July 6th, 2020
July 6th, 2020
When you don’t understand how credit works, it can be an intimidating factor in your financial life. Unfortunately, there are some things that may affect your credit without you even realizing as they don’t seem to be commonly discussed. To help you avoid a credit curveball, we asked a few credit experts to talk about some things you might not expect that may negatively affect your credit situation. Here’s what they said: Unpaid bills and fines “Most people are aware of the major things that negatively affect your credit score. However, most people are not aware of the effect of unpaid parking tickets, library fees, etc. Any unpaid fine can be sent to a collection agency and show up on your credit report. — Jory McEachern, Director of Operations at ScoreShuttle “It’s common knowledge that unpaid debts can damage your credit scores, but it may not be obvious that unpaid debts can include utility bills, child support, parking tickets, and much more. Once any of these seemingly menial debts is reported to a collection agency, your credit scores are likely to take a serious hit.” — Sean Messier, Credit Industry Analyst at Credit Card Insider “Here's the thing: when you ignore that traffic ticket and fail to pay it, it doesn't just go away. Instead, the county will actually turn it over to a debt collection agency to get their money.And if that debt collection agency decides to report your failed payment to the credit bureaus, which it most likely will, it will almost certainly lower your credit score, perhaps significantly, since it sends a signal to lenders that you are not responsible in paying back your debts. So while the actual traffic ticket will not impact your credit score, if you fail to pay it off, it could cause serious damage to your score.” — Mike Pearson, Founder of Credit Takeoff“While unpaid/late child support may seem like an agreement between you and your ex, child support and alimony are very much considered debts and delinquencies may be reported to the credit bureaus.” — Jenna Biancavilla, Financial Planning Expert and Owner of Pearl Capital Management“One factor that can unexpectedly affect your credit score is having overdue library books. Many people don't know this, but public libraries and libraries at educational institutions can report customers to the credit bureaus if they have an overdue account. They usually only report you if you have a big balance, for textbooks for example. If reported, it will show up as a delinquent account on your credit report and can ding your score by 25, 50, or even 100+ points depending on the amount that's due and how late you are. Remember that payment history accounts for 35 percent of your credit score. Return library books on time, and pay any outstanding library fines to avoid this from happening.” — Priyanka Prakash, Lending and Credit Expert at Fundera A medical bill if left unpaid will negatively impact your credit score. Additionally if you have an emergency and you have to use the majority or your entire credit limit, that would negatively impact your credit score as well. — Marshall Armond, CEO of CreditRevo.com“Liens will also show up on the public records section of your credit report. This can include a lien for unpaid taxes from your own business or a lien resulting from unpaid homeowner association dues.”— Todd Christensen, Education Manager at Money Fit and author of Everyday Money for Everyday People Civil judgments “Civil judgments will show up under the public records session of your credit report. This would include any large bill a company has chosen to sue you for. Typically it involves old credit card debts and collection accounts. Most medical and dental offices do not take their current or former patients to court but will send the accounts to collections. Then, it is up to the collection agency to decide whether or not to go to court.” — Christensen Paying off installment loans “Paying off an installment loan, such as an auto loan, may cause your credit scores to drop. Fortunately, this will likely only occur if it’s the only installment loan that you’re currently paying. Your variety of credit accounts makes up 10 percent of your FICO credit scores, which means that removing installment loans from the mix could have a negative effect.” — Messier“Common sense would tell you that paying off, say, your student loans would prove that you are a responsible borrower and cause your credit score to increase. But credit scores aren't always calculated in the most logical way....there's a factor that goes into your credit score called ‘credit mix.’ This factor accounts for about 10 percent of your credit score. Essentially, borrowers who have a mix of different kinds of credit — credit cards being one and installment loans (like student loans) being another — are basically seen as more creditworthy than borrowers with only one kind of credit.So if your student loans are the only installment loans on your credit report, and you pay them all off, this could cause the ‘credit mix’ factor to negatively affect your credit score.” — Logan Allec, CPA and Owner of Money Done Right “Loans give your credit score a boost as long as you make your loan payments on time. So, you’d assume that once you’ve paid off your debt, your credit score would skyrocket, right? Well not exactly. When the status of an installment loan like car loan changes from ‘active repayment’ to ‘paid,’ your credit score doesn’t know exactly what that means. Therefore, your credit score may temporarily drop due to the change. But no worries, in a month or two, your score will stabilize and eventually go up.” — Chelsea Hudson, Personal Finance Expert at TopCashback.com Closing a credit card “Canceling a credit card on which you’ve developed a positive history. Some people switch around from card to card, and cancel one along the way. However, the longer you hold a card, the more valuable it is in your credit score determination. Store a card away — or even freeze it — to avoid using it, but think very carefully before actually closing the account.” — Freddie Huynh, Vice President of Credit Risk analytics at Freedom Financial Network Filling out applications “It's fairly common for people to know if they apply for loans or credit cards it will ding their score, but landlords, insurance companies, utility companies, and cell phone companies can also pull your credit. Too many