Yes, you can! Your credit score doesn’t care about how much money you make, only how much you owe and whether you can pay it back.
If you earn a modest income, it’s easy to be envious of the super-wealthy. They travel around the world, eat at Michelin-rated restaurants, and shop for high-end luxury items. They enjoy a lifestyle that’s nothing more than a pipe dream for most of us.
But when it comes to credit, your score may be just as high—or higher—than even billionaires Bill Gates and Richard Branson. That’s probably not much consolation, but it is the truth.
It may seem like credit scores should increase with your income, but the truth is much more complicated. Read on for a deep dive into what makes up your credit score—and why just being wealthy can’t protect you from bad credit.
Why Credit Bureaus Don’t Care About Your Income.
Despite what many people think, your credit score is completely independent of your income. People with $20,000 salaries can have good credit scores, just like those with $200,000 incomes can have poor credit scores.
Credit scores only look at one thing—your credit. It doesn’t matter how large your 401k is or how much equity you have in your house. A credit score doesn’t show how much you earn, how stable your job is or how much you save. Though a credit score is a popular financial barometer, it’s not a comprehensive look at your finances. Credit bureaus don’t collect any information about your income—only about how you treat any credit you’ve taken on.
“The purpose of credit scores is to help assess the risk a person will not pay a debt as agreed—regardless of income,” said Rod Griffin, Director of Public Education for Experian (@Experian_US).
A lender looks at your credit score because it reflects how well you manage your credit obligations. A high credit score means you’re dependable and reliable, and a poor credit score means you’re negligent and irresponsible.
Some consumers mistakenly think income is part of their credit score because lenders ask for it on applications and can use it as a reason to deny a line of credit. If you have a good credit score and low income, you might not qualify for a loan because the lender thinks the payments will be too high.
If you have bad credit with good income, you can also be denied. According to Griffin, your credit history is typically more important to a potential lender than your income, because the former shows your track record of managing debt.
“Understanding the components of your credit report is essential because a strong credit history increases your access to the financial services you need,” he said.
How High-Earners End Up With Bad Credit.
Because income has no impact on credit, the wealthy are just as likely to have a low credit score as the poor. The rich can miss payments, rely too heavily on credit, and open too many new accounts, all of which will lower their credit score. If you’re a doctor making $300,000 a year and have $1 million in debt, for example, you’ll likely have a poor credit score.
On a practical level, it boils down to whether or not your income can support your lifestyle. We’ve all seen examples of lifestyle creep—where you start to scale up your expenses as your income increases—and the wealthy are no more immune to this. A busy mother of three working in a call center can attain a perfect credit score by diligently paying her bills, just like a superstar basketball player can tank his score with a few purchases he can’t afford.
(To read more about how your friend’s bad spending habits can affect your own, check out our blog post: Is Bad Credit Contagious?)
However, wealthy people may also have a bad credit score or no credit because they don’t borrow money. If you can afford to buy your house or car in cash and only use a debit card, you won’t build up a credit history.
The fact is, a poor credit history doesn’t really matter if you don’t need to borrow money. Many financially independent or early retirees have no credit or poor credit because they only use their debit cards.
What Makes Up Your Credit Score.
Though the exact algorithm is a secret, FICO uses the following factors to decide your credit score:
Payment history: Your history of paying credit bills on time makes up 35 percent of your credit score. This is the most important component and also the easiest to change. If you pay your bills on time every month, your credit score will increase. If you miss payments repeatedly, your credit score will suffer. Switching to auto-pay will guarantee you’re never late again.
Amounts owed: How much you owe relative to how much credit you have available to you constitutes 30 percent of your credit score. This is also known as your credit utilization ratio. If you owe $35,000 on your credit cards and have a credit limit of $100,000, you have a credit utilization ratio of 35 percent. Credit bureaus don’t like to see a ratio of more than 30 percent. Anything higher makes them worry that you can’t afford to pay down your balance and that you’re relying too heavily on credit.
Length of credit history:How long you’ve had credit only counts for 15 percent of your credit score. The longer you’ve had your accounts, the better. The only way to improve this section is to avoid opening new accounts and keep your oldest accounts active.
Type of credit: Lenders like to see a variety of credit accounts on your report, including student loans, auto loans, credit cards, personal loans, and mortgages. You won’t be heavily dinged for not having more than one or two different types of accounts, as this part only makes up 10 percent of your credit score.
New credit inquiries: Any time you open or apply for a new line of credit, it shows up on your credit report. New inquiries account for 10 percent of your credit report. The more inquiries you have on your report, the lower your score will be. It takes one year for inquiries to fall off, and if you’re applying for a big loan like a mortgage, it’s best not to have any recent inquiries on your credit report.
If you have a solid income and a poor credit score, there are plenty of ways you can increase your score quickly. Go through your credit report and look at any red marks. Are you bad at paying your bills on time? Or is your credit ratio too high?
Address each reason you see a negative score and work on improving those areas. You should see a higher credit score in just a few months if you follow the right steps.
To learn more about what it takes to improve your credit, check out these related posts and articles from OppLoans:
Rod Griffin is Director of Public Education forExperian (Experian_US). He leads Experian’s national consumer education programs and supports the company’s community involvement and corporate responsibility efforts. 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.
How Much More Does it Cost to Live With Bad Credit?
Having a bad credit score can make lots of things, like getting a credit card or buying a car, much more expensive.
How expensive? Well, we spoke to the experts to find out just what bad credit can end up costing you.
Bad credit means higher interest rates.
One of the most obvious and most striking ways bad credit can make your life more expensive is when it comes to interest rates for loans. The worse your credit score, the more money you’ll be paying in interest.
“For many consumers, a small missed payment or bad credit decision, can set them back financially for years,” warned Sahil Gupta, founder and CEO of Patch Homes (@patchhomes). “The reason is that credit score is key to accessing capital at lower rates. A bad credit score means the cost of accessing money goes up. Rather than getting a loan at say 5 percent, a consumer with bad credit may get a loan (if at all) at 8 percent or 10 percent.
“Take for example, a $100,000 loan for 5 years. At a 5 percent rate (good credit), the monthly payments are $1,887 for a total interest of $13,228. At an 8 percent rate (bad credit), the monthly payments are $2,028 for a total interest of $21,658. As you can see, a small difference in rate means a 7 percent higher monthly payment and a total interest paid higher by 60percent. That’s very expensive overall. This type of issue can occur across personal loans, credit cards etc. In the case of large ticket items like homes, a bad rate can mean more than a hundred thousand in additional payments. Additionally, it’s extremely difficult to get one’s credit score back-up. It’s a case of ‘stairs up, elevator down.’ Hence, poor credit can really hurt people for a long time.”
