5 Things to Consider Before Getting a Personal Loan

Consider This Before Getting a Personal Loan – SmartAsset

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It’s a new year and if one of your resolutions is to get out of debt, you might be thinking about consolidating your bills into a personal loan. With this kind of loan, you can streamline your payments and potentially get rid of your debt more quickly. If you plan on getting a personal loan in 2016, here are some key things to keep in mind before you start searching for a lender.

Check out our personal loan calculator.

1. Interest Rates Are Going Up

At the end of 2015, the Federal Reserve initiated a much anticipated hike in the federal funds rate. What this means for borrowers is that taking on debt is going to be more expensive going forward. That means that the personal loan rates you’re seeing now could be a lot higher six or nine months from now. If you’re planning on borrowing, it might be a good idea to scope out loan offers sooner rather than later.

2. Online Lenders Likely Have the Best Deals

The online lending marketplace has exploded in recent years. With an online lender, there are fewer overhead costs involved, which translates to fewer fees and lower rates for borrowers.

With a lower interest rate, more money will stay in your pocket in the long run. Lending Club, for example, claims that their customers have interest rates that are 33% lower, on average, after consolidating their debt or paying off credit cards using a personal loan.

Related Article: How to Get a Personal Loan

3. Your Credit Matters

Regardless of whether you go through a brick-and-mortar bank or an online lender, you  likely won’t have access to the best rates if you don’t have a great credit score. In the worst case scenario, you could be denied a personal loan altogether.

You can check your credit score for free. And each year, you have a chance to get a free credit report from Experian, Equifax and TransUnion. If you haven’t pulled yours in a while, now might be a good time to take a look.

As you review your report, it’s important to make sure that all of your account information is being reported properly. If you see a paid account that’s still showing a balance, for example, or a collection account you don’t recognize, you’ll need to dispute those items with the credit bureau that’s reporting the information.

4. Personal Loan Scams Are Common

As more and more lenders enter the personal loan arena, the opportunity for scammers to cash in on unsuspecting victims also increases. If you’re applying for a loan online, it’s best to be careful about who you give your personal information to.

Some of the signs that may indicate that a personal loan agreement is actually a scam include lenders who use overly pushy sales tactics to get you to commit or ask you to put up a deposit as a guarantee against the loan. If you come across a lender who doesn’t seem concerned about checking your credit or tells you they can give you a loan without doing any paperwork, those are big red flags that the lender may not be legit.

Related Article: How to Avoid Personal Loan Scams

5. Not Reading the Fine Print Could Cost You

Before you sign off on a personal loan, it’s best to take time to read over the details of the loan agreement. Something as simple as paying one date late could trigger a fee or cause a higher penalty rate to kick in, which would make the loan more expensive in the long run.

Photo credit: ©iStock.com/DragonImages, ©iStock.com/Vikram Raghuvanshi, ©iStock.com/MachineHeadz

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Freezing Your Credit

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In the age of paperless transactions, identify theft is something that virtually all of us are susceptible to. If your identity is stolen, the consequences can be severe, and in some cases, can take years to recover from. One way to be proactive against fraud and defend yourself from identity theft, is to freeze your credit report with each of the three major credit bureaus—Experian, TransUnion, and Equifax. 

Placing a credit freeze on your credit report will stop identity thieves from being able to open new accounts, lines of credit, or make any large purchases in your name, regardless of whether or not they have your Social Security number or any other sensitive information. 

What a credit freeze means

A credit freeze is a process that shuts off access to your credit reports at your request. Without your verified consent, your delicate information cannot be acquired. This means that if someone were to attempt to apply for credit in your name, your report would come up as “frozen,” and therefore the creditor would not be able to see the information needed for the application to be approved.

You can unfreeze your credit at any time by using a PIN or a password. 

Reasons to freeze your credit

It might be a good idea to freeze your credit if you’re experiencing any of the following situations:

  • Your data has been compromised in a data breach: It happens. If you’ve been a victim of a data breach and personal information related to your identity has been leaked or made vulnerable to cyber criminals, a credit freeze can offer you some extra protection. 
  • You have reason to think you’ve been a victim of identity theft: Perhaps you’ve checked your credit recently and noticed open accounts that you don’t recognize. Maybe you’ve been getting phone calls from collections agencies requesting payments from accounts you know you didn’t open. While a credit freeze won’t be able to stop them from using accounts a thief has already opened, it can stop them from opening any more. 
  • You want to protect your child from identity theft: According to the Economic Growth, Regulatory Relief and Consumer Protection Act, parents and legally guardians of children 16 years old and younger have the right to open a credit account for their child with the sole purpose of putting a freeze on it to protect them from identity theft. 

