Author: Elyssa Carlos

Your credit score can impact your entire financial future. It can determine where you live and what you drive. It can control your access to things like banking accounts, credit cards, loans, insurance, and sometimes even jobs. Having a decent credit score is a necessity in the U.S. but how is credit score calculated? What specific actions need to be taken to improve a credit score? Here’s a brief overview of how a credit score is calculated. 

What Is a Credit Score? 

A credit score is essentially a picture of your credit behavior based on your credit history and reports. There are several credit bureaus that use different scoring methods, but generally your score is between 300 and 850. Typically, the credit score ranges are: 

• 300-579: Poor credit score 
• 580-669: Fair credit score 
• 670-739: Good credit score 
• 740-799: Very good credit score 
• 800-850: Excellent credit score 

A lower score can result in unfavorable loan terms or ineligibility for a loan altogether, while a higher score demonstrates an ability to pay back a loan on time. 

What Factors Impact My Credit Score? 

There are five key factors that affect your credit score: payment history, account balances, length of credit history, types of credit, and new credit accounts.  

Payment History 

Your payment history has the most weight on your credit score, representing 35% of your score. When credit bureaus look at your payment history, they take note of your payments to credit cards, lines of credit, auto loans, and more. They will also look at how many past due payments you have, as well as if you have any delinquencies, like bankruptcies, collections, and liens.  

Account Balances 

How much of your credit is being used also has a high impact on your credit score. In fact, it makes up 30% of your score. If you have high balances on your accounts to the point where you are nearly maxed out, your credit score is negatively impacted. Credit bureaus look at the percentage of debt you have on each line of credit, or your utilization rate. Most credit bureaus recommend that you do not use more than 30% of your credit line.  

Length of Credit History 

The length of your credit history makes up 15% of your credit score. This portion of your score paints a picture of how long you’ve had each line of credit on your report. Those who are just starting to build their credit are negatively impacted by this factor, while those who have established credit will benefit from it.  

Types of Credit 

It’s not all about how many credit lines you have, but also what types you have. This factor makes up 10% of your score and you will benefit from it if you have several types of credit, like auto loans, credit cards, mortgages, and so on. This factor helps creditors determine if you can manage a wide range of credit accounts. 

New Credit Accounts 

Finally, creditors want to see if you frequently open new accounts, making you a riskier borrower. This factor makes up the last 10% of your credit score and is determined by how many new inquiries you have on your credit report, even if you did not go through with the borrowing.  

How Can I Improve My Credit Score? 

To improve your score, the most effective thing you can do is to make your monthly payments in full and on time. One late payment can drop your score a few points, and sometimes much more. Keep in mind that according to credit bureaus, a late payment is one that is 30 days overdue, not one that is a couple days or even weeks late. You’ll also want to ensure that your credit utilization rate is at or below 30% at all times. If you’re well above 30% on a credit card, you might want to look into getting a balance transfer card to help offset the utilization rate. To help the length of your credit history, try to avoid closing credit accounts as doing so can affect the average age of your accounts. You don’t have to spend frequently, but charging a card every now and then can help keep the account active. Finally, once you have established your credit and you have a good handle on your debt, you can try to boost your score by opening a different type of credit account.  

Debt Relief is an Option 

We cannot stress the importance of a good credit score. While the unwritten rules state you should have a healthy amount of debt, you should ensure that you are able to repay the debt within a reasonable amount of time. Opening new accounts without being certain you can pay them off can result in unmanageable debt. A good rule of thumb is to first determine if you can pay off your debt within five years while still affording your other expenses. If this isn’t possible, the best option may be to work with a debt relief company. Debtmerica Relief has over 16 years of experience in providing relief to our clients whose financial burdens have become too much to handle. If you need help with debt, give us a call at 800-470-8155 for a free consultation. 

Sometimes debt becomes so unmanageable that bankruptcy appears to be the only solution. While bankruptcy seems like a fresh start, you should know and understand the process and consequences before going through with it. 

What is Bankruptcy? 

There are two common types of bankruptcy – Chapter 7 and Chapter 13. Chapter 7 bankruptcy is the simpler and quicker of the two, and it requires you to liquidate your non-exempt assets to wipe out your unsecured debt. If you do not have many assets to liquidate and have lower income, this might be a better option than Chapter 13. Chapter 13 allows you to keep all assets in exchange for a full or partial repayment of your debt. 

Which Debt Cannot Be Forgiven? 

Some debts are unforgiveable, so you should prepare to possibly retain some of your debt including: 

• Student loan debt (at least for now) 
• Alimony 
• Child support 
• Reaffirmed debt 
• Taxes and tax liens 
• Government fines 
• Court fines 

Am I Eligible for Bankruptcy? 