But as Gupta mentioned, this is all if you can get a loan in the first place.
You’ll have fewer options to borrow money.
Higher interest rates on bank loans are one thing. But if your credit is low enough or non-existent enough, you may not be able to get a loan from a bank at all. This will cost you even more money, especially if you become the target of predatory lenders hocking sketchy bad credit loans and no credit check loans.
They might be payday loans, with their with short payment terms and sky-high annual percentage rates (APRs). (Watch out: These loans are sometimes advertised as ‘cash advances.’) You should also avoid title loans, which have similarly high APRs and require your car as collateral.
If you want a good example of how having bad credit can make your life more expensive, just add whatever the cost of getting a new car would be to the running total. And speaking of getting a car…
Buying a car will get way more expensive.
Need a new car because a title lender seized your old car or because you just need or want one anyway? Well, bad credit is going to make that a lot more expensive.
“Bad credit is a huge disadvantage when buying a car, advised Roslyn Lash (@RosLash), an Accredited Financial Counselor and the founder of Youth Smart Financial Education Services. “You’re forced to purchase at ‘buy here, pay here’ dealerships. You’ll overpay for the car, the interest rate will be higher, and when you’re ready to trade, your new payment will include the balance of the old car. It’s a vicious cycle of bad credit and even worst debt!”
So what can you do?
Raising your credit score is a top priority.
If you want to spend less money overall, you’re going to have to get your credit back up to a good place. This means paying all of your bills on time. It means paying down your existing debt as much as you can. It might mean getting a secured credit card and only spending around 30 percent of your credit limit—plus making sure you pay your card off in full every month before it starts accumulating interest.
Sahil Gupta is the co-founder of Patch Homes (@patchhomes), a financial institution that’s focused on unlocking home-equity wealth for homeowners without any interest or monthly payments. He’s passionate about developing new and innovative ways to redefine old school products and disrupt industries.
Roslyn Lash (@RosLash) is an Accredited Financial Counselor and the founder of Youth Smart Financial Education Services. She specializes in youth financial education, adult coaching and works virtually with adults helping them navigate through their personal finances i.e. budgeting, debt, and credit repair. Her advice has been featured in national publications such as USA Today, TIME, Huffington Post, NASDAQ, Los Angeles Times, and a host of other media outlets.
Can Bad Credit Stop You From Moving to a New City?
A bad credit score can affect lots of different areas of your life. Moving to a new city is one of them.
Some people stay in the same place their whole lives. They’re born in a house, go to school in town, attend the college that’s just down the road, take over the family business, and start the cycle anew.
But that’s increasingly becoming the exception, rather than the rule. Rolling stones gather no moss and job stability isn’t what it used to be. Whether it’s because you’ve got a new job or because you just want a change of environment, moving to a new city can be a great opportunity.
But what if you’ve got bad credit? Can a lack of access to financial services keep you from moving to the new city of your dreams?
Your credit will likely hinder you move to a new city
Why build too much suspense? Yes, your credit will likely affect your ability to move to a new city. We reached out to it to nationally recognized credit expert Jeanne Kelly (@creditscoop) for a rundown:
“A move can be exciting, but how is your credit? If you have a not-so-good credit report, you could have some issues renting a new place to live. Another thing to think about is: If you are going to rent an automobile for the move, your credit can be checked and you might have an issue renting that van.”
“Always be prepared in advance,” says Kelly, “because credit reports can have errors and it can bring your credit score down lower than it should be. Besides the new rental, you need utilities. Oftentimes the utility companies are also reviewing your credit report for oil, electric, telephone, and more—so credit does become a factor with a new move. Think ahead of time.”
So there you have it. Your credit can impact your ability to move to a new city. Not only can it prevent you from renting a moving truck or a new apartment, it can also make your move a lot more expensive. In order to pay for those added costs, you could find yourself taking out a sketchy bad credit loan, like a payday loan with a 400 percent APR, to be able to make ends meet.
Obviously, that is something you’ll want to avoid. And one way to make things better on both your credit and your budget is to reduce the cost of relocating. That’s why we spoke to the experts to help you knock some dollars off that move.
Choose your new location carefully
You (probably) don’t want to live in some rickety tree house, but you also want to make sure the dwelling you choose is within your budget.
“If you’re moving to a new city and you don’t know it well, you should rent,” advised Ali Wenzke (@AliWenzke), who writes at The Art of Happy Moving. “Get to know the city and the neighborhoods before you make the biggest financial investment of your life. When you rent instead of buy, this gives you flexibility with your job and the city if things don’t work out (saving you tons of money in the long term). It also puts you in a stronger negotiating position if and when you do decide to buy.”
Wenzke also outlined some other things to look for when picking your location:
“Commuting costs add up. Whether you are spending money on gas, bus fare, or the commuter train, calculate what the daily cost will be to you. While downtown rents may be more expensive, it may be less of a price difference than you think when you take parking or daily travel costs into consideration. Before you move, type your potential new address into Walk Score. Do you have easy access to grocery stores, restaurants, and entertainment? Save money on that Uber and find fun things to do within walking distance of your new place. It’s good for your wallet, health, and happiness.”
Consider a “hybrid move” to save on professional help
So you found the perfect place. Or at least the closest to perfect you can get within your budget. Now it’s time to get yourself and all of your stuff to the new place. What’s the best way to go about that process without spending too much money?
“The best cost-cutting effort someone can make starts by choosing the right moving method,” Mike Glanz, CEO of HireAHelper (@hireahelper), told us. “People have more choices today than they may think. Instead of hiring an expensive full-service moving company, or breaking your back by doing it yourself—look at all of your moving options. For example, take the ‘hybrid moving’ concept that is gaining momentum nationally because it’s dramatically reducing the cost of moving.
“With a hybrid move, you simply hire local, hourly moving laborers to load and unload a rented truck or portable moving container. You can find hourly laborers (fully licensed and insured) anywhere in the country using online services such as HireAHelper. Then drive your own truck or manage the delivery of your own container. It’s called a ‘hybrid move’ because it’s part DIY and part full-service.
“By decoupling the transportation and labor, this approach is hundreds of dollars cheaper than hiring a full service moving company—and it mitigates the most popular scam employed by rogue moving companies: holding your goods hostage for more money (some moving companies will hold your goods in their truck until you pay an above-quoted price. It happens all the time.)”
