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What Types of Debt Affect Your Credit Score? It’s Not Just Your Credit Cards

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Staying informed about your credit score is important. You can easily track your debt while ensuring your financial information is always safe. However, understanding your credit score and how it can change can be confusing. 

Misinformation and a lack of education regarding financial literacy can significantly impact your debt management abilities. For example, you might think only your credit card activity determines your credit score. However, your credit score is more than that; your debt accounts for 30% of your credit score.

Having a little bit of debt history is fine, as it lets lenders know whether you pay back what you owe. This also establishes that you were approved for some credit at some point. It is difficult to get more substantial loans and credit amounts for large purchases without an established debt pattern. 

The critical thing to remember about debt is that there is no problem having it, but there needs to be an effort made to pay down your debt.

You do not want the debt just sitting there collecting interest. Failure to pay will affect your credit score in a bad way, no matter where the debt came from. 

Different types of debt can affect your credit score. Understanding these types of debt and how they relate to your financial situation can ensure you take the proper steps to manage your debt and improve your credit score. 

Loans 

Regardless of where you get it from, a loan will show on your credit score. A loan may be taken for a few reasons. First, it is considered installment debt, as you take a large sum and pay it off in small payments. Typically, there will be a minimum amount you have to pay against your principal each month. 

Interest will also be charged on the amount you owe back for your loan. For most loans, there is a fixed percentage of interest. Your credit history is one of the factors that will determine how much interest you must pay. Furthermore, it determines your approval for a loan. 

Car Loan and Mortgages

Interest rates are usually lower for car loans or a mortgage because the lender has less risk. For example, if you were to miss any payments or fail to pay your auto loan or mortgage, the lender would take back the property. 

Other Types of Loans

For loans such as a student loan or a personal loan, there is nothing that the lender can take from you to pay themselves back. Therefore, giving you this loan is more of a risk for the lender. This is partially why the lender will review your credit history and potentially give you a higher interest rate. 

How Loans Affect Your Credit Score

If you make your monthly payments on time towards your loan, it will positively affect your credit score. In addition, these payments show that you are responsible with your debt and actively have the funds to pay towards your debt. 

Missing a payment once or twice most likely will not hurt your score, provided you try to make up the payment as soon as possible. However, making a habit of missing payments or making late payments can impact your credit score. This is because the company or financial institution you owe money to will report missed payments on your credit history. Your score goes down when this happens. 

When it comes to getting a loan in the future, if you have a history of missed payments that you do not try to make up or you default on a loan, you run the risk of getting denied. 

Charge Cards

Charge cards are not as common as they used to be. They are also much harder to get than other types of credit. A charge card will let you make purchases that you pay for in monthly increments. They will usually have a limit, but that limit can fluctuate. 

The debt that you incur on a charge card is considered unsecured, which means it is a high risk for lenders to approve you for these. They can also have higher interest rates than other types of credit and penalties if you fail to pay your monthly amount on time. 

Medical Bills 

Depending on where you live and if you have any insurance, it is possible to garner medical debt in the case of medical necessity. If you cannot pay your medical debt off right away, you can potentially arrange a payment plan that splits up payments into smaller increments. Click the link below to learn more.

https://www.cnbc.com/select/how-long-does-medical-debt-stay-on-your-credit-report/

If you miss payments towards your medical debt, the medical facility may turn that debt over to a collection agency. If it gets that far, it could have a significant impact on your credit score. You would have to be dormant on payments for quite some time before that happens. 

Furthermore, when medical debt is turned over to a collection agency, there is often a waiting period between when it is turned over and when it shows up on your credit report. Because of how these debts are incurred, it allows you to have more time to set up a payment arrangement that works.

Debt Consolidation

Many banks or financial institutions offer debt consolidation loans. These loans essentially allow you to pay off multiple types of debt.

Once those debts are paid, you will then owe the consolidating lender. These loans work like most loans, where you have a monthly payment plus interest and a fixed term to pay it back in. 

While this can be an excellent option for getting a good handle on debt, doing so can have a small impact on your credit score. It affects your credit score because a credit report will need to be pulled to determine whether you are eligible for one. 

It also affects your credit score because you reduce your credit utilization. Utilization is how much credit you have available versus what you are using. 

The only solution for those in an unmanageable financial solution might be filing a consumer proposal or bankruptcy. It could be a necessary solution for your financial situation, but it will lower your credit score substantially. Thankfully, once you manage your debt, there are many ways to build it back up smartly. 

Bills 

When you purchase items like a cell phone or internet plan, you may not realize that your credit score is checked before being approved for these items. It happens because the issuer wants to know you can pay your bills. 

If you fail to pay these bills, the issuer will submit this history to your credit report. Once again, a more extended history of missed payments will be sent to a collection agency. Alternatively, a propensity for paying your bills in full and on time is excellent for your credit score. 

Opening and Closing Accounts Frequently 

It may be tempting to switch credit cards every time a good offer or incentive comes up. Therefore, it may seem smart to close an old card, so you do not have multiple that you’re tempted to use it.

