If you’re interested in buying a house or purchasing a vehicle, then you’re likely familiar with credit scores. Your credit score estimates the likelihood of you repaying your debt, and for the most part, scores around 675 or higher or considered good credit.
What does your credit score mean?
Your credit score is a three-digit number between 300 to 850 that estimates how likely you are to pay your bills and repay borrowed money. Your credit score is developed based on mathematical formulas and past actions. While a credit score of 675 or higher usually indicates that you’re a good credit risk, a low credit score will not stop you from being approved for credit. If your score is not in the ideal range, you may be approved for credit, but will be required to pay higher interest or put down a deposit.
Several factors affect your credit score. The two most important factors are paying your bills on time and limiting how much you owe (compared to how much your creditor is willing to loan you). Credit scores reward people who pay their bills on time, and a misstep here can be extremely costly. A late payment of 30 days or more past due can affect your credit score for years. Credit utilization is also very important, and it’s best to avoid using more than 30% of your credit limits.
Other factors that go into your credit score are credit age, credit mix, and how recently you’ve applied for more credit. You can be rewarded for having long-standing accounts and a variety of credits, but you can be penalized for having more frequent inquiries. Your credit score is important to securing new lines of credit, but it is not the only factor that credit lenders look at. Don’t be discouraged if you have a subprime credit score.
Fortunately, there are ways to help raise your score. If your debt is too high to manage, or you’re near your credit limits, consider enrolling in a debt management program to pay down your debts efficiently. Most debt programs reflect favorably on a credit score because they reduce interest rates and therefore more of your monthly payment goes towards paying down the principal balance. Once your current debts are in control, paying off defaulted bills and opening new lines of credit can help you slowly improve your score for the future.
Credit cards are great ways to build your credit score and have emergency money, but interest rates can be confusing and very expensive. Credit card interest mostly depends on how you manage your accounts. If your credit card has an annual percentage rate of 20%, it doesn’t necessarily mean you’re getting charged 20% interest once a year. Your actual interest rate can be higher or lower because it is calculated daily and is only charged if you carry debt from month to month.
How to calculate credit card interest
1. Change your annual rate to a daily rate. The first step to calculating your rate is to convert your annual percentage rate to a daily rate. You can do this by dividing it by 365. The result of this calculation is called the periodic interest rate or the daily periodic rate.
2. Review your average daily balance. Your second step is to figure out your average daily balance. Start with your unpaid balance and go through it day by day, writing down each day’s balance. Once you have done this, you must add up all the daily balances and divide them by the number of days in your billing cycle.
3. Do some math. Finally, multiply your average daily balance by your daily rate and then multiply that result by the number of days in the billing period. Your credit card issuer may compound interest daily or monthly, so your actual interest charge may differ slightly from this amount. Compound interest is where you add the accrued interest to your unpaid balance, meaning you will pay interest on interest.
To convert your annual interest rate to a daily interest rate based on simple interest, divide the annual interest rate by 365, the number of days in a year. For example, say your personal loan charges 14.60 percent simple interest per year. Divide 14.60 percent by 365 to find the daily interest rate equals 0.04 percent. So, if your loan balance is $8,000, you would be paying $3.20 in interest each day.
A debt management program can reduce interest rates significantly, reducing the monthly cost of your debt payments. The lower your interest charges, the more money can be used to pay down your principal balance, getting you out of debt faster than you would on your own.
A debt-to-equity ratio is a way of measuring if a corporation or group is being financed through debt or owned outright by funds/assets. Debt-to-equity ratios are commonly used and referenced in the financial world, and as such are important to understand. Knowing what is good and bad when it comes to debt-to-equity ratios can help keep groups financially secure long-term.
‘Good’ and ‘Bad’ Debt-to-Equity Ratios
Debt-to-equity ratios are calculated by dividing total liability (debt) by equity. A 1.0 or less is a safe or less-risky ratio to have. A number higher than 2.0 is thought to be less secure. However, a good debt-to-equity ratio does not guarantee that a business will be successful.
