Understanding Credit Scores: How are they Calculated?

  • Raise Credit Score

Credit scores are calculated using an advanced algorithm. The exact calculations have not been provided by Fair Isaac, the company behind the FICO Score, but they have provided a breakdown of the key areas and that’s what we’ll look at in this guide.

Your credit score is weighted as follows:

  • 35% – Payment History
  • 30% – Credit Utilization
  • 15% – Age of Accounts
  • 10% – New Credit
  • 10% – Types of Credit

Payment History (35%)

Whether or not you meet monthly repayments has the biggest impact on your credit score. Miss them and your credit score will drop; enter collections and it will plummet. Meet them and your score will remain strong and steady.

Payment history shows whether you are a responsible lender or not. Can you meet your minimum repayments on time, are you at risk for delinquency? These are the questions that lenders ask.

A solid payment history can help to build an impressive credit score, but there’s still another 65% unaccounted for and it’s possible to have a good credit payment history and a terrible credit score.

Credit Utilization (30%)

Credit utilization is simply the amount of credit available compared to the amount of credit used. It’s an accumulation of debt in relative terms, because what’s significant to one individual could be immaterial to another.

You don’t need to worry too much about the exact calculation, but it can be helpful to turn your credit utilization into a percentage and then use this as a benchmark. As an example, let’s imagine that your debt looks like this:

  • Credit Card 1: $10,000 Credit; $5,000 Debt
  • Credit Card 2: $20,000 Credit; $10,000 Debt
  • Credit Card 3: $5,000 Credit; $5,000 Debt
  • Credit Card 4: $10,000 Credit; $0 Debt
  • Personal Loan: $5,000 debt

In this case, your total available credit is $50,000 and your debt is $25,000, which means you’re using 50% of what’s available. This is very high and will have a hugely negative impact on this portion of your credit score.

10% or less is an ideal amount, 20% is still considered to be good, but anything above 30% puts you in dangerous territory.

The good news is that this is credit utilization is relatively easy to fix when compared to other aspects of your credit score. The best way to do this is to increase your current limits, thus increasing credit but not debt.

If we return to the above example and imagine a 50% increase on all credit cards then we’ll end up with the following:

  • Credit Card 1: $15,000 Credit; $5,000 Debt
  • Credit Card 2: $30,000 Credit; $10,000 Debt
  • Credit Card 3: $7,500 Credit; $5,000 Debt
  • Credit Card 4: $15,000 Credit; $0 Debt
  • Personal Loan: $5,000 debt

Your score drops from a high 50% to a much more respectable 37.5%. If you spend a few months increasing minimum repayments to reduce your debts, you can bring it under 30%.

This is also why experts recommend you keep credit cards active even after they have been cleared. If, for example, you clear the debts on Credit Card 1 and Credit Card 2, you’ve lost $15,000 of debt but $45,000 worth of credit, which bumps your score up to 44.4%. If those cards remain active but unused, then it drops to 14.8%.

Age of Accounts (15%)

Time is on your side when it comes to credit. Everything negative will disappear in time, from hard inquires to bankruptcy, and the older your accounts are, the better this aspect of your score will be.

Old accounts that have never missed a payment are very important and account for 50% of your credit score overall. A lot of new accounts will have a temporarily negative impact on your score, but once those accounts have settled and you have proven your worth, then your score will improve.

There’s no way of knowing how long it takes for an account to shift from a negative new account to a positive old one, but the main thing is that you keep meeting those payments while you wait.

New Credit (10%)

This concerns your applications and whether or not you’re applying for a lot of credit. Multiple credit applications infer that a debtor is in financial distress. Of course, there are many other reasons why someone may apply for credit, but that’s why this only affects 10% of your score.

Keep hard inquiries to a minimum and make sure that lenders are using only soft inquiries until you’re ready to acquire new credit.

Types of Credit (10%)

Lenders like to see variety. In their eyes, the best borrowers are those with multiple types of credit, including personal loans, mortgages, car loans, and credit cards. Red flags may be raised if a user has multiple credit cards but nothing else, as it suggests they may have irresponsible spending habits and not have the experience needed to handle multiple types of debt.

This puts borrowers in a bit of a quandary, because while applying for new lines of credit will improve this part of a credit score, it will negatively impact the New Credit section mentioned above, which is weighted the same.

You should never acquire new credit just to improve this part of your credit score. Instead, think about where future credit is coming from. If you’re going to apply anyway, then think about applying for a line of credit different from what you already have. 

Got half a dozen credit cards and nothing else? Maybe a personal loan would be wise. Got several loans already? A credit card could help to balance things out.

Conclusion: How Your Credit Score is Weighted

It’s fair to say that credit scores are quite complicated and can be very confusing if you’re new to all of this. The good news is that common sense often prevails and you don’t need to fuss too much about the details.

For instance, simply meeting your repayments every month and being patient with your accounts will maintain 50% of your score. It’s a marathon, not a sprint, but by checking your credit score regularly, and avoiding high-interest rates and hard inquiries, your score will improve in the long-term.

Source: pocketyourdollars.com

Can I Get a Car Lease With Bad Credit?

Most people have a gut feeling about their credit – it’s either great, good or bad. But what is a bad credit score really? First, it’s important to understand that there are many different credit scoring models out there and each may use a different scale – or numbers – to convey information.

Still, in the lending world, some assumptions can be made about credit scores that fall into different ranges — and, as such, what score may qualify as “bad.”

For instance, most major credit scoring models follow a 300 to 850 range (the lower the score, the worse for wear, but more on this in a minute), and, while you’re looking at a score measured this way, you can generally assume anything below 600 is a bad credit score.

