When you’re in over your head or you’ve had a bad experience with something, your natural reaction is pretty much always going to be to steer clear of the cause for some time. With credit, this typically means cutting up credit cards and closing credit accounts. Unfortunately, when it comes to your credit score, this is one of the worst knee-jerk reactions you can have. On the surface, getting rid of your accounts makes a lot of sense. You’re having debt issues, so get rid of the source of the problem and your credit problems will start to disappear. The little known fact is that this can actually make your credit issues even worse.
Let’s look at this a little closer. Fifteen percent of your credit score is derived from the age of your credit cards, with older credit accounts giving you a better score. This part of your credit score is based on the average age of your accounts. As a result, every time you terminate older accounts, you drive down the average age of your accounts considerably and risk decreasing your credit score.
Another factor to consider is your recent credit history. The credit bureaus base their evaluation of your credit worthiness on your account activity. If you close your accounts, there’s no activity for them to evaluate. This can result in a lowered score because they have no current data to determine whether you are a responsible borrower.
In addition to your account activity and age of your credit cards, your credit score is also affected by your overall utilization rate. Your utilization rate is your percentage of debt compared to your credit limit. Credit bureaus reward consumers who keep their utilization rate below 30 percent. If you close an account, there’s a good chance your rate will go up and can directly affect your credit score.
If you are having issues with paying a card, some options you might want to consider include transferring some of the debt evenly across other cards so you keep your utilization rates below 30% on all cards. If you’re not able to do that, start reducing your debt and making your way to the 30% utilization rate by making regular monthly payments. A steady history of payments will demonstrate to credit-scoring bureaus your ability to manage your accounts and will eventually improve your credit score. You’ll want to pay special attention to the oldest accounts with the highest limits and lowest interest rates.
Category: CREDIT SCORING
“Buy Now Pay Later No Credit Check
Are the buy now pay later no credit check offers good for your credit score?
Probably not.
As you learn how to build credit, you should consider that certain credit types of credit, including buy now pay later no credit check offers, will probably hurt your credit score.
You can probably surmise that buy now pay later no credit check offers usually come with Goliath-sized interest rates. People who apply for these loans are often risky borrowers who are unlikely to repay their loans, so creditors who offer buy now pay later no credit check loans know that many of their customers will default once the grace period expires. To make these loans worthwhile, creditors attach high interest rates. The people who do repay their loans pay an arm and a leg in interest to compensate the creditors for the cost of those who default.
Aside from the high interest rates, buy now pay later no credit check offers are probably a bad idea for another reason. The creditor might not check your credit before granting you a loan, but the creditor will most certainly report the buy now pay later no credit check offer to the credit-scoring bureaus. And credit scoring systems frown upon any buy now pay later loans. These loans suggest that the borrower is not currently able to meet the financial obligations of the loan, and this gives the credit-scoring bureaus reason to believe that you are a credit risk.
One of the rules of how to build credit is that you should never do anything that suggests you are experiencing financial strain. Even if you plan to repay the loan in a timely manner, the buy now pay later no credit check loan tells the credit-scoring bureaus that you are in such a financial bind that you will agree to sky-high interest rates. A person whose finances are stable probably would not agree to high interest rates, so credit-scoring bureaus will lower your credit score if you apply for these loans.
One more reason to steer clear of buy now pay later no credit check offers: These loans often result in a high utilization rate. Remember that your utilization rate is the balance you have on a loan or credit card as compared to the limit. The lower your utilization rate, the better your credit score. Because the balance on these loans often does not decrease for many months (remember, you will pay later), your utilization rate stays high until you start paying.
Though the buy now pay later no credit check offers might be tempting, if you really want to take the steps and learn how to improve your credit score, you should turn your back on these offers.
Build Credit: Debunking the Lower Credit Limits Myth
Similar to the belief that no credit equals good credit, having lower limits can actually be extremely harmful to your credit score. To understand how this works you need to understand utilization rates, or what we call the 30% rule. Credit bureaus look to see that you are maintaining less than 30% of your credit limit at all times. If you go over the 30% marker, you are considered to be living above your means and this will be reflected in your credit score.
The problem with lower limit credit cards is that it is far too easy to go over the 30% rule. If you only have a $250 credit limit, you can never have a balance of over $75 without creating a negative reaction to your credit score. In addition, many credit card companies report your credit limit lower erroneously. Meaning you may be right under $75 each month, but your credit limit is being reported at $200 instead, putting you over the 30% limit.
