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


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


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: 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


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

Know Your Credit Score: Payment History

payment history

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

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

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


What is your payment history? 

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

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

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

How important is your payment history?

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

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

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

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

What’s included in your payment history?

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

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

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

With one notable exception…

What’s not included in your payment history?

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

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

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

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

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

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

What about payments that aren’t debt-related?

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

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

According to Lesavich, the answer is mostly no:

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

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

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

How does your payment history impact in your score?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN


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.

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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).

Why Do (Some) Credit Checks Lower Your Score?

There are two different types of credit inquiries: One type will affect your credit score, while the other won’t affect it at all. Why is that?

If you are tired of relying on bad credit loans and no credit check loans to make ends meet during an emergency, then you’ve probably looked into ways that you can improve your credit score. And in the course of that research, you’ve certainly come across a note that “recent credit inquiries” make up 10 percent of your overall score.

While that might not mean much to you right now, the explanation is fairly simple: If a hard inquiry is run on your credit report, it will affect your score and likely cause it to dip. So why is that? Why would a credit check cause your score to go down? Shouldn’t actively monitoring your credit be a sign that you’re financially responsible.

Well, it’s actually a bit more complicated than that. And besides, people checking their own credit doesn’t actually affect their scores. When it comes to hard credit inquiries and how they impact your credit score, here’s what you need to know.


Here’s how credit scores (and credit reports) work.

In order to explain credit checks, we first need to explain credit reports and credit scores. If this is a subject you’re familiar with, feel free to skip to the next section, as this will all be stuff you already know.

Credit scores are based on the information contained in your credit reports, which are documents that track and compile your history as a credit user. Credit reports are created and maintained by the three major credit bureaus—Experian, TransUnion, and Equifax—and they cover the past seven to 10 years of your credit history.

Credit reports contain information on how much you’ve borrowed and on what accounts, whether you pay your bills on time, how long all your different accounts (loans, credit cards, etc.) have been open, whether you’ve ever been sent to collections or filed for bankruptcy, and more. The only kinds of loans that won’t show up on your score are no credit check cash advances like payday loans and title loans.

The most common credit score is the FICO score, which is scored on a scale from 300 to 850. The higher your score, the better your credit. It takes all the info on your reports and expresses it as a single three-digit number that summarizes your trustworthiness as a borrower. Another credit score is the VantageScore, which was created by the credit bureaus themselves.

While the specific FICO formula is kept top-secret, we do know the basic contours. There are five main factors that go into making up your score: Most important is your payment history, which makes up 35 percent of your credit score, followed closely by the amount of debt you owe at 30 percent.

The final third of your credit score is divided up between the length of your credit history (15 percent), your credit mix (10 percent), and your recent credit inquiries (10 percent). So while credit inquiries only make up 10 percent of your overall score, they’re still important enough that a single inquiry could cause your score to drop. Why is that?

There are two types of credit inquiries.

A credit inquiry (also known as a credit check or credit pull) occurs when information from your credit history, including your credit score, is requested. But not all credit inquiries are the same. In fact, there are two types of credit inquiries: hard and soft.

A hard credit inquiry almost always represents a request for new credit, as they occur when a potential lender or landlord is processing a loan or lease application. However, they can also sometimes occur when a person is being hired or considered for a promotion. Hard inquiries return a full copy of a person’s credit report.

In order to run a hard pull on your credit, a business or individual must get your permission first. If you are applying for a personal loan and the lender asks you for permission to run a credit check, then you know it’s a hard inquiry. These require your permission because they are recorded on your credit report and factor into the “recent credit inquiries” category.

Soft credit inquiries, on the other hand, return more of an overview of your credit history and do not require your permission. Importantly, soft credit inquiries also do not affect your score. When you receive a “pre-approved” credit card offer in the mail, that means a soft pull has been run on your credit. The same goes for when you check your own credit score.

That bears repeating: Checking your own credit score will not affect your credit!

Hard inquiries mean requests for new credit.

As we mentioned up above, hard credit inquiries are mostly run in situations where a person is asking for more credit, like applying for a new credit card or an online loan or a mortgage to buy a house. And when a person is asking to borrow more money, lenders need to ask themselves why.

Lenders care about one thing above all else: Getting paid back. The purpose of credit scores and credit checks is to determine whether or not a potential customer is likely or unlikely to pay back the money they are borrowing—plus interest.

