Can Debt Consolidation Hurt Your Credit?

payday-loan-good-for-credit

Whether you take out a debt consolidation loan or opt for a debt management plan, making your payments on time will be key.

When you’re trying to get out of debt, it’s important to consider many different options. Unfortunately, much like with losing weight or starting a zoo, there isn’t some miraculous step to take that will instantly get you out of debt overnight. There is no magic diet, there is no mail-order zoo kit, and there is no company or product that will just instantly erase your debt.

But there are a lot of companies that offer ways to help fix your debt over longer periods of time. Obviously, anything that sounds too good to be true probably is, but some programs are worthy of consideration. One of those programs is debt consolidation. But how does it work, and what will it do to your credit?


A credit counselor can help consolidate your debt.

When considering debt consolidation, you have to consider whether you’re looking for a debt management plan or a debt consolidation loan.

“Our finances are typically referred to as ‘personal’ finances for a reason,” explained Carlos Perez, Director of Counseling Services at DebtWave Credit Counseling, Inc (@debtwave). “Our relationship with money, debt, credit cards, saving, etc. is largely a result of how we grew up, our values, education, and our experience with money.

“Just like there are many ways to spend money and get into debt, there are a few different options for those looking to pay off their debts. One of which is debt consolidation. At DebtWave Credit Counseling, Inc., we are a nonprofit credit counseling agency working to help our clients get out of debt in three to five years or less.

“To do this, we work with creditors to lower the interest rates and monthly payments for our clients. When an individual recognizes they are over their head in debt and give us a call, we share seven other options for getting out of debt. We do this because there is a chance that based on their lifestyle, needs, etc., they may not be an ideal candidate for enrolling in a debt management plan.

“One of the options for getting out of debt that we share with our clients is debt consolidation, or obtaining an unsecured personal loan.”

You could also take out a debt consolidation loan.

On a basic level, getting a debt consolidation loan means taking out a new personal loan to pay off your current debts. This leaves you with only one loan to pay off, hopefully with lower interest.

“Just like there are pros and cons to a debt management plan, there are pros and cons for obtaining a personal loan,” advised Perez. “For example, instead of having maybe three or four different credit card payments, someone who consolidated their debt via a personal loan may now have one monthly payment. There’s also a chance they were able to negotiate a lower APR or lower monthly payment.

“However there are also some serious cons with debt consolidation. For starters, to get a loan, one needs to have good credit. If you’re in credit card debt, you still may be able to qualify for a loan, but you’ll likely have to pay a higher interest rate and a higher monthly payment because your credit score is already lower due to the debt.”

So how will debt consolidation impact your credit?

It depends! As Perez pointed out, the terms of your debt consolidation loan can vary. And what those terms are can affect how well you’ll be able to keep up with payments and therefore how it might impact your credit.

“Debt consolidation can help or hurt a person’s credit,” attorney Marie Martin told us. “I think debt consolidation is a tool that can be effective if used wisely. The credit reporting agencies don’t give out a lot of information about how they calculate credit scores, and I think consumers make better financial decisions if they focus on how an additional debt will impact their overall quality of life rather than how or if it will change their credit score.

“I have found that many families that go through debt consolidation end up reusing the credit card balances they paid down to zero in the consolidation, so they end up with the consolidation loan and the credit card debt again as well. The amount that is consolidated seems to be the biggest factor in determining whether the process helps them get back on their feet or is the shovel that helps them dig a bigger financial hole for themselves. The larger the consolidation amount, the more likely it is to upset the family finances in the long run.”

With debt consolidation, making your payments is key.

Damon Duncan (@Damon_Duncan), an attorney with Duncan Law (@DuncanLaw), gave us his take on the different ways consolidation can impact your credit:

“Typically, debt consolidation can both help or hurt your credit depending on how you use it. If you make the necessary monthly payments on time each month it will typically help your FICO credit score. However, if you are late on payments or if you are applying for several different loans then your FICO credit score could be hurt. Usually, debt consolidation can help with a lower interest rate so doing it is beneficial as long as necessary payments are being made on time each month.”

Much like any financial service, you’ll have to weigh the pros and cons to see if debt consolidation is right for you. If you play your cards right, you could end up in a better financial situation with a better credit score to show for it.

To learn more about how credit scores work, check out these related posts and articles from OppLoans:

How did debt consolidation affect your credit? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

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Contributors

Damon DuncanDamon Duncan (@Damon_Duncan) (@DuncanLaw), is an attorney on the North Carolina Bar Association and Foundation’s Board of Governors, a member of the Elon University School of Law’s Alumni Council, the Secretary of the North Carolina Bar Association’s Bankruptcy Section and adjunct professor at Elon University School of Law and Guilford Technical Community College.
Marie Martin is a consumer bankruptcy attorney who has been practicing for 20 years. She is a member of the National Association of Consumer Bankruptcy Attorneys, the American Bankruptcy Institute, and the incoming Chair of the Consumer Subcommittee of the Bankruptcy Section of the Minnesota State Bar Association.
Carlos Perez is the Director of Counseling Services at DebtWave Credit Counseling, Inc (@debtwave).

Pre-Employment Credit Checks: What are They and What’s On Them?

pre-employment-credit-checksEmployers can and do run pre-employment credit checks as a part of your application process, but they need your permission to do so.

Getting a better paying job can be a good step towards improving your credit score. With more money, you’ll have a better chance of paying off your debt and keeping up with your bills going forward. But could a pre-employment credit check when you have poor credit hurt your chances of getting a new job in the first place?

For that matter, can potential employers even see your credit score? And will they use it as a factor when considering whether or not to offer you the job? We spoke to the experts to find out the answers to this pressing job interview inquiry.


Pre-employment credit checks will pull your credit report.

So, if an employer runs a pre-employment credit check, will they be able to see your credit score?

Here’s what nationally recognized credit expert Jeanne Kelly (@creditscoop) told us: “a prospective employer might want to pull your credit report. They do not get your credit score, just a report.”

“A credit check is a record of a person’s credit-to-debt ratio and shows how someone has managed credit and bill payments in the past and is one of the pre-employment searches a company can run before deciding whether to hire someone,” explained Elizabeth McLean, an FCRA compliance attorney for GoodHire (@goodhiretweets). “It is important to note that the employer can view the person’s credit history, but not their credit score.”

Some poor decisions can be found without a credit check.

And what sort of things might an employer find when they look into your credit history? Unfortunately, they might not always be good.

“While employers may not be able to check your actual credit score, bankruptcies, and other financial headlines that are published online will surface if a potential employer digs into your search profile,” warned Jonas Sickler, marketing director for ReputationManagement.com (@repmgmt_com). “If a hiring manager, client, or business partner searches your name and discovers an unsavory financial reputation, they could make assumptions about your character and judgment.”

But while it is possible for potential employers to run a pre-employment credit check, is it actually likely?

Pre-employment credit checks require your permission.

First of all, it’s important to know that your employer can’t just check your credit report without your knowledge and consent, so you won’t be taken by total surprise, at least.

