden fees… In short, you are being asked to buy more money on impulse.

Let us take some time now to consider all the angles of retail store credit cards so you can make a wise, educated decision the next time this situation presents itself.

What are retail store credit cards, and how are they different from “normal” credit cards?

Retail store credit cards are the cards nearly every retail store makes available to customers. They function like any other credit card, but can only be used for purchases at that store or (in some cases) on the store’s website. As such, retail store credit cards are no different from any other type of credit card in how they are used or what impact they can have on your credit score.

Every application and “20-second approval” requires a hard inquiry that will drop your credit score a little bit. If you apply for several store credit cards over a short period of time, the overall impact could be significant.

It also means that every retail store credit account in your name increases your total available credit, and every balance you maintain on those cards counts toward your total debt. So, when the bureaus are figuring your credit score (or lenders are considering your loan application) retail credit cards count into the important credit utilization ratio.

Likewise, your payment history and timeliness on every retail store credit account — even that little $300 limit card for the hole-in-the-wall shoe shop in the mall — counts either positively or negatively toward your credit score and history.

Why do retail store credit cards exist?

You may wonder, since I can use my “normal” Visa or MasterCard at all of these stores, why do retail store credit cards even exist?

The answer is simple: retail store credit cards encourage you to shop more often and/or spend more at the issuing store. At the same time, they offer the store contact and demographic information about you and your buying habits they might otherwise not be able to collect, which aids them in their marketing efforts.

That is not to say these cards cannot benefit the consumer in some way as well, but it is important to understand that benefits relating to the customer are not the main reason behind a store’s provision of a store-specific credit card.

What are the advantages of obtaining a retail store credit card?

As with any financial decision, there are pros and cons to consider regarding opening a retail store credit account. Here are some advantages these cards can offer:

  • Sign-up discounts – Nearly every retail store credit card includes some sort of instant discount or bonus for signing up, often applicable to the purchase you’re making right now. Everything else being equal, this is essentially free money, so it can be a positive thing.
  • Ongoing discounts – Many store cards also offer additional discounts related to using the card. These may be related to individual products, seasonal specials, or may be a flat discount off every purchase made using the card.
  • Special offers or perks – Some retail store credit cards offer additional perks as well, such as exclusive offers reserved just for cardmembers, or accumulation of reward points for use toward future purchases. In rare cases, these perks may even be made available toward purchases or rewards outside the store itself.
  • Spending flexibility – Having a credit card available for use at a given store can allow greater flexibility to make purchases when the price is best or when you most need the item, rather than waiting until you have the cash handy.
  • Interest-free financing – In many cases, store credit cards will offer interest-free (0%) financing for a limited time and/or toward purchases over a certain dollar amount.
  • Establishes a credit history – Retail store credit cards are much easier to qualify for if you have little or no credit history, or if you’re working on fixing your credit after a bankruptcy or similar situation. Credit consultant Julie Marie McDonough, author of “How to Make Your Credit Score Soar,” calls retail cards the “training wheels” of credit.
  • Builds a credit history – Used wisely over time, store credit cards can boost your credit score and build a positive credit history just like any other credit card or loan. However, since they are easier to qualify for, they may be the best or only choice for some consumers in need of credit repair.

What are the disadvantages of opening a store credit card account?

At the same time, there are also disadvantages to be considered as well when it comes to obtaining a retail store credit card:

