interest

Apache is functioning normally

After sustaining a 23-year high for over a year, the Federal Reserve has elected to slash the federal funds target rate by half a point, dropping from a range of 5.25%-5.50% to 4.75%-5%.

Lenders anticipated that the Fed would move to lower rates by some degree, and began adjusting mortgage rate offers ahead of the September 17-18 meeting: Rates fell 23 basis points in the week ending September 12. (A basis point is one one-hundredth of a percentage point.) This means that home shoppers who still find today’s rates out of budget shouldn’t expect more than modest drops in the coming days.

Why the Fed is moving quickly now

The Fed has held rates steady for the past 14 months in an effort to control inflation. Recent data shows that the economy is moving toward central bankers’ target inflation rate of 2% — the latest Consumer Price Index (CPI) report, a broad measure of price changes for goods and services in the U.S., shows that inflation slowed to 2.5% in August, down from 2.9% in July and 3% in June.

This data alone may have justified a softer cut of 25 basis points to keep inflation on a downward trajectory. However, job growth continued to slow in August, and a fairly weak July jobs report showed the rate of unemployment hitting a three-year high. Unemployment is a leading sign of recession, and the Fed’s decision to reduce rates by 50 basis points indicates that employment may have now eclipsed inflation as the Fed’s chief concern for the economy.

While this is good news for mortgage shoppers hoping to score a lower interest rate, the Fed’s aggressive move may reflect an effort to hold off “more rapidly deteriorating labor market conditions and weakening of the economy,” said Selma Hepp, chief economist and senior vice president at the housing data provider CoreLogic.

Lawrence Yun, chief economist at the National Association of Realtors (NAR), said that the Fed’s choice could be the result of both positive and negative factors. If an unsteady job market is the Fed’s primary motivation, it could mean that central bankers see the possibility of a recession. On the other hand, it could be a good sign “if the Fed has a solid belief that inflation is conquered, even as CPI remains at 2.5%.”

Mortgage rates have further room to fall (but home prices will rise)

Falling interest rates are likely to signal changes across the housing market. Freddie Mac’s August 2024 Outlook projects that the labor market will continue to weaken into 2025. In this scenario, Freddie Mac outlines the probability that mortgage rates will trend downward in the coming months, leading to a “significant surge in demand, mainly from the first-time home buyers left at the margins,” as well as a small uptick in housing inventory as the rate lock-in effect loosens somewhat.

With an influx of buyers and inventory remaining tight, home prices are expected to rise 2.1% in 2024 and 0.6% in 2025. Fannie Mae’s August economic development report projects that mortgage rates will average 6% in 2025.

While Fed watchers are mostly inclined to believe that another cut will come at the November 6-7 meeting, any decision by central bankers will be informed by trends in new economic data as it emerges. One CPI report and two jobs reports will be released between now and then, and what they reveal about the rates of inflation, unemployment and job growth will be a major indicator of when and how the Fed may choose to shift rates.

How home buyers can move forward

Market traders were divided over predictions of what central bankers would do in the days leading up to this September meeting. Those currently shopping for a mortgage should remember that mortgage rates will continue responding to expectations of what the Fed will do, rather than waiting for central bankers to take action. If additional rate cuts are expected, we could see mortgage rates fall even further before the November meeting.

There’s no perfect way to time the market, and buyers holding out for mortgage rates to hit their lowest point will have to contend with greater competition and higher home prices. While it’s understandable to want to get the best deal, the “right time to buy” is determined by personal factors as much as economic ones.

If you can afford to move forward with your homebuying plans now and want to take advantage of refinancing later, you can benefit from strategically keeping your closing costs as low as possible, since you’ll have to pay them again when refinancing. For example, if you’re hoping to refinance in the next year or so, it wouldn’t make sense to pay for points that lower your mortgage rate at closing right now.

However, while it can be useful to think about your refinancing plans when considering your closing options, it’s not recommended that you commit to a mortgage you cannot comfortably afford with an expectation that you’ll refinance later. The lack of consensus among industry experts going into this meeting should underscore the fact that it’s too risky to rely on a concrete timeline of when rates will hit your specific target.

Source: nerdwallet.com

Apache is functioning normally

If you’ve got a home equity line of credit (HELOC), payment relief may finally be here.