4 ways to reduce your moving costs even further
Doug Keller, marketing manager at PaylessPower (@paylesspower), offered his own list of steps to cut down on the moving costs:
1. Purchase Recycled Boxes: “You can buy used boxes ahead of your move to store away some of your smaller items. Not only can this help you to save money in the event you’re having movers help you out of your old home, there is often the ability to sell back the boxes once you’ve used them, which will put even more cash back into your pocket.
2. Get Rid of What You Don’t Need: “As you go through your things in preparation for your move, make sure you note the things that can be discarded. While local movers charge by the hour, long distance movers charge by the weight and distance. That means, the more stuff you can get rid of, the better it is for you. In addition, consider selling the things you can do without. It will help to make the cost of moving a little less burdensome.
3. Enlist The Help Of Loved Ones: “You may have to offer an incentive, like some snacks, but getting family and friends to help with packing will make your life a lot easier. It will save you and the movers time and money and can even be a pleasant stroll down memory lane. Just be mindful that your loved ones are not professional movers and may require direction as well as notice in the event they are moving delicate or precious items.
4. Try to Avoid Moving at Peak Times: “The most popular time of the year to move is generally in the summer as most people try to be in their homes before the start of a school year. This leaves September through April as a sensible time to consider relocating to save money, as demand will be lower. Moreover, for those interested in moving into college towns, this is usually the time in which most leases start and end.”
And here’s how to continue saving money after your move
Once you’ve moved into a new place, there’s still a lot more work to be done. And the same is true with saving money. Just because the move is over, doesn’t mean the savings have to stop!
“Try and get a tax break,” advised Keller. “In the event that you are relocating for a job, there is a possibility that you will be able to deduct some of the expenses from your taxes. These expenses can include storage, transportation, and even the cost of hotel stays or other lodging options incurred in between staying in your old house and your new one. Just make sure you don’t throw away your receipts!”
And finally, Wenzke offered a tip that could be helpful even if you’re not moving: “My first stop in a new city is the library. You can borrow books, movies, and get access to online materials. Your public library may also have free resident passes to local attractions and there’s often some sort of free event happening.”
You got all that? Great. A commitment to minimizing the costs of your move should help you stay away from predatory no credit check loans or cash advances just to pay the bills.
To learn more about living your best life—even with bad credit—check out these related posts and articles from OppLoans:
Mike Glanz is the Founder & CEO of HireAHelper (@hireahelper), a moving labor marketplace that debuted in 2007. Having worked in the moving industry for a number of years, Mike launched HireAHelper to provide consumers with a new way to move called Hybrid™ Moving – a cross between the affordability of moving yourself and the ease of paying movers to do it for you.
Douglas Keller has been a financial expert for 20 years, helping people reach financial stability. He works for Payless Power (@paylesspower) where he continues to help people save money on their bills every month.
Jeanne Kelly (@creditscoop), is an author, speaker, and coach who educates people to achieve a higher credit score and understand credit reporting. #HealthyCredit is her motto. As the founder of The Kelly Group in 2000 and the author of The 90-Day Credit Challenge, Jeanne Kelly is a nationally recognized authority on credit consulting and credit score improvement.
Ali Wenzke (@AliWenzke), Moving Expert, moved 10 times in 11 years. Now she’s helping the millions of people who move each year by providing practical tips on how to make moving a happy experience at The Art of Happy Moving. After calling seven U.S. states home, Ali is now happily settled in the Chicago suburbs with her husband and three children. She doesn’t plan on moving anytime soon.
An Apple a Day Keeps the Bad Credit Away*
*None of these are apples. These are financial tips to help you improve your credit rating. Do not try and use these to make a pie. It won’t work.
Bad credit: it’s bad. If it wasn’t, they would have called it good credit. It means higher rates on your loans and credit cards, trouble renting an apartment, and less financial leeway in general.
But thankfully, there’s a very easy way to get rid of bad credit. All it takes is an apple a day!
To clarify, none of the following things we’re about to list are actually apples. They’re all just tips you could consider to improve your credit, only a few which are even fruit at all.*
*None of these are any other kind of fruit either.
Head down to the orchard and see what’s available.
There’s a reason picking your own apples is still such a classic activity. It’s great exercise and there’s a joy in the process of going to the orchard, examining each apple on a tree to find the perfect one.
You can use AnnualCreditReport.com to safely get a copy of your credit report each year. You’ll want to check for blemishes like missed payments, collections notices, and overly large credit card balances. These financial “bruises” are often of the self-inflicted variety, but there very well might be some mistaken information in there as well!
By checking your credit report, you’ll know what you’re working with when it comes to taking a bite out of your bad credit. You can prepare for the right way to take the apples life has given you and make … um … appleade!
Get rid of the bad apples.
Just like credit, not all apples are good. Some apples might have been bruised if they fell off the tree, or you may have had them sitting in the fruit drawer for too long and now they’ve grown moldy.
Those bad apples are debt, and just like you’re getting rid of the bad apples, you need to get rid of your debt. And the longer you put off getting rid of those rotten apples, the more they start to smell.
When it comes to debt, part of that bad smell is interest—the kind of interest that accumulates when you don’t pay off your credit card bill.
You really, really need to try and pay off all of your credit card bill in full each month, or that smell is just going to get worse. Same with paying off all of your other debt as quickly as you reasonably can and always paying your bills on time.
If you can’t pay off the whole balance, then do your best to make sure that you’re paying as much as you can. If you’re only making the minimum payment each month, it could take you a really long time to pay off your credit card bill. You might even end up paying more in interest than you originally spent!
Another way to avoid excessive interest, by the way, is to stay away from credit card cash advances. Standard credit card purchases come with a 30-day grace period before interest starts to accrue. But with cash advances, interest starts getting added the minute the transaction is made!
You like apples? How ’bout them apples!
It’s easy to give apple advice when you have mountains of delicious apples, like Matt Damon in Good Will Hunting. As you’ll recall, his character is absolutely loaded with apples, and he delights in the opportunity to show them off whenever he can.
(Fun fact: None of us have ever watched Good Will Hunting.)
But perhaps you aren’t apple rich, like Matt Damon. Maybe you’ve yet to get yourself a single apple. You probably wonder how you can get that first apple. Who is going to trust you enough to give you an apple if you haven’t yet proven your apple-handling ability?
If it hasn’t become obvious, we are no longer talking about apples. We’re talking about credit. If you have a bad credit score, it can be really hard to get an installment loan or a credit card. Lenders take one look at your score and think “this lady’s not going to pay us back.”