Here are how the basic credit tiers typically work out:

  • Excellent Credit: 750+
  • Good Credit:700-749
  • Fair Credit:650-699
  • Poor Credit:600-649
  • Bad Credit: below 600

Let’s take a deeper dive into what constitutes a bad credit score.

Who Decides if a Credit Score Is ‘Bad’?

As we mentioned, credit score ranges can vary by model. For example, all FICO scores range between 300 and 850 with 300 being the lowest (or worst) possible score, while 850 is the highest (or best) possible score. The range for VantageScore 2.0 credit scores is between 501 and 990, with the higher number representing the strongest score. But its newer version, VantageScore 3.0, has a range of 300 to 850.

Now, the companies that develop credit scores – FICO and VantageScore, for example – do not decide which credit scores are technically “good” or “bad.” Nor do the credit reporting agencies that supply the credit reports used to create credit scores.

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Instead, it’s up to individual lenders and insurance companies who use these scores to decide which scores demonstrate an acceptable level of risk. They use scores in a variety of ways, too.

These include:

  1. Determining the interest rate they will charge for a loan, or in the case of an insurance company, the discount they may offer on an insurance policy.
  2. Deciding whether to extend credit, how much credit to approve, whether to increase (or lower) a customer’s credit limit or even to close a risky account.

In a way, then, there is no such thing as a “bad credit score,” since the number itself doesn’t mean anything until a lender decides how to use it. In other words, a credit score is only bad when it keeps you from whatever you are trying to accomplish, whether that is to refinance a loan, borrow at a low-interest rate, or get the best deal on your auto insurance.

Moreover, what is considered bad credit by one lender may be perfectly acceptable to another. For example, with many mortgages, the minimum score required may be a 620, while some credit card issuers offering low-rate cards may reject applicants whose scores are lower than say 680.

Find Out Where You Stand

Lots of people are saddled with bad credit scores. According to a 2015 analysis of VantageScore 3.0 data, almost 30% of Americans have poor or bad credit (defined here as a score lower than 601). That 30% amounts to about 68 million of the 220 million score-able people out there, VantageScore says.

Keep in mind; it’s possible to have bad credit and not even know it. That’s why you’ll want to keep a close eye on your credit. You can check your credit score using Credit.com’s free Credit Report Card. Make sure to check your credit at all three of the major credit bureaus.

This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt, and other factors affect your score, and you’ll get recommendations for steps you may want to consider to address problems.

In addition, you’ll also find credit offers from lenders who may be willing to offer you credit. Checking your own credit reports and scores does not affect your credit score in any way.

You can start taking your credit score from “bad” to “good” by disputing errors on your credit report, paying down excessively high debts and limiting new credit inquiries.

Credit Score Factors

If you feel that your credit score is far below where you want it to be and want to see a vast improvement, the following are a few things you should take into consideration when trying to build a good credit score:

Payment History: make sure to pay all your bills on time each month, and you will begin to see a positive impact on your credit score.

Credit Utilization Rate: keep the credit utilization rate below the thirty percent mark. You can improve this ratio by paying down credit card balances.

Credit History: look at the type of debt and type of credit you have and how long you have had them. Make sure you have a good mix of credit rather than just a few credit cards.

Is 620 a Good Credit Score?

As already mentioned, credit scores can be deemed bad, fair, or good directly by the lenders. However, there are still a few things a credit score of 620 might be able to get you even if some lenders consider it “poor.”

  • Can I qualify for any kind of credit card? No
  • Can I get a credit card with no annual fee and 0% financing? Possibly but depends on the lender.
  • Can I get a personal loan with a credit score of 620? Possibly but it depends on the lender.
  • Can I get a store credit card with a credit score of 620? Most likely, you can.
  • Can I find the best and lowest mortgage rates with a 620 score? No.
  • Can I find a credit card with a big sign up bonus? Not likely.

Improving Your 620 Credit Score

If you are not happy with the answers to the above questions, you should consider the different ways you can begin to improve your 620-credit score.

  • Keep your hard inquiries under the mark of three for the past two years
  • Lower your overall credit utilization rate
  • Maintain a 100% on-time payment history
  • Keep a low debt-to-income ratio
  • Have a diverse mix of credit accounts on your credit reports

Side Effects of Bad Credit

When you are saddled with a bad credit score, you will essentially end up paying more in fees and interest and other charges. Remember, the higher the number, the better your credit score will be.

If you do have bad credit, you may find that you are often maxing out your credit cards and you may also find that you are not paying your bills on time. Your payment history accounts for a sizable portion of your credit score and your credit report, and it can have a negative impact on your credit.

With a bad credit score and a score of lower than 620, you will find:

  1. You are getting denied for credit and loan applications. The lenders are looking at you as high risk and will not extend credit to you with a poor credit score.
  2. You will have higher interest rates on any loans you are able to secure. A bad credit score costs you money in the long run.
  3. You may even find it difficult to get approved for an apartment or home. Landlords often check potential tenants credit scores to help them determine if they will pay their rent on time.
  4. You may find that you have to pay higher security deposits on your utility accounts
  5. You may be denied employment in the finance industry or even an upper management position because of your poor credit history. Negative items on your credit report can play a substantial role in your life- especially if there has been a bankruptcy or your debts are in the higher numbers
  6. You may experience higher insurance premiums because some insurance companies link a lower credit score to higher claims being filed

Stuck with No Credit Score and Need a Credit Card?