However, having old cards or accounts open and showing a history of on-time payments on your credit report is good. 

When you continuously open new accounts or take on new loans, your credit score will reduce your credit age. In addition, the frequency of credit inquiries that will show on your report will also affect your score. To lenders, all this new activity will look a little dodgy to them. They may think you’re at high risk of mismanaging your debt. 

Having a few different types of credit opened, such as a credit card and a couple of loans, is good. This will tell potential lenders that you can handle multiple types of debt. Thus, they may not be as wary when it comes to lending to you. However, this is not to be incentivized to take on more debt than you can manage. 

Once again, being cognizant of your credit and your debt is essential to improving your financial situation. In addition, it can help you prioritize how you allocate your budget towards different types of debt. Finally, this awareness and some budgeting efforts on your end can help you improve your credit score.

Best P2P Lending Platforms in 2021

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Are you looking for loans to fund your next big purchase? A P2P lending platform may be able to help you! However, there are so many different options out there. You will want to make sure that you are choosing a reliable platform that is going to be worth your time. 

Many of the most trustworthy sites have more than ten years’ worth of experience. These sites are very secure and consistently deliver your loans. You will not need to worry when you decide to go with one of these long-standing P2P platforms.

What is a P2P Lending Platform?

A P2P, also known as a peer-to-peer lending platform, allows you to get loans directly from others.

This option is best when you want to cut out lenders, such as banks. Many people with lower credit choose P2P lending since they can still get loans in this way.

Many of these platforms use specialized software to match lenders with borrowers. If you are looking for more loan options to pay for something expensive, you will want to consider this method. It is worth noting that you will still need to pay interest on your loan, most of the time.

How P2P Lending Works

P2P lending is a straightforward process and works much like you would expect it to. You will experience a soft credit check, which is there to make sure you can pay back the loan.

Once you make it through this step, the platform performs a hard credit check, then assigns you a rank. This rank or grade shows lenders on the forum what levels of risk they take when investing in you.

At this stage, you have access to the platform! You can make a post about what you need for the loan, as well as what interest rates you can pay. Finally, lenders make “bids” on your post. These bids include the amount the lender will offer- then you choose the one that suits you the best.

After you accept a bid on your listing, the loan amount enters your bank account. You will have to pay it back over time, but you now have the funds for your purchase.

Why Use a P2P?

There are a variety of reasons for anyone to use a P2P platform. Many people use P2P lending to provide funds for personal projects and similar situations. If you do not want to work with an institution, then P2P is your best choice! The sites still report to the credit bureaus, so you can still build your scores using these sites.

https://www.moneyunder30.com/peer-to-peer-lending-sites-for-borrowers-and-investors

However, there are plenty of sketchy P2P platforms online. You only want to borrow from reliable sources, so make sure to check out all the options below.

The Best P2P Lending Platforms

Now that you understand how to use a P2P lending site best, you will want to choose a platform that suits you the best. There are plenty of different sites available, so you will want to choose one that fits all your needs. For example, if you have Fair Credit, then Payoff may be best for you.

1. Peerform

Peerform is an excellent P2P lending platform. The site offers competitive interest rates, does not have prepayment penalties, and is perfect for Fair credit scores. This platform is very trustworthy since it’s been around since 2010. The people running the site also have ample experience in the field because of this.

The maximum loan amount is $25,000, which is not as high as others on this list. Still, you receive great rates and reliable services. It is also worth noting that the minimum loan amount is $4,000.

Overall, Peerform is the best P2P lending platform for many people. It comes with a low credit requirement, which is a 600-credit score. If you happen to be late paying on the due date, you also have 15 days before receiving a late fee.

https://www.thebalance.com/best-peer-to-peer-lending-companies-4580285

2. Payoff

The payoff is another reliable P2P lending platform that you will want to consider. Payoff even works with those who have a short credit history or fair credit scores. Many borrowers also said they appreciated having free access to their FICO scores on the site.

You can also pre-qualify as an added benefit, giving you a higher chance of getting the loans you want. There also are no prepayment penalties, so you can pay off the loan as soon as you are ready. 

Payoff also started in 2005, giving the site many years’ worth of experience. The platform also has lower fees and sends you the funds quickly. Their maximum loan amounts also fall between $5,000 and $40,000, which is more than enough money for many situations.

Overall, Payoff is an excellent option for anyone with fair credit who wants to build on their score. Most borrows can find the loans they need there.

3. Upstart

Upstart is a trustworthy P2P lending site that you should also investigate. The starting interest rate is a bit higher than the above two options at 8.27%. However, it is still great for borrowers who do not have an extensive credit history.

To offer loans to more people, Upstart does look at your job history and education, but these factors should work in your favor when you have low credit scores. The platform accepts those with scores of at least 600, which is lower than many other lenders.

Upstart came into existence in 2012. Today, you can borrow between $1,000 and $50,000. Additionally, about 90% of borrowers pay off their loans from the platform- making it an excellent place for those looking to invest on a platform. 

