What Determines Credit Card Limit?

All credit cards have some sort of a credit limit, which is the maximum amount that you can charge to the respective account before any charges are void. However, this credit limit isn’t information that consumers are typically privy to – unless they apply for the card, that is. That’s largely because before a creditor can issue any sort of a limit, it has to know your credit score as well as other crucial information, like how much money you make, your monthly debt obligations, credit report history and more.

The Rule of Thumb

Just because you won’t get the specifics of your credit limit until you’ve gone through the application process – and become approved – doesn’t mean that you can’t have a general idea of what it’s likely to be. Generally speaking, your credit limit is about double your monthly income, minus any debt obligations you have. So, for instance, if you make $5,000 a month and have debt obligations of $2,000 per month, your credit limit is likely to be in the $6,000 range. While this is the general rule of thumb, the key word is “general,” as there’s no true universal method and each creditor typically uses their own respective formulas.

Anatomy of the Credit Limit

There’s typically a lot that goes into the credit limit that creditors issue when you apply for a credit card. Here’s a brief overview of what helps make up this limit, aside from your monthly income and debts owed:

  • Credit score: The better your credit score, the less interest you’re likely to pay on purchases. You’re also more likely to have a higher credit limit, as a good credit score shows that you’re a reliable, responsible consumer that can adequately repay any credit card debt. Data shows, for example, that consumers with a FICO score of 720 or greater had an average credit limit of at least $8,000. Conversely, those with FICO scores at or below 620 had a significantly lower limit at an average of $700. So if you want a high limit and your credit score is sub-par, we’d recommend enacting some credit repair best practices prior to applying.
  • Payability: Credit limit is also largely contingent on a consumer’s ability to pay. Noting this, things like debt-to-income ratio, debt-to-asset ratio and consumer income after any debt is paid are all major factors that play into credit card limit.
  • Risk: This factor isn’t so much pertaining to your potential risk as a consumer, but any economic risk based on what’s going on in the world. For instance, during the Great Recession, credit cards were issued with much lower limits than what was issued before and after the economic downturn. Creditors often don’t want to chance a situation where you’ll max out your limit and be unable to repay debt.

It’s also important to note that the credit limit you initially receive should be thought of as more of a starting point. If a creditor sees that you’ve been responsible with your card, you’ll often see your limit increase over time. If the creditor doesn’t do this for you, you can even put in a limit increase request.

How Does Credit Score Affect Mortgage Rate?

The better your credit score, the better your mortgage rates.

While this rule of thumb is fairly common knowledge, most people are unaware of just how much savings homeowners can experience over the term of a 15- or 30-year fixed-rate mortgage with even the most seemingly marginal difference in interest rate. For example, a mortgage rate of 3.75 percent, compared to a lower 3.5 percent rate, would likely cost a homeowner over $40 more a month – or about $500 more per year. If you multiply $500 by 30, that hypothetical consumer is paying about $15,000 more over the course of a 30-year mortgage than a consumer whose rate is only 0.25 percent less. That’s how big the difference can be between an excellent credit score and just a good credit score.

Yes, your credit score can wind up costing you – or saving you – a lot of long-term money when it comes to your mortgage.

Why Your Credit Score is Key

Would you want to lend money to a friend or family member who has a history of never paying people back? Lenders are in the same boat – and that’s why so much weight is put on your credit score during the mortgage loans application process. A good credit score tells lenders that you’re a responsible, reliable consumer with a track record of making on-time payments. A poor credit score can signify the opposite.

When there’s less risk with a consumer, lenders are more apt to do business with them and approve a loan with a low rate. However, when there’s more perceived risk, lenders throw in the caveat of a higher rate if the particular consumer is even approved for a loan in the first place.

What Are the Best Scores for Conventional Mortgages?

The higher the score, the lower your rate. That said, a FICO score of 720 usually puts consumers in excellent standing where they’re able to qualify for the lowest rates. Between 700-720 is considered good standing, where rates are still favorable, but not as low, and 680 is in the average range where rates are likely to be higher. Anything below 680 and you may be hard-pressed to get approved for a conventional mortgage.

