How Long Does Information Stay on Your Credit Report?

While almost all information stays on your report for seven years, most of it will stop affecting your score sometime before that.

If you have a bad credit score, you’re going to have a lot of trouble taking out personal loans from a traditional lender like a bank or online loan company. Instead, you may find yourself settling for short-term bad credit loans, like payday loans and cash advances, and risk entering a cycle of high-interest debt.

The long-term solution is to improve your credit score, but that’s easier said than done. And before you can improve your score, you first need to first you need to understand why you have bad credit and what you can do to fix it.

And in order to understand your credit score, you first need to understand your credit reports because it’s the information these reports that are leading to your lousy credit score. With good financial behavior, that information will eventually be replaced by better info—and one day it will drop off your score entirely.

But how long does information stay on your credit report? And how long will it affect your score? We reached out to the experts for answers.


Here’s how your credit report works. 

Your credit reports are documents that trace your history as a borrower, and information from these reports is used to create your credit score. A common metaphor to describe the relationship between the two is that credit reports are like a test, while credit scores are like the grade you receive on that test.

According to financial coach and author Karen Ford, credit reports provide “a summary of your credit history and certain other information reported to credit bureaus by your lenders and creditors.” These reports are created and compiled by the three major credit bureaus: Experian, TransUnion, and Equifax.

Information that’s recorded in credit reports includes bill payments, amounts owed on loans and credit cards, as well as recent hard credit inquiries. “Bills that will affect your score are credit cards, student loans, mortgage loans, car loans, personal loans,” said Ford. “Bills that won’t affect your score are utilities, rent (if the landlord doesn’t report to the FICO), and medical bills.”

“Of course, if you’re horrendously late with any of these, they may decide to utilize a collection agency. If you get turned into a collection agency, this will affect your credit score,” she added. Bankruptcies and other information available on the public record are also included in your report.

As not all companies report information to all three credit bureaus, your score can actually vary depending on which report was used to create your score. The most common type of credit score is the FICO score, but there are other types of credit scores as well, including VantageScore, which was created by the bureaus themselves.

Your credit reports can also contain incorrect information that could be artificially lowering your score. “One reason to check your credit report is to ensure there isn’t something on there that isn’t accurate,” Ford advised. “There may have been a mistake and a bill unpaid may be on the report, which can adversely affect your credit score.”

Luckily, you can access your credit reports for free! As Ford went on to explain, you’re entitled to one free copy of your report from each bureau every twelve months. You can order a copy of your report online by visiting AnnualCreditReport.com, which Ford emphasized was “the only authorized website for free credit reports.”

Information stays on your report for 7 to 10 years.

If you make a mistake like a late payment, the good news is that it won’t be on your credit report forever. The not-so-good news is that it will be on your report for quite some time—over half a decade.

“Items will stay on your credit report for different periods of time depending on the nature of the information,” said Jacob Dayan,CEO and co-founder of Community Tax, LLC (@communitytaxllc) and Finance Pal, LLC. “Many common things like late payments and charge-offs will stay on your report for seven years, while more serious incidents like bankruptcy will stay for up to 10 years.”

Luckily, not all bankruptcies stay on your report for a full decade. According to Jared Weitz (@jaredweitz), CEO and Founder of United Capital Source Inc, it’s only Chapter 7 bankruptcies that stay on your record for the full 10 years. Chapter 13 bankruptcies, on the other hand, only remain on your report for seven years.

(What’s the difference between Chapter 7 and Chapter 13 bankruptcies? Chapter 13 involves a restructuring of debts and a repayment plan, whereas Chapter 7 involves liquidating your assets in order to pay off what you can and then discharging the rest. For more information, check out our blog post on which debts can—and can’t—be discharged through bankruptcy.)

So if you miss a bill payment on your credit card bill, you have to wait a full seven years before your credit score can rebound? Not necessarily.

“The good news, however, is that these items will carry less weight in your credit score as they become older,” said Dayan. “You can expect your credit score to rebound from the significant hit a bankruptcy will have in around five years.”

Dayan also added that you are free to dispute any items on your credit report as long as you have grounds to do so. For information on that, you can read our post on contesting credit report errors.

How late was that late payment?

Even though a late payment stays on your credit report for seven years, the damage it does to your credit score should fade well before that seven-year mark is up. The difference lies in how late you were in making that payment. The longer that bill sits unpaid, the worse it is for your score.

“Negative actions, such as late payment, will stay on your credit record for seven years, but not all actions are equally as damaging,” explained Weitz. “If you have an isolated event where payment is 30 to 60 days late, this will be less damaging than multiple late payments or a late payment that exceeds 90 days.”

“To view impact to your credit, think of payments in 30-day increments,” Weitz continued. If you have one payment that is 30 days, or 60 days late, this won’t cause lasting damage to your credit. If you are 90 days late your score can be impacted for the entire seven years.

“Since the scoring model is based on the prediction of whether you meet the credit obligations in a 90 day period, exceeding this duration will hurt a creditors trust in you, and thus—lowering your score.”

And if you think that the damage to your score can’t get any worse past 90 days, think again.

“If your delinquency exceeds 120 days, your debt is usually sold to a third-party collection agency and will be filed on your credit score, hurting it further and longer,” said Weitz.

So if you miss a bill payment, don’t throw up your hands and assume that it’s too late to do anything. The longer that bill sits unpaid, the more your score will suffer.

How can you improve your credit?

There are five main categories of information that make up your FICO score. Your payment history makes up 35 percent of your total score, more than any other single factor—while your amounts owed/credit utilization comes in a close second at 30 percent.

So if you are looking to improve a bad credit score, these are two areas where you want to focus your efforts. In short: You need to pay your bills on time and you need to pay down your debt.

To pay down your debt, check out the Debt Snowball and Debt Avalanche strategies. Ford also recommended measuring your credit utilization ratio, as carrying credit card balances that exceed 30 percent of your overall limit can have an additional negative impact on your score.

Lastly, Ford pointed out that the length of your credit history and your credit mix also play a part in your score. (In fact, they make up 15 percent and 10 percent of your overall credit score, respectively.) While longer credit histories are preferable, Ford asserted that a short credit history can be great as long as you’ve made your payments on time.