In some cases, when you’re rebuilding your credit you may have to work with these lower balances. This will take careful planning to avoid any issues with errors. However, if you have higher balances, you do not want to ask for your rates to be lowered. You can never have “too much available credit.”
The best way to make sure you don’t go over the 30% rule is to use auto payments. You’ll want to schedule a monthly payment for a bill such as a gym membership or other monthly payment you need to make to be taken directly from your credit card. Then, from your bank account, schedule another auto payment to pay the credit card for the same amount.
This may sound like taking a few extra steps, but it keeps your accounts active and you can control exactly what spending is happening on your cards so you don’t go over the 30% limit.
To learn all all the facts on your credit score, get the book that will walk you through the 7 steps to a 720 credit score.
Build Credit: The Truth About Living Debt Free
For a lot of people, living with credit card debt is simply a way of life. We have all heard of the credit crunch where banks lent more to people than they could afford to pay back. When people fell behind on their repayments, the banks were in trouble and drastically cut back on the amount of money they were lending. This then led to a collapse in the housing market as a glut of foreclosures suddenly came up for sale. A lot of people, during this depression, decided that credit was actually a bad thing and they started to live a debt free lifestyle. While this is a great idea in principle, it is not a good idea to close your credit card accounts and attempt to live life on a cash only basis.
The problem is that your credit score affects many areas of your life. For example, car insurance companies now use credit scoring as a way to determine how responsible you are behind the wheel of a car. More and more companies are now using credit scoring to decide how responsible you will be as an employee. Also, if you ever need cash in an emergency, it is essential to have a good credit score to ensure you get the money you need quickly and at the best rate.
What most people do not understand is that not having credit is just as bad as having bad credit. We no longer live in a society where you can be good friends with your bank manager and he, knowing who you are and how you live, can decide whether to lend you the money you need. Most bank managers know little more than sales department managers.
At US Bank, for example, the local branch no longer has control over whether a check that overdrafts your account will be paid or bounced. If you call the branch and ask them to pay it, they will tell you that they have no control over it. They will tell you, however, that you should apply for overdraft protection so that it does not happen again, and they will happily help you fill out an application. Of course, whether or not they grant you overdraft protection depends on your credit score.
The problem with not having credit is that the credit bureaus will no longer be able to assess your credit worthiness. Rather than assume you are a good person to lend to and risk being wrong, they will err on the side of caution and assign you a poor credit score. This could lead to higher rates on your car insurance, mortgage or even stop you from getting a job or promotion.
Unfortunately, it is not a good idea to simply put the credit cards into a drawer and never use them either. A lot of companies will declare unused cards as inactive and therefore they will not count towards building your credit score. However, there is a solution that will not cost you extra money in interest and will still build your credit score.
The solution is to have between three and five credit cards and set them up to automatically pay one monthly bill each. For example, your cable bill could be paid out of one card, your car insurance could be paid out of another and your gym membership could be paid out of a third card. In order to avoid interest charges, you could then set up an automatic payment to these cards from your bank.
In essence, using this method, your money leaves your bank and arrives at the place it needs to get to; it just passes through your credit card accounts on the way. This allows you to essentially live debt free, but give you the benefits of a healthy credit score so you have access to the cash you need in case of an emergency.
Build Credit: Debunking the No Credit Equals Good Credit Myth
Credit is a tricky subject. Everyone thinks they know the right thing to do, and everyone seems to be an expert. The fact is, there are a lot of myths and untruths about the way your credit score is compiled. The biggest and first mistake most people fall for is believing that no or little credit equates to good credit. This couldn’t be further from the truth.
Imagine someone you didn’t know came up to you and asked if they could borrow money from you. They promised they’d pay it back to you in a week. How would you know they were responsible or even ethical enough to return your investment? Now, let’s say a trusted friend you’ve known for years came up to you and asked you for the same favor. Your response would more than likely be quite different than the one you had towards the unknown person.
When you have little or no credit, credit bureaus view you as the stranger asking for money. They have very little information on whether you are a good investment and whether they are likely to see a return. You have to become like the trusted friend and create credit history to have a valued and trusting relationship.
This doesn’t mean go out and apply for multiple credit cards and start taking out loans. While you need to show credit history, you also don’t need to go into debt. To create a good credit score, you need at least three credit cards with balances below 30% of your credit limit and an installment loan.
