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

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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).

7 Bad Money Habits That Lead to Bad Credit

Bad Money Habits

If you want a healthy credit score, you need to save more, spend less, and be patient.

Having bad credit can sometimes feel like a curse, like it’s something entirely beyond your control, something that’s utterly impossible to fix.

But even though it can feel that way. We all know that’s not the case.

While there are certainly many instances where bad luck or misfortune—incidents that are entirely beyond your control—can contribute to financial woes and send your credit score down the tubes, there are just as many times where bad money habits are the real culprit.

Even when it comes to instances of bad luck, there are good money practices that can leave you much better prepared to deal with them. Having a real, sizable emergency fund, for instance, means that you don’t have to turn to personal loans in a time of financial need.

If you want to fix your bad credit, you need to fix the bad money habits that cause it. Here are seven bad credit habits to fix today!


1. Making only the minimum payment on your credit card.

While paying your bills on time represents a big portion of your FICO credit score, another big factor in your credit score is your amounts owed, and your credit utilization plays a big part in that,” says Stephen Slaybaugh, a consumer analyst with DealNews (@DealNews).

“If you’re only making the minimum payment, your credit utilization will be higher and it will take longer to pay off your debt. Try to pay as much of your balance off as possible each month.”

This is great advice, and it bears repeating. Credit experts generally say that you should keep your credit utilization ratio at 30 percent of your total credit limit or below. Paying off your entire balance month to month means that you are maintaining a ratio of zero percent.

Carrying a balance from month to month on your card also means that you are paying interest on that balance, which is cutting in your budget and costing you more money in the long run.

Even if you can’t pay off your entire balance every month, avoid paying only the minimum.

2.    Not having an emergency fund. 

Carla Dearing is the CEO of Sum180 (@mysum180), an online financial wellness service. She says that “The single worst money mistake you can make is to fail to maintain a cash cushion for emergencies.”

“Eventually, an event like a job layoff or a medical emergency will happen to most of us. Without an emergency fund, this can trigger debt that gradually spirals out of control. Give yourself the security that comes from knowing unexpected expenses will not derail you.”

Being saddled with debt like that is going to be very bad for your credit score. Here are two steps that Dearing suggests you take to build up an emergency fund:

  • “Increase your monthly savings and deposit as much of that as possible into an easily accessible savings account until it reaches about six months’ worth of expenses.”
  • “After that, build up another 18-24 months of cushion to weather more serious emergencies.”

Unsure where you can find money to save? Dearing has a wonderful suggestion for that, too:

“If you’re not sure where or how to cut back on expenses in order to increase your savings, try this exercise: take a “No Spend Month.” Eliminate all non-essential spending for a month. The simple act of sorting your expenses into “wants” vs. “needs” for one month can be eye-opening and liberating.”

“You’ll find it easier to sacrifice luxuries like expensive dinners or a vacation when you understand what you stand to gain: security and peace of mind.”

Krista Neeley, Managing Vice President of Appreciation Financial (AppreciationFin), a retirement services company, has some great insight into why some people have difficulty with saving.

“Most savings habits are difficult for people because they perceive it as a loss, rather than a replacement. We have too many of us who seek instant gratification rather than long-term longevity benefits,” she says.

“When we think of savings as someone or something taking away from us rather than a gift we are giving to ourselves, it can make it harder to save. We have so many bills to pay or financial responsibilities to meet, sometimes we forget to get ourselves onto that list!”

3. Being Too Casual About Saving.

If you don’t have an emergency fund or retirement savings, it means that you aren’t putting any thought towards saving money. You’re just living your life, swiping your card, and hoping that things will take care of themselves.

But saving money isn’t something that just happens. It requires making a plan and then sticking to it—which is a lot harder than it sounds. It definitely won’t “take care of itself.”

“Saving is a habit, and the same way it took us multiple attempts over time to learn how to correctly, then effectively, then quickly tie our shoes, the same principles apply when seeking how to improve or build habits of financial abundance and stability,” says Neeley.

“Starting young means building a healthier relationship with money and a high expectation of the goals and life money can create should you choose to create it. Money can be one of the most empowering tools and one of the most frustrating, but it’s determined 100% by us! Saving for long-term goals while you are young is also vital when remembering interest and accounts build up over time which is only on your side before age 40. After that, long-term savings (like retirement) become increasingly expensive!”

