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Auto Loan Interest Rates and Delinquencies: 2017 Facts and Figures

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Led by a prolonged period of low interest rates, consumers now have a record $1.2 trillion1 in outstanding auto loan debt. Despite record high levels of issuance, the auto lending market shows signs of tightening. With auto delinquencies on the rise, consumers are facing higher interest rates on both new and used vehicles. In particular, over the last three years, subprime borrowers saw rates rise faster than the market as a whole. MagnifyMoney analyzed trends in auto lending and interest rates to determine what’s really going on under the hood of automotive financing.

Key insights

  1. Overall auto delinquency is on the rise, and the first quarter of 2017 saw near record levels of new auto loan delinquency rates.54
  2. Interest rates are on the rise, with average new car loan rates up to 4.87%, 60 basis points from their lows in late 2013.2
  3. The average duration of auto loans (new vehicles) is a record 67.37 months, reducing the monthly payment impact of higher interest rates.31

Facts and figures

  • Average Interest Rate (New Car): 4.87%2
  • Average Interest Rate (Used Car): 8.88%3
  • Average Loan Size New: $29,3144
  • Average Loan Size Used: $17,1805
  • Median Credit Score for Car Loan: 7066
  • % of Auto Loans to Subprime Consumers: 31.34%7

Subprime auto loans

  • Total Subprime Market Value: $229 billion8
  • Average Subprime LTV: 113.4%9
  • Average Interest Rate (New Car): 11.05%10
  • Average Interest Rate (Used Car): 16.48%11
  • Average Loan Size (New Car): $28,09912
  • Average Loan Size (Used Car): $16,02613
  • % Leasing: 25.9%14

Prime auto loans

  • Total Prime Market Value: $717 billion15
  • Average Prime LTV: 97.91%16
  • Average Interest Rate (New Car): 3.77%17
  • Average Interest Rate (Used Car): 5.29%18
  • Average Loan Size (New Car): $32,15319
  • Average Loan Size (Used Car): $20,77820
  • % Leasing: 37.4%21

Auto loan interest rates

Interest rates for auto loans continue to remain near historic lows. As of the first quarter of 2017, interest rates for used cars was 8.88% on average. The average interest rate on new cars (including leases) is 4.87%. However, the low average rates belie a tightening of auto lending, especially for subprime borrowers.

New loan interest rates

Consumer credit information company Experian reports that the average interest rate on all new auto loans was 4.87%, up six basis points from the previous year.24 The small interest rate increase masks a larger underlying tightening in the auto loan market for new vehicles.

During the last year, lenders tilted away from subprime borrowers. Just 10.88% of new loans went to subprime borrowers compared to 11.41% the previous year. The movement away from subprime borrowers led to a smaller increase in new car interest rates compared to if car rates had stayed the same.25

Across all credit scoring segments, borrowers faced higher average borrowing rates. Subprime and deep subprime borrowers saw the largest absolute increases in rate hikes, but super prime borrowers also saw an 18 basis point increase in their borrowing rates over the last year. The average interest rate for super prime borrowers is now 2.84% on average, the highest it’s been since the end of 2011.27

When comparing credit scores to lending rates, we see a slow tightening in the auto lending market since the end of 2013. The trend is especially pronounced among subprime and deep subprime borrowers. These borrowers face auto loan interest rates growing at rates faster than the market average. Consumers should expect to see the trend toward slightly higher interest rates continue until the economic climate changes.

Even with the tightening, interest rates remain near historic lows, but that doesn’t mean consumers are paying less interest on their vehicle purchases. The estimated cost of interest on new vehicle purchases is now $4,223,29 up 42% from its low in the third quarter of 2013.

Growth in interest paid over the life of the loan stems from longer loans and higher average loan amounts. The average maturity for a new loan grew from 62.5 months in the third quarter of 2008 to 67.4 months in early 2017.31 During the same time, average loan amounts for new vehicles grew 14.7% to $29,134.32

Used loan interest rates

Over the past year, interest rates for used vehicles fell by 35 basis points to 8.88%. The drop in average interest rates came from a dramatic increase of prime borrowers entering the used car financing market. In 2017, 47.4% of used car borrowers had prime or better credit. The year before, 43.99% of used borrowers were prime.34

On the whole, borrowers in the used car market face nearly identical rates to this time last year. Super prime and prime borrowers saw upticks of 15 basis points and 4 basis points, respectively. This brought the average super prime borrowing rate up to 3.56% for used vehicles, and the prime rate to 5.29%.36

On the other end of the spectrum, subprime and deep subprime borrowers saw their interest rates fall by approximately 10 basis points year over year. Despite the decrease, interest rates for these borrowers are up a dramatic 250 basis points (2.5%) from their 2008 rates.

Although average interest rates on used vehicles continue to fall, the estimated interest paid on a used car loan rose $12 from the previous year to $4,046. The increase in overall interest is part of a larger trend. Over the past four years, estimated interest on used cars was 8.4%. Almost all of the increase comes from longer average loan terms (61 months vs. 57 months),38 leading to more interest paid over the life of a car loan.

Auto loan interest rates and credit score

As of March 2017, the median credit score for all auto loan borrowers was 706.40 A credit score of 706 is just shy of the prime credit rating (720). This is the highest median rate since the first quarter of 2011.

In the first quarter of 2017, just 31% of all auto loans were issued to subprime borrowers compared with an average of 35% over the past three years.

Total auto loan volume decreased dramatically between 2008 and 2010. During that time, subprime and deep subprime lending contracted faster than the rest of the market. Since early 2010, auto lending as a whole is near prerecession levels. However, subprime lending has not completely recovered. In the first quarter of 2017, banks issued just $41.5 billion to subprime borrowers. That’s $6.7 billion less than the average $48.2 billion of subprime auto loans issued each quarter between 2005 and 2007.

Loan-to-value ratios and auto loan interest rates

One factor that influences auto loan interest rates is the initial loan-to-value (LTV) ratio. A ratio over 100% indicates that the driver owes more on the loan than the value of the vehicle. This happens when a car owner rolls “negative equity” into a new car loan.

Among prime borrowers, the average LTV was 97.91%. Among subprime borrowers, the average LTV was 113.40%.44 Both subprime and prime borrowers show improved LTV ratios from the 2007-2008 time frame. However, LTV ratios increased from 2012 to the present.

Research from the Experian Market Insights group46 showed that loan-to-value ratios well over 100% correlated to higher charge-off rates. As a result, car owners with higher LTV ratios can expect higher interest rates. An Automotive Finance Market report from Experian47 showed that loans for used vehicles with 140% LTV had a 3.03% higher interest rate than loans with a 95%-99% LTV. Loans for new cars charged just a 1.28% premium for high LTV loans.

Auto loan term length and interest rates

On average, auto loans with longer terms result in higher charge-off rates. As a result, financiers charge higher interest rates for longer loans. Despite the higher interest rates, longer loans are becoming increasingly popular in both the new and used auto loan market.

The average length to maturity for new car loans in 2017 is 67.37 months.48 For used cars, the average is 61.12 months.49 The increase in average length to maturity is driven primarily by a concentration of borrowers taking out loans requiring 61-72 months of maturity.50

In the first quarter of 2017, just 7.1% of all new vehicle loans had payoff terms of 48 months or less, and 72.4% of all loans had payoff periods of more than 60 months.51 Among used car loans, 18.5% of loans had payoff periods less than 48 months, and 58.3% of loans had payoff periods more than 60 months.52

Auto loan delinquency rates

Despite a trend toward more prime lending, we’ve seen deterioration in the rates and volume of severe delinquency. In the first quarter of 2017, $8.27 billion in auto loans fell into severe delinquency.54 This is near an all-time high.

Overall, 3.82% of all auto loans are severely delinquent. Delinquent loans have been on the rise since 2014, and the overall rate of delinquent loans is well above the prerecession average of 2.3%.

Between 2007 and 2010, auto delinquency rates rose sharply, which led to a dramatic decline in overall auto lending. So far, the slow increase in auto delinquency between 2014 and the present has not been associated with a collapse in auto lending. In fact, the total outstanding balance is up 33.4% to $1.167 billion since 2014.57

However, the increase in auto delinquency means lenders may continue to tighten lending to subprime borrowers. Borrowers with subprime credit should make an effort to clean up their credit as much as possible before attempting to take out an auto loan. This is the best way to guarantee lower interest rates on auto loans.

Sources

  1. Quarterly Report on Household Debt and Credit May 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  2. State of the Automotive Finance Market,” New Car Average Rates – Page 25, from Experian.TM
  3. State of the Automotive Finance Market,” Used Car Average Rates – Page 25, from Experian.TM
  4. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, July 17, 2017.
  5. Board of Governors of the Federal Reserve System (US), Average Amount Financed for Used Car Loans at Finance Companies [DTCTLVEUANQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUANQ, July 18, 2017.
  6. Quarterly Report on Household Debt and Credit May 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  7. Quarterly Report on Household Debt and Credit May 2017.” Auto Loan Originations by Credit Score, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  8. Calculated metric: “State of the Automotive Finance Market” Loan Balance Risk Distribution Q1 2017 – Page 5, from Experian,TM and “Quarterly Report on Household Debt and Credit May 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.(3.76% of All Loans Are Deep Subprime + 15.94% of All Loans Are Subprime)X ($1.167 trillion in Auto Loans)
  9. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  10. State of the Automotive Finance Market,” New Car Subprime Average Rates, Page 25, from Experian.TM
  11. State of the Automotive Finance Market,” Used Car Subprime Average Rates, Page 25, from Experian.TM
  12. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  13. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  14. State of the Automotive Finance Market,” % Leasing By Tier, Page 16, from Experian.TM
  15. Calculated metric: “State of the Automotive Finance Market” Loan Balance Risk Distribution Q1 2017 – Page 5, from Experian,TM and “Quarterly Report on Household Debt and Credit May 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.(41.7% of All Loans Are Prime + 19.74% of All Loans Are Super Prime)X ($1.167 trillion in Auto Loans)
  16. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  17. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (New Car), Page 25, from Experian.TM
  18. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (Used Car), Page 25, from Experian.TM
  19. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  20. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  21. State of the Automotive Finance Market,” % Leasing By Tier, Page 16, from Experian.TM
  22. Graph 1 – Auto Loan Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  23. Graph 2 – Average New Vehicle Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  24. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (New Car), Page 25, from Experian.TM
  25. State of the Automotive Finance Market,” New Loan Risk Distribution, Page 15, from Experian.TM
  26. Graph 3 – % of New Car Loans Issued to Subprime Borrowers, data compiled from historic Experian State of the Automotive Finance Market Reports.
  27. Average Interest Rate by Credit Score, data compiled from historic Experian State of Automotive Finance Reports.
  28. Graph 4 – Average Interest Rate by Credit Score (New Car Loans), data compiled from historic Experian State of Automotive Finance Reports.
  29. Calculated metric: Total Interest over the Life an Auto Loan (New Car).
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, July 17, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, July 18, 2017.
    3. Average New Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  30. Graph 5 – Estimated Interest on New Car Loan.
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, July 17, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, July 18, 2017.
    3. Average New Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  31. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, July 18, 2017.
  32. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, July 17, 2017.
  33. Graph 6 – Average Used Vehicle Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  34. State of the Automotive Finance Market,” Used Car Loan Risk Distribution, Page 15, from Experian.TM
  35. Graph 7 – Lending By Credit Score Q1 2016 vs. Q1 2017 “State of the Automotive Finance Market,” Used Car Loan Risk Distribution, Page 15, from Experian.TM
  36. State of the Automotive Finance Market,” Average Loan Rates By Credit Tier (Used Cars), Page 25, from Experian.TM
  37. Graph 8 – Average Interest Rate by Credit Score (Used Car Loans), data compiled from historic Experian State of Automotive Finance Reports.
  38. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, July 17, 2017.
  39. Graph 9 – Calculated metric: Estimated Interest on Used Car Loans.
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for Used Car Loans at Finance Companies [DTCTLVEUANQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUANQ, July 18, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, July 17, 2017.
    3. Average Used Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  40. Quarterly Report on Household Debt and Credit May 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  41. Graph 10 – Credit Score at Auto Loan Origination “Quarterly Report on Household Debt and Credit May 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  42. Graph 11 – % of New Loans Issued to Subprime Borrowers. Calculated metric from “Quarterly Report on Household Debt and Credit May 2017.” Auto Loan Originations by Credit Score ((<620+620-659)/Total Lending), from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  43. Graph 12 – Auto Loan Origination by Credit Tier “Quarterly Report on Household Debt and Credit May 2017.” Auto Loan Originations by Credit Score, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  44. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  45. Graph 13 – Average LTV at Auto Loan Origination “U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  46. Understanding automotive loan charge-off patterns can help mitigate lender risk,” from Experian.TM Accessed July 17, 2017.
  47. State of the Automotive Finance Market Q4 2010,” Pages 25-26, from Experian.TM
  48. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, July 18, 2017.
  49. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, July 17, 2017.
  50. State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  51. Calculated metric: “State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  52. Calculated metric: “State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  53. Graph 14 – Average Auto Loan Length to Maturity (Months).
    1. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, July 18, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, July 17, 2017.
  54. Quarterly Report on Household Debt and Credit May 2017.” Transition into serious delinquency (90+ days): Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  55. Graph 15 – New Severely Delinquent Auto Loans (90+ Days) “Quarterly Report on Household Debt and Credit May 2017.” Transition into serious delinquency (90+ days): Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  56. Graph 16 – % of All Loans Severely Delinquent “Quarterly Report on Household Debt and Credit May 2017.” % of Balance 90+ Days Delinquent: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  57. Quarterly Report on Household Debt and Credit May 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017. (Q1 2014 compared to Q1 2017.)
Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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Building Credit, Featured, News

Average Credit Score in America Reaches New Peak at 700

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

In late 2016, American consumers hit an important milestone. For the first time in a decade, over half of American consumers (51%) recorded prime credit scores. On the other side of the scale, less than a third of consumers (32%) suffered from subprime scores.1 As a nation, our average FICO® Score rose to its highest point ever, 700.2

Despite the rosy national picture, we see regional and age-based disparities. A minority of Southerners still rank below prime credit. In contrast, credit scores in the upper Midwest rank well above the national average. Younger consumers struggle with their credit, but boomers and the Silent Generation secured scores well above the national average.

In a new report on credit scores in America, MagnifyMoney analyzed trends in credit scores. The trends offer insight into how Americans fare with their credit health.

Key insights

  1. National average FICO® Scores are up 14 points since October 2009.3
  2. 51% of consumers have prime credit scores, up from 48.1% in 2007.4
  3. One-third of customers have at least one severely delinquent (90+ days past due) account on their credit report.5
  4. Average VantageScores® in the Deep South are 21 points lower than the national average (652 vs. 673).6
  5. Millennials’ average VantageScore® (634) underperformed the national average by 39 points. Only Gen Z has a lower average score (631).7

Credit scores in America

Average FICO® Score: 7008

Average VantageScore®: 6739

Percent with prime credit score (Equifax Risk Score >720): 51%10

Percent with subprime credit score (Equifax Risk Score <660): 32%11

Credit score factors

Percent with at least one delinquency: 32%12

Average number of late payments per month: .3513

Average credit utilization ratio: 30%14

Debt delinquency

Percent severely delinquent debt: 3.37%15

Percent severely delinquent debt excluding mortgages: 6.9%16

States with the best and worst credit scores

What is a credit score?

Credit scoring companies analyze consumer credit reports. They glean data from the reports and create algorithms that determine consumer borrowing risk. A credit score is a number that represents the risk profile of a borrower. Credit scores influence a bank’s decisions to lend money to consumers. People with high credit scores will find the most attractive borrowing rates because that signals to lenders that they are less risky. Those with low credit scores will struggle to find credit at all.

The Big 3 credit scores

Banks have hundreds of proprietary credit scoring algorithms. In this article, we analyzed trends on three of the most famous credit scoring algorithms:

  • FICO® Score 8 (used for underwriting mortgages)
  • VantageScore® 3.0 (widely available to consumers)
  • Equifax Consumer Risk Credit Score (used by the Federal Reserve Bank of New York)

Each of these credit scores ranks risk on a scale of 300-850. In all three models, prime credit is any score above 720. Subprime credit is any score below 660. All three models consider similar data when they create credit risk profiles. The most common factors include:

  • Payment history
  • Revolving debt levels (or revolving debt utilization ratios)
  • Length of credit history
  • Number of recent credit inquires
  • Variety of credit (installment and revolving)

However, each model weights the information differently. This means that a FICO® Score cannot be compared directly to a VantageScore® or an Equifax Risk Score. For example, a VantageScore® does not count paid items in collections against you. However, a FICO® Score counts all collections items against you, even if you’ve paid them. Additionally, the VantageScore® counts outstanding debt against you, but the FICO® Score only considers how much credit card debt you have relative to your available credit.

American credit scores over time

Average FICO® Scores in America are on the rise for the eighth straight year. The average credit score in America is now 700.

On top of that, consumers with “super prime” credit (FICO® Scores above 800) outnumber consumers with deep subprime credit (FICO® Scores below 600).

We’re also seeing healthy increases in prime credit scores, defined as Equifax Risk Scores above 720. According to the Federal Reserve Bank of New York, 51% of all Americans have prime credit scores as measured by the Equifax Risk Score. Following the housing market crash in 2010, just 48.4% of Americans had prime credit scores.20

A major driver of increased scores is the decreased proportion of consumers with collection items on their credit report. A credit item that falls into collections will stay on a person’s credit report for seven years. People caught in the latter end of the real estate foreclosure crisis of 2006-2011 may still have a collections item on their report today.

