Know Your Credit Score: New Credit Inquiries

credit mix

In the final post of this five-part series, we cover your new credit inquiries and how hard checks and softs checks will affect your score differently.

So far in this series, we’ve covered how your amounts owed, payment history, credit mix, and the length of your credit history can impact your FICO Score. Today, we’re covering the final category of info that makes up your score: your new credit inquiries.

Let’s get started!


What is a credit inquiry?

Basically, a credit inquiry occurs anytime a request is made to access your credit report. If you request a copy of your report or you apply for a loan, both will result in credit inquiries noted on the report itself. Credit inquiries are also sometimes referred to as “credit pulls.”

Your new credit inquiries and your credit mix are the least important parts of your score as each only makes up 10 percent of your total. For comparison, your payment history and your amounts owed combine to make up 65 percent of your score.

But that doesn’t mean that your credit inquiries aren’t important. When there are so few factors making up your score, everything is important. And the most important thing to know when it comes to credit inquiries is that not all kinds of inquiries are created equal.

“There are two types of credit inquiries: soft inquiries and hard inquiries,” says attorney Stephen Lesavich, Ph.D., (@SLesavich), best-selling author of The Plastic Effect. “Soft inquiries do not affect your credit score. Hard inquiries have a direct effect on your credit score.”

Here’s why soft inquiries won’t affect your score.

The basic point of a tracking new credit inquiries is so that lenders know when you are applying for a new loan or credit card. If they see a bunch of recent inquiries, it could mean that you’re desperate for more credit, which means that you’re a higher lending risk.

But not all credit inquiries come about from loan applications, which is why soft inquiries don’t affect your score.

According to Lesavich, “Soft inquiries or soft pulls include such events as a person checking their own credit score and the creation of list inquiries by credit card companies, mortgage companies, etc., to create lists of pre-approved applicants”

“Credit card companies routinely buy lists of potential customers from the three major credit reporting bureaus. The credit card companies use the lists and other demographic information to target individuals that meet a desired credit score level, income level, or other desired threshold criteria.

“Typically, the individuals on the lists are then targeted in a mass mailing with a paper application or an application sent electronically (e.g., via e-mail).  Such lists are created with soft pulls that do not affect anyone’s credit scores,” he says.

When you check your own report, you can access a full copy and still have the check be recorded as a soft inquiry. On the other hand, when a credit card runs a soft check on your credit, they won’t get all the same information that they’d get with a hard check.

If it helps, you can think of hard checks like reading a novel, while soft checks are like reading Cliff’s Notes instead.

“A hard inquiry directly affects your credit score and usually causes it to go down,” says Lesavich.

Why do hard inquiries lower your credit score? 

Hard inquiries are most commonly done when a lender or a credit card company is reviewing your loan application. The lender wants to view your history of using credit, making payments, maintaining low balances, etc.

So why do these inquiries cause your score to go down?

According to Lesavich, “Credit score scoring rules consider anyone applying for new credit (e.g., a new credit card, loan, or mortgage) to be incurring additional debt. That increases the financial risk associated with extending additional credit or lending money to that person.”

“Numerous hard inquiries are also viewed as a potential indicator that a person is attempting to expand his/her debt limits, or may be experiencing financial problems, both of which increase the risk that the person may not be able to pay back any additional money lent to him/her,” he says.

Lesavich also points out that personal loan and credit card applications are far from the only time that hard credit pulls are made:

“Did you know that other common activities also result in hard inquiries that can affect your credit score? Some of these are: getting a new cell phone or changing your cell phone carrier; connecting utilities such as electricity, natural gas, or cable television; switching to a new utility provider; opening a new bank account; opening a trading or retirement account with a broker; signing a lease to rent an apartment; applying for a job and going through a divorce.  Even though most of these entities do not report payments to a credit reporting bureau they still may do a hard inquiry on you before they provide you with the desired goods or services.”

There are actually certain types of loans that won’t result in a hard credit check. Most often, these are bad credit loans, and certain types of them won’t check your ability to repay at all. These are no credit check loans, a category of products that includes payday loans and title loans. These types of loans can be very dangerous and can trap borrowers into a cycle of predatory debt. If you’re going to apply for a bad credit loan, you might want to check out a “soft credit check” loan instead.

While the effect on your score from hard credit inquiries is usually minimal, you should also remember that multiple inquiries within a short period of time can end up lowering your score quite a bit. And as Lesavich puts it, those inquiries could  “result in you either being placed in a higher risk category for which you will pay a higher interest rate, or having your mortgage or loan application denied.”

“Hard pulls remain on your credit report for 2 years,” he says. “However, your credit scores are typically only impacted for 12 months after the hard pull.  Each hard pull may lower your credit score by three to five points.”

How to shop for a loan with minimal effect on your score.

“If you are planning to apply for a mortgage or a loan for a large purchase (e.g., automobile, boat, motorcycle, etc.) in the next one to two years,” says Lesavich, “you should try to limit any activities that result in multiple hard inquiries.”

Luckily, Lesavich has some great pieces of advice for how to do this. First, he says that you should find out how many inquiries are involved with each application:

“If you are applying for new credit, such as financing for a new car, truck, motorcycle, boat, etc. be aware of how the hard inquiries are conducted.”

“For example, if you want to finance a car with a new loan, a first dealer may offer you three different financing options.  You visit another dealer and they also offer you three more different financing options.  Or your visit one dealer and you are offered six different financing options.   Are the six different financing options six hard pulls or just one hard pull?  It depends.”

Next, he says that you should try and pack your inquiries into as short a span as possible:

“Most credit scoring systems count all inquiries for the same purpose (e.g., obtaining a loan for an automobile, etc.) within a given period of time, usually around 14 days, as a single hard pull inquiry.

“So if you visited the two dealers within 14 days each with three financing options or the one dealer with six financing options, you would likely only have one hard pull recorded on your credit report.

“However, if you visited the two dealers 30+ days apart, you may have more than one hard pull on your credit, one or more from each of the two dealers.”

This practice is referred to as “bundling” and it exists to encourage people to shop for credit more wisely. Lastly, Lesavich says that you should check how exactly these pulls are being reported:

“Be sure to ask how the credit inquiries (i.e., hard pulls) are conducted and reported to the credit reporting bureaus any time you are considering financing options.

“If you are shopping for a loan on the Internet on a site that provides comparative financing from multiple parties or multiple financing options, make sure you carefully read the Terms and Conditions and understand how the hard pulls are conducted and reported before conduct your search.”

Taking the time to fully read your contract is actually very good advice for any situation. But when it comes to protecting your credit score, it’s advice you should definitely take to heart.

Expand your credit knowledge by checking out these recent credit-related posts:

What kinds of questions do you have about your credit score? We want to know! You can email us or you can find us on Facebook and Twitter

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Google+


Contributors
Stephen Lesavich, Ph.D., JD, (@SLesavich) is an attorney, credit card expert, award-winning and best-selling author of “The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards”.

Know Your Credit Score: Length of Credit History

Length of Credit History

In this five-part series, we’re breaking down the different categories that make up your credit score. Today we’re talking about Length of Credit History.

The length of your credit history is pretty self-explanatory: it measures how long you’ve been using credit. Lenders like to know this because, for the most part, the longer you’ve been using credit, the more reliable a borrower you will be.

It’s not like this is a major factor in your score. In fact, it only makes up 15 percent of your total. Compare that to your payment history (35 percent) and your amounts owed (30 percent), which together make up a whopping 65 percent your overall score.