“Employers may only check your credit reports with your expressed written consent,” advised Michelle Black (@MichelleLBlack), credit expert and president at www.HOPE4USA.com. “Of course, keep in mind that if you withhold your consent you are not likely to get hired either.”

McLean expanded on when and where potential employers can take your credit into consideration: “The FCRA mandates that the employer get written consent to run a credit check first, and if they decide not to hire someone based on information they find in the credit check, the employer must notify the person in writing and give the person an opportunity to explain what was found on the report. There are additional state and local prohibitions regulating the use of credit history in hiring decisions. Roughly a dozen states restrict the use of credit history in hiring, and a handful of cities also have similar restrictions in place.”

These credit checks are more common in certain industries.

As far as how likely your credit is to impact your chance at getting hired, it depends.

“Some employers will pass over an applicant due to problems on a credit report, especially within certain industries,” Black outlined. “Additionally, if you and another applicant are equally qualified for a position a great credit report might make you stand out among the competition. Negative marks on your credit reports do unfortunately have the potential to cost you a job.”

And what are the sorts of industries Black is alluding to? Financial, mainly. As McLean said: “Companies that run a pre-employment credit check are typically hiring for positions in the financial services industry where the employee would manage money, or has access to money on a daily basis.”

So now you know there’s a chance your credit score will impact your odds of getting the job. How can you mitigate the possibility of bad credit impacting your hiring prospects?

Bad credit can be an obstacle, but it’s rarely a deal breaker.

Even if you have bad credit, that doesn’t mean you automatically have to give up on a job you want that will be taking it into consideration. Fortunately, Ketan Kapoor (@ketankapoor), CEO & co-founder Mettl (@mettl_), offered us a guide to managing the job application process when you have less than ideal credit:

“The fear of rejection is quite natural, when you are already obsessing over a poor credit score killing your hiring chances. Remember that even if a credit check is in place, that won’t get precedence over the skills you have. When organizations are looking to fill urgent positions, wherein they require someone to take over as soon as possible, the credit score agenda takes a backseat. So, simply focus on highlighting your skills or experience and be your best version during the interview

“Even if you have a bad credit score, most organizations provide a chance to explain the reasons along with a detailed plan to overcome the problem. So, your job is to convince the recruiter or the HR that you are working for a fix and are expecting an improvement quite soon. Come up with a detailed answer about your finances and record positive changes before appearing for any interview. Reiterating the first strategy, try to keep your focus limited to the skills that they are currently looking for and boost your past academic and professional achievements. All of this can help in masking your bad credit score and nailing the job offer.

Your new job can also be a fresh start.

“Although the fact goes without saying, there can’t be a more opportune time to start fixing your bad credit. Use the ‘hiring excuse’ to push yourself into establishing good financial habits for both your personal and professional good, rather than spending sleepless nights worrying about credit scores axing your hiring chances. Make a debt repayment plan, start a sizable financial fund every month and repeat the process until the results are evident in your credit history.”

You can’t fix your credit score overnight, but it shouldn’t be too hard to keep it from affecting your job prospects. And once you get that sweet new gig, you’ll have taken the first step to a better financial journey!

To learn more about how a poor credit score can affect your life in unexpected ways, check out these related posts and articles from OppLoans:

Has your bad credit score ever gotten in the way of you getting hired? 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

Michelle BlackMichelle Black (@MichelleLBlack) is a credit expert and President at www.HOPE4USA.com, a credit education program located in the Charlotte, NC area.
Keten Kapoor Ketan Kapoor (@ketankapoor), CEO & Co-Founder Mettl (@mettl_), was presented with the Economic Times 40 Under 40 Entrepreneurship Award in 2017, being named one of the top business leaders in the country. Mettl helps organizations make better people decisions with their suite of scientific tools for people evaluation.
Jeanne KellyJeanne 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.
Elizabeth McleanElizabeth McLean is an attorney and FCRA compliance analyst for GoodHire (@goodhiretweets), an employment screening company. She follows new legislation and court decisions and advises the company on processes that follow compliance best practices. A graduate of the University of North Carolina School of Law with Honors, she also holds an Advanced FCRA certification from the National Association of Professional Background Screeners.
Jonas SicklerJonas Sickler is responsible for building and executing the digital marketing strategy at ReputationManagement.com (@repmgmt_com). The broad scope of his role encompasses strategic content creation, web analytics, and developing and deploying targeted digital campaigns from concept to completion.

“How is Your Credit Score Doing?” by Your Mother

Are you taking care of your credit score? And remember, I’m your mother, so I can always tell when you’re lying.

Hello bubbele! I wanted to call just to make sure your phone was working. I figured there must have been something wrong with it, since you haven’t called me in weeks, but apparently it’s working just fine. How odd.

Anyway, I just wanted to see how your credit is doing. You know you have to pay attention to it, right? It’s not something you can only think about every other month or so, like your dear loving mother. If you’re not careful you can end up with payday loans as your only option—and that would break your father’s heart, you know.

Have you been eating well? I saw you were looking a little chubby the last time you came to visit, which was almost a year ago, you know. If you’ve been eating out too much, that could lead to increased credit card debt and that isn’t great for your credit score. Instead, you should consider meal planning. I read about it in the Oprah magazine. You take a few hours on the weekend to prepare a bunch of food, then you’re all set for the week.

You’ve also been paying your bills on time, right? Remember, your father and I are willing to help you out if you need it. We’d rather help you out now so you don’t go into debt and ruin your credit score. Then you’ll be better prepared to care for us when we’re old!  Which isn’t that long away, you know! You have an extra room at your home, right? Wouldn’t that be so much nicer than us living in a home or on the streets relying on title loans and cash advances to get by? But if you’re too busy for us to live with you someday, we’d understand. We only raised you after all, but we wouldn’t want to inconvenience you.

You should also be building an emergency fund. Do you remember that time your father and I were in the Pocono Mountains and I told him to be careful because there was no mat on the floor of the shower in the cabin and he said it was fine because we didn’t have a mat for the first 20 years we were living in the house but I pointed out that we aren’t the young spring chicks we used to be and it turned out I was right because he fell and we had to go to the emergency room with that nice lady doctor who I thought was the nurse?

I’ve never told you this but we didn’t have an emergency fund! Can you believe it? We had to take out a personal loan just to make ends meet! It was a very nice installment loan with manageable payments and a reasonable interest rate but taking out all that extra debt certainly had a negative effect on our credit score. Please learn from our mistakes!

Oh, and don’t forget to check your credit score at least once a year at www.AnnualCreditReport.com. It’s almost as important as washing behind your ears.

You are washing behind your ears, right?

Also be sure to use your credit card. But not too much! Try to never spend more than 30 percent of your balance and pay it off in full each month. You can mark the date each month on one of the calendars we got you. You know the ones right? We sent them to you for your birthday. We weren’t sure which one you would like, so we sent you a Snoopy one, a Ziggy one, and a different Ziggy one. Which one did you end up using?