The Fed is expected to “pivot” today, meaning they’ll shift from a tightening monetary policy to a loosening policy.

In other words, they’re going to start cutting rates instead of raising them!

While this won’t have a direct impact on long-term mortgage rates, it directly affects loans tied to the prime rate, including HELOCs.

This means your HELOC rate will go down by whatever the Fed cuts. So if they cut 25 basis points today, your HELOC rate will be adjusted down 0.25%.

Though one cut isn’t likely to provide major relief, there are expectations that this is the first cut of many, with possibly 200+ bps of cuts penciled in over the next 12 months.

So if you’ve been given the option to “lock your HELOC rate,” it’s probably best to give it a hard pass.

How HELOC Rates Are Determined

As a quick refresher, HELOCs are variable-rate loans, meaning they can adjust each month based on the prime rate.

To come with your HELOC rate, you combine the HELOC’s margin, which is fixed, and the prevailing prime rate, which moves in lockstep with the fed funds rate.

Whenever the Fed decides to raise or lower its own fed funds rate (FFF), the prime rate will also go up or down by the same amount.

Since early 2022, the Fed has raised the FFF 11 times, from near-zero to a range of 5.25% to 5.50%.

Today, they are expected to lower the FFF either 25 or 50 bps. This means banks will lower the prime rate by the same amount shortly after.

Quick note: The Fed does not control long-term mortgage rates, so their action today won’t directly impact the 30-year fixed. If they cut the 30-year fixed could actually rise today!

Anyway, let’s assume you have a margin of 2% and prime is currently 8.50%. That’s a 10.50% HELOC rate. Ouch!

But if the Fed cuts 25 bps or 50 bps today, that rate will fall to 10.25% or 10%. Okay, we’re getting somewhere.

Still not a low rate, though it’s finally not going up and in fact is coming down.

Now factor in another 200 bps of cuts and the rate is down to 8%. Sweet, that could actually result in some decent interest savings and a lower monthly payment!

What Is Locking Your HELOC Anyway?

That brings us to “locking your HELOC.” As noted, HELOCs are variable-rate loans.

But the banks will sometimes give you the opportunity to lock the interest rate in for the remainder of the loan term. This happened to my friend, who asked today if he should lock in his rate.

This only happens once you’ve had the HELOC open for a period of time and made draws on it. Not upfront, otherwise that’d simply be a fixed-rate home equity loan.

So Bank X might say hey, we know rates have been rising and there’s a lot of uncertainty out there.

If you don’t want to deal with any further adjustments, you can lock in the rate you currently have.

For those not paying attention to the Fed, this might sound like a decent idea. After all, many homeowners are risk-averse, which is why they also don’t tend to go with adjustable-rate mortgages.

And many borrowers may not have actually known that their HELOC was variable to begin with.

They could jump at the offer to lock in the rate and stop worrying. But this could actually be a terrible time to do that.

You watched helplessly as your HELOC went up and up over the past couple years. And now you’re going to lock it in, when rates are finally slated to fall?

Probably not a good idea. This would just benefit the bank, who will make a lot less if you simply do nothing and let the rate fall as prime drifts lower and lower over the next 12 months.

If you’re curious where the prime rate is expected to go, keep an eye on the fed funds rate predictions. A good place to do that is the CME website.

They’re currently predicting a prime rate that is 2.25% lower by September 17th, 2025, as seen in the table above.

In other words, if you have a HELOC set at 10% today, it might be 7.75% in 12 months. Don’t lock in the 10% rate and miss out on those savings!

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

40-year mortgages aren’t exactly what you think they are, and we’re here to clear up the confusion. Yes, a 40-year mortgage is only 10 years longer than the traditional 30-year mortgage, but the increased time to amortize interest makes it significantly more expensive. Though it may seem more affordable on a month-to-month basis, the increased amount of interest you’ll pay over the entire loan makes it hard to pay off the principal and build equity.

Additionally, 40-year mortgages are not backed by the federal government, so it can be hard to find a lender that originates them.

Here’s a deep dive on exactly what they are, how to qualify for one, how much they cost, how they compare with other loan terms, and what factors you’ll want to consider if you’re thinking about a 40-year mortgage.

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Understanding a 40-Year Mortgage

To understand a 40-year mortgage, it’s important to look at how the mortgage market works and where a 40-year mortgage fits. With a traditional 30-year mortgage, the loan is typically sold on the secondary mortgage market to be bundled into securities by government-sponsored enterprises Fannie Mae and Freddie Mac.