Now, you may be thinking that credit isn’t really a big of deal and you don’t want to have credit cards and loans because they are a hassle. This way of thinking can hurt you financially more than you know. Your credit score is used to determine a number of things including, believe it or not, your automobile insurance and even your job worthiness.
When it comes to purchasing a house, your interest rate is determined by your credit score. This means you could be paying thousands more for your home because of bad credit decisions. Think about this:
On a $300,000, 30-year fixed rate mortgage, a person with poor credit (below 620) would pay $589 more a month than a borrower with a 720 credit score. That’s $589 a month! Imagine what you could do with an extra $7,068 a year. You could buy a new car, save for your child’s college tuition or with wise investments, double, triple, or even quadruple the money!
The bottom line is, your credit score can either help or hurt you financially. Learning the ins and outs of how to maintain a high credit score will give you a great return on your investment of time and research. It may even help you live the life you dream without overextending yourself.
Bad Credit Is Bad News for the Unemployed
A recent report from Inc. Magazine says at that at least 60 percent of employers run credit checks on potential job applicants at least some of the time. This is a 17 percent increase from 2006.
And given the high unemployment rate, this is particularly concerning. With a much bigger pool of candidates to choose from, employers can narrow the pool of qualified candidates by looking at a job applicant’s credit score. Fearful that a poor credit score is a sign of irresponsibility, an employer might not offer a job to a candidate with bad credit.
This means that job applicants may be hit with a double dose of trouble. Not only are they out of work, but they also are unable to make regular payments on mounting mortgage and credit card bills, which is causing their credit score to plummet. Since many employers are making credit checks a mandatory condition of employment, job applicants may find themselves stuck in a vicious cycle: No job translates to no ability to pay bills, which in turn causes poor credit, which means a person might be ineligible for jobs.
If you are a job applicant worried that an employer will run a credit check, your best bet is to be candid with possible employers and let them know about your experience. Since the recession has had unfortunate consequences for many people, the employer might be sympathetic to your plight. Pitch your situation as a learning experience so that you can show the employer that you are ready to move on from your mistakes.
Explain that you have started the process of learning how to build credit to minimize damage and improve your credit score.
By taking serious steps to repair your credit, your credit report might indicate that you have had a shift in the positive direction. If you walk into a job interview armed with a the facts about your credit score, how you have turned over a new leaf, and what your credit report indicates about your current behavior, a potential employer might be sympathetic, especially if you have extenuating circumstances brought on by the recession.
Though credit checks for job applicants might create barriers in the already-tight job market, employers are also likely to value an honest account of your situation. By being forthright about your past mistakes and offering evidence of your progress, employers will be more likely to look past a three-digit number and offer you the job.
The Credit-Scoring Scam of the Century
Are you a victim of the credit scoring scam of the century? If you have a credit card, there’s a 50/50 chance that you are.
What Is the Credit Scoring Scam of the Century?
About half of credit card companies use a shameful tactic to keep their competitors away from you, and this tactic hurts your ability to build a good credit score.
It works like this:
When sending credit card solicitations, credit card companies target specific people to receive their offers. Imagine that all of your credit cards have low interest rates and credit limits of at least $10,000. A credit card company would not offer you a credit card with a high interest rate and a $500 limit. After all, you would never apply for that credit card.
But a credit card company might offer you a credit card with a $15,000 limit and even lower interest rates. And you just might take advantage of this offer and switch cards.
Obviously, your existing credit card companies don’t want you to receive these offers because they might lose you as a customer.
And this is where the credit scoring scam of the century comes into play.
To create their marketing lists, credit card companies buy information about you from the credit bureaus. While the credit bureaus do not disclose your specific financial information, they do provide information about the credit cards you carry. For instance, Whatchamacallit Credit Card Company might buy a list of people who have credit cards limits of at least $5,000. Whatchamacallit could then send a credit card offer targeted to these people
And here is the credit scoring scam: Your existing credit cards can keep your name off these lists by reporting a lower credit card limit than you actually have, and this slaughters your credit score.
Let’s use the earlier scenario as an example. Whatchamacallit is looking for people with credit limits of at least $5,000. You carry a Tweedledee credit card with a $5,000 limit. Technically, your name should be on the list Whatchamacallit buys from the credit bureaus.
But Tweedledee doesn’t want Whatchamacallit to steal your business, so it reports your limit as only $3,000.
Your name is not included in Whatchamacallit’s list, so you do not receive the competing credit card offer.