  • Low credit limit – In many cases, retail store credit cards will be approved with very low credit limits, sometimes as little as $200 or $300. Factoring in that initial purchase you’re making, such a small limit could result in negatively impacting your utilization ratio (which should be kept under 30 percent at all times.)
  • High interest rates – The average APR on the credit cards from America’s largest retailers was 99 percent in 2017, which is significantly higher than the national average for credit cards during the same period (around 16.7 percent). As noted by Consumer Reports, if you fail to pay your monthly balance in full, “the interest you’ll be charged could wipe out the discount you got for signing up for the card.”
  • Expensive fees – The more accounts you maintain, the easier it is to miss a due date, even if the money is there. While they are common with most credit accounts, late fees on store cards are particularly steep. Target, for example, charges a $27 late payment fee the first time you pay late, and then increases the late fee to $38 for each month you miss payments up to six months. This is a direct result of the lender’s easier and faster approval process. They are taking on extra risk by approving less reliable debtors, so they make up for that risk with higher late payment fees.
  • Non-transparent rules – The standard sales pitch described at the outset lends itself to pressuring the consumer into applying without providing much, if any, of the fine print. Unfortunately, some retail store credit accounts include rules and limitations in the fine print that would have likely resulted in a different decision if the consumer had known.

Next time the associate asks you to apply for a store credit card, should you do it?

Of course, the answer is, “it depends.” The two most important factors in the decision are your own spending habits and the specific details of the account you’re considering.

If you are already a regular customer at the store and make purchases there regularly, then there’s a good chance the discounts and perks that come with a store credit card could save you money over time. Likewise, if you haven’t applied for credit recently, and have no intention of doing so again in the near future, the tiny impact on your score from applying for one account shouldn’t dissuade you.

On the other hand, if having that card in your pocket is likely to cause you to overspend or buy things you otherwise would not have considered, just say “no!” If you’re planning to apply for an important loan or to request a credit limit increase on an existing card, there is no sense in jeopardizing that approval for the sake of a 10 percent discount on your current purchase.

As with any sort of credit, it’s vital to remember that credit cards can and should be a powerful tool to help improve your financial situation. But, that’s not why they’re offered to you. It’s up to every consumer to make the best decision about whether or not to apply for and use a given credit card to their own benefit.

For more advice, check out these past articles on wise use of credit and how to boost your credit score.

 

 

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Demystifying 11 Complex Credit Terms

demystifying credit terms

Credit can be complex and confusing. When you’re applying for a loan or credit card, the process can be intimidating — especially when unfamiliar terms start getting thrown around. While some terms are self-explanatory, others can be a bit more ambiguous.

Getting familiar with some of the terms you will encounter in the loan or credit card application process can be beneficial in getting the best loan terms and ensuring you are entering into credit agreements that are favorable for you. Depending on your credit score, of course, you will be eligible for more favorable loan terms and lower interest rates.

Let’s take a look at 11 common credit terms you’re likely to encounter in the process of a credit application scenario.

  1. Interest rate

    An interest rate is a percentage of the principal balance your lending institution charges you for borrowing the money. Many factors go into determining a borrower’s interest rate, including credit score, the risk of default and inflation, as well as the length of the loan.

  2. Annual Percentage Rate (APR)

    APR is an annual rate that accounts for the interest and other fees paid on a loan or credit card balance. This percentage varies based on the bank or lending institution.

  3. Billing cycle 

    A billing cycle is essentially the number of days between statements on a credit card or loan account. The length of this cycle is typically between 20 and 45 days and is at the discretion of the credit or loan provider. The credit card company or loan institution provides the borrower with a statement once the billing cycle ends. Some lenders will allow the consumer to request a different billing cycle than what is offered.

  4. Minimum amount/payment due 

    Minimum amount due is the monthly payment a borrower must pay to keep their account current and in good standing, avoiding late fees. The amount of this payment can be fixed or variable based on the outstanding balance on the account. The former is more common on installment loans, and the latter is more common on revolving credit accounts. It’s important to remember, especially with credit cards, that making only the minimum payment won’t yield fast results in paying off a balance, and the longer you carry any balance on a card, the more interest you’ll be paying.

  5. Payoff amount

    A payoff amount is the total dollar amount that has to be paid to satisfy a debt. Payoff amounts are often more than the principal balance because they include any unpaid interest, late charges or fees. If you are ready to pay off a loan, it’s important to contact the lender to get the correct payoff amount, because interest compounds daily, so that figure is always changing.

