Tag: credit card limits
As suggested above, there are many similarities between lines of credit and other types of borrowing, but there are also many important differences that borrowers need to understand.
Like credit cards, lines of credit effectively have preset limits – you are approved to borrow a certain amount of money and no more. Also like credit cards, policies for going over that limit vary with the lender, though banks tend to be less willing than credit cards to immediately approve overages (instead they often look to renegotiate the line of credit and increase the borrowing limit). Also like credit cards, the loan is essentially pre-approved and the money can be accessed whenever the borrower wants, for whatever use the borrower intends. Lastly, while credit cards and lines of credit may have annual fees, neither charge interest until/unless there is an outstanding balance.
Unlike credit cards, lines of credit can be secured with real property. Prior to the housing crash, Home Equity Lines of Credit (HELOCs) were very popular with both lending officers and borrowers. While HELOCs are harder to get now, they are still available and tend to carry lower interest rates. Credit cards will always have monthly minimum payments and companies will significantly increase the interest rate if those payments are not met. Lines of credit may, or may not, have similar immediate monthly repayment requirements.
Like a traditional loan, a line of credit requires acceptable credit and repayment of the funds, and charges interest on any funds borrowed. Also like a loan, taking out, using, and repaying a line of credit can improve a borrower’s credit score.
Unlike a loan, which generally is for a fixed amount, for a fixed time, with a prearranged repayment schedule, there is much greater flexibility with a line of credit. There are also typically fewer restrictions on the use of funds borrowed under a line of credit – a mortgage must go towards the purchase of the listed property and an auto loan must go towards the specified car, but a line of credit can be used at the discretion of the borrower.
Pawn Loan / Payday Loan
There are some superficial similarities between lines of credit and payday loans, but that is really only due to the fact that many payday loan borrowers are “frequent flyers” that frequently borrow, repay, and/or extend their loans (paying very high fees and interest along the way). Likewise, a pawnshop or payday lender does not care what a borrower uses the funds for, so long as the fees/loans are paid/repaid.
The differences, however, are more considerable. For anyone who can qualify for a line of credit, the cost of funds will be dramatically lower than for a payday/pawn loan. By the same token, the credit evaluation process is much simpler and less demanding for a payday/pawn loan (there may be no credit check at all) and the process is much, much quicker. It is also the case that payday lenders will seldom lend the amounts of money often approved in lines of credit (and banks will seldom bother with lines of credit as small as the average payday or pawn loan).
A $10 purchase can help you save more than $40 a month — and get you started on paring down what you owe.
If you find yourself falling deeper into credit card trouble, it’s time to take a hard look at what’s coming in, what’s going out and see where you can free up some cash quickly to start hacking away at your debt.
Some trims may seem small, but if you package several of them together, you can soon get started on a respectable payment plan. Here are some ideas for places to turn first.
1. Cell Phones
“For $9.88, you can buy a TracFone (prepaid cell phone) with pretty decent coverage and pay by the minute,” says Mike Sullivan, director of education at Take Charge America in Phoenix. “And if you’re careful, you can end up saving $40 to $50 a month off a typical $80 cell phone bill.” He also recommends canceling your land line unless you have medical issues that may require emergency calls.
2. Cable / Satellite
Most people can save money just by getting rid of the extra pay packages they have — such as premium movie channels and extra services. “If you’re really in trouble, cancel the whole package,” Sullivan says. Check out the library for free movies, DVDs and CDs to bridge the entertainment gap.
3. Homeowners Insurance and Car Insurance
By increasing the deductible of your policy from $500 to $1,000, you can see big decreases on your premium, says Michael Barry, vice president of media relations for Insurance Information Institute in New York. “People pay about $880 a year, so if I can knock $88 off, it’s a start.” Regarding auto insurance, take a look at your collision insurance if you have an older car. If you have even a fender-bender, sometimes the cost to repair the car would be more than it’s worth, so perhaps you could cancel the collision insurance altogether.
First, look up the value of the car at Kelley Blue Book, Edmunds.com or the National Automobile Dealers Association, then check the collision line on your auto insurance bill and see what it’s worth to you to keep that insurance. Also, if you don’t drive that car much, look for a discount. “If you drive from 7,000 to 7,500 miles a year, you can often qualify for low-mileage discounts,” Barry says.