Scenario—you have no real credit history, so you don’t have much of a credit score or have a bad or fair credit score. But, you also are financially savvy. You just need to build some credit or improve the score you’ve got.
What do you do? One option is the Petal credit card. It’s a new approach to credit. Petal doesn’t look at your credit score to decide whether to approve you for its card. Instead, it looks at your financial habits and income to approve you. It also offers a higher credit limit than some cards made for those with lower scores. Learn more. [schumerbox api_url=”https://static.ccom-cdn.com/credit/api/creditcard/v2/offer/petal_card-creditcardoffers?af=32806″ button_text=”Apply Now” button_color=”green”]

Bottom Line

A 620-credit score may be an average score, but many lenders are still considering it on the poor side and with so many credit score ranges, you will find it best to do what you can to get your credit score as high as you can and improve your credit. Don’t settle for minimum credit or average credit.

To combat the effects of poor or bad credit, you should monitor your credit reports, dispute any errors, and find ways to improve your current credit standing. By doing so, you will find that you have much better luck in the future when you try to secure a mortgage loan, auto loan, or any other type of loan or line of credit.

This article was last published October 26, 2018, and has since been updated by another author.

At publishing time, the Petal Visa Credit Card  is offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of Credit.com alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).

Source: credit.com

Guide to Choosing the Best Debt Consolidation Companies

  • Get Out of Debt

In a world of last resorts and desperate measures, debt consolidation is a veritable godsend. It’s an effective, low-cost, and hassle-free solution that can clear troublesome debts in one fell swoop and leave you with something more suitable and manageable.

But as helpful as debt consolidation is, it’s not always an easy and straight-forward solution. Some debt consolidation companies will give you more problems than solutions, more questions than answers, and others will refuse you outright.

In this guide, we’ll take a look at the best options available to you as you seek to consolidate your debt.

How to Get a Debt Consolidation Loan

Debt consolidation can be somewhat of an enigma, a Catch-22. It’s at its most helpful when you have a lot of unsecured debt and a history of late payments, but this also means you have a poor credit score, in which case you might be refused a loan. 

After all, debt consolidation is a personal loan and a personal loan requires a good credit score. 

Bad Credit Options

Your options are somewhat limited if you have bad credit, but you’re not without opportunity:

New Credit Card

This is rarely a good option as credit cards come with high-interest rates and likely won’t benefit you unless you can find a balance transfer card with a long introductory period. 

These cards allow you to move debt from one credit card to another and for a fixed period (typically 12 to 18 months) you won’t pay any interest. You can use this period to clear the debt or at least make a significant impact so that you’ll pay less interest when the introductory period ends.

Credit Unions

A credit union may provide you with more possibilities than a bank, offering better rates and targeting these towards borrowers with lower credit scores. They can also help you to establish a debt management plan and provide you with a credit counselor.

Friends and Family

If you can’t get a consolidation loan from a bank, credit union or credit card provider, you can try asking friends or family. This is a huge ask, but if you have a terrible credit score and a lot of debt, it’s one of the only ways you can get a personal loan. You can ask them to lend money directly or take a loan on your behalf. 

In either case, make it worth their while with a monthly payment that covers more than the principle of the loan. Even if you’re repaying 10% or 20% on the total cost of the loan, it’s likely to be much cheaper than a traditional consolidation loan, which is designed to prolong the loan’s term, keeping monthly payments low but overall interest payments high.

Improve Credit Score

It’s an option you probably don’t want to see and have no doubt already considered, but the simple fact is that every time your credit score improves your chances of getting a consolidation loan improve with them. The difference between a 5% loan and a 10% loan is massive over several years as compound interest kicks in and the interest costs escalate.

It can take years for your score to improve enough to make a difference, but only if you have a lot of derogatory marks. If your score is weak because of a limited history, the odd missed payment, and very few active accounts, you can fix it in a few months. Take a look at our guide on how to improve your credit score fast to learn more.

Good Credit Options

A good credit score improves your chances significantly. There is no guarantee, but you’ll certainly have more options than someone with bad credit.

Debt Consolidation

Banks and credit unions have created loans specifically for debt consolidation. They will take your circumstances and debt into account, look at manageable monthly payments, and then provide you with the money you need to clear your debt.

This money can be used to clear credit card debt and loan debt and will come with a favorable interest rate. There may also be an origination fee, which is charged as a percentage of the loan.

Personal Loan

A personal loan is more of a DIY option. Shop around for a loan that offers a favorable interest rate and provides enough money to cover your debts, apply, and then use the funds to clear those debts. There may be an origination fee, which is charged to cover processing fees.

How to Start with Debt Consolidation

In simple terms, debt consolidation is refinancing. You’re swapping one loan for another, but in doing so you’re essentially refinancing the terms.

 If you only have one or two debts to clear, your first step should be to seek refinancing. Contact your lender and look at extending the agreement.

They may also recommend a debt management program. Both options are often more favorable than consolidation and at the very least they should be considered. Once you’ve exhausted those possibilities, you can look into acquiring a consolidation loan. 

What to Look for in a Debt Consolidation Company

Debt consolidation is a world away from debt settlement, which can be a bit of a minefield when it comes to scams. However, debt consolidation scams do exist as well, and you need to look out for these, remember to look for:

Interest Rates

If something looks too good to be true, it probably is. Make sure the company is regulated, the site is secure, and the offer is genuine. Don’t be tempted by introductory rates and false promises, only to be blindsided by small print.

Just because it’s a debt consolidation loan doesn’t mean you’re getting a beneficial rate. It’s not uncommon for consolidation loan providers to offer you interest rates much higher than the ones you already have, which means you’ll pay much more interest over the lifetime of the loan.

Changing Rates

Not all rates are fixed, so make sure your rate is. It can be helpful to use a loan rate calculator to make sure you’re getting a good deal and won’t pay more than you already are. Focus on the long-term as well as the short-term, lower monthly payments are great, but not if they mean you will pay twice as much interest over the course of the loan. 

Check the BBB

The Better Business Bureau is a great source of information when dealing with companies in the financial sector. A company’s absence from this list isn’t necessarily a sign that it’s a scam but it should warrant further research. Look at complaints and mediations as well as reviews and company info.