  6. Mortgage insurance

    Mortgage insurance is completely separate from the insurance borrowers are required to carry on a home in order to secure a loan against it. Mortgage insurance is designed specifically to protect the lender in the event that a borrower defaults on the loan. Mortgage insurance is required in all states for borrowers who have less than a 20-percent equity stake in their home.

  7. Down payment

    Down payments are an initial one-time cash payment that is put towards a loan at the beginning of the application process. For mortgages and auto loans, a down payment is typically a percentage of the full loan amount. While auto loans don’t always require a down payment, mortgages nearly always do. The smallest down payment options are attached to FHA and VA loans, which require between 3 percent and 5 percent down, with special programs available to make down payments as low as 1 percent available to qualified buyers. Conventional loans require 20 percent down in order to avoid mortgage insurance.

  8. Principal balance

    The principal balance is the unpaid portion of a loan or credit account excluding interest and fees. Your loan agreement should clearly define the amount of your monthly payment that goes toward principal and what goes toward interest and other fees.

  9. Refinance

    Refinancing allows you to move debt to a new loan and/or change the terms of an existing loan. For example, many consumers refinance their mortgage loans, using their equity to pay off other loans such as credit cards, and/or to secure a lower interest rate or shorten the term of the new loan. It’s important to calculate the associated fees to ensure that the overall benefit warrants refinancing. In addition to mortgages, consumers can often yield benefits from refinancing student loans and car loans. This is often especially beneficial after credit repair efforts have raised a previously low credit score.

  10. Cosigner

    A cosigner is someone other than the primary borrower who assumes risk for a loan along with the primary borrower. Adding a cosigner to a loan is a way to increase the odds of approval, particularly if the primary borrower doesn’t have substantial income or a high enough credit score to qualify on his or her own. Cosigners are equally responsible for repaying the debt on which they’ve signed and are therefore putting their own credit score at risk if the primary borrower makes late payments or defaults on the loan.

  11. Collateral

    Collateral is the asset or property used to secure loan repayment. Collateral value must be equal to or greater than the loan amount. The asset or property is then at risk of seizure (or repossession in the case of a mortgage or auto loan) by the lender in the event that the borrower defaults on payments.

Understanding these credit terms can remove some of the anxiety associated with the credit application process and help you manage your credit more effectively. If you’re struggling to qualify for any type of loan and wondering how to fix your credit you may benefit from working with a credit repair professional. Lexington Law offers a free credit report summary and consultation. Contact us today to get started.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

 

 

 

 

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Will a Balance Transfer Affect my Credit?

balance transfer

Millions of Americans are currently carrying a collective credit card debt of roughly $905 billion. With the average interest rate of credit cards continuing to hover around 16 percent, it’s safe to assume that many of us would love the chance to pay off some of that debt at a lower interest rate.

Some of those same people were likely thrilled to learn about balance transfers, or transferring the debt from one credit card to another credit card. This is done by opening a new credit card and informing the issuers of that card that you intend to transfer your previous balance. Usually these cards are attractive to people because they promise a lower interest rate for a certain period of time. However, be warned: transferring your balance is not the same as paying off your card. You are still liable for the entire balance, regardless of which credit card you are using.

While this arrangement might seem like a no-brainer, there are several factors to consider before applying for a balance transfer card.

Current credit score

Your credit score has an impact on every financial aspect of your life and could even affect your ability to gain employment as more and more employers utilize credit checks to determine how reliable you are as a person.

If you have a decent credit score, and you apply for a new credit card, you’ll likely get all the credit you need, or at least most of it. For example, if you have $8,000 of debt to transfer, and you have good credit, you will likely get approved for an $8,000 limit provided your debt-to-income ratio isn’t too high.

However, if you’re unable to get approved for the total amount you need, you may be doubling your problems by only transferring a portion of your credit card debt. While you might end up paying less in fees and interest on the original card, having two credit card payments where you used to have just one can be stressful for some.