But just because the length of your credit history is a smaller factor, that doesn’t mean it’s not important. (Hot tip: there are only five factors that make up your credit score, so all of them are pretty important.)

Here’s what you need to know.


How does the length of your credit history work?

According to attorney Stephen Lesavich, Ph.D., (@SLesavich), best-selling author of The Plastic Effect, the length of your credit history includes three basic parts:

  1. The dates you opened each of your credit accounts.”
  2. “The time that has elapsed since the last activity on each account.”
  3. The specific type of credit accounts opened (e.g., credit card, loans, etc.).”

But how are all of these factors used to calculate this portion of your score? Well, there’s a couple of different ways.

First of all, you have to have at least some kind of recent activity.

“To have this factor counted in the calculation of your credit scores you need to have activity on at least one of your accounts the past six months that is reported to a credit reporting bureau,” says Lesavich.

He adds that “The length of credit history factor is determined with the ages of your newest and oldest accounts, along with the average age of all your accounts.”

And what about accounts that you’ve had in the past but that you’ve since closed out?

It depends on another factor: your payment history.

According to Lesavich, “Closed accounts in which all payments were paid on time remain on your credit report for 10 years from the date of last payment or the date of closure.”

Meanwhile, he says that “Closed accounts with late payments remain on your credit report for 7 years from the date of the first late payment.”

You’ll need six months of credit-use to establish a credit score.

One of the important things to remember about the length of your credit history is that, without it, you cannot actually have a credit score.

Even though your credit history is only 15 percent of your score, the company that’s making the calculation (likely FICO or one of the three credit bureaus) needs info from all five categories to create your score in the first place.

And remember, it takes a minimum of six months to establish a viable credit history.

“If a consumer is trying to establish credit and obtained a single credit card 3 months ago, with no other loans, then he/she would not have a credit score because there would be no length of history component to use in the credit score calculation,” says Lesavich.

Your score could also be impacted if you’ve gone a long time without using any credit.

“If a consumer has not used any of their credit accounts for a long time period, such as several years, because they are paying cash for everything and/or they have paid off everything,” says Lesavich, “then such a consumer also would not have a credit score because there would be no length of history component to use in the credit score calculation. This will hurt such a consumer because if they need to borrow money they will be deemed to have ‘no credit.’”

So make sure that you’re staying active on the credit accounts that you already have open. Make your payments, and make them on time!

And if you’ve never used credit before, then it might be a good idea to apply for a secured credit card. These are cards that use a cash deposit to establish your credit limit and to serve as collateral.

You can usually get one of these without a credit check and many secured credit card companies report payment information to the credit bureaus. They can be a great way to establish your credit history.

Closing an old credit account? Not so fast.

“Be careful closing your oldest account or credit card,” says Lesavich. “If you do so you will likely lower your credit score at some point.”

Confused? Let him explain:

“For example, assume the consumer has three credit cards and no other loans.  The credit card accounts were opened 15, three and two years ago.

“The consumer decides to close the credit card account opened 15 years ago because the interest rate is too high, they no longer use the card, they are going to transfer the balance to a zero interest card, etc.

The consumer then has an “oldest account” of three years and not 15 years.”

You see what happened there? By closing their oldest account, that (hypothetical) person sacrificed all that credit history that they had built up with it.

Now, one of the dangers of keeping old credit lines open is that you might be tempted to use them, which only put you further into debt! That’s why, if you keep the account open, you should make sure you don’t have easy access to it.

Closing an old card might also affect another important factor of your score, your credit utilization, which is a major part of your “amounts owed.”

“Credit utilization is a ratio of how much debt you owe to how much credit you have available to you,” says Lesavich. A low ratio, i.e., not much debt but a lot of available credit, is considered most desirable. Credit utilization scores are typically calculated in two parts, using two different calculations. If your credit utilization score for either part exceeds a pre-determined threshold, your credit score will go down.”

According to Lesavich, the “first calculation is done for an individual credit utilization score that is calculated separately for each of your credit cards,” while the “second calculation is done for an aggregate credit utilization score that is calculated for your total balances on all your credit cards against your total credit limits for all cards.”

So here’s how it breaks down: closing an old credit card will reduce the total amount of credit you have available to you, which will increase the ratio for your aggregate credit utilization and potentially lower your score.

What can you do to improve the length of your credit history?

This might come as a shock to you, but the best way to improve your credit history is to keep using credit.

The longer you keep making payments on your loans and credit cards–as well as opening new accounts, when appropriate–the longer your credit history will become and the more it will help your score.

Of course, if you’re routinely making late payments and overdrawing your accounts, then that longer credit history won’t really help your score. So don’t do that. The same goes for taking out bad credit loans and no credit check loans. Those lenders don’t report payment information to the credit bureaus, so they won’t do your score any good.

You should also try to keep your old accounts open, especially if you never use them or use them only rarely. While it might seem tempting to close those old cards when you open up new ones, it can have the opposite effect.

Think about it the same way you would think about dating. Whose advice are you going to trust? The person who just got into a relationship three months ago, or the person who’s been happily married for 15 years?

When you think about it like that, the answer is pretty obvious.

What do you want to know about your credit score? We want to hear from you! You can email us or you can find us on Facebook and Twitter

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Google+


Contributors
Stephen Lesavich, Ph.D., JD, (@SLesavich) is an attorney, credit card expert, award-winning and best-selling author of “The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards”.

Time to Fix Your Credit Score? Here are 12 Expert Answers to Get You Started 

opploans-how-long-rebuild-credit

Learn more about your credit score, credit report, and the best ways to improve your creditworthiness.

For a being such a dinky little three-digit number, your credit score sure has the power to shape your life. It determines how much your loans and credit cards are going to cost you, not to mention it can decide whether you have access to (traditional) credit at all!

We know you’ve got questions about how it all works—especially when it comes to raising your credit score. But before you fix your score, you’ve got to learn a bit more about what makes it tick. And, in particular, you’ve got to learn more about your credit report. Without it, you wouldn’t have any credit scores at all!

That’s why we reached out Rod Griffin, Director of Public Education for Experian (@Experian), one of the three major credit bureaus. He gave us some great pieces of expert insight into how credit scores and credit reports work and how you can use that knowledge to improve your credit.

You’ve got questions? He’s got answers.


1. Is your credit score part of your credit report?

“There are two things to keep in mind about credit scores, says Griffin, “there isn’t just one credit score and it is not part of your credit report.”

Are you surprised?

Credit scores use the information kept on credit reports to determine your creditworthiness, but the score isn’t actually a part of the report itself. Information can vary between the three major credit bureaus—Experian, TransUnion and Equifax—so you have different scores depending on which credit report is used.

And that’s not all.

“In fact,” adds Griffin, “there are many different credit scores used by lenders to meet their particular risk management needs. Each scoring model weighs credit indicators differently.”

Figuring out your credit score might be a little harder than you originally thought—but that doesn’t mean there aren’t common “best practices” you can follow to keep all your scores healthy.

2. What are the most important factors in a person’s score?

Griffin says that “Missed/late payments are the most important factor in credit scores.” And that makes sense, as your payment history makes up 35 percent of your score, more than any other single factor.

According to Griffin, those late or missed payments “may appear as negative information on your credit report for seven years, but their impact on a person’s credit score will decline over time.”

But he adds that “depending on the severity of the delinquency, they can affect scores for as long as they remain on the report.”