How to freeze your credit 

The process of freezing your credit is simple but does require a few steps. You will need to get in touch with each of the three major credit bureaus one by one and request a credit freeze:

  • Experian: Contact by phone at 800-349-9960 or go to their website.
  • Equifax: Contact by phone at 888-397-3742 or go to their website.
  • TransUnion: Contact by phone at 888-909-8872 or go to their website.  

The credit bureaus will ask you for your Social Security number, your date of birth and other information to verify your identity.

Once you freeze your credit, your file will be unattainable even if a thief has sensitive information such as your social security number or date of birth. If you need to use your credit file, you can unfreeze your credit report at any time. 

How to unfreeze your credit

Once you’ve frozen your credit file, it will be remain blocked until you decide that you would like to unfreeze it. You will need to unfreeze your credit report in order to open a new line of credit or make a major purchase. 

Unfreezing your credit file is simple. All you will need to do is go online to each credit bureau website and use the personal identification number (PIN) that you used to place the freeze on the account. If you don’t want to complete this task online, you can also unfreeze your credit file over the phone or through postal mail. 

When the unfreezing process is done online or by phone, it is completed within minutes of submitting the request. However, if you send your request via mail, it will take much longer. 

Keep in mind that you don’t necessarily need to unfreeze your credit through all three of the major credit bureaus if you don’t want to. For instance, let’s say you plan to apply for credit somewhere. You can ask the creditor which credit bureau it will go through to pull up your report, and only unfreeze that one credit bureau. 

You may also have the option to unfreeze for a specific amount of time. Once the time is up, your credit file will automatically freeze again. 

Credit freeze pros and cons

There are a few reasons why you might want to freeze your credit in this day and age, but just like with anything else, there are pros and cons to credit freezing. Here is a general breakdown of the benefits and downfalls of putting a freeze on your credit report:

Pros:

  • It prevents thieves from opening new lines of credit: With a credit freeze placed on your account, no one will be able to open a new line of credit or any other type of account requiring a credit check using your personal data. Anyone trying to commit fraud will be stopped in their tracks as soon as lenders notice that the report is frozen. 
  • It won’t affect your credit score: Freezing your credit report will not damage your credit score. Additionally, if you’ve been a victim of identity theft, freezing your credit report could actually protect your credit score from being damaged due to fraud. 
  • It’s free: It used to be the case that some credit freezes would cost a fee, but that is no longer the way it works. 

Cons

  • It requires some effort: Putting a credit freeze on your credit report takes some effort. You will need to get in touch with all three credit bureaus. 
  • You will need to remember your PINs: A PIN is required to lift or freeze your credit report. If you lose it, you will need to jump through extra hoops to create a new one.

It can’t stop thieves from accessing your existing accounts: Credit freezes can only stop fraudsters from opening new accounts using your information. If you’ve already been a victim of identity theft, a credit freeze can’t block thieves from committing fraud with your current accounts. This means that thieves can still make a purchase using a credit card they stole from you.

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How does refinancing a student loan affect credit? – Lexington Law

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

If you’re considering refinancing a student loan, you need to have answers to all of your questions. For starters, does refinancing student loans affect credit? Fortunately, student loan refinancing doesn’t have to negatively affect your credit, but you need to know how to go about the process carefully and fully informed. Since refinancing comes with several benefits, it’s nice to know that you can consider this option without it killing your credit. 

What is a student loan refinance?

Student loans can come from two sources: federal funding and private funding. Federal student loans come with some benefits, such as subsidized interest while you’re in school and the potential to apply for a loan forgiveness program.

Unfortunately, you can’t refinance a federal student loan with the government. Refinancing is always done through a private lender. While going to a private lender may sound scary, refinancing can save you money. 

When you refinance, you take your student loan(s) to a lender and negotiate a better interest rate or a more manageable monthly payment. This can help you save thousands during the life of your loan, but how much money you save depends on a number of factors—such as fees for refinancing, the decrease in interest rate and the length of your new repayment term. 

Protect your credit during a student loan refinance

Credit inquiries and missed or late payments are the two factors that might impact your credit when you go through student loan refinancing. But if you’re careful, you can minimize the damage done to your score during a refinance.

Credit inquiries

When you initially approach a lender about refinancing, they’ll conduct a soft inquiry on your credit to see if you’re eligible. However, once you officially apply with a lender for a refinance, there will be a hard check on your credit. A hard inquiry can lower your credit score by a few points.

These few points are easy to recover if you continue to be responsible with your credit. But if you have multiple hard inquiries within a relatively short period of time, your credit score may drop significantly—potentially up to 10 points per credit inquiry. 

To avoid this situation, try to submit as few applications as possible. To be clear, that doesn’t mean you shouldn’t compare your options. It’s in your best interest to approach several lenders to see who can offer you the best terms and lowest interest rate. You can still shop around and compare lenders—just don’t fully apply with every lender.