In the first quarter of 2013, 14.64% of all consumers had at least one item in collections. Today, just 12.61% of consumers have collections items on their credit report. Overall collections rates are approaching 2005-2006 average rates.40

Credit scores and loan originations

Following the 2007-2008 implosion of the housing market, banks saw mortgage borrowers defaulting at higher rates than ever before. In addition to higher mortgage default rates, the market downturn led to higher default rates across all types of consumer loans. To maintain profitability banks began tightening lending practices. More stringent lending standards made it tough for anyone with poor credit to get a loan at a reasonable rate. Although banks have loosened lending somewhat in the last two years, people with subprime credit will continue to struggle to get loans. In June 2017, banks rejected 81.4% of all credit applications from people with Equifax Risk Scores below 680. By contrast, banks rejected 9.11% of credit applications from those with credit scores above 760.22

Credit scores and mortgage origination

Before 2008, the median homebuyer had an Equifax Risk Score of 720. In 2017, the median score was 764, a full 44 points higher than the pre-bubble scores. The bottom 10th of buyers had a score of 657, a massive 65 point growth over the pre-recession average.23

Some below prime borrowers still get mortgages. But banks no longer underwrite mortgages for deep subprime borrowers. More stringent lending standards have resulted in near all-time lows in mortgage foreclosures.

Credit scores and auto loan origination

The subprime lending bubble didn’t directly influence the auto loan market, but banks increased their lending standards for auto loans, too. Before 2008, the median credit score for people originating auto loans was 682. By the first quarter of 2017, the median score for auto borrowers was 706.26

In the case of auto loans, the lower median risk profile hasn’t paid off for banks. In the first quarter of 2017, $8.27 billion dollars of auto loans fell into severely delinquent status. New auto delinquencies are now as bad as they were in 2008.28

Consumers looking for new auto loans should expect more stringent lending standards in coming months. This means it’s more important than ever for Americans to grow their credit score.

Credit scores for credit cards

Unlike other types of credit, even people with deep subprime credit scores usually qualify to open a secured credit card. However, credit card use among people with poor credit scores is still near an all-time low. In the last decade, credit card use among deep subprime borrowers fell 16.7%. Today, just over 50% of deep subprime borrowers have credit card accounts.30

The dramatic decline came between 2009 and 2011. During this period, half or more of all credit card account closures came from borrowers with below prime credit scores. More than one-third of all closures came from deep subprime consumers.

However, banks are showing an increased willingness to allow customers with poor credit to open credit card accounts. In 2015, more than 60% of all new credit card accounts went to borrowers with subprime credit, and 25% of all the accounts went to borrowers with deep subprime credit.

State level credit scores

Consumers across the nation are seeing higher credit scores, but regional variations persist. People living in the Deep South and Southwest have lower credit scores than the rest of the nation. States in the Deep South have an average VantageScore® of 652 compared to a nationwide average of 673. Southwestern states have an average score of 658.

States in the upper Midwest outperform the nation as a whole. These states had average VantageScores® of 689.

Unsurprisingly, consumers across the southern United States are far more likely to have subprime credit scores than consumers across the north. Minnesota had the fewest subprime consumers. In December 2016, just 21.9% of residents fell below an Equifax Risk Score of 660. Mississippi had the worst subprime rate in the nation: 48.3% of Mississippi residents had credit scores below 660 in December 2016.35

These are the distributions of Equifax Risk Scores by state:37

Credit score by age

In general, older consumers have higher credit scores than younger generations. Credit scoring models consider consumers with longer credit histories less risky than those with short credit histories. The Silent Generation and boomers enjoy higher credit scores due to long credit histories. However, these generations show better credit behavior, too. Their revolving credit utilization rates are lower than younger generations. They are less likely to have a severely delinquent credit item on their credit report.

Gen X and millennials have almost identical revolving utilization ratios and delinquency rates. Compared to millennials, Gen X has higher credit card balances and more debt. Still, Gen X’s longer credit history gives them a 21 point advantage over millennials on average.

To improve their credit scores, millennials and Gen X need to focus on timely payments. On-time payments and lower credit card utilization will drive their scores up.

A report by FICO® showed that younger consumers can earn high credit scores with excellent credit behavior. 93% of consumers with credit scores between 750 and 799 who were under age 29 never had a late payment on their credit report. In contrast, 57% of the total population had at least one delinquency. This good credit group also used less of their available credit. They had an average revolving credit utilization ratio of 6%. The nation as a whole had a utilization ratio of 15%.39

Sources

  1. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  2. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  3. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  4. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  5. 2016 State of Credit Report” National 2016 90+ Days Past Due, Experian. Accessed May 24, 2017
  6. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed May 24, 2017.
  7. 2016 State of Credit Report” National 2016 Average VantageScore®, Experian. Accessed May 24, 2017.
  8. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  9. 2016 State of Credit Report” National 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  10. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  11. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  12. 2016 State of Credit Report” National 2016 90+ Days Past Due, Experian. Accessed July 23, 2017.
  13. 2016 State of Credit Report” National 2016 Average Late Payments, Experian. Accessed July 23, 2017.
  14. 2016 State of Credit Report” National 2016 Average Revolving Credit Utilization Ratio, Experian. Accessed July 23, 2017.
  15. Quarterly Report on Household Debt and Credit May 2017” Percent of Balance 90+ Days Delinquent by Loan Type, All Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  16. Calculated metric using data from “Quarterly Report on Household Debt and Credit May 2017” Percent of Balance 90+ Days Delinquent by Loan Type and Total Debt Balance and Its Composition. All Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017. Multiply all debt balances by percent of balance 90 days delinquent for Q1 2017, and summarize all delinquent balances. Total delinquent balance for non-mortgage debt = $284 billion. Total non-mortgage debt balance = $4.1 trillion$284 billion /$4.1 trillion = 6.9%.
  17. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  18. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  19. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  20. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  21. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  22. Survey of Consumer Expectations, © 2013-2017 Federal Reserve Bank of New York (FRBNY). The SCE data are available without charge at http://www.newyorkfed.org/microeconomics/sce and may be used subject to license terms posted there. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.
  23. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  24. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  25. Quarterly Report on Household Debt and Credit May 2017” Number of Consumers with New Foreclosures and Bankruptcies, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  26. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  27. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  28. Quarterly Report on Household Debt and Credit May 2017” Flow into Severe Delinquency (90+) by Loan Type, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  29. Quarterly Report on Household Debt and Credit May 2017” Flow into Severe Delinquency (90+) by Loan Type, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  30. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  31. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  32. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  33. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  34. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  35. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  36. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  37. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  38. 2016 State of Credit Report” National 2016 VantageScore®, Experian. Accessed July 23, 2017.
  39. Andrew Jennings, “FICO® Score High Achievers: Is Age the Only Factor?” Fair Isaac Corporation. Accessed July 23, 2017.
  40. Quarterly Report on Household Debt and Credit May 2017” Third-Party Collections (Percent of Consumers with Collections), from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  41. Quarterly Report on Household Debt and Credit May 2017” Third-Party Collections (Percent of Consumers with Collections), from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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Older Americans Are Getting Crushed by Debt, New MagnifyMoney Analysis Shows

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

More American seniors are shouldering debt as they enter their retirement years, according to a new MagnifyMoney analysis of data from the latest University of Michigan Retirement Research Center Health and Retirement Study release. MagnifyMoney analyzed survey data to see whether debt causes financial frailty during retirement. We also spoke with financial experts who explained how seniors can rescue their retirements.

1 in 3 Americans 50 and older carry non-mortgage debt

The Health and Retirement Study from the University of Michigan Retirement Research Center surveys more than 20,000 participants age 50+ who answer questions about well-being. The survey covers financial topics including debt, income, and assets. Since 1990, the center has conducted the survey every other year. They released the 2014 panel of data in November 2016. MagnifyMoney analyzed the most recent release of the data to learn more about financial fitness among older Americans.

In an ideal retirement, retirees would have the financial resources necessary to maintain the lifestyle they enjoyed during their working years. Debt acts as an anchor on retiree balance sheets. Since interest rates on debts tend to rise faster than earnings from assets, debt has the power to destroy the balance sheets of seniors living on fixed incomes.

We found that nearly one-third (32%) of all Americans over age 50 carry non-mortgage debt from month to month. On average, those with debt carry $4,786 in credit card debt and $12,490 in total non-mortgage debt.

High-interest consumer debt erodes seniors’ ability to live a quality lifestyle, says John Ross, a Texarkana, Texas-based attorney specializing in elder law.

“From an elder law attorney perspective, we see a direct correlation between debt and institutional care,” Ross says. “Essentially, the more debt load, the less likely the person will have sufficient cash assets to cover medical care that is not provided by Medicare.”

Even worse, debt leads some retirees to skip paying for necessary expenses like quality food and medical care.

“The social aspect of being a responsible bill payer often leads the older debtor to forgo needed expenses to pay debts they cannot afford instead of considering viable options like bankruptcy,” says Devin Carroll, a Texarkana, Texas-based financial adviser specializing in Social Security and retirement.

Some older Americans may even be carrying debt that they don’t have the capacity to pay.

According to our analysis, 40% of all older Americans have credit card debt in excess of $5,000. More than one in five (22%) Americans age 50+ have more than $10,000 in credit card debt. On average, those with more than $10,000 in credit card debt couldn’t pay off their debt even by emptying their checking accounts.

Over a third of American seniors don’t have $1,000 in cash

It’s not just credit card debtors who struggle with financial frailty approaching retirement. Many older Americans have very little spending power. More than one-third (37%) of all Americans over age 50 have a checking account balance less than $1,000.

Low cash reserves don’t just mean limited spending power. They indicate that American seniors don’t have the liquidity to deal with financial hardships as they approach retirement. This is especially concerning because seniors are more likely than average to face high medical expenses. Over one in three (36%) Americans who experienced financial hardship classified it as an unexpected health expense, according to the Federal Reserve Board report on the Economic Well-Being of U.S. Households in 2015. The median out-of-pocket health-related expense was $1,200.

Debt pushes seniors further from retirement goals

Seniors carrying credit card debt exhibit other signs of financial frailty. For example, seniors without credit card debt have an average net worth of $120,000. Those with credit card debt have a net worth of just $68,000, 43% less than those without credit card debt.

The concern isn’t just small portfolio values. For retirees with debt, credit card interest rates outpace expected performance on investment portfolios. Today the average credit card interest rate is 14%. That means American seniors who carry credit card debt (on average, $4,786) pay an average of $670 per year in interest charges. Meanwhile, the average investment portfolio earns no more than 8% per year. This means that older debtors will earn just $4,508 from their entire portfolio. Credit card interest eats up more than 15% of the nest egg income.

For some older Americans the problem runs even deeper. One in 10 American seniors has a checking account balance with less than $1,000 and carries credit card debt. This precarious position could leave some seniors unable to recover from larger financial setbacks.

Increased debt loads over time

High levels of consumer debt among older Americans are part of a sobering trend. According to research from the University of Michigan Retirement Research Center, in 1998, 36.94% of Americans age 56-61 carried debt. The mean value of their debt (in 2012 dollars) was $3,634.

Over time debt loads among pre-retiree age Americans are becoming even more unsustainable. Today 42% of Americans age 50-59 have debt, and their average debt burden is $17,623.

Credit card debt carries the most onerous interest rates, but it’s not the only type of debt people carry into retirement. According to research from the Urban Institute, in 2014, 32.2% of adults aged 68-72 carried debt in addition to a mortgage or a credit card, and 18% of Americans age 73-77 still have an auto loan.

Even student loan debt, a debt typically associated with millennials, is causing angst among seniors. According to the debt styles study from the Urban Institute, as of 2014, 2%-4% of adults aged 58 and older carried student loan debt. It’s a small proportion overall, but the burden is growing over time.

According to the Consumer Financial Protection Bureau, in 2004, 600,000 seniors over age 60 carried student loan debt. Today that number is 2.8 million. Back in 2004 Americans over age 60 had $6 billion in outstanding student loan debts. Today they owe $66.7 billion in student loans, more than 10 times what they owed in 2004. Not all that student debt came from seniors dragging their repayments out for 30-40 years. Almost three in four (73%) older student loan debtors carry some debt that benefits a child or grandchild.

Even co-signing student loans puts a retirement at risk. If the borrower cannot repay the loan on their own, then a retiree is on the hook for repayment. A co-signer’s assets that aren’t protected by federal law can be seized to repay a student loan in default. Because of that, Ross says, “We never advise a person to co-sign on a student loan. Never!”

How older Americans can manage debt

High debt loads and an impending retirement can make a reasonable retirement seem like a fairy tale. However, an effective debt strategy and some extra work make it possible to age on your own terms.

Focus on debt first.

Carroll suggests older workers should prioritize eliminating debt before saving for retirement. “Several studies have shown a direct correlation between debt and risk of institutionalization,” he says. Debt inhibits retirees from remodeling or paying for in-home care that could allow them to age in place.

Downsize your lifestyle

As a first step in eliminating debt, seniors should check all their expenses. Some may consider drastic measures like downsizing their home.

Cut off adult children

Even more important, seniors with debt may need to stop supporting adult children.

According to a 2015 Pew Center Research Poll, 61% of all American parents supported an adult child financially in the last 12 months. Nearly one in four (23%) helped their adult children with a recurring financial need.

Wanting to help children is natural, but it can leave seniors financially frail. It may even leave a parent unable to provide for themselves during retirement.

Work longer

Older workers can also eliminate debt by focusing on the income side of the equation. For many this will mean working a few years longer than average, but the extra work pays off twofold. First, eliminating debt reduces the need for cash during retirement. Second, working longer also allows seniors to delay taking Social Security benefits.

Working until age 67 compared to age 62 makes a meaningful difference in quality of life decades down the road. According to the Social Security Administration, workers who withdraw starting at age 62 received an average of $1,077 per month. Those who waited until age 67 received 27% more, $1,372 per month.

Retirees already receiving Social Security benefits have options, too. Able-bodied retirees can re-enter the workforce. Homeowners can consider renting out a room to a family member to increase income.

Consider every option

If earning more money isn’t realistic, a debt elimination strategy becomes even more important. Ross recommends that retirees should consider every option when facing debt, including bankruptcy. He explains, “A 65-year-old, healthy retiree would be well advised to pay down the high-interest debt now. Alternatively, an 85-year-old retiree facing significant health issues is better off filing bankruptcy or just defaulting on the debt. For the older person, their existing assets are a lifeline, and a good credit score is irrelevant.”

Don’t take on new debt

It’s also important to avoid taking on new debt during retirement. “The only exception,” Ross explains, “[is taking on] debt in the form of home equity for long-term medical care needs, but then only when all other reserves are depleted and the person has explored all forms of government assistance such as Medicaid and veterans benefits.”

Every senior’s financial situation differs, but if you’re facing financial stress before or during retirement, it pays to know your options. Conduct your research and consult with a financial adviser, an elder law attorney, or a credit counselor from the National Foundation for Credit Counseling to choose what is right for your situation.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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Average Household Credit Card Debt in America: 2017 Statistics

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Even as household income and employment rates are ticking up in the U.S., credit card balances are approaching all-time highs. What’s behind the growth of credit card spending among consumers? In a new report on credit card debt in America, MagnifyMoney analyzed credit debt trends in the U.S. to find out exactly how much credit debt consumers are really taking on and, crucially, how they are managing their growing reliance on plastic.

Key Findings:

  • While credit balances are increasing, the amount of debt that households are carrying from month to month is actually much lower than it was leading up to the 2008 financial crisis. As of December 2016, households with credit card debt owed an average of $7,703, down 27.2% compared to October 2008, when household credit card debt peaked at $10,588.
  • Credit card balances and credit card debt are not the same thing. The 73 million Americans who pay their bill in full each month have credit card balances reported to the major credit reporting bureaus.
  • Assessing financial health means focusing on credit card debt trends rather than credit card use trends.

Credit Card Debt in the U.S. by the Numbers

Credit Card Use

Number of Americans who use credit cards: 203 million1

Average number of credit cards per consumer: 2.22

Number of Americans who carry credit card debt: 127 million3

Credit Card Debt

The following figures only include the credit card balances of those who carry credit card debt from month to month.

Total credit card debt in the U.S.: $504 billion4

Average credit card debt per person: $3,9715

Average credit card debt per household: $7,7036

Credit Card Balances

The following figures include the credit card statement balances of all credit card users, including those who pay their bill in full each month.

Total credit card balances: $764 billion as of January 2017, an increase of 7.3% from the previous year.7

Average balance per person: $5,5518

Who Pays Off Their Credit Card Bills?

42% of households pay off their credit card bills in full each month

31% of households carry a balance all year

27% of households sometimes carry a balance10

Understanding Household Credit Card Balances vs. Household Debt

At first glance, it may seem that Americans are taking on near record levels of credit debt. Forty-two percent of American households11 carry credit card debt from month to month, and, if you look at the total credit card balances among U.S. households, the figure appears astronomical — $764 billion. But that figure includes households that are paying their credit debt in full each month as well as those that are carrying a balance from month to month.

While credit balances are increasing, the amount of debt that households are carrying from month to month is actually much lower than it was leading up to the 2008 financial crisis. The total of credit card balances for households that actually carry debt from month to month is $504 billion.

As of the first quarter of 2017, households with credit card debt owed an average of $7,703.3 That is a decrease of 27.2% compared to October 2008, when household credit card debt peaked at $10,588.12b

And as household incomes have risen in recent years, this has helped to lower the ratio of credit card debt to income. Today, indebted households with average debt and median household incomes have a credit card debt to income ratio of 14.9%.13 Back in 2008, the ratio was 19.1%.

Credit Card Debt per Person

Once we adjust for these effects, we see that an estimated 127 million Americans carry $503 billion of credit card debt from month to month. Back in 2008, 7 million fewer Americans carried debt, but total credit card debt in late 2008 hovered around $631 billion.16 That means people with credit card debt in 2008 had more debt than people with credit card debt today.