Paying off your personal loans and credit cards responsibly is one of the best ways to raise your credit score. But if no one will give you the chance to take out a safe, affordable loan or credit card in the first place, then what are you supposed to do?!
That’s where a secured credit card comes in. You can use money as collateral to get yourself a shiny, red (or whatever color) secured credit card. Then you can use that secured card to start building your credit.
Keep it up, and you’ll be rolling in apples in no time!
Manage your apples well.
You know that expression about not putting all your eggs in one basket? Well, it’s even more true about apples! Just imagine if you had put all of your apples in one basket and then a shifty apple thief grabs the basket while you’re focused on an apple-based website you’ve visited on your Android device.
Similarly, you don’t want to put too many purchases on any one credit card. Overloading one card is going to mess with your “credit utilization ratio” which measures how much of your available credit limit you’re actually using.
So even though you need to use the card to build your credit, you should try to use it modestly and never go above 30 percent of your credit limit each month.
Don’t be like Snow White.
To be clear, we mean don’t be like Snow White in one very specific way. Snow White is generally pretty pleasant, but she makes a big mistake by biting into an apple she receives from a stranger.
Biting into an apple you got from a stranger is like taking out a bad credit loan with a sketchy storefront lender who doesn’t even both to check your income: a bad idea.
Snow White should have done proper research and checked out the online reviews for that mysterious woman with the apple… And you should do research and check out customer reviews for the lenders you’re considering using—this goes for both for storefront loans and online loans—so your credit doesn’t get a dose of poison and fall into a deep sleep.
Because, unlike Snow White, there’s no handsome prince who’s going to kiss your credit better.
We hope these tips will help you harvest better credit! Keep up with these apples and you’ll be golden. Golden delicious, that is!
If you want to learn more about taking your credit score from rotten to ripe, check out these related posts and articles from OppLoans:
We’re taking a break from answering your most pressing bad credit-related questions and answering a question you definitely weren’t asking.
Everyone spends so much time talking about human credit scores:
“Will getting a mortgage affect my credit score?”
“How can I repair my bad credit?”
“Will my score down if I check my credit report?”
We hear you. All those questions can be totally exhausting. Don’t you sometimes get a little jealous of animals—that they don’t have to spend their days obsessing about their credit scores?
And it’s not like all of them have great credit either. Maybe if they spent a little less time foraging or hunting for food and a little more time thinking about debt reduction, some of these animals would be a little higher up on the food chain.
(Editor’s note: What? That’s not … how any of this works.)
In the spirit of scientific inquiry why we spent the last decade traveling the globe, studying different animals to find out what their credit scores are.
(Editor’s note: We did not do that.)
And now we’re bringing that information to you, so when you need to borrow some money or cosign a lease, you know which animals to turn to—and which animals you should hang up on when they call asking for money.
(Editor’s note: Do not ask an animal to cosign a loan. We were locked in a closet while this post was being written. In fact, we’re still in the closet. We’ve been in here for days. Help!)
Octopi have incredible credit scores. In fact, every single octopus has a credit score over 800. This is for a few reasons. First of all, octopi are very intelligent. They almost never get taken in by scams like phishing or fake charities. Many can also change color to escape from predatory lenders. Plus, each of those eight limbs can be paying off a different bill at once, so an octopus never lets debt—and the resulting interest—build up. On the rare chance they do ever get caught it in a debt trap, they can still escape through a hole as small ping pong ball.
Terrible credit scores. Just awful. All they eat is eucalyptus and that can get expensive quickly. Maybe they could slide in a nice, cheap apple every so often but apparently noooooo. And it’s not like they only eat a little of it. Koalas eat up to 500 grams of eucalyptus each day. This 500-gram jar of eucalyptus honey costs about ten euros, which is around $12.50. And remember, that’s probably mostly honey so… you know, let’s just assume pure eucalyptus must be a least five times that. All that money they spend on eucalyptus is money that can’t go towards their credit card bills or personal loan payments. They are easy pickings for sketchy storefront lenders hocking payday loans and title loans. Get it together Koalas! Eucalyptus doesn’t even taste that good!
These weirdos must have bad credit, right? They’re mammals that lay eggs! They have a duckbill and venomous spurs! Maybe they could use the venomous spurs to hold up a bank, but you can’t fix your credit with stolen money, can you? Well, all of these assumptions are just revealing your biases. Platypuses actually have amazing credit. We couldn’t tell you why. Maybe living on both land and water has given them a well-rounded perspective that allows them to spend responsibly. They have a diverse credit mix and also keep their credit utilization well below the 30 percent threshold. Or maybe they’ve been robbing banks with their venom spurs, who really knows?
Ostriches don’t literally bury their heads in the sand. That’s a myth. But they absolutely metaphorically bury their heads in the sand. They keep telling themselves that the collections agency will stop calling; that if they don’t pay their credit card bill, it’ll all just eventually work out; that they’ll never run into an emergency, which means they’ll never need an emergency fund. Well sorry, feathered friend, but it’s just not true. Emergencies happen to everyone. And without an emergency fund, these large flightless birds will be forced to turn to a predatory no credit check loan or take out a high-interest cash advance. A refusal to plan for unforeseen expenses is why ostriches have terrible credit.
One great way to stay ahead of your payments is to use online services and bill pay. You can even set up automatic payments to guarantee you’re never late. But if you’ve ever seen a pug, you know they can’t quite figure that out. We love them. They’re adorable, but let’s just say technology isn’t their strong suit. Waking themselves up by farting might be adorable, but it won’t fix their financial situation. Many animals have worse credit, but most pugs probably won’t be able to buy a house without some help.
Cats have amazing credit. And why shouldn’t they? They use their owner’s credit cards to purchase whatever they want. They don’t even consider it stealing because according to Cat Law, they own everything in the house where they live. Why do cats have to live by our human credit rating agencies even though they have their own sets of laws for everything else? We don’t know, but we do know that, under Cat Law, every cat is entitled to the fish they need to live. Maybe we could learn a little something from Cat Law. Oh, and if you own a cat and keep seeing mysterious credit card purchases that are tanking your human credit score, now you know why.
Unfortunately, you can’t hide from debt. And while chameleons are great at avoiding their creditors, they do no favors to their credit score by doing so. Why is it that octopi use their camouflage abilities to avoid predatory lenders hocking dicey bad credit loans while chameleons use it to dodge responsibility? We couldn’t tell you, but the difference is clearly reflected in their credit scores. Chameleon credit score? Not good.