inquiries will ding your score the same as an installment loan will. To help avoid this, use an insurance broker or get all the information you can from companies to know who you want to use before you give them your social security number.” — Joyce Blue, Money Relationship Expert at Empowering You Life Enhancement Coaching LLC“Personally, when I applied for a new group cell phone plan, my credit score took a hit when the company made a hard inquiry on my credit score. They expressly said this wouldn’t happen but clearly were wrong because it took over 6 months to recover to the level immediately before the inquiry.Another instance was when I used financing to purchase a couch for my home. We used available financing through the retailer’s sponsoring service, and another inquiry hit my account. Both expenses were relatively small but still had negative impacts on our credit which have only recently run off our credit reports.” — Riley Adams, CPA, Senior Financial Analyst and Owner of the Young and The Invested blog“Things like hard credit checks and rate shopping are among the unexpected things that can have a negative impact on your credit score. Hard credit checks generally hurt your score between 1-5 points and you can expect them when applying for a new credit card, when you apply for any type of loan or mortgage, when you get a new cell phone contract, or when you request a line of credit increase. In regard to rate shopping, if you're looking for the best rates on a loan it's ideal to group these hard inquiries within a 30-45 day window. This way they will generally act as one inquiry, instead of multiple, saving you from hurting your credit score significantly.” — Jordan Tarver, Credit Analyst at FitSmallBusiness.com Cosigning a loan “Another thing that can affect your credit score is if you cosigned a loan. Both the cosigner and primary loan holder share responsibility for the debt and it will appear on both credit reports. Communicate with the primary loan holder how his/her actions will affect your financial life too.” — Alissa Todd, Financial Advisor at The Wealth Consulting Group Balance cards “Some people use balance cards to transfer debt onto the card and pay off debt at the 0 percent introductory period. This can, however, potentially ding your credit as carrying a high balance on a card will often do so. However, for many people it will still be worth it to pay off debt interest free and be able to pay down that debt faster, in which case, their credit will bounce back after a short period.” — Jacob Dayan, CEO of Community Tax & Finance Pal The bottom line Clearly, many factors can affect your credit. Fortunately, you can use these credit repair options and tips if your credit has suffered in the past. To avoid further credit harm, you may want to make sure you monitor your credit, understand what can affect your credit, and stay on top of your debt as well as your daily credit usage.
Regardless of where you are in life, it's becoming increasingly important to understand your credit report and score. In addition to determining whether or not you can get a loan, the contents of your credit report can also affect your interest rates, insurance premiums, cell phone plans, getting an apartment, a job, passing a background check, and more. In this article, we're going to give a basic overview of how it all works. We'll talk about: What a credit report is Why we have them What goes in them Who maintains them How a credit score is calculated (we'll tackle credit scores in more detail in a separate article). What is a Credit Report? Basically, your credit report is a history of your use (or misuse) of borrowed money. In a nutshell, whenever you apply for a loan, credit card, lease, make a payment, miss a payment, and so forth, your lenders report it back to one or more credit bureaus. The credit bureaus collect this information from all of your lenders, then organize and compile it into your credit report. In other words, a credit report is basically a personal profile that shows, in tremendous detail, how consistent and responsible someone is with paying back borrowed money. Why Do We Have Credit Reports? The main reason credit reports came about was to help lenders see how financially responsible somebody was before lending them money. Let's use an example to illustrate: An Example: Lending to Greg Let's say you own a small bank and I come in and ask you for a $500 loan to help me cover car repairs, promising to pay you back $550 in a year. You want to give me the loan, but you also have no idea who I am or how likely I am to pay it back as promised. So... you call your buddy, who tells you that I borrowed $250 from him a year ago and never paid it back. Knowing this, you're probably less likely to lend me the money, right? However, if your buddy instead tells you that I borrowed $1,200 a year ago and paid it back on time, you're probably more likely to trust me to pay back the $500. And if you were to keep calling around and find more people vouching for my ability to repay, you're even more likely to feel comfortable giving me the loan, because I've demonstrated through past behavior that I am creditworthy. The problem is, you don't have time to call every single one of your buddies every time someone needs a loan, otherwise you wouldn't get anything done. So instead, you just call your buddy at the credit bureau who keeps track of all of my loans and payments in my credit report which can quickly tell you whether or not I'm a safe bet. So for banks and other lenders, a credit report provides a quick and reasonably accurate way to determine creditworthiness without having to call a zillion other lenders or references. What's in a Credit Report? Depending on how long you've been using credit, your report could have an enormous amount of information on you. Let's take a look at the four major pieces of information you'll find in your report: Personal Information First, your credit report contains personal information used to identify who you are as a person, such as your name, birthday, social security number, employment, address etc which is reported based on what you put on your past loan/credit applications. Your Credit Accounts Whether it's a car loan, a house payment, credit card, lease, or some other form of credit, it's probably listed in your credit report as an account. Typical account information includes when you opened