Average credit card debt among those who carry a balance today is $3,970 per person2 or $7,703 per household.3 Back in 2008, credit card debtors owed an average of 28.6% more than they do today. In late 2008, the 115 million17 Americans with credit card debt owed an average of $5,567 per person12a or $10,689 per household.12b

Delinquency Rates

Credit card debt becomes delinquent when a bank reports a missed payment to the major credit reporting bureaus. Banks typically don’t report a missed payment until a person is at least 30 days late in paying.

In the second quarter of 2009, delinquency rates were 6.77%, nearly three times higher than they are today. Today, credit card delinquency rates among U.S. households are down to 2.34%.14

Credit card debt is well below recession levels, but balances continue inching upward. In the last year, overall credit card balances rose 7.3% to $764 billion.

Our Method of Calculating Household Credit Card Debt

Credit card debt doesn’t appear on the precipice of disaster, but the recent growth in balances is cause for some concern. Still, our estimates for household credit card debt remain modest.

In fact, MagnifyMoney’s estimates of household credit card debt is two-thirds that of other leading financial journals. Why are our estimates comparatively low?

A common estimate of household credit card debt is:

This method overstates credit card debt. The Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP) does not release a figure called credit card indebtedness. Instead, they release a figure on national credit card balances. Representatives of the Federal Reserve Bank of New York and the Philadelphia Federal Reserve Bank both confirmed that the CCP includes the statement balances of people who go on to pay their bill in full each month.

To find a better estimate of credit card debt, we found methods to exclude the statement balances of full paying households from our credit card debt estimates. Statement balances are the balances owed to a credit card company at the end of a billing cycle. Even though full payers pay off their statement balance each month, their balances are included in the CCP’s figures on credit card balances.

To exclude full payer balances, we turned to academic research outside of the Federal Reserve Banks. The paper, Minimum Payments and Debt Paydown in Consumer Credit Cards, by Benjamin J. Keys and Jialan Wang, found full payers had mean statement balances of $3,412. We used this figure, multiplied by the estimated number of full payers to find the statement balances of full payers.

Our credit card debt estimate is:3

Credit Card Debt: Do We Know What We Owe?

Academic papers, consumer finance surveys, and the CCP each use different methods to measure average credit card debt among credit card revolvers. Since methodologies vary, credit card debt statistics vary based on the source consulted.

MagnifyMoney surveyed these sources to present a range of credit card debt statistics.

Are We Paying Down Credit Card Debt?

A Pew Research Center study25 showed that Americans have an uneasy relationship with credit card debt. More than two-thirds (68%) of Americans believe that loans and credit card debt expanded their opportunities. And 85% believe that Americans use debt to live beyond their means.

Academic research shows the conflicting attitude is justified. Some credit card users aggressively pay off debt. Others pay off their bill in full each month.

However, a substantial minority (44%)26 of revolvers pay within $50 of their minimum payment. Minimum payers are at a high risk of carrying unsustainable credit card balances with high interest.

In fact, 14% of consumers have credit card balances above $10,000.27 At current rates, consumers with balances of $10,000 will spend more than $1,386 per year on interest charges alone.28

Minimum Payments and Debt Paydown in Consumer Credit Cards29

Even an average revolver will spend between $54530 and $55631 on credit card interest each year.

Credit Debt Burden by Income

Those with the highest credit card debts aren’t necessarily the most financially insecure. According to the Survey of Consumer Finances, the top 10% of income earners who carried credit card debt had nearly twice as much debt as average.

However, people with lower incomes have more burdensome credit card debt loads. Consumers in the lowest earning quintile had an average credit card debt of $3,000. However, their debt-to-income ratio was 21.7%. On the high end, earners in the top decile had an average of $11,200 in credit card debt. But debt-to-income ratio was just 4.9%.

Although high-income earners have more manageable credit card debt loads on average, they aren’t taking steps to pay off the debt faster than lower income debt carriers. In fact, high-income earners are as likely to pay the minimum as those with below average incomes.32 If an economic recession leads to job losses at all wage levels, we could see high levels of credit card debt in default.

Generational Differences in Credit Card Use

  • Boomer consumers carry an average credit card balance of $6,889.
  • That is 24.1% higher than the national average consumer credit card balance.34
  • Millennial consumers carry an average credit card balance of $3,542.
  • That is 36.1% lower than the median consumer credit card balance.35

With average credit card balances of $6,889, baby boomers have the highest average credit card balance of any generation. Generation X follows close behind with average balances of $6,866.

At the other end of the spectrum, millennials, who are often characterized as frivolous spenders who are too quick to take on debt, have the lowest credit card balances. Their median balance clocks in at $3,542, 36.1% less than the national median.

Better Consumer Behavior Driving Bank Profitability

You may think that lower balances spell bad news for banks, but that isn’t the case. Credit card lending is more profitable than ever thanks to steadily declining credit card delinquency. Credit card delinquency is near an all-time low 2.34%.14

Despite better borrowing behavior, banks have held interest on credit cards steady between 13% and 14%37 since 2010. Today, interest rates on credit accounts (assessed interest) is 13.86%. This means bank profits on credit cards are at all-time highs. In 2015, banks earned over $102 billion dollars from credit card interest and fees.38 This is 15% more than banks earned in 2010.

How Does Your State Compare?

Using data from the Federal Reserve Bank of New York Consumer Credit Panel and Equifax, you can compare median credit card balances and credit card delinquency. You can even see how each generation in your state compares to the national median.

Footnotes:

  1. Source: Survey of Consumer Expectations, © 2013-2015 Federal Reserve Bank of New York (FRBNY). “The SCE data are available without charge at www.newyorkfed.org and may be used subject to license terms posted there. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.”The June 2016 Survey of Consumer Expectations shows 76.1% of people with credit reports had balances on credit cards. The May 2017 Report on Household Debt and Credit showed 267 million adults with credit reports. For a total of 203 million credit card users.
  2. May 2017 Report on Household Debt and Credit, Page 4, Q1 2017, 453 million credit card accounts. 453 million credit card accounts / 203 million credit card users1 = 2.2 credit cards per person.
  3. The 2015 Report on the Economic Well-Being of U.S. Households reports 58% of credit card users carried a balance in 2015. 203 million1 * 58% = 118 million people with credit card debt.Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang shows that 67% of credit card users were not “full payers.” This results in a high estimate of 136 million people with credit card debt.Average estimate is 127 million with credit card debt.
  4. Using data from the 2015 Report on the Economic Well-Being of U.S. Households, 203 million credit card users * (58% not full payers) * $4,011 per individual5 = $472 billion in credit card debt.Using data from Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang, we calculate 203 million credit card users * (67% not full payers) * $3,930 per individual5 = $535 billion in credit card debt.Average estimated total credit card debt is $504 billion.
  5. The May 2017 Report on Household Debt and Credit shows $764 billion in outstanding credit card debt. Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang shows an average balance of $3,412 for “full payers.” Using their estimate of 33% full payers, we calculate:[$764 billion – ($3,412 (full payer balance) * 33% full payer * 203 million credit card users1)] / (203 million credit card users * (100% – 33% not full payers)) = $3,930Using their estimate of 42% full payers, from the 2015 Report on the Economic Well-Being of U.S. Households and the $3,412 full payer balance from Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang, we calculate:[$764 billion – ($3,412 (full payer balance) * 42% full payer * 203 million credit card users1)] / (203 million credit card users * (100% – 42% not full payers)) = $4,011Average estimated credit card debt per person is $3,971.
  6. Average per person credit card is $3,9715 and the average household contains 1.94 adults over the age of 18. $3,971 * 1.94 = $7,703.
  7. May 2017 Report on Household Debt and Credit, Compare Q1 2016 to Q1 2017, outstanding credit card debt (Page 10).
  8. May 2017 Report on Household Debt and Credit, Page 3, Q1 2017, credit card debt $764 billion / 203 million1 = $3,759.
  9. 2016 State of Credit Report” National 2016 Average Balances on Credit Cards, Experian,Accessed May 24, 2017. National Balance on Bankcards- average of $5,551.
  10. Page 30, 2015 Report on the Economic Well-Being of U.S. Households.
  11. 2013 Survey of Consumer Finances reports 37.1% of U.S. households carry credit card debt. There are 125.82 million U.S. households.Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der Klaauw reported that 46.1% of U.S. households carried a balance the month prior to the Survey of Consumer Finances.Between 48 million14 and 58 million15 households carry credit card debt. Using the average of the two estimates, we believe 53 million households out of 125.82 million households carry credit card debt.
  12. a. CCP data shows 76.6% of people with credit reports had balances on credit cards in September 2008. The May 2017 Report on Household Debt and Credit showed 240 million adults with credit reports in Q3 2008. For a total of 183 million credit card users.The May 2017 Report on Household Debt and Credit shows $866 billion in outstanding credit card debt in Q3 2008. Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang shows an average balance of $3,412 for “full payers.” Using their estimate of 33% full payers, we calculate:[$866 billion – ($3,412 (full payer balance) * 33% full payer * 183 million credit card users)] / (183 million credit card users * (100% – 33% not full payers)) = $5,365U.S. Census Bureau, Survey of Income and Program Participation, 2008 Panel, Wave 4shows 44.5% of all households with a credit report have credit card debt. Using this along with the $3,412 full payer balance from Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang, we calculate:[$866 billion – ($3,412 (full payer balance) * (100% – 44.5%) full payer * 240 million people with credit reports)] / (240 million people with credit reports * (44.5% not full payers)) = $5,769Average estimated credit card debt per person is $5,567.b. Average per person credit card is $5,56712 and in 2008, the average household contained 1.92 adults over the age of 18. $5,567 * 1.92 = $10,689.
  13. U.S. Bureau of the Census, Real Median Household Income in the United States [MEHOINUSA672N], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MEHOINUSA672N, March 17, 2017.
  14. Board of Governors of the Federal Reserve System (US), Delinquency Rate on Credit Card Loans, All Commercial Banks [DRCCLACBS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DRCCLACBS, March 16, 2017.
  15. Statement balances are the balances owed to a credit card company at the end of a billing cycle. Full payers will pay off the entirety of their statement balance each month. Finding an estimate of full payers’ statement balances was not an easy task. The Federal Reserve Bank of New York does not provide estimates of full payers compared to people who carry a balance.In order to get our estimates, we turned to academic research outside of the Federal Reserve Banks. In the paper, Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang, we found robust estimates of the statement balances of “full payers.” According to their analysis (see Table 1-A), full payers had mean statement balances of $3,412 (when summarized across all credit cards) before they went on to pay off the debt.We multiplied $3,412 by the estimated number of full payers to get the estimated balances of full payers.
  16. CCP data shows 76.6% of people with credit reports had balances on credit cards in September 2008. The May 2017 Report on Household Debt and Credit shows 240 million adults with credit reports in Q3 2008. For a total of 183 million credit card users.The May 2017 Report on Household Debt and Credit shows $866 billion in outstanding credit card debt in Q3 2008. Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang shows an average balance of $3,412 for “full payers.” Using their estimate of 33% full payers, we calculate:$866 billion – ($3,412 (full payer balance) * 33% full payer * 183 million credit card users) =$659 billionU.S. Census Bureau, Survey of Income and Program Participation, 2008 Panel, Wave 4shows 44.5% of all households with a credit report have credit card debt. Using this along with the $3,412 full payer balance from Table A-1 in Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang, we calculate:$866 billion – ($3,412 (full payer balance) * (100% – 44.5%) full payer * 240 million people with credit reports) = $587 billionEstimated credit card debt is $623 billion.
  17. Source: Survey of Consumer Expectations, © 2013-2015 Federal Reserve Bank of New York (FRBNY). “The SCE data are available without charge at www.newyorkfed.org and may be used subject to license terms posted there. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.”The June 2016 Survey of Consumer Expectations Shows 76.1% of the adult population uses credit cards. The May 2017 Report on Household Debt and Credit shows 267 million adults with credit reports. For a total of 203 million credit card users. Page 30, 2015 Report on the Economic Well-Being of U.S. Households shows that 58% of households with credit cards sometimes or always carry a balance.203 million * 58% = 118 million people with credit card debt
  18. Source: Survey of Consumer Expectations, © 2013-2015 Federal Reserve Bank of New York (FRBNY). “The SCE data are available without charge at www.newyorkfed.org and may be used subject to license terms posted there. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.”The June 2016 Survey of Consumer Expectations Shows 76.1% of the adult population uses credit cards. The May 2017 Report on Household Debt and Credit shows 267 million adults with credit reports. For a total of 203 million credit card users. Minimum Payments and Debt Paydown in Consumer Credit Cards by Benjamin J. Keys and Jialan Wang shows that 67% of credit card users were not “full payers.”203 million * 67% = 136 million people with credit card debt
  19. The 2013 Survey of Consumer Finances reports 37.1% of U.S. households carry credit card debt. There are 125.82 million U.S. households.
  20. Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der Klaauw reported that 46.1% of U.S. households carried a balance the month prior to the Survey of Consumer Finances.
  21. The 2013 Survey of Consumer Finances reports a median credit card debt of $2,300 per household with credit card debt.
  22. Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der Klaauw used CCP data and determined a more realistic median credit card debt of $3,500 per household. Two-person households systematically underreported their debt.
  23. The 2013 Survey of Consumer Finances reports a median credit card debt of $5,700 per household with credit card debt.
  24. Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der Klaauw used CCP data and determined a more realistic average credit card debt of $9,600 per household.
  25. The Complex Story of American Debt, Page 9.
  26. Table 1 in Minimum Payments and Debt Paydown in Consumer Credit Cards.
  27. Recent Developments in Consumer Credit Card Borrowing.
  28. Board of Governors of the Federal Reserve System (US), Commercial Bank Interest Rate on Credit Card Plans, Accounts Assessed Interest [TERMCBCCINTNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TERMCBCCINTNS, June 6, 2017.February 2017 interest rate on accounts assessed interest 13.86%: $10,000 * 13.86% = $1,386.
  29. Table 1 in Minimum Payments and Debt Paydown in Consumer Credit Cards.
  30. $3,9312 * 13.86%28 = $545
  31. $4,0112 * 13.86%28 = $556
  32. Minimum Payments and Debt Paydown in Consumer Credit Cards.
  33. 2013 Survey of Consumer Finances.
  34. 2016 State of Credit Report” National 2016 Average Balances on Credit Cards, Experian,Accessed May 24, 2017. Average credit card balance for baby boomers is $6,889 compared to a national average of $5,551.
  35. 2016 State of Credit Report” National 2016 Average Balances on Credit Cards, Experian,Accessed May 24, 2017. Average credit card balance for millennials is $3,542 compared to a national average of $5,551.
  36. Board of Governors of the Federal Reserve System (US), Commercial Bank Interest Rate on Credit Card Plans, Accounts Assessed Interest [TERMCBCCINTNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TERMCBCCINTNS, June 6, 2017.
  37. U.S. Bureau of the Census, Sources of Revenue: Credit Card Income from Consumers for Credit Intermediation and Related Activities, All Establishments, Employer Firms [REVCICEF522ALLEST], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/REVCICEF522ALLEST, March 17, 2017.
  38. CCP data shows 76.6% of people with credit reports had balances on credit cards in September 2008. The May 2017 Report on Household Debt and Credit shows 240 million adults with credit reports in Q3 2008. For a total of 183 million credit card users.The May 2017 Report on Household Debt and Credit, Page 3, Q3 2008, credit card debt $886 billion / 183 million = $4,720
  39. State Level Household Debt Statistics 1999-2016, Federal Reserve Bank of New York, May, 2017. All average credit card debt balances are calculated using the following formula:(Total Credit Card Balancea – Balance of Population Not Carrying Debtb) / Population Carrying Credit Card Debtc
    1. Total Credit Card Balance = (Average Credit Card Debt Per Capita * Population)
    2. Balance of Population Not Carrying Debt = Average Credit Card Debt Per Capita * Population * % of Population Using a Credit Card
    3. Population * % of Population Using a Credit Card * (1 – .375)
  40. State Level Household Debt Statistics 1999-2016, Federal Reserve Bank of New York, May, 2017.
  41. Data from Consumer Credit Explorer.
Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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U.S. Mortgage Market Statistics: 2017

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Homeownership rates in America are at all-time lows. The housing crisis of 2006-2009 made banks skittish to issue new mortgages. Despite programs designed to lower down payment requirements, mortgage originations haven’t recovered to pre-crisis levels, and many Americans cannot afford to buy homes.

Will a new generation of Americans have access to home financing that drove the wealth of previous generations? We’ve gathered the latest data on mortgage debt statistics to explain who gets home financing, how mortgages are structured, and how Americans are managing our debt.

Summary:

  • Total Mortgage Debt: $9.8 trillion1
  • Average Mortgage Balance: $137,0002
  • Average New Mortgage Balance: $244,0003
  • % Homeowners (Owner-Occupied Homes): 63.4%4
  • % Homeowners with a Mortgage: 65%5
  • Median Credit Score for a New Mortgage: 7646
  • Average Down Payment Required: $12,8297
  • Mortgages Originated in 2016: $2.065 trillion8
  • % of Mortgages Originated by Banks: 43.9%9
  • % of Mortgages Originated by Credit Unions: 9%9
  • % of Mortgages Originated by Non-Depository Lenders: 47.1%9

Key Insights:

  • The median borrower in America puts 5% down on their home purchase. This leads to a median loan-to-value ratio of 95%. A decade ago, the median borrower put down 20%.10
  • Credit score requirements make mortgages tougher than ever to get. The median mortgage borrower had a credit score of 764.6
  • 1.67% of all mortgages are in delinquency. In 2010, mortgage delinquency reached as high as 8.89%.11

Home Ownership and Equity Levels

In the first quarter of 2017, real estate values in the United States recovered to their pre-recession levels. The total value of real estate owned by individuals in the United States is $23 trillion dollars, and total mortgages clock in at $9.8 trillion dollars. This means that Americans have $13.7 trillion in homeowners equity.12 This is the highest value of home equity Americans have ever seen.