In order to file for Chapter 7 bankruptcy, you must meet a few requirements: 

• You must complete a credit counseling course within 180 days of filing 
• You must pass a “means” test, which determines if you are financially able to make payments to creditors 
• You can’t have filed a Chapter 7 bankruptcy in the past eight years 
• You can’t have filed a Chapter 13 bankruptcy in the past six years 
• If you filed for bankruptcy but your case was dismissed, you must wait at least 181 days before filing again 

Chapter 13 has a few unique eligibility requirements since it requires monthly debt repayment. 

• You must have steady income 
• You can’t have filed a Chapter 7 bankruptcy in the past four years 
• You can’t have filed a Chapter 13 bankruptcy in the past two years 
• As of 2023, you must not have a combined secured and unsecured debt totaling more than $2,750,000 as of the date of filing. 

How Do I File for Bankruptcy? 

For this type of drastic action, you’ll want to hire a bankruptcy attorney to avoid any mistakes that could result in your case being dismissed. If your case is dismissed, you’ll need to wait another six months before filing again.  

Once you file a Chapter 7 bankruptcy correctly, creditors will stop collecting payments, garnishing wages, repossessing your assets, and so on. A bankruptcy trustee will be assigned to your case to review your finances, sell your assets and pay back creditors. After about six months, the court will discharge any remaining forgivable debt. 

Chapter 13 works a bit differently. In this case, the court and your attorney will negotiate a three-to-five-year repayment plan that will cover all or some of your debt. After you make your final payment, your debt is discharged. 

Consequences of Filing for Bankruptcy 

The consequences of filing for either type of bankruptcy are severe. If you file a Chapter 7 bankruptcy, you will likely lose your assets and the bankruptcy will remain on your credit report for ten years. If you file a Chapter 13 bankruptcy, it will remain on your credit report for seven years. Having these delinquencies on your credit report can indicate to other lenders that you had issues paying back debt, which can result in a rejected loan or an approved one with unfavorable terms. 

Should I File for Bankruptcy? 

Bankruptcy should be viewed as a last resort when you cannot pay your debts. Before considering bankruptcy, you should try to work with your creditors to settle your debts. This task alone can take a toll on anyone under financial hardship. Debtmerica has over 16 years of experience in providing relief to our clients whose financial burdens have become too much to handle. If you need help with debt, give us a call at 800-470-8155 for a free consultation.

Higher inflation rates have meant inflated interest rates on credit card debt, making it nearly impossible to make a dent in account balances. When credit card debt has become too much to manage, you might wonder what options are available without having to resort to extreme measures. One of the more popular options is using a personal loan to pay off your credit card debt.  

How Can I Use a Personal Loan to Pay Off My Debt? 

Paying your debt with a loan is fairly simple. First, you should look into personal loans available to you based on your credit score. There are a few important things to note when looking at your loan offers. 

Loan Amount 

This is the amount of money you are borrowing from the lender. This does not include the interest you will pay over time to finance the loan. 

Loan Rate 

This is the annual percentage rate (APR), which includes your interest rate, plus any loan fees. Your APR for the personal loan will likely be smaller than your credit card APR.  

Loan Term 

This is the amount of time you will have to repay the loan, usually 2-7 years.  

Fees 

Some loans come with an origination fee, an upfront fee that the lender charges to process the loan. You should also be aware of other fees, like late payment fees, before deciding on a lender. 

Monthly Payment 

This is the amount you will be responsible for paying monthly. You should be certain that you can afford this monthly payment before moving forward with the loan application. 

Once you find a loan with terms that you approve of, you can apply for it. You should be notified immediately whether you are approved. Since this is a loan, it will be counted as a hard inquiry on your credit report so you should prepare for a minor dip in your score. On the other hand, once you pay off debt, your credit utilization rate will improve drastically so that should improve your score.  

Once you’re approved, the lender will typically send you the money within a day to a week if you opt for direct deposit. Receiving a paper check will take longer. If you notify your lender that you are using the loan for debt consolidation, they may give you the option to send the funds directly to your other creditors. This is the best option if you’re serious about using the funds for debt repayment only. 

Debt Relief for Those Considering Debt Consolidation 

There are other options for paying off debt if you do not want to get a loan. Balance transfer cards are one option that includes a 0% APR for a limited time, usually 6-18 months. They do often come with balance transfer fees, which would be similar to an origination fee for a loan. You would also be limited to transferring a little less than the new card’s limit. That said, a loan can offer a payoff option for larger sums of debt. If you don’t want to take on any new accounts, it might be better to work with a debt relief company like Debtmerica Relief. If you need help with debt, give Debtmerica a call at 800-470-8155 for a free consultation. 