In order to build up your savings, you need to be deliberate. You need to make a plan and then stick to it—which can be harder than it sounds.

With that in mind, here are some great savings tips from Ashley Feinstein Gerstley, money coach and founder of The Fiscal Femme (@TheFiscalFemme):

  • Automate. I love making our financial lives as easy as possible, and automating is a great way to do that. It also ensures that it will happen. When we set our savings up to transfer automatically we treat our saving like an expense. It’s not about what’s left over or what we’d like to save, it’s about paying ourselves first and making it a priority.”
  • Separate. It’s very hard to save money in a savings account that’s with the same bank as our checking account. We see it every time we check our balance and it just feels available to us to use. We end up transferring money over bit by bit to our checking and then there’s no money left in our savings. When we open up a separate savings account, the money feels less available to us. Out of sight and out of mind. We also can earn some interest. Online savings accounts get about 1 percent interest vs. our brick-and-mortar banks that give about 0.01 percent.”

Neeley has some spot-on advice as well:

“You can use a third-party app like Digit to help you save each month also. This is a great tool when saving for a trip or something fun that’s a few months out, you will surprise yourself with how much you can save in small increments.”

[Oh, and speaking of apps to help improve your financial life, why not check out our Finance App Directory? There, we review money apps for everyday needs like savings, budgeting, transferring money and more.]

“You can still go out to dinner and enjoy life, maybe just remind yourself that the $10 movie popcorn or $8 dessert when at dinner would feel better in your bank account instead of in your belly. Instead of giving into that $7 Starbucks run, take the cash and put it into savings for your future goals (maybe that’s a future Starbucks run).”

No matter how you decide to do it, you need to get serious about saving. Lacking an emergency fund is how you end up putting emergency expenses on your credit card or turning to bad credit loans and no credit check loans to get cash in a hurry.

And behavior like that is how you end up hurting your credit score in the long run.

4. Living Without a Budget.

Fixing this bad habit can fix a lot of other spending woes.

Going without a budget means that you aren’t tracking your spending, and you’re not making the hard choices on where to cut back. It means you’re probably racking up too much credit card debt and making only your minimum payments.

Living without a budget means living without awareness of where your money is going. And your credit score is going to pay the price.

“It’s important to have a budget and stick to it, says Slaybaugh. The best way to do that is to examine your spending habits. That means writing it all down.”

He says that “the simplest way to get started is by using an app like Mint or Level, which connect to your bank account(s) to see what you make and what you spend. These apps can build budgets for you based on your existing spending patterns, and keep you on track by letting you know when you’re going over budget and when bills are due.”

Gerstley notes that the rising popularity of mobile payment makes it even easier for us to ignore our finances:

“We have a tendency to avoid paying attention to where our money is going, and technology has made this that much easier. We can hop in and out of Ubers without paying and we can buy things with a click of a button or swipe of a credit card.”

“I have each and every one of my clients manually track their spending via an actual notebook or notes on their phone,” she says.

“It’s a new practice so it will take time to get the hang of it. It’s important that we are kind with ourselves as we build the new habit. And the more we don’t want to do this, the more we have to gain from doing it!”

5. Spending Outside of Your Means.

There are two main planks to the “out of control credit card spending” platform.

The first is using your cards to pay for emergency expenses because you lack a savings account. It’s using credit cards to buy consumer goods that you want but can’t you couldn’t otherwise afford!

This doesn’t mean that you can’t afford to go out to a nice dinner once in awhile, or buy that new PS4, or paint those sweet jet flames on the side of your Honda Civic.

It just means that you can’t do all of those things at the same time. And it means saving up the money to pay for them up front.

“If your spending is higher than your income, it’s time to rethink things,” says Slaybaugh. Look at your spending numbers and figure out where you could cut back.” Do you need that pricey cable package? Could you skip a few nights out every month?”

“Sometimes even relatively small changes, like carrying your lunch or not picking up coffee on the way to work every day, can add up over the month to make your budget work. Keep tweaking your budget numbers until what you’re spending is less than what you’re making.”

Another option is taking on a side gig. That way, you can earn extra money to pay for all that great stuff. (We’d be remiss if we didn’t tell that at least some of that should go towards your savings.)

To learn more about picking the perfect side hustle, check out our list of 10 great side hustles that are perfect for quick cash.

5. Ignoring Your Credit Score.

Failing to pay attention to your credit score and then wondering why it’s so low is like failing to pay attention to your dog and then wondering why it misbehaves.