When a request is made for additional credit, this can be taken as a sign that a person isn’t able to meet their current bills and debt obligations, or that they are looking to spend beyond their means. This is why even a single hard inquiry can ding your score, usually around five points. However, the effect only lasts a year or two.

Multiple credit inquiries within a short period of time, on the other hand, can lower your score even more, because it starts to look like you are desperate for more credit. And when someone is desperate to borrow money, that’s usually a sign that something has gone awry with them financially, meaning that they’ll be less likely to pay back the money they’re trying to borrow.

There is one exception: Lenders want to encourage borrowers to shop around for the best deal, especially for larger loans. But shopping around means filling out multiple applications which means multiple credit checks which means your score dropping.

In order to prevent this from happening, all credit checks for mortgage, auto, and student loans made within the same 45-day span are bundled together into a single inquiry. However, if you are shopping around for a credit card or an unsecured installment loan, you are unfortunately out of luck!

To read more about credit scores, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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How Long Does It Take to Go from Bad Credit to Good Credit?

Improving your credit is a marathon, not a sprint. But just how long it will take you to fix your score could depend on why it was so lousy in the first place.

If you’re tired of relying on bad credit loans and no credit check loans when you need to cover an unforeseen expense, then you’re going to need to improve your credit score. But how long is that going to take?

Well, it’s going to depend on how low your score is, and why your score is lousy in the first place. Here’s what you need to know.


There is no one-size-fits-all answer.

One of the reasons that this question doesn’t have one answer to rule them all, is because “bad credit” is a pretty broad definition.

FICO credit scores are scored on a scale from 300 to 850, with 850 being the best score possible and 300 being the worst. A prime credit score—which is a more technical way of saying a “good” credit score—is generally considered to be any score above 680.

Once you’re in that range, you can start getting qualified for a wide range of unsecured personal loans from traditional lending institutions like banks and online loan companies. And when you take out secured loans like auto or mortgage loans, you’ll be able to qualify for much better terms and lower interest rates.

If you have a score under 680, on the other hand, then your score is generally considered to be “subprime”—but this isn’t necessarily the same thing as bad credit. You can still qualify for some traditional personal loans if you have a score under 680. It’s when your score dips to below the 620 to 630 range that the bad credit label starts to really stick.

But even then, a score that’s in the 400 range is much, much worse than a score of 619, even if both of them still qualify as “bad credit.” The bottom line is this: The lower your score is, the more damage that has been done, and the longer it is going to take to fix.

So, why is your credit score low in the first place?

Your credit score is based on the information contained in your credit reports, which are documents that track your history as a borrower and user of credit over the past seven-to-ten years. These reports are created and maintained by the three major credit bureaus: Experian, TransUnion, and Equifax.

Credit reports contain lots of different data, some of which is collected from lenders and other businesses, some of which is available on the public record. Types of info tracked by these reports include credit accounts, bill payments, credit card balances and credit limits, bankruptcies, collection accounts, government liens, and recent hard credit inquiries.

With your FICO score, there are five main categories of credit report data that are used to create your score: payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), credit mix (10 percent), and recent credit inquiries (10 percent).

Looking at those five categories, it’s clear that payment history is the most important factor in your score, followed closely by the amount of debt that you owe. Together, they make up almost two-thirds of your overall score.

So if you have bad credit, it’s a good bet that the answer lies somewhere within these categories. Either you have a history of late or missed bill payments, you owe too much high-interest consumer debt (probably on your credit cards), or both.

The best way to learn why your score is bad is to check a copy of your credit report. Luckily, U.S. consumers are entitled to one free copy of their credit reports every 12 months from each of the three major bureaus. To request a free copy of your credit report, just visit AnnualCreditReport.com.

Always pay your bills on time. Always.

If you have a history of late payments that are tanking your score, then fixing that score is relatively simple: Pay your bills on time. Only one late payment can send your score plummeting, so you’re pretty much going to need a 100 percent on-time payment success rate in order to improve your score and maintain it.

For folks who have trouble paying their bills on time because they don’t have the funds to cover every bill every month, here are a couple of helpful tips. First, contact your creditors to see if you can have your due dates changed. Second, create a household budget to make sure that that you have enough money in your checking account to cover all your outstanding bills.