Debt-to-income ratio

With that in mind, another factor that comes into play when applying for a credit card is your income compared with how much debt you already have. Most lenders or credit card companies want you to spend less than 40% of your monthly income on debt repayment, including your mortgage, car loan, any personal loans you may have, and credit card debt. (In reality, this number should be much lower in order to really stay on track with your spending, saving, and credit repair or maintenance.)

One of the most important things to consider is whether or not you can afford to make the monthly payments necessary to pay off your balance before the end of the introductory period. Not doing so can wreak havoc on your finances.

Not paying off your balance within the introductory period

If you do wind up being approved for the amount you need, you’ll want to consider the introductory period. Whether the initial interest rate is zero percent or as much as five percent, it’s wise to calculate how much you can afford to pay monthly, and if you can accomplish paying off this debt within the allotted time period.

If you can’t, things can get complicated and expensive very quickly. While credit card agreements can vary, it’s important to read them thoroughly. Many balance transfers restrict balance payment to the introductory period, so you may be liable for interest for the entire amount of the transfer, and not just the remaining balance.

Fees

Nothing comes for free, and that’s especially true of credit cards. While a low interest rate may draw you in initially, the fees associated could be the difference between paying off your credit card on time, or getting further into debt. When doing research on the best balance transfer card for you, always check the fees and ensure you can afford them. Be on the lookout for annual fees, introductory fees, balances transfer fees, and more. These can add up to hundreds of dollars, and may not be worth paying in the long run, especially if you’re only transferring a small balance (under $1,000).

It would be a shame not to be able to pay off your balance transfer on time because of fees, resulting in a chargeback of interest. Reading the fine print on any credit card agreement can save you thousands.

When not to transfer your balance

Balances transfers are designed for those with good credit who simply wish to pay off their debts with a lower interest rates. Using a balance transfer to help you avoid sinking into worse debt isn’t worth it, according to experts. The best thing to do in this type of situation is to work hard to pay down your existing debt as much as possible before exploring the idea of opening new lines of credit.

Additionally, if you have poor credit, you may not qualify for a balance transfer to begin with. In these cases, a personal loan or debt consolidation loan might be a better choice for your financial situation and lifestyle.

Things to remember

At the end of the day, if you do sign up for a balance transfer, you’ll want to do the following first:

  • Calculate how much you can afford to pay monthly
  • Check your credit
  • Research the card that best suits your needs
  • Pay it off as quickly as possible

A balance transfer does tend to have an affect on your credit score, but it all depends heavily on your current credit situation. To find out if a balance transfer could benefit your credit, contact Lexington Law at 844-259-3482.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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5 Reasons to Say “No!” to Opening a Store Credit Card This Year

store credit card

The holidays are a distant memory and now that the bills have mounted, we find ourselves in need of a few things for that we’ve been neglecting. Maybe you can relate. Perhaps the new year brought with it a new job or some necessary home repairs, and you find yourself in need of a wardrobe makeover or some supplies from your neighborhood home-improvement store. Thanks to the holidays, you may be tapped out and tempted to open a department store or Home Depot card to make these necessary purchases.

To make this an even more tempting option, the cashier says, “Would you like to open up a store credit card today? You’ll get 15 percent off this purchase and a 10 percent discount every time you use it!” With a big smile and fingers hovering over the keyboard she says, “It’ll only take two minutes to get you approved and you can be on your way.”

What do you do?

Based on the figures, many people in this situation will say “yes.” The Nilson Report (an annually published report on the world’s top card issuers) confirms that private store credit cards made up over 7 percent of the total annual credit card debt carried in the United States. While 7 percent may sound insignificant, it accounted for over $184 billion in 2014 and was the third consecutive rise in store credit card debt in as many years.

A survey conducted by a popular credit card ranking service found that 9 of the top 20 most-used credit cards in the nation are store credit cards from retailers such as Sears, Macy’s, JCPenney, Kohl’s, and Walmart.