Look for Affiliations

Does the company work with the National Foundation of Credit Counseling or the Financial Counseling Association, do they have any worthwhile affiliations? These partnerships can be a sign that you’re dealing with a legitimate consolidation company.

How Do Debt Consolidation Companies Work?

Imagine that you have $30,000 in debt spread across three credit cards:

  • Credit Card 1 = $10,000
  • Credit Card 2 = $10,000
  • Credit Card 3 = $10,000

You’re paying 20% APR and making monthly repayments of $300 each or $900 total. Those loans will be repaid in approximately 4 years and in that time, you’ll repay just over $4,700 in interest per card, amounting to a total repayment of $44,100.

If you take out a 5-year personal loan at 10% interest, you’ll pay $637 a month and repay just $38,245, saving you a couple hundred bucks a month, nearly $6,000 in total, and making the debts more manageable, all at a cost of an additional year.

However, there are some issues to consider here. Firstly, if you really want to reduce those monthly payments, you’ll need to increase the loan’s term. If we reduce it to under $300, then you’ll pay back close to $70,000 and it’ll take 20 years to clear.

This is essentially how many consolidation companies work. They’ll promise to clear your loan debt and leave you with a low monthly payment, but in doing so they’ll prolong the life of your loan and leave you repaying massive amounts of interest.

Of course, if you get a loan with just 4% interest, you can clear the above debt in 4 years, pay just a couple grand more, and repay less than $700 a month. But this option isn’t available for the majority of borrowers.

Pros and Cons of a Debt Consolidation Loan

Debt consolidation is not always the best option. It certainly can be if you have the freedom of choice and a great credit score to back it up, but if you’re struggling in that department then debt consolidation can be a nightmare that drags you into lifelong debt.


  • Clear Debts: Turn multiple debts into one manageable one.
  • Lower Rates: Pay less money every month, thus improving your debt-to-income ratio and decreasing outgoings.
  • Fewer Penalties and Missed Payments: With lower monthly payment demands and fewer debts, your risk of missing payments and accumulating penalties reduces.
  • Multiple Options: There are several options available, even for borrowers with a low credit score.


  • Extend Debt: It can extend the length of your debt.
  • Pay More: You may pay more money over the lifetime of the debt.
  • Prolonged Misery: Unlike debt settlement, it won’t drag you out of debt any time soon and if your debts are causing you great stress, it may prolong that.
  • Credit Score: A consolidation loan will appear as a new account on your credit score, although at the same time the other accounts will be cleared. You may, therefore, take an initial hit, but this will even-out before long.

The Best Debt Consolidation Loan Companies

There are dozens of reputable debt consolidation companies out there, many of which provide loans that can be used to purchase cars, make home improvements or launch a business, as well as consolidate debt. 

There are a few key points to consider when looking for a debt consolidation company including the minimum credit score they require, the origination fee, the loan amount and term, and whether or not they require anything specific from borrowers.

With those things considered, here is a selection of the best debt consolidation companies out there right now.


BestEgg is has funded more than $9 billion worth of loans with a 95% customer satisfaction rate and an A+ BBB rating.

The process is quick and easy and you can secure as much as $35,000 for consolidation and major purchases. You need a minimum credit score of 640 to apply and they have interest rates ranging from a low of 5.99% to a high of 29.99%.

There are origination fees, however, and they also require an extensive credit history, which rules them out if you’re young and are only just starting to build credit.


LightStream was launched back in 2013 as a division of SunTrust Bank. It requires a minimum FICO Score of 660, but there is no origination fee, no minimum debt-to-income ratio, and there is also a co-signer option.

You can borrow anywhere from $5,000 to $100,000 with LightStream and use this to repay loans from approved lenders, with terms fixed for between 2 and 7 years.

LightStream’s rates are between 5.49% and 17.29% and its higher maximum loans make it a great option for consumers with substantial amounts of debt.


You can borrow as little as $1,000 with Upstart and repay this over 3 to 5 years. You only need a FICO Score of 620 or more to apply. There is an origination fee, however, and this can be quite expensive, but it all depends on the individual and the size of the loan, ranging from 0% right up to 8%.

Upstart claims to have lent over a quarter of a million individuals more than $3.2 billion since it was founded.


One of America’s most trusted credit card providers also offers consolidation loans to all consumers with a credit score of 660 or more. You can borrow between $2,500 and $35,000 with Discover and monthly payments can be spread over a term of between 3 and 7 years. 

This is a personal loan, but one that can be used for debt consolidation, and there is no origination fee or minimum debt-to-income ratio requirement.

Other Reputable Debt Consolidation Loan Companies

There are many other reputable companies in this sector, including a whole host of banks, credit unions, and lenders:

  • Marcus, By Goldman Sachs: A 660 credit score is required; respectable interest rates are offered.
  • Prosper: The lowest rates are a little higher than some other companies, but there is also a lower cap on the maximum, with loans between $1,000 and $45,000 on offer.
  • Payoff: Get up to $35,000 with interest rates that drop as low as 5.99%.
  • Upgrade: Loans up to $50,000 with a minimum credit score of 600.
  • Avant: A good option for bad credit and loans up to $35,000.

Debt Consolidation vs Debt Settlement

Debt settlement aims to clear your debts and works best when you have missed payments and old debts. A debt settlement company, such as National Debt Relief, will ask you to pay money into a secure account and then use this money to negotiate with lenders. National Debt Relief’s goal is to get the lenders to settle for a reduced amount and clear the debt in exchange, thus removing them from your credit report.