the account, how much you owe (your balance), how much you've paid, when you paid it, your credit limit (on credit cards), missed payments, and so forth. Public Records, Collections Bankruptcies, foreclosures, suits, judgments, garnished wages, overdue collections, these all show up on your credit report as well. Much of this information is gathered from court records. Inquiries Finally, whenever someone pulls your credit (typically to determine your creditworthiness), like when you apply for a loan or a new credit card, it shows up on your credit report as an inquiry. Who Maintains My Credit Report? There are three credit bureaus, also known as credit reporting agencies: TransUnion, Experian, and Equifax. Even though we call them credit bureaus, they are not government institutions, they're private sector, for-profit enterprises. Each of these bureaus maintains a report on you. So whenever someone pulls a copy of your credit report, like when you're applying for a mortgage, lease, or credit card, they reach out to one of these companies and pull their report on you. So you actually have three credit reports, one with each bureau. And while the bureaus are supposed to share a lot of information... sometimes there are major differences between these three reports. In some cases, whether you get approved or denied for a loan can depend on which credit bureau the lender got your report from! What is a Credit Score? Basically, a credit score is a 3-digit number that represents your creditworthiness based off of what's in your credit report. Banks use complicated mathematical formulas to weigh different parts of your credit report to arrive at this number, and it is often a major factor in determining whether or not you'll be approved for a loan (along with the interest rate you qualify for if you're approved). The vast majority of major lenders use what's referred to as the FICO® score, short for Fair Isaac Corporation, the company that first created it in 1989. FICO® scores range from 300 to 850. Generally speaking, a score over 720 is considered "good" credit, but each lender has its own benchmarks for determining what scores qualify for the best rates. Although we know a lot about how it works, the exact formula for determining your FICO® score is a closely guarded secret that constantly changes over time to adapt to consumer credit behaviors. Finally, as we mentioned before, since you have three different credit reports (one with each credit bureau), you also have three different credit scores, one for each report. For example, when I was looking at apartments earlier this year, I had a 724 with Equifax, a 720 with TransUnion, and a 728 with Experian. How to Raise Your Credit Score Entire articles could (and will) be written on improving your credit score, but the nutshell version is to borrow responsibly across multiple types of credit (credit card, installment loans, mortgages) pay back your loans on time, keep your credit card balances low, avoid late payments, bankruptcies, etc. And most importantly, do all of these things consistently over a long period of time. We'll tackle this in greater detail in a separate article. We've only scratched the surface of credit reports and scoring, but hopefully we've given you enough of an idea of how it works to feel confident in pulling your own reports, taking a closer look at them, and getting to work on improving your credit.
In order to build a credit score, you will need to create a relationship with a lender. The easiest and the fastest way to do this is to open a credit card account. This account will provide a way for you to demonstrate your reliability and trustworthiness through documented records. These records will make up your credit score. Learn the Ins and Outs of Maintaining Good Credit Before you begin applying for credit cards, it is important to learn the basics of maintaining good credit. To build credit in under a year, you will need to stick to a few hard and fast rules. Any slip-ups during this time could be heavily damaging to your credit score. Rule #1: Only make purchases you can afford to pay off immediately.Rule #2: Pay your bill in full.Rule #3: Pay your bill on time. Your credit score is an evaluation of your reliability for lenders. How successful you are at establishing a pattern of stability through your payment history will be the determining factor in achieving a good credit score. Credit Cards Through Schools and Banks Students enrolled in post-secondary education should consider applying for a credit card through their school. Colleges will often partner with major credit card companies to offer their students low interest, low limit credit cards. Similarly, major banking institutions will also partner with credit companies to offer their clients credit cards that are unique to that partnership. Among them will be a few cards that offer limits of $500. Getting approval for these cards will typically require proof of regular employment in the form of pay stubs. Banks may also require that your source of income comes from a salaried position as opposed to contract work. Apply for a Secured Credit Card In the case that school credit cards and bank credit cards are not an option, your final option for building fast credit will be to apply for a secured credit card. There are two types of credit card: unsecured and secured. Unsecured cards are your average credit card that most people are able obtain once they have an established credit score. Typically, these credit cards will have higher limits and only require a good credit history for approval. When starting from zero, the latter, "secured" cards are the best option for building up a credit score in very little time. Secured credit cards require no previous credit history for approval. Instead, they require a security deposit of a few hundred dollars when the account is opened. This deposit protects the credit card company if the cardholder is unable to pay the balance. The limit on the card will be either the total sum of the security deposit or, at the very least, a large percentage of it. Some secured cards also carry a small annual fee. Once you have opened a credit card account, your next task will be to start building a credit history. Make small purchases with your card and remember to pay off those purchases in full as quickly as you can. Above all, pay on time to avoid to consequences of late payments.
