You know your credit score is important, but if you have an annuity or structured settlement you may find yourself wondering how it can impact your credit worthiness.
Understanding the relationship between annuities and your credit is complicated. It requires a firm understanding of how both your annuity and your credit score function. But, by being in the know about how it all works, you’re in a better position to get the best deals on things like car loans and mortgages.
Let’s jump right in.
Your Credit Score, Plain and Simple
Boiled down, a credit score is a number between 501 and 990 that businesses that money lenders use to estimate how likely someone is to pay them back. Your credit score is big indicator of the health of your financial outlook.
This is an approximate estimate of how the number is calculated by the three major credit reporting companies, TransUnion, Equifax and Experian:
- 35 % is past payment history.
- 30 % is the amount of money you currently owe.
- 15 % is the length of time you’ve had lending accounts.
- 10 % is the amount of new credit inquiries recently.
- 10 % is the diversity of the accounts you’ve had.
So when you take all of those things together, your credit score looks at how long you’ve been making payments and what types and future payments you will be asked to make.
How Do You Improve Your Credit Score?
As you can see from the math above, the biggest factor in your credit is having a good record of on-time payments. The more on-time payments you’ve made in your life, the higher your credit score will be. This means that not only is it important to pay your bills on time, but also that the longer you’ve had a well-maintained account, the better.
Here are some best practices in having healthy credit:
- Shoot for having 65 to 75 percent of your credit limits untouched. More than that makes you a risk, and less than that makes you an unknown.
- Don’t close old accounts. Instead, leave them open. If you can’t resist temptation, simply cut up your card.
- Apply for new accounts sparingly. (This is also where having an old account comes in handy!) Each time a lender or business looks at your credit, it slightly decreases your credit score.
- Handle any delinquent or past due accounts as quickly as possible. If you have other assets to liquidate, like an annuity or structured settlement, consider doing so to avoid a lasting impact on your credit.
Finally, avoid quick fix solutions. Online ads and hand written signs on the side of the road promising to fix your credit are often outright scams. Be careful of credit repair companies asking for money up front or companies that ask you to do something illegal like creating a new credit identity.
Annuities and Debt-to-Income Ratio
So where do annuities and structured settlements come in?
While annuities and structured settlements don’t affect your credit score, the can impact how a lender determines your credit worthiness when applying for a mortgage. When you apply for a loan to buy a home, mortgage companies look both at your credit score as well as your debt-to-income ratio. A debt-to-income ratio examines the relationship between how much money you currently owe to other lenders and the amount of money you’re currently bringing in.
"Debt-to-income ratio: the percentage of your monthly income that goes towards paying your debts."
While your credit score will be a big factor in the interest rate you qualify for when you buy a home, your debt-to-income ratio determines how large of a loan you qualify for.
If you’re applying for a mortgage, you can list ongoing payments like annuities and structured settlements as income towards your debt-to-income ratio – so long as your payments are scheduled for at least the next 36 months.
How Does Selling Structured Settlement Payments Affect my Credit?
If you’ve made the decision to cash out your structured settlement, it’s only natural to question how the process could affect your credit.
Depending on your situation, using the funds you receive to pay down debt can improve your credit score. Again, 30 percent is determined by the amount of money you currently owe on accounts, so paying them down to allow for having 70 percent of your credit lines open can be a big boost for your score.
In more pressing situations, like selling your payments to get a car when your old one breaks down, you may request a cash advance so that you can act fast. Luckily, cash advances through Annuity.org aren’t processed like a third party loan. There’s no credit check, and thus no ding on your credit for a new inquiry.