Americans are increasingly finding alternatives here. In fact, consumers spent 11 percent less last year in this category, according to the Bureau of Labor Statistics’ 2009 Consumer Expenditures Survey released in October. If you have more than one car, this may be the time to look at downsizing to just one car and getting around with better planning, carpooling, bike riding, public transportation or car sharing. Car-sharing companies such as Zipcar operate in a growing number of cities and on many university campuses. You can rent a car by the hour when you have to have one without the expense of insuring and maintaining your own car.
“People often overlook programmable thermostats,” says Edward Tonini, director of education of Alliance Credit Counseling in Charlotte, N.C. “You can spend $20 to get a programmable thermostat and if you set it right, it can save you $100 over the course of a year easily.”
Households spent an average of just more than $300 a month on food eaten at home and about $215 per month on food outside the home in 2009, the BLS survey reported. “Maybe eating out isn’t necessary for you,” Tonini says. “Packing lunches and eating at home will lower your discretionary spending.”
7. Gym Membership
Are you really using it multiple times a week? Divide your monthly dues by the number of times you go in a month and get a realistic picture of what you’re spending on a one-hour workout. Park districts or community centers often have low-cost or free programs. Also check into exercise videos or a piece of home exercise equipment that you would use regularly. If you decide to keep the membership, check to see whether the facility offers discounts for coming at off-peak times.
A family of four can quickly rack up nearly $100 on one movie with popcorn, drinks and maybe even parking fees. “Instead of going to the movies, have a game night at home. It sounds kind of corny, but it will be more meaningful than sitting in the dark when you can’t talk to each other,” says Dave Gilbreath, a regional director with Apprisen Financial Advocates in Yakima, Wash.
9. Tax Relief
Wendy Burkholder, executive director of Consumer Credit Counseling Service of Hawaii in Honolulu, says, “Many of the families we work with are struggling with credit card debt because of loss of income. One of the first things to do is re-evaluate your tax withholding on your paycheck (if your spouse or partner has lost a job). If you don’t make the change, you end up with a whopping refund. You don’t need the money a year from now, you need it now.” If you’re overpaying taxes, you’re also giving the government a free loan and are likely putting off paying for your own bills, which can lead to fees and penalties, she says.
10. Health Insurance for Dependents
“If you’re struggling with loss of income, you may no longer be able to afford $600 being deducted from a paycheck to cover your dependents,” Burkholder says. She suggests checking to see whether you now qualify for a state or federal coverage plan for dependents, such as the Children’s Health Insurance Plan, or coverage by health care providers that may offer reduced prices for basic health care for children.
Deciding what to cut first will be different for every consumer, but whatever the choice, it should be sustainable, rather than a one-time quick fix, Tonini says. Sometimes it’s cutting out the daily $4 coffee, but “they need to figure out what their ‘latte factor’ is.”
1. Don’t close credit card accounts to improve your credit score.
You might have a good reason to shutter your account — you don’t want to pay an annual fee, you’re concerned about identity fraud, or you want to reduce the temptation to overspend — but don’t do it for the sole purpose of raising your credit score.
One factor in your credit score is your utilization, which is the ratio of balances owed compared to the credit limits on revolving accounts such as credit cards. Utilization is calculated for each credit card you have and across all of your cards. The lower your utilization, the better for your credit score. Closing a credit card account that has a zero balance excludes that credit limit from the overall utilization calculation, which can make your utilization increase and in turn, lower your score.
For the same reason, it’s also a bad idea to ask for lower credit limits on your credit cards if your goal is to improve your score. Doing so can only push your utilization higher.
Tip: If you must close a credit card account but want to keep your score high, pay down balances on other accounts to mitigate the effect.
2. Paying in full doesn’t hide a high credit card balance from your credit score.
If you’re consistently charging near the credit limit on your credit card but pay the balance in full when each bill arrives, you might be hurting your credit score. That’s because your score considers the account balance shown on your credit report. Your credit report will reflect the account balance at the time the issuer supplied it to the credit reporting agency, which will typically be the balance as of your last statement date.
Tip: If you pay in full each month but need to bump your score higher for an upcoming credit check, charge less on your credit cards.
3. Light use of credit cards is best for your credit score.
Maxing out your credit cards can obviously have a negative impact on your score. Using the majority of your credit limit is not good, either. Light use of your cards is best. Using 10 percent of your credit limit will be better than using 30 percent, which in turn is better than 50 percent. A small balance is actually slightly better than a zero balance (though it doesn’t matter to the score if you actually carry a balance).
Tip: If you need to raise your credit score, look at your monthly billing statements to see how your balances compare to your credit limits. Consider increasing your payments, or if you pay in full, using your credit cards less often.