3. How long do new credit inquiries stay on your report?

Whenever you apply for a loan or a credit card from a traditional lender, they’re going to run a “hard” credit check. These get recorded on your report as “new credit inquiries.” Basically, lenders want to know any time you’re searching for more credit than you already have.

“While inquiries remain on a credit report for two years, their impact on credit scores is minimal and diminishes relatively quickly, says Griffin. “Typically, any significant impact from inquiries diminishes after two or three months, by which time a new account will appear in the report, or not.”

“The new account – or lack thereof – represents the risk and the inquiry becomes much less significant. FICO excludes entirely any inquiries more than 12 months old from their score calculations. Inquiries for car loans or mortgage loans are counted as only one inquiry by most credit scoring models and may be not counted at all in the newest systems from FICO and VantageScore.”

He adds that “Inquiries will always be the least important factor in credit scores.”

4. How do debts sent to collections affect your score?

If you fail to make a payment on one of your credit accounts, it’s going to get sent to collections—which oftentimes means that your lender (or “creditor”) sells the debt to a new company for a fraction of what you actually owe. That company, a debt collection agency, then tries to recoup the debt, while the collection account gets recorded on your report

According to Griffin, “The collection account will remain on your credit report for seven years from the date the original creditor first reported the debt as delinquent to the credit-reporting agency. That’s true even if the collection account has been transferred from the original creditor to one or more collection agencies.”

“Although collection accounts stay on the credit report for seven years, the longer ago they were paid off, the less of an effect they will have on your credit scores.”

“A collection account that has been paid in full is often viewed more favorably by lenders than if left unpaid, especially after some time has passed. In fact, some newer scoring models no longer include paid collections when calculating scores, so paying off a collection could benefit credit scores even sooner,” he says.

A collection account is one of the ways that no credit check loans like payday loans or title loans can get recorded on your report. Even if the lender doesn’t report your loan to the credit bureaus, a debt collector will report their collection account. In cases like these, bad credit loans will only hurt your score, not help it.

5. How long does a bankruptcy remain on your report?

“There are two main forms of bankruptcy, chapter 7 and chapter 13,” says Griffin. “Chapter 7 bankruptcy remains on your credit report for 10 years after the date filed. Chapter 13 bankruptcy remains on your credit report for 7 years after the date filed.”

“Bankruptcy is the most serious negative factor in a credit report. The exact point impact depends on the individual’s unique credit history and the credit scoring system used to calculate the score. Regardless of those issues, a bankruptcy will have very serious negative implications for credit scores while it remains on the credit report.”

We agree. While bankruptcy is sometimes a person’s only solution, the effect on your credit score is … well, it’s not going to be pretty. We can promise you that much.

6. How long does it take for on-time payments to positively affect your score?

“Everyone’s credit history is unique, and there are many different scoring systems, so there’s really no one-size-fits-all answer,” says Griffin.

“Payment history is the number one factor in determining credit scores. Therefore, consistent on-time payments for one year or even three years will positively impact a person’s score because it shows you are responsible. The longer the history of on-time payments, the more positive the impact.”

But making on-time payments won’t fix your score all by itself.

“For example,” offers Griffin, “credit usage is the second biggest factor in credit scoring models. If someone is making consistent on-time payments, but their credit card balances are creeping closer and closer to their limit each month, the higher balances could offset the impact of the positive payments on their score.”

And if you’re looking for instant results from an on-time payment, you’re going to be disappointed. According to Griffin, “Credit scores also require a minimum of three months, and more typically six months of payment history before they can be included in the credit score calculation.”

7. Is there a certain credit utilization ratio at which a person will see their score jump?

Your credit utilization ratio sounds complicated, but it’s actually pretty simple. It measures how much of your available credit you’re using.

Say you have a credit card with a $1,000 limit on which you’re carrying a $500 balance. Your credit utilization ratio would be 50 percent, as you are currently using half of the credit that’s  available to you.

“A general rule of thumb is to always keep your utilization rate below 30 percent,” says Griffin, adding that “Ideally, you should pay your balances in full each month.”

He stresses that “The 30 percent ratio is a maximum, not a goal.” So if your ratio is currently above 30 percent, it certainly makes a good milestone to shoot for. Just make sure you don’t stop paying down your balances once you’ve achieved it.

“Credit scores consider both your overall balance-to-limit ratio, or utilization rate, and your utilization rate on individual accounts. The credit limit of an account is important because it is part of what determines your utilization ratio—the amount of credit you’re currently using vs. the amount that is available to you.”

This is one of the reasons why closing down an old credit card can actually hurt your credit. It lowers the amount of credit you have available to you, which in turn hurts your ratio. Instead of closing that account, you should consider keeping it open—so long as you aren’t tempted to use it.

To learn more about your credit utilization ratio, check out our blog post, Know Your Credit Score: Amounts Owed.

8. Do people’s scores get penalized for using zero percent APR balance transfers to help with debt repayment?

“Opening a new credit account often means taking on new debt, or at least increasing your potential to incur debt,” says Griffin. “For this reason, you may see a slight dip in scores when you first apply for and open a new account.  The action of opening the new account would not cause you to be penalized for using a zero percent APR balance transfer to help with debt repayment.”

“However,” he adds, “there are other pitfalls that may affect your credit score.”

  • “For instance, a high transfer fee could outweigh the benefits you might get from a lowered or zero percent APR.”
  • “Another downside is that if you fail to pay off the entire transfer amount by the end of the promotional period, your APR will reset to a higher rate – one that could potentially be higher than you were paying before making the transfer.”
  • “And lastly, if you continue to use the paid-off card, you could accrue even more debt. It’s important to avoid adding more debt – either on the old card you’ve paid off or on the new card with lower or zero percent APR.”

To learn more about balance transfers, Griffin recommends that you check out this article from Experian.

9. How does the length of your credit history affect a person’s creditworthiness?

“The length of credit history helps lenders evaluate your creditworthiness,” says Griffin. “Credit history gives lenders a better insight into your credit behaviors, thus, determining lending risk and not really a fuller picture of how you manage your debts.”

“In general, the longer your accounts have been opened, the better it can be for your credit history, as long as you manage them well. “

“Though, in terms of creditworthiness having a line of credit for one to three years is only positive if the account is managed well. It’s quite possible for a person with a credit history that is only a few years old to have very good credit scores,” he says.

10. Is it easier to go from bad to fair credit than it is from fair to good credit?

According to Griffin, “Moving your credit score up the scale regardless of where you start requires the same behaviors. You have to catch up on any late payments, reduce your credit card balances and always pay your bills on time”.

“Just how fast any individual’s scores will improve depends on their unique credit history. The more severe the issues, the longer it will take.”

“For example,” he says, “a person who is just beginning to build their credit history but has all positive, on-time payments may increase their score faster that a person whose scores have been dragged down by bankruptcy. The bankruptcy filing will seriously hinder scores for as much as 10 years, especially if coupled with other late payments, charged-off accounts or collections. It also depends on the scoring system and how it weighs the individual items.”

The bottom line for Griffin is that “everyone has a unique credit history with a different mix of factors that will determine how fast their credit scores may increase.”

11. If someone is committed to raising their credit score, what is the best course of action for them take?

According to Griffin, there are two things that a person should do if they want to raise their score:

1. “If you have late payments, catch up and then make all your payments on time, every time.”

2. “Reduce your credit card balances. Payment history and revolving account utilization are the two most important factors in credit scores.”