Improving your credit score is likely going to take years—especially if the main reason you have poor credit is too many late or missed payments. But the sooner you start working to fix your credit, the sooner you’ll see results, even if it’s still years down the line.

Have bad credit? Build an emergency fund.

Oddly enough, the kinds of short-term no credit check loans (like payday and title loans) that you get stuck with when you have bad credit don’t affect your score—unless they get sent to collections. But even if these loans don’t show up on your credit report, their high rates and lump sum payments can do plenty of damage to your financial wellbeing.

Many soft credit check installment loans, on the other hand, do report your payments and can affect your score either positively or negatively, depending on whether or not you make your payments on time.

Even if you have bad credit, the best way to avoid one of these loans is not to need a loan in the first place. That means having a well-stocked emergency fund built up to cover surprise expenses. To learn more about how you can save money and manage your finances, check out these other posts and articles from OppLoans:

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

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Contributors

Jacob Dayan is the CEO and Co-Founder of Community Tax, LLC (@communitytaxllc) and Finance Pal, LLC. He began his career in Wall Street New York at Bear Stearns working in the Financial Analytics and Structured Transactions group. He continued to work in Wall Street until early 2009. When he then left New York and returned to Chicago to be with his family and pursue his lifelong dream of self-employment. There he co-founded Community Tax, LLC followed by Finance Pal in late 2018.
Karen Ford is a Master Financial Coach, Public Speaker, Entrepreneur, and Best- Selling Author. Her #1 Amazon Best Selling Book “Money Matters” is a discovery for many.  In “Money Matters” she provides keys to demolishing debt, shares how to budget correctly, and gives principles in wealth building.
Jared Weitz (@jaredweitz) has been in the financial services industry for over 10 years. Due to his extensive work experience and deep network of close financial relationships, he handles a multitude of different finance options for his clients and contacts. Over the years, he has held positions in some of the largest business financing companies in the U.S. Some of his roles have been: Underwriter, Director of Business Development, Managing Partner and currently, CEO of United Capital Source, LLC.

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

Always pay your bills on time. Always.

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

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

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

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

How quickly can you pay down your debts?

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

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

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

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

You’ll probably have to be patient.

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

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

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

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Should You Use a No Credit Check Loan to Pay for Medical Bills?

by Jessica Easto
If you’re short on emergency savings and facing an expensive medical bill, there are better ways to cover it than taking out a short-term, high-interest no credit check loan.

According to a new study out of the University of Chicago, 51 percent of working Americans would need to dip into their savings accounts if they missed more than one paycheck. But about 31 percent of Americans have less than $500 in savings set aside for emergencies and an additional 19 percent have no money set aside at all.

So what happens, for example, when you or someone in your family needs an unexpected trip to the emergency room—which can cost up to $700 even with insurance—or worse? Many people who are struggling to keep the finances stable end up using no credit check loans or bad credit loans in an attempt to bridge the financial gap between unexpected medical expenses and their next paycheck.

If you can avoid them, you should, as these types of short-term loans are not the best idea. We’re going to tell you why and then explore some of the options you have available for avoiding them.


Why not pay for medical bills with no credit check loans?

No credit check loans allow you to borrow a small amount of money (usually a few hundred dollars) for a short period of time—often until your next paycheck. This is why they are sometimes called payday loans or cash advances.

As you may have guessed by their name, these loans don’t require credit checks like traditional personal loans and other financial products, which make them popular among those who don’t have very good credit.

The catch? They come with ridiculously high interest rates and fees, which means that you can end up paying way more money than you originally borrowed. Many people find themselves having to take out another loan just to pay off the first one, creating a cycle of debt that seems never-ending.

In fact, the average person who takes out a no credit check loan spends an average of $520 in fees to repeatedly borrow $375.

Taking out a short-term no credit check loan to pay for medical bills could likely cause more problems than it solves. Just consider that a full 80 percent of these loans are rolled over or followed by another loan within two weeks of the first one.

You want to get these medical expenses paid down, not pay for them forever. So what do you do?

1. Confirm your medical bill is correct.

The cost of healthcare is ballooning in this country. Even those who are lucky enough to have employer-sponsored health insurance paid a record-breaking average of $19,616 in annual premiums for family coverage and $6,896 for individual coverage in 2018.

If you find yourself with a giant medical bill on your hands, the first thing you should do is confirm that the bill is actually correct. About 80 percent of medical bills contain billing errors. This usually happens because procedures were miscoded either by a breakdown in technology or human error. One study found that errors are more common in bills totaling $10,000 or more, with an average of $1,300 worth of errors per bill!

In addition to costing you more money, miscoding can also cause the insurance company to reject the claim or pay less of their share than they should. This might happen if your doctor accidentally coded a preventative visit, like an annual physical, that is covered by insurance at 100 percent as a visit to treat an illness, which is likely not covered at 100 percent.

So what do you do? First, if the healthcare facility gives you a bill that only shows a lump sum, ask them to provide an itemized bill that lists all of the procedures and charges individually. Then carefully read through that itemized bill, making sure the items listed make sense, that they are coded correctly, and that nothing is duplicated.

Sometimes it can be difficult to parse the diagnostic codes and descriptions on a bill. For anything you don’t understand, call the billing office and ask for an explanation. This writer, for one, can speak from experience. She received a bill for a “surgical procedure” that cost $115. Surely, this is a mistake, she thought, having never had a surgery in her life. Then she realized that it was referring to the impacted wax she had removed from her ear during a routine annual physical. Unbelievable! But unfortunately true.

If you find a real mistake on your bill, demand that the billing department remove it and issue a new bill. If you can’t get ahold of someone or do not receive resolution within a week or so, set a reminder to yourself to keep calling until the issue is resolved.

2. Negotiate a payment plan.

If you cannot afford to pay the lump sum of a medical bill, many healthcare facilities will let you negotiate a payment plan, especially if you meet certain financial criteria, so you can pay it off little by little. This eliminates the need for no credit check loans—or even for soft credit check installment loans.

To do this, you may need to contact the billing department, a financial aid office, or a financial assistance office—it can be different depending on what kind of facility you are dealing with. You won’t know what can be done until you ask!