If your score is short of the excellent mark, we’d recommend that you do some credit repair in order to get your score up where you can qualify for a lower rate. Though you may be chomping at the bit to buy a home now, the long-term savings of potentially tens of thousands of dollars can’t be dismissed. Here’s how to improve your credit score:

  • Improve your debt-to-credit ratio: Keep your credit card debt within 30 percent of your total credit limit. Anything higher and your score can take a hit.
  • Make all payments on time.
  • Pull your credit report and analyze it carefully for errors. It’s estimated that over 20 percent of all credit reports have some sort of error. Dispute any that are on your report.
  • Pay off high-interest credit cards before low-interest ones.

Black Boxes That Are Credit Scores

The concept of a Black Boxes is actually derived from the science and engineering fields. Specifically, Black Boxes are defined as something that you can view externally, but have no understanding of how it works internally. The same concept can be applied to credit scores, as many consumers just take note of the three-digit score that they get, yet have no idea of how – and why – it is what it is.

A Google search will quickly provide you with how the FICO score is calculated, but consumer beware – there’s also a lot of misinformation about credit scores and scoring formulas on the Internet as well. You could say that the formula itself behind the credit score isn’t that big of a mystery. The mystery is how that formula is navigated and what parts of it are stressed by the consumer. This post is designed to help you better debunk the black boxes when it comes to credit scores.

Black Boxes that are Credit Scores In a Nutshell

As you likely know, your credit score is essential to getting approved for a mortgage, auto loan, student loan and more. But what you might not know is that there’s more than just one credit score. In fact, while the FICO score is the most popular, there are dozens of credit scores that lenders may choose from based on the data that is reported to the three major credit bureaus. Because of the various different credit scores, and the fact that new formulas are always coming out, this confuses people. It’s why we encourage consumers to pull their credit report at least once a year and pay more attention to the data – not necessarily the three digit number that they get. Understanding the data is what’s really important when it comes to determining whether or not you have good credit – and how you can improve your credit score.

A Credit Repair Plan

Say you want to buy a home, but your credit isn’t good enough to get approved for a mortgage. Or maybe you want to further elevate your credit score so you can lock in a lower interest rate. That’s where a credit repair plan is necessary, as you need to know what your current score is and how much you need to elevate it to meet your goal. This is the point where the “3 Ups” come into play:

  • Clean Up
  • Build Up
  • Pay Up

Before you can truly put a credit repair plan into place, you need to know why your score is what it is, and make a plan to clean it up accordingly. After this, you need to analyze ways that will allow you to build your credit back up. And then, finally, there’s likely to be debts that you have to pay off in order to get your debt-to-credit ratio to at or below 30 percent to really notice an improvement on your score.

Which Credit Score Do Lenders Actually Use?

If you’ve ever applied for a car loan, mortgage or credit card before, then you know that part of the process involves the respective lender checking your credit score. Credit checks are crucial anytime you’re requesting to borrow money, as they help lenders determine whether or not you’re an at-risk consumer.

But what you might not know is that there’s more than one credit score that lenders can check to determine your risk. This is largely because there are three main credit bureaus that report your credit information – TransUnion, Equifax and Experior – and each of these bureaus use different models. So what credit score do lenders actually use? Let’s examine:

The Most Popular Credit Score

According to a report in Fair Isaac, an overwhelming majority – about 90 percent – of the top lenders in the United States use the FICO score to determine consumer risk. But noting this, it’s important to keep certain things in mind when it comes to the FICO score – there are more than 60 different types of it, so one FICO scoring formula may not necessarily come up with the same number as another scoring formula.

The report goes on to state that the most popular FICO score used is FICO Score 8. Mortgage lenders typically use FICO Scores 5, 2 and 4 when determining whether or not to approve a loan. Additionally, one type of credit score to keep an eye on moving forward is the VantageScore, a score that was developed by the three main credit bureaus and currently serves as a competitor to FICO. There’s some speculation that VantageScore will continue to gain traction in the future. VANTAGE 3.0 is the latest score from this family of credit scores.

What’s the Difference Between Scores?

In reality, the scoring formulas are pretty universally similar, but many of the formulas are designed to more closely analyze different things. Typically, the type of lender will depict what type of score – or scores – will be looked at. For instance, an auto lender will want to see data on whether you paid on time and in full when it comes to any past auto loans that were in your name.

With that being said, the issue shouldn’t be so much worrying about what credit score a lender is going to check, but whether your credit is in good shape to begin with. If it’s not, there are a number of credit repair tactics you can enact to get your score where it needs to be, whether you’re looking to get into the range of acceptance on a loan or whether you want to get it into the range that will qualify you for the lowest offered interest rates. Here’s a look at some credit repair tips:

  • Pay off high-interest debts first.
  • Keep your debt-to-credit ratio at or below 30 percent.
  • Pay all bills on time and in full.
  • Check your credit report at least once a year to ensure its accuracy. Dispute any inaccuracies accordingly.