Lenders should be able to give you a good idea of your options when they pull a soft inquiry on your credit. Let your lenders know you’re comparing rates so they’ll begin to offer you more competitive terms. 

In addition, most credit bureaus have a 14 to 45 day “shopping period.” If you have multiple hard inquiries within this time frame, a credit bureau may count it as only one inquiry. Whenever possible, try to keep your inquiries to this small window of time, ideally ranging between two and four weeks.

Payments

Your student loans are tied to your credit. Every time you miss or make a late payment, it negatively impacts your credit history and your credit score. If you’re considering refinancing, you must make all your payments on both your past loan and your refinanced loan until you’re absolutely certain the previous loan has ended. After you know the transfer is complete, you can make payments on the refinanced loan only. 

When should you refinance?

When it comes to refinancing a student loan, timing can be everything. For this process to be worth it, you need to have a decent credit score and a stable income. These two factors will ensure that when you go to lenders for refinancing, they’ll offer you a lower interest rate than the one you currently have. 

Two downsides of refinancing a student loan

Refinancing isn’t the best choice for everyone, and there are two main downsides you should know about. 

Your interest rate might not decrease by much

Student loan interest rates have remained relatively low in recent years. This means private lenders don’t have much leeway and may not be able to offer you an interest rate that’s much lower. 

That being said, even a small decrease in interest can make a significant difference over the lifetime of a loan. For example, let’s say you had a $30,000 student loan with a 10-year payment period. Your initial loan interest is five percent, and a refinancing lender offers to lower your interest to four percent. A one percent difference may not sound like a lot, but it’ll save you $1,736 in interest over 10 years. 

One thing to note is to take into account any fees for refinancing when comparing your loans. If your refinance lender is charging you a $200 sign-up fee, that will eat into your savings. 

You’ll lose access to benefits of federal funding

You can only refinance with a private lender, which opts you out of any benefits of federal funding. If you opt out of federal student loans, you lose access to federal repayment options such as the income-driven repayment plan. 

You also lose the ability to apply for federal loan forgiveness programs. Several federal loan forgiveness programs for candidates such as teachers, military service members and public servants may forgive a portion or all of a loan under specific conditions. These programs are often difficult to qualify for, but it may be worth sticking to it if you were already on this path. 

Who shouldn’t refinance

If you have poor credit or unstable income, you’ll likely be denied refinancing or get an interest rate that isn’t better than your current interest rate. If this is the case for you, focus on improving your credit score and reapply for refinancing later on. 

Additionally, people who are close to the end of their loan term typically won’t see any benefit from refinancing. If you’re almost done paying off your student loan, simply focus on getting to your end goal. 

Is refinancing the best option for you?

Ultimately, the decision to refinance should be made on a case-by-case basis. You need to weigh all the pros and cons of refinancing before making a decision.

A useful tool when evaluating refinancing is a loan calculator. These online calculators help you determine just how much you can save if you refinance a loan. Don’t forget to subtract any fees from your savings to depict your actual savings accurately. 

Your student loan will impact your credit for many years to come, and your credit has a long-reaching impact on other areas of your life. Whether you refinance or continue with your regular student loan, make sure you build responsible habits with your loan repayment. Sign up for auto-pay, make additional payments if you can and track your progress. 


Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

Experian Credit Score vs. FICO Score

January 14, 2021 &• 7 min read by Barry Paperno Comments 17 Comments

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When you think “credit score,” you probably think “FICO.” The Fair Isaac Corporation introduced its FICO scoring system in 1989, and it has since become one of the best-known and most-used credit scoring models in the United States. But it isn’t the only model on the market.

Another popular option is called VantageScore, the product of a collaboration between the three major credit reporting agencies: Experian, Equifax, and TransUnion. It uses similar scoring methods to FICO but yields slightly different results.

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Each scoring model has multiple versions and multiple applications—you don’t have just one FICO score or one VantageScore. Depending on which bureau creates the score and what type of agency is asking for the score, your credit score will vary, sometimes siginifcantly. One credit score isn’t more “accurate” than another, they just have different applications. Learn more about the different types of credit scores below.

When you sign up for ExtraCredit, you can see 28 of your FICO scores from all three credit bureaus. Your free Credit Report Card, on the other hand, will show you your Experian VantageScore 3.0.

What Is a VantageScore?

VantageScore was created by the three major credit reporting agencies—Experian, Equifax, and TransUnion. It uses similar scoring methods to FICO but yields slightly different results.

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One of the primary goals of VantageScore is to provide a model that is used the same way by all three credit bureaus. That would limit some of the disparity between your three major credit scores. In contrast, FICO models provide a slightly different calculation for each credit bureau, which can create more differences in your scores.