Dolphins are very smart and have very good credit. This isn’t directly related, however. After all, many people have bad credit even though they are quite intelligent. The actual reason dolphins have good credit is because they live under the water and there are no cool figurine stores where they’ll be tempted to blow all their money.
If you want to read more about the fun side of finance, check out these related posts and articles from OppLoans:
Time to Fix Your Credit Score? Here are 12 Expert Answers to Get You Started
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.
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.
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.”
First of all, let’s establish what it means to have good credit: it’s any FICO credit score above 680. Bad credit is any credit score below 550. The worse your credit, the worse rates you’ll be looking at for any kind of loan, and the fewer lenders will be willing to offer you a loan at all.
You probably know that failing to pay your bill on time is a big no-no when it comes to keeping a good credit score, but there are multiple factors you might have not even considered. Here are some of those factors!
Cosigning on a loan.
You’re a responsible person and a good friend. Someone you know is having trouble qualifying for a loan and needs you to sign on with them. It’s just a signature, right?
Wrong! You’re leaving your credit future in their hands. As nationally recognized credit expert Jeanne Kelly (@creditscoop) told us:
“Many people do not understand that the loan they just cosigned is just as much their responsibility as the other person they signed for. The loan and payment history goes on both of their credit reports. If the other person pays late, it will get reported on both their reports. If the other person lets the loan go into default, the cosigner is responsible for the balance. I wish lenders stopped using the word ‘cosign,’ as for some reason people do not realize the full impact. I wish they would just call it a joint loan.”
Closing old credit cards.
You know acting irresponsibly with your credit cards will mess up your credit score. But some behavior that seems responsible may actually hurt your credit.
Per certified financial educator Maggie Germano (@MaggieGermano): “There are many things that can negatively impact your credit score, and some of them aren’t what you’d expect. For example, closing your old credit cards can hurt your credit score, because it shortens your credit history. So if you have old cards that you don’t really use anymore, keep them open. Another thing that can hurt your credit score is if something is sent to collections. Is there an old electric bill you never paid? Perhaps a medical bill that you couldn’t afford? Track those bills down! Pay them off before they go to collections and get reported on your credit report.”
A hard credit check.
Most legitimate lenders will want to perform a credit check before determining if they’ll lend to you. That’s because your credit score is seen as an indication of your likelihood to pay back the loan you take out. But not every credit check is equal! There are both soft and hard credit checks.
Trent Hamm of The Simple Dollar (@thesimpledollar) wrote an article explaining the difference. As Hamm says, hard credit checks are “ones where you’ve granted permission, they indicate that you’re actively seeking credit, they show up on your credit report for everyone to see, and they tend to have a slight negative impact on your credit score.”
“A soft credit check, on the other hand, doesn’t require your permission, doesn’t indicate anything about your interest in seeking credit, only shows up on the credit report you see, and has no impact on your credit score,” Hamm explains.
If you need a “bad credit loan” from a lender who will consider you even if you have less than ideal credit, it’s better to apply to lenders who perform a soft credit check, so that your credit score isn’t harmed further. And it’s much better to consider a lender who performs a soft credit check than no credit check at all, as that can be a red flag that they don’t expect you to be able to pay back the loan and might be trying to trap you into a cycle of debt.
Receiving a “charge-off.”
You know missing payments is bad, but you may not have realized how bad it can get. Miss too many credit card payments and the credit card company will decide you aren’t likely to ever make those payments. That’s when they hit you with a charge-off.
How does that work? According to LaToya Irby (@latoyairby) in an article she wrote for The Balance (@thebalance): “Once your account is charged-off, you will no longer be able to make purchases with the account. However, you still owe the charged-off balance.
“The creditor will report a charged-off account status to the credit bureaus. This status will remain on your credit report for seven years from the date you first went delinquent. In the future, when creditors and lenders pull your credit report, they’ll see you once were late enough to have a charge-off.”
Irby goes on to explain how this impacts your score: “Your credit score will drop after a charge-off. Payment history weighs heavily in the calculation of your credit score. An unpaid charge-off will affect your credit score more when it first happens. As time passes, your credit score can improve if no additional negative entries are placed in your credit report.”
Missing a payment is bad for your credit score, but missing multiple payments should be avoided at (nearly) all costs.
Having a high credit balance.
Last time we wrote about managing your credit score, we asked author and debt expert Gerri Detweiler (@gerridetweiler) for advice. She told us about the importance of having a good credit balance.
It’s not enough to just pay your credit card bill each month. According to Detweiler, you want to make sure you keep your balance at around 20-25% of your credit limit.
She also warned that most issuers report balances before your payment is received, so even if you’re paying your bill back in full, you’ll still want to keep that balance from getting too high or risk negatively impacting your credit score.
Not having a credit balance at all.
Alright, so if racking up too many charges on your credit card can hurt your score, wouldn’t it be better not to have a credit card at all?
Nope! That’s also bad for your credit. In a Forbes (@Forbes) article presented by Rent.com (@RentDotCom), the authors caution against having too few kinds of credit: “having just a single type of credit can decrease your score. That means even if you’re building credit by paying student loans or in some other way, a credit card can still help you make your credit history more diverse.”
If you don’t think you’ll be able to qualify for a credit card, you can consider a secured credit card. A secured credit card requires you to put down some money as collateral, but it will allow you to start building up your credit score so you can qualify for a regular credit card one day, should you choose to do so.
Paying for a rental car with a debit card.
That same Forbes article offers another quirky way you can hurt your credit score. Apparently “For some car rental companies, when customers use a debit card it causes them to order a hard inquiry on their credit.” That’s why they advise you “Pay with a credit card or check the rental application to keep this from happening.”
Maggie 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!
The ABCs of Bad Credit Loans
If you have bad credit, you’re likely worried about finding a loan. And you have good reason to be! No matter how your credit ended up in an unfortunate place, trying to find a good loan with bad credit is like making your way through a financial minefield. If only there was a list of tips, maybe even one for every letter of the alphabet, that would allow you to get the best “bad credit loan” you can.
Well, you’re in luck, because not only does such a list exist, but we’ve included it below! Go through each letter and you’ll be ready to find the loan that’s best for you.
A IS FOR APR
When you’re considering loans, it’s not enough to just look at different interest rates. A simple interest rate can hide all sorts of hidden fees. Instead, you want to compare loans in terms of their annual percentage rate, or APR. The APR is a number that takes interest, fees, and all the other costs of a loan and puts them in one number to allow proper comparison between different loans. That way you don’t have to worry about doing all sorts of complex math to compare different loans.