To be eligible for sale, the loan must meet certain criteria to be considered a “qualified” mortgage. One of these criteria is that the loan term must not be longer than 30 years (the average mortgage term length in the U.S. is three decades). So a 40-year loan isn’t considered a qualified mortgage. You might also see it referred to as a “nonconforming loan.”

Because a 40-year mortgage can’t be backed by the government, it’s harder and more expensive to originate. As a result, this type of mortgage often doesn’t make sense for borrowers or lenders.

Recommended: What Is Mortgage Curtailment?

How a 40-Year Mortgage Works

When lenders do offer 40-year mortgages, there are a number of different ways these loans can be structured.

•  ARM: The 40-year mortgages can be adjustable-rate mortgages (ARMs) where the interest rate adjusts every five or ten years.

•  Interest-only for 10 years + 30-year term: They can also operate like a 10-year interest-only loan tacked on to the front of a traditional 30-year mortgage.

•  Fixed 40-year term: They can also work as a 40-year fixed loan, much like a 30-year fixed-rate loan.

Most 40-year loans require that the property be owner occupied. But the biggest hurdle you’ll encounter in the mortgage process is finding a lender that offers 40-year mortgages. Qualification works as it does with a 30-year loan, but because the lender has to keep the loan on its books, it will be extra judicious about lending when it comes to a 40-year mortgage.

40-year Loan Modification

If you’re reading up on 40-year mortgages, you may run across the term as it relates to home loan modifications. Borrowers with FHA loans (from the Federal Housing Administration) who got into financial trouble during the COVID-19 pandemic may have the opportunity to have their loans modified (or “recast”) into 40-year loans.

Advantages and Disadvantages

With a typical 40-year mortgage, it’s clear what the advantage is because there’s only one: a lower monthly payment. A lower monthly payment may make buying a home possible for some borrowers, so it’s tempting to look at a 40-year mortgage despite the drawbacks.

The lone pro, as well as the risks and drawbacks of a 40-year mortgage, can be summarized as follows:

Pros Cons
Lower monthly payment Pay more in interest over a 40-year term
May have a higher interest rate
Builds equity more slowly
Hard to find a lender who offers this loan type

Qualifying for a 40-Year Mortgage

Qualifying for a 40-year mortgage is similar to qualifying for other types of mortgages. In addition to the loan type and interest rate the lender can offer you, other mortgage qualification factors may include:

•  Credit score. There is no minimum score required specifically for 40-year mortgages but generally, the better the score, the better your rate.

•  Income verification. The lender will examine your employment history and how reliable your source of income is.

•  Debt-to-income ratio. How much debt you have affects how large a mortgage you can take on. Higher debt equals less borrowing power.

•  Down payment. The down payment affects the loan-to-value ratio, which affects how much the lender is willing to lend and what rate it will offer.

Recommended: How to Get a Home Loan

Comparing 40-Year Mortgage to Other Loan Terms

When you look at the costs on a 40-year mortgage, it becomes very clear what the tradeoff is. Here is an example using interest rates available in August 2024. Note that the 40-year example has a rate that adjusts every five years, so the total interest paid is an estimate.

Mortgage amount Interest rate Monthly payment (principal and interest only) Total interest paid over the term
40-year 5/5 adjustable rate mortgage $450,000 6.625% $2,674.73 $833,870.52
30-year fixed mortgage $450,000 6.500% $2,844.31 $573,950.20
15-year fixed mortgage $450,000 6.250% $3,858.40 $244,512.52

For a 40-year loan, you’ll pay $833,870.52 in interest for a $450,000 mortgage. In total, that’s $1,283,870.52 you’ll pay for the $450,000 loan.

The monthly payment on a 40-year mortgage is only about $200 less for a $450,000 mortgage. All told, you would save nearly $300,000 by choosing a mortgage term of 30 years vs. a 40-year mortgage. Borrowers who opt for the lowest payment with an idea that they would pay off the mortgage early would be wise to make sure they understand whether there are prepayment penalties before signing on the loan.

Factors to Consider with a 40-Year Mortgage

Because of how much more you’ll pay for a 40-year mortgage vs. 30-year mortgage, a 40-year loan comes with some serious considerations.