FICO vs. VantageScore

So, what are the differences between an Experian credit score calculated using VantageScore and one calculated via the FICO model? More importantly, does the score used matter to you, the consumer? The answer is usually no. But you might want to look at different scores for different needs or goals.

Is Experian Accurate?

Credit scores from the credit bureaus are only as accurate as the information provided to the bureau. Check your credit report to ensure all the information is correct. If it is, your Experian credit scores are accurate. If your credit report is not accurate, you’ll want to look into your credit repair options.

Our free Credit Report Card offers the Experian VantageScore 3.0 so you can check it regularly. If you want to dig in deeper, you can sign up for ExtraCredit. For $24.99 per month, you can see 28 of your FICO scores from all three credit bureaus. ExtraCredit also offers rent and utility reporting, identity monitoring and theft insurance, and more.

Features of ExtraCredit

Understanding the Scoring Models

FICO and VantageScore aren’t the only scoring models on the market. Lenders use a multitude of scoring methods to determine your creditworthiness and make decisions about whether or not to give you credit. Despite the numerous options, FICO scores and VantageScores are likely the only scores you’ll ever see yourself.

Here’s what FICO uses to determine your credit score:

  • Payment history. Whether or not you pay your bills in a timely manner is critical, as this factor makes up around 35% of your score.
  • Credit usage. How much of your open credit you have used—which is called credit utilization—accounts for 30% of your score. Keeping your utilization below 30% can help you keep your credits core healthy.
  • Length of credit. The average age of your credit—and how long you’ve had your oldest account—is a factor. Credit age accounts for around 15% of your score.
  • Types of credit. Your credit mix, which refers to having multiple types of accounts, makes up around 10% of your score.
  • Recent inquiries. How many entities have hit your credit history with a hard inquiry for the purpose of evaluating you for credit is a factor for your score. It accounts for about 10% of your credit score.

VantageScore uses the same factors, but weighs them a little differently. Your VantageScore 4.0 will be most influenced by your credit usage, followed by your credit mix. Payment history is only “moderately influential,” while credit age and recent inquiries are less influential.

Each company also gathers its data differently. FICO bases its scoring model on credit data from millions of consumers analyzed at the same time. It gathers credit reports from the three major credit bureaus and analyzes anonymous consumer data to generate a scoring model specific to each bureau. VantageScore, on the other hand, uses a combined set of consumer credit files, also obtained from the three major credit bureaus, to come up with a single formula.

Both FICO and VantageScore issue scores ranging from 300 to 850. In the past, VantageScore used a score range of 501 to 990, but the score range was adjusted with VantageScore 3.0. Having numerical ranges that are somewhat consistent helps make the credit score process less confusing for consumers and lenders.

Your score may also differ across the credit bureaus because your creditors aren’t required to report to all three. They may report to only one or two of them, meaning each bureau likely has slightly different information about you.

Variations in Scoring Requirements

If you don’t have a long credit history, VantageScore is the score you want to monitor. To establish your credit score, FICO requires at least six months of credit history and at least one account reported to a credit bureau within the last six months. VantageScore only requires one month of history and one account reported within the past two years.

Because VantageScore uses a shorter credit history and a longer period for reported accounts, it’s able to issue credit ratings to millions of consumers who wouldn’t yet have a FICO Score. So, if you’re new to credit or haven’t been using it recently, VantageScore can help prove your trustworthiness before FICO has enough data to issue you a score.

The Significance of Late Payments

A history of late payments impacts both your FICO score and your VantageScore. Both models consider the following.

  • How recently the last late payment occurred
  • How many of your accounts have had late payments
  • How many payments you’ve missed on an account

FICO treats all late payments the same. VantageScore judges them differently. VantageScore applies a larger penalty for late mortgage payments than for other types of credit payments.

Because FICO has indicated that it factors late payments more heavily than VantageScore, late payments on any of your accounts might cause you to have lower FICO scores than your VantageScores.

Impact of Credit Inquiries

VantageScore and FICO both penalize consumers who have multiple hard inquiries in a short period of time. They both also conduct a process called deduplication.

Deduplication is the practice of allowing multiple pulls on your credit for the same loan type in a given time frame without penalizing your credit. Deduplication is important for situations such as seeking auto loans, where you may submit applications to multiple lenders as you seek the best deal. FICO and VantageScore don’t count each of these inquiries separately—they deduplicate them or consider them as one inquiry.

FICO uses a 45-day deduplication time period. That means credit inquiries of a certain type—such as auto loans or mortgages—that hit within that period are counted as one hard inquiry for the purpose of impact to your credit.

In contrast, VantageScore only has a 14-day range for deduplication. However, it deduplicates multiple hard inquiries for all types of credit, including credit cards. FICO only deduplicates inquiries related to mortgages, auto loans, and student loans.