You do, however, receive a credit card solicitation from John Q. Credit Card Company, which offers a new credit card with a $3,000 limit.
When you receive the offer, you immediately toss it in the garbage, thinking to yourself, “Why would I get a John Q. credit card with only a $3,000 limit when I already have a Tweedledee credit card with a $5,000 limit?”
Voila! Tweedledee has successfully kept you as a customer.
But here is where the credit scoring scam gets really dirty. About 30 percent of your credit score is based on the amount of money you owe. Credit scoring formula want to know how much you owe based as a percentage of your credit limit. This balance-to-limit ratio is called a “utilization rate.” The credit scoring bureaus will award you more points if your utilization rate is below 30 percent.
For instance, if you have a $1,500 balance on a credit card with a $5,000 limit, you have a 30 percent utilization rate. If you have a $1,500 balance on a credit card with a $3,000 limit, you have a 50 percent utilization rate. In other words, you are utilizing 50 percent of the available limit.
So when Tweedledee reports your limit as lower than it actually is, your utilization rate appears higher than it actually is, and your credit score plummets.
The credit scoring bureaus assume that someone with a high utilization rate is suffering from a financial drought and might be unable to pay his or her bills. On the other hand, a utilization rate below 30 percent indicates that your finances are in order.
In other words, this credit scoring scam can mean the difference between a good credit score and a poor credit score. In turn, this can mean the difference between low interest rates and high interest rates.
How to Fix the Credit Scoring Scam
Start by pulling your credit report. Check your credit card limits and make sure they are being reported accurately.
If any of your limits are being reported inaccurately, call your credit card companies and tell them to report the accurate limit. They might refuse. (Shockingly, this credit scoring scam is legal.) If they refuse, tell them you plan to stop using that card until they report the proper limit.
You might even threaten to close the account, though I don’t suggest carrying through with this threat. Closing a credit card can hurt your score. Nonetheless, the threat might be enough to get the credit card company to report the accurate information
Next, send a letter to the credit scoring bureaus asking them to correct the information. Be sure to send your credit card statement as proof of your actual limit.
Then follow up. Keep calling the credit card company until they correct this credit scoring scam. Be sure to pull your credit report every six months to make sure the mistake hasn’t resurfaced.
Build Your Credit with Do-It-Yourself Credit Tricks
Okay. You want to build your credit score, but you don’t want to pay a bundle.
Here are a few tricks that will help turn a bad score into a good credit score.
An obvious place to start is with your credit cards.
Here’s a little trick that can really boost your FICO score. (By the way, even though it’s perfectly legal, not one consumer in a thousand knows this technique.)
Most credit cards have a limit: a maximum credit line.
You are allowed to borrow against that credit line up to the maximum amount.
But, you should NOT!
Why not?
Lenders don’t like to make loans to consumers who are constantly “maxing out” their credit cards, because they consider them spendthrifts.
In fact, if the balance on any one of your credit cards is more than 30 percent of the credit line, your FICO score will be penalized.
So how do you reverse that trend … and raise your FICO score?
Here are two easy methods that work and won’t cost you a dime:
- Transfer balances from one credit card to another, so that none of the balances exceed 30 percent of the credit limit. If necessary, obtain another credit card and transfer some of your balances to it. (But keep in mind that you should never have more than five credit cards, and that you should transfer your balance after you have secured the credit card and know the limit.)
- Ask the credit card companies to increase your credit limit so that your current balance falls under 30 percent. If you can get the credit card company to raise your limit from $10,000 to $25,000, then you can safely borrow up to $7,499 – and not just $3,000 – on it without jeopardizing your credit.
Now here’s another trick …
You probably don’t know this, but credit card companies routinely under-report the limits on their customers’ credit cards – or, even worse, don’t report them at all. Let’s say your true limit is $10,000. The credit card company might report your limit as only $5,000 to the credit bureaus .
So if you have a $4900 balance, you appear to be “maxing out” the credit card, which will hurt your score.
Why do credit card companies do this? Because it keeps their competitors from offering you other cards.
When competing credit card companies see high limits from another card issuer, they have found credit-worthy borrowers whom they can solicit through the mail.
On the other hand, customers with low limits are not as desirable.
So many credit card companies report incorrect limits just to protect their customer base. But this could be hurting your credit score by causing the bureaus to think you are closer to maxing out your cards.