Long Repayment Period

A 40-year mortgage loan will take much longer to pay off. And because you’re paying a greater percentage of interest in the beginning of your loan, it will be hard to pay down the principal for quite some time.

Building Equity Is Difficult

As noted above, a 40-year mortgage loan makes building equity more difficult because of the increased interest costs. Difficulty building equity can make it harder to move because you may not have adequate profits from the home sale to make a down payment on your next home. It can also make refinancing challenging.

Interest Costs Are High

When you look at a mortgage calculator, you may be quite shocked at how much more interest you’ll pay on a 40-year mortgage when compared to a 30-year mortgage, as illustrated previously.

When a 40-Year Mortgage Makes Sense

A 40-year mortgage could make sense if:

•  You plan to refinance to a different mortgage term in the future. If you need to keep monthly costs as low as possible and refinance at a later date, such as when you’re renovating your home, then you may want to consider a 40-year mortgage.

•  It makes a difference in home affordability. If the difference between buying a home and not buying a home is a 40-year mortgage, you’re probably thinking about the 40-year mortgage. Hopefully, you could refinance down the line and save yourself a large chunk of money.

As mentioned previously, the high cost of a 40-year mortgage is a major drawback. The total amount of the mortgage works out to be hundreds of thousands more when compared with a traditional 30-year mortgage. Be sure you’re aware of the increased costs and risks before committing to a 40-year mortgage.

The Takeaway

The 40-year mortgage isn’t common and there are few scenarios where it makes sense. When you compare a 30-year mortgage with a 40-year mortgage, you’ll only pay a couple hundred dollars more per month on a 30-year mortgage, but you’ll save hundreds of thousands of dollars over the life of the loan. If you’re considering a 40-year mortgage, consult a lender you trust. They will have many tools at their disposal for helping you afford a home of your own.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Are 40-year mortgages widely available?

No, 40-year mortgages are not common because they aren’t considered conforming, qualified mortgages. Qualified mortgages follow guidelines set by the government so they’re less risky and able to be bought by Fannie Mae and Freddie Mac. A 40-year mortgage falls outside the maximum allowable 30-year term for a qualified mortgage.

Can I refinance a 40-year mortgage later?

Yes, you can refinance a 40-year mortgage at a later date, provided you can qualify for the new loan you’re applying for.

Is a 40-year mortgage a good option for first-time homebuyers?

There are serious downsides to a 40-year mortgage. It may have a more affordable monthly payment than a 15- or 30-year mortgage, but you’ll have a hard time building equity (which is important for first-time homebuyers) and you’ll pay much more in interest over 40 years than you would 30 years.

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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Apache is functioning normally

It’s been a pretty good year so far for mortgage rates, which topped out at around 8% last year.

The 30-year fixed is now priced about one full percentage point below its year ago levels, per Freddie Mac.

And when you consider the high of 7.79% seen in October 2023, is now over 150 basis points lower.

But the recent mortgage rate rally may still have some gas in the tank, especially with how disjointed the mortgage market got in recent years.

Simply getting spreads back to normal could result in another 50 basis points (.50%) or more of relief for mortgage rates going forward.

Forget the Fed, Focus on Spreads

There are a couple of reasons mortgage rates have improved over the past 11 months or so.

For one, 10-year treasury yields have drifted lower thanks to a cooler economy, which is a boost for bonds.

When demand for bonds increases, their price goes up and their yield (interest rate) goes down.

Long-term mortgage rates follow the direction of the 10-year yield because they have similar maturities (mortgages are often prepaid in a decade).

So if you want to track mortgage rates, the 10-year yield is a good place to start.

Anyway, inflation has cooled significantly in recent months thanks to monetary tightening from the Fed.

They raised rates 11 times since early 2022, which seemed to finally do the trick.

This pushed the 10-year yield down from nearly 5% in late October to about 3.65% today. That alone could explain a good chunk of the mortgage rate improvement seen since then.

But there has also been some narrowing of the “spread,” which is the premium MBS investors demand for the risk associated with a home loan vs. a government bond.

Remember, mortgages can fall into default or be prepaid at any time, whereas government bonds are a sure thing.

So consumers pay a premium for a mortgage relative to what that bond might be trading at. Typically, this spread is around 170 basis points above the 10-year yield.