4. Prosper

Prosper is another wonderful option, but it is much better for those with a long credit history. Many of their lenders mention appreciating that the site allows them to change their monthly due dates. That way, you can choose a date that will enable you to make payments reliably.

Prosper was the first P2P lending site, which came online in 2005. During the years since the platform has gained a lot of experience and is very well-known. They can be a little slow to provide you with the funds, but you can borrow between $2,000 and $40,000.

This lending platform is best for those with a more extended credit history because the venue requires at least three open credit accounts. Those just starting on building their credit may not have that many credit accounts open. In short, Prosper is very trustworthy and always makes sure that you get your funds from accepted loans.

Final Thoughts

To summarize, there are many trustworthy P2P lending platforms that you can make use of. Many borrowers use these loans to pay for home improvement, new cars, starting a business, and other large purchases- we’re sure you will find them helpful!

Image credit: Wutzkoh

Lending Club Review

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At a time when investors are making record low interest rates of little more than 1-2%, there is an opportunity to earn much higher returns through peer-to-peer investing with Lending Club.

And for would-be borrowers, the news is almost as good. They can borrow money from Lending Club investors at rates generally below those offered by credit cards. They can do so without putting up collateral and without all the red tape that comes along with borrowing from a bank.

Note: A few years back Matt used Lending Club to consolidate his debt and has been investing with them ever since paying off that loan. Over the last three years he has averaged an interest rate of over 10% on his investments with Lending Club.

What is Lending Club

Lending Club is a “peer-to-peer” lending company, matching borrowers directly with lenders.

The model removes banks from the process, enabling the borrower to pay a lower interest rate, and the investor to earn a higher rate of return. The company is the first peer-to-peer lending organization to be registered with the Securities Exchange Commission.

The company began operations in 2007 and has originated over $1 billion in loans.

According the company’s website, the latest statistics–as of November 23, 2012–include:

  • Loans funded to date: $1,348,306,700
  • Interest paid to investors since inception: $114,375,168

77.32% of Lending Club borrowers report using their loans to consolidate debt or pay off their credit cards. Can I get an Amen?

How does Lending Club work

Both investors and borrowers can go to the Lending Club website, sign up and investigate the loan programs available, including loan requirements and grades, interest rates, terms and any other factors connected with the transaction.

Loans sizes range from $1,000 to $35,000 (the maximum loan amount), and are unsecured, personal loans. If a borrower is determined to be credit worthy, Lending Club assigns them a credit grade that determines the interest rate charged. Credit grades are determined by the borrower’s credit characteristics, including credit history and credit scores, loan amount and debt-to-income ratios.

Loan (or note) listings are provided on the Lending Club website that reveal the loan grade, loan amount, and loan purpose. Investors can choose loans to invest in from the listings, deciding, for example, what loan grades and interest rate terms they deem acceptable – then they can save the filters and use them later to find and fund more notes.

How investors benefit from Lending Club

According to the site, Lending Club has over 45,000 investors who have funded more than $1 billion in loans. And they have collected over $114 million in interest payments.

Lending Club Notes ($20,000 denominations) have a net annualized return that is determined by loan grade. For an A note, the net annualized return is 5.66%, ranging up to a G note with a return of 12.07%. The nominal average interest rate is 14.21%, with an average default rate 4%, and an average net annualized return of 9.64% (Matt is currently earning at 10.23%).

Lending Club itself makes money by charging a service fee to investors and a loan origination fee to borrowers, similar to points charged by a mortgage lender.

Investors start by opening a account with Lending Club and depositing their money. They then choose the loans they want, based on the expected rate of return on investment and the level of risk they’re comfortable with. Higher rate loans also carry higher risk, while lower risk loans offer lower interest rates.

How Borrowers benefit from Lending Club

Borrowers can borrow money through Lending Club for less than they’ll pay for most other loans. Since there’s no “middle man” in the Lending Club process, they can see a loan approval in less time and with much less documentation. Borrowers can get debt consolidation loans to pay off credit cards charging, say, 15% with a loan from Lending Club carrying a rate well under 10%.

Which is exactly what Matt did. He consolidated three credit cards and an auto loan, then paid it off in seven months.

Lending Club isn’t a “no other way” lender, and there are some stipulations that keep loans primarily to higher quality borrowers. According to the website, fewer than 10% of loan applications are approved. The credit standards are pretty stiff, with a minimum credit score of 660.

This is because Lending Club likes to deal with borrowers who are going to pay off the loans. Makes sense right?

Some statistics on the profile of the average borrower from the site:

  • 715 FICO score
  • 14.98% debt-to-income ratio (excluding mortgage)
  • 15.21 years of credit history
  • 68,831 personal income (top 10% of US population)
  • Average Loan Size: $12,159

Even with the high credit standards required by the program, Lending Club offers tangible advantages for borrowers who do qualify.

As mentioned above, 77.32% of Lending Club borrowers report using their loans to consolidate debt or pay off their credit cards. How cool is that?