Influence of Low-Balance Collections

VantageScore and FICO both penalize credit scores for accounts sent to collection agencies. However, FICO sometimes offers more leniency for collection accounts with low balances or limits.

FICO 8.0 also ignores all collections where the original balance was less than $100 and FICO 9.0 weighs medical collections less. It also doesn’t count collection accounts that have been paid off. VantageScore 4.0, on the other hand, ignores collection accounts that are paid off, regardless of the original balance.

What Are FAKO Scores?

FAKO is a derogatory term for scores that aren’t FICO Scores or VantageScores. Companies that provide FAKO scores don’t call them this. Instead, they refer to their scores as “educational scores” or just “credit scores.” FAKO scores can vary significantly from FICO scores and VantageScores.

These scores aren’t completely valueless, though. They can help you understand where your credit score stands or whether it’s going up or down. You probably don’t want to shell out money for such scores, though, and you do want to ensure the credit score provider is drawing on accurate information from the credit bureaus.

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Can I Sue a Company for Sending Me to Collections?

A woman in a wheelchair sits with her laptop in front of her as she talks on the phone.

It happens. A collections notice shows up, a debt collector starts calling or you find a negative report on your credit history, but you know you paid the account in question. Can you sue a company for sending you to collections for money you didn’t owe? Find out more about what the law says about your rights when it comes to protecting your credit history.

How Does the Law Protect Your Rights Regarding Credit Collections and Reporting?

Numerous federal and state laws protect your rights to fair and accurate credit reporting. Some of those laws also cover your rights as a consumer to fair debt collection practices. A few of the laws that might come into play are as follows:

  • The Fair Credit Report Act ensures your right to an accurate consumer credit profile. It obligates companies to report truthful information on your credit report. It also provides some ways you can challenge information you think is inaccurate.
  • The Fair Debt Collections Practices Act  also helps ensure creditors are honest when reporting or collecting debts. Additionally, it prohibits collectors from engaging in harassing or abusive behavior to collect a debt, including contacting you excessively or at inappropriate times. You might be able to report or seek remedies from collectors who break these FDCPA rules for fair collections.
  • The Truth in Lending Act is part of the Consumer Credit Protection Act. This law deals with what information lenders must disclose, how they can advertise their products and rates and what rights you have when a lender isn’t truthful or transparent.

Credit law can be complex. If you’re not sure which laws cover you or what the best course of action is in your case, you might need to consult with an attorney.

Can You Sue a Company for Sending You to Collections?

Yes, the FDCPA allows for legal action against certain collectors that don’t comply with the rules in the law. If you’re sent to collections for a debt you don’t owe or a collector otherwise ignores the FDCPA, you might be able to sue that collector.

It’s a good idea to do everything you can under the law to protect your rights before you sue. That might include requesting validation of any debt within 30 days of receiving the first notice, for example. But even without that action, the collector can still be liable if it breaks the law.

According to the FDCPA, civil liabilities are limited to the amount of damages actually experienced plus any additional damages awarded by the court. Those additional damages are limited to $1,000 in individual cases and $500,000 in class action suits.

Can You Sue a Company for False Credit Reporting?

Yes, you might be able to sue a company for false credit reporting. However, before you seek a civil remedy through the courts, you should properly exercise your rights under the law.

Begin by challenging the information with the credit bureau. False information hits credit reports for a variety of reasons, including misunderstandings and honest mistakes such as clerical errors. When you sent a credit dispute letter, the bureau must investigate and respond within a time frame dictated by the regulation.

The investigation typically involves contacting the reporting creditor or collection agency. That entity is given a chance to demonstrate the information is accurate via appropriate documentation. If the credit bureau determines the information is inaccurate or can’t be proven, it typically removes or corrects it.

The Fair Credit Reporting Act lists civil penalties for people or businesses that willfully refuse to comply with accurate credit reporting. Actual damages are limited to a range of $100 to $1,000. You might also be able to recover attorney’s fees and additional punitive damages the court can award on a case-by-case basis. Punitive damages are those awarded as a type of punishment for the person or business engaged in wrongdoing.

Coronavirus Impact on Credit Reporting and Your Rights

The Coronavirus Aid, Relief and Economic Security Act of 2020 (CARES Act) made some temporary modifications to creditors’ legal requirements for reporting. For example, it requires creditors to report accounts as current in certain situations where forbearances were granted.

Forbearance means the creditor agrees you don’t have to pay the loan for a certain period of time. During that time, you won’t be penalized by having the account reported as late.

If you think your collection or credit reporting issue should be be protected under the CARES Act, consider consulting a lawyer. One can help you understand your rights, which laws affect them and any action you might take next.

How Do You Sue a Collection Agency or Other Creditor?