However, debt settlement has a notable impact on your credit score. Not only do companies like National Debt Relief request that you stop making payments so they can use the money to negotiate, thus leading to missed payments, but the process can take several years and you may be sued in that time.

It’s also not an option if you don’t have much more to spare every month. This means your only option is to use money that would otherwise go toward paying off debts, which in turn means those debts will default and you’ll miss several months of payments, potentially entering collections.

Debt consolidation avoids all these issues and is a simpler process that does much less damage to your credit score. A new account will appear on your credit report and reduce your score, however, and debt consolidation is not without its issues.

FAQs on Debt Consolidation Loans

Still have some questions about these loans, how they operate, and how they can help you? Take a look at these frequently asked questions which cover some of the points we have yet to discuss:

What are the Different Types of Debt Consolidation?

Debt consolidation takes many forms and applies to any personal loan or balance transfer that moves one or more high-interest debts into another, low-interest account.

A large, low-interest personal loan is the best option and one we have discussed extensively already. Other options include:

  • Home Equity Loan
  • Bank Consolidation
  • Credit Union Consolidation
  • Balance Transfer Card
  • New Credit Card
  • Refinancing
  • Home Equity Loan

How Does it Affect Your Credit Score?

Debt consolidation can both positively and negatively affect your credit score. On the one hand, you will be hit with hard inquiries and a new account penalty. Your average account age will also drop. On the other hand, your credit utilization score should reduce and your payment history should improve now you have more manageable debt.

What are the Financial Consequences of Debt Consolidation?

In the short-term, debt consolidation will improve your debt-to-income ratio as you’re reducing your monthly payments while maintaining the same earnings. This gives you more buying power and provides a little breathing space.

It also relieves pressure that would otherwise be applied from multiple high-interest loans and credit cards, pressure that could result in delinquencies.

What Should You Consider Before Applying?

Make sure you have understood the pros and cons and that you know what you’re getting yourself in for. As discussed already, debt consolidation isn’t for everyone and it’s not without its problems. You may be signing up for decades of debt.

Don’t focus too much on the lower monthly payments and try to look at the bigger picture.

Can I Use My Credit Card After Debt Consolidation?

Try to keep cleared credit cards active, as this will improve your credit utilization ratio by keeping your debt low and available credit high. Don’t rush into using them again, however, unless you have properly budgeted and know you’ll be able to clear the balance every month.

The last thing you want to do is accumulate more credit card debt after going to great lengths to pay it off.

Why Am I Being Refused?

Your credit score may be too low or you may have a limited credit history. Lenders want customers who have a proven track record, which means your score needs to be respectable and you need to have a record of monthly payments, cleared accounts, and debt variety.

What Other Options Do I Have?

Debt consolidation is far from the only option and while it is one of the better ones for many consumers, it’s not suitable for everyone. Other options include:

  • A Debt Management Plan: A debt management plan is preferable in many ways as you don’t need to apply for new loans, pay origination fees, and worry about your credit score taking a hit. It’s all about helping you manage your debt.
  • Non-Profit Credit Counseling: As with debt management, credit counseling is geared towards helping you find your feet, manage your debts, learn to budget, and maneuver through difficult times. The ultimate goal is to avoid delinquencies and last resorts like bankruptcy.
  • Repayment Plan: If you’re struggling to meet your current monthly payments, try to negotiate a repayment plan with your creditors. They want to make sure you pay your debts and don’t default, and if that means reducing monthly payments and prolonging the term, they’ll be happy to do it.
  • Debt Settlement: A good option if you have some money put aside, can afford to wait, and have multiple debts that you want cleared completely.
  • Bankruptcy: It should always be a last resort as it can leave a mark on your credit report that stays for 10 years, but bankruptcy is an option nonetheless. We only recommend looking into this if you can’t find a debt consolidation loan; debt settlement and debt management is not an option, and you have more debts than you can afford to pay. Don’t take bankruptcy lightly, even if it seems to be in-vogue with celebrities.

Source: pocketyourdollars.com

Why Did My Credit Score Drop? Reasons and Solutions

  • Raise Credit Score

It can be very disheartening when your credit score drops. You monitor it, you get excited when it increases, you think you’re on the right path, and then, seemingly for no reason, it drops.

The bad news is that these things happen and while there is often a way to fix them, it isn’t always quick or easy. The good news is that they never happen without reason and understanding that reason can help to prevent your credit score from dropping in the future.

Why Did My Credit Score Drop?

There are a few reasons why your credit score might have dropped:

There was a Hard Inquiry

Did you apply for a loan or a credit card recently? If so, the lender may have initiated a hard inquiry, or what is also commonly referred to as a “hard pull”. This means that they checked your credit report and left their mark to warn other lenders.

You don’t need to agree to a new line of credit for this mark to show and it can reduce your score by as many as 5 points. 

If this was the cause, then it will disappear in 24 months and will no longer impact your score after 12 months. It’s a long wait, but it’s a marginal reduction so it isn’t a major concern.

Your Credit Utilization Increased

Your credit utilization has a huge bearing on your credit score, often more than people realize. Simply put, credit utilization compares the amount of credit you have at your disposal to the amount of credit you have used.

The reason this causes so many issues is that borrowers don’t realize that this score will drop when credit limits are reduced and when credit cards are canceled, and not just when debt increases. For instance, if you clear a credit card debt and then cancel the card, both your debt and your available credit will decrease, potentially canceling one another out.

Keep old credit cards, increase credit limits, and remember that the size of the debt is not the most important thing, it’s how that debt compares to your available credit that matters.

You Missed a Payment

The most common reason your credit score might have dropped is also the easiest to manage. If you meet your repayments every month and keep a close check on your credit report, then this shouldn’t be an issue.