The bad news with a score that’s suffering due to a poor payment history is that it will take years for your score to fully recover. Lenders and other creditors really value customers who pay their bills on time, so it will many, many months of on-time payments before your score will be in the prime range again.

If you need to borrow money in an emergency while your score is still in the dumps, consider taking out a soft credit check installment loan that reports your payment information to the credit bureaus. Unlike short-term cash advances like payday loans and title loans, paying one of these loans off on-time could actually help your score improve.

How quickly can you pay down your debts?

If your score is low because you owe too much high-interest consumer debt, however, there is some good news: Your score can recover much faster. The quicker you pay down those debts, the faster your score will rise.

Still, that’s easier said than done! You’ll once again need to stick to a strict household budget, on top of which you’ll need a debt repayment plan. Two of the most popular strategies out there are the Debt Snowball method—which rewards you with early payoff victories—and the Debt Avalanche method—which will save you money in interest.

The more funds you are able to free up for debt repayment, the faster you’ll be able to improve your score. Considering getting a second job or side hustle to supercharge your payoff. If you get paid biweekly, plan for those three paycheck months when you’ll have some extra money coming your way.

Luckily, you should see a bump in your score once you are able to get your outstanding credit card balances below 30 percent of your total credit limits. Moving forward, do your best to maintain a credit utilization ratio under 30 percent at all times—even if that means paying your cards off more regularly than once a month.

You’ll probably have to be patient.

Unless you’re able to pay off a lot of debt in one fell swoop, improving your score is still likely going to take you years, not months. But the good financial habits that you build during that time will help you not only improve your score now, they’ll help you manage your money for years to come.

To learn more about building better financial habits, check out these related posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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What Happens When Someone Checks Your Credit?

What happens during a credit check depends on what kind of check is being run—and who’s doing the checking.

There are a lot of myths out there surrounding credit scores, especially when it comes to what happens when you or someone else check them. That’s why we’ve cooked up this little blog post to set the record straight.

We don’t know how much good it will do—the internet is pretty good at sustaining all sorts of “out there” legends—but we figured it doesn’t hurt to try. In that regard, it’s actually a lot like checking your own credit score!


Here’s how credit scores work.

We say “your credit score” as though you only have one. In fact, you have several! The most common type of credit score—and the one you’re almost certainly familiar with—is your FICO score. FICO scores are graded on a scale from 300 to 850 and the higher your score, the better, with a score of 680 serving as a rough border between “good” and “fair” credit.

Like all credit scores, FICO scores are based off the information in your credit report. Or shall we say, credit reports! You have three different credit reports, and each one is compiled by one of the three major credit bureaus: Experian, TransUnion, and Equifax.

Information can vary between your credit reports, as some businesses don’t report information to all three. As such, your credit score can also vary depending on which credit report was used to create it. In addition to FICO scores, the three credit bureaus also got together a few years ago to create their own credit score: VantageScore.

Your credit reports contain a whole bunch of information regarding how you use credit, including records of what accounts you’ve opened, how much you’ve borrowed, whether you’ve made your payments on-time, any debts that have been sent to collections, and whether you’ve ever filed for bankruptcy.

All that information is then blended together using a super secret formula to create your credit score. With FICO scores, we do know the five main categories of info and how they’re weighted. The categories are payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), credit mix (10 percent), and recent credit inquiries (10 percent).

There are two types of credit checks: hard and soft.

When you apply for a personal loan, a mortgage, an auto loan, or a student loan, your lender is going to want to look over your credit report. In order to do this, they need to run what’s called a “hard” inquiry on your credit report. This delivers them a full copy of your credit report, and it can only be run with your express permission.

Other times, a business might want to access your credit report for a more general purpose, like renting you an apartment or “pre-approving” you for a credit card offer. In cases like this, a business would run what’s called a “soft” inquiry. Unlike hard inquiries, these soft credit checks can be run without your permission—or even your knowledge.

One of the biggest differences between hard and soft credit checks is how they affect your credit score. Hard inquiries are recorded on your credit report under the “recent credit inquiries” category, and they do affect your score. Depending on your credit, a single hard inquiry can ding your score by five points, and multiple inquiries in a short amount of time can have a larger effect.