 

Will This New Bill Help Your Credit Score?

There are three big complaints about the current credit scoring system in the United States – it’s confusing, it’s not always fair and it’s not always as accurate as it pretends to be. And considering that about one-third of all Americans have either poor or bad credit, it’s probably a good bet that a significant number of these individuals are “victims of the system” to some extent. In other words, their credit situation isn’t quite as dire as their FICO score indicates.

But soon this may be changing, thanks to a bill introduced in May by Rep. Maxine Waters dubbed the “Comprehensive Consumer Credit Reporting Reform Act of 2016.” The proposed bill could help a number of Americans improve their credit scores – and they wouldn’t even have to do anything:

What the Proposed Bill Includes

  • Bad credit information (i.e. foreclosures, Chapter 13 bankruptcy) would be removed from credit reports after 4 years (not 7 as it currently stands).
  • Debts that have been paid and settled would be removed 45 days after the date of finalization.
  • Employers would be forbidden to check a would-be employee’s credit report for employment consideration purposes.
  • Disputes wouldn’t be handled so much by the consumer, but by the credit bureaus.
  • Credit reports and credit checks would be able to be accessed complimentary more regularly so individuals could monitor improvements. Presently, consumers are allowed one free credit report check a year.
  • Credit relief would be provided to those that have been victimized by predatory lending.
  • The Consumer Financial Protection Bureau would be in charge of monitoring and developing scoring algorithms and models.

Will it Pass?

While the proposed Comprehensive Consumer Credit Reporting Reform Act of 2016 appears favorable (and practical?), it’s also another pitch in a line of credit reform proposals that have been introduced over the years. And these proposals have done little in the way of moving the legislative needle when it comes to credit scoring.

In fact, this is the second recent credit reform pitch from Waters herself, as her first attempt came in 2014. Last year, Sen. Elizabeth Warren and Rep. Steve Cohen introduced a proposal that would prohibit employers from checking credit scores and reports on job applicants. Both proposals didn’t pass. In fact, the last real notable change in credit reporting may have been way back in 2003 when an amendment to the Fair Credit Reporting Act permitted consumers to receive complimentary annual credit reports. Based on this unfavorable track record, the Waters’ latest proposal may appear to be a long shot, but the Senator is still working to help raise support for it.

Stay tuned to see where – if anywhere – this bill goes, as it could spell some welcome relief for millions of Americans with less than favorable credit scores.

FICO Introduces New Credit Scoring Model

The FICO score is the most popular credit score formula that lenders use to weigh the risk of a consumer. But there’s one common complaint with the FICO scoring formula, especially among younger consumers – and that the fact that it takes into account past credit history. In fact, past credit history makes up about 15 percent of the FICO score as it stands today, something that can work against young consumers who may not have the likes of credit cards, auto loans, home loans and more working in their favor.

However, this could soon be changing thanks to a new FICO score – FICO Score XD – that’s designed for consumers that may not have a traditional credit history to fall back on.

FICO Score XD: The Basics

The big difference between the conventional FICO score and FICO Score XD is that the latter will put a greater emphasis in judging a consumer based on their history of paying non-credit accounts (i.e. cable bill, phone bill, utility bills, etc.). In other words, the model won’t penalize consumers who may not have a traditional credit history, and will instead weigh the “credit invisibles” accordingly so that they’re not penalized as much for it.

FICO Score XD could be a big help to consumers who are attempting to acquire that first credit card or car loan.

The FICO Score XD will also still feature a scale ranging from 300 to 850.

It’s also worth noting that FICO is hardly the only one that is working on or employing an alternative formula for different types of consumers.

Working on Your Credit History

The FICO Score XD will be able to help consumers without traditional credit history, but it remains to be seen how many lenders are actually going to use it to weigh decisions on whether or not to grant approval. So while the FICO Score XD can certainly help if enough lenders embrace it, consumers should also take measures to make sure that they’re building positive credit history. For instance:

  • Get a secured credit card: While these alternative cards can come with high fees, they’re ideal in that they report on-time payments to all three of the major credit bureaus. What’s more is that you’re pretty much guaranteed approval for a secured card, regardless of your credit score.
  • Become an authorized user: While there’s risk involved with this, becoming an authorized user enables you to make purchases on an account holder’s credit card. As long as you’re making payments on time, it should help your credit score.
  • Check your report: You can check your credit report for free at least once a year, and this can be a good way to judge just how much your credit history is hurting you and to what lengths you should go to improve it.