However, real estate wealth is becoming increasingly concentrated as overall homeownership rates fall. In 2004, 69% of all Americans owned homes. Today, that number is down to 63.4%.4 While home affordability remains a question for many Americans, the downward trend in homeownership corresponds to banks tightening credit standards for new mortgages.

New Mortgage Originations

Mortgage origination levels show signs of recovery from their housing crisis lows. In 2008, financial institutions issued just $1.4 trillion dollars of new mortgages. In 2016, new first lien mortgages topped $2 trillion for the first time since the end of the housing crisis. Despite the growth in the mortgage market, mortgage originations are still 25% lower than their pre-recession average.8

As recently as 2010, three banks (Wells Fargo, Bank of America, and Chase) originated 56% of all mortgages.13 In 2016, all banks put together originate just 44% of all loans.9

In a growing trend toward “non-bank” lending, both credit unions and non-depository lenders cut into banks’ share of the mortgage market. In 2016, credit unions issued 9% of all mortgages. Additionally, 47% of all mortgages in 2016 came from non-depository lending institutions like Quicken Loans and PennyMac. Behind Wells Fargo ($249 billion) and Chase ($117 billion), Quicken ($96 billion) was the third largest issuer of mortgages in 2016. In the fourth quarter of 2016, PennyMac issued $22 billion in loans and was the fourth largest lender overall.9

Government vs. Private Securitization

Banks tend to be more willing to lend mortgages to consumers if a third party will buy the mortgage in the secondary market. This is a process called loan securitization. Consumers can’t directly influence who buys their mortgage. Nonetheless, mortgage securitization influences who gets mortgages and their rates. Over the last five years government securitization enterprises, FHA and VA loans, and portfolio loan securitization have risen. However, today private loan securitization is almost extinct.

Government-sponsored enterprises (GSEs) have traditionally played an important role in ensuring that banks will issue new mortgages. In 2016, 46% of all loans issued were securitized by Fannie Mae or Freddie Mac. However, in absolute terms, Fannie and Freddie purchased 20% fewer loans than they did in the years leading up to 2006.8

In 2016, a tiny fraction (0.4%) of all loans were purchased by private securitization companies.8 Prior to 2007, private securitization companies held $1.6 trillion in subprime and Alt-A (near prime) mortgages. In 2005 alone, private securitization companies purchased $1.1 trillion worth of mortgages. Today private securitization companies hold just $500 billion in total assets, including $440 billion in subprime and Alt-A loans.14

As private securitization firms exited the mortgage landscape, programs from the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) have filled in some of the gap. The FHA and VA are designed to help borrowers get loans despite having smaller down payments or lower incomes. FHA and VA loans accounted for 23% of all loans issued in 2016. These loan programs are the only mortgages that grew in absolute terms from the pre-mortgage crisis. Prior to 2006, FHA and VA loans only accounted for $155 billion in loans per year. In 2016, FHA and VA loans accounted for $470 billion in loans issued.8

Portfolio loans, mortgages held by banks, accounted for $639 billion in new mortgages in 2016. Despite tripling in volume from their 2009 low, portfolio loans remain down 24% from their pre-crisis average.8

Mortgage Credit Characteristics

Since banks are issuing 21% fewer mortgages compared to pre-crisis averages, borrowers need higher incomes and better credit to get a mortgage.

The median FICO score for an originated mortgage rose from 707 in late 2006 to 764 today. The scores on the bottom decile of mortgage borrowers rose even more dramatically from 578 to 657.6

In 2016, 23% of all first lien mortgages were financed through FHA or VA programs. First-time FHA borrowers had an average credit score of 677. This puts the average first-time FHA borrower in the bottom quartile of all mortgage borrowers.8

Prior to 2009, an average of 20% of all volumes originated went to people with subprime credit scores (<660). In the first quarter of 2017, just 8% of all mortgages were issued to borrowers with subprime credit scores. Mortgages for people with excellent credit (scores above 760) more than doubled. Between 2003 and 2008 just 27% of all mortgages went to people with excellent credit. In the first quarter of 2017, 61% of all mortgages went to people with excellent credit.6

Banks have also tightened lending standards related to maximum debt-to-income ratios for their mortgages. In 2007, conventional mortgages had an average debt-to-income ratio of 38.6%; today the average ratio is 34.3%.15 The lower debt-to-income ratio is in line with pre-crisis levels.

LTV and Delinquency Trends

Banks continue to screen customers on the basis of credit score and income, but customers who take on mortgages are taking on bigger mortgages than ever before. Today a new mortgage has an average unpaid balance of $244,000, according to data from the Consumer Financial Protection Bureau.3

The primary drivers behind larger loans are higher home prices, but lower down payments also play a role. Prior to the housing crisis, more than half of all borrowers put down at least 20%. The average loan-to-value ratio at loan origination was 82%.10

Today, half of all borrowers put down 5% or less. A quarter of all borrowers have just 3.5% equity at the time of mortgage origination. As a result, the average loan-to-value ratio at origination has climbed to 88%.10

Despite a growing trend toward smaller down payments, growing home prices mean that overall loan-to-value ratios in the broader market show healthy trends. Today, the average loan-to-value ratio across all homes in the United States is an estimated 48%. The average LTV on mortgaged homes is 73%.16

This is substantially higher than the pre-recession LTV ratio of approximately 60%. However, homeowners saw very healthy improvements in loan-to-value ratios of 94% in early 2011. Between 2009 and 2011 more than a quarter of all mortgaged homes had negative equity. Today, just 6.2% of homes have negative equity.17

Although the current LTV on mortgaged homes remains above historical averages, Americans continue to manage mortgage debt well. Current homeowners have mortgage payments that make up an average of just 16.5% of their annual household income.18

After falling for 20 straight quarters, mortgage delinquency rates reached an eight-year low (1.57%) in the fourth quarter of 2016. Delinquency rates ticked up to 1.67% for the first time in Q1 2017, but remain substantially below the 2010 high of 8.89% delinquency.11

Despite the general progress, delinquency rates are still six basis points higher than their 2003-2006 average of 1.07%. It remains to be seen if delinquency rates will return to their pre-crisis lows, or if the housing market is entering a new normal.

Sources:

  1. Board of Governors of the Federal Reserve System (U.S.), Households and Nonprofit Organizations; Home Mortgages; Liability, Level [HHMSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS, June 22, 2017.
  2. Survey of Consumer Expectations Housing Survey – 2017,” Credit Quality and Inclusion, from the Federal Reserve Bank of New York. Accessed June 22, 2017.
  3. Home Mortgage Disclosure Act, Consumer Financial Protection Bureau, “Average Loan Amount, 1-4 family dwelling, 2015.” Accessed June 22, 2017.
  4. U.S. Bureau of the Census, Homeownership Rate for the United States [USHOWN], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USHOWN, June 22, 2017. (Calculated as percent of all housing units occupied by an owner occupant.)
  5. “U.S. Census Bureau, 2011-2015 American Community Survey 5-Year Estimates,” Mortgage Status, Owner-Occupied Housing Units. Accessed June 22, 2017.
  6. Quarterly Report on Household Debt and Credit May 2017.” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed June 22, 2017.
  7. Calculated metric:
    1. Down Payment Value = Home Price* Average Down Payment Amount (Average Unpaid Balance on a New Mortgageb / Median LTV on a New Loanc) * (1 – Median LTV on a New Loanc)
    2. Home Mortgage Disclosure Act, Consumer Financial Protection Bureau, “Average Loan Amount, 1-4 family dwelling, 2015.” Accessed June 22, 2017. Gives an average unpaid principal balance on a new loan = $244K.
    3. Housing Finance at a Glance: A Monthly Chartbook, May 2017.” Combined LTV at Origination from the Urban Institute, Urban Institute, calculated from: Corelogic, eMBS, HMDA, SIFMA, and Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  8. Housing Finance at a Glance: A Monthly Chartbook, May 2017.” First Lien Origination Volume from the Urban Institute. Source: Inside Mortgage Finance and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  9. Mortgage Daily. 2017. “Mortgage Daily 2016 Biggest Lender Ranking” [Press Release] Retrieved from https://globenewswire.com/news-release/2017/04/03/953457/0/en/Mortgage-Daily-2016-Biggest-Lender-Ranking.html.
  10. Housing Finance at a Glance: A Monthly Chartbook, May 2017.” Combined LTV at Origination from the Urban Institute, Urban Institute, calculated from: Corelogic, eMBS, HMDA, SIFMA, and Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  11. Quarterly Report on Household Debt and Credit May 2017.” Mortgage Delinquency Rates, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed June 22, 2017.
  12. Calculated metric: Value of U.S. Real Estatea – Mortgage Debt Held by Individualsb
    1. Board of Governors of the Federal Reserve System (U.S.), Households; Owner-Occupied Real Estate including Vacant Land and Mobile Homes at Market Value [HOOREVLMHMV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HOOREVLMHMV, June 22, 2017.
    2. Board of Governors of the Federal Reserve System (U.S.), Households and Nonprofit Organizations; Home Mortgages; Liability, Level [HHMSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS, June 22, 2017.
  13. Mortgage Daily, 2017. “3 Biggest Lenders Close over Half of U.S. Mortgages” [Press Release]. Retrieved from http://www.mortgagedaily.com/PressRelease021511.asp?spcode=chronicle.
  14. Housing Finance at a Glance: A Monthly Chartbook, May 2017” from the Urban Institute Private Label Securities by Product Type, Urban Institute, calculated from: Corelogic and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  15. Fannie Mae Statistical Summary Tables: April 2017” from Fannie Mae. Accessed June 22, 2017; and “Single Family Loan-Level Dataset Summary Statistics” from Freddie Mac. Accessed June 22, 2017. Combined debt-to-income ratios weighted using original unpaid balance from both datasets.
  16. Calculated metrics:
    1. All Houses LTV = Value of All Mortgagesc / Value of All U.S. Homesd
    2. Mortgages Houses LTV = Value of All Mortgagesc / (Value of All Homesd – Value of Homes with No Mortgagee)
    3. Board of Governors of the Federal Reserve System (U.S.), Households; Owner-Occupied Real Estate including Vacant Land and Mobile Homes at Market Value [HOOREVLMHMV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HOOREVLMHMV, June 22, 2017.
    4. Board of Governors of the Federal Reserve System (U.S.), Households and Nonprofit Organizations; Home Mortgages; Liability, Level [HHMSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS, June 22, 2017.
    5. U.S. Census Bureau, 2011-2015 American Community Survey 5-Year Estimates, Aggregate Value (Dollars) by Mortgage Status, June 22, 2017.
  17. Housing Finance at a Glance: A Monthly Chartbook, May 2017.” Negative Equity Share. Source: CoreLogic and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  18. Survey of Consumer Expectations Housing Survey – 2017,” Credit Quality and Inclusion, from the Federal Reserve Bank of New York. Accessed June 22, 2017.
Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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Guide to Student Loan Forgiveness for Teachers

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Becoming a schoolteacher is heralded as a rewarding profession but not one that often comes with a large paycheck. Starting salaries for public school teachers range from $27,000 to $48,000, according to the National Education Association. And yet, teachers who graduate with a Master in Education carry an average of $50,000 in student loan debt.

With salaries like these, it’s no wonder teachers can struggle to afford their student loan payments. Thankfully, classroom teachers qualify for many debt forgiveness programs. These programs can help give teachers an extra boost to help them pay down debt while working.

These are the most important student loan forgiveness programs for teachers, which we’ll review in detail in this guide.

Public Service Loan Forgiveness

Public Service Loan Forgiveness forgives Direct student loans for teachers. Public sector employees who make payments for 10 years qualify for debt forgiveness.

How do loans become eligible?

Teachers at nonprofit schools are eligible for Public Service Loan Forgiveness. This includes public and private nonprofit schools. To qualify, teachers must make 120 on-time payments while working full time in a public service role.

The 120 payments do not have to be consecutive. However, you must pay the full amount listed on your bill. Additionally, your loans must be in good standing when you make the payment.

How much of my loan will be forgiven?

After 120 payments, the government will cancel 100% of the remaining balance and interest on your Direct Federal Loans. Direct Federal Loans include:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans — for parents and graduate or professional students
  • Direct Consolidation Loans

Some federal loans are excluded from forgiveness. These include:

  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • Federal PLUS Loans — for parents and graduate or professional students
  • Federal Consolidation Loans (excluding joint spousal consolidation loans)
  • Federal Perkins Loans

However, you may refinance the excluded loans into a direct consolidation loan. The full balance of the direct consolidation loan becomes eligible for forgiveness.

Can I take advantage while I’m on a payment plan?

You qualify for loan forgiveness as long as you are on a qualified repayment option. That means that you must make standard payments or the payments required by an income-based repayment plan.

Payments only count toward forgiveness if your loan is in active status. Payments made while loans are in the six-month grace period, deferment, forbearance, or default do not count toward forgiveness.

Is forgiveness taxable?

Public Service Loan Forgiveness (PSLF) is completely tax-free. You will not see an increased tax bill the year your loans are forgiven.

Any fine print?

Even if you qualify for loan forgiveness, the government will not automatically discharge your loans. You need to submit the PSLF application to receive loan forgiveness.

The applications for loan forgiveness are not yet available. The U.S. Department of Education will make them available before October 2017.

The Department of Education encourages participants to submit an employment certification form to FedLoan Servicing. This will help ensure that you’re on the right track for loan forgiveness.

Tips and tricks

Consider refinancing PLUS, Stafford, and Perkins loans into a direct consolidation loan. If you take this route, the entire consolidation loan will be forgiven. PSLF works best in conjunction with an income-based repayment plan. These plans lower your monthly payments. Since you will qualify for loan forgiveness, this means more money in your pocket. Just remember, you must keep your loans in good standing to qualify for forgiveness.

Federal Teacher Loan Forgiveness

The Federal Teacher Loan Forgiveness program encourages teachers to work in the neediest areas of the country. Teachers who qualify can have up to $17,500 in federal loans forgiven after five years.

How do loans become eligible?

Teachers must complete five consecutive years of teaching at a low-income (Title I) school. If your school transitions off the list after your first year of teaching, your work in that school still counts toward forgiveness.

Your loans may not be in default at the end of your five years of teaching. The only exception includes loans that are set up in a repayment arrangement.

Direct Subsidized and Unsubsidized Loans and Subsidized and Unsubsidized Stafford Loans can be forgiven. Loans must have originated after October 1, 1998. This is important for anyone who hasn’t paid off loans and wants to consider teaching as a second career.

How much of my loan will be forgiven?

To receive the full $17,500 in forgiveness, you must meet one of two criteria: either work as a highly qualified math or science teacher in a secondary school, or work as a qualified special education teacher for children with disabilities.

Other highly qualified teachers can have up to $5,000 of loans forgiven if they work in Title I schools.

You’ll notice that all teachers must be “highly qualified.” To meet the highly qualified standard, you must be licensed in the state you work, hold a bachelor’s degree, and demonstrate competence in the subject(s) you teach. Do you need to check whether you’re highly qualified? The U.S. Department of Education explains qualification in detail.

Can I take advantage while I’m on a payment plan?

You qualify for teacher loan forgiveness as long as you are on a qualified repayment option. These include the standard 10 year repayment plans or the payments required by an income-based repayment plan. If your loan goes into a default, a repayment arrangement works with this program.

Is forgiveness taxable?

The Federal Teacher Loan Forgiveness program forgives your loans and does not result in a taxable event.

Any fine print?

Qualified teachers must submit this application with administrative certification. Be sure you work with your school’s administration in advance.

Tips and tricks

Consider teaching at a Title I school directly after graduation. The loan forgiveness may help you achieve debt freedom within five years. Consider an income-based repayment program to lower your payments while you’re teaching.

Teacher Cancellation for Federal Perkins Loans

If you’re a teacher who took out a Federal Perkins Loan from your school, you may qualify for loan cancellation. Teachers can cancel up to 100% of their Perkins Loans after five years.

How do loans become eligible?

The teacher cancellation program for Perkins Loans is one the most lenient programs for loan forgiveness. You will qualify to have loans forgiven if you meet any one of these three requirements:

  • You work full time in a low-income (Title I) school.
  • You work full time as a special education teacher.
  • You work full time in a designated shortage area (such as math, science, foreign language, bilingual education, or any shortage area declared by your state).

If you work part time at multiple qualifying schools, you may qualify for loan cancellation.

Your loans may be in a grace period, deferment, or any qualified repayment plan at the time of discharge. They may not be in default.

How much of my loan will be forgiven?

Over the course of five years, 100% of your Federal Perkins Loan will be forgiven. The discharge occurs at the end of each academic year. In years 1 and 2, the government discharges 15% of the principal balance of the loan. It cancels 20% of the loan in years 3 and 4 of service. The final year, the remaining 30% of your loan will be canceled.

In most cases, the five years of service do not have to be consecutive. However, this isn’t always the case. The university that issued your Perkins Loan administers the loan cancellation program. That means you need to check with your alma mater for complete details.

Can I take advantage while I’m on a payment plan?

You qualify for Perkins loan forgiveness as long as you are on a qualified repayment option. Your payment plan could be the standard 10 year repayment plans or an income-based repayment plan. If you qualify for deferment, your loans may still be eligible for cancellation.

Is forgiveness taxable?

This program forgives your loans and does not result in a taxable event.

Any fine print?

You must request the appropriate forms from the university that holds the loans. If you don’t know the office that administers Perkins Loans, contact your university’s financial aid office.

Tips and tricks

If your Federal Perkins Loan qualifies for deferment, take advantage of this option. Under deferment, you don’t have to make any payments on the loan. At the same time, the government pays any accruing interest. Teachers who qualify for deferment can have 100% of their Perkins Loan forgiven without ever paying a dime.

TEACH Grant

The Teacher Education Assistance for College and Higher Education (TEACH) Grant isn’t like other loan cancellation programs. Under the terms of the program, you accept the money during your college years. Eligible students can receive a grant of up to $4,000 per year of education. After you graduate, you agree to work as a teacher for four years in a high-need field in schools that serve low-income families.