Honestly, though you need to be careful with those credit cards. Spend too much on your cards and the only loans you’ll be able to qualify for will be bad credit loans or, even worse, no credit check loans! Can you imagine how mortifying that would be for us? What if you took out too many online loans and then you declared bankruptcy and then you had to move back in with your dad and me! What would we tell the neighbors?! We’d have to move. There would be no facing them!

OK, I should be going. I have bridge with the other women from the synagogue. You know Helen’s daughter Sarah has an over 800 credit score? You should meet with her. She has her own company and maybe she has something for you. Do you want me to set up a meeting?

Well, tell me if you change your mind and if you need some money. Keep keeping that credit score healthy!

If you enjoyed this post, check out these related posts and articles from OppLoans:

What other questions do you have about credit scores? 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

Your Mother doesn’t mean to bother you too much. She only wants what’s best for you. And also, are you considering having children soon? She doesn’t want to rush you, but she saw some baby clothes that looked so cute and were on sale, so she bought them and wants to know if that makes you more likely to have a kid soon.

How to Avoid the High Interest Rates on Bad Credit Loans

When you have bad credit, taking out a loan means spending some extra cash on interest. But does it have to be that way?

High interest rates are one of many things that plague the lives of people with bad credit. But are these high fees really an unchangeable fact of life? Next time you need to take out a bad credit loan, is there a way to get around the crazy-high interest rates that payday and title lenders charge?


How do interest rates work anyway?

Let’s start with the basics. Lenders charge interest, or a set percentage of the total loan amount, in order to make sure you pay back your loan on time, and to pad their own pockets with a little profit on the loan.

For example, if you take out a $1,000 dollar loan with a 5 percent annual interest rate, you’ll have to pay $50 in interest if you pay back the loan in one year, $100 if you pay off the loan in two years—etc.

Lending is a big business in the U.S., and this is ALL because of interest. Interest is how lenders make money which is (don’t forget) what lenders want to do.

Why does your credit score matter?

Many lenders (*cough* bad lenders) look at the world like a giant casino where their borrowers are the slot machines. Unlike regular slot machines which barely ever give their players a payout, whenever a borrower pays back their loan in full with interest, the lender gets a jackpot.

Sure, it’s not much, maybe just a few cents per dollar put in, but when you multiply that out over hundreds or thousands of loans, it adds up.

There are slot machines in this casino that lenders will play every day, without hesitation, and these are people with prime credit ratings. There’s little risk and lots of reward in lending to people with a history of paying their debts.

But at the other side of this hypothetical casino there are slot machines that only pay out half the time. These slot machines are people with bad credit or a history of late or delinquent payments, and most lenders avoid playing them at all, because they don’t want to risk losing the money they lend.

So how does this casino get lenders to start playing again? Hike up the payout amount. Unlike the reliable slot machines across the room, which pay out a few cents for every dollar you put in, these babies will pay out 50 cents to the dollar—but only half the time.

NOW it’s worth the risk to the gambler, because even though they won’t always win, when they do, it’s enough to make up for their losses, and then some.

A borrower’s credit rating is essentially a prediction, based on past behavior, of how likely that borrower is to pay back their loan plus interest. Lenders assume that potential borrowers with lower credit ratings are less likely to pay back their debts, so they’ll only to people with subprime credit if the payout is big enough to make up for all the other subprime borrowers who won’t pay back.

Like the casino owners who up the payout amount, lenders ensure they make a profit on people with bad credit by raising their interest rates.

How can you find a GOOD lender?

Here’s the thing. Good lenders don’t see their customers as slot machines. Good lenders are willing to gamble a bit in order to get you the best rate possible. If this means collecting a little less in interest when you pay your loan back, so be it!

A good lender knows that a credit rating isn’t the only way to judge whether someone can pay back a loan or not. So how can you find a good lender?

Nationally recognized credit expert Jeanne Kelly (@creditscoop) advises potential borrowers to do do some digging before taking the plunge.

“Make sure you do your research on the company and the account you are applying for,” she says.

You should also avoid lenders who perform hard credit checks, which can hurt your credit. Instead, you’d be better off seeking a lender who performs a soft credit check, which will not appear on your credit report.

Look for lenders who can give you rates that are significantly lower than what you’d find at a payday or title loan storefront, who give reasonable payment terms, and are transparent about how much you’ll be paying in interest from the get-go.

A surefire way to see which lenders to avoid? Check for a lot of bad online reviews. If customers are, as a whole, unhappy with the way they were treated, or feel like they were scammed, you should run far, far away and never look back.

But good online reviews are a (wait for it) good sign! Look at sites like Yelp and Google, and check out the Better Business Bureau as well.

A high accreditation on the BBB will help identify legitimate businesses, while bad reviews (or no accreditation) can signal dangerous lenders. James Sinclair, a manager at Trade Financial Global (@tradefinglobal) warns potential borrowers that they need to do their research or pay the price.

“In relation to spotting a dangerous lender, look at the clauses they add to an agreement,” Sinclair suggested. “Especially in relation to a missed payment—what will the effect be? What is the penalty? Understand the downside risk. It is important to understand the documents you are signing.”

The bottom line: you have options.

No matter how bad your credit, nor how dire your need for fast cash, you don’t need to settle for a predatory payday loan. There are other options out there for you, as well as ways you can improve your credit over time.

“If you are tired of having no credit or a low credit score, start to rebuild with a secured credit card that will report to Experian, Equifax & Trans Union,” said Kelly. “You can start to build a good history on the new account and keep balances low.”

Of course, things happen. If an emergency expense pops up before you can fix your credit, do yourself a favor and do your research before you borrow. To learn more about interest rates, payday loans and bad credit, check out these related pages and articles from OppLoans:

How do you avoid higher interest rates? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

What Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN


Contributors

Jeanne Kelly (@creditscoop) is an author, speaker, and coach who educates people to help them 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.

James Sinclair, is a manager with Trade Finance Global. Trade Finance Global (TFG) is an international company focused on structured debt. They use their relationships with banks and alternative finance houses to structure and negotiate trade lines for their clients. There are more details online at TradeFinanceGlobal.com (@tradefinglobal).

Loan Scams: 6 Warning Signs You Need to Know

loan-scams

Guaranteed approval, fee-based help for your federal student loans, and upfront payment should all set off alarm bells.

When you’re in desperate need of cash, it can be easy to look for the fastest solution. Unfortunately, doing so will open you up to a whole host of predatory lenders and outright scammers. Desperate people, especially ones with low credit scores, often make the easiest marks.

Between con artists who demand payment upfront and then disappear to predatory cash advance loans designed to trap you in a dangerous cycle of debt, there’s a lot you have to watch out for. Applying for a loan with one of these companies could dig you even deeper into debt.

But don’t worry. That’s why we’re here. Before you venture online or pick up the phone, make sure you know these warnings signs for when a fast-cash loan is actually fast-talking scam.


1. Watch out for upfront or “advance” fees.

There’s a reason that we made this warning sign number one. Even if you decided to skip the rest of this post (please don’t do that), you would be okay coming away with this one piece of knowledge.