So what should you do? Simple: Just check your credit report to make sure the bureaus have the correct information. If not, call your credit card company and tell them they must correct the mistake – knowingly reporting incorrect limits is illegal. If you raise heck, the credit card companies will report the correct information.
– Philip Tirone
Survey says consumers still confused about credit-scoring
A survey from NerdWallet and Harris Poll found that many Americans do not know the rules of credit scoring. Here are some of the findings:
- About half of Americans don’t know that having bad credit can limit their option for cell phone service, and more than half don’t know that people with poor credit will pay higher utility rates.
- Almost one-quarter of Americans in the survey didn’t know that they might be unable to rent an apartment due to poor credit.
- Nearly 45 percent didn’t know that they might pay higher car insurance premiums if their credit scores are low.
- About 41 percent erroneously think that carrying a small balance on credit cards will hurt their credit scores.
Knowing the rules of credit-scoring is important because having bad credit is expensive. You will pay higher interest rates on your credit cards and loans, as well as higher premiums on insurance, and higher deposits for utilities.
Credit-Scoring 101
Here are the basics of credit-scoring. FICO scores are calculated from data reported to credit bureaus by lenders. This information includes:
- Your payment history accounts for 35 percent of your credit score. If you are 30 days or more late on a payment, your score could drop.
- The amount of credit you use accounts for 30 percent of your score. You will have a higher credit score if your credit card balances never exceed 30 percent of your credit limit. And, as your loans age, your score will increase, assuming you pay your loans on time.
- The age of your accounts determines about 15 percent of your score. The older your accounts, the deeper your roots, and the better your score.
- Having a healthy mix of credit accounts for about 10 percent of your score. Creditors want to see that you can juggle different types of credit, so they assign better scores to people who have, at a minimum, three credit cards and an installment loan or credit rebuilder loan.
- Credit inquiries account for 10 percent of your score. Unless you are rate shopping, your score will drop a few points every time you apply for a credit card or a loan.
Correct Errors To Rebuild Your Credit Score
The first step to rebuilding your credit is getting a copy of your credit report. Yes, I know that’s an extremely simple first step, but it is an essential one. When rebuilding your credit, it is wise to review your credit report at least once every six months. If your credit score is low, you may want to pull your credit report quarterly. This won’t negatively affect your credit score. After getting your credit report, look for errors. If there aren’t any, good! You can now focus on rebuilding your credit score. If there are errors address them immediately if they are severe. In Step Five of my program, I explain that almost 80 percent of people have errors on their credit report, and 25 percent of these errors are severe enough to cause a person to lose a loan or a job opportunity. This is one reason it is essential to know what’s on your credit report. When finding an error on your credit report, what should you do? First and foremost, if you think you are a victim of identity theft, call the three credit bureaus right away to put a freeze on your credit account. This way, no one else can open credit in your name. If the mistake doesn’t seem to indicate you are a victim of identity theft, you can start by filing an online dispute at each of the three credit bureaus. Following are the three credit bureau links:
If a bank or credit card company is responsible for incorrect information on your credit report, contact them. Ask them to investigate the mistake they reported to the credit bureaus. Make sure you have documentation to support your statements. One of the most common (and dangerous) errors you will find is an inaccurate credit limit. So why does an inaccurate credit limit hurt your credit score? The credit-scoring agencies give higher credit scores to people with lower utilization rates (your credit card balance as a percentage of your limit.) If your limit is, for instance, $2,000, and your balance is $600, you have a utilization rate of 30 percent. Maintaining a 30 percent utilization rate is good. It should improve your credit score. If your credit card company is reporting your limit as $1,000 instead of $2,000, this is an error. Your utilization rate will appear to be 60 percent (a $600 balance on a $1,000 limit). This is a bad utilization rate because it may seem that you rely on credit. This will cause your credit score to drop. Notify the credit bureaus of the error on your credit limit by filing a dispute with all three credit bureaus. At the same time, place a call or send a letter to your credit card company demanding they report your correct limit. Correcting errors help rebuild your credit score. After all major errors are corrected, get another copy of your credit report to verify it is error-free. If it is, focus on rebuilding your credit to increase your credit score. FYI: Your credit score will not decrease if you get a copy of your credit report. Inquiries into your credit score by lenders will cause a dent in your score, but you are not penalized for getting your own credit report. This is considered responsible financial behavior. Therefore, get your credit report as often as you desire to check for errors and/or to rebuild your credit score.
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