Meanwhile, soft credit checks are also recorded on your report, but they will only be visible to you. And they have zero effect on your credit score. For instance, if you have lousy credit and you’re applying for a bad credit loan, that lender might run a soft check on your credit. Even if you end up getting denied for the loan, your score will remain the same.

Soft credit checks also apply when you check your own credit score or request a copy of your credit report—the latter of which you can do for free, by the way. It’s the law: All three credit bureaus must provide you with one free copy of your report annually upon request. To order a free copy of your report, just visit AnnualCreditReport.com.

Why do hard inquiries affect your credit score?

To explain why hard credit inquiries affect your credit score, it helps to think like a lender:

You receive an application for an unsecured personal loan, and you pull up a copy of this applicant’s credit report. You notice that, recently, they’ve been applying for a number of different personal loans and credit cards. What does that say to you?

For many lenders, a large number of recent credit inquiries points to one thing: A borrower who is desperate for more credit, which means that they have probably encountered some additional costs that need covering. And when a person is struggling with added costs—including extra debt—that means that they are somewhat less likely to pay back a new loan.

However, there is one pretty obvious exception to this rule: shopping around! In order to find the best loan possible, it helps to apply for a bunch of different ones. It’s only once your loan application is approved that you’ll see the terms these lenders are actually offering you.

Shopping around for the best loan is smart financial behavior and something to be encouraged. That’s why, when it comes to mortgages, auto loans, and student loans, any inquiries made within the same 45 day period are bundled together on your credit report and are counted as only a single hard inquiry.

The benefits of soft credit check loans.

For people with bad credit, a hard inquiry on an in-person or online loan application might as well be a “No Trespassing” sign. That’s why many of them end up borrowing no credit check loans that don’t perform any hard inquiries—and come with much higher interest rates to compensate.

And while some of these loans can provide a sensible short-term financial solution, there is a big difference between checking a person’s credit score and checking their ability to repay, period. That’s why many bad credit lenders perform a soft credit check, one that won’t affect an applicant’s credit but that still gives them a better idea of what this person can handle financially.

Other no credit check lenders, meanwhile, don’t do anything to check whether or not a potential borrower can repay the loan they’re applying for. Many of these lenders offer short-term payday loans, cash advances, and title loans. And even with such quick turnarounds, many borrowers end up taking out more money than they can handle and getting stuck in a spiral of debt.

Soft credit check loans, on the other hand, often come in the form of longer-term installment loans. If you have bad credit and need a loan, you should look into the benefits of installment loans that perform a soft credit check when you apply.

Some of these lenders, like OppLoans, even report your payment information to the credit bureaus, meaning that on-time payments could help improve your score! To learn more about credit scores—and what you can do to improve your own—check out these other posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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What Is a Hard Credit Check?

Hard credit inquiries occur when you are applying for new credit and can only be run with your express permission.

No credit check loans can help people with poor credit and meager savings obtain short-term financing when their car breaks down or they find themselves hit with a surprise medical bill. Unlike standard personal loans, these are bad credit loans that don’t perform a “hard” check on an applicant’s credit.

For those who have bad credit, hard credit inquiries are something that they can come to dread, as it often means that their application is about to be denied and their score is going to get dinged even further. If you’re not familiar with the ins and outs of hard credit checks, here’s what you need to know.


Credit scores: an overview.

In order to explain credit checks, it helps to explain how credit scores work in the first place. Your credit score is a three-digit number that summarizes your creditworthiness—basically, how likely you are to meet your financial obligations, whether that be a personal loan, a credit card, a rent check, a mortgage, etc.

The most common kind of credit score is also the oldest: Your FICO score. Created by Fair, Isaac and Company in 1989, the FICO score is graded on a scale from 300 to 850. The higher your score, the better your credit, with 680 being a rough cut-off point for “good” credit.

Credit scores are created using the information from your credit reports. These are documents maintained by the three major credit bureaus–Experian, TransUnion, and Equifax–that track your history as a credit user.  Most of the info on these reports will drop off after seven years, though some information—like bankruptcies, for instance—sticks around for longer.

In addition to the public record, credit reports rely on businesses like banks, credit unions, landlords, and debt collectors to report information. Some businesses do not report to all three credit bureaus, which means that your score can vary slightly depending on which report was used to create it.

There are five main factors used to create your FICO score: payment history (35 percent), amounts owed/credit utilization (30 percent), length of credit history (15 percent), credit mix (10 percent), and recent credit inquiries (10 percent). We’ll talk a little bit more about that last category in the next section.