Is there really anything wrong with taking advantage of store credit cards, especially considering the discounts and perks they generally offer to sign up? Despite the appeal of these offers, there are at least five good reasons to steer clear of opening additional store credit card accounts this year:

Those discounts are only half the story

It is important to remember that retail stores are not in business to lose money. If they offer you a discount, it’s because they ran the numbers and know they can afford to do so, meaning you very well may be paying too much for your purchases to begin with.

To test this theory, before you get to the checkout line, take a few minutes to search online for the products you’re considering buying and see if they’re available elsewhere for less. In many cases, you can get the same exact item for a lower price, even factoring in shipping.

But, surely if they’re giving you 15 percent just for signing up, it’s worth it, right?

The discounts and perks are covered by the interest rate

Beyond the simple math, retail stores have also done their research and understand human nature and spending habits.

They know most Americans go overboard during the holidays, leaving them strapped in the early months of the new year and continuing to spend beyond their means. They also know it is highly unlikely that most of their customers will be able to pay off the balances they accrue within the first few months. Because of this, many of these store credit cards come with enticing introductory offers, including “zero interest for 3 months” or “no payments until…”

If you read the fine print, though, you’ll see that these too-good-to-be-true offers carry a dangerous caveat: If you don’t pay off the entire balance during the introductory period specified, ALL the interest you would have accrued on your full balance is instantly added to your debt.

Which brings us to a third serious consideration:

The interest rates are usually higher

In 2017, the average annual percentage rate (APR) for all credit cards issued in the United States hit an all-time high of 16.15 percent. In comparison, however, the average store credit card APR is 24.99 percent!

Based on a 24.99 percent APR, you would pay $125 for every $100 you spend on that card over the period of a year, causing the initial discount and other perks to lose their luster. It only takes a few months of minimum or no payments before your initial discount is completely erased and your higher-than-average interest continues to pile up.

That low credit limit hurts your credit score

Another danger that comes with store credit cards is the negative impact they can have on your credit score.

These instant-approval cards often only offer a few hundred dollars in available credit to begin with. Because of the low credit limit, your very first purchase is likely to use a significant portion of your available credit on that account.

Your credit utilization ratio is one of the factors used in determining your credit score, and the higher that ratio is, the more it tends to negatively impact your score. To avoid negative effects, you should be striving for a credit utilization ratio under 30 percent. However, if your Big Box Store Credit Card only has a $300 credit limit, that first purchase of $185 immediately puts you at a ratio of 62 percent.

By itself, one low-limit card with a high utilization ratio probably isn’t going to sink your credit. But, if you’ve been lured into signing up for this one, how many others do you already have in your wallet? It is important to know how much of your overall credit is made up of low limits, elevated interest rates, and high utilization ratios.

Store credit cards are designed to encourage overspending

Finally, let’s call these store credit cards out for what they really are: clever means used by retail stores to encourage their customers to overspend.

Even looking beyond the introductory promotions, the low credit limits and high interest rates, consider this: why are we hit with the credit card offer at the worst possible time for us to make a rational decision — either during or immediately after the holidays? During these times we may be mentally struggling with pulling out the cash or debit card to handle our purchase and that’s when we’re offered a shiny new piece of plastic that can make this entire situation faster, easier, and 100 percent pain free.

There’s a lot of psychology involved in how that’s set up. And, not surprisingly, if you’ve ever worked the cash register at one of these retailers, you know how hard they push the credit card offers. In many cases, employees can lose their jobs if they don’t rack up a high enough number of new accounts per week or month. That kind of pressure isn’t focused on your best interests or your long term financial health.

Credit should be a tool for strategic spending that’s part of a planned budget. Or, if absolutely necessary and with clear limitations, as a safety net when an emergency arises. Credit cards should be chosen wisely and should never be a vehicle for impulse purchases or a thoughtless add-on obtained for convenience.

As you’re weighing the need for the card, be aware of the potential harm store credit cards can do, and remember these five reasons why you should say, “no!”

The best way to understand how different types of accounts impact your credit score is to regularly review your credit report. If you’d like a free credit report summary and credit consultation, contact a credit repair company today.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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