We’re not legal experts at Credit.com, so we can’t give legal advice. We’ve provided a good amount of information to help you understand your rights under the law. But if you think suing a debt collector or other creditor is the next best step, consult an attorney.

A legal professional can help you understand if you have a claim against your creditor, for example. That person might also be able to advise you about other options, including debt settlement, if you do owe any money.

If you ended up here because you just discovered inaccurate information on your report, consider credit repair services from providers such as Lexington Law or CreditRepair.com. And if you have no idea what’s on your credit report, consider signing up for a service such as ExtraCredit to stay as informed as possible.

Disclosure: Credit.com and CreditRepair.com are both owned by the same company, Progrexion Holdings Inc. John C Heath, Attorney at Law, PC, d/b/a Lexington Law Firm is an independent law firm that uses Progrexion as a provider of business and administrative services.]

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5 Steps for Getting a Car Loan

This Article was Updated July 5, 2018

When you are looking to buy a vehicle, the first thing you should do is apply for a preapproved loan. The loan process can seem daunting, but it’s easier than you think and getting preapproval prior to going to the car dealer may help alleviate a lot of frustration along the way.

Here are five steps for getting a car loan.

  1. Check Your Credit
  2. Know Your Budget
  3. Determine How Much You Can Afford
  4. Get Preapproved
  5. Go Shopping

1. Check Your Credit

Before you shop for a loan, check your credit report. The better your credit, the cheaper it is to borrow money and secure auto financing. With a higher credit score and a better credit history, you may be entitled to lower loan interest rates, and you may also qualify for lower auto insurance premiums.

Review your credit report to look for unusual activity. Dispute errors such as incorrect balances or late payments on your credit report. If you have a lower credit score and would like to give it a bit of a boost before car shopping, pay off credit card balances or smaller loans.

If your credit score is low, don’t fret. A lower score won’t prevent you from getting a loan. But depending on your score, you may end up paying a higher interest rate. If you have a low credit score and want to shoot for lower interest rates, take some time to improve your credit score before you apply for loans or attempt to secure any other auto financing.

2. Know Your Budget

Having a budget and knowing how much of a car payment you can afford is essential. You want to be sure your car payment fits in line with your other financial goals. Yes, you may be able to cover $400 a month, but that amount may take away from your monthly savings goal.

If you don’t already have a budget, start with your monthly income after taxes and subtract your usual monthly expenses and how much you plan to put in savings each month. For bills that don’t come every month, such as Amazon Prime or Xbox Live, take the yearly charge and divide it by 12. Then add the result to your monthly budget. If you’re worried, you spend too much each month, find simple ways to whittle your budget down.

You’ll also want to plan ahead for new car costs, such as vehicle registration and auto insurance, and regular car maintenance, such as oil changes and basic repairs. By knowing your budget and what to expect, you can easily see how much room you have for a car payment.

3. Determine How Much You Can Afford

Once you understand where you are financially, you can decide on a reasonable monthly car payment. For many, a good rule of thumb is to not spend more than 10% of your take-home income on a vehicle. In other words, if you make $60,000 after taxes a year, you shouldn’t spend more than $500 per month on car payments. But depending on your budget, you may be better off with a lower payment.

With a payment in mind, you can use an auto loan calculator to figure out the largest loan you can afford. Simply enter in the monthly payment you’d like, the interest rate, and the loan period. And remember that making a larger down payment can reduce your monthly payment. You can also use an auto loan calculator to break down a total loan amount into monthly payments.

You’ll also want to think about how long you’d like to pay off your loan. Car loan terms are normally three, four, five, or six years long. With a longer loan period, you’ll have lower monthly payments. But beware—a lengthy car loan term can have a negative effect on your finances. First, you’ll spend more on the total price of the vehicle by paying more interest. Second, you may be upside down on the loan for a larger chunk of time, meaning you owe more than the car is actually worth.

4. Get Preapproved

Before you ever set foot on a car lot, you’ll want to be preapproved for a car loan. Research potential loans and then compare the terms, lengths of time, and interest rates to find the best deal. A great place to shop for a car loan is at your local bank or credit union. But don’t stop there—look online too. The loan with the best terms, interest rate, and loan amount will be the one you want to get preapproved for. Just know that preapproved loans only last for a certain amount of time, so it’s best to get preapproved when you’re nearly ready to shop for a car.

However, when you apply, the lender will run a credit check—which will lower your credit score slightly—so you’ll want to keep all your loan applications within a 14-day period. That way, the many credit checks will only show as one inquiry instead of multiple ones.

When you’re preapproved, the lender decides if you’re eligible and how much you’re eligible for. They’ll also tell you what interest rate you qualify for, so you’ll know what you have to work with before you even walk into a dealership. But keep in mind that preapproved loans aren’t the same as final auto loans. Depending on the car you buy, your final loan could be less than what you were preapproved for.