5 Credit Report Myths Debunked

Your credit score is unquestionably the lifeblood of your borrowing power, so it’s only natural for you to want to put yourself in a position to have the highest score possible. After all, the higher your score, the more likely you are to be approved for financing, and the more likely that you’ll be approved for said financing with a low interest rate.

Despite the importance of your credit score – not to mention the importance of occasionally checking your credit report to ensure that there aren’t any irregularities – there are a lot of misconceptions out there about credit, credit reports and credit scores in general. Here’s a look at five myths that are often taken for fact to help settle the debate once and for all:

5 Credit Report Myths to Know

  1. I don’t need to check my credit: Many people think that if they’re good consumers and pay all of their bills on time, have good credit history, etc., that they won’t need to check their credit scores. Don’t get caught thinking like that. If you don’t have an ideal credit history, it’s important to check your report often to see if any credit repair tactics are paying off. And even if you’re an ideal consumer, it’s estimated that one out of every five Americans has an error on their credit report. Hence, checking it is really the only way to know and begin the process of disputing any errors.
  2. Checking my own score will dock it: This isn’t true, as when you check your own score it’s what’s known as a “soft inquiry.” This permits you to see the score and a limited amount of data to give you an idea of why it’s in the shape that it is and what you might need to work on to improve it. Conversely, “hard inquiries,” which are those pulled by lenders to assess your financial behavior, can hurt your score if many are done within a certain timeframe.
  3. Paying off debt will remove it from my report: While paying off a debt is likely to help your score, it won’t be removed from your report immediately. In fact, some entries can take anywhere from seven to 10 years to be removed.
  4. Reports only display one entry per debt: This is true in most cases, but in a situation where your debt is past due and has been sold off to a collection agency, both the original lender and the collection agency may appear on your report, essentially showing two negative entries.
  5. Canceling an old credit card will hurt me: This is generally false, as canceling a card will have little to no effect on your credit standing. There is one exception, however, and that’s the cancelation of a credit card with a big credit limit. This may impact your credit utilization ratio, which is essentially your debt-to-total-credit allotment percentage. Generally, your score will be better if your debt is 30 percent or less of your total limit. Bottom line – canceling an old credit card likely won’t hurt you, but it’s best to close out those with smaller limits.

Now that you can separate some credit report facts from the fiction that often accompanies them, you can be more sure of situations that either potentially help or hurt your score.

Best Credit Scores – Top 10 Cities

It’s no secret that your credit score is the lifeblood of financial potential, at least when it comes to borrowing money. And it might not surprise you to learn that credit scores are often reflective of where you live. For instance, communities with high-income, well-educated professionals are more likely to have higher average credit scores than those to the contrary.

Certainly, there’s a lot more that dictates a credit score, and living in the aforementioned areas doesn’t guarantee you’ll have a great score, but we thought it would be fun to take a moment to examine the top 10 cities in America with the best credit scores, according to CBS Money Works:

Top 10 Cities with the Best Credit Scores

10. San Mateo, CA: With a score of 708, this northern California city close to San Francisco meets the “high income” criteria often associated with better credit scores. Credit repair consultants may not have a lot of business out in the Bay area.

9. San Ramon, CA: Another suburban San Francisco city, the average score in San Ramon is a solid 709.

8. Davis, CA: It must be something about California and high credit scores. Davis, a northern California city near Sacramento, has a 710 average credit score.

7. Arlington, VA: With a plethora of federal agencies and big businesses, most residents of Arlington, Virginia are well educated. That helps explain the 714 average credit score.

6. Redmond, WA: Redmond isn’t Silicon Valley, but it is a big tech town with an educated population. Hence its 715 average score.

5. Bellevue, WA: With median home values of over $660,000, this suburb of Seattle requires a good credit score and high income level for home ownership. That’s where the 716 average score comes to play.

4. Sunnyvale, CA: Back to California we go for No. 4 on this list, which has an average credit score of 719. Like others on this list, Sunnyvale is another big tech town with a well-educated population.