“Beyond those two things,” he says, “every credit history is different, and the things that each person should do differ as well.”

“To find out what you need to do, get a copy of your credit report and purchase a credit score. When you purchase your credit score you will receive a list with the risk factors that go with that score. The risk factors tell you what, from your personal credit history, are most affecting your credit score. Address those risk factors and all your scores should get better.”

“The numbers can be different from one scoring system to another, but the risk factors are very consistent,” says Griffin.”

12. How can I get a copy of my credit report and score?

Here’s some great news: Did you know that you are entitled to one free copy of your report from Experian, TransUnion, and Equifax ever year? Well, you do! It’s the law! All you have to do is request them by going to www.annualcreditreport.com.

As for your credit scores, the FICO score is the most commonly used type of score, but there’s also the VantageScore, which was created by the three bureaus.

“You can purchase a VantageScore from Experian when you request your free annual credit report,” says Griffin. “You also can get a free credit report and free FICO credit score at www.freecreditscore.com.”

“In both cases,” says Griffin, “you get the number, an explanation of what it means in terms of risk and the list of risk factors that most affected the score. The risk factors are empowering because they tell you what you can do to make your scores better.”

What questions do you have about your credit scores and your credit report? We want to know! You can email us or you can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Google+


Contributors
Rod Griffin is Director of Public Education for Experian (@Experian). Rod oversees the company’s financial literacy grant program, which awarded more than $850,000 in 2015 to non-profit programs that help people achieve financial success. He works with consumer advocates, financial educators and others to help consumers increase their ability to understand and manage personal finances and protect themselves from fraud and identity theft. He works to help all consumers be better prepared to get the credit they need, at the time they need it, and at rates and terms that are favorable to them.”

Know Your Credit Score: Credit Mix

credit mix

Your credit score is important. It can increase your buying power, your financial security and keep you and your family safe from predatory payday loans and title loans.

That’s why we’re doing this Know Your Credit Score series, where we break down the five categories of information that make up your score. You can check out our previous posts on amounts owed and payment history. Today we’re going to talk about your “Credit Mix.”


Just what the heck is a credit mix anyway?

Your credit mix is essentially how many different kinds of credit you have. We’ll let certified financial educator Maggie Germano (@MaggieGermano) explain:

“Lenders like to see several (and varying) accounts on your report because it shows that other lenders have trusted you with credit. However, this is the least important factor for your credit score, so don’t rush to open a bunch of new credit accounts.”

So what’s your credit mix really worth?

As Germano mentioned, your credit mix is the least important part of your credit score. You might think you can just ignore it because of its lesser significance. But you’d be wrong!

“Credit mix makes up 10 percent of your FICO score,” says nationally recognized Credit Coach Jeanne Kelly (@CreditScoop). “That may not seem like a big part of your score, but every point does matter.”

So now that we know what your credit mix is and how much of your score it’s worth, how can you start building it up?

Here’s how you can improve your credit mix.

This advice from our experts will help you get 100 percent out of the 10 percent that is your credit mix. (Don’t think too hard about the math on that one.)

“If you only have student loans, getting a credit card would help mix up your accounts,” Germano advised. “However, if you struggle with overusing your credit cards, it’s not in your best interest to get one just to add a different type of credit account. Unless you absolutely need something like a personal loan, mortgage, or car loan, I would not recommend opening new credit accounts just to mix up your types of accounts.”

“You do not need to go out and get a home mortgage or auto loan if you do not need it to add to your mix,” Kelly reiterated. “You can always get a small personal loan if you need to purchase an item instead of another credit card.”

Alayna Pehrson, digital marketing strategist for @BestCompanyUSA, offered her own strategy for fixing the mix:

“To improve your credit mix, you can start by effectively managing numerous credit card accounts as well as installment loans. Although opening new credit card accounts may lower your score at first, successfully having and using multiple credit cards will benefit you as time goes on.

“Installment loans cover anything from mortgages to student/personal loans and auto loans as well. Having these loans will demonstrate your ability to efficiently diversify your credit usage/habits.

“Even though keeping your credit mix at a good level will benefit your score, it’s good to keep in mind that your credit mix makes up only 10 percent of your overall credit score, so it’s something that shouldn’t be overly stressed about.”

Let’s review.

As Pehrson said, you should worry the least about your credit mix, as it’s much less important to your credit score than making all of your payments on time and paying down your debt.

But when it comes to getting a loan, especially a longer-term loan, you’ll want to have the lowest interest rates possible. And that means the best credit score possible.

Otherwise, you’ll be stuck with bad credit loans and no credit check loans, which have much higher rates and can even leave you stuck in a cycle of debt.

Your credit mix might not be as important as your payment history or your amounts owed, it’s certainly worth keeping an eye on.

By the time we’re done with this series, you’ll be ready to make your credit score the best it’s ever been! Check back next week when we cover recent credit inquiries!

In the meantime, stay informed by checking out these recent credit-related posts:

What kinds of questions do you have about your credit score? Please let us know! You can email us or you can find us on Facebook and Twitter

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Google+


Contributors
CarlaDearing-2_2015-1Maggie Germano (@MaggieGermano) is a Certified Financial Education Instructor and financial coach for women. Her mission is to give women the support and tools that they need to take control of their money, break the taboo of discussing debt and income, and achieve their goals and dreams. She does this through one-on-one financial coaching, monthly Money Circle gatherings, her weekly Money Monday newsletter, and speaking engagements. To learn more, or to schedule a free discovery call, visit maggiegermano.com.
Jeanne Kelly (@CreditScoop) After being turned down for a mortgage 15 years ago, Jeanne Kelly realized she needed to get her credit in order. Not only was she able to fix her bad credit, but she took the skills and knowledge she gained and decided to share it with the world. Now she’s a nationally regarded credit coach and expert, with multiple books and television appearances. Follow her on Twitter and check out JeaneKelly.net to get the credit help you need!
Alayna Pehrson (LinkedIn) is a Digital Marketing Strategist and Credit Repair Specialist at BestCompany.com, (@BestCompanyUSA).

Know Your Credit Score: Payment History

payment history

In this five-part series, we’re breaking down the five different categories that make up your credit score. Today we’re talking about Payment History.

It’s pretty obvious that missing a payment on your credit card isn’t going to be good for your credit. But exactly how “not good” would it be? Just a little not good? Or like super duper not good?

Well, as it turns out, missing a payment or making it late could have a pretty big impact on your score. That’s because your payment history is the single largest factor in determining your score.


What is your payment history? 

“Your payment history includes your on-time, late payment and missed or non-payment information,” says attorney Stephen Lesavich, PHD, (@SLesavich), best-selling author of The Plastic Effect.

When a lender is assessing your application for a loan or a credit card, it’s very important to them that you make your payments on time.

So if you have a history missing your payments or making them late, that sends lenders a signal that you’re likely to default on your loan altogether.

How important is your payment history?

Your payment history is one of the most important factors in your credit rating. It accounts for 35 percent of your overall credit score, more than any other individual factor.

(However, it must be said that your Amounts Owed, which we covered last week, are also very important, accounting for 30 percent of your overall score.)

With over a third of your score dependent on you making your payments, it’s safe to say that making your payments late is a bad idea.

“Making late payments or missing payments if the quickest way to have your credit score drop significantly,” says Lesavich

What’s included in your payment history?