Lenders that ask you to pay money upfront before they deliver your loan or make noise about “advance fees” are scamming you. Once you pay them that money, they are going to melt away, leaving you with an even bigger hole in your wallet than when you started.

While it is customary for many personal loans to include origination fees as a part of their lending process, those fees are often deducted from the loan amount—not demanded up front before anything’s been agreed upon. (Mortgages also come with a number of additional fees.)

Other hallmarks of an advance fee scheme include requests that you pay the costs of transferring the funds, demanding that payment is made via wire transfer, or encouraging you to make payments via a prepaid debit card or other gift cards.

But before you even reach any of those other warning signs, you should be tipped off by any demand of a fee prior to the loan being approved.

2. Don’t fall for promises of “guaranteed approval.”

This promise often goes hand in hand with an advance fee scheme. By telling their mark that they can get a loan no matter how dire their financial situation, scammers can more easily dupe them into paying them.

If a lender tells you that approval is guaranteed, then they are not being truthful with you. A real lender always has some kind of condition for issuing a loan. Even if the loan is very easy to get approved for, it’s still not “guaranteed.”

But don’t take it from us. According to the Federal Trade Commission (FTC), “Legitimate lenders never “guarantee” or say that you are likely to get a loan or a credit card before you apply, especially if you have bad credit, no credit, or a bankruptcy.”

Even if a lender that promises guaranteed approval ends up issuing you a loan, that doesn’t mean that you’re out of danger. It might be a sign that the loan is a first step to trapping you into a long-term cycle of debt. To learn more, check out our blog post: Is Guaranteed Approval A Real Thing?

3. They don’t check your credit history or income.

Real lenders don’t offer guaranteed approval for one simple reason: they care about your ability to repay what you borrow. That’s why they take steps to verify your credit history and your income before approving your loan. If you have good credit, every loan you apply for will involve some kind of credit check.

The same doesn’t hold true for bad credit loans and no credit check loans. If you have poor credit and are applying for one of these loans, you need to have your guard up. And even if a lender doesn’t make splashy promises of guaranteed approval or demand an advance fee, you can sniff out their trustworthiness by whether or not they check your credit history.

It doesn’t have to be a hard credit check. A soft check will do just fine. Plus, a soft credit check won’t show up on your credit report and dent your credit score. Sure, they return a lot less information than a hard check, but they return way more information than no credit check at all.

When a lender doesn’t verify your credit history or income, it might be a sign that they’re hoping you can’t afford your loan. In situations such as these, the lender is counting on a lot of their customers being forced to roll their loans over—paying additional fees and interest to get an extension on the due date.

When a person is continually rolling or reborrowing a loan, it makes it very hard for them to climb out of debt. Instead of paying off their principal loan amount, they’re only ever paying off the interest. Imagine spending $1,000 in interest on a $300 loan and then realizing that you’re no closer to paying it off than you were when you first began.

If a lender doesn’t check your credit history or try to verify your income—whether it’s a short-term loan or a long-term installment loan—it’s not too much to assume that a predatory cycle of debt is right around the corner.

4. Beware promises around loan “forgiveness.”

These scams often center around student loans. And while the state of student debt in this country is massively screwed up, these people are not making it any better. In fact, they’re profiting off other people’s misery and desperation.

Most of these folks aren’t lenders. Instead, they are “student debt relief” companies that promise to help ease your federal student loan burden. They promise lower monthly payments and sometimes outright loan forgiveness, and they will request a fee for their services.

But here’s the thing: Anything they say they can get you can actually be gotten for free. And don’t believe these companies that say they are aligned with the federal government. They are not.

There are a bunch of different claims that these scammers will make in order to get you to use their services. From the U.S. Department of Education:

Here are some examples of the false claims made in these communications:

  • “Act immediately to qualify for student loan forgiveness before the program is discontinued.”
  • “You are now eligible to receive benefits from a recent law that has passed regarding federal student loans, including total forgiveness in some circumstances. Federal student loan programs may change. Please call within 30 days of receiving this notice.”
  • “Your student loans may qualify for complete discharge. Enrollments are first come, first served.”
  • “Student alerts: Your student loan is flagged for forgiveness pending verification. Call now!”

Instead of working with one of these companies whose fees and deceptive practices could leave you much worse off, you should go straight to the Federal Student Aid website, where you can find information on loan forgiveness, debt consolidation, lowering your monthly payments, and getting out of default, all for free.

5. Loan scammers will lie about their identity. 

This advice is two-fold. Many scammers will lie about who they’re representing. They’ll say they’re from a bank or another reputable lender, or they will say that they are a partner of the federal government. This is often the case with companies that are trying outright trick you through an advance fee scheme.

Other times, a lender will contact you—an actual lender, albeit one who is decidedly predatory—and tell you that you are eligible for a loan with them. The only problem is that you live in a state where loans like the ones they’re offering (usually high-interest payday loans or title loans) are illegal. This lender is breaking the law and shouldn’t be trusted.

When you’re shopping for a loan, especially an online loan, you need to do your research to make sure that you’re not being scammed. Don’t trust the numbers or websites that the lender gives you. Do some snooping and independently verify that the information they’ve given you is accurate.

Sometimes, a cursory Google search is the only standing between you and some real financial hardship.

6. Beware of companies that contact you, especially over the phone.

It’s not just you. A recent article in The New York Times confirmed that robocalls and phone scams are calling your phone more now than ever before. Amongst those callers are many folks claiming to be from a legitimate lender with a fantastic loan offer for you. Don’t believe them.

Real lenders don’t call you out of the blue asking if you want a loan. While many legit lenders might have an over-the-phone part of their application process, it’s only going to be after you’ve applied for a loan or expressed a direct interest in being contacted.

If a lender contacts you out of the blue, the odds are extremely good they’re, well, up to no good. According to the FTC, “It is illegal for companies doing business by phone in the U.S. to promise you a loan or credit card and ask you to pay for it before they deliver.”

A phone call is also an extremely good place to give out false information—to lie about your name, affiliations, address, and contact info. Don’t be taken in. Any lender who contacts you and promises a loan should get only one response: the click of you hanging up.

To learn more about keeping yourself safe from scammers, check out these related posts and articles from OppLoans:

Have you ever been duped by a loan scam? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

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How to Finance a Phone with Bad Credit

finance-phone-with-bad-credit

Bad credit means everything costs more, even cell phones. So what are your options?

Remember when a cell phone was considered a big luxury, rather than a necessity? Back in the day, high-powered businessmen would pay thousands of dollars to carry around a brick that was slightly more effective than two tin cans tied to a string.

Over the years, cell phones have become much more advanced, with internet access and apps for everything. Presumably, the call quality has gotten better, although only robocallers seem to actually make phone calls anymore so who really knows?

Regardless, having a smartphone is practically essential these days, as so much of modern society is oriented around it. But how will your credit score impact your ability to get a phone? Is it possible to get a good deal on a phone contract even if you have bad credit?