Here’s how hard credit checks work.

Hard credit inquiries occur when you are applying for a loan, credit card, or other forms of credit. The prospective lender will pull a copy of your credit report to review whether or not your credit application should be approved. Hard credit inquiries can only be run on your report with your express permission.

These hard inquiries get reported on your credit report under the “recent credit inquiries” category. Depending on your credit score, a single hard inquiry could ding your score by five points or not at all. These inquiries stay on your report for two years but generally aren’t included in your score longer than one year.

Why are hard inquiries reflected in your credit score? Well, hard credit inquiries represent a request for new credit. And any request for new credit could mean that you are encountering costs beyond what you could normally afford. While a single hard inquiry might just ding your score, several inquiries within a short period of time will have a greater negative effect.

There is one exception: Lenders and credit bureaus do not want to discourage borrowers from shopping around when applying for a loan. But shopping around means multiple hard inquiries. This is why all credit inquiries within 45 days for mortgage, auto, and student loans are bundled together and counted as a single hard inquiry.

If a business requests permission to run a hard inquiry on your credit, you do not need to grant them permissions. However, it is often the case that declining permission will result in your application being automatically denied. Still, if you do not want that inquiry recorded on your report, the decision is ultimately up to you.

Soft credit checks exist as well.

Have you ever checked your own credit score or received a “pre-approved” credit card offer in the mail? If you have, then that means a soft inquiry has been run on your credit. Unlike hard inquiries, these soft checks do not affect your credit score.

If hard credit checks represent instances where a lender is evaluating your request for more credit, then soft credit checks represent … pretty much any other instance where a credit pull is being requested on your report.

It’s often said that soft credit checks don’t show up on your credit report, but this isn’t exactly true. Soft pulls are recorded on your report, but they are visible only to you, not to any other businesses or entities that might run a credit check. More importantly, soft inquiries do not affect your credit score.

With a soft check, companies will often get a less clear picture of your overall creditworthiness: A solid overview, not a detailed analysis. This is why you can receive a pre-approved offer for an online loan or credit card and then still be denied when you submit an application and a hard inquiry is run.

Unlike hard credit inquiries, soft inquiries can be run with or without your permission. So if you are applying for a new apartment and a landlord runs a soft check on your application, then they don’t need to ask for permission before doing so. However, if the landlord does request permission, then you know it is a hard check.

Some loans use soft credit checks.

If you have bad credit and you’re applying for a loan, you should consider the benefits of a soft credit check loan over a no credit check loan. While neither one of these loans performs a hard inquiry, soft credit check loans do indeed run a soft inquiry when evaluating their loan applications.

Running a soft check allows the lender to determine a borrower’s ability to repay the loan they’re applying for. It’s pretty much exactly the same reason that traditional personal lenders run hard inquiries. If a soft credit check lender determines someone cannot afford a loan, they will decline to lend to them.

No credit check lenders, on the other hand, will approve a loan regardless of whether the borrower can afford it or not. This means that it’s all too easy for no credit check loans to trap borrowers under a mountain of high-interest debt that they have little hope of ever paying off on their own.

Common no credit check loans include payday loans, title loans, and cash advances. Soft credit check loans, meanwhile, most often come in the form of bad credit installment loans. Some soft credit check lenders even report payment information to the credit bureaus; this means that paying your loan off on time could help you build a better credit history.

To learn more about how you can improve your credit, check out these other posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN |Instagram

Can Renting a Car Affect Your Credit?

Has anyone ever told you that you should always use a credit card to rent a car instead of a debit card? Your credit score is one of the reasons why.

Sometimes, it can feel like just looking at someone the wrong way could end up dinging your credit score. And while that’s obviously an exaggeration, it is true that all manner of financial transactions and general behaviors can end up affecting your credit.

But is renting a car one of them? Well, if you thought this was one of those urban credit score myths, we have some news for you …


Yes, renting a car can affect your credit score.

In short: Yeah. And what’s more, the effect will probably be negative.

But here’s the good news: The damage to your score will be minimal. Only in rare circumstances would renting a car cause significant harm to your score. (More on that later in the post.)

Here’s more good news: Any effect on your score can be easily avoided using this one simple trick (that isn’t actually a trick at all). All you need to do is … use your credit card to rent the car instead of a debit card.