In other words, if the 10-year is 4%, a 30-year fixed might be offered at around 5.75%. Lately, mortgage rate spreads have widened due to increased volatility and uncertainty.

In fact, the spread between the 10-year and 30-year fixed nearly doubled from its longer-term norm, meaning homeowners were stuck with a rate 3%+ higher.

For example, when the 10-year was around 5%, a 30-year fixed was priced around 8%.

Normalizing Spreads Could Drop Rates Another 60 Basis Points

New commentary from J.P. Morgan Economic Research argues that “primary mortgage rates could fall by as much as 60 bps over the next year” thanks to spread normalization alone.

And even more than that if the market prices in more Fed rate cuts.

They note that the primary/secondary spread — what a homeowner pays vs. the secondary mortgage rate (what mortgage-backed securities trade for on the secondary market) remains wide.

Head of Agency MBS Research at J.P. Morgan Nick Maciunas said if the yield curve re-steepens and volatility falls, mortgage rates could ease another 20 bps (0.20%).

In addition, if prepayment risk and duration adjustment fall back in line with their norms, spreads could compress another 20 to 30 bps.

Taken together, Maciunas says mortgage rates could improve another 60 basis points (0.60%).

If we consider the 30-year fixed was hovering around 6.35% when that research was released, the 30-year might fall to 5.75%.

But wait, there’s more. Aside from the mortgage market simply rebalancing itself, additional Fed rate cuts (due to a continued economic slowdown) could push rates even lower.

How Much Will the Fed Actually Cut Over the Next Year?

Remember, the Fed doesn’t set mortgage rates, but it does take cues from economic data.

At last glance, the CME FedWatch tool has the fed funds rate hitting a range of 2.75% to 3.00% by September 2025.

That’s 250 bps below current levels, of which some is “priced in” and some is not. There’s still a chance the Fed doesn’t cut that much.

However, if it becomes more apparent that rates are in fact too high and going to drop to those levels, the 10-year yield should continue to fall.

When we combine a lower 10-year yield with tighter spreads, we could see a 30-year fixed in the low 5s or even high 4s next year.

After all, if the 10-year yield slips to around 3% and the spreads return closer to their norm, if even a bit higher, you start to see a 30-year fixed dip below 5%.

Those who pay discount points at those levels might have the chance to go even lower, perhaps mid-to-low 4s and maybe, just maybe, something in the high 3s depending on loan scenario.

Just note this is all hypothetical and subject to change at any given time. Similar to the ride up for mortgage rates, there will be hiccups and unexpected twists and turns along the way.

And remember that lower mortgage rates don’t necessarily imply another housing boom, assuming higher unemployment offsets purchasing power and/or increases supply.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

Although Experian is the largest credit bureau in the U.S., TransUnion and Equifax are widely considered to be just as accurate and important. When it comes to credit scoring models, however, there is a clear winner: FICO® Score is used in roughly 90% of lending decisions.

It’s crucial that consumers understand at least the basics of how credit reports work and credit scores are calculated. After all, a high credit score can get borrowers the best deals on loans and credit cards, potentially saving them many thousands of dollars over a lifetime. Read on to learn how you can build a credit history that lenders will swoon over.

Will My Credit Score Be the Same Across the Board?

In a word, no. Credit scores vary depending on the company providing the score, the data on which the score is based, and the method used to calculate the score.

In an ideal world, all credit bureaus would have the same information. But lenders don’t always report information to every bureau, so there will be variations in your credit file — usually minor — from bureau to bureau.

How Are Credit Scores Calculated?

Regardless of the scoring model used, most credit scores are calculated with a similar set of information. This includes information like how many and what types of accounts you have, the length of your credit history, your payment history, and your credit utilization ratio.

Lenders like to see evidence that you have successfully managed a variety of accounts in the past. This can include credit cards, student loans, personal loans, and mortgages, in addition to other types of debts. As a result, scoring models sometimes include the number of accounts you have and will also note the different types of accounts.

The length of your credit history shows lenders that you have a record of repaying your debts responsibly over time. Scoring models will factor in how recently your accounts have been opened.

Your payment history allows lenders to see how you’ve repaid your debts in the past. It will show details on late or missed payments and any bankruptcies. Scoring models typically look at how late your payments were, the amount you owed, and how often you missed payments.