Wait, what’s a credit score again?

Before we answer whether your credit score can affect your ability to get a phone, let’s go over what a credit score actually is.

Basically, your credit score is a three-digit number that’s compiled from the credit reports created by the three major credit bureaus: Experian, TransUnion, and Equifax. The most common credit score is the FICO score, which is scored on a scale from 300 to 850.  The closer your score is to 850, the better the loans you’ll be able to get—and with better interest rates too.

If you have a credit score below about 650, then you’re considered to have poor or bad credit. In this range, you won’t be able to qualify for many traditional loans or credit cards. Instead, you’ll have to settle for bad credit loans or no credit check loans, some of which are fine, but many of which come with eye-popping fees and interest rates.

But your credit score isn’t all about loans. It can also be a necessary factor for getting a car or an insurance plan or, yes, a phone and phone plan.

How much will your credit score impact your ability to get a phone?

When you try to enter into a cell phone contract, many providers will perform a credit check.

It makes sense. The reason for a credit score, generally, is to measure how reliable an applicant has been about paying down their debts and managing their credit. If you’ve generally been paying your bills on time, odds are greater that you’ll also pay your phone bill on time.

On the other hand, if you’ve run into trouble paying your bills previously, a provider will likely think that you won’t treat their bills with any greater value and will offer you worse rates—if they’re willing to offer a contract at all.

Obviously, a low credit score doesn’t necessarily mean that a person is irresponsible, but that is often the assumption a lender or service provider will make, at least when it comes to the subject’s likelihood to pay their bills.

Hard credit checks will temporarily lower your score.

Unfortunately, there’s a good chance this credit check will be a hard credit check. That means it’ll cause temporary damage to your credit score. If you are given the option, a soft credit check is always going to be better, but depending who the provider is, it may not be able to be helped.

Improving your credit score by paying off your debts, paying all your bills on time, and using credit cards responsibly, will allow you to get better options when it comes to phone plans.

But it can take time to build up a good credit score, and you probably can’t go that long without a phone. So what are your options?

You can pay more for your phone upfront.

One option you’ll have is to pay more money upfront when purchasing a new phone. Your monthly payments might even be lower than a person with better credit who chooses to pay less upfront.

Paying more upfront when you have bad credit is actually quite common. It can help you rent an apartment and sign up for utilities. With some services, like dental work, you may be able to pay less overall if you’re willing to pay for everything up front and in cash.

Of course, this means you’ll need a larger amount of money saved up, and you’ll want to make sure that the phone you’re getting has a good warranty, as you don’t want to lose that upfront investment if the phone gets damaged.

This won’t always be possible, however. If your credit is low enough, you may not be able to qualify for any financing plan at all. At least not with certain providers.

Many companies will give you the option to prepay for your phone use, but this tends to be more expensive over time than a traditional phone financing plan.

Unfortunately, it’s a recurring reality that the worse your credit, the more you’ll have to pay in the long run. If you do consider a prepayment plan, be sure to shop around at many different providers to see which ones specialize in these kinds of offers.

Shop around for phones and a cosigner.

Obviously, it’s always a good idea to look at different providers to find the one whose plan is the most affordable for you, but the big providers may be less likely to offer good deals to people with worse credit.

Some carriers, like T-Mobile, have started offering plans that don’t require a credit check. As tends to be the case, you may not get the same rates you’d get with good credit, but it’s worth looking into.

You can also consider reaching out to friends or family. If you know someone who trusts you and has good credit, see if they are willing to be a cosigner on the account. You can also look into joining a relative’s family plan and just pay them back each month as necessary.

Fixing your financial situation can feel like a Catch-22: You need a better job to get more money but you need a phone to get that job and you need more money to get a phone. But hopefully, this advice can help you on your journey to better credit and a better phone plan!

If you want to learn more about living with bad credit, check out these related posts and articles from OppLoans:

What are your best tips for buying a phone when you have bad credit? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

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Looking for a Credit Repair Company? Here are 4 Red Flags to Avoid Getting Scammed

credit-repair-company-red-flags-scammed

Do your research, don’t pay anyone up front, and take lots of notes.

Your credit score is incredibly vital. In fact, it might be the most important three-digit number in your life! The better your credit score, the more easily you’ll be able to get loans with good terms. Unfortunately, the reverse is also true: The lower your score, the more often you’ll be stuck with predatory payday loans with APRs of 400 percent or higher!

Fixing your credit score on your own can be a challenge, so you might consider enlisting the help of a credit repair company. If the price is right, a credit repair company can be worth it. A better credit score will save you money in the long run in the form of lower interest rates, so it is possible that the service can end up paying for itself.

But you have to be very, very careful when it comes to choosing a credit repair company. Much like those sketchy payday lenders hocking dangerous no credit check loans, scammy credit repair companies know that a low credit score makes you an easy target. That’s why you need know the red flags that identify a credit repair company as a credit DESPAIR company.


First, figure out where your finances stand. 

Before you start shopping for credit repair companies, you’re going to need a good picture of where your own finances are at. After all, if you don’t know what your own financial picture looks like, how can you protect yourself from getting scammed?

“First things first,” advised Justin Lavelle (@Justin_Lavelle_), Chief Communications Officer for BeenVerified.com (@BeenVerified), “determine your income and expenditures. If your income is not consistent, use the average monthly income to calculate.

“Expenditures are all the things you are responsible for paying for with your income: food, rent, utilities, insurance, and also your debt—credit card bills, car payments, medical bills, and anything else you are expected to repay.

“Next itemize your debt. When you work with a credit repair company, they will want to know how much of your debt is consumer debt and how much isn’t. Many times, companies will help you only if you have over $X thousand dollars in consumer debt. That means someone with a $500 credit card bill and $3,000 in medical bills will have different options than someone with the opposite debts.

“Know what you have to recover from before you begin. It may be daunting, but it is the best first step toward improving your credit score.”

Now that you’ve got a picture of your finances, it’s time to roll out the red flags! Here are the things you do and do not want to see from potential credit repair companies.

1. Check BBB ratings and online reviews.

Much like finding a restaurant, you’re going to want to use online reviews when determining which credit repair company to reach out to. Odds are if they’ve been scamming people, at least some of those people have been speaking up online.

“Once you know what you are up against, look at your repair assistance options,” Lavelle told us. “Make use of the Better Business Bureau’s search feature for your community and nationally. Check for the highest ratings, and then look at their complaints and conflict resolution documentation.

“The company you choose should have the best ratings, several years of successful and unblemished business history, and excellent conflict resolution practices. It’s fair to say people are angry or frustrated when they complain, but they aren’t necessarily wrong. How the company responds is a key piece in understanding what working with them will be like.”

2. Don’t give up your rights.

Speaking of looking for a restaurant, imagine that there was a restaurant that made you sign a waiver before you eat saying you wouldn’t sue them if you got food poisoning. You’d probably choose another restaurant, right? Well, some credit repair companies will try and pull a similar trick, and it’s a big red flag to watch out for.