3. Cambridge, MA: It’s probably a good bet that the city that plays host to Harvard and MIT would have pretty financially savvy residents. It does – the average credit score is a cool 725.

2. Mountain View, CA: And we’re back in California for the runner-up, as Mountain View clocks in with an average score of a whopping 741. It’s another big tech city, but we’re starting to think there’s something in the water out there in Cali. Either that or people are just really responsible with their finances.

1. Cupertino, CA: We stay in California for the city with the best credit score, as Cupertino takes it with an average 742 mark. Another big tech city, Cupertino is perhaps best known as the home of Apple.

Buying a Home in 2016 – Trends to Watch

Buying A HomeIs 2016 the year you will act on your dreams and buy a home of your own? This year is going to be different than ones in the past, and upcoming trends can affect prospective homeowners in some dramatic ways. A few things to look out for:

1. Interest rates are going up.

Interest rates held steady at record lows for a decade. But, the Fed raised a key interest rate in mid-December and they expect to make four more increases this year. This is going to mean higher interest rates for borrowers, as well.

To insure the very best interest rate possible, make sure you improve your credit before applying for a loan. Make sure that any entries on your credit report that could drag down your score are dealt with. A difference of even 1% can add up to tens of thousands extra over the life of your loan.

2. More renters looking to buy.

Rental prices are expected to increase by eight percent on average in 2016. Since buying a home is already cheaper in most markets, increases could be enough to encourage some renters to make the jump and buy a home instead. If enough people make the switch, it can increase competition significantly.

3. Millennials (maybe) entering the market.

Consumers between 18 and 34 continue to confound industry experts. On average, they are less likely to want to buy homes than previous generations were at the same age. However, a recent survey shows that 13% of Millennials plan to buy a home within the next year and 35% say they’d like to buy by 2018. Since Millennials are the largest consumer cohort in the country, increased competition from this group can mean that it’s harder to find a home to buy.

4. Better prices.

Despite the pressures listed above, home prices are expected to go up more slowly than they did last year. In 2015, housing prices went up over 6%, but are expected to go up just 3 to 5% this year.

This smaller increase can help balance some of the pain of higher interest rates on mortgages. But, some industry experts think that the lower prices may make some people who may have decided to sell to stay where they are and invest in their current homes instead.

Each year brings a different set of challenges to prospective home buyers. But, by keeping up on the trends and building the strong foundation you need to qualify for a great deal on a mortgage, you can be ahead of the game. Talk to us now about how we can help you get ready for home ownership in 2016.

Credit Scores – More Important than Ever in 2016

If you’re reading this, we hope that you already know just how important your credit score is. To review, your score is somewhat of your financial lifeblood, and those three little digits can tell lenders if you’re an at-risk borrower, whether or not you should even qualify for a loan and what interest rate you should pay on said loan (should you qualify for one). Generally speaking, the better your credit score, the lower the interest rate – and vice versa. So, yes it is important – and in 2016, it’s arguably going to be more important than ever. Why? Because the Federal Reserve Board elected to raise the benchmark federal funds rate. We explain:

About the Benchmark Federal Funds Rate

You’re probably wondering just what impact the raising of the benchmark federal funds rate has on the value of your credit score. Consider this: the aforementioned rate, essentially, is the determining factor in how high of an interest rate banks and financial entities have to pay to borrow from each other. When the benchmark federal funds rate increases, so does the minimum interest rate, or prime rate, that lenders will charge even their most exceptional customers.

What the Rate Increase Means

Since the prime rate is likely to go up, so will interest rates in general, even if your credit is exceptional. This means that new loans are likely to be more expensive, as will any existing loans with variable rate financing. Those who will be particularly hard hit are individuals with bad credit, as loans and credit cards may become more difficult to attain (not to mention the likelihood of even higher interest rates for at-risk borrowers). The Federal Reserve Board has elected to raise the benchmark federal funds – and the board is likely to approve further increases in the future, hence why your rating and score is so important as we begin 2016. So if it is less than stellar, start making efforts now to improve it. Some common credit repair practices include committing to paying bills on time, lowering your debt-to-credit ratio and, perhaps easiest of all, checking your credit report at least once a year to ensure its accuracy related to your consumer behavior. With the funds increase, interest rates are likely to increase across the board, for those with both good and poor credit. Make the commitment now to elevate your score so that you can ensure you’re paying the least amount possible on any loans or credit cards.