As long as you keep your end of the bargain, you don’t have to pay the money back. Otherwise, the grant transforms into a loan. If you’re planning to become a teacher, this can be a great opportunity. But you need to understand the details before you accept the grant.

How do I qualify for a TEACH Grant?

To qualify for a TEACH Grant, you must enroll in a teacher education program, complete the Free Application for Federal Student Aid, maintain a certain GPA (usually 3.25), and agree to a work requirement.

When you accept a TEACH Grant you agree to work as a teacher in a high-need field serving low-income families. You must complete four years of full-time teaching within eight years of graduation.

What if I don’t keep up my end of the bargain?

If you don’t keep up your end of the bargain, the funds get converted into a Direct Unsubsidized Loan. What’s worse? The interest begins accruing from the point you received the grant. That means you’ll have the principal and interest to pay.

Don’t take a TEACH Grant unless you plan to meet the work requirements.

Are TEACH Grants taxable?

TEACH Grants are nontaxable education grants. However, you cannot claim a tax credit for education expenses paid by the grant.

Any fine print?

In this instance, you take the money first and agree to do the work later. That means that you’re taking on a risk.

You must complete a Free Application for Federal Student Aid form, and you must complete a training and counseling module from StudentAid.gov. Pay attention to the training; it will help you understand the risks of the TEACH Grant.

Tips and tricks

The TEACH Grant offers a great way to graduate debt free, but you must commit to follow through. Don’t take the grant money unless you know that you can work as a teacher for at least four years.

State Loan Forgiveness Programs

Several states offer generous loan forgiveness opportunities. You can use these programs in conjunction with the federal programs above. Qualified applicants might achieve debt freedom in a few years with these programs. These are some of the highlights of state loan forgiveness programs.

If your state isn’t listed, check out the database at the American Federation of Teachers. They keep track of most major scholarship and loan forgiveness opportunities for teachers.

Illinois Teacher Loan Repayment Program

The Illinois Teacher Loan Repayment Program offers up to $5,000 to Illinois teachers who teach in low-income schools in Illinois. This award is meant to encourage the best teachers to serve students in high-need areas.

Who is eligible for the program?

The Illinois Teacher Loan Repayment Program is a unique loan forgiveness matching program. Teachers must meet every qualification to receive Federal Teacher Loan Forgiveness. In addition, teachers must have served all five years in a low-income Illinois school.

How much of my loan can be forgiven?

Teachers who meet all requirements can receive federal loan forgiveness up to $5,000. You must apply for Illinois loan repayment funds within six months of receiving federal loan forgiveness.

Where can teachers find more information?

Illinois teachers can find more information on the Illinois Student Assistance Commission website. Teachers can apply for the program here.

Montana Quality Educator Loan Assistance Program

The Montana Quality Educator Loan Assistance Program encourages Montana teachers to serve in high-needs communities or in subject areas with critical shortages. The program provides direct loan repayment for teachers who meet the requirements.

Who is eligible for the program?

Licensed Montana teachers who work in “impacted schools” in an academic area that has critical educator shortages. Impacted schools are more rural, have more economically disadvantaged students, or have trouble closing achievement gaps.

How much of my loan can be forgiven?

Montana will repay up to $3,000 a year for up to four years.

Where can teachers find more information?

Montana teachers can find more information on the Montana Guaranteed Student Loan Program website.

North Dakota Teacher Shortage Loan Forgiveness Program

The North Dakota Teacher Shortage Loan Forgiveness Program encourages North Dakota teachers to teach in grades or content levels that have teacher shortages.

Who is eligible?

The North Dakota Department of Public Instruction identifies grades and content areas with teacher shortages. Teachers who work full time as instructors in those grades and content areas in North Dakota can receive loan forgiveness.

How much of my loan can be forgiven?

Teachers can receive up to $1,000 per year that they teach in a shortage area. The maximum lifetime award is $3,000.

Where can teachers learn more?

This program is administered by the North Dakota University System. To get more information, teachers should visit the North Dakota University System website, call 701-328-2906, or email NDFinAid@ndus.edu.

Arkansas State Teachers Education Program

The Arkansas State Teachers Education Program (STEP) helps teachers with federal student loans pay back their loans. Teachers must work in geographical or subject areas with critical shortages.

Who is eligible?

Arkansas teachers with federal student loans can receive loan repayment assistance if they serve geographical areas with teacher shortages. They can also receive repayment assistance if they have licensure or endorsements in designated subject areas.

How much of my loan can be forgiven?

Eligible teachers can receive up to $3,000 per year that they teach in critical shortage areas. There is no lifetime maximum of loan forgiveness. Licensed minority teachers can receive an additional $1,000 for every year that they qualify for STEP.

Where can teachers find more information?

Arkansas teachers can find more information on the Arkansas Department of Higher Education website.

Teach for Texas Loan Repayment Assistance Program

The Teach for Texas Loan Repayment Assistance Program encourages Texas teachers to serve high-needs areas. Qualified teachers can receive up to $2,500 in loan repayment per year with no lifetime maximum.

Who is eligible?

Any Texas-based teacher with outstanding loans can apply for loan repayment assistance. However, funds are given out with priority to teachers who work in shortage subjects in schools with at least 75% economically disadvantaged students. Shortage subjects include ESL, math, special education, science, career education, and computer science.

If funds remain, they are given out in the following order:

  1. Teachers who work in areas with 75% or more economically disadvantaged students in nonshortage subjects.
  2. Teachers who work in shortage subjects in schools with 48.8%-75% economically disadvantaged students.
  3. Teachers who demonstrate financial need.

How much of my loan can be forgiven?

Eligible teachers can receive up to $2,500 in loan forgiveness each year with no lifetime maximum.

Where can teachers find more information?

Texas teachers can find more information on the Texas Higher Education Coordinating Board website.

West Virginia Underwood-Smith Teacher Scholarship Loan Assistance Program

West Virginia teachers who work in critical need positions may qualify for the Underwood-Smith Teacher Scholarship Loan Assistance Program. This scholarship helps qualified teachers pay back student loans.

Who is eligible?

Teachers and school professionals who work in a designated critical position can qualify for the Underwood-Smith scholarship. Critical positions include all teachers in underserved districts and certain teachers who teach subjects with designated shortages.

How much of my loan can be forgiven?

Qualified teachers can receive up to $3,000 per year in federal loan forgiveness and up to $15,000 over their lifetime.

Where can teachers learn more?

West Virginia teachers can learn more about the scholarship on the College Foundation of West Virginia website. The most recent list of critical needs can be found here.

Maryland Janet L. Hoffman Loan Assistance Repayment Program

Maryland offers loan repayment assistance to excellent teachers who teach STEM subjects or in low-income schools.

Who is eligible?

Only teachers who earned a degree from a college in Maryland or a resident teacher certificate from the Maryland State Department of Education qualify for this award. Additionally, qualified Maryland teachers must serve in low-income (Title I) schools or other schools designated for improvement. Alternatively, licensed teachers who work in designated subject areas such as STEM, foreign languages, or special education can qualify.

To qualify, you must earn less than $60,000 per year or $130,000 if married filing jointly.

How much of my loan can be repaid?

Qualified teachers can have up to $30,000 repaid over the course of three years. The repayment assistance you receive depends on your overall debt load.

Total Debt Overall Award Limit Yearly Payment
$75,001 – Over $30,000 $10,000
$40,001 – $75,000 $18,000 $6,000
$15,001 – $40,000 $9,000 $3,000
$15,000 – Below $4,500 $1,500

Where can teachers find more information?

The Janet L. Hoffman Loan Assistance Repayment Program offers some of the most generous loan repayment terms. However, the program has stringent eligibility requirements. To find out more about your eligibility, visit the Maryland Higher Education Commission website.

New York City Teach NYC

Teachers hired by the New York City Department of Education who work in specified shortage positions can receive up to $24,000 in loan forgiveness over the course of six consecutive years.

Who is eligible?

Teachers must work in a New York City school in one of the following designated shortage areas:

  • Bilingual special education
  • Bilingual school counselor
  • Bilingual school psychology
  • Bilingual school social worker
  • Blind and visually impaired (monolingual and bilingual)
  • Deaf and hard of hearing
  • Speech and language disabilities (monolingual and bilingual)

How much of my loan can be forgiven?

The NYC Department of Education will forgive one-sixth of your total debt load, each year for up to six consecutive years. The maximum award in one year is $4,000. The maximum lifetime award is $24,000.

Where can teachers learn more?

Teachers can learn more on the Teach NYC programs website.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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Best of, Credit Cards, Reviews

2017 Best Credit Cards for Small Businesses

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Note from the Editor: The information related to Chase Ink Business Preferred Card credit card has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card.

 

As a small business owner you know you need to manage your cash flow and plan for financing. Credit cards can be an ideal way to meet those needs. But business owners need to be savvy cardholders. Small business credit cards come with unique risks that personally affect entrepreneurs.

 

In this roundup we cover the risks and advantages of small business credit cards. And we’ll show you what card fits your business needs.

 

Best Cards for Financing

If credit cards are an important source of financing and capital for your business, then you need to be a savvy borrower. Look for cards with compelling terms, and take the time to understand the fine print. Remember, the card may be in the business’s name, but you’re personally liable for the debt. Don’t take on more debt than you can handle.

Best 0% Financing

The American Express Blue for Business card offers 15 months of 0% APR for financing. If you fail to pay back your purchases within 15 months, your interest rate will move to 11.74%-19.74%, depending on creditworthiness. You lose access to the introductory rate if you make a late payment.

The 15-month 0% APR window is one of the most generous offers available. On top of generous financing, you earn rewards for spending.

You can also earn 10,000 Membership Rewards points after making your first purchase. Every year, you’ll also receive a bonus of 30% of the previous year’s points earned.

The card offers perks including secondary car rental insurance, purchase protection, extended warranties, baggage insurance, trip accident insurance, and travel hotline help.

The Fine Print
  • Introductory rate: 0% APR financing for 15 months. You must pay on time, or you lose this rate.
  • APR: After 15 months, 11.74%-19.74%, depending on your creditworthiness
  • Penalty APR: 29.74%
  • Annual fee: No annual fee
  • Late fee: Up to $38
  • Returned payment fee: $38
  • Cash advance fee: Greater of $5 or 3%
  • Cash advance APR: 25.74%
  • Rewards: 1 point per dollar spent on all other purchases.
  • Bonus: 2 points for every dollar you spend booking travel at amextravel.com

Apply Now

Low Interest Rates

If you and your business have excellent credit, the Platinum Plus for Business MasterCard from Bank of America offers low ongoing financing. This is a great card for businesses with periodic short-term borrowing needs. Besides interest rates as low as 9.74%, it offers a seven-billing-cycle 0% APR promo rate and $200 statement credit if you spend $500 in the first 60 days.

Plus, the card offers travel accident insurance, secondary rental insurance, and automatic downloads to QuickBooks.

Remember, it’s not wise to use a small business credit card for long-term financing. Many credit unions will offer low rates on installment business loans.

The Fine Print
  • Introductory rate: 0% APR financing for seven billing cycles.
  • APR: 9.74%-20.74% variable APR, depending on your creditworthiness (after seven billing cycles)
  • Annual fee: No annual fee
  • Late fee: $19-$49 (depending on your balance)
  • Returned payment fee: $39
  • Cash advance fee: Greater of $10 or 4%
  • Cash advance APR: 24.74%
  • Sign-up bonus: $200 statement credit if you spend $500 in your first 60 days
  • Rewards: None

Apply Now

Cash Flow Management

Managing cash flow can be one of the most difficult problems facing small business owners. The Plum Card by American Express makes cash flow easier. The Plum Card is a charge card not a credit card. This means that it is designed to give you access to short-term working capital. However, it is not a good source of financing.

If you pay your bill within 10 days of statement closing, you’ll get a 1.5% discount on eligible charges. Otherwise you have a full 60 days without interest before you need to make a payment. Beware, these benefits come at a steep price. After one year, you’ll pay a $250 annual membership fee. Plus, carrying a balance on a charge card comes with huge penalties. The first time you go past due, you’ll be charged 1.5% of the balance. After that, they charge a late fee of 2.99%. The minimum fee is $38.

The Fine Print
  • Late fee: 1.5%, then 2.99%; minimum of $38
  • Returned payment: $38
  • On-time payment bonus: 1.5% discount if you pay balance within 10 days of statement closing
  • Annual fee: $0 for the first year, $250 thereafter
  • No cash advance
  • Rewards: None

Apply Now

Imperfect Credit

If you’re struggling to get approved for a small business credit card, the Spark Classic from Capital One offers an excellent option. The card has a high variable APR (23.49%) and mediocre rewards (1% cash back). But Capital One will approve business owners with just average credit.

This isn’t a great card for borrowing, even in the short term. However, the Spark Classic will give you some working capital, and it will help your business build its credit. Just remember to pay your bill on time each month and to keep your credit use low.

The Spark Classic also offers perks like purchase protection, free extended warranties, and travel and emergency assistance. These protections offer tremendous value to business owners.

The Fine Print
  • APR: 23.49% variable APR
  • Annual fee: No annual fee
  • Late fee: Up to $39
  • Cash advance fee: Greater of $10 or 3%
  • Cash advance APR: 23.49%
  • Rewards: 1% cash back on all purchases

Apply Now

Cards for Service Members

Former and current members of any branch of the military can join Navy Federal Credit Union and apply for these high-quality credit cards. The Visa and MasterCard have the same fees and conditions, but they offer different perks.

 

Navy Federal Credit Union’s Visa for Business credit card gives former service members access to low interest rates and rewards spending. This can be an excellent choice for service members with excellent credit who may have to borrow for short-term needs.

The card gives access to the Visa SavingsEdge program, which gives up to 15% off business purchases at qualifying retailers. However, the card doesn’t offer extended warranties or other protections, so it isn’t always the best choice.

The Fine Print
  • APR: 9.65%-18.0%
  • Annual fee: No annual fee
  • Late fee: Up to $20
  • Returned payment fee: Up to $20
  • Cash advance fee: $0 at Navy Federal Credit Union branch ATM, 50 cents domestic, $1 foreign
  • Cash advance APR: APR + 2%
  • Rewards: 1 point per dollar spent

Apply Now

Navy Federal Credit Union’s MasterCard for Business credit card gives former service members access to low interest rates and rewards. The low interest rates make it a compelling choice for service members with short-term borrowing needs.

The card gives access to the MasterCard Easy Savings program, which gives automatic 10% rebates at a network of gas stations, auto repair shops, and shipping companies. This can lead to significant savings. The card also connects to the MasterCard Business Network, which makes expense reports easy. However, the card doesn’t offer extended warranties or other protections.

The Fine Print
  • APR: 9.65%-18.0%
  • Annual fee: No annual fee
  • Late fee: Up to $20
  • Returned payment fee: Up to $20
  • Cash advance fee: $0 at Navy Federal Credit Union branch ATM, 50 cents domestic, $1 foreign
  • Cash advance APR: APR + 2%
  • Rewards: 1 point per dollar spent

Apply Now

Best Cards for Rewards

Many small business credit cards offer compelling rewards to cardholders. These rewards can allow you to reinvest in your business, or you can take them for personal use. If you choose to use a rewards credit card, try to avoid paying interest. Most of these cards are not good choices for short-term borrowing.

Travel Perks

If you’re a frequent traveler, these small business credit cards give you access to incredible perks. But be sure to read the fine print. These cards have a few gotchas attached.

 

The American Express Business Platinum Card is a charge card with a premium price tag ($450 per year) and premium benefits for some users. Please note, it is not a credit card; you should not plan to borrow money with this card. These are the most significant perks:

  • Global Lounge Collection access, which includes access to Delta Sky Club lounges and American Express Centurion lounges
  • $200 airline fee credit (for checked bags, inflight refreshment, etc.)
  • One free Global Entry or TSA Pre-check application fee (allows you to expedite security at select airports and U.S. Customs)
  • 10 free passes per year to inflight Gogo Wi-Fi and unlimited Boingo (land-based Wi-Fi) access
  • 50% airline points redemption bonus on first- or business-class tickets (if you spend 100,000 points on a business-class ticket, you’ll get 50,000 points back 6-10 weeks later)
  • Starwood Preferred Guest Gold Elite Status, which also gets you Marriott Rewards Gold status for room upgrades and free breakfast. It also gets you access to the Fine Hotels and Resorts Program (perks like in-room WiFi, complimentary breakfast, and other hotel perks at participating luxury hotels).
  • Elite status for National car rental for free upgrades whenever you rent a car.
  • This could be a great card for frequent Delta fliers; not only do you get access to the Delta Sky Club lounges but you can also convert the points you earn into Delta SkyMiles.
The Fine Print
  • Annual fee: $450
  • Late fee: 2.99% or $38, whichever is greater
  • Returned payment fee: $38
  • No cash advance
  • Sign-up bonus: Earn 50,000 Membership Rewards points after you spend $10,000 within three months of card membership. Earn 25,000 more points after spending an additional $10,000 within your first three months.
  • Rewards: 1 point per dollar spent
  • Bonus rewards: 1.5 points per dollar for first $5,000 spent in a year; 2 points per dollar spent through amextravel.com.

Apply Now

As a business owner, little incidentals can add up in a big way. The Chase Ink Business Preferred Card mitigates these costs by providing high-value insurance protection to you and your employees. Not only will you earn rewards (outlined in the fine print), you’ll enjoy these perks, too.

Trip Cancellation/Trip Interruption Insurance
If your trip is canceled or cut short by sickness, severe weather, or other covered situations, you can be reimbursed up to $5,000 per trip for your pre-paid, non-refundable travel expenses, including passenger fares, tours, and hotels.