Why you should rent cars with credit, not debit.

“Most rental car agencies want a credit card for the method of payment,” explained Todd Christensen, education manager for Money Fit by DRS, Inc. (@MoneyFitbyDRS). “It provides additional security in case of accidents or incidental damage to the vehicle.”

“They may think that because you aren’t using a credit card you may not even have one—perhaps because your credit is too low,” added Jake McKenzie, content manager at Auto Accessories Garage (@aagarage).

“This may cause the rental company to check your credit via what FICO calls a ‘hard inquiry.’ This inquiry can, in fact, ding your credit by five points or more.”

If you have good credit, then a temporary “ding” of five points or so won’t be much to worry about. Then again, folks with good credit probably have plenty of room on their credit cards to rent the car in the first place. They don’t need to use a debit card!

For people with bad credit, things can get a bit dicier. Not only will they end up with a hard inquiry docking their already lousy score, but there’s the chance that their rental application could be denied—meaning they dinged their score for nothing!

If you have a credit card (that’s not maxed out), and you are renting a car, you should use that card to rent it instead of using a debit card. It’s really just that simple.

Except that it’s not. After all, bad credit renters are also less likely to have a credit card that they can use to rent a car, leaving with little-to-no choice in the matter. Living with a bad credit score can be tough in any number of ways. It’s not surprising, then, that renting a car is one of them!

Here’s how credit scores work.

When you rent a car with a debit card and the rental company runs a “hard check” on your credit, that check is recorded on your credit report and ends up getting factored into your score.

Credit reports are documents compiled by the three major credit bureaus—Experian, TransUnion, and Equifax—that track your history as a credit user. Most information stays on your report for seven years, but some information can stay on your report for longer.

Your credit score is based on the information in those reports. And since information can vary between your different credit reports, that means that your credit score can vary depending on which report is used to calculate it.

The most common type of credit score is also the oldest: Your FICO score. This is a three digit number ranging from 300 to 850. The higher your score the better, with 680 being the rough cut off for “good” credit.

There are other types of credit scores. The three credit bureaus, for instance, got together to create a score called VantageScore. But since this score is also based on the info contained in your credit reports, it won’t often vary widely from your FICO score.

One way that renting a car could really hurt your score.

Recent credit inquiries are one of five major factors in how your credit score is calculated. This is the category that hard credit checks fall into. However, it’s one of the least important factors, which is why renting a car with a debit card will only ding your score.

The two most important factors are your payment history and your amounts owed. Your payment history makes up 35 percent of your total score and your payment history makes up an additional 30 percent. Together, they comprise a whopping 65 percent of your credit score.

Which brings us to the other way that renting a car could affect your credit.

“As with most accounts, if any fees or charges from the car rental agency are not paid, they may end up being sold to a collection agency, which would then show up on your credit report as a negative,” explained Christensen.

If you have a good credit score, then the odds are good that you don’t have any accounts that have been sent to collections. That’s because having a collection account added to your credit report can really hurt your score.

The reason that payment history is the number one factor in determining your score is that, well, businesses really like working with people who will pay their bills on time. So if you rent a car, it’s critically important that you pay all the related fees and expenses on time. Otherwise, your score could end up taking a major hit.

And if that news comes as a surprise to you, well, we have some other posts and articles from OppLoans that you should probably read:

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Contributors

Author and Accredited Financial Counselor®, Todd R. Christensen, MIM, MA, is Education Manager at Money Fit by DRS, Inc. (@MoneyFitbyDRS), a nationwide nonprofit financial wellness and credit counseling agency. Todd develops educational programs and produces materials that teach personal financial skills and responsibilities to all ages. Having facilitated nearly two thousand workshops since 2004 on the fundamentals of effective money management, he based his first book, Everyday Money for Everyday People (2014), on the discussions, tips, stories and ideas shared by the tens of thousands of individuals and couples in attendance.
Jake McKenzie is the Content Manager at Auto Accessories Garage (@aagarage), a fast-growing, family-owned online retailer of automotive parts and accessories. He manages all written content for the website including research guides, product descriptions, and other informative articles. He also enjoys attending the annual SEMA Show, the premier automotive specialty products trade event held every November in Las Vegas. Jake often lends his opinions and expertise to a variety of online blogs, websites, and news sources.