Here’s a pro tip: It’s always better to try to negotiate a bill with a healthcare facility than let it go to a collections agency. According to a 2014 study, about 20 percent of credit reports contain a medical bill in collections. Once you are in default in that way, it starts to negatively impact your credit score (between 40 and 100 points on average, according to that same study), which can cause even more headaches down the line. A payment plan will keep your debt in good standing and out of the hands of collections.

3. Open a Health Savings Account (if you can)

Health Savings Accounts (HSAs) are a great way to save for both expected and unexpected medical expenses. It allows you to deposit 100 percent tax-deductible money into a savings account. When you use it to pay for qualifying medical expenses, your payment is tax-free, too.

One catch is that you have to have a high deductible health plan (HDHP) and meet certain out-of-pocket criteria to be eligible to open an HSA. To be eligible in 2019:

  • an individual’s health insurance plan must have a minimum annual deductible of $1,350 and maximum annual out-of-pocket expenses of $6,750.
  • a family’s health insurance plan must have a minimum annual deductible of $2,700 and maximum annual out-of-pocket expenses of $13,500.

Check your insurance plan to see if you qualify. Many plans purchased on the state health exchanges are eligible for HSAs. You may even be eligible if you get health insurance through an employer, especially if you work for a small business.

The other catch is that you can only use it to pay for qualifying medical expenses. The good news is that most medical costs qualify as eligible, according to the IRS.

The great things about HSAs are that you can contribute a good amount of money each year (in 2019, $3,500 for individual coverage and $7,000 for a family), the money never expires, and you can keep rolling it over year after year. The requirements and restrictions of HSAs are updated every year, but even if your circumstances change and you no longer qualify for an HSA, you can still use your HSA to pay for medical expenses until you run out of funds.

If you do have an HSA, you can contribute a little money each month until you build a nest egg. Depending on your employer, you may be able to have them instantly take money out of your paycheck and put it in the HSA, so you never “miss” it.

Technically, once you save enough to cover your deductible and out-of-pocket savings, you’ll never have to dip into your checking account to cover medical expenses. You’ll always have the money on hand, and you’ll get to use it tax-free to boot!

To learn more about saving money and building a nest egg, check out these other posts and articles from OppLoans:

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

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5 Tips for Finding the Right Bad Credit Loan

The smarter you are when looking for a bad credit loan, the better positioned you’ll be to find the loan that works best for you.

Shopping for a personal loan isn’t easy, even when you have good credit. Add bad credit to the mix, however, and the difficulty level ratchets up pretty severely. While there are some bad credit loans and no credit check loans that make for good short-term financial solutions, there are many others that could easily trap you in a recurring cycle of debt.

In order to find the right bad credit loan for your situation, you need to know what to look for. You need to know how to look at interest charges versus APRs and how to compare payment terms versus your monthly budget. That’s why we’ve put together this handy bad credit loan guide to help ensure that you’re asking the right questions in order to find the right loan.


1. Ask friends and family first.

If you haven’t stopped to consider this option, then you should—well—stop and consider it! While borrowing money from a friend or family member can be deeply awkward, it sure beats borrowing money from a bad credit lender.

The key to borrowing money in a situation like this is communication. You need to sit down with the person you’re requesting money from and make everything crystal clear. Why do you need this money? How much do you need? What other options have you considered? What kind of repayment plan makes sense?

And while it’s often the case that friends and family members don’t charge each other interest, you should be prepared for this to be part of the deal. But even if they do charge you interest, the rates are probably going to be much lower than the average 400 percent APRs that you see from a typical payday loan or cash advance.

Make sure that both you and your lender understand the terms of your agreement before they hand over the money. In fact, you would do well to get the agreement in writing. If that sounds like a big hassle, you should check out this personal loan agreement template that we created to help people in situations exactly like this one.

2. Shop around.

When people are borrowing bad credit loans, it’s often because they have been blindsided by an emergency expense or another financial shortfall. When your car breaks down, you just want to get it fixed, pronto. The last thing on your mind is taking the time to shop around for the perfect deal. You need money, and you need it now.

But here’s the thing: You should take that extra time to shop around for the best bad credit loan you can find. Loan offers can differ depending on what state you live in, so do some quick research to figure out what kind of interest rates and payment terms are possible for you—and then compare that to the offers you’re actually seeing.

The more loans you compare—including online loans and loans from storefront lenders—the more likely you are to find the best possible loan for you. On the flip side, settling on the very first offer you see is a great way to end up with a loan that’s dragging down your financial picture instead of helping to prop it up. An extra hour or so is rarely going to matter in the grand scheme of things, so take your time and see what’s really available.

Even better, do your research now so that you can act quickly when an emergency expense arises later. Depending on the nature of the situation, you might find yourself under a great deal of pressure to act quickly. If you already have a bad credit loan on file that you know works best for you, it will save you time and it will save you from a financial headache down the road.

3. Do they perform soft credit checks?

Unlike regular personal loans, many bad credit loans don’t perform a hard credit check when you apply. That’s why they’re often referred to as “no credit check loans.” But there’s a difference between checking your credit score and checking your ability to repay, and it could also mean the difference between a loan that helps your finances and one that hurts them.

Bad credit lenders that check your ability to repay will often run some kind soft inquiry on your credit history and/or use a process to verify your income. They take these steps to ensure that you can actually afford the loan that you’re applying for. In many ways, it’s very similar to the process that traditional lenders use with their customers.

True no credit check lenders, on the other hand, do not take any steps to verify your income or look into your credit history. And because they do not do anything to check whether or not you can afford the loan you’re attempting to borrow, the odds are much higher that you’ll end up buried under a pile of high-interest debt.

Many no credit check lenders offer short-term bad credit loans like payday loans, cash advances, and title loans, while most soft credit check lenders offer longer-term bad credit installment loans. Keep this in mind when you’re shopping around and you’ll be well on your way to finding the right bad credit loan for you.

4. Consider payment size.

When people think of payday loans, they usually think about the fact that they have very short repayment terms. Whereas traditional personal loans usually have terms measured in years, payday loan terms are measured in a matter of weeks. In fact, the average payday loan has a repayment term of only 14 days.