Trip Delay Reimbursement
If your common carrier travel is delayed more than 12 hours or requires an overnight stay, you and your family are covered for unreimbursed expenses, such as meals and lodging, up to $500 per ticket.

Travel Accident Insurance
When you pay for your air, bus, train, or cruise transportation with your card, you are eligible to receive accidental death or dismemberment coverage of up to $500,000.

Auto Rental Collision Damage Waiver
Decline the rental company’s collision insurance and charge the entire rental cost to your card. Coverage is primary when renting for business purposes and provides reimbursement up to the actual cash value of the vehicle for theft and collision damage for most cars in the U.S. and abroad.

Baggage Delay Insurance
You are reimbursed for essential purchases like toiletries and clothing for baggage delays over six hours by passenger carrier up to $100 a day for five days.

Lost Luggage Reimbursement
If you or an immediate family member check or carry on luggage that is damaged or lost by the carrier, you’re covered up to $3,000 per passenger.

Extended Warranty Protection
This warranty extends the time period of the U.S. manufacturer’s warranty by an additional year on eligible warranties of three years or less.

Cellphone Protection
Get up to $600 per claim in cellphone protection against covered theft or damage for you and your employees listed on your monthly cellphone bill when you pay it with your Chase Ink Business Preferred Credit Card. There is a maximum of three claims in a 12-month period with a $100 deductible per claim.

The Fine Print
  • APR: 16.99%-21.99%
  • Annual fee: $95 per year
  • Late fee: $15-$39, depending on balance
  • Returned payment fee: $39
  • Cash advance fee: Greater of $15 or 5% of transaction
  • Cash advance APR: 25.99%
  • Sign-up bonus: 80,000 points when you spend $5,000 in the first three months
  • Rewards: 1 point per dollar spent, 3 points per dollar spent on travel, shipping purchases, internet, cable or phone services, or online advertising (social media or search engines)
  • Bonus: Points worth 25% more when you redeem through Chase Ultimate Rewards (Chase’s travel website)

Big Introductory Bonuses

Business owners who know they’ll spend a lot in a short period of time should take note of these cards. These bonuses provide excellent value if you can meet the spending requirements. But be wary: these cards have high interest rates. You won’t come out ahead if you end up financing a big purchase with these cards.

The Business Platinum Card offers excellent travel perks, but it offers an unparalleled sign-up bonus, too. Right now, you can earn 50,000 Membership Rewards points after you spend $10,000 within three months of card membership. You’ll also earn 25,000 more points after spending an additional $10,000 within your first three months.

If you plan to spend $20,000 or more in the next three months, this bonus is worth the highest value when redeemed for travel rewards. Depending on which option you choose, this bonus may offset annual fees. You need to churn through a lot of money to meet the spending minimums, but this is a lucrative bonus.

Click here to see details including perks and the fine print.

The Chase Ink Business Preferred Card offers ideal perks for frequent travelers, but right now you can get a great sign-up bonus, too. By spending $5,000 in three months, you’ll earn 80,000 points. This bonus is worth $1,000 if you spend your points through Chase Ultimate Rewards for travel or $800 if you redeem for cash back. You can also transfer the points to airline partners like United and Virgin Atlantic and hotel partners like Marriott and Hyatt.

In addition to the lucrative bonus, you can earn everyday spending rewards (including 3 points per dollar spent in certain categories) and valuable trip insurance.

Click here to see details including perks and the fine print.

Cash Back Rewards

Every business owner can benefit from more cash in their pocket. These cards give you the best cash back offers for everyday spending. You can find better rewards if you use multiple cards, but these have excellent rewards for those who don’t want to mess around with multiple cards. Plus, these cards have excellent protections, too. But be careful when you finance with these cards; they don’t offer great terms for borrowing.

 

The Spark Cash card from Capital One offers unlimited 2% cash back on all purchases, and it is free for the first year. Plus, if you spend more than $4,500 in the first three months of holding the card, you get a $500 cash bonus. After the first year, you’ll pay $59 to hold the card. After the first year, if you spent more than $3,000 per year, it’s worth it.

The Spark Cash card also offers valuable protective features like purchase protection, free extended warranties, primary auto rental collision coverage, and more. Overall, the Spark Cash card gives straightforward rewards to business owners with excellent credit.

The Fine Print
  • APR: 17.49% variable APR
  • Penalty APR: 29.9% (applied if you make a late payment)
  • Annual fee: Free for the first year, $59 per year afterward
  • Late fee: Up to $39
  • Cash advance fee: Greater of $10 or 3% of transaction
  • Cash advance APR: 23.49%
  • Sign-up bonus: $500 reward when you spend $4,500 in the first three months
  • Rewards: 2% cash back on all spending

Apply Now

The Spark Cash Select card from Capital One offers a rare combination of friendly financing terms and rewards. You’ll earn an unlimited 1.5% cash back rewards on all purchases, and you’ll receive a $200 sign-up bonus if you spend $3,000 or more in your first three months.

On top of that, you’ll have a 0% APR financing rate for nine months, and an APR as low as 13.49% afterward.

This isn’t the most lucrative rewards card, but you won’t pay an annual fee. This makes it a great card for businesses that don’t spend as much on a credit card.

The Fine Print
  • Promo APR: 0% for nine months
  • APR: 13.49%-21.49%, depending on your creditworthiness
  • Penalty APR: 29.9% (applied if you make a late payment)
  • Annual fee: $0
  • Late fee: Up to $39
  • Cash advance fee: Greater of $10 or 3% of transaction
  • Cash advance APR: 23.49%
  • Sign-up bonus: $200 reward when you spend $3,000 in the first three months
  • Rewards: 1.5% cash back on all spending

Apply Now

Best Category Bonuses

If you and your employees spend a lot of money in a limited number of categories, you might want to consider a rewards card with heavy bonuses in those categories. These cards offer at least 3 points for every dollar you spend in a given category. That’s the equivalent of a 3% reward.

Remember, rewards cards aren’t usually a good choice for financing purchases. Look to pay off these cards every month.

Online Advertising

Businesses that regularly advertise on social media networks (Facebook, Twitter, etc.) or via search engines (Google, Bing) can earn impressive rewards on their marketing spending. These are the best cards for heavy online advertisers.

 

You’ll earn 3 points for every dollar you spend on online advertising. In addition, you’ll be eligible for travel perks, sign-up bonuses, and more.Click here to see details including perks and the fine print.

The American Express Business Gold Rewards Card allows you to choose to earn 3 points per dollar spent on any one of the following categories: advertising in select online media, airfare from airlines, gas, shipping, or computers and cloud services from select providers. You’ll earn 2 points per dollar on the categories you don’t choose.

All other spending earns 1 point per dollar you spend.

As a sign-up bonus, you’ll earn 50,000 points if you spend $5,000 or more in your first three months of holding the card. In addition to the rewards, you get trip accident insurance, extended warranties, and purchase protection.

Since the Business Gold Rewards Card is a charge card, you shouldn’t plan to borrow with the card. But the rewards for online advertisers are excellent. Just watch out for the $175 annual fee that kicks in after the first year.

The Fine Print
  • Annual fee: $0 for the first year, then $175
  • Late fee: 2.99% or $38, whichever is greater
  • Returned payment fee: $38
  • No cash advance
  • Sign-up bonus: Earn 50,000 Membership Rewards points after you spend $5,000 within three months of card membership
  • Rewards: 1 point per dollar spent
  • Bonus rewards: 3 points in one category (pick between advertising in select online media, airfare from airlines, gas, shipping, or computers and cloud services from select providers).
  • 2 points rewards on remaining four categories.

Apply Now

Dining and Travel

Dining and travel cost a lot, but these cards offer enticing rewards. The cards we recommend offer more than 3% cash back on restaurant spending, travel, or both. Plus, they have other compelling perks. But most of these cards aren’t great for borrowing, so check the fine print.

 

The American Express Blue for Business card offers the single best dining deal, at least during your first six months. During the first six months of holding the American Express Blue for Business card, you’ll get 10 points for every dollar you spend at a restaurant up to $2,000. Once the six-month offer period is over, you may want to turn to other rewards programs from the cards we outline below.

This is also one rewards card that has a decent financing option. Right now you can get 0% APR financing for the first twelve months.

Learn more here about the perks, rewards, and fine print before you apply.

Looking to thin down your wallet? A Sam’s Club Business MasterCard, doubles as your membership card. But it’s not just for wholesale shopping. Spending on the Sam’s Club Business MasterCard gives you the opportunity to earn 3% cash back rewards on all restaurant spending worldwide. It also gives 5% cash back rewards on gas (except when purchased at other wholesalers) and 1% on all other spending.

Road warriors and frequent business entertainers will love this card. Plus, the $45 statement credit (if you spend $100 the day you open it) pays for your annual Sam’s Club membership.

The Fine Print
  • APR: 15.15%-23.15%
  • Penalty APR: 29.99% (applied if you make a late payment)
  • Annual fee: $0 (requires $45 Sam’s Club membership)
  • Late fee: Up to $39.99
  • Cash advance fee: Greater of $5 or 3% of transaction
  • Cash advance APR: 20.15%-26.15%
  • Sign-up bonus: $45 statement credit when you spend $100 on your first day (applying in-store makes this easy).
  • Rewards: 1% cash back on all spending. Maximum of $5,000 back in a given year.
  • Bonus rewards: 3% on dining and travel expenses. 5% on gas (up to $6,000 in gas purchases). Gas cannot be purchased from other wholesale clubs.

Apply Now

If you prefer Costco to Sam’s Club, the Costco Anywhere Visa Business Card offers similar terms. Their 4-3-2-1 program includes 4% on gas purchases (up to $7,000 per year), 3% cash rewards for all dining and travel expenses, 2% on Costco purchases, and 1% on all other spending.

While the rewards are sweet, the terms can be expensive. This is not a good card for borrowing, so be sure to pay it off each month.

The Fine Print
  • APR: 0% for seven months, then 15.74%
  • Penalty APR: 29.99% (applied if you make a late payment)
  • Annual fee: $0 (requires $55 Costco membership)
  • Late fee: Up to $37
  • Returned payment fee: Up to $37
  • Cash advance fee: Greater of $10 or 5% of transaction
  • Cash advance APR: 22.49%
  • Rewards: 1% cash back on all spending.
  • Bonus rewards: 4% on gas (up to $7,000 in gas purchases). Gas cannot be purchased from other wholesale clubs. 3% on dining and travel expenses. 2% rewards on all purchases from Costco and Costco.com.

Apply Now

If you’re a frequent business traveller, Chase Ink offers the best rewards. You earn 3 points for every dollar you spend on travel, but you get a travel bonus. Every point is worth 1.25 points when you book through Chase Ultimate Rewards.

Travel perks also include trip insurance, auto rental collision damage waivers (this is primary coverage), and more.

Click here to see details including perks and the fine print.

Gas

 

As a small business owner, you know that driving can be an economical choice, but you can also earn rewards for all those miles on the road. Sam’s Club Business MasterCard gives 5% cash back rewards on gas (except when purchased at other wholesalers), and 1% on all other spending.

Even if you don’t frequent Sam’s Club, this is the best category for rewards for gas purchases.

Click here to see details including perks and the fine print.

Learn More

Risks of Using Small Business Credit Cards

Many business owners see credit cards as an easy solution to their capital needs. But small business credit cards have unique risks. Savvy entrepreneurs will consider the risks before opening a new line of credit. These are the most important considerations.

 

1. Personal Liability

As a small business owner, you’re personally liable for credit card debt. Business bankruptcy won’t protect you. Whether your business succeeds or fails, you have to pay back the debt.

The only way to get rid of small business credit card debt is to declare personal bankruptcy. Bankruptcy destroys your credit history for a few years, and it stays on your report for 7-10 years.

Don’t treat a credit card like venture capital. It’s not. You need to repay it.

2. Credit Bureau Reporting

Small business cards don’t report to the credit bureaus the same way personal cards do. Depending on which card you choose, if you pay your credit card on time, you may not see any information on your personal report. For most business owners, that is a good thing. It will keep your personal credit utilization low.

However, an unpaid bill will show up on your personal credit report. A bill that goes unpaid for 60 days will generally appear on your personal credit report. Some banks offer more generous reporting and some less. You can speak with a banker to determine your bank’s reporting standards. Still, your personal credit score can take a hit at the same time that your business credit runs afoul.

When you take out a business credit card, put precautions in place to protect yourself. You can limit employee spending, and remove authorized users. You can also set up automatic payments each month.

3. Not Protected by the Credit CARD Act

In 2009, Congress passed the Credit CARD Act. The act curtailed predatory lending behaviors, including raising interest rates on existing balances. It also required credit cards to be more transparent about rates and fees.

This act does not apply to business credit cards. With a small business card, banks can raise the interest rate on your existing balance at any time. A higher interest rate means a bigger minimum payment and a longer time to pay off your debt. If you’re using your small business credit card to finance something, you could be at risk.

Still, many banks will not raise your rate if you have an excellent history of on-time payments. It is simply a risk to understand.

Another risk related to the Credit CARD Act is the possibility of double-cycle billing. Business credit cards do not require an interest accrual grace period. This means you may begin accruing interest on purchases right away. We only recommend cards that have a grace period of at least 23 days built in. If you choose a different card, be sure to check for this in the rates and fees schedule.

4. Employee Risk

Small business credit cards make it easy to watch employee spending. Still, they pose serious risks. You’re personally liable for any employee spending on a credit card. If you wouldn’t trust an employee with your wallet, don’t trust them with a company card. Employees can rack up debt and leave the company. That leaves you with a bill and no recourse to get the money back.

The Best Ways Use Small Business Credit Cards

Once you understand the risks of small business credit cards, you can also understand their best uses. Over 65% of small businesses use credit cards on a regular basis. Some use them for rewards, and some for financing. In fact, close to 10% of all small business financing comes from credit cards.

Here are some of the best ways to use a small business credit card.

 

1. Earning Rewards and Protection

If you pay your small business credit card in full each month, you can earn substantial rewards. Many business credit cards offer perks, including cash back, travel rewards, extended warranties, trip insurance, and more. As a business owner, you can reinvest the rewards into your business or take them for personal use.

2. Managing Cash Flow

Cash flow problems destroy small businesses, but credit cards provide short-term working capital. If you have a sales cycle that lasts 30 days or less, a credit card can fund inventory purchases. By the time your bill comes due, you’ll have money to pay it off. If you follow this practice, you’ll pay no interest, and you’ll manage your cash flow.

Credit cards can simplify employee monitoring, too. Most business credit cards allow you to place individual restrictions on employee use. That means you can limit how much and where employees can use company cards. But your employees may manage to misuse the cards. If they do, you will be stuck with the bill.

3. Building Business Credit

Businesses have credit reports just like people. Business credit cards can help you build your score. To build your business credit, hold the card under your employer identification number (EIN).

When your EIN establishes a record of paying its bills on time, it makes your business creditworthy. That means you’ll have an easier time finding long-term loans at great rates.

63% of all small businesses carry debt. Having a lower interest rate on that debt could make the difference between success and failure. This means every small business should take their credit history seriously from the outset. Small business credit cards may allow you to build that history without paying interest or fees.

4. Short-Term Borrowing

Small business credit cards have high interest rates, but they can work for short-term borrowing. If you know that you’ll only carry debt for a few months, you may want to finance something with a credit card.

Credit cards do not have origination fees or prepayment penalties. Sometimes this means that they offer the best terms for short-term borrowing. Just be careful when you borrow, and pay it back quickly. High interest debt compounds over time.

If possible, borrow on a card with a 0% introductory offer. Remember, failing to pay off 0% interest purchases may result in back interest. Be sure you understand the risks before you borrow.

The Worst Ways to Use Small Business Credit Cards

Small business credit cards aren’t always the best tool to get the job done. These are a few times when you should avoid using credit cards.

 

1. Personal Expenses

Bad accounting sinks many entrepreneurs. Always keep your personal spending off of your business credit cards. This will simplify bookkeeping, and it will keep your business credit utilization low. If you need to borrow for personal expenses, look for a low-interest credit card instead.

2. Long-Term Financing

Due to the high interest rates, most businesses should not finance long-term commitments using credit cards. Instead, consider an installment loan from a local credit union or a bank.

Applying for an installment loan can be a pain, but the lower interest rate will be worth it in the long run. Keep money in your pocket and avoid small business credit cards for long-term financing.

3. Cash Advances

Cash advances are the most expensive way to use a credit card. Banks begin charging interest right away, and the advance has a higher interest rate. Cash advances also have high fees of up to 10% of the amount you withdraw.

If you need cash, withdraw it from your business checking account instead, or take out a traditional loan.

4. Financing a Failing Business

Do not use credit cards to help a failing business limp along. Too many people will not give up on their idea even when the execution doesn’t work out. Credit card debt will bury a failing company and erode your personal wealth.

Remember, negative credit behavior will show up on your personal credit report. Plus, courts hold you liable for all credit card debt your business incurs. Use an objective lens to decide whether you need to shut down your business.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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Advertiser Disclosure

Best of

The Best Tax Software of 2017

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

 

If you’re like most Americans, you dread filing your taxes. You have to track down the right forms, deal with the IRS, and try to remember all your deductions and credits. That’s why so many people turn to online tax software to help file taxes. Great tax software simplifies the filing process without draining your pocketbook. But choosing the right software can be as much work as filing your taxes.

To help you choose the right software, we’ve tested 11 of the leading online tax software packages. We’ve ranked each software on the following criteria: usability, helpfulness of support articles, availability of audit support, and accessibility of tax and technical support. Then, we compared these criteria to the price to determine which software package is best for your situation.

Which tax software fits your needs? Find out below.

Best Tax Software of 2017

Best Free Filing Service

Of the 11 tax software packages we reviewed only two allow all users to file state and federal taxes for free.