However, mistakes happen, and payments may be missed as a result of banking errors, canceled cards, and incorrect reporting. Find the source of the missed payment and if it’s a mistake, contact your bank/credit bureau to correct it.

You Closed an Account

Not only can closing a credit account reduce your credit utilization score, but it can also impact your credit history. Credit account age counts for 15% of your total score. If you recently closed a line of credit, you may have reduced the overall age of your accounts, thus reducing this aspect of your score.

It may also reduce the variety of credit in your account, which counts for 10% of your score. If you have several credit cards, a mortgage, and a personal loan, then you’re showing lenders that you can handle multiple types of credit and this looks great on your report. If, however, you pay off that loan and the account closes, then your score may take a temporary hit.

The good news is that it’s temporary and what you lose by reducing variety and age you gain by improving payment history and reducing debt.

You Opened an Account

A new account can land you with a hard inquiry, which marginally impacts your score, and it can reduce the average age of all your accounts. More importantly, it has a direct impact on an area that counts as 10% towards your overall score.

This will be more noticeable if you don’t have a lot of credit accounts and the ones you do have are new. If you have multiple accounts, a solid repayment history, and a high score, you may feel it less, but your score will still take a slight hit.

The only way to rebuild after this hit is to wait it out. Once that account is no longer considered “new”, it will start having a positive effect on your score.

What is a Derogatory Mark?

If your score suffered a significant drop, then it may have been the result of a derogatory mark, which is a serious red flag on your credit report. Derogatory marks rarely happen without your knowledge as they are usually initiated by you or preceded with many warnings and issues:

  • Bankruptcy
  • Foreclosure
  • Civil Judgement
  • Delinquency

How Can I Get Rid of a Bad Mark?

If you received a derogatory mark that had nothing to do with you, then you can dispute it. It may be the result of identity theft, which is much more common than you might think. If you initiated bankruptcy or had a foreclosure or delinquency, then it’s a little trickier. 

Time is really your only friend here, but you can also work with lenders and collections agencies to try and clear those debts and get back on your feet. 

It’s important not to adopt an “all or nothing” attitude. It’s very easy to slip into this mentality and to ignore all your financial responsibilities because of one major blip, but you’ll only regret it a few years down the line when one major red flag turns into many.

What is a Trade Line?

A trade line is simply a record of activity on an account. Every time you open a new credit account, the lender keeps details of the total amount and the repayment dates. This information is then handed to the major credit bureaus who use it to build your credit report and calculate your credit score.

Most lenders report to these bureaus, but it’s not mandatory. There are some secured loans and secured credit cards that do not. If you’re looking to build credit and improve your score, it’s imperative that all activity is recorded, otherwise your hard work will go unnoticed. 

Summary: When Your Credit Score Drops

The main thing to consider when your credit score takes a hit is that it’s not the end of the world. If it came unexpectedly, there’s a good chance it’s not significant. Derogatory marks rarely happen without the consumer’s knowledge unless there was some element of fraud at play, in which case they are easily reversed.

As for closed accounts, new accounts, hard inquiries, and credit utilization changes, these can all be remedied in time. Just keep meeting those repayments, don’t go overboard when applying for new credit, and focus on clearing the accounts you have as quickly as you can.

Source: pocketyourdollars.com

When Did Credit Scores Start?

The concept of credit scores started in 1989, and would evolve into today’s most popular scoring model, the FICO Score from Fair, Isaac, and Company.

Before the FICO Score, credit was determined based on the character of the consumer. Character-based decision making was popular when granting credit. For example, you could have an excellent credit score, but if the lender didn’t like something about you, they could deny you credit anyway.

This character-based decision making practice would eventually lead to the need for a more just method of scoring; one that wasn’t solely based on personal judgment and first impressions. And by 1991, all three national consumer reporting agencies were selling the FICO score to lenders. The score revolutionized the way lenders, and other businesses, assess consumer credit risk. And because it considers only credit histories, the score offers a fair and objective risk assessment that ignored subjective factors.

What Is a Credit Score?

Credit scores are three-digit numbers assigned to consumers. The number shows potential lenders how likely it is that the consumer will repay a debt if extended a loan or other form of credit.

Those three unassuming numbers are what stands between a lender denying and approving your credit or loan application. Each of the three major credit bureaus — Equifax, Experian, and Transunion — create your credit reports and scores using VantageScore and FICO Score models.

There are different scoring models, even with VantageScore and FICO, and you have multiple credit scores from different bureaus. Scores can vary depending on the type of lending or financing you’re trying to secure as well. For example, if you apply for a car loan, one scoring model may be used while an entirely different one is used if you apply for a mortgage.

Different Credit Scores

The variety of scoring models used by different companies and lenders, includes:

FICO Score: One of the most commonly used scoring models, this model gathers information from all three of the credit bureaus. When people refer to a credit score, the FICO Score is typically the one they mean.

VantageScore: This scoring model was created by the three main three credit bureaus as a way to compete with the popularity of the FICO Score model. VantageScore credit scores ranges are generally the same as the FICO Score range. There are older VantageScore models where the range varies slightly. Many lenders use this scoring model, but not as prevalently as the FICO Score model.

PLUS Score: This model was developed by Experian and is solely based on your Experian credit report. Lenders don’t use this model, and it is intended for the consumer’s educational purposes only.

TransRisk Score: TransUnion developed this model. It is based on the information in your TransUnion credit report. It considers the length and totality of your credit history. This scoring model has a range of 100 to 900 and is only used to help determine credit risk.

Equifax Score: The Equifax scoring model ranges from 280 to 850. Like the PLUS Score, it also only used for educational purposes and is not used by lenders to determine creditworthiness.