“If the credit repair company requires you to sign any agreement which provides that, should you have any dispute with them, you must take your dispute to arbitration, they are robbing you (and their other customers) of the right to go to court,” warned attorney and consumer rights expert Donald E. Petersen. “It’s a sign that they are violating the consumer protection laws.”

3. Watch out for form letters, pre-pay, and promises to remove truthful (but damaging) information.

But that’s far from the only red flag Petersen advised looking out for. He told us you should be wary “if the credit repair company asks you to pay them before you’ve received the results of the dispute showing that the credit bureau removed or corrected the account tradeline.”

He also suggested that if something sounds too good to be true, it probably is. He told us it’s a red flag “if the credit repair company tells a consumer that they can remove information which is truthful concerning events which occurred within the past seven years. Consumers can dispute information even if it’s truthful but the information often reappears soon after they’ve disputed it. Some credit repair companies lodge a second dispute near the end of the 30 day dispute period so that the credit bureau will suppress the account tradeline while the *second* dispute is pending and then falsely tell the consumer ‘see, I removed it’ in order to be paid.”

Finally, Peterson warned against companies that try to use form letters rather than addressing your specific situation, telling us you should steer clear “If the credit repair company uses ‘template’ letters which contain little (if any) information to explain why the account information is false or misleading. For example, one huge so-called law firm routinely disputes ‘account included in bankruptcy’ by saying ‘I never filed bankruptcy, please remove this account.’ Of course that robs the consumer of the best weapon they have (their bankruptcy discharge and the bankruptcy court’s sanctions powers) but it’s easier (and far more profitable) to tell consumers what they want to hear and ‘scale’ using non-lawyers and a template letter.”

As mentioned above, doing some online research can help you determine if the company you’re considering uses practices like these.

4. Take proper precautions.

Even if you’re reasonably certain you’ve found a legitimate company to help you fix your credit, you should still take steps to protect yourself.

“Always ask for the name of anyone you speak to and write it down along with the date, time, phone and extension each time you communicate with the agency you choose,” suggested Lavelle. “Be sure to clarify verbally and in writing any and all terms offered to you. If you begin a process and things don’t line up, don’t click send on the payment screen. Stop and report your concerns to the company and authorities if necessary.

“Sign up for free credit monitoring through another service. This serves as a check and balance to be sure the commitments are being upheld by all parties involved in your credit repair process.”

You don’t need a credit repair company to fix your score.

Before considering a credit repair company, it’s worth figuring out if you could fix your credit score on your own without having to pay anyone.

The first step to fixing your credit is paying off your outstanding debts to the best of your ability, while still covering your day to day needs. One strategy you can use to overcome those debts is called the debt snowball.

To utilize that strategy, you put aside some money each month in addition to the minimum payments you have to make on your various debts. You add that money to the minimum payment you make on your smallest debt. Then when that debt is paid off, you take all the money you were putting into that debt and start putting it into the next smallest debt. With every debt you pay off, the amount you’re putting towards each subsequent debt gets larger.

It’s like rolling up all your debts into a big snowball which you can then use to create a snowman which represents your new, better credit score. And because this snowman is metaphorical, it won’t melt when spring comes!

Payment history is the #1 factor in your credit score.  

In order to fix your credit score, you’ll also want to start paying your bills in full and on time. Your payment history makes up 35 percent of your score, more than any other factor—although the total amount you owe is right behind it at 30 percent.

Payment history is so important that not carrying any debts at all could even cause your score to lower. That’s why it’s important to spend money regularly on your credit card so that you can pay it off in full every month.

If you can’t get approved for a regular credit card, then getting a secured credit card, which requires you to put up some cash as collateral, can be a good way to start building your credit. As long as you’re paying your bill in full, and on time of course. Seriously. We cannot stress that enough.

In addition to credit cards, most debt payments—like student loans, auto loans, mortgage loans, etc.—report payment information to the bureaus. However, many bad credit loans—like payday loans, “cash advance” loans, and title loans—do not. If you need a bad credit loan that reports to the bureaus, you’re best off looking for a long-term installment loan instead of a short-term payday loan.

Having low credit will always put you in a position to be taken advantage of. But stay vigilant and you’ll be able to improve your credit score, whether or not you need the help of a credit repair company.

To learn more about the ways that you can improve your credit score, check out these related posts and articles from OppLoans:

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

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Contributors

Justin LavelleJustin Lavelle (@Justin_Lavelle_) is a Scams Prevention Expert and the Chief Communications Officer of BeenVerified.com (@BeenVerified). BeenVerified is a leading source of online background checks and contact information. It helps people discover, understand and use public data in their everyday lives and can provide peace of mind by offering a fast, easy and affordable way to do background checks on potential dates. BeenVerified allows individuals to find more information about people, phone numbers, email addresses and property records.
Donald PetersenDonald Petersen is an Orlando, Florida trial lawyer who represents consumers against companies who violate their rights under the Telephone Consumer Protection Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act and other consumer protection laws.

For People with Bad Credit, China’s ‘Social Credit’ Scores Sound Like an Actual Nightmare

China-social-credit-scores

Everything from volunteering in your community to running a stop sign—or criticizing the government on social media—affects these “social” scores.

If you’re one of the third of Americans who have bad credit, you know how difficult life can be with a subprime credit score. When your credit is shot, things that should be easy, like leasing a car, buying a home, getting a loan, and even renting an apartment, can be downright impossible to achieve.

In the U.S., even a small mistake, like forgetting to pay a utility bill or being more than 30 days late on a student loan payment, can result in a dent in your credit report that could take almost a decade to wipe clean. During that time, legitimate lenders are free to turn you away at the drop of a hat, making it tempting to fall victim to predatory payday loans, which can trap credit-poor borrowers in a cycle of seemingly unending debt.

So yeah, living in this country with bad credit can really suck. But let’s pause for a moment to count our blessings, shall we? Being unable to qualify for a loan or an apartment is bad, but imagine if having bad credit would cause your internet connection to slow down. Imagine if having bad credit would bar your kids from going to a good school or stop you from buying plane or train tickets. Imagine if your credit score affected how many matches you could get on a dating app or what hotels you were allowed to stay in.

This might sound like the plot to a dystopian YA novel, but it’s actually real life for Chinese citizens.


China is scoring more than just their citizens’ credit history.

The Chinese government began building this credit system about three years ago, and by 2020, it plans to have assigned a score to all of its 1.4 billion citizens. While the harsher-than-average punishments for slipping up might seem a little nuts, upon first glance, this doesn’t seem so much different from our system.

But these scores aren’t just markers of a person’s financial history. While the new Chinese scores do take into account missed payments and delinquent accounts, just like ours do, they also take it several steps further. These scores are actually a marker of a person’s “social credit,” and the way they’re calculated has critics of the system up in arms.

“Good” behavior is rewarded while “bad” behavior is punished.