Best Software: Credit Karma Tax

Credit Karma Tax features an outstanding user interface with easy interview questions. The built-in calculators make Credit Karma appropriate for even complex filers. You can’t import information, and Credit Karma doesn’t have robust help, but it’s easily the best software you can use for free.

 

Runner-up: DIY Tax

DIY Tax is a joint partnership between Liberty Tax Services and eSmart Tax. Their user interface is clunky, but it has all the functionality you need. Their software interface allows you to import prior tax returns, and they have excellent support articles.

Best for Simple Filing

Simple filers are W-2 employees who claim the standard deduction. You typically file as Single or Married Filing Jointly. You don’t have dependents, and you earn less than $100,000.

Best Software: TaxAct, free edition

TaxAct offers completely free state and federal filing options for simple filers. However, they do charge $10 for prior year import. The user experience is easy, and TaxAct offers free tax and technical support.

Runner-up: Credit Karma Tax

Credit Karma Tax offers free filing for all users, and they have an easy-to-use interface. While they only offer email tech and tax support, Credit Karma allows simple filers to explore more complex credits and deductions for free.

Best for Maximizing Deductions and Credits

Charitably inclined people, most homeowners, parents who pay for child care, and people who qualify for the earned income tax credit may want to maximize deductions and credits.

Best Software: Credit Karma Tax

Most software packages require you to upgrade to itemize deductions or claim credits. With Credit Karma Tax you can claim them for free. The only problem with Credit Karma Tax? If you fail to qualify for a credit, they don’t offer great explanations.

Runner-up: TaxSlayer Classic

TaxSlayer Classic offers federal filing for $17 and state filing for $22. The software is easy to use and intuitive. It even allows you to upload your W-2 form. For maximizing deductions and credits, you won’t find a better software for the price. TaxSlayer gives you access to technical support, but you need to upgrade to ask tax-related questions.

Easiest for New Filers

We assume that new filers have simple forms to file, but they want a clear user interface and ready access to tax and technical support.

Best Software: 1040.com EZ

1040.com offers free federal filing, and state filing for $9.95. Normally, we don’t recommend paying for a service that you can get for free elsewhere, but new filers will love 1040.com’s user interface and live chat support. Their tax and tech professionals can quickly guide you if you get stuck.

Runner-up: Credit Karma Tax

Credit Karma Tax has an excellent user interface that you can use for free. Even new filers can use the interview questions to determine whether they qualify for credits or deductions. Unfortunately, Credit Karma only offers email support.

Best Audit Protection

The IRS has the right to audit anyone, but people with complex taxes run a greater audit risk. No tax software (or accountant) can prevent you from getting audited. However, some tax software will give you access to a tax specialist or accountant if you undergo an audit. These are the software services that can lend a hand if you need it.

Best Software: FreeTaxUSA Deluxe

FreeTaxUSA Deluxe costs $6.99 for federal filing and $12.95 for state filing. FreeTaxUSA does not feature an intuitive user interface, but they have built-in calculators that most complex filers need. They also promise to give you personal assistance if you’re audited. If you can stand the software, it’s the best price for audit protection.

Runner-up: TaxSlayer Premium

TaxSlayer Premium costs $35 for federal filing and $22 for state filing. At the Premium level, trained tax professionals will help you if you’re audited after using the TaxSlayer software. The software is generally easy to use. However, the amortization and depreciation calculators can be confusing.

Why H&R Block and TurboTax didn’t make the cut

Historically, H&R Block included audit assistance with all of their paid programs. This year, you can only get that protection if you purchase the desktop software. If you purchase H&R Block online, you can pay an additional $79.99 for a “Best of Both” package. In this package, a tax professional reviews your filing, and they offer in-person support if the IRS audits you.

In the past, TurboTax included audit assistance with their paid package. This year, if you want audit assistance from TurboTax, you have to pay for the $44.99 “MAX” package. They give some additional security measures and access to in-person support if you’re audited.

Because of the increase in price, these historic powerhouses didn’t make the cut for best audit protection.

Best Interface for Health Care Premium Tax Credit

Health insurance isn’t only confusing during open enrollment. Tax time means that you’ll need to figure out how much of the premium tax credit you qualified for during the year. If you were on an Obamacare health plan for any part of the year, you’ll need to look for software that can handle this credit.

Best Software: OLT.com

OLT.com offers free federal filing and $9.95 state returns. It’s got a poor user interface, but their Affordable Care Act section offers excellent support articles, and it’s easy to use. You can’t import forms, but it’s easy to copy data from your 1095-A onto the software.

This software is only appropriate for simple filers with a marketplace plan. Everyone else should look elsewhere.

Runner-up: TurboTax Deluxe

TurboTax Deluxe costs $34.99 for federal filing and $36.99 for state filing. This is a steep price if you want to itemize deductions and maximize credits. However, TurboTax offers the best Affordable Care Act information on the market. They even allow you to upload your 1095-A form to the software.

Best for Investors

If you buy and sell stocks, bonds, or options outside of your tax-advantaged retirement accounts, you need a tax software that can handle all your information. Tax software for investors needs to handle dividends as well as short-term and long-term capital gains.

Best Software: H&R Block Premium – Online version

H&R Block Premium online software costs $54.99 for federal filing and $36.99 for state filing. But the price is well worth it in this case. H&R Block allows you to import all major forms from many financial institutions. If you actively trade, you need this capability. H&R Block also has accurate accounting for short-term gains and losses, which will help investors minimize the tax they owe. H&R Block also has helpful community forums and unlimited real-time chat support if you need help.

Runner-up: Credit Karma Tax

Credit Karma Tax offers a free solution for all kinds of investors. You must manually enter all your trading information, but Credit Karma calculates capital gains and losses and the appropriate tax rate. It’s a decent (and free) solution for less active investors.

Best for Real Estate Investors

Real estate investors need to calculate depreciation. They need to amortize certain expenses and deduct others. This can be confusing for DIY tax preparers. The best tax software for real estate investors needs to feature helpful support articles, intuitive depreciation and amortization calculators, and as many import features as possible.

Best Software: TurboTax Premier

TurboTax Premier costs $54.99 for federal filing and $36.99 for state. The real estate portion of TurboTax is second to none. If you use QuickBooks software to manage your real estate accounting, you can connect it directly to TurboTax. If you don’t, you can still upload a Schedule E or use the robust calculators.

Runner-up: H&R Block Premium

H&R Block Premium also costs $54.99 for federal filing and $36.99 for state. The software allows users to import many documents including an entire Schedule E. The depreciation and amortization calculators offer standard inputs, but they are flexible enough for special events. H&R Block also makes it easy to import last year’s tax return. Most real estate investors need this to accurately report depreciation.

Best for Self-Employed People

Are you a freelancer or contractor? If so, you know that you can deduct many business-related expenses. This means that taxes can get messy in a hurry. The best tax software for self-employed people makes it easy to claim business deductions. It will also offer robust explanations that will help you understand amortizing equipment expenses and whether you qualify for a home office deduction.

Best Software: Credit Karma Tax

Credit Karma Tax makes it easy for you to find and deduct appropriate expenses if you’re self-employed. Their built-in amortization calculators are easy to use, and Credit Karma offers helpful explanations. Outside of the most complex self-employment situations, Credit Karma is a simple filing solution.

Runner-up: Jackson Hewitt Basic

Jackson Hewitt Basic software offers one of the lowest cost Schedule C-EZ forms if you’re self-employed. The cost is $19.95 for federal returns and $36.95 for state returns. Their extensive support articles and helpful interface mean that you can find the help you need at the right price. Plus, you can get unlimited live chat support from technical assistants. If you need help from tax experts, you will have to pay for a consultation at a local Jackson Hewitt office.

Best Bargain for Self-Employed People

When you’re self-employed, you don’t always have the luxury of choosing the best-value product. Sometimes, you just need the cheapest product that will get the job done. If that’s you, these are the software products you should consider.

Best Software: Credit Karma Tax

Credit Karma Tax is the best 100% free option if you’re self-employed. It offers all the functionality you need.

 

Best Software: FreeTaxUSA

FreeTaxUSA allows free federal filing and $12.95 state filing. Their calculators and website are adequate for self-employed people. This software allows you to deduct mileage, amortize expenses, and categorize meals and entertainment. FreeTaxUSA isn’t beautiful, but it gets the job done at a low price. If you upgrade to Deluxe, you’ll even get audit assistance.

Best for Small Businesses

Sole proprietors and single member LLCs can also use tax software for self-employed people. As long as the software supports a Schedule C, it will work for your small business needs.

If you’re part of a partnership, a corporation, or a multi-member LLC, then you need more than the standard tax software that we reviewed above.

Corporations need software that supports Form 1120. S Corporations (with more than one member) need tax software that supports Form 1120S. Partnerships and multi-member LLCs need software that supports Form 1065.

If you need business tax software consider one of these options.

TurboTax Business

$149.99 federal (up to five federal e-files); $49.99 per state + $24.99 per state e-filing fee.

TurboTax Business offers the same interview style interface that consumers love, but it offers increased functionality. Small business owners will especially love that they can use it to create unlimited W-2 forms and 1099-MISC forms.

H&R Block Premium and Business

$79.95 federal (up to five federal e-files); first state software free, after that: $35 per state + $19.95 per state e-filing fee. H&R Block offers an excellent interview style user interface with increased functionality such as creating employee forms. This software supports the major forms for businesses, plus the form for nonprofit organizations.

TaxAct for Small Businesses

TaxAct bundles federal and state filing and software for a total of $100. You can purchase federal filing only for $60. TaxAct has a slightly more stripped-down user interface than H&R Block or TurboTax, but business owners can easily complete everything. You can even create as many employee tax forms as you need.

 

Tax Software Pricing, Plans, and Insights

Credit Karma Tax

Credit Karma Tax offers free federal and state filing for all users. With a robust and easy-to-use interface, it’s an excellent default choice for most filers. Their guided path through the tax software is as good as the most expensive tax software on the market. But it has a few shortfalls. You can’t import your prior year’s taxes. This makes year-to-year comparisons impossible within the software. You also can’t import any forms, which can be a pitfall for active traders and real estate professionals.

Credit Karma offers tax and tech support via email. They currently have at least a 3-day wait time for answers. Credit Karma doesn’t offer audit support either.

Superlatives: Best Free Filing Service, Best for Maximizing Deductions and Credits, Best for Self-Employed People, Best Bargain for Self-Employed People, Runner-up Best for Simple Filing, Runner-up Easiest for New Filers, Runner-up Best for Investors

DIY Tax

DIY Tax offers 100% free federal and state filing for everyone. Their user interface is a bit clumsy, but it proves accurate and usable. They even allow you to import your prior year’s taxes for your reference. Real estate investors and small business owners need to be careful with this platform. The depreciation and amortization calculators can be confusing. Their software offers technical support, but they push Liberty Tax Service offices for tax support. The software doesn’t come with an audit support guarantee.

DIY Tax is sponsored by Liberty Tax, and you will see ads for their offices in the software. Remember, filing in a Liberty Tax office isn’t free.

Superlatives: Runner-up Best Free Filing Service

eSmart Tax

eSmart Tax and DIY Tax are the same software package. However, you have to pay for eSmart Tax. Why would you pay? The Deluxe and Premium packages offer unlimited phone or email support from tax specialists, which can prove helpful. But in most cases eSmart Tax isn’t a great option.

 

Free Basic Deluxe Premium
Price $0 Federal $29.95 State $14.95 Federal
$29.95 State
$19.95 Federal
$29.95 State
$34.95 Federal
$29.95 State
Best For 1040EZ Homeowners, people with dependents, sole proprietors Stock market investors without capital gains or losses Freelancers, real estate investors, people who sold a home in the previous years

Superlatives: None

TaxSlayer

TaxSlayer has an incredible user interface and helpful support articles. When it comes to itemizing deductions or finding credits, it is one of the easiest to use tax software packages on the market.

Unlike most tax software, TaxSlayer supports all forms on its second-tier Classic level. This means that anyone could complete their entire tax return at a relatively low price. Their Premium level gives you access to live chat support, audit protections, and help from tax professionals.

However, TaxSlayer has two demerits. First, you cannot import a prior year’s tax return from a competitor. The only tax information you can use is information you entered into TaxSlayer during a previous tax year. Second, TaxSlayer doesn’t allow you to see internal calculations for depreciation and amortization. That makes TaxSlayer inappropriate if you’re a real estate investor or self-employed.

 

Simply Free Classic Premium
Price $0 Federal
$0 First State ($22 each additional)
$17 Federal
$22 State
$35 Federal
$22 State
Best For 1040EZ All others (itemizers, stock market investors, real estate investors, self-employed, etc.) Comes with audit assistance, ask a task professional, and live chat support

Superlatives: Runner-up Best Audit Protection, Runner-up Best for Maximizing Deductions and Credits

TaxAct

When does free really mean free? When it comes to simple tax filing through TaxAct. People who file a 1040 or 1040EZ can file federal and state taxes for free through TaxAct. Even if you don’t qualify for free filing, TaxAct usually represents an excellent value. At any level, you can receive phone and email support from tax and technical professionals. TaxAct doesn’t offer audit support, but it is priced accordingly.

For the most part, TaxAct simplifies tax filing. It uses simple questions, helpful knowledge articles, and easy navigation to help you complete your taxes. They even make it easy to import your prior year’s taxes into their software. TaxAct also offers some of the best guidance if you’re a stock market investor or self-employed.

Despite all these praises, the software stumbles somewhat on its real estate coverage. The depreciation calculator seems clumsy in certain areas. Outside of this flaw, TaxAct offers tremendous value for the price.

 

Free Plus Premium
Price $0 Federal
$0 State
$27 Federal
$33 State
$37 Federal
$33 State
Best For 1040EZ, 1040A (no dependents, claiming standard deduction) Itemizers, stock market investors Self-employed, real estate investors

Superlatives: Best for Simple Filing

OLT.com

OLT.com offers bargain basement pricing, but it shows in the interface. You have to pay $7.95 for tax and technical support. Nonetheless, the $7.95 also brings audit support, which offers some value.

Their clumsy user interface only allows you to import prior year tax forms from its own database. Their support articles send you to the even more confusing IRS website.

However, OLT.com offers a few bright spots. The health insurance coverage is easy and accurate. It is the only tax software that makes it easy to claim the premium tax credit for part of the year. Also, the real estate depreciation calculators are flexible enough to deal with complex circumstances.

In most cases, we don’t recommend OLT.com, but a few people may benefit.

 

Free Premium
Price $0 Federal
$9.95 State
$7.95 Federal
$7.95 State
Best For All major schedules supported Anyone who wants audit support

Superlatives: Best Interface for Health Care Premium Tax Credit

1040.com

According to 1040.com, tax filing should be smart and simple. If you’re a new filer or a freelancer with basic expenses, 1040.com delivers. 1040.com offers free live chat and email technical support. They also have support articles that are approachable and informative.

In fact, their entire software is friendly and informative. New filers are likely to appreciate the high-quality and low-cost support from 1040.com, but other simple filers can find better deals elsewhere. Their friendly interview style interface starts to falter if you’re a real estate or stock market investor. You will need to add forms that don’t have built-in calculators. This means that 1040.com is best for people with less complexity in their filing.

 

Free $19.95 $39.95
Price $0 Federal
$9.95 State
$19.95 Federal
$14.95 State
$39.95 Federal
$19.95 State
Best For 1040EZ Stock market investors Self-employed, real estate investors, itemizers

Superlatives: Easiest for New Filers

H&R Block Online

H&R Block is one of the biggest names in tax software for good reason. People with complex tax returns will love the value that H&R Block offers. H&R Block offers unlimited technical support to all filers, and phone and chat tax support for those who pay. The only disappointment is that H&R Block online filing customers do not get a free in-person audit support. This is reserved for those who purchase a $79.99 “Best of Both” upgrade or who download H&R Block’s software.

However, the H&R Block interface offsets this disappointment. H&R Block offers easy navigation, helpful interview questions, and robust articles that can help you untangle even the most complex filing situation. H&R Block’s built-in calculators are flexible enough to deal with uncommon filings. Plus, you can import most major forms, including prior year’s tax returns from competitors. This makes H&R Block ideal for anyone with complex filings.

Their software isn’t quite as easy to use as TurboTax, but it’s quite a bit less expensive. In particular, freelancers and self-employed people with basic expenses will see huge value since they can purchase the Deluxe edition.

 

Free Deluxe* Premium*
Price $0 Federal
$0 State
$34.99 Federal
$36.99 State
$54.99 Federal
$36.99 State
Best For New filers, basic filers (allows for earned income tax credit), homeowners Stock market investors, self-employed with basic expenses, other itemizers Real estate investors, self-employed with more complex expenses

*Deluxe and Premium filers can upgrade to a $79.99 “Best of Both” package. This means that a CPA will review your return and you’ll receive in-person audit assistance.

Superlatives: Best for Investors, Runner-up Best for Real Estate Investors

TurboTax

If you’re looking for the Cadillac of tax software, TurboTax emerges as the winner. Their interface is easy to use and navigate. TurboTax even allows you to import last year’s taxes from any of their competitors. 1040EZ filers will even get to file federal and state returns for free. After that, the price climbs quickly. But for many filers the high price is well worth the cost.

The interview style format makes tax filing simple, even if you’re facing a complex situation. Paying customers who get stuck can get help from tax or technical professionals. TurboTax takes their support seriously. With your permission, support staff can “draw” on your screen to guide you through tough situations.

Real estate investors, self-employed people, and small business owners will appreciate TurboTax’s robust interface. The one thing they won’t appreciate? The price of audit support. TurboTax’s MAX costs $44.99. This is the only way to get audit support from TurboTax this year.

 

Free Deluxe Premium Self-Employed
Price $0 Federal
$0 State
$34.99 Federal
$36.99 State
$54.99 Federal
$36.99 State
$89.99 Federal
$36.99 State
Best For 1040EZ/ 1040A Itemizers Investors, real estate investors Self-employed

*Anyone can upgrade to TurboTax’s MAX for $44.99.