CIBIL Credit Score: CIBIL was India’s first credit bureau and is now part of TransUnion. Its CIBIL credit score is based on the Credit Information Report (CIR) and summarizes your entire history of loan and credit card payments. It ranges from 300 to 900 and plays a vital role in the overall loan and credit card approval process.

Consumers have an auto insurance credit score as well. It is a numerical point system based on different credit file characteristics. Insurance scores don’t measure creditworthiness, but are often used to help predict risk for insurance companies.

What Determines a Credit Score?

Several factors are used to determine credit scores, including:

Payment history: This is one of the biggest determinants to your credit scores. It accounts for approximately 35% of your scores. The payment history on your credit report shows lenders whether you paid your bills on time or not. If you were late making payments, the lender may view you as a higher credit risk and deny your application.

The total amount owed: This category accounts for about 30% of your total scores. You should never utilize a significant portion of the credit you have available. Doing so may make lenders feel as if you are spread too thin and can’t take on any more credit or debt. Watch your utilization ratio on each of your accounts so you can see how much you have used versus the amount of your total credit limit (the amount you have available).

Credit history length: Accounting for 15% of your credit scores, the length of your credit history is important because it shows that you have managed different credit accounts over the years. It also shows the overall age of each account, so the older your accounts are, the better it looks to a potential lender.

Credit utilization: This accounts for about 10% of your credit scores. You never want to have too many different credit accounts open at one time. You also want to avoid having too many hard credit inquiries on your credit when applying for new credit accounts or loans.Hard inquiries can negatively affect your credit scores.

Diverse credit portfolio: Lenders will check how many types of credit accounts you have. Having a variety of accounts is always better than just having credit cards, for example. A mix of an installment debt, a car loan, personal loan, and credit cards shows that you can borrow money and then pay what is owed. However, multiples types of each account can be seen as negative.

Do I Start With a Credit Score of ‘0’?

Credit scores have a lot in common with the SATs — they stress people out, involve tough-to-answer questions, and play a huge role in determining whether your loan and credit applications (instead of college) get approved or denied.

There’s another notable similarity, too, which you may not know about — when it comes to credit scores, you can’t get a zero. The only way to get a zero on the SAT is to leave it blank. And with both a credit and SAT score, you can have no score at all.

Credit Score Ranges

Most major credit scoring models, including the standard FICO Score and VantageScores, range from 300 to 850, with 300 representing the lowest, or worst, possible score and 850 representing the highest, or absolute best score. The FICO scoring model, for example, has a range of between 300 and 850. The same applies to the VantageScore. A score that is considered exceptional on these scoring models falls in the 800 plus credit score range. A poor credit score will fall under 580. Learn more about what makes a good credit score.

Some specialty credit scores, including the FICO Industry Option scores, have a lower minimum (250), but, generally, no matter what model is being talking about, “you don’t start at zero and, let’s say, work your way up to a respectable score over time,” said Barry Paperno, a credit scoring expert who worked at FICO for many years and now writes for SpeakingofCredit.com

While you won’t have a credit score of zero, you also won’t start at a 350. That’s because until you meet a model’s minimum criteria, you don’t have a score at all. In that case, the credit bureaus will let a lender (a landlord or cable company or anyone requesting your credit as part of their application process) know that you’re scoreless.

“When a score can’t be computed because the credit report doesn’t meet the minimum scoring criteria, an alpha or numeric ‘exclusion code’ is transmitted to the requester indicating that one, that no score can be calculated, and two, a general reason why the credit report didn’t meet the minimum scoring requirements,” Paperno said.

How do I Check My Credit Score?

Everyone is entitled to receive a free copy of their credit reports from each of the three bureaus each year. You can order your free credit report online from annualcreditreport.com. It is the only authorized website that provides free credit reports. Your report will include your score. You can also keep an eye on Experian score free by accessing it and a free credit report card on credit.com.

This article was originally published July 27, 2016, and has been updated by another author.

Image: PeopleImages

Source: credit.com

Preparing To Buy a House in 8 Simple Steps

In life there are some situations a person simply can’t prepare for, like locking the keys in a car full of groceries or having a head full of shampoo when the smoke alarm goes off. Luckily, purchasing a home doesn’t have to be one of those moments.

Buying a house is probably one of the biggest financial decisions many people will make in their lifetime, and the process can be lengthy and complex. From getting a bird’s-eye view of their overall financial picture to calculating housing costs and securing loan pre-approval, there are many actions for home buyers to take as they get ready to purchase a home.

With the right resources and a solid strategy, however, purchasing a house can be a smooth process.

8 Steps to Prepare for a Home Purchase

1. Determining Credit Score

A home buyer’s credit score can impact their ability to secure a mortgage loan with a desirable rate. It can also affect how much they’ll be required to pay as a down payment when it’s time to close.

In a recent report from the National Association of Realtors , home buyers who had debt said it hindered their ability to set aside funds for a down payment by a median of four years.

Credit score can be influenced by a variety of factors, from payment history to amount of debt (a.k.a. credit utilization ratio) to age of credit accounts, mix of credit accounts, and new credit inquiries.

Payment history is the main factor that affects a person’s credit score, accounting for 35% of an overall FICO® score. Missing a payment on any credit account—from unpaid student loans to credit cards, auto loans, and mortgages—can negatively impact a person’s credit score.

By making on-time payments, limiting the number of new inquiries on their credit file, and working to pay down outstanding balances, home buyers could potentially boost their credit score and qualify for a lower mortgage rate.

Is There a Credit Score “Sweet Spot?”

Many buyers wonder whether there’s a desired credit score range or “sweet spot” to obtain a mortgage. The 2020 Q1 Federal Reserve Report on Household Debt and Credit found that the median credit score of newly originating borrowers increased to 773 in the first quarter for mortgages—up 14 points from 2019.