And while your credit score won’t eat your couch or poop in your shoes, ignoring it can have incredibly dire consequences for your life overall.

“Figure out where you stand with your credit score,” says Gerstley.  “The first step to increasing your credit score is to figure out where you stand. How will you get where you want to be if you don’t even know where you’re starting from?”

Here are her three tips for keeping on top of your score, as well as your larger credit history:

  • Pull your credit report for free each year at AnnualCreditReport.com. Your credit report is the source of information for your credit score. In the report, you should find all of your credit accounts, including credit cards and loans as well as your limits, balances and payment history.”
  • Review this information each year to make sure it’s all correct. The quickest way to increase your score is to remedy errors from your credit report. A delinquent loan on your report that isn’t yours would be weighing your score down incorrectly. Having that removed will move you up immediately!”
  • Your credit score can range from 350-850, 850 being perfect. The most widely used credit score is the FICO score and many credit cards are now reporting that score on monthly statements. You can also pull your FICO score from MyFICO.com. For a fee, you can see a breakdown of your score along with action steps to improve it.”

By federal law, the three major credit reporting agencies—Experian, TransUnion, and Equifax—all have to make one free copy of your credit report available to you per year. In order to really keep track of your finances—not to mention your identity—we recommend that you request one report every four months.

6.  Skipping out on insurance.

Another way to deal with unforeseen expenses, especially medical costs and home or car repairs, is to have insurance cover the majority of the tab.

Even if insurance premiums mean that your budget is a little tighter than normal, it beats resorting to costly payday loans or title loans during an emergency.

When it comes to the benefits  insurance coverage, Dearing is chock full of good advice:

“When we think about our taking care of our ‘finances,’ we often think of growing our savings, retirement or investment accounts. But the truth is, your money is so much more than your savings or your investments.”

“Protect your assets and your future from liability by getting property, casualty, and perhaps umbrella insurance coverage, as well as health insurance, disability, and other specialized coverage you may need to have due to your circumstances.”

Identity theft has become increasingly common recently, so you may want to consider this as well. For a small premium ($25-$60 per year) you can purchase credit monitoring and reimbursement for the costs associated with repairing your credit history if you become a victim.”

“If you are a homeowner, be sure to update your coverage yearly. Have you had an addition built onto your home in the past year? Did you completely renovate your kitchen or install a full-feature home theater? Reviewing and adjust your coverage to reflect the current value of your home will save you a lot of money in case the unexpected happens.

7.  Not daring to hope.

No, wait. Here us out.

One of the worst things you can do when you’re financially struggling is to give up hope. That kind of mindset leads to self-destructive choices, which then make you feel even more hopeless.

If you have bad credit already, it’s going to take a while to pull your score up out of the gutter. But that doesn’t mean it’s impossible.

(Read more about this in our blog post: Want to Raise Your Credit Score by 50 Points? Here Are 4 Great Tips.)

Granted, it’s going to take some planning, some discipline, and a whole lot of patience. (A little luck doesn’t hurt, either.) But it is the farthest thing from impossible

On the other hand: giving up? That’ll guarantee your score stays bad. Heck, it will probably make it get even worse.

Dearing has some fantastic insight on this topic:

“Three out of four Americans live paycheck to paycheck, says Dearing.  In this situation, it takes a leap of faith to imagine that a better financial situation for yourself and your family might be possible. But hope is an essential ingredient to building a better financial picture. You don’t have to know how to get there; that can come later. For now, just allow for the possibility of making things work. “

“Then, tune in. Instead of avoiding the things that stress you out – credit cards debts, student loans, etc. – confront them. If you need it, get help from a good financial planner. You may be surprised to discover that things aren’t as bad as you imagine.”

“Set aside time to deal with your money on a regular basis, so you can deal thoughtfully with questions that come up and address problems before they become crises. If dealing with money has been stressful for you in the past, creating a schedule to handle money questions regularly can defuse the anxiety. Eventually, it will just be another part of your routine.”

Think about your finances the same you’d think about your health. If you don’t take care of it every day, your finances will end up getting sick. Really, really sick.

“Our financial health and strength are just as important as our mental, emotional, and physical health and strength,” says Neeley. “Taking time to better understand and empower yourself financially can be the backbone to creating the freedom, flexibility, and peace of mind your desire for your future. Having a strong, stable foundation for your finances is the easiest way to create a bright future in all other areas of your life.”