Short terms might seem great, as they mean you’ll be getting out debt faster, but that’s not necessarily the case: When considering a loan’s repayment term, you should also be considering the size of its payments. Many short-term no credit check loans have lump sum repayment structures, which means that you pay the loan off all at once.

Lump sum terms can actually make these loans more difficult to pay. Think about it: If you borrowed a $300 two-week payday loan with a 15 percent interest charge, that would give you only 14 days before you had to make a single payment of $345. Is that kind of payment really something you can afford, or would it force you to take out another payday loan to cover your other bills?

Installment loans, on the other hand, come with smaller, regularly scheduled payments that let you pay the loan off gradually. Do the math and calculate how much money you can afford on each payment: Even if a short-term loan seems cheaper than a longer-term installment loan, a lump sum payment that’s too big for your budget means it might not be.

5. Read their reviews.

If your opinion on a company is based solely on their advertisements, then you’re doing it wrong. Ads are where a company puts its best face forward. Customer reviews, on the other hand, give you an idea of what working with them is really like. Before borrowing money from a company, see what their actual customers have to say.

Visit sites like LendingTree and Google to see what kind of customer reviews the business has received. You can also check out their Facebook page to see what kinds of comments are being left and how they’re being resolved. See if the company has a BBB page; if they do, what kind of grade do they have? When customers complain, are their claims being handled?

Borrow now, plan for later. 

When you’re borrowing money, there is no perfect way to protect yourself from risk. You could do everything right and still end up defaulting on your loan—possibly for reasons that were entirely beyond your control. But following these five tips will help you make the best decision you can. From there, the rest is up to you.

And in the future, the best way to deal with an unexpected bill or financial shortfall is to be prepared. That means creating a budget, building your savings, and improving your credit score. To learn more about how you can make your finances battle-ready, check out these related posts and articles from OppLoans:

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

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No Credit? Here Are 3 Ways to Start Building Some

In order to have good credit, you need to build up a positive credit history. For some people, that means starting from scratch.

If you have bad credit, it’s probably due to some combination of two things: You don’t pay your bills on time and/or you’ve taken out to much debt. But if you have no credit, it’s only due to one thing: You don’t use any credit at all!

Whether you have bad credit or no credit, the result will still be the same when you try to borrow money: Instead of being able to take out a standard personal loan from a bank or online loan company, you’ll be forced to rely on predatory no credit check loans and short-term bad credit loans like payday loans, cash advances, and title loans to cover unforeseen expenses.

And while focusing instead on bad credit installment loans might be a good short-term solution to that problem, the real fix is simple: You need good credit. When you have no credit, that means starting to build your credit history from scratch.

The problem you’ll run into is of the chicken-and-the-egg variety: You need a good credit history to borrow money at reasonable rates, but you need to borrow money first in order to create that history. Luckily, there are some ways that you can start building that credit history now so that you can qualify for better types of personal loans later. Here’s how …


1. Take out a secured credit card.

In order to qualify for a traditional credit card, you’re going to need decent credit. But in order to qualify for a secured credit card, all you’ll need is cash. Unlike traditional cards, secured credit cards require a cash deposit to serve as collateral and to set your total credit limit. For example: Put down $500 and your card will have a $500 limit.

Once you’ve opened this secured card, you can start using it to make small purchases. Make sure that you aren’t using the card to spend beyond your means; simply take purchases that you would have made on your debit card and make them on your secured credit card instead. And make sure that you are paying off that card’s balance as quickly as possible.

To the best of your ability, try to never let your outstanding balance reach 30 percent of your total credit limit. This doesn’t mean you have to spend less than 30 percent of your limit every month, it just means paying off your card frequently instead of monthly. Keeping your credit utilization ratio below 30 percent will help your score.

While secured credit cards can be a great way to build your credit score, there are two things you should keep in mind. First, you need to make sure that the credit card company reports your payment information and balances to the credit bureaus. Second, secured credit cards can come with some pretty outrageous fees, so do your research first to find a card that’s reasonably affordable.

2. Ask someone to “lend” you their score.

If you don’t have any credit—or you have bad credit—you can help build your score with a little help from your friends. How does that work, exactly? If you become an authorized user on one of their credit accounts or they cosign a loan for you, they are basically lending you their good credit to help you build their own.

When you’re an authorized user on another person’s credit card, your name is on the account. This means that any activity on said account—like payments and outstanding balances—gets recorded on your credit report as if that activity was your own. Even if you don’t have any actual access to the account, you’ll still get credit for it—literally.

When someone cosigns for you on a loan or credit card application, it’s the credit equivalent of them vouching for you as a borrower. This can help you qualify for a better loan or credit card, but there are some sizable potential downsides: Late payments and large balances will drag down your friend’s score, and they’ll be liable if you end up defaulting entirely.

When possible, you should opt for being an authorized user over getting a friend to be your cosigner because there is much less risk that you’ll jeopardize your relationship. You can become an authorized user on your friend’s credit card without ever actually using the card at all. In fact, you should definitely avoid using the card at all.

Asking friends and family for financial help can be tricky, so you’ll want to broach the subject with them in a calm and cautious manner. This is especially true if you’re asking them to be your cosigner. Gaining access to someone’s account or asking them to be liable for your own financial behavior requires a lot of trust, and it’s vitally important that that trust is maintained.

3. Take out a credit-building loan.

If you’re looking for a traditional personal loan from a bank or credit union, you’re going to need good credit. But there are other kinds of loans you can borrow that are designed for people like yourself who need help improving their scores. The key is to look local.

While large national banks are unlikely to have lending options focused on helping customers build their credit, local banks and credit unions are different. They tend to have more customer-friendly mentalities that extend to issuing small loans to customers with little to no credit.

This is especially true for credit unions, which are nonprofit institutions. In order to qualify for one of their loans, you’ll first need to become a member. Membership in credit unions can be based on where you live, where you work, or even where you go to church.

As mentioned earlier in this article, it’s critical that you don’t use this loan to spend beyond your means. Instead, only use it to purchase something that you can already afford. While paying the loan off slowly means racking up a little bit of interest, the positive payment history it will help you build can be worth it in the long run.