B IS FOR BAD CREDIT
Bad credit can be a big obstacle to getting a good loan. Jake Sabatino (@LiaisonTech), the PR outreach manager for Liaison Technologies, told us what is considered a bad credit score: “If your credit score is below 620, you have bad credit—meaning it will be difficult to get approved for most loans.” This is what sends most people in search of a “bad credit loan.”
C IS FOR COLLATERAL
Lenders use your credit score as an indication of how likely you are to pay back a loan. Some lenders will be willing to accept collateral if you don’t have a good credit score. Collateral is an object of value that you’ll have to turn over to a lender if you don’t keep up with your payments. That way the lender isn’t taking as big a risk because they know they’ll be able to get something whether the payments are made or not. If you’re considering a title loan, they’ll want your car as collateral. Can you afford to lose your car just for a short term loan?
D IS FOR DEBT TRAP
A good lender wants the borrower to pay back their loan. Once the borrower pays back the principal and interest, they aren’t stuck in debt and the lender gets their money back plus interest. It’s a win-win! But that’s not enough for some lenders. They’d rather you not be able to pay back your loan in time, forcing you to pay a rollover fee to extend your loan. This will lead you into a cycle of debt, meaning that paying your loan back becomes increasingly difficult, and ultimately, impossible.
E IS FOR EMPTY PROMISES
Many dishonest lenders will try to take advantage of you (they know your lower credit score leaves you with fewer options, so they think you’ll settle for their unfair deals). These bad lenders will do whatever they can to try and rush you into signing up for a loan that could put you in an even worse position than you are to begin with. It’s important that you ask whatever questions you need and take whatever time you’re able to find the loan that works best for you and your current situation.
F IS FOR FICO SCORE
Your FICO score is the most commonly used credit score, and it’s the one that lenders are most likely to use. Do you know what makes up that FICO credit score? The largest portion is your payment history: Do you pay back your debts on time? The next largest portion is your amount borrowed. Following that, there’s the length of your credit history: The longer your history (if it’s been good) the better. Finally, there’s your credit mix (the kinds of credit you have) and your new credit inquiries. Too many new credit inquiries in a short time will reflect negatively on your credit score.
G IS FOR GOOD CREDIT
All right, so Jake Sabatino told us what bad credit looks like, but did he tell us what a good credit score is? Of course he did: “If you have a credit score between 620 and 699 you have fair credit. Anything above 700 is good credit and you’ll start to see better interest rates for approved loans at this level. To improve your credit score, pay off your debts and your credit card balances each month.”
Your best option when looking for a loan is to build up your credit score first. But emergencies happen, and sometimes you’ll have to find the best bad credit loan you can.
We asked Dawn McCraw (@GoCleanCredit) co-owner of Go Clean Credit, to explain the difference between the two: “Hard inquiries can lower your credit score by a couple of points and might remain on your credit report for two years. Luckily, as time goes on, the damage to your credit score typically decreases or vanishes altogether—often even before the hard inquiry disappears from your report.”
And soft inquiries? “On the other hand, your score won’t be impacted by a soft inquiry. This type of inquiry can occur when you get a copy of your own credit report (You can check your own credit history as many times as you’d like, and it won’t impact your score.) This is because you are not viewed as looking for new credit. Rather, you are demonstrating responsible credit management practices. Soft inquiries will also not appear for lenders who pull your credit history.”
Be sure that if your lender is performing a credit check, it’s a “soft” credit check, which won’t affect your credit score.
I IS FOR INTEREST
You’ll have to pay interest on any loan you take out, but the better your credit, the less interest you’ll have to pay. Of course, that means the worse your credit, the more interest you’ll have to pay. This is, unfortunately, a pretty unavoidable reality when you have bad credit. Try to get the best rate you can find (remember to compare in terms of APR) and avoid compound interest, if at all possible because it grows far faster than simple interest and can quickly snowball.
J IS FOR JUST GET WHAT YOU NEED
Most bad credit lenders are likely to set you up with some pretty high-interest rates. That’s why it’s important to only take out the amount you need. Since interest is charged as a percentage of the loan, the more you take out, the greater the interest will be. So only take out what you need to handle whatever financial emergency you’re dealing with at the moment.
K IS FOR KEEP TRACK OF YOUR CREDIT REPORTS
Sometimes your bad credit might be due to errors. That’s why it’s important to keep track of your credit report and contact the credit bureaus if you find any mistakes. You already have to worry enough about managing your credit when everyone is doing their job as they should. There’s no reason you should have to suffer because of someone else’s mistake.
L IS FOR LOAN FEE
APR is important because there can be costs associated with a loan that aren’t shown in the interest rate. Aside from the rollover fee you’ll have to pay if you need to extend a loan, some loans will charge you a fee when you take out the loan, and you’ll likely have to pay fees if you’re ever late on any payments. Always read the fine print and check the APR so you can figure out exactly what you’ll have to pay.
M IS FOR MORTGAGE
You likely remember the sub-prime mortgage crisis. Lenders gave mortgages to anyone they could, without any thought about whether they’d be able to pay it back since they were planning to just turn around and sell that debt to someone else as soon as the papers were signed. It didn’t turn out well for anyone. But some mortgage providers didn’t learn their lesson and will still try and do whatever they can to get you into a mortgage you might not be able to afford. Given that a first mortgage is rarely an emergency expense, you’re probably better off getting your credit up before applying for one, rather than letting someone sweet-talk you into bad terms.
N IS FOR NO CREDIT CHECK LOAN
Have bad credit? Some lenders will give you a loan without performing a credit check. With these “no credit check loans“—ideally—, the lender will still want to verify you have the income to pay back the loan. If they don’t, they’re likely trying to trap you into the sort of loan you don’t want to get yourself into.
O IS FOR OUTCOMES
At the end of the day, you want the loan that will leave you with the best outcome. Figure out what payment terms you’ll be able to handle that will result in paying the least interest. However, it might still be worth paying a greater amount of interest in the end if the alternative is payment terms too short to manage. Better off paying more interest over time than going into serious debt!
P IS FOR PAYDAY LENDERS
This is the important one. No matter what you do. Do NOT get a payday loan. Really. Payday lenders offer incredibly high interest rates and short payment terms designed to get you into the sort of debt trap we described earlier. Avoid these at all costs!
Q IS FOR QUESTIONABLE PRACTICES
Seriously, avoid those payday lenders.