“Payment history typically includes payment information for credit cards, mortgages, loans, retail accounts and lines of credit,” says Lesavich, who also lays out what those different categories include:

  • The loans include student loans, auto loans, other loans, etc. that are paid in installments.
  • The retail accounts include credit cards and lines of credit from department stores, etc.
  • The lines of credit include home equity lines of credit and other lines of credit.”

Basically, if you’ve borrowed money in any form, it’s payments are going to be reported to the credit bureaus and will factor into your score.

With one notable exception…

What’s not included in your payment history?

Notice that he didn’t include short-term bad credit loans, such as payday loans and title loans. That’s because the vast majority of these lenders do not report your payment information to the credit bureaus.

While this means that missing a payment on a payday and title loan might not hurt your score, it also means that making your payments on-time won’t help your score either. Plus, if the lender decides to send your unpaid debt to a debt collection agency, the agency likely will report the debt.

“Collection account information remains on your credit report for 7 years from the date the first account became past due causing the account’s placement with a collection agency,” says Lesavich.

That’s true for all kinds of debts, whether they’re from no credit check loans, personal installment loans, a credit card, etc. If you never pay the debt, and it gets sent to collections, the account will be noted on your score.

But since most payday and title loans aren’t reported to the credit bureaus in the first place, they can basically only hurt your credit score. They can’t ever help it.

(And if you think that’s the only issue with these predatory short-term loans, think again.)

What about payments that aren’t debt-related?

Sure, paying down personal loans and credit cards accounts for a lot of the payments you’re making each month. But it’s certainly not all of them.

So what about your payments on things like rent and utility bills? Are those reported to the credit bureaus?

According to Lesavich, the answer is mostly no:

“Most landlords for renters and service providers such as electric, cable and cell phones providers do not report payments to the credit reporting bureaus.”

“However, some landlords and service providers do such reporting.  So it is always wise to check and determine if your landlord or any of your service providers do report payment history.”

To learn more about how your credit score your utility payments are related, check out our blog post: How Bad Credit Can Affect Your Utilities.

How does your payment history impact in your score?

It’s a safe bet that making a payment late will negatively affect your credit score. But there’s no way to tell how bad it will affect it as there a lot of other factors at play.

According to Lesavich, the impact of a late payment on your score will depend on:

  • “Your current credit score
  • “Amount of days the payment was late
  • “How much money was owed for the payment
  • “Total number of times you made a late payment
  • “When the late payment occurred with respect to the when the credit score was calculated.”

One of the reasons it can be had to determine how much a late payment will affect your credit score is that you actually have multiple scores.

Each of the three major credit bureaus—Experian, TransUnion, and Equifax—maintains their own version of your credit report. Your exact score depends on which score is used to create your credit score.

And that’s not all. It can depend on which specific formula is used as well.

“It is important to note, says Lesavich, “that the credit reporting bureaus, etc. have all developed their own proprietary credit scoring models.  Such proprietary credit scoring models are never fully published or disclosed.”

“As a result, any discussion of credit scores is always a best guess estimate. It can be used to predict a reasonable range to approximate your credit score, but your own credit  score may vary with a late payment.”

Lesavich does, however, offer the following example of how a late payment could affect your score:

“A single 30-day late payment typically reduces a person’s credit score by 60-110 points (e.g., ranging from 60-80 points if your credit score is in the 600s, to about 80-110 points if your credit score is in the 700s, etc.).”

That’s a lot! But notice that he mentioned a payment that was 30 days late. Generally speaking, most lenders have a “grace period” after a due date is missed before they will report it.

So if you’ve missed a payment by a few days, go ahead and make that payment ASAP. It could mean a huge difference to your score.

“Late payment or missed payment information will typically remain on your credit report for seven years,” says Lesavich. Read more in our blog post How One Late Payment Can Affect Your Credit.

What should you do if you’ve made a late payment?

Lesavich has some sage words of advice regarding what to do if you’ve missed a payment:

“Everybody can and typically does face a life situation (e.g., illness, accident, birth, death, etc.) in which a late payment is made.

“If you have not made a late payment in the past, or have done so very infrequently, check with your credit card provider, bank or loan provider and explain your situation.  They may not report the late payment to the credit reporting bureaus.”

Remember, a credit score is dynamic. It can change, and it frequently does change as life circumstances change. If you make a late payment or miss a payment and it lowers your credit score, do not get discouraged.

Instead, view the situation from an empowered position, which gives you an opportunity to take control and initiate change.”

“Then, make a plan with action steps you can accomplish to change to your credit card purchasing and debt management practices by making all your payments on-time and not make any late payment or miss any payments.”

We couldn’t agree more. Check back with Know Your Credit Score next week when we’ll be writing about your Credit Mix!

What kinds of questions do you have about your credit score? We want to hear from you! You can email us or you can find us on Facebook and Twitter

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Google+


Contributors
Stephen Lesavich, PhD, JD, (@SLesavich) is an attorney, credit card expert, award-winning and best-selling author of “The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards”.

Know Your Credit Score: Amounts Owed

Know Your Credit Score: Amounts Owed

In this five-part blog series, we’ll break down the different categories of information that make up your credit score, starting with your “amounts owed”.

Your credit score: It’s important. It’s how lenders decide if they’re going to lend you money, and at what rates. And remaining in the dark about your score is the perfect way to end up at the mercy of predatory payday loans and title loans.

So how is your credit score determined? As it turns out, there are five categories of information that go into it: payment history, amounts owed, length of credit history, credit mix, and recent credit inquiries. We’re going through them one by one.

Today, we’re talking about your “amounts owed”, which makes up 30 percent of your score.


What is “amounts owed”?

Simply put, your “amounts owed” is, well, the amount of money that owe on your various debts, including personal loans, lines of credit, and credit cards. In order to figure out your amounts owed, all you need to do it tally up all the outstanding balances on your loans and credit cards.

With amounts owed, owing less debt is generally considered a better thing than owing more. The only exception to this is if you never use any debt at all: no installment loans, no credit cards, nothing. That can leave you with a “thin” credit history that will hurt your score.

Beyond keeping your debts to a minimum–avoiding large outstanding balances and/or paying down the balances you have already built up–there’s another factor with your amounts owed that needs to be reckoned with.

It’s your credit utilization.

What is credit utilization?

Your credit utilization refers to the percentage of your available credit that you’re using. This won’t matter with your loans, which are issued to you as a single lump sum, but it’ll matter big time with your credit cards.

With credit cards, you are given a credit limit that you can borrow up to. The more money you borrow, the more of your available credit you’re using, and the higher your credit utilization ratio rises.

Credit utilization is also where your amounts owed can start to get a bit tricky.

30 for (keeping it under) 30

“Lenders want you to keep your utilization rate at or below 30 percent,” certified financial educator Maggie Germano (@MaggieGermano) told us. “This means that you should keep your balances below 30 percent of your actual credit limit.”

“Say you only have one credit card with a limit of $1,000, but every month you end up spending at least $750. That means that your credit card utilization is typically at 75 percent. One way to improve this is to make sure you pay off your balances in full each month.”

Paying down your balances is always a good idea because it also keeps you from accruing interest on the purchases you’ve made. The less you have to spend in interest, the more money you’ll have free to put towards things like emergency funds, 401k’s, or sweet dirt bikes.

“If that’s harder for you, consider asking for a credit limit increase,” says Germano. “This will only help you if you don’t increase your spending, though! Keep your spending down, even if your limit is higher.”