Earlier in this article, we mentioned bad credit installment loans as a possible option for borrowers with little to no credit history. Some companies that offer these loans—like OppLoans—report payment information to the credit bureaus, which means that paying your loan off on-time could help you build a better score.

Again, you wouldn’t want to borrow one of these loans solely for the purposes of building your credit. But if you find yourself needing to borrow money to cover a financial shortfall, taking out a loan that will help you improve your credit history is certainly a factor worth considering.

There’s more to money than credit.

Improving your credit score will help brighten your financial future in any number of ways. But that doesn’t mean that your credit score should be your only financial priority. Building up your savings, investing for retirement, and creating a budget are all important financial building blocks as well.

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

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

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6 Scary Facts about Bad Credit Scores

by Jessica Easto
If you need some motivation to start fixing a lousy credit score, then these six terrifying facts should help scare you into action.

When you need to feed your family but there’s not enough money in the bank account to cover it, it may not seem like you have much of a choice but to run up credit cards or skip other bill payments, like on your utilities or maybe your car loan.

In the long term, however, actions like these can damage your credit score, which means the next time you need a line of credit, you may have to pay higher interest rates. And if your score gets really low, you may only be eligible for bad credit loans or predatory payday loans and cash advances that can threaten your already fragile finances.

Bad credit is a huge problem in this country, where only 40 percent of us have at least $1,000 in the bank to cover emergency expenses. Let’s take a look at six other scary facts about bad credit scores.


1. 34.8 percent of Americans with credit have bad credit.

According to a recent report by one of the top three credit bureaus in the country, nearly 35 percent of Americans with credit have what’s called “subprime credit,” or a FICO credit score between 580 and 669. In fact, the national credit score average is 701. (A “very good” score is between 740 and 799.)

Since your credit score is the primary tool lenders use to measure how risky it would be to loan you money, having subprime credit means you may end up paying much higher rates in order to borrow money. In some cases, you may not qualify for the product you want at all.

2. 26 million Americans don’t have any credit at all.

A recent Consumer Financial Protection Bureau (CFPB) report found that about one in 10 Americans don’t have any credit history with a national credit bureau—or at least not enough credit history to produce a credit score. This is what is called being “credit invisible.”

Certain communities are at a higher risk for being credit invisible, including black and Hispanic consumers (15 percent credit invisible), as well as those who live in low-income areas (30 percent credit invisible).

It can be very difficult for those with no credit to qualify for financial products like credit cards and installment loans. They may also have trouble getting a cell phone contract or an apartment.

3. About 12 million Americans use no credit check loans each year.

According to a study by the Pew Charitable Trusts, about 12 million Americans took out at least one payday loan—a predatory form of a no credit check loan—in 2010. An average borrower actually took out eight payday loans, each with an average principal of $375.

Due to payday loans having such short terms and high interest, many borrowers have to take out multiple loans simply to pay down the debt owed on the first loan. Because these storefront and online loans do not require credit checks—hence the umbrella term “no credit check loan”—vulnerable populations with poor credit or credit invisibility are frequently the target of predatory lenders.

4. The national average interest rate on a payday loan is 400 percent.

Recent reports have shown that payday loans in the United States come with an average annual percentage rate (APR) of 400 percent and can be as high as 700 percent!

APRs reflect that total cost (interest and fees) of a loan per year, so it is a good way to compare the cost of different financial productions.  Compare those payday loan APRs to your average credit card or personal loan and you will see rates that are twenty times higher on the low end.

And if you think a secured title loan might be a better option—think again. The average annual interest rate for those no credit check loans is 300 percent. Plus, according to a study from the CFPB, one in five title loan sequences ends with the borrower’s vehicle being repossessed.

5. A bad credit score can prevent you from getting a job.

That’s right. It’s not just loan and apartment applications that can be affected by bad credit. Unless you live in one of the few states that have regulated the practice, employers can—and do—run your credit as part of the application process.

According to one report, which surveyed low- and middle-income households, one in four participants said that potential employers asked to run their credit, and one in 10 respondents had been informed that they would not be hired based on credit report findings. Of those, 70 percent were rejected on the basis of their credit score.

A survey of human resources professionals—the people who help make hiring decisions for companies—found that 25 percent of participants checked credit for some positions while 6 percent checked for all positions.

6. Bad credit may be the result of errors.

The three major credit bureaus—the companies that calculate your credit score—are not perfect and sometimes they even make mistakes that can negatively impact your credit score.

In fact, a new study of CFPB consumer complaint data showed that 43 percent of all complaints made in 2018 were related to credit reporting, and 61 percent of those complaints were specifically about credit reporting mistakes.

Credit reporting mistakes can be disputed, but according to the report, it’s not common for the credit bureaus themselves to resolve issues with customers.

To check your credit report for errors, simply request a free copy of your report by visiting AnnualCreditReport.com. You are legally entitled to one free credit report from each of the three primary credit bureaus every year upon request.

Bad credit is scary, but fixing your score might actually be easier than you think. To learn more about how you can improve your credit score, check out these other posts and articles from OppLoans:

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

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8 Credit-Killing Mistakes that Recent Grads Make with Credit Cards

120 credit hours is a good thing. A 120 credit score? Less so.

Credit card usage among college students has declined thanks to legislation that prevents credit agencies from marketing to students. Unfortunately, loopholes still make students one of the demographics most targeted by credit card companies. In fact, 57 percent of students reported carrying at least one credit card, and that number jumps to 86 percent for graduates.

Many young people will sign up for their first credit card during college or immediately afterward. And while a new credit card may grant some new freedoms, it also comes with a lot of responsibility. Credit card mistakes, like falling for predatory credit card offers and practices, can greatly damage credit scores just when new credit users are starting out.

In February 2009, the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act went into effect, making it more difficult for credit card issuers to target and market credit cards to college students, or those under 21. This act also increased the transparency of the relationship between institutions of higher education, including their affiliated organizations, and credit card issuers. The CARD Act requires the Consumer Financial Protection Bureau (CFPB) to submit a report to Congress about these relationships and make the report available to the public.

The 2009 law stipulates that, one, credit card issuers can’t entice students to sign up for a credit card by offering tangible items; two, students under 21 must have either an independent income or a co-signer to qualify for a credit card; and three, credit card issuers can’t issue pre-screened offers to students, or those under 21, without their consent.