In most cases, if you secure a pre-approved loan, you shouldn’t have any problems getting a final loan. But being preapproved doesn’t mean you’ll automatically receive a loan when the time comes. Factors such as the info you provided or whether or not the lender agrees on the value of the car can affect the final loan approval. It’s never a deal until it’s a done deal.

If you can’t get preapproved, don’t abandon all hope. You could also try making a larger down payment to reduce the amount you are borrowing, or you could ask someone to cosign on the loan. If you ask someone to cosign, take it seriously. By doing so, you are asking them to put their credit on the line for you and repay the loan if you can’t.

When co-signing a car loan, they do not acquire any rights to the vehicle. They are simply stating that they have agreed to become obligated to repay the total amount of the loan if you were to default or found that you were unable to pay.

Co-signing a car loan is more like an additional form of insurance (or reassurance) for the lender that the debt will be paid no matter what.

Usually, a person with bad credit or less-than-perfect credit may require the assistance of a co-signer for their auto financing and loan.

5. Go Shopping

Now you’re ready to look for a new ride. Put in a little time for research and find cars that are known to be reliable and fit into your budget. You’ll also want to consider size, color, gas mileage, and extra features. Use resources like Consumer Reports to read reviews and get an idea of which cars may be best for you.

Once you have narrowed down the car you are interested in, investigate how much it’s worth, so you aren’t accidentally duped. Sites such as Kelley Blue Book or Edmunds can help you figure out the going rate for your ideal car. After you’re armed with this information, compare prices at different car dealerships in your area. And don’t forget to check dealer incentives and rebates to get the best possible price.

By following these steps, you’ll be ready to make the best financial decision when getting a car loan. Even if you aren’t ready to buy a car right now, it doesn’t hurt to be prepared. Start by acquiring a free copy of your credit summary.

It is always a good idea to pull your credit reports each year, so you can make sure they are as accurate as they should be. If you find any mistakes, be sure to dispute them with the proper credit bureau. Remember, each credit report may differ, so it is best to acquire all three.
If you want to know what your credit is before purchasing a car, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get a free credit score updated every 14 days.

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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How Late Can You Be on a Car Payment, Mortgage or Other Bill?

A man sits on a chair, looking concerned.

It’s always frustrating to come across a bill and realize it was due yesterday—or last week. If you’re late on a payment or if you miss it completely, you could end up paying late fees and taking a hit on your credit score. It can be especially difficult if you want to apply for a loan or credit and are about to make a big purchase like a house or a vehicle.

If you’re a reliable customer and have only missed this one payment, it likely shouldn’t be a big problem, and you can probably avoid a late fee. But if you wait too long, it might not be possible.

Either way, we’re going to help answer some of your biggest questions:

  • How late can you be on a car payment before it affects your credit?
  • Is there a late car payment grace period?
  • What about for rent?
  • What happens if you miss a payment completely?
  • Who should you notify?
  • How will it impact your credit score?

Read on to learn how late a credit card or car payment can be before it affects your credit score and what to do if it does.

How Late Can a Credit Card Payment Be?

People often wonder how late a payment has to be before their creditors report it to the credit bureaus. A credit card payment is considered late if it’s received after the cutoff time in your credit card agreement or if the payment submitted is less than the minimum amount due.

Missed credit card payments are generally added to your credit report when the payment is more than 30 days late. This same entry is updated if your payment is 60 days late, and then 90 days. It is important to know what your specific credit card issuer’s policies are, so you can know what to expect.

Keep in mind that one late payment among years of on-time payments is far less serious than a late payment and limited credit history.

When Is a Credit Card Payment Considered Late?

As far as credit card companies are concerned, the payment is considered late if it’s submitted after the cutoff period, which varies depending on the lender. Sometimes it’s 5 p.m. on a business day while for others it’s 8 p.m. or 11:59 p.m. Also be aware of when a late fee will be charged. Generally speaking, a late fee is issued if payment is received after the credit card issuer’s cutoff time.

30 Days Past Due

Late credit card payments usually aren’t reported to the credit bureau until after 30 days. In other words, if you make a payment after the due date but within this initial 30-day period, it won’t show up on your credit report, but you may have to pay a late fee.

60 Days Past Due

If your payment is more than 60 days late, the 30-day entry on your credit report is updated and your card’s interest rate could increase. If it increases and by how much depends on your card’s terms.

How Late Can You Be on a Car Payment?

Typically, the grace period on auto loans is 10 days, but this depends on the lender. The grace period your lender allows should be listed under the terms and conditions of your loan. This is where you’ll also find the details of the loan, including your loan balance, your interest rate, the term of the loan and the fees associated with a late or missed payment.