R IS FOR RENTAL ASSISTANCE
One common reason why people with bad credit might suddenly need a loan? Trouble making rent. Before you try and find the best lender you can, it might be worth checking online to see if you qualify for any government rental assistance programs. If not or if you still need help, it might be time to go lender hunting.
S IS FOR SECURED LOAN
A secured loan is one that requires collateral. Secured loans tend to have better rates compared to unsecured loans, but you risk losing your collateral if you can’t make the payments.
T IS FOR TITLE LOAN
Title loans require you to turn over the deed to your car as collateral. Go ahead and avoid these. Unless you somehow have an endless supply of cars hanging around.
U IS FOR URGENT NEED
Getting a bad credit loan is always going to be worse than getting a loan with good credit. But sometimes emergencies happen.
V IS FOR VET YOUR LENDER
Look up any potential lenders online and see what other people have said about them. You want to know who you’re dealing with before you start dealing. Once you sign up you’ll be stuck with them until your loan is paid off, so do your homework beforehand.
W IS FOR WARNING SIGNS
There are certain signs that suggest you should look elsewhere when considering a lender. We already mentioned that you’re in for a bad time if they aren’t concerned at all about your ability to pay back a loan. Randall Yates (@the_lenders_net), CEO and founder of The Lenders Network, offers another warning sign: “If you’re having trouble getting approved for a loan with other lenders, or lenders are telling you that your chances of getting approved are low, be careful when speaking to a lender that claims they will get you the loan easily. This is a sign that the lender is just trying to get a loan to stick. Your odds of approval aren’t any higher with this lender than any other lender. They’re usually just trying to throw your loan into processing and hope it sticks. This can cause consumers a lot of headaches and waste a lot of time.”
X IS FOR XTREMELY SHORT PAYMENT TERMS
On the one hand, short payment terms mean less interest will build up. But the kind of payment terms payday lenders offer are so short, you’re likely to get stuck having to pay “rollover” fees to extend your loan, trapping you in a terrible cycle of debt.
Y IS FOR YOU CAN DO IT
We know it’s tough, but we believe in you! If you do your research and compare different lenders, you’ll find the best loan that works for you right now. We also trust that you’ll be able to get your credit score back up.
Here are a couple tips from Randall Yates to do just that: “Make sure your credit card balances are low. Credit utilization ratios account for 30% of your FICO score. If you carry high balances on your credit cards, it is really hurting your credit score. Pay your balances to less than 15% of the credit limit to ensure you are maximizing your credit score.”
Z IS FOR ZERO
Zero is the number of words related to “bad credit” that start with the letter “z.”
Dawn McCraw is a co-owner of Go Clean Credit and deeply passionate about consumer credit rights. She is an expert in credit reports and scores and establishing credit history as well as the Fair Credit Reporting Act, Fair Debt Collection Practices Act, and other credit and collection laws. Dawn is a certified expert witness for credit litigation, FCRA Certified, and FICO Pro Certified. She is also currently in law school pursuing her Juris Doctorate.
Jake Sabatino is currently the PR Outreach Manager for Liaison Technologies. He is also a licensed loan officer with 5 years of mortgage experience.
Randall Yates, is the founder and CEO of The Lenders Network, an online mortgage marketplace that helps homebuyers find reputable mortgage lenders. As a part of Randall’s successful entrepreneurial career, he spends a chunk of time helping consumers understand their credit and lending his mortgage expertise to help them find the right type of loan. Randall Yates lives in Dallas, Texas with his two sons.
What It Really Means to Cosign a Loan
If you wouldn’t be comfortable taking out a given loan for yourself, then you’ll want to think twice about cosigning that loan for someone else.
There you are, sitting on your couch, minding your own business when suddenly you receive a call. It’s from your nephew! He’s heading off to college soon, but it turns out that he needs to take out a private student loan (or three) to cover his educational costs. And since he’s only 18 and has no credit history, nobody will lend to him.
He’s not asking to borrow money from you, he’s just asking if you’ll cosign a loan (or three) to help him go to school. You love your nephew so you say “sure thing!” He promises to send you the loan documents, and you return to sitting on your couch and minding your own beeswax.
Freeze frame. Was this a wise decision you just made? Granted, things might work out okay for you, but the way you went about this was all wrong. Clearly, you don’t really get what it means to cosign for a loan, or else you’d have asked many more questions. Thank goodness you’re reading this blog post. Here’s what you need to know about cosigning a loan …
But instead, they’ve got you, a helpful friend/parent/relative to give them a boost! By cosigning for a loan, you are taking your good credit score and using it to put the lender at ease. Since you have good credit, and you’re taking responsibility for the loan, the lender can rest assured that they’ll be repaid.
Congrats, you have great credit.
Creditworthiness is the most important aspect of being a cosigner. It’s by far the biggest thing that lender cares about. A great credit score (which is generally considered to be anything over 720) means that you have a long history of paying all your bills on time and not taking out more debt than you can handle. That’s music to a lender’s ears.
On the other hand, if you have poor credit, that pretty much means you can’t be someone’s cosigner. It doesn’t matter how much you vouch for your friend’s trustworthiness, that score is going to be the lender’s primary concern. And if you’re not careful when cosigning, your score could end up taking a hit as well.
You are on the hook.
The reason that lenders allow cosigners is because they have only one primary concern: Getting paid back, no matter what. And that’s the whole point of cosigning a loan—to give the lender some assurance that they’ll be paid back, even if the borrower taking out the loan isn’t able to do that.
So when you cosign a loan, you have to understand that you’re ultimately on the hook for that money. If your friend can’t pay it back, the responsibility will fall to you. Before agreeing to cosign, it’s wise to find out why your friend/relative has a poor credit score in the first place. If it’s because they have a history of bad money habits, you’ll probably want to steer clear.
It’ll affect your credit score.
When it comes to your credit history, cosigning for a loan isn’t seen as any different than taking out a loan yourself. After all, your name is on the loan agreement. So this means that the loan will be recorded on your credit reports, and thus it will affect your credit score.
Here’s the not-so-great news: Cosigning an installment loan could very well hurt your credit, and it’s far more likely to hurt it than it is to help it. One of the main factors in your credit score is the amount of debt (especially consumer debt) that you owe. It makes up 30 percent of your total score. Adding a bunch of money to that total might cause your score to drop.
It can really, really hurt your credit.