However, this act hasn’t entirely curbed predatory credit card practices. In reality, credit card issuers have found ways to skirt the law. For instance, they can still offer enticing perks, like free pizza and t-shirts. It’s a fact that credit card companies love college students.

So what should current students and recent college grads do to avoid damaging their credit? We gathered the eight most common credit-killing mistakes that recent grads face when it comes to credit cards. Learn what to avoid from the pros.

#1 Not Establishing Credit

Perhaps one of the first mistakes that college grads make with credit cards is not starting to build their credit history while in college. A lot of young people either don’t think that credit is important or simply don’t know enough about it. Only 58 percent of students said that establishing credit was their number one reason for having a credit card. If not to establish good credit card practices and improve a credit score, then what purpose do credit cards serve? Sadly, many young people most likely use credit cards as a tool to fall back on when overspending. This subsequently racks up debt and starts a vicious cycle of paying interest and fees.

When done responsibly, signing up for a credit card that caters to students can be a good first step into the world of credit. The main requirement if you’re under 21 is that you may need to prove that you have a steady income or you’ll need to secure a co-signer.

One viable credit card option is student credit cards. A student credit card is tailored to meet the needs of young adults who have a limited credit history. These types of credit cards typically offer lower credit limits, no annual fee, and have more lax requirements for approval.

When looking for a good starter credit card, be sure to consider the rewards structure, the introductory annual percentage rate, and additional perks. For instance, many cards offer rewards such as cash back on your purchases. That means all those text books, fast food stops, and entertainment expenses will add up and give you a certain percentage back. Other cards focus on travel, gift cards, or statement credit rewards.

Student credit cards are a powerful option for building a credit history with limitations that promote good credit behavior. Still, you’ll have to remember to use your best judgement as with any other type of credit card.

#2 Treating Credit Like a Necessity

According to personal finance blog and a licensed real estate agent Jaquetta Ragland, “[n]ew graduates should see credit cards as a tool and not a necessity.” When used correctly, this tool can be used to boost your credit score. The trick is to only make purchases on a credit card that offers rewards or in cases of extreme emergency.

Students “should only use their credit cards for purchases such as hotel stays, rental car reservations and airline tickets,” she said. “Since some credit card companies offer insurance for rental car reservations and other purchases, they would be covered in case of an accident.”

Ragland warned students to “never get in the habit of using their credit card as a way to handle their everyday expenses or to pay their monthly bills.” Keep your balances low and pay off what you charge to your credit card in full each month. These are the cornerstone rules of managing credit cards and building a positive credit history.

#3 Overspending on Credit Cards

In that same vein, overspending is one of the biggest mistakes that everyone, including college grads, makes when it comes to credit cards. This is the easiest and fastest way to rack up credit card debt. Learn these lessons before you find yourself in an overwhelming situation with bills you can’t pay.

Recent college graduates tend to spend more than they save. If you’re a graduate who has secured a job and salary, it’s easy to view your ramen-eating and low-budget living days as long gone. This is a dangerous mindset to get in since it challenges the practicality of living within your means.

While piling up credit card debt is never good, it’s especially dangerous when you’re just beginning your career, since it can have lasting professional and personal consequences. By living outside of your means now, you’ll be paying off credit card debt long into your late 20s and maybe even 30s. If you want to buy a car or a home in the future, then all of that credit card debt may hurt your credit card score from carrying a high balance, missed payments, and in the worst case delinquency or default.

#4 Letting Someone Use Your Credit Card

Generosity is an admirable trait, but not when it comes to finances. A good rule of thumb is to remain in control of your personal credit cards by not lending them to others.

“Many people have encountered the situation where a family member or friend asks to use your credit card,” said Justin Lavelle, the chief communications officer for an online background check company. “Perhaps they don’t have a credit card or perhaps they don’t have room on their credit card to make a purchase,” he said, adding that “[w]hatever the reason may be, it can be a potentially dangerous situation for the card holder.”

The consequences of losing possession of your credit card, whether intentional or not, could be disastrous on your credit.

“A few of the things that can happen when your credit card is out of your possession is the card being confiscated after an identity check when making a purchase, loss of the credit card, abusing the privilege to use the credit card by making multiple purchases, and overage charges due to lack of knowing how much has been charged.”

Your best bet? Not to “let someone use your credit card,” he said. Don’t let your family or friends’ mistakes affect your financial future.

#5 Not Checking Credit Card Activity

Lavelle had some great advice about why it’s crucial to monitor your credit card activity for those who hold even one credit card account.

“Unauthorized charges can appear on your card very easily and if you’re not monitoring them, you may continue to overpay every month,” he said.

Charges often “stem from fraud/abuse of your card by an outside person or vendor, charges for services you may have discontinued or never signed up for, and service charges you were unaware of.”

Go through your credit card statement, either online or on your paper statements. Cross-check each purchase you made with what’s listed on the statement. If something looks fishy be sure to report it immediately. “It’s just smart business,” Lavelle said.

#6 Waiting to Report a Lost or Stolen Credit Card

Have you lost or misplaced your credit card? It happens to everyone at some point. The important thing to do is act quickly in an effort to protect your account. In some cases what you initially believed was an error on your part may actually be a lot more nefarious.

“Many times people will assume it’s their own fault, thinking they left it laying on the kitchen table or stuck it in the pocket of their coat, but in reality it was stolen,” said Lavelle. “The longer you wait to report a lost or stolen the card, the easier it is for a thief to add fraudulent charges to your account.”

What should you do if your credit card suddenly goes missing? Report it as soon as possible!

“If you report your missing credit card before any fraudulent charges are made, the faster you’ll clear your account,” he said.

Always be overcautious when it comes to credit cards. “Report a missing credit card as soon as possible—don’t assume you misplaced it,” recommended Lavelle.

#7 Responding to Phony Emails

Scammers are rampant both online and over the phone. Be on the watch for unusual emails or calls from people who may be posing as a credit card issuer, bank, or other financial professional.

“Credit card companies do not typically email you regarding your credit card and they will never ask you [for] personal information,” said Lavelle. Scammers pose as people connected to banks or credit card companies and ask for personal information in an attempt to steal your login, identity, and ultimately hard-earned money.