Let’s use Maggie’s previous example: If you spend $750 against a $1,000 limit, you’re utilizing 75 percent of your available credit. But if you get your limit raised to $2,000, then that $750 is only utilizing 37.5 percent of your available credit. You’ve improved your credit utilization without changing your spending habits at all!

Like we said, it gets kind of tricky

Seven percent and zero percent

If you are committed to paying down your credit card and loan balances, you will see improvements in your credit score. (This is assuming that you don’t start paying all your bills late or hurting your score in some other way.) And once you get your open balances to a 30 percent utilization rate, that should help your score even more.

But if utilizing 30 percent of your available credit is good, is there a more specific number that’s ideal? According to nationally recognized credit expert Jeanne Kelly (@CreditScoop) When you review people who have 800 scores, they use only seven percent of what is available to them.”

For people who have lots of credit card debt, a seven percent utilization might sound pretty impossible to achieve, but Kelly has additional advice to help you get there:

“If you get balance transfer credit cards to help lower the debt with a 0 percent interest rate, that is the time to truly focus on paying the debt down. Do not close the other account that you just transferred it from. But remember the goal is to not use the cards to build up more debt but to lower it.”

Keeping your old accounts open helps your amounts owed because it raises your total available credit. Credit utilization is judged across all your different cards, so having one old card with a completely open credit line can (and likely will) positively affect your score.

Paying down your debt

If you are able to qualify for those zero percent balance transfers, it’s best to combine them with a solid plan to pay down your debt. The more debt you can pay down while you’re interest-free, the better.

So what’s the best way to do it? There are tons of debt repayment strategies out there, but two of the best are the Debt Snowball and the Debt Avalanche.

With the Debt Snowball method, you order all your debts from the smallest balance to the largest. You put all your extra debt repayment funds towards the debt with the lowest balance, making only the minimum payments on all your other debts.

Once that first debt is paid off, you take all those funds and you put them towards the next debt, working your way up from smallest balance to largest.

Plus, every time you pay a debt off, you add its monthly minimum payment towards your future debts. This way, the money you’re putting towards each subsequent debt gets larger and larger, just like a snowball rolling down the hill.

The Debt Avalanche is structured in much the same way, only you order your debts from the highest interest rate to the lowest, then pay off the debt with the highest rate first.

To learn more about the Debt Snowball and Debt Avalanche, check out these blog posts:

What else can you do?

When it comes to your amounts owed, the simplest advice is also the best: pay down your debts as fast as you can, and then try to avoid taking out lots of debt in the future. The more you stay away from high-interest bad credit loans and no credit check loans, the better!

Depending on your situation, a debt consolidation loan might also be a good option to help you lower your interest rates and pay down debt faster.

In regards to your credit utilization, Alayna Pehrson, digital marketing strategist for BestCompany.com, (@BestCompanyUSA), has a great strategy for keeping your ratio at 30 percent or below:

“One way to improve your credit utilization is by keeping track of the amounts you charge your credit card. Going over a 30 percent credit utilization will negatively affect your credit score, therefore, if you set up a way to track how much you’re charging to the card, then it’ll be easier to monitor your utilization and keep it low. You can keep track by setting balance notifications or by creating your own credit journal list.”

Pehrson also warns that a credit line increase could result in a hard inquiry showing up on your report. So while it might help your score in the long run, it might cause a smaller rise, or even a small dip, in the short-term.

Since your amounts owed is one of the two largest factors of your credit report–fixing your credit utilization is a great way to get your credit score up.

Tune in next time, to learn about payment history!

What kinds of questions do you have about your credit score? Let us know! You can email usor you can find us on Twitter at @OppLoans.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Google+


Contributors
CarlaDearing-2_2015-1Maggie Germano (@MaggieGermano) is a Certified Financial Education Instructor and financial coach for women. Her mission is to give women the support and tools that they need to take control of their money, break the taboo of discussing debt and income, and achieve their goals and dreams. She does this through one-on-one financial coaching, monthly Money Circle gatherings, her weekly Money Monday newsletter, and speaking engagements. To learn more, or to schedule a free discovery call, visit maggiegermano.com.
Jeanne Kelly (@creditscoop) After being turned down for a mortgage 15 years ago, Jeanne Kelly realized she needed to get her credit in order. Not only was she able to fix her bad credit, but she took the skills and knowledge she gained and decided to share it with the world. Now she’s a nationally regarded credit coach and expert, with multiple books and television appearances. Follow her on Twitter and check out her site to get the credit help you need!
Alayna Pehrson is a Digital Marketing Strategist and Credit Repair Specialist at BestCompany.com (@BestCompanyUSA).

How to Money, Episode Three: Credit Scores

how to money video

Your credit score is just a simple, three-digit number, but it has a super powerful effect on your financial health. It determines what kind of loans and credit cards you can apply for, what sorts of interest rates you can get, and could even decide where you live or work.

For more on how these scores work—and what you can do to improve your own score—check out the video below.

Enjoy!

What is a credit score?

Your credit score is a three-digit number that expresses your “creditworthiness”, or how likely you are to repay a loan based on your past borrowing behavior. Lenders use them to help judge whether or not to accept a person’s loan application and what kind of interest rates to charge them.

When it comes to your credit score, you don’t actually have just one. You have several. The most commonly used kind of score is the FICO score, which was created by Fair, Isaac and Company in 1989. (The company has since changed its name to FICO.) But even with your FICO score, you don’t have just one. You have three!

That’s because your credit score is based off information from your credit reports. The reports are compiled by the three major credit bureaus: TransUnion, Experian, and Equifax. The information on the reports can vary from bureau to bureau, which means that your FICO score can change depending on which credit report is being used to create it!

What do credit scores mean?

FICO scores exist on a scale from 300 to 850. The higher the score the better your credit.

The exact criteria for what makes a “good” credit score versus a “fair” or even a “bad” credit score will vary from lender to lender (check out our other resources for more information on bad credit loans). That being said, there are six basic ranges of credit scores:

  • 720-850 = Great Credit
  • 680-719 = Good Credit
  • 630-679 = Fair Credit
  • 550-629 = Subprime Credit
  • 300-549 = Poor Credit

If you have a great credit score, you are going to get approved for pretty much any loan you apply for–especially if you have a score of 750 or above. Not only that, but you’ll also receive the very lowest interest rates and the best credit cards perks and rewards.

The lower your score goes, the more likely you are to be turned down for a loan–especially if it’s an “unsecured” loan that isn’t backed by collateral, like a car or a house. You’ll also see your interest rates go up and the kinds of credit card rewards you’re being offered start to dwindle.

If you have a score below 630, that’s when you’re going to find real difficulty getting a loan from a traditional lender. In this range, you’re much more likely to fall prey to a predatory payday loan or title loan. Predatory lenders offer no credit check loans that can seem like a great solution for folks with bad credit–when in reality they can trap those borrowers in an unending cycle of debt.  

How are credit scores created?

In order to create your credit score, FICO first has to get a look at what’s in your credit reports. These reports are basically a history of how you’ve used credit (aka how you’ve borrowed money) over the past seven years.

After that period of time, information on your score usually drops off. This means that poor decisions you’ve made—ones that have lowered your score–will eventually drop off your report and stop hurting your credit. However, some information, like bankruptcies, can stay on your report for 10 years.

Your credit report contains information like how much money you’ve borrowed, how much of your total credit limit you’ve used, what kinds of credit you’ve used (like credit cards, mortgages or personal loans), whether you pay your bills on time, how long you’ve been using credit, whether you’ve recently applied for more credit, and if you’ve ever filed for bankruptcy.