While cosigning for a personal loan (or any other kind of loan) might cause your score to drop initially, that shouldn’t be so much the cause for your concern. What should worry you is what happens if the borrower starts falling behind in their payments or, even worse, stops paying the loan back altogether.
If this happens, and their late or missed payments start being reported to the credit bureaus, you can kiss your great credit score goodbye. And that doesn’t even account for the fact that you’ll probably have to step in and start making payments for them (including any late fees they’ve accumulated). Basically, this is the worst case scenario.
The best cosigner is a cautious cosigner.
The number one thing to keep in mind if someone asks you to cosign is that this is a big financial decision. It’s not something you should enter into lightly, or without asking your friend/relative a lot of questions about their finances, their money habits, and why they need the loan in the first place.
The best case scenario for cosigning a loan is that all the payments get made and you go on your merry way. The worst case scenario is that you end up with damaged credit and on the hook for (in all likelihood) years of loan payments for money you never even got to use—not to mention the bad feelings this will cause between you and your friend or family member.
If you don’t feel comfortable cosigning a loan, then don’t. And if you do, make sure that the expectations between you and the borrower are crystal clear. That way, you can reduce the risk of ruining an important relationship over a loan (or three).
To learn more about financial best practices, check out these related posts from OppLoans:
Rising Bankruptcy Rates Are Threatening America’s Seniors
A new study has found that bankruptcy rates for Americans 65 and older have grown fivefold since 1991—and indicates that a fraying social safety net is to blame.
What happens when your debts pile up so high that you’re practically buried underneath them? Well, unless you win the lottery or have a rich relative die and leave you a pile of cash, you’ll probably have to file for bankruptcy. This can help you discharge some or all of your outstanding debts, at the cost of absolutely pile-driving your credit into the ground.
Some people file for bankruptcy because they have been irresponsible with their money, but many others file for it for reasons almost entirely out of their control. An unexpected health crisis or a sudden loss of a job—especially for older workers, who have trouble getting rehired—can leave people racking up debt after debt and scrambling to keep up with their bills.
According to a new study from the Consumer Bankruptcy Project, America’s seniors are filing for bankruptcy at record high rates. After decades of public policy decisions that shifted responsibility for retirement costs from the government and corporations onto the shoulders of private citizens, it appears that many seniors can’t keep up.
Seniors are filing for bankruptcy at record rates.
Through the Consumer Bankruptcy Project, researchers Deborah Thorne, Pamela Foohey, Robert M. Lawless, and Katherine M. Porter analyzed data from bankruptcy court records and written questionnaires in order to create an overall snapshot of bankruptcy filings in the United States over the past two and a half decades Their results unearthed some disturbing trends.
According to their report, the rate at which Americans ages 65-74 file for bankruptcy has doubled, while the rate for seniors aged 75 and above has tripled. The rates at which bankruptcy effects older populations becomes even more pronounced when compared to other age groups who also file.
From the report (emphasis ours):
One in seven bankruptcy filers is of retirement age, 65 years or over. This is nearly a five-fold increase over just two and a half decades. This is a notable demographic shift.
Within the oldest cohort, those age 75 and over, there has been a near ten-fold increase since 1991. In 1991, this group constituted only 0.3 percent of filers, as compared to 3.3 percent now.
Of course, all these numbers can simply be explained by the fact that more and more Baby Boomers are reaching retirement age, right? Wrong. The report notes that older Americans comprised 2.1 of bankruptcies in 1991, while they made up 12.2 percent as of 2016. “Even adjusting for increased numbers of older Americans,” they note, “older people are still more likely to seek protection in bankruptcy courts than in prior decades.“
Loss of income, debt collectors, and medical costs.
Seven out of 10 people who responded to the survey named a “loss of income” as either a major or the primary factor driving them into bankruptcy. Adding to these difficulties was the stressed caused by dealing with debt collectors, which 71.6 percent of responders also listed as a major or primary factor.
Said one respondent:
All things went up in price. Retirement never went up. Had a part time job that was helping to meet monthly payments. House payment kept going up. Was fired from my part time job that I had for over 10 years without any warning. Being 67 and having back problems, not many people will hire you even as part time worker
And then there are medical costs, which six out of 10 people named as a major source of financial strain contributing to bankruptcy. 40 percent of responders also noted that they suffered a loss of income driven by missing work for medical reasons.
From another response to the researchers’ questionnaire:
My bankruptcy started with back surgery I had in 2011. I had several medical tests that my insurance did not cover. This caused me to fall behind in my medical payments. The next thing I knew, the bills began piling up. I got to the point I owed more than I was making on Social Security. To get out from under these medical bills I had to file bankruptcy.
I went without medical and dental. Even with Medicare and supplemental dental insurance, the co-pays were more than we could afford. I still need dental work. It will have to wait until I can save up the money. Our income is just over the limit to get [governmental] help.
And one cannot forget the shrinking of the social safety net, with Social Security benefits that have not kept up with the cost of living or medical care and a shift from defined benefit pension plans to 401(k)s that leave plan-holders vulnerable to a far greater deal of risk.
“With the 401(k)-style of savings, payout during retirement is not defined or predictable,” states the report, adding that “employees bear all of the market risks, and returns depend on employees’ investment skills.”
What can you do to avoid bankruptcy post-retirement?
There isn’t any shame in having to file for bankruptcy. As we noted above (and the researchers stress continuously in their report), many people go bankrupt for reasons entirely beyond their control. Still, you’ll want to avoid filing for bankruptcy if you can.
The first thing that you can do is to start saving. This means both putting money into your 401(k) or another retirement plan—or starting a retirement plan if you haven’t already—as well as building up cash savings to deal with emergencies.
Start with building up a $1,000 emergency fund that you can keep in cash, on a prepaid debit card, or somewhere else you can easily access. Just make sure that you can’t access it too easily—to ward off to temptation. Keep building from there until you have six months worth of living expenses saved up and ready for use.
And lastly, paying down your debts isn’t just good for your credit score, it’s good for your finances period. Make a plan to pay down your debt—starting with a tight budget—and get to work. We suggest either the Debt Snowball or the Debt Avalanche methods, depending on your flavor of fiscal responsibility. You might even consider taking on a second job or a side gig to bring in some extra debt-slaying income!
There is no way to completely protect yourself against bankruptcy. Life is too unpredictable for that. But while society sets about fixing the macro issues laid out in the Consumer Bankruptcy Project’s report—a process we encourage you to be a part of—there are plenty of things you can do on the micro level to fix the issues with your own finances.
To learn more about taking control of your financial future, check out these related posts and articles from OppLoans:
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