“Replying to the email with personal information, even clicking a link and entering personal information, can give the scammer what he needs to commit identity theft,” he warned. “Assume that any email asking for you to confirm personal information, submit personal information or click on a link is a scam.”

Remember that you can always call the bank or credit card company associated with the call or email to make sure that it is in fact phony and to warn the company about the possible scam. Financial institutions take these threats to current and potential customers very seriously. With your assistance they may be able to track down the source and put a stop to it before someone is scammed into losing money.

#8 Applying for Retail Cards

A retail card is a type of credit card that certain retailers, such as department stores or airlines, offer to their loyal customer base. These cards can get you merchandise discounts, rewards, and other special offers.

Students are most likely to run into these types of credit cards while shopping in person at stores or online through pop-up ads. A store card, while a good option for some, come with dangers and should be avoided by most students. Interest rates on store credit cards are higher than many other types of credit cards. These types of cards also promote overspending since their added convenience at check out makes them hard to resist.

Be wary of sales associates who push you to sign up or send in an application. They’re most likely trying to improve their sales or bonus if they’re based on the number of customers they convince to open a credit card. Politely decline and finish up your purchase.

If you are a frequent shopper at a specific retail store, then perhaps a store-branded card makes sense. You’ll be able to save more money by using that card on store purchases when compared to a regular credit card. Just be sure to research the true value of the store card before agreeing to apply. Some credit card applications are a soft pull, but a majority are a hard pull on your credit, which will briefly lower your score. Your credit won’t take a huge hit when you apply for one new credit card, but several inquiries and new lines of credit will reflect badly to credit card companies. Don’t go through with the application process unless you’re serious.

Bottom Line

Credit cards can be a useful financial tool, but they can also be easily abused when the user doesn’t have a solid understanding of how they work. This is even more true for recent college graduates, who are often new to the world of credit, but are a key target of credit card agencies.

Key mistakes that this demographic can avoid when using credit cards include:

  1. Misunderstanding the importance of establishing a positive credit history early on.
  2. Using credit for daily purchases as opposed to rewards-driven expenses, such as travel, education, dining, and entertainment.
  3. Living beyond their means by overspending on credit cards.
  4. Loaning credit cards to friends or family members.
  5. Overlooking a statement error by not diligently monitoring credit activity.
  6. Waiting to report or cancel a credit card that is misplaced, lost, or stolen.
  7. Failing to identity a credit card scammer by phone or email and letting personal information get leaked to untrustworthy people.
  8. Opening too many retail credit cards at the urging of pushy sales associates.

Contributors

Justin LavelleJustin Lavelle is the chief communications officer for beenverified.com, a leading source of online background checks and contact information. It allows individuals to find more information about people, phone numbers, email addresses, property records, and criminal records in a way that’s fast, easy, and affordable. The company helps people discover, understand, and use public data in their everyday lives.
Jaquetta T RaglandJaquetta T Ragland is the owner of youngandfinance.com and is also a licensed real estate agent. She teaches personal finance education to empower individuals to make the right financial decisions in their lives.

What credit card lesson did you learn after college? Share your stories with us on Twitter at @OppUniversity.

What Happens When Someone Checks Your Credit?

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

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

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


Here’s how credit scores work.

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

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

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

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

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

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

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

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

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

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

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

Why do hard inquiries affect your credit score?

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

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

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

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

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

The benefits of soft credit check loans.

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

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

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

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

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

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

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10 Ways That Bad Credit Can Mess up Your Life

10 ways that bad credit can mess up your life

If you thought that a bad credit score only affected your ability to get qualified for personal loans and credit cards—think again.

Having a bad credit score is … bad. That’s why they call it “bad” credit. But what does that actually mean? If you’re a credit newbie, you would do well to learn all the different ways that bad credit can damage your financial wellbeing. Luckily, that’s exactly what we’re here to teach you. So check out these 10 ways that bad credit can totally mess up your life!


1. Higher interest rates.

The way that bad credit most directly affects a person’s life is in the realm of—well—credit. If you have a lousy credit score, you’ll have a hard time getting approved for personal loans and credit cards, especially if those loans are unsecured.

But even if you do get approved, the bad credit pain isn’t over.

“Everyone knows that having bad credit can make it difficult to be approved for a loan, but even if you do happen to be approved, it’s not always a good thing,” said Jacob Dayan, CEO and co-founder of Community Tax, LLC (@communitytaxllc) and Finance Pal, LLC.

“These loans will come with higher down payments, higher interest rates, and tighter terms. When it comes to loans, even a one or two percent increase in your rates can be extremely expensive over time.”

This is why people with bad credit and zero savings often end up relying on short-term no credit check loans (like payday loans, cash advances, and title loans) to bridge unexpected financial shortfalls—loans that can all-too-easily leave them trapped in a dangerous cycle of debt.

2. Car ownership.

Unlike unsecured personal loans, online loans, and credit cards, auto loans involve collateral. Specifically, they use the car or truck that the loan has been taken out to purchase. The presence of collateral means that these loans are easier to qualify for, even if you have bad credit.

Still, bad credit means that you will stand a much higher chance of being declined for the loan. And even if you are approved, you will once again face higher interest rates and more restrictive terms. Due to the larger principal amounts and longer terms for auto loans, this could mean paying thousands and thousands more in interest.

3. Buying a home.

“At worst a bad credit score will prevent you from securing a mortgage,” said CFP Patricia Russell, founder of the personal finance blog FinanceMarvel. “And at best, even if you do secure a mortgage, you will be paying a much higher interest rate compared to someone with a better credit rating.”

For first-time homebuyers, a credit score of 580  is needed to secure a Federal Housing Administration (FHA) mortgage loan with as little as 3.5 percent down. If your credit score is between 500 and 579, you’ll have to put 10 percent down in order to secure that same loan.

While a 580 score is much lower than the score one would need to qualify for an unsecured installment loan, there are many borrowers would still be unable to meet it. For them, the dream of home ownership might be beyond their grasp, all because they have poor credit!

4. Car insurance.

Most people understand that their access to affordable loans and credit cards pretty much depends on their credit score. But here’s another less widely known way that bad credit can increase a person’s cost of living: Car insurance!