How have you conquered your bad money habits? We want to know! You can email usor you can find us on Twitter at @OppLoans.

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Contributors
CarlaDearing-2_2015-1Carla Dearing is CEO of SUM180, an online financial wellness service designed to be simple and affordable. She is also CEO and Managing Director of IMC, a marketing services agency. Previously, Carla held senior executive positions with at the University of Louisville, Community Foundations of America and Investors Capital Services. Earlier, she worked at Morgan Stanley and American National Bank & Trust Company. She holds an MBA from The University of Chicago Booth School of Business and a BA from the University of Michigan, Phi Beta Kappa.
J_BisestoAshley Feinstein Gerstley (@TheFiscalFemme) is a money coach and founder of the Fiscal Femme where she demystifies the world of personal finance and money in a fun and accessible way so her clients achieve their financial goals.
KristaNeelyKrista Neeley is the proud mother of three amazing girls, passionate about finances and helping others, and is blissfully married to her sweetheart. She’s been in financial services for 5 years and enjoys supporting people in achieving financial liberty. She enjoys traveling, photography, reading, and Disneyland trips during her free time.
stephenslaybaugh2Stephen Slaybaugh has been writing for such national and regional publications as The Village Voice, Paste, The Agit Reader, and The Big Takeover for 20 years, and has been covering consumer electronics and technology for DealNews since 2013. Stephen lives in New York, and is a native of Ohio.

Want to Raise Your Credit Score by 50 Points? Here Are 4 Great Tips

Raise Your Credit Score by 50 Points

These aren’t overnight solutions. But with a little planning and a lot of dedication, following this expert advice can help you rebuild your credit score.

Having a bad credit score is kind of like having a serious nut allergy. People wouldn’t know it to look at you, but there are a whole bunch of things that this condition is holding you back from doing.

With a nut allergy, it might be eating certain types of candy bars or a nice PB&J sandwich. With a bad credit score, it’s taking out a personal loan or a credit card that doesn’t require a cash deposit.

Either way, both these things put real limits on the kinds of decisions you can make. Luckily, while a nut allergy is something you’re pretty much stuck with, a bad credit score is something you can fix.

For someone who has a mediocre credit score—say it’s in the 670 range—raising their credit score is pretty easy. But if you have bad credit, like a score that’s 630 or below, rebuilding your credit is going to take a lot more effort.

But just because it’s hard, doesn’t mean it isn’t worth doing. Your financial well-being is worth it. If you’re looking to raise your credit score by 50 points or more, here’s what you should do.


1. Check your credit report and dispute any errors you find

This step is a lot like filling up your gas tank before going on a long car trip. It’s kind of a no-brainer, but it’s also absolutely necessary. Skip this step, and you’re not going to get very far at all.

Jeff Hunter is the Editor of Simple. Thrifty. Living., a personal finance site. He says that “More than 42 million people in this country have errors on their credit report, and 10 million of those have errors that affect their credit score.”

He recommends that you “Make sure you are regularly checking your credit report to make sure there are no mistakes and that you haven’t been a victim of identity theft.” You can read more about identity theft in our post 3 Identity Theft Warning Signs.

But who wants to spend money just to order a copy of your credit report? No one, that’s who. That’s why it’s so great that you won’t have to pay a dime!

“You are entitled to one free credit report per year from each of the three major credit reporting bureaus, so you should be able to order one every four months,” says Krystal Rogers-Nelson, a freelance writer and contributing Safety & Security Expert for ASecureLife.com (@ASecureLife).

“It won’t affect your score as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.”

To order a free copy of your credit report, just visit www.AnnualCreditReport.com.

2) Make your payments on time

There are five different categories of information that the FICO corporation uses to create your credit score. Of those five, the most important one is your payment history. It makes up a whopping 35 percent of your total score.

The most important thing to remember is to keep your credit report clean from here on out,” says Hunter. And if you’re serious about a clean report, paying your bills late is not an option.

First, this will mean automating as many bills as you can. If you can outsource the hassle to an e-bill, then go ahead and do it. Just make sure that you check in at least once a month to make sure everything is going smoothly.

Second, this will mean budgeting your money properly so that you always have the funds in your account when a bill comes due. An e-bill doesn’t do you much good if it’s zeroing out your account and racking up overdraft fees.