FICO takes all that information and uses it to create a snapshot of your creditworthiness. There are five general categories of information, some of which are weighted more heavily than others:

  • Payment History – 35% of your total score
  • Total Amounts Owed – 30% of your total score
  • Length of Credit History – 15% of your total score
  • Credit Mix – 10% of your total score
  • New Credit Inquiries – 10% of your total score

As you can see, your payment history and your total amounts owed are the two most important factors.

How can you fix your credit score?

If you’re trying to improve your credit score, the two best things you can do are:

  1. Pay your bills on time.
  2. Pay down your existing debt.

Taking care of them will have the biggest impact on your score.

It’s a good idea to take a look at your credit reports to see what information is on there. Sometimes, the credit bureaus make mistakes that can impact your score! Luckily, the credit bureaus are all legally obligated to provide you one free copy of your credit report per year. To get a free copy of your credit report, just visit www.annualcreditreport.com.

Is there a financial topic you’d like to see us cover in a future episode of How to Money? Let us know! You can email us by clicking here or you can find us on Twitter at @OppLoans.

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Can Bad Credit Prevent You from Opening a Bank Account?

Can Bad Credit Prevent You from Opening a Bank Account
Yes. Sort of. It’s complicated…

For lots of people, opening a checking or savings account at their local bank branch is seen as just another errand to run. You go in, you sign some papers, deposit a bit of cash, and then go on your way. Next stop: the grocery store.

But for people with bad credit, opening a bank account can be a slightly more nerve-wracking experience. Less running to the store and more going to the doctor to have that weird lump checked out. In both cases, the results they’re waiting for could have a serious affect on their lives.

So can a bad credit score prevent a person from opening a bank account? Well, not exactly. It won’t prevent them from opening a bank account in the same way that it prevents them from getting a loan or a credit card. However, the type of behavior that causes bad credit—overdue bills, missed or late payments, accruing more debt than you can handle—is also the kind of behavior that will prevent you from opening an account.

Here, let us explain…  


Remember what “bad credit” actually means

It can be all too easy for us to throw around the term “bad credit” without stopping to remember its true meaning.

If you have “bad” credit, it means that you have a low FICO score—usually, a score that’s somewhere below 630. FICO scores come in a range between 300 and 850. The lower your score, the worse your credit. (A FICO score of 680-719 is generally considered to be a “good” score, and anything above that is “great.”)

Your credit score is determined by the information contained in your credit report. These are documents compiled by the three major credit bureaus: Experian, TransUnion, and Equifax.

Credit reports keep a record of how you’ve used credit over the past seven years—although some info on your report can stick around even longer. There are five factors used in calculating your score:

Your payment history, which makes up 35 percent of your score.

The total amounts owed, which makes up 30 percent of your score.

The length of your credit history, which makes up 15 percent of your score.

Your credit mix, which makes up 10 percent of your score.

New credit inquiries, which makes up the last 10 percent.

The more poor credit decisions you make—the more bills you pay late or credit card balances you run up—the lower your credit score goes. When lenders see a low credit score, they see someone who has a history of using credit poorly, which makes them a much riskier customer to lend money and would probably offer them a bad credit loan.

How bad credit can lead to no bank account

The same is true for banks when you’re opening a checking account. If they see you as too big a risk, they aren’t going to let you open an account. As attorney Carmen Dellutri, founder of Dellutri Law Group (@DellutriLaw), puts it, “Banks don’t like to take risks, period.”

The only difference is that the bank won’t check your credit score or pull a copy of your credit report from one of the three major bureaus. Instead, they will run a bank-specific version of a credit check, using a slightly different system to evaluate your creditworthiness. Rather than look at your history of borrowing money, the bank looks at your history of, you guessed it, using bank accounts.

They will most often run the check through a company called ChexSystems. “If you have made mistakes with banks in the past, you might have been put on the ChexSystems list,” says Dellutri. “Those mistakes could include a closed bank account without paying fees, bad credit, or other banking mistakes.” Additionally, an overdrawn bank account that is never paid up will end up being sent to a collections agency—which will show up on both your normal credit report and your ChexSystems report.

If you have bad credit, there’s a good chance that you’ve overdrawn your checking account or bounced a check or two in the past. The bank running the check will see this in your report from ChexSystems and may deny you an account. So while bad credit won’t directly lead to your being denied for a checking or savings account, the kind of behavior that leads to bad credit certainly will.

What to do if you’re denied a bank account.

It can be hard for many people to imagine not having a bank account, but it’s a hard reality for millions of Americans. A 2015 survey from the Federal Deposit Insurance Corporation (FDIC) estimated that as many as nine million households in the US were entirely “unbanked.” Going without a bank account means relying on check cashing stores, which can charge pretty exorbitant fees—all so that a person can simply access the hard-earned money in their paycheck.

That report also lists an additional 24.5 million Americans as “underbanked.” Finance expert David Bakke (@yourfinances101) defines the underbanked as “people who have a bank account but rely on other methods of financing and payments, such as using money orders or payday loans.” Even if these people currently have a bank account, they likely have bad or “thin credit”—and are at a greater risk for losing the bank accounts they already have.

If you are denied a bank account, the first thing to do is to request a copy of your ChexSystems report. Here’s the good news: you can get a copy for free. Under federal law, you are entitled to request one free copy of your ChexSystems report every year. (The same holds true for your traditional credit reports.) All you need to do is visit their website.  If there are any errors on your report, you should dispute them with ChexSystems. Likewise, if you have any outstanding overdue accounts or collections notices, get them resolved pronto.

Fixing your ChexSystems report is just like fixing your credit score. The best thing you can do is start making responsible financial decisions today. “Pay your bills on time and in full,” says Bakke. “Make sure you never bounce a check again by keeping a little more in your bank account than your register reflects.”

Even with black marks on your report, Dellutri says there’s a type of bank account that you might still qualify for:

“Many banks and credit unions offer ‘second chance’ banking accounts. These accounts might come with fewer services and higher fees, but they do allow you to open a bank account – and often you can become eligible for a regular account after six months of paying banking fees regularly and establishing a solid reputation with a bank.”

While bad credit might mean getting turned down for a bank account, it’s not the end of the world. By correcting errors on your ChexSystems report, making better financial decisions, and looking for a second chance account, you can work your way back to a standard bank account.

Have you been turned down for a checking or savings account? We’d like to hear from you! You can email us by clicking here, or you can find us on Twitter at @OppLoans.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Google+


Contributors
David Bakke (@YourFinances101) is a finance expert who started his own personal finance blog, YourFinances101, in June of 2009 and published his first book on ways to save more and spend less called ““Don’t Be A Mule…” Since then he has been a regular contributor at Money Crashers.
Carmen Dellutri is the Founder and President of the Dellutri Law Group, P.A. (@DellutriLaw). He is certified by the American Board of Certification Consumer in bankruptcy law. He is also a Florida Supreme Court Certified Circuit Court and Family Law Mediator and a Qualified Arbitrator.

How Bad Credit Can Affect Your Kids’ Future

How Bad Credit Can Affect Your Kids' Future

Bad credit can feel like an anchor, bringing you down while you’re attempting to swim through the ocean of life. Even if you’re careful, there are things you might not even realize can harm your credit.

And as unfair as that is, things get even less fair, because your credit won’t just affect you. It can also affect your kids. But instead of taking this as a negative, try and take this expert advice as a warning and a motivation to rise to the challenge of improving your credit and building a better future for you and your children.