“A poor credit score will result in a higher premium as insurance companies run a credit check,” said Russell. And why is that? Russell went on to state that there is evidence linking lower credit ratings and higher claim rates.

Insurance companies actually use something called your “credit-based insurance score” to predict how many claims you’ll be likely to file. And according to a 2007 report from the Federal Trade Commission (FTC), these scores do a pretty great job:

“Credit-based insurance scores are effective predictors of risk under automobile policies. They are predictive of the number of claims consumers file and the total cost of those claims. The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer. Thus, on average, higher-risk consumers will pay higher premiums and lower-risk consumers will pay lower premiums.”

While your credit-based insurance score isn’t exactly the same thing as your FICO score, the two are quite closely linked. If you have poor credit and you’re applying for car insurance, you should brace yourself for a larger bill!

5. Renting.

It’s a fair bet that the biggest bill you encounter every month is the bill for your place of residence. If you own a home, that’s your mortgage payment. If you don’t, then it’s your rent. Either way, your credit score is going to come into play. When you’re applying for a new apartment, most landlords are going to check your credit score.

Like lenders, landlords don’t want to rent to people who cannot pay their bills on time. And since payment history makes up 35 percent of your total FICO score—more than any other single factor—poor credit will make many a potential landlord leery.

If you’re applying for a new apartment and you know you have lousy credit, there are steps you can take. The most helpful step of all is to offer a larger security deposit: Instead of one month’s rent, for instance, maybe you offer to pay them two months rent. You’ll still end up having to pay more due to your bad credit, but at least you’ll have a place to live.

6. Cell phone contracts.

If you’ve applied for a new phone contract recently, you might have noticed that they checked your credit before approving your application. That’s right: Bad credit can even affect how much you get charged to talk (and more likely, text) on the phone!

“One of the lesser known effects of bad credit is that it can make it very difficult to obtain a contract with a phone service provider,” explained Dayan.”This may not have been a problem in the past, but these days when your cell phone is your connection to the entire world, it can be a huge handicap.

“Similar to landlords, service providers like to know that you will be able to consistently pay for your service and cover any additional charges you may rack up. If you have bad credit then you will likely have to resort to more costly options like security deposits and prepaid plans.”

The answer here is similar to the answer for renting an apartment, as you’ll probably be forced to pay more for the phone up front. Beyond shopping around for the best deal, it might be a good idea to ask your friends and family members if one of them is willing to co-sign your phone contract.

7. Starting a business.

“Many entrepreneurs need a loan or line of credit to get their business idea off the ground, but as a small business owner, your personal credit will impact your ability to get a loan for the business,” said personal finance blogger Marc Andre of VitalDollar.com (@vital_dollar).

“Poor credit could prevent you from being able to qualify for the business loan, and you may have a hard time getting the funding that you need to start the business.” So if you’re looking to pay down some extra debt in hopes of boosting your score, an unincorporated side hustle might be the way to go.

8. Getting a job.

“It can be tough to secure employment, as many jobs in upper management will require a good credit score (especially in the financial sector). A bad credit history will greatly reduce your chances of securing a job,” said Russell.

Pre-employment credit checks count as a hard inquiry, which means that an employer will need your permission in order to run one. In certain states—and the District of Columbia—an employer’s ability to run credit checks on potential (and current!) employees is limited.

While a pre-employment credit check could prevent you from getting hired—or could lead to you being fired from a job you already have—these inquiries slightly more rare outside of the financial sector and jobs that require handling a lot of money. But don’t forget: Some bad information from your past doesn’t require a credit check. A quick Google search will do just fine.

9. Utilities.

“Not many people are aware that a poor credit score can result in higher costs of utilities like electricity, water, phone, and cable,” said Russell. “These are in essence short-term loans as you receive the benefits of the service before you pay for them.”

“Utility companies will always run a credit check when you sign up to and anyone with poor credit may be required to pay a deposit of several months worth of services,” she added.

And while many utility companies will refund that deposit after a year of on-time payments, some will require a letter of guarantee: Basically, someone with good credit has to co-sign your gas bill!

10. Strain on your relationship.

If you think that the effects of bad credit are limited to only matters of your pocketbook, think again. Bad credit and—and sometimes bad credit loans—can negatively affect your dating life. And the more serious the relationship, the more damage a bad credit score can do.

“The impacts of poor credit, like higher interest rates and missing out on job opportunities, can lead to a lot of stress and sometimes to financial difficulties,” said Andre. “These situations put added strain on marriages and other relationships. In this case, the indirect results of credit troubles can be much worse than the direct results.”

Maneuvering through life with a bad credit score is like trying to use your phone’s GPS right after you dropped it in the pool: Getting where you want to go is a lot more difficult than it should be, and the many detours you’re sure to encounter are going to be a real hassle. To learn more about how you can improve your credit score and seize control of your financial future, check out these related posts and articles from OppLoans:

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

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Contributors

Marc Andre is a personal finance blogger at VitalDollar.com (@vital_dollar), where he writes about saving money, managing money, and ways to make more money. His goal with Vital Dollar is to help individuals and families get the most out of the money they have and to reach their full financial potential. He lives in Pennsylvania with his wife and their two kids (a son and a daughter).
Jacob Dayan is the CEO and Co-Founder of Community Tax, LLC (@communitytaxllc) and Finance Pal, LLC. He began his career in Wall Street New York at Bear Stearns working in the Financial Analytics and Structured Transactions group. He continued to work in Wall Street until early 2009. When he then left New York and returned to Chicago to be with his family and pursue his lifelong dream of self-employment. There he co-founded Community Tax, LLC followed by Finance Pal in late 2018.
Patricia Russell is a Certified Financial Planner (CFP) and the founder of the personal finance blog, FinanceMarvel, which provides free financial advice on managing credit, debit and savings. Patricia has more than 10 years experience in helping families and individuals take control of their personal finances and achieve financial independence.

What Is a Hard Credit Check?

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

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

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


Credit scores: an overview.

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

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

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

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

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

Here’s how hard credit checks work.

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

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

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

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

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

Soft credit checks exist as well.

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

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

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

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

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

Some loans use soft credit checks.

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

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

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

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

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

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

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