With higher interest rates, now is the time to get serious about your finances. At least some of your income should be going towards savings or debt, and both if your budget will allow it. Here are some financial resolutions you can make for 2023.  

Reevaluate (Or Create) Your Budget 

When was the last time you reevaluated your budget? While you’re probably roughly familiar with how many expenses you have each month, it’s important to know where every dollar you earn goes. If you have a budget – great! You can work off your current budget and update it according to new goals you have or your new gross income if it has changed in the last year. If you don’t have a budget already, don’t worry. There are several popular budgeting styles to choose from, including the 50/30/20 budget or the zero-based budget.  

The 50/30/20 budget allocates 50% of your after-tax income towards necessities, like housing and groceries. 30% is for discretionary expenses, or things you want but do not necessarily need. These things might include your Netflix account, snacks or hobby supplies. The final 20% should go towards savings and debt, not including your minimum payments on credit cards since those are necessary and should be included in your 50% category. This strategy can help reevaluate your lifestyle and help pay down debt or save faster.  

The zero-based budget is one that requires you to allocate every dollar you earn on something. You can start by creating budget categories, like bills, debt, gas, groceries, and fun spending money. Then you will allot every dollar of your paycheck to a certain category however you see fit. You should do this until you have zero dollars leftover. 

If you’re new to budgeting, it might be best to use a traditional budget, in which you subtract your monthly expenses from your monthly income. Then take what is leftover to either spend, save or pay off debt. In any case, a budget will be key to achieving any financial goals you make this year. 

Build an Emergency Fund 

If your budget will only allow you to contribute to either savings or debt for now, it’s key to make sure your emergency savings fund is sufficient first. A 2021 study found that more than half of Americans have less than three months’ worth of covered expenses saved, while 25% said they had no emergency fund at all. A good starting point is to save at least three months’ worth of pay, or six months’ worth of living expenses to help keep you afloat during job loss or surprise medical bills, and more. So how do you accomplish this? You can automate your savings so that a certain percentage of your paycheck goes directly into your savings account. If you can afford to put 10% or more of your income into savings, you should. If not, you can do whatever is affordable to you.  

Pay Down Your Debt 

Your debt is more expensive than it has been in years because of rising interest rates. The average credit card interest rate today is around 21% and the rate is likely higher if you don’t have the best credit score. If you are carrying a lot of debt right now, your first step should be to reevaluate your budget. See where you can cut down expenses and then reallocate those funds to debt repayment. It might also be worth getting a side job to help pay off your debt as quickly as possible.  

Save for Retirement 

Retirement savings are often overlooked or pushed aside until a later time. Financial giant Fidelity Investments recommends having at least the equivalent to your salary by age 30, three times your salary by age 40, six times by age 50, eight times by 60, and 10 times by 67. If you’re one of the Americans who feels like they are behind on retirement savings, you’re not alone. In fact, over half of Americans feel this way. You can’t make up for lost time, but you can start saving immediately to start compounding interest now. This is especially true if your employer matches your retirement contributions. Financial experts say that you should try to put 5% to 10% of your gross income towards retirement savings. 

Debt Relief in 2023 

Maybe your 2023 New Year’s resolution was related to your finances, like saving for a vacation or paying off one credit card. Even something as simple as saving a little bit of each paycheck requires a plan and commitment. It’s understandable that saving can seem impossible if you have debt that has become unmanageable and stressful. Debtmerica Relief has over 16 years of experience in providing relief to our clients whose financial burdens have become too much to handle. If you need help with debt, give us a call at 800-470-8155 for a free consultation.

One of the top financial questions asked is “Should I put my extra money toward paying off my debt or savings?” The answer can vary depending on your current financial situation and the current state of the economy. In any case, it is important to find a balance between the two.

Priority #1: Build Up an Emergency Fund 

Most financial experts will agree that your priority should be to secure an emergency savings fund. Without this, unforeseen expenses can be impossible to cover. A good starting point is to save at least three months’ worth of pay, or six months’ worth of living expenses. This starting point will likely be sufficient in covering the cost of unexpected car or medical expenses. It can also help keep you afloat if you were to lose your job. Since this emergency fund will mostly go untouched, it’s best to keep it in a high-interest savings account that will accumulate more money over time. Remember, even when you decide to focus on building your emergency fund, you should continue to make at least your minimum payments on your debts. Failing to do so can result in hefty fees, making repaying your debt later more difficult.  