Every citizen is awarded 1,000 points to start out with, and through their subsequent, day-to-day actions, they can either increase or lower their score, which range from A+++ to D. According to an article from Foreign Policy:

“Get a traffic ticket; you lose five points. Earn a city-level award, such as for committing a heroic act, doing exemplary business, or helping your family in unusual tough circumstances, and your score gets boosted by 30 points. For a department-level award, you earn five points. You can also earn credit by donating to charity or volunteering in the city’s program.”

Other ways to dock your score? Getting caught jaywalking, spending too much time on certain websites, buying too many video games (??), lighting up a cig on a train, drinking and driving, and—perhaps most troublingly of all—criticizing the government on social media.

Government critics are already feeling the pain.

That last social “sin” has critics of the communist party up in arms. According to an article from CBS News:

“The fear is that the government will use the social credit scoring system to punish people who are not sufficiently loyal to the communist party, and trying to clear your name or fight your score is nearly impossible since there is no real due process.”

Already, outspoken government critics and investigative Chinese journalists are finding that their low social credit ratings are costing them their freedom.

“I can’t buy property, my child can’t go to a private school,” said Liu Hu, a Chinese journalist who recently tried to buy a plane ticket and was rejected because his name is currently on the list of ‘untrustworthy’ citizens. “You feel you’re being controlled by the list all the time.”

The system is supported by a massive amount of surveillance. 

These fears are justified, given that Chinese police have started wearing Google Glass-inspired eyewear equipped with cameras and facial recognition software, supplementing the country’s already massive surveillance state. According to a piece on Big Think:

“It’s estimated that China has 176 million surveillance cameras in operation now, with plans to more than double that by 2020. The stated goal of this surveillance infrastructure is to deter criminals, but so far there seems to be no crime too small to punish. For instance, Chinese officials in Fuzhou have been publishing the names of jaywalkers, and it’s been reported that citizens might soon be punished for being seen smoking in non-smoking areas or driving poorly.”

Most Chinese citizens approve of the new system … for now. 

While all this Orwellian surveillance and judgement is concerning, the majority of Chinese citizens are currently sitting at the top of the credit scoring system, a position that comes with a set of serious perks. For example, Business Insider reports that Baihe, a major dating site in China, is boosting the profiles of “good” citizens, meaning people in the A+ pool are probably getting more dates than those languishing at the bottom. Additionally, people with high social credit scores can enjoy reduced interest rates on loans, rent things without having to put down a deposit, and even get discounts on utility bills.

And many people are reporting that the increased focus on behavior has actually improved life in the sprawling Asian country.

“I feel like in the past six months, people’s behavior has gotten better and better,” a 32-year-old entrepreneur named Chen told Foreign Policy. “For example, when we drive, now we always stop in front of crosswalks. If you don’t stop, you will lose your points. At first, we just worried about losing points, but now we got used to it.”

If you want to learn more about how your credit score works, check out these related posts and articles from OppLoans:

Do you think a “social credit score” would be a good or bad idea? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

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When You Get a Cash Advance, Do They Check Your Credit Score?

Neither credit card cash advances nor cash advance loans require a credit check. But that doesn’t mean they can’t affect your credit score.

For people with not-so-great or flat out bad credit, applying for a loan or a credit card can be nerve-wracking. After all, applying for new credit is something that gets added to your credit report, and it usually causes your score to lower just a little bit.

When your score is already hurting, the last thing you need is for your score to drop any further. Plus, what if you apply for a loan and you get denied for it? Now you’ve got a lower score and nothing to show for it!

One option you could explore is a cash advance. After all, if you need fast cash to cover some emergency expenses, a cash advance seems like as good an option as any. But will they check your credit? Will a cash advance affect your score at all?


With a credit card cash advance, you use your card to withdraw cash.

There are two different types of cash advances. One is a credit card cash advance. This is a type of credit card transaction where you use your card to take out paper money and the amount you withdraw is then added to your total balance.

The annual percentage rate (APR) for a credit card cash advance is usually much higher than the APR for a regular transaction. Plus, the cash advance does not come with a 30-day interest-free grace period like regular transactions do. This means that the interest for cash advances starts accruing immediately.

Plus, most credit card cash advances carry an additional fee just to process the transaction. The fee is often expressed as either a dollar amount or a smaller percentage of the amount withdrawn. For instance: $10 or three percent of the amount withdrawn, whichever is higher. All in all, credit card cash advances are a much more expensive alternative to regular credit card use.

Some predatory loans advertise themselves as “cash advance loans.”

However, credit card cash advances are far preferable to the other kind of cash advances, which are just sketchy no credit check loans—like payday loans or title loans—that advertise themselves as “cash advance loans.”

These loans are a subset of bad credit loans. They’re financial products with short terms and high rates that can be very difficult for people to repay on time. Lenders who offer these products often stand to make more money from the customer rolling their loan over and entering a dangerous cycle of debt.

However, even though these two types of cash advances are very different, neither one of them involves a credit check.

With either type of cash advance, they won’t check your credit.

When you take out a credit card cash advance, there is no credit check run. In fact, the transaction won’t even show up on your credit report. It will just be seen as an increase in your total credit card balance.

As we mentioned earlier, most cash advance loans fall under the heading of “no credit check loans,” which pretty obviously means that they do not involve a credit check. Lenders that offer loans like these usually don’t report payment information to the credit bureaus either, which means that your cash advance loan won’t be showing up on your credit report.

With both types of cash advances, this is good news for your credit score. When a lender runs a full check on your credit history—otherwise known as a “hard” credit check—it will slightly ding your score. After all, looking for additional personal loans or credit cards can be a sign that you are “desperate” for more credit, which makes you a less appealing prospect to lenders.

The effects of the hard check won’t last long, but it’s always best if you can keep your score from lowering, even if it’s just a temporary “ding.”

There are two ways that a cash advance could affect your credit score.

Now, the only way that a credit card cash advance will affect your credit is if you take out a series of very large cash advances and add so much money to your balance that it starts to affect the “amounts owed” component of your credit score.

When it comes to credit cards, your credit score takes into account your “credit utilization ratio,” which measures how much of your total limit you’re spending. If you had a total credit limit of $10,000 and a balance of $3,000, your credit utilization ratio would be 30 percent.

And in fact, 30 percent is the ratio that you should aim to stay below. Above that, and you’ll start seeing your score be negatively affected. Luckily, it will probably take quite a few cash advances to push your balance above 30 percent, so this likely isn’t something you’ll have to worry about.

A cash advance loan, on the other hand, could affect your score if you fail to pay it back. In a situation like that, the lender will probably sell the debt to a collections agency, who will then report it to the credit bureau. Once that collections account is on your report, you will see your score be seriously impacted.

A “soft” credit check loan might be a better solution.

If you’re in the market for a cash advance loan, you should get out of that market right now. There are too many no credit check loans out there with incredibly high interest rates—often between 300 and 400 percent, but sometimes even higher—that will trap you in a cycle of debt.

Actually, the very fact that a lender does not do anything to check your ability to repay your loan is a big red flag. A lender that doesn’t care about your ability to repay is a lender that doesn’t mind if you have trouble repaying your loan. That way, they can charge you additional interest for a due date extension and make way more money.