When it comes to exchanging vows, you must be willing to accept your partner both in sickness and in health, in dirt and in wealth. Joining lives with someone who will become a lifelong companion often means assuming their debts as well, both emotionally and financially. Every couple has their differences, and if you've spent the majority of your lifetime building your credit, you might be wondering how getting married will affect your stellar credit score. Credit Checks After the "I Dos" When you get married, virtually nothing will change when it comes to your credit score. You can let out a deep breath and sigh of relief knowing that credit history checks will not reveal your spouse's credit after you're married, nor will your spouse's credit score affect your own after you exchange vows. Separate credit reports will remain in order for you and your spouse even after you sign on the dotted line, and your credit score will neither decrease nor increase as a result of marrying someone with a higher or lower credit score. Changing Your Name and Your Credit History If you plan on changing your surname to that of your future husband or wife, don't expect anything to change on your credit report or credit score, either. Your current information will remain the same, and virtually the only thing that will change on your credit report will be your last name. The theory that changing your name will erase your past history and allow you to start over in terms of building credit is simply untrue, though sometimes a split credit file is created by the credit reporting bureau as a result of a name change. If this occurs, the credit bureau should be contacted to have the files re-merged. Applying for a Joint Credit Card If you and your spouse decide you'd like to apply for a joint credit card for the ease of finances after you've said your vows, you may encounter some differences. If you and your spouse apply for any type of credit together, whether it's a joint credit card, a mortgage, or a joint loan, both you and your spouse's credit history will be checked as a part of the application process. Therefore, if your spouse has poor credit, you may receive a higher interest rate or less favorable terms as a result. Both spouses will be held at fault-and both credit scores and credit histories will be affected-should there be a default in payments on the loan or credit card. The history of the joint credit card or loan will also be reported on both credit histories. If you are planning on getting married, it can be useful to discuss how finances will be managed in the future. When it comes to marrying someone with a much lower credit score than you, it could be beneficial to handle future credit cards and financial loans solely on your credit in order to achieve the best interest rates and terms. Having at least one good credit score in the relationship is certainly a benefit, and it certainly won't be altered just because you're saying, "I do."
Having a good credit score is important for various reasons. For one thing, it will pay a big role in determining your mortgage options if you want to own your own home someday. A good score could translate into mortgage options with lower interest rates while a poor credit score could translate into mortgage options with higher interest rates as well as heftier down payments, which may make it more difficult to buy a home. Here five things that some people don't realize are ruining their credit score. A Debt-Free Lifestyle While it's true that drowning in debt is a losing proposition, a debt-free existence is a credit score killer. Case in point: Lenders will have no idea how reliable people are if these people don't have any debt. What people need to do is have a track record of paying back debt. A credit card purchase of a reasonable amount, followed my regular monthly payments, will help give lenders confidence in borrowers. As a good repayment track record is established, people will gradually see their credit scores improve. Too Much Plastic While a no-debt lifestyle is a no-no, people who overuse credit cards will see their credit score hurt as well. Another thing to keep in mind is that people can see their credit score hit even if they pay off the balance owing by month's end. So it's best to avoid accumulating an excessive amount of debt at all costs. The Default Dilemma Any sort of default move, such as a home foreclosure, is the sort of credit score killer that should be avoided at all costs. Going this route will take a huge toll on the defaulter's credit score. People who are staring down a default situation should do everything in their power to find another solution since defaulting will hit their credit score with the force of a sledgehammer. The Drain of Late Payments Another way that people can damage their credit score is by being late with their credit card payments. In fact, a single late payment can have a disastrous impact on the credit score front. So it's best to pay on time... all the time. Line of Credit Issue People who open a line of credit will, by so doing, lessen their credit score. The reason for this is that people are usually at an elevated risk level as soon as they open a new account. It's also important to know that the process of opening a credit line requires that the provider check the credit score of people seeking the credit line. This process, which requires a so-called hard inquiry, will dock the applicants' credit score by a few points. Having a good credit score is important, but achieving and maintaining the ideal is only possible if people understand the sorts of things that can work against them. People who arm themselves with the right information will be able to not only build up a good credit score, but also keep it at a suitable level.