(Just make sure that your zeal for on-time bill payment doesn’t lead you to take out a payday loan in order to make ends meet. The potential debt trap that awaits you just won’t be worth it.)

When it comes to your credit score, improving your payment history is a bit of a long game. Most information stays on your report for seven years, so it’ll take awhile for the old bad info to drop off.

Don’t worry. though. The wait will be worth it.

3) Pay down your debt, and do it as aggressively as you can

When it comes to fixing your credit score, “Your “Payment History” and the “Amount Owed” categories make up 65 percent of your FICO Score calculation, so those are the categories you should focus on first,” says Rogers-Nelson.

Paying down your debt is critical to improving your score, but it can also feel like one of the most overwhelming obstacles to good credit. That’s why you should start small. Going too big too fast is a surefire way to fail.

Make sure you are paying the minimum balances every month,” says Rodgers Nelson, “then make adjustments in your budget to increase your payments, even if it’s only $5 or $10 per month. If you can, start making two payments per month.”

Once you get comfortable with your debt repayment, you can start getting more aggressive. Remember, the faster you pay down your debt, the faster you’ll see your score start to rise.

A truly aggressive debt repayment plan is going to require three things: a strict budget, an extra source of income, and a plan. Luckily, these are all subjects we’ve written about before:

If you need help starting a budget, try these five great budget apps or check out the OppLoans App Directory.

To start earning some extra cash, read these six expert tips for getting your side hustle going, then peruse our list of 10 awesome side hustles for quick cash.

Lastly, the two best debt repayment strategies out there are the Debt Snowball and Debt Avalanche methods. You can read about the Debt Snowball and the Debt Avalanche.

4) Use your credit cards responsibly

As you pay down your debt, it’s important that you try and use your remaining credit cards in a smart and strategic manner.

“Credit cards can help you build your credit, but the key is to show that you can manage them responsibly,” says Rodgers Nelson. “Keep your balances low on credit cards–set a limit for yourself on spending to make sure you are not going over budget–and pay your balance in full every month.”

The unique thing about credit cards is that they carry a one-month grace period before interest starts to accrue on any purchases that have been made.  Paying off your credit card balance in full every month ensures that you’ll get all the card benefits–like points and rewards–without paying any extra money.

Basically, never spend money on your card that you don’t already have in your bank account. So long as you always have the money to pay off your balance you’ll never be in danger of racking up additional debt.  

Rodgers-Nelson has some other great credit card tips:

“Make sure you’re not maxing out your credit limit every month; shoot for no more than 30% credit utilization ratio. 10% is even better. This means that if your credit limit is $2000, your spending would ideally be between $200 and $600 per month.”

The great thing about your credit utilization ratio is that, as old credit card debt is paid off, you should start to see those old cards slip to levels where your score will be positively affected.

Two last quick tips for raising your score

  • “This may seem counterintuitive,” says Hunter, “but canceling credit cards actually lowers your credit score. Part of your credit score is based on how much credit you utilize (your credit utilization score), so the more credit you have available, the higher your credit score.
  • Hunter has one last seemingly counter-intuitive tip: raising your credit limits. This is another way to try and improve your credit utilization ratio. Instead of only paying down the balances you already have, you could contact your credit card company and request that they raise your total credit limit. If you have a good history with the company, they’ll be pretty likely to agree!

Don’t let your bad credit get you down. Instead, get serious about fixing it. Raising your credit score 50 points is totally doable–even if won’t happen overnight.

Do you have a story about how you raised your credit score by 50 points or more? We’d love to hear about it! You can email us by clicking here or you can let us know on Twitter at @OppLoans.

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Contributors
KR_NelsonJeff Hunter is the Editor of Simple. Thrifty. Living. (@simplethrifty) and is an avid believer in personal finance education, especially for children and young adults. He started his career as a business journalist, where he decided to focus on personal finance. Since then, he has focused his overall personal finance education on all things credit and savings. As Editor of Simple. Thrifty. Living, he feels he can reach everyday readers who have questions about smarter ways to handle their money.
PIG
Krystal Rogers-Nelson is a freelance writer living in Salt Lake City, Utah. She is a contributing Safety & Security Expert for ASecureLife.com
(@ASecureLife), specializing in financial security, home security, and family safety. As a homeowner and mother, she is committed to empowering others with the knowledge and tools needed to live secure and comfortable lives at home and abroad.

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.

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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.