Each scoring model will place a different weight of importance on each factor. As an example, here are the weighting figures for your base FICO Score:

Payment History 35%
Amounts Owed 30%
Length of Credit History 15%
Credit Mix 10%
New Credit 10%

Recommended: Can You Get a First-Time Personal Loan With No Credit History?

Which Credit Score Matters the Most?

As noted earlier, the credit score that matters the most is generally your FICO Score, since it’s used in the vast majority of lending decisions. There’s really no way to determine which credit score is most accurate, though, because they all use slightly different scoring models to calculate those precious three digits.

Even within your FICO Score, there’s variation. The most widely used FICO Score is FICO 8 (though the company has released a FICO 9 and FICO 10). This differs from previous versions in key ways:

•   Credit utilization is given greater weight.

•   Isolated late payments are given less weight than multiple late payments.

•   Accounts gone to collections for amounts less than $100 are ignored.

In addition, FICO can tweak their algorithm depending on the type of loan you’re applying for. If you’re looking to get an auto loan, your industry-specific FICO Score may emphasize your payment history with auto loans and deemphasize your credit card history.

As you can see, slight differences in method can result in different credit scores even given the same source data.

What Are the Largest Three Credit Bureaus?

The three major credit bureaus are Experian, Equifax, and TransUnion. These bureaus collect and maintain consumer credit information and then resell it to other businesses in the form of a credit report. While the credit bureaus operate outside of the federal government, the Fair Credit Reporting Act allows the government to oversee and regulate the industry.

It’s worth noting that not all lenders report to the credit bureaus. You may have seen advertisements for loans with no credit check. Lenders that offer this type of loan won’t check your credit, and typically don’t report your new loan or your loan payments to the credit bureaus. Because these loans are riskier for the lender, they can justify high interest rates (possibly as much as 1000%) and faster repayment schedules. Consumers should beware of predatory lenders, especially risky payday loans and other fast-cash loans.

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How To Find Your Credit Score

Your credit history and score play a large role in your personal finances. They can impact everything from taking out a mortgage or renting an apartment to buying a car and refinancing your student loans. Having an idea of what your credit score is can help you determine what your loan may look like and how much you can afford to borrow.

You can request a free copy of your credit report from each of the major credit bureaus at AnnualCreditReport.com. Typically, your credit reports will not contain your credit scores. However, you may be able to access your FICO Score for free through your bank or credit card company (it may be on your statement or you may be able to see it by logging into your account online). You can also purchase credit scores from one of the three major credit bureaus or FICO. Some credit score services offer free scores to any user, while others only offer sores to customers who pay for credit monitoring services.

Be careful when you pull your free credit reports not to accidentally opt in to an add-on service that will charge you for special tools or credit monitoring.

Building Strong Credit

Credit scores aren’t set in stone. They evolve constantly as new financial information comes in, both positive and negative. Here are some strategic steps to consider for those trying to build a positive credit history:

Make Payments on Time

This includes credit card payments, rent, loans, utilities, and any other monthly bills or payments. Lenders often consider past behavior to be a predictor of future behavior and want to avoid lending money to individuals with a history of missed payments.

Pay Down Revolving Credit

Revolving credit refers to credit cards and credit lines, such as home equity lines of credit (HELOCs). Lenders generally like to see that you use no more than 30% of the total revolving credit available to you. It’s an indicator that you are able to effectively manage your credit.

One popular way to pay down high-interest revolving debt, is to use a debt consolidation loan. These are unsecured personal loans that typically offer lower fixed interest rates compared to credit cards. Getting approved for a personal loan is fairly straightforward, and you can usually shop around for the best personal loan interest rates without it affecting your credit score.

Be Selective About New Accounts

Opening a new credit card or applying for a loan generally involves a hard credit inquiry. Too many hard credit inquiries can have a negative impact on the applicant’s score. So while having a diverse mix of credit is a good thing in the eyes of lenders, opening a number of new accounts at once may be counter-productive.

The Takeaway

All three major credit bureaus — Experian, Equifax, and TransUnion — are more alike than they are different, and any variations in their data are usually minor. Equifax is the largest credit bureau in the U.S., but TransUnion and Equifax are thought to be just as important. When it comes to credit scores, however, lenders prefer FICO Score by a wide margin.

SoFi Personal Loans

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SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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Source: sofi.com