Instead, look for a bad credit lender that runs a soft credit check with your loan application. These checks return a summary of your financial history but, most importantly, do not affect your credit score. You can apply for a soft credit check loan—like the installment loans offered by OppLoans—without having to worry about a denial lowering your score.

Plus, there are some other benefits to installment loans that a cash advance loan simply doesn’t have. To learn more, check out these related posts and articles from OppLoans:

What other questions do you have about cash advances? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

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Bad Credit Repair: When to Close a Credit Card and When to Keep It Open

when-to-close-a-credit-cardClosing a credit card will negatively impact your score, but not for the reason you think.

Your credit score is very important. This three-digit number compiled by the three major credit bureaus determines what kind of loans and other credit cards you’ll be able to qualify for and at what rates.

Simply put, your credit score determines your financial future.


How does a credit score work, anyway?

If your score is in the high 700s or above, you’ll have a good shot at getting whatever kinds of loan you might need. But if that score is under 700, your prospects will look gradually worse and worse the lower it gets.

If your score is too low, you might not be able to find any loan at all, other than a bad credit loan. And while some bad credit loans can be useful financial tools,  many of them are quite risky. For instance, you could end up with a no credit check loan with super high rates and super short payment terms–you might even have to put up your car as collateral.

Clearly, you’ll be much better off with a higher credit score, but if you’re starting with a low score or even no score at all, it can be really intimidating to build up good credit. One of the most important steps is paying down your debts and paying all of your bills on-time going forward.

But there’s often some confusion when it comes to credit cards. If less debt is good, wouldn’t the best possible option be paying off your remaining credit card balances and then closing them so you won’t be able to acquire any further credit card debt?

Closing a credit card won’t lower the age of your credit.

While you might be worried about hurting your credit score through credit card misuse, proper credit card use is one of the most effective ways to build up your score. And that’s not all. If you aren’t careful, you can actually harm your credit score by closing a credit card.

“Closing credit cards is typically a bad idea for your credit scores, but not for the reason a lot of people believe,” advised Michelle Black (@MichelleLBlack) credit expert and president at www.HOPE4USA.com. “One of the factors which FICO considers when calculating your credit scores is the average age of the accounts on your credit reports—the older the better.”

“Some people believe that when you close an account, such as a credit card, you lose credit for the age of that account when your average age of accounts is calculated. However, that is not true. Closed credit card accounts remain on your credit for generally seven to 10 years (seven years for negative accounts, 10 years for positive accounts). As long as the account remains on your credit reports, the age of the account will continue to be considered by credit scoring models.

Closing credit cards will hurt your credit utilization ratio.

“The real reason why closing a credit card account often damages credit scores is because closing an account, especially one which is paid off, can trigger an increase in your aggregate revolving utilization ratio. Credit scoring models take a look at how much total credit card debt you owe versus your total credit limits on open accounts. When you close an account your overall or aggregate credit card limit is lowered, often resulting in lower credit scores.”

Katie Ross, Education and Development Manager at the American Consumer Credit Counseling, or ACCC (@TalkCentsBlog), reiterated the warning against closing credit cards recklessly while also advising how best to properly close them:

“Closing your credit cards, especially closing multiple cards at once, will hurt your credit score, credit utilization, and length of credit history. Only close your card if you can’t control your spending and need to remove the temptation. However, if you plan on closing cards, you should fulfill your debt obligation so that it doesn’t report as closed, but with a balance. If you decide to close multiple cards, gradually doing so every six months will help limit the damage to your score, rather than closing multiple cards at once.”

So closing credit cards isn’t an inherently good way to improve your credit, and can even cause it greater harm.

If you’re going to close a credit card, which one should you close?

This doesn’t mean that you should never ever close a credit card. But how do you know which to close and which to leave open?

Thankfully, Ross gave us the rundown on which cards you should close:

  • “The card you don’t use with an annual fee. A card with an annual fee that you aren’t using will just cost you money.”
  • “A newer card you don’t use; it won’t help you establish credit history.”
  • “Make sure closing one card doesn’t impact your score by paying off balances on all other cards. If you have zero balances, your credit utilization rate will be zero, and won’t be impacted by the loss of a balance.”

And which cards does Ross advise leaving open?

  • “Keep your oldest credit card open. A longer, positive credit history is beneficial to your score.”
  • “Don’t close a card with a high credit limit, especially if you have high balances on other cards or loans. Closing a card with a higher limit will negatively impact your credit utilization ratio, making it seem like your ratio is spiking.”
  • “If you do close a card, request a credit increase on another existing card to maintain a strong ratio.”

Old cards are better than new cards, and secured cards can also help rebuild your credit.

Another expert we spoke to echoed Ross’s advice about leaving open cards you’ve had for a while and offered some tips about trying out new cards:

“Keep the credit cards you use and the cards you have held for a long time,” Janice Lintz (@JaniceLintz), consumer writer and CEO of Hearing Access & Innovations, told us. “A card that you have held for an extended time boosts your score. I was shortsighted and closed a card I held which was an error. But I will not shut a card I have held for 32 years since it boosts my score dramatically.

“I regularly try and close cards that don’t work for me. Some cards I don’t think I will like and do and vice versa. I ‘date’ my credit cards to see if we can be in a long-term relationship. My score is in the high sevens to eights.”

But what if you don’t have a credit score or any credit cards? Or you lost your credit cards for some reason?

“After bankruptcy, all the credit card companies cancel the credit cards, so I tell my clients to open a secure credit card to start building a credit history and to improve their credit ratings,” explained attorney Arnold Hernandez.

Hopefully, this has all helped you get a better understanding of how closing your credit cards can impact your credit. Now go forth, and may your credit be stronger than ever!

To learn more about credit scores, check out these related posts and articles from OppLoans:

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

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Contributors

Michelle Black (@MichelleLBlack) is a credit expert and President at www.HOPE4USA.com, a credit education program located in the Charlotte, NC area.
Arnold Hernandez has been an attorney since 2000. He has represented consumers in many different areas of law. He has handled personal injury, wrongful death, unpaid overtime claims, and bankruptcy. He hs set goals to also represent individuals pro bono.
Janice Lintz (@JaniceLintz) is also a consumer education/travel writer. Her work has been published in Forbes.com, Yahoo Travel, Huffington Post and Johnny Jet. She contributed twice to Wendy Perrin’s column in Condé Nast Traveler and is featured in Departures magazine’s marketing video. Janice has traveled to 106 UN countries and 147 Traveler’s Century Club destinations. She is also the CEO of Hearing Access & Innovations.
Katie RossKatie Ross, joined the American Consumer Credit Counseling, or ACCC (@TalkCentsBlog), management team in 2002 and is currently responsible for organizing and implementing high-performance development initiatives designed to increase consumer financial awareness. Ms. Ross’s main focus is to conceptualize the creative strategic programming for ACCC’s client base and national base to ensure a maximum level of educational programs that support and cultivate ACCC’s organization.