In your best interest

You probably know that a lower credit score means higher interest rates. And that can affect your children.

“Sadly, your credit doesn’t just affect you, it also affects your kids,” Michael Banks, founder of FortunateInvestor.com (@FortunateInvest), warned us. “One of the biggest ways it can affect your kids is via interest rates. With a lower credit score, every loan you take out ends up having a higher interest rate. It may not seem like a 4.65% interest rate on your mortgage is that much worse than a 4% one, but over the life of your children, that can add up to thousands of dollars- dollars that could be used to pay for college, cars, and other expenses you may encounter as your children grow up.”

Schoooool’s out for credit

You’ll notice one of the concerns Banks mentioned was college costs. Education was a recurring concern among the experts we talked to. And it makes sense: your kids’ education can have a big impact on the rest of their life. And sadly, if bad credit is going to influence it, it’s not going to influence it in a positive direction.

Accredited financial counselor and founder of Youth Smart Financial Education Services Roslyn Lash (@RosLash), painted us a picture of how things can go wrong: “If the child needs an expensive graphing calculator and you don’t have the cash, your bad credit could prevent you from buying it, contributing to your child’s classroom struggles. In addition, higher grade classes offer expensive field trips, often out of the country. Without good credit, your child may not be able to attend. If s/he does attend, it will be at a higher cost due to the higher interest rate. And lastly, when it’s time for college, your teen may need a co-signer (with good credit) for a student loan. Again, you won’t be able to help them. Bad credit hinders you from helping them get a better grip on life.”

Generalized credit anxieties

If you have bad credit, you probably find yourself worrying about it somewhat frequently. Sadly, children can catch some of that worry.

Marc Johnston-Roche, cofounder of Annuities HQ (@AnnuitiesHQ), echoed the concerns about education, in addition to bringing up financial anxiety: “Growing up in an environment of constant financial worry can cause your children to ‘inherit’ those same concerns and carry them into their adulthood.

“Bad credit could also impact their ability to receive student loans for college, and limit your ability to help them as a co-signer for their first car or home.”

Justin Lavelle (@Justin_Lavelle_), Chief Communications Officer for BeenVerified.com (@BeenVerified), covered some of the ways bad credit can generally affect children’s upbringing:

“Bad credit will limit options that you have to provide your kids opportunities. A lot of things your kids want and need cost money and unless you are flush with cash you may from time to time require credit to get through the lean times. Back to school shopping, camps, and extracurricular activities all cost money and good financial management and the availability of credit can help you provide these things for your children.

“Kids learn a lot from their parents and financial management is one of them. If you are constantly struggling with your finances or are denied credit for large purchases these events can rub off on your kids and they may be less likely to handle money of finances when they are of age to need to. Set a good example and mind your finances if for no other reason than to set a good example for your kids.

“Your children will need you at some point for financial help. They may need student loans or need you to co-sign a loan for their first car. These things are going to be dependent on your ability to obtain credit and this requires a strong credit history. Don’t waste away your financial future and your child’s hopes and dreams because you have sloppy money habits. Make sure that you don’t have more credit than you can handle. Pay your bills on time and act responsibly with money.”

Are you (in)sure?

Bad credit can even affect you and your kids in ways you might not have realized. Like your insurance coverage!

In some states, your credit based insurance score can be used to rate your insurance,” Scott W. Johnson, manager and founder of Marindependent Insurance Services LLC (@marindependent1), told us. “If your parents have a bad score and end up having to pay more for auto or home insurance, it could result in the parents opting for less insurance. This could obviously wreak havoc on a young adult that is still getting their auto insurance from their parents. Lucky for me, my home and auto clients are based in California where this practice is not allowed. There are a few more states where this practice is illegal.”

But don’t give up hope!

We know this can all sound like a huge bummer and you might think a bad credit loan is your only option when you need money. But as we said earlier, take it as an incentive to grow your credit. Get a secured credit card and pay it off in full every month. Catch up on all of your bills, asking friends or family if you need help. Before you know it, you’ll have a shiny new credit score and your children will have a shiny new future!  

Have you talked to your kids about the effect that bad credit can have on their futures? We’d love to hear about it! You can shoot us an email by clicking here or you can find us on Twitter at @OppLoans.

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Contributors
Michael Banks is a seasoned finance professional and founder of FortunateInvestor.com (@FortunateInvest). With 20 years of professional experience in the financial services industry, he uses his expertise to turn simple lessons on money into lifelong habits that form the basis for a successful financial future.
Marc Johnston-Roche, working steadily in the financial services, online marketing and lead generation industry for over eight years, Marc has had literally thousands of conversations concerning annuities with prospective buyers and advisors. Always looking forward to the time when he could develop a company network of retirement professionals based on three equally important but simple principles: respect, integrity, and professionalism. With his understanding of online marketing operations – he branched out with his partner and formed Annuities HQ (@AnnuitiesHQ).
Roslyn Lash (@RosLash) is an Accredited Financial Counselor. She specializes in financial education, adult coaching, and works virtually with adults helping them to navigate through their personal finances i.e. budgeting, debt, and credit repair. She is also the founder of Youth Smart Financial Education Services. Her advice has been featured in national publications such as USA Today, TIME, Huffington Post, NASDAQ, Los Angeles Times, and a host of other media outlets.
Justin Lavelle (@Justin_Lavelle_) is a Scams Prevention Expert and the Chief Communications Officer of BeenVerified.com (@BeenVerified). BeenVerified is a leading source of online background checks and contact information. It helps people discover, understand and use public data in their everyday lives and can provide peace of mind by offering a fast, easy and affordable way to do background checks on potential dates. BeenVerified allows individuals to find more information about people, phone numbers, email addresses and property records.
Scott W. Johnson is the owner of Marindependent Insurance Services LLC (@marindependent1), a hard to place and affluent home Insurance Agency based in Marin County California.  Scott enjoys reading, investing, and the outdoors.  He can often be seen on the trails in Northern California on his mountain bike or skis.

Know Money, Win Money! Episode One: Credit

opploans - know money, win money

We here at the OppLoans Financial Sense Blog want to make sure you have more money in your pockets by any means necessary. Normally that means giving you advice about saving money, but starting today, it also means running around on the street and asking you (or people like you) questions about money, and then giving you money if you get them right.

It’s called Know Money, Win Money, and it’s our hot new game show. The first episode is all about credit, and you can check it out right here:

The first question we asked was pretty simple: What’s the definition of a credit score?

Even though most people have some sense of why their credit score is important, they may not totally realize what it is. Simply put, it’s a measure of your “credit-worthiness,” or how good you are at taking on debt and paying it back. Your credit score determines what kind of interest rate you’ll get on your loans, or if you can qualify for a loan at all.

Our next question asked was what would be considered a “good credit score.”  If you’re wondering, it’s 680 to 719. Anything more than that and you’re golden but anything less than that… well, your interest rates aren’t going to be so hot. Or they’ll be too hot. The point is you’ll have high interest rates.

Finally, Most people are aware of the FICO company that creates the most common type of credit score. But we wondered if people knew what the company’s name actually stands for? For the most part, they did not. And we can’t blame them. Few people do! If you’re wondering, it stands for Fair, Isaac, and Company.

So we got to give away money, and teach people about credit. Hopefully next time we’ll run into you!

What financial topics would you like us to cover in future episodes of Know Money, Win Money? Let us know! You can email us by clicking here or you can find us on Twitter at @OppLoans.