Superlatives: Best for Real Estate Investors, Runner-up Best Interface for Health Care Premium Tax Credit

FreeTaxUSA

FreeTaxUSAand TaxHawk offer the same tax software at the same price. They are owned by the same parent company, and you can even move your profile from one site to the next. The websites aren’t pretty, but experienced filers will find everything they need to complete their taxes. You can even upload prior year’s tax returns from competitors. This is a huge value given the bargain basement pricing.

FreeTaxUSA offers two pricing tiers. Both levels support all major tax forms. You can also access chat support from tax and technical specialists from both levels. However, upgrading will give you priority access to specialists. Upgrading also gives you access to a tax specialist if you’re audited.

The name might lead you to believe you’re getting free tax filing, but you’ll have to pay at least $12.95 for state filing. Nonetheless, FreeTaxUSA is a great bargain — especially if you have a complex filing situation.

 

Free Premium
Price $0 Federal
$12.95 State
$6.99 Federal
$12.95 State
Best For All major schedules supported Anyone who wants audit support

Superlatives: Best Audit Protection, Best Bargain for Self-Employed People

Jackson Hewitt Online

Jackson Hewitt brings the neighborhood tax filing office online. They feature excellent knowledge articles and easy interview style tax filing. It’s easy to import your taxes from any major competitor or from Jackson Hewitt. This makes switching to Jackson Hewitt Online easy.

Built-in calculators make depreciation and amortization easy. However, Jackson Hewitt doesn’t offer many import options. This makes their relatively high pricing difficult to justify. Simple filers (1040EZ) and self-employed people with basic expenses may see high value in the Jackson Hewitt software. After all, they offer live chat tech support to all their customers. If you need tax support, you’ll have to upgrade to Premium to get the phone support.

Jackson Hewitt also allows online filers to pay extra for an in-person tax consultation. Prices for these meetings vary by location.

It’s important to note that this review is only for the online Jackson Hewitt software package. Magnify Money did not review Jackson Hewitt office preparations.

 

Free Basic Deluxe Premium
Price $0 Federal
$0 State
$19.95 Federal
$36.95 State
$34.95 Federal
$36.95 State
$54.95 Federal
$36.95 State
Best For 1040EZ Freelancers Investors, families with dependents, homeowners, itemizers Small business owners, real estate investors

Superlatives: Runner-up Best for Self-Employed People

 

Tax Software FAQs

Is online tax software safe?

Tax-related identity theft is the number one reported form of identity theft. However, most theft isn’t the direct result of using online software. Any time you apply for a credit card or use online banking, your information enters the digital world. If this information gets stolen, you’re at risk. Nobody can eliminate the possibility of identity theft, but you can work to protect yourself.

Part of protecting yourself involves only giving out your information on trusted websites. When you file your taxes, you provide all your personally identifiable information to a software service. You need to know whether or not that information is safe.

Every software company that we reviewed is an Authorized IRS e-File provider. This means that these sites comply with the security and business standards set forth by the IRS.

None of the software packages we reviewed will sell your personal information to a third party. Each of the software packages we reviewed requires you to use multi-factor authentication. This makes it difficult for hackers to access your personal information. These websites are as secure as possible, but they are not 100% safe.

If you think you’ve been the victim of tax fraud, contact the IRS immediately at 1-800-908-4490 to work with their resolution specialists. You will need to file an identity theft affidavit that explains that someone filed taxes in your name.

What if I don’t want to use tax software?

If you don’t want to use tax software, you can choose a paper filing option. Each state requires you to mail your check to a different office.

You can also use the IRS’s free electronic fillable forms. However, these offer limited guidance and can be difficult to use. With so many other free options, these should be a last resort.

Finally, you can hire a professional tax preparer to do your taxes for you. Be sure that the person you hire is in the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.

Should I hire an accountant?

An accountant can save you time, headache, and in some cases, money. Tax professionals must follow the tax code, but their specialized knowledge helps them pick up on deductions or credits that you might miss on your own.

In general, the more complex your tax return, the more you may want to hire an accountant. If you choose to hire an accountant, be sure that they are an authorized tax return preparer. They should sign your return as an authorized preparer.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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Credit Cards, Identity Theft Protection, News

Credit Cards That Offer Identity Theft Resolution — Too Good to Be True?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Credit Cards That Offer Identity Theft Resolution — Too Good to Be True?

Molly Johnson, 56, of Minneapolis, Minn., felt adrenaline pumping when she got a call from Wells Fargo in September 2016. The representative informed her that they suspected fraudulent activity on her credit card.

Johnson confirmed the fraudulent charges, and Wells Fargo shut down the credit card. She didn’t have to pay for any of the stolen funds, and she got a new credit card in the mail a few days later.

“When I realized that was it, I thought to myself, ‘that wasn’t so bad,’” she told MagnifyMoney.

Every major credit card in the United States offers their customers $0 fraud liability. That means if a thief steals your credit card number, you don’t have to pay for the item as long as you inform your bank. Much of the time, your bank informs you of fraudulent activity before you detect it.

Having a bank protect you from fraud offers a huge benefit for cardholders. But some banks, including Citigroup and MasterCard, are taking this responsibility a step further. They now offer identity theft resolution services. That means they will help their account holders restore their identity after instances of fraud — even if the fraud happened through an unrelated account.

What are identity theft resolution services? And how do they compare to identity theft products you can buy? We dug into the fine print to help you understand.

What are identity theft resolution services?

If someone steals your identity or financial information, it’s important to restore your identity as soon as possible. This process involves fixing your credit report, removing bogus charges from your accounts, and recovering stolen funds. Depending on the severity of the fraud, this could involve sending letters to collection agencies that believe you owe them money or disputing debts from other services. In a worst-case scenario, you may need to clear your name of criminal charges.

Read More: Credit Monitoring and Identity Theft Protection Guide

Doing this on your own can be a time-consuming task. Restoring your identity takes average of 4 hours, but up to 130 hours in 5% of identity theft cases, according to the Federal Trade Commission. But some credit cards will help you save time by working with you as you restore your identity. Citigroup and MasterCard give their customers free access to designated specialists who give guidance and insight into resolving identity theft problems. In some cases, MasterCard will do the work for identity theft victims.

What do credit card companies promise?

Two companies promise some level of identity theft resolution assistance. We read their service agreements to explain what they really offer.

Citigroup

It’s more accurate to call Citibank/Citi’s perks identity theft resolution assistance. They won’t restore your identity for you, but they simplify the process. Customers can call on Citi’s identity theft resolution services even if the fraud didn’t originate from their Citigroup accounts.

Citigroup customers who suspect that they’ve been the victim of identity theft can simply call the Citigroup Identity Theft Hotline (1-800-274-6660). The hotline is staffed by a team of identity theft resolution specialists. Identity theft resolution specialists help customers check their credit report for fraud. (That’s something you can do proactively, too.) They give customers advice on contacting creditors and the credit bureaus.

Specialists even help customers complete an identity theft affidavit. An identity theft affidavit is a notarized document that provides evidence that you were the victim of identity theft. Banks and creditors will use the information inside the affidavit to fix problems that arose as the result of identity theft.

Citigroup specialists also watch a customer’s credit report and keep in touch with them until their identity theft issue is fixed. This level of guidance can be a tremendous help.

MasterCard

MasterCard offers two levels of identity theft resolution: the MasterCard ID Theft Protection program and full identity theft resolution.

MasterCard ID Theft Protection program

The MasterCard ID Theft Protection program is part of MasterCard’s core credit benefits. Every MasterCard holder is eligible to participate in the program.

MasterCard customers who suspect they are the victim of identity theft can contact 1-800-MasterCard to report an identity theft incident. You can report incidents, even if they did not originate on your MasterCard. When you call, you will get into contact with an identity resolution specialist.

The specialist will help you by providing you with an identity theft affidavit and explaining all the steps that go into unraveling identity theft. They will help you contact all three credit bureaus, so you can get a copy of your credit report. This support matches the support that Citigroup offers.

Full identity theft resolution from MasterCard

MasterCard also offers more robust resolution assistance on a limited number of co-branded credit cards. These credit cards have a specific set of benefits called World Elite MasterCard Benefits. Many (but not all) travel rewards MasterCard credit cards have full resolution benefits.

Customers with this benefit can opt to let an identity theft resolution specialist restore their identity for them. When a customer reaches out to the identity theft hotline, they have the option to give MasterCard’s identity theft specialist a limited power of attorney (LPOA). The LPOA allows the specialist to resolve identity theft problems on behalf of the customer. Specialists file forms for the customer, clean up the customer’s credit report, and resolve fraud. Specialists keep customers updated on their progress, but customers don’t have to do work.

This program offers enormous protection and time savings to all eligible customers. It is almost identical to purchasing identity theft resolution services from Zander Insurance, Prosper Daily, IDShield, or ProtectMyID. The only difference? MasterCard doesn’t limit your financial losses associated with identity theft. Identity theft expenses can include notary signatures, credit-freezing and credit-thawing expenses, and legal expenses.

Are you eligible for this highest level of protection? Look for the phrase “Concierge Level Certified Restoration specialist who works on behalf of the cardholder” in your credit card’s guide to cardholder benefits.

These are the 10 credit cards that offer MasterCard’s concierge level services, including four with no annual fee.

How to restore your identity on your own

When you’re the victim of identity theft, the biggest cost to you is usually not money — it’s your time.

These are the steps that the Federal Trade Commission recommends when you’ve been the victim of identity theft.

  • Call companies where the fraud occurred and ask them to freeze or close your account.
  • Place a 90-day fraud alert at one of the three major credit bureaus.
  • Get a copy of your credit report from all three bureaus.
  • Report the identity theft to the FTC.
  • Close new accounts opened in your name.
  • Remove bogus charges from your existing accounts.
  • Clear your credit reports of fraudulent information.

Depending on your situation, you may also need to do the following:

  • Create a police report.
  • Create an identity theft affidavit.
  • Stop creditors from contacting you.
  • Look for fraudulent checking accounts through ChexSystems.
  • Contact the IRS or other government bureaus.
  • Get help from a lawyer.

Need in-depth guidance on each step? MagnifyMoney’s Identity Theft Protection Guide will help you through each step.

Even when you know the steps to take, the amount of work can be overwhelming.

Consider Molly Johnson’s situation mentioned earlier. Five minutes spent resolving fraud isn’t a big deal. However, on October 31, Molly fell for a phishing scheme while on vacation. A fraudster called her hotel room and claimed to be the front desk. The fraudster asked for her credit card information, and Molly gave it to them.

A few minutes later Wells Fargo called her cellphone. Again, they asked Molly about some fraudulent charges, which Molly confirmed. The fraudulent charges didn’t go through, but that wasn’t the end of the fraud. Over the next day, the thief tried to take out three cash advances totaling over $1,500. Wells Fargo never released the funds.

The thief also used Molly’s personal information to access her savings account and two of her children’s checking accounts, all housed at Wells Fargo. The fraudster moved funds between the accounts, but Wells Fargo prevented any theft.

That wasn’t the end of the fraud. The thief tried to order a new debit card from Molly’s unrelated checking account at Northeast Bank. Thankfully, Northeast Bank security measures prevented the fraudster from getting a debit card.

Wells Fargo worked with Molly to move money back to the correct accounts and remove fraudulent charges. With those removed, Molly spent 10-12 hours resolving the identity theft and protecting herself against future attacks. She’s still nervous about what will happen when the fraud alert comes off her credit report.

Are identity theft resolution services enough?

Choosing one of the credit cards above ensures you won’t spend much time restoring your identity if you fall victim to identity theft. However, the best battle is the one you don’t have to fight. That’s why we still recommend that you take care of your identity through common-sense protection and regular credit monitoring. Your credit card company might help you out if you fall victim to identity theft, but protecting your identity is your responsibility.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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Identity Theft Protection, News

Is Credit Sesame’s $50,000 Identity Theft Insurance Worth the Hype?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Is Credit Sesame's $50,000 Identity Theft Insurance Worth the Hype?

If you register an account with Credit Sesame, the credit monitoring and financial recommendations company now provides an unconventional perk: a free identity theft insurance policy with $50,000 worth of coverage.

Identity theft insurance, like the insurance offered by Credit Sesame, helps victims of fraud to recoup money they may spend to resolve the issue. In minor cases of fraud, victims may have to pay for notary expenses, to freeze and thaw their credit, or to replace a visa, passport, or driver’s license. In serious cases, victims may lose wages when they take time off from work to deal with identity theft. Some victims may even have to pay for legal representation.

Without insurance, it is possible — but not always the case — that victims might have to pay out of pocket to resolve cases of identity theft.

Credit Sesame’s identity theft insurance policy might be “free,” but is it worth getting excited over? We took a closer look at the policy and compared it to similar offerings from competitors.

Here’s what we found.

Yes. It really is free.

Free sounds good, but it’s usually filled with gotchas. Is Credit Sesame’s identity theft insurance really free? Yes. It’s real insurance, and you really don’t have to pay. Despite the $0 price tag, the insurance policy isn’t half bad.

What Credit Sesame’s policy covers:

With a few exceptions, Credit Sesame’s policy covers:

  • Application re-filing fees
  • Courier costs
  • Notary costs
  • Court costs
  • Legal representation (up to $75 per hour)
  • Lost base wages if you need to take time off from work (self-employed people can’t receive any compensation)
  • Dependent care coverage
  • Travel costs
  • Postage or other communication costs

What Credit Sesame will not cover:

Credit Sesame’s insurance never replaces stolen money that has been taken from a bank, savings, or other financial account.

Like most other identity theft insurers, Credit Sesame also won’t reimburse identity theft costs if the theft occurred under suspect conditions.

  • Credit Sesame will not cover fraud perpetrated by the victim or a family member of the victim.
  • They will not reimburse customers who voluntarily gave up their account numbers.
  • They only cover cases of identity fraud. That means if the fraudulent activity occurred because the victim or a bank employee made an error, the victim can’t get reimbursed for those costs.

Is that enough insurance?

Most of Credit Sesame’s competitors (and Credit Sesame’s premium product) offer up to $1 million in identity theft recovery services, so a $50,000 policy may seem skimpy. But bigger policies don’t necessarily offer better benefits.

Many million-dollar ID theft policies aren’t a great deal. You’re unlikely to spend thousands resolving identity theft. According to the Federal Trade Commission, most people spend just $40 for resolving identity theft. Five percent of identity theft victims spent more than $2,000 resolving identity theft.

The highest potential cost associated with identity theft is the cost of legal representation. Credit Sesame’s policy offers to cover $75 per hour for legal needs. But some attorneys can charge much more than that. According to Lawyers.com, a database that matches consumers with lawyers, most experienced lawyers charge $100-$200 per hour. So if a victim has to hire a lawyer, Credit Sesame’s policy may cover only some of their legal fees.

You might be worried that Credit Sesame doesn’t reimburse stolen funds, but in most cases banks will reimburse you anyway. The Fair Credit Billing Act (FCBA) and the Electronic Fund Transfer Act (EFTA) protect consumers from having their accounts drained.

The FCBA assures that you have to pay a maximum of $50 in fraudulent charges on a credit account. Your credit card company will reimburse your for the rest. In fact, most credit card companies have $0 fraud liability. That means you don’t have to pay for any fraudulent charges at all.

The EFTA covers you if someone steals money from your checking account. As long as you report fraud on your checking account within 48 hours, your bank will reimburse you for all but $50 of the charges. If you wait 2-60 days, the bank could leave you with $500 in losses.

Unless you have significant assets in a brokerage account, you’re legally protected. In the rare case that the law doesn’t protect you, your insurance probably won’t either. Most ID theft insurance companies limit their reimbursement of stolen funds to somewhere between $10,000 and $25,000.

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Is it worth signing up for a Credit Sesame account?

Credit Sesame’s insurance is a useful tool to limit financial exposure, and it can be a part of your plan to protect yourself against identity theft. But the reality is you probably don’t need identity theft insurance. You may prefer to keep your email address to yourself rather than get blasted with emails from Credit Sesame.

Most people can handle the $40 out-of-pocket fees associated with identity theft. Even $2,000 of costs can be manageable if you have an emergency fund.

When it comes to identity theft, the biggest cost you’ll face is the cost of your time. On average, victims spend four hours unraveling identity theft issues, and 5% of victims spend more than 130 hours. Credit Sesame’s insurance product won’t help you with that.

If you want identity resolution services, you can get them as a free perk from several credit cards, including:

You can also compare identity theft monitoring and resolution services on the MagnifyMoney website to find a product that suits your needs.

How to sign up

In order to take advantage of Credit Sesame’s ID theft protection, you’ll need to sign up on the site using your email address. You’ll provide personal information, including your Social Security number and your address. You cannot get free insurance unless you complete your Credit Sesame member profile.

Is it safe to provide this information? Credit Sesame promises that they will not give or sell your information to third parties without your express permission. They use multifactor authentication, which makes it difficult for hackers to take your information from their website.

What’s the catch?

The value of Credit Sesame’s insurance protection policy may not be worth the cost of handing over your email address. Customers are bound to receive marketing emails from the company, encouraging you to visit the site to check your credit score. Once on the site, you’ll receive recommendations to sign up for certain credit card or financial products that may or may not be best for your needs.

Eventually, Credit Sesame will nudge users to upgrade their Credit Sesame service.

Credit Sesame pushes their premium service offerings to existing customers. If you pay more, you can get up to $1 million of insurance and more monitoring. The additional insurance coverage still won’t reimburse you for stolen funds that your bank won’t replace.

The costs for these products include:

  • $14.95 for monthly reports from the three credit bureaus.
  • $19.95 for credit resolution help from an assistant.
  • $24.95 for lost wallet resolution assistance and dark web monitoring.

These prices are higher than competitors, and Credit Sesame’s product doesn’t offer full resolution coverage at any price.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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