If you can afford to pay but simply forgot, you’ll want to pay it as soon as possible. But if you feel you can’t afford the car payment, you should get in touch with your lender and see if they would be willing to renegotiate the terms of the loan.

Deferring Car Payments

You can also look into deferring your car payment if you don’t have the funds now but you expect to later. A deferment essentially means you’re changing your due date by postponing the date of your next payment. Deferments usually don’t negatively affect your credit score.

What If I’m Late on Paying My Rent or Mortgage?

If you’re a few days late paying your rent, usually you shouldn’t have to worry about this affecting your credit score. If you know your landlord, chances are they’ll say something if you continue to submit late payments. If you’re paying a property management company, they likely won’t be as lenient on late payments. Our best advice is to pay your rent within the week it’s due.

Mortgage lenders typically report late payments to credit bureaus and usually have different grace periods. Paying within seven days should help you avoid decreasing credit scores.

One of the best ways to stay on top of your mortgage or rent payment is to set up a monthly reminder for a few days before the first of the month or, if possible, set up an automatic payment. Because your rent or mortgage payment is the same each month, it should be easy to calculate it into your personal finances.

Can a Late Credit Card Payment Made Under 30 Days Still Affect My Score?

If you make a credit card payment within the 30-day period, it generally should not be reported negatively or have any effect on your credit score. Beyond that time, however, there is a possibility your credit score could be affected. Make sure you know the terms of your credit card however, terms can vary and you don’t want any surprises.

If it turns out your late payment has been reported, know that its impact on your score generally diminishes with time, especially if it’s an isolated event. Other on-time payments can help counter the negative effects of late payments. And, as with almost any other mistake, the sooner you realize you’ve made it and try to fix it, the less likely it is to turn into a big problem.

Late Fees vs. Overdue Payments

Late fees are essentially fees charged by lenders to borrowers if a payment is received after its due date. So, if your payment is sent late—or is not the minimum payment or above—you could be charged a late fee.

Most credit card payments are due within a minimum of 21 days after the billing cycle ends, but remember, the grace period is usually only 30 days, so you’ll want to pay them off as soon as possible. Credit card late fees vary depending on your lender and requirements under the CFPB, but the late fee amount can’t be more than the minimum payment. For example, if your minimum payment is $35, your late fee won’t be higher than that.

An overdue payment, however, is a payment that was not paid by the due date. If you miss a due date, you will see the minimum balance plus the overdue payment on your next billing cycle. The overdue payment may be the full amount or a partial amount, such as if you paid part of your minimum but not all of it.

Removing Late Payments From Your Credit History

If there’s an error on your credit history, such as if a car payment is marked late but it actually wasn’t and you have proof, you can challenge it with the lender. The process involves explaining exactly what happened and asking that the error be fixed. Technically, the lender or servicer has 30 business days to respond to the error. If you don’t hear from them within about 45 days, follow up with them.

If a late payment ding on your credit report is accurate, you can still contact the lender and dispute it, especially if you’ve been diligent about paying your bills on time. The lender can provide what’s called a goodwill adjustment, which is when the lender essentially forgives your late fee.

As part of this process, you may be asked to explain the circumstances surrounding the reasons for your payment being submitted late. For example, maybe you went on vacation and forgot or you had to pay a large unexpected cost, such as medical fees, and you couldn’t afford the payment that month.

The lender may offer you a chance to enroll in automatic payments to lessen the chances of a late payment happening again.

How Long Does It Take for a Missed Payment to Come Off My Credit Report?

Unfortunately, if there’s a missed payment or a negative item on your credit history and you’re not able to have it removed, it can stay on there for seven years.

Keep in mind that if the incident occurred five years ago and you’re applying for a loan, it will have less effect than if it occurred last week. The more time that passes after the missed payment occurs, the better. Why? Because credit scores are based on recent financial behavior, so if you only miss one payment and not multiples, eventually your credit score takes your frequent on-time payments into account.

How to Prevent Late Payments in the Future

It’s hard to keep track of everything—grocery lists, kids’ schedules, work to-do lists and, of course, bill due dates—but there are ways to manage your personal finances better to ensure you never miss a payment.

  • Go paperless. Going paperless may increase the likelihood you notice when a bill comes through each month instead of being lost in piles of other mail.
  • Set up reminders. Banks sometimes offer text and email reminders that tell you when a bill, such as a car payment or credit card payment, is coming up. You can also set these up yourself to recur each month on your personal digital calendar.
  • Enroll in automatic payments. Automatic payments ensure your car payment or other loan payment is made on time. Just make sure the funds are available in your account on the day it’s due to be withdrawn to avoid potential overdraw fees.

Keep an eye on your credit report and past late payments when you sign up for Credit.com’s Credit Report Card. It gives you a letter grade in each of the five key factors of your credit.

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