When it comes to a personal consumer’s debt-to-equity ratio, 80% is the limit for safe financial housekeeping. If your debt-to-equity ratio exceeds 80%, lenders and creditors are going to consider you a risk and may avoid extending you further credit or funding your loan.
Unfortunately, most young people find themselves in 80% territory when working to accumulate assets. Most people do not begin their adult lives with significant savings, and often buy homes with a minimum down payment. This common transaction gives almost every young family a high debt-to-equity ratio. Over time it is possible to reverse a high debt-to-equity ratio by paying down outstanding loans and carefully avoiding new debts while carrying large existing debts.
This is a GREAT example of why we recommend our debt relief program to anyone overwhelmed by existing debts, because we don't believe people should take on more debt to pay off existing debt! Typically, new loans carry higher interest rates and have little to no advantage over simply consolidating the debt into a relief program and negotiating a better rate.
Because of the varying circumstances in which different industries operate, a high debt-to-equity ratio does not always spell doom. The ratios are used by investors to decide the risk of investing in any given company, keeping in mind the risk the company itself has accumulated. Diverse industries and situations make it difficult to determine the health of a business using equity ratios alone. A good debt-to-equity ratio can be described as a company that has low liabilities compared to assets, while a bad ratio can be understood as a company that operates in debt. It is considered safer to be financed by equity and income, rather than debt- but this principle can be overlooked, depending on the industry.
Some people may want to invest in a company that has more debt than others, as long as the company in question has a good history making wise financial decisions, or is very capable of generating income to repay debts. In addition, some industries simply have a higher debt-to-equity ratio and so cannot be faulted for the financial ratio outcomes of the business.
In the end, having a high debt-to-equity ratio whether you’re a large corporation or an individual person can cause stress and struggle. If you yourself are struggling with consumer debt, allow Golden State to help you. We have realistic plans that can help you consolidate your debt and work towards becoming debt-free. See how we can help you live a life more financially free.
Millions of people find themselves in debt that can become extremely difficult to get out of. In the wake of the worst national crisis in modern times, debt issues have grown exponentially. Now more than ever, it is important to practice proper financial techniques and to learn how to be debt free. For those with debt issues, or those who want to ensure healthy saving practices, there are a few things that should be done in order to safeguard funds for the future!
Pay Down Larger Debts & Save What You
The most important first step is to make a plan. By breaking down your income, you can plan out how much you have available to pay down your debts, and how much will be left to save. While it can feel good to have savings in the bank, it makes more financial sense to first repay your debts (rather than sitting on a savings account that pays low interest rates.) For those who are in financial debt, planning out expenses and making a schedule for debt payments can be extraordinarily helpful.
Sell What You Do Not Need
This is not a strategy for generating consistent income, but when you are finding yourself in debt or fear of financial hardship, it makes sense to sell the items that you do not need. This not only generates extra money to pay off expenses, but also helps declutter your home and your life. Indeed, markets like eBay or Facebook were meant to help get rid of things that you have no use for anymore. It also pays to keep kid’s toys, clothing and furniture in mind. Items that you or your family are growing out of can be sold for decent prices on one of the many marketplaces now popping up on the internet.
Find Extra Sources of Income
If you are looking to get out of debt, start budgeting time to spend on other income pursuits. Fortunately, we live in a time where it is possible to make money from your home or car. There are many ways to make supplemental income, from part-time jobs to freelance positions to paid reviews. You could donate plasma, which is now becoming a viable way to make money in free time as it is sorely needed. You could attempt to grow a social media following and monetize your content. Most of these things will take time, but if you do them consistently and plan for the long-term, you can better avoid the stress of debt (and will have less free time for spending!)
Debt freedom is something with which many people struggle. We are living through a time where the unemployment rates have soared higher than any season in the last seventy years, where the national minimum wage is not enough to afford even a simple living, and where a college education is practically unaffordable, it is important to know how to handle debt. By planning, scheduling expenses, using savings, selling what you do not need and pursuing other sources of income, you can keep control of your debt and secure a successful future.
Help with Debt?
Need help with your credit card debt? Talk to certified credit counselor today call 844-872-9046