Priority #2: Focus on Debt Repayment 

Once you have a healthy emergency fund, you should focus on debt repayment. You may want to start by reviewing your expenses, debts, and income to create a debt repayment strategy. First look at your monthly expenses. Are you overspending? Are there any expenses that can be eliminated or decreased? Paying off debt will come a lot quicker if you can minimize your expenses. Next, review your current debts. While some debts are fixed until paid off, others may have more wiggle room. Consider a credit card balance transfer that charges 0% interest for a set period of time or see if your student loan payments can be temporarily deferred. Finally, look at your income to determine how much money you can afford to spend on debts. From here, you can decide if you want to tackle the smallest debts first, the debts with the highest interest rates first, or whichever strategy works best for you. 

Priority #3: Bulk Up Your Savings 

Assuming your emergency fund is set, and your debt is at least partially paid off, it may be a good time to start bulking up your savings. Usually at this stage, it’s best to find a balance between paying off debt and bulking up your savings. For example, if you have $500 left after paying all your expenses for the month, you might decide the best thing to do is put $200 in savings and the other $300 towards debt. When bulking up your savings, try to take advantage of accounts that can help build your wealth, like your retirement fund. This is especially true if your employer matches your contributions. 

Debt Relief is Always an Option 

Some may find themselves stuck in an endless cycle of debt repayment. Many can argue this is the hardest step. If you find that after several years, you have yet to make a dent in your debts, it might be a good time to consider debt relief. Debtmerica Relief has over 16 years of experience in providing relief to our clients whose financial burdens have become too much to handle. If you need help with debt, give us a call at 800-470-8155 for a free consultation. 

Credit cards are usually the first step to establishing credit. Without this first step, it would be nearly impossible to qualify for larger purchases, like auto loans, mortgages, and more. While it’s true that credit cards have become almost a necessity in our financial growth or even survival, misuse of them can lead to a huge financial burden. Here are some of the most common credit card mistakes to avoid.  

Carrying a Balance Each Month  

Nearly a quarter of Americans are under the impression that holding a balance on their credit cards will increase their credit scores. Not only is this untrue, but it can cost hundreds and even thousands of dollars in unnecessary interest payments. 30% of your credit score is determined by your credit utilization, which is the amount of debt you have compared to your total available credit. By carrying a balance each month, you are also carrying a higher utilization rate.   

Only Making the Minimum Payment 

Making a minimum payment on your credit card is a requirement, but not paying your bill in full each month can result in interest charges, which can help you rack up debt quickly. Sending larger payments can also significantly reduce your credit card payoff timeline, sometimes even by years.  

Missing a Payment  

The factor that has the largest impact on your credit score is your payment history. A late or missed payment is one that is more than 30 days past the due date. According to FICO, a 30-day missed payment can result in a credit score drop of 17 to 83 points, while a 90-day missed payment can drop your score 27 to 133 points. Late or missed payments can also incur late fees, penalties, or raised APRs.  

Applying For Too Many New Credit Cards  

Every time you apply for a credit card, a hard inquiry will appear on your credit report and affect your score. Having several inquiries in a short period of time makes you appear as a credit risk to other lenders. Opening new credit accounts also lowers the average age of your credit history, a factor that makes up 15% of your credit score.   

Using The Cash Advance Feature  

Relying on cash advances when facing financial challenges can often make matters much worse.  If you find that you’re frequently using cash advances to pay for things—especially essentials like groceries—it’s time to take a closer look at your budget and spending and make efforts to align the two 

Not Understanding Your Credit Card Terms  

Upon being approved for a credit card, you will receive a long agreement that details all the important terms of your new account. Though the verbiage used can seem complicated, understanding at least some key terms can help avoid serious mistakes. Some things to pay closer attention to are:  

• Annual Fee: The yearly fee due just to hold the card  
• Purchase APR: The yearly interest rate you’ll be charged based on your balance each month. To calculate your interest for the month, you can divide your purchase APR by 12.  
• Late Payment Fee: The amount you will pay if you are late on your payment  
• Penalty APR: The new yearly interest rate you’ll be charged if you make a late payment  

Debt Relief for Credit Users  

Credit cards are necessities for some, whether to establish and build credit or help cover expenses. The best thing you can do to avoid high credit card debt is to pay off your balance in full each month. If this is not possible, you should try to pay more than just the minimum monthly payment, but you should never miss a payment. Understanding terms before applying for a credit card can save you money and prevent stressful financial situations. Unfortunately, credit card debt can be inevitable and sometimes it can be too much to handle. Debtmerica Relief has over 16 years of experience in providing credit card debt relief to our clients. Give us a call at 800-470-8155 for a free consultation.