That’s not necessarily to say a credit score of 773 is a must for securing a mortgage, but the difference between a credit score in the 600 range and one in the 700 range could amount to about half a percent less interest on a mortgage loan and add up to a lot of money over time.

Credit scores can also affect the amount of the down payment itself. Many mortgage lenders require at least 20% of the house’s sale price be put down, but might offer more flexibility if the buyer’s credit score is in the higher range. A lower credit score, on the other hand, could call for a larger down payment.

Whether home buyers have debt or not, checking credit reports is still a recommended first step to applying for a mortgage. Understanding the information on credit reports is invaluable in knowing whether time is needed to repair credit, which could potentially lead to a higher credit score and possibly lower mortgage loan rate.

2. Deciding how Much To Spend

Deciding how much to pay for a new home can be based on a variety of factors including expected and unexpected housing costs, up-front payments and closing costs, and how it all fits into the buyer’s overall budget.

Calculating Housing Costs

There are several housing costs for home purchasers to consider that might affect how much they can afford to offer for the house itself. The costs of ongoing fees like property taxes, homeowner’s insurance, and interest—if the loan does not have a fixed rate—can all lead to an increase in the monthly mortgage payment.

Closing costs are fees associated with the final real estate transaction that go above and beyond the price of the property itself. These costs might include an origination fee paid to the bank or lender for their services in creating the loan (typically amounting to 0.5% to 1% of the mortgage), real estate attorney fees, escrow fees, title insurance fees, home inspection and appraisal fees and recording fees, to name a few. To get an idea on how this can impact your budget, use this home affordability calculator to estimate total purchase cost.

Last year, the average closing costs for a single-family property were $5,749 including taxes, and $3,339 excluding taxes, according to a recent report from ClosingCorp .

In addition to closing costs, expenses that potential home buyers might want to consider are repairs and updates they might want to make to a home, new furniture, moving costs, or even commuting costs.

Finally, unforeseen costs of a major life event like a layoff or the birth of a new child might not be the first expenses that come to mind, but some buyers could find themselves making a potential home buying mistake by not getting their finances in order to prepare for the unexpected.

Making a list of these estimated expenses can help home buyers calculate how much they can feasibly afford and create a budget that could help them avoid being overextended on housing costs, especially if they might be paying other debt or saving for other financial goals.

3. Saving for a Down Payment

Saving money for a house is one of the biggest financial goals many people will have in their lifetime. And how much they’re able to offer as a down payment can significantly impact the amount of their monthly mortgage payment.

A larger down payment can also be convincing to sellers who see it as evidence of solid finances, sometimes beating out other offers in a competitive housing market.

The average down payment on a house varies depending on the type of buyer, loan, location, and housing prices, but, according to Zillow’s 2019 Consumer Housing Trends Report , 56% of buyers put down less than the typical 20% down payment, 19% put down 20%, and 20% of home buyers put down more than 20%.

For first-time home buyers, 20% of the price of the home can seem like a daunting figure. Many buyers find that cutting spending on luxury or non-essential items and entertainment can help them save up the funds.

Other tactics could include getting gifts and loans from family members, applying for low-down-payment mortgages, withdrawing funds from retirement, or receiving assistance from state and local agencies.

For buyers who were also sellers, proceeds from another property could also fund the down payment.

4. Shopping for a Mortgage Lender

There are many mortgage lenders competing for the business of the 86% of home buyers who finance their home purchases. These lenders offer a variety of mortgages to apply for, with a few of the most common being conventional/fixed rate, adjustable rate, FHA loans, and VA loans.

Buyers might not realize they can—and should—shop around for a lender before selecting one to work with. Different lenders offer different variations in interest rates, terms, and closing costs, so it can be helpful to conduct adequate research before landing on a particular lender.

Mortgage lenders must provide a loan estimate within three business days of receiving a mortgage application. The form is standard—all lenders are required to use the same form, which makes it easier for the applicant to compare information from different lenders and make sure they are getting the best loan for their financial situation.

5. Getting Pre-Approved for a Loan

While it might seem like a bit of a nuance, getting prequalified for a loan versus pre-approved for a loan are two different things.

When a buyer is prequalified for a loan, their mortgage lender estimates—but does not guarantee—the loan rate, based on finances provided by the buyer.

When a buyer is pre-approved, the lender conducts a thorough investigation into their finances that includes income verification, assets, and credit rating. This pre-approval gives a guarantee to the buyer that they will be able to obtain the loan and breaks down exactly what the bank is willing to lend.

Having a pre-approval letter in hand can help some buyers get ahead by appealing to the seller as a serious intention of purchase and a lender’s guarantee to back that purchase up.

6. Finding the Right Real Estate Agent

According to the National Association of Realtors 2020 Generational Trends Report :

•  89% of all buyers purchased their homes through a real estate agent.
•  The primary method most used to find that agent was referral.
•  All generations of buyers continued to utilize a real estate agent as their top resource for helping them buy a home.

While the internet and popular real estate search websites have made it easier for home buyers to hunt for a house online, most buyers still solicit the help of a real estate agent to find the right home and negotiate the price and purchase.

Also, many realtors are experts in their particular housing market, so for buyers who are searching in a specific location, a real estate agent may be able to offer valuable insights that might not be revealed online.

7. Exploring Different Neighborhoods

By researching neighborhoods where they might want to purchase a property (both in-person and online), home buyers can get a better sense of what living in their future community could look like.

Many real estate websites provide comparable listings to help determine a reasonable offer amount in a given neighborhood.

Check out housing market
trends, hot neighborhoods,
and demographics by city.

They may also highlight nearby school ratings, price and tax history, commute times, and neighborhood stats like home value fluctuations or predictions, and walkability ratings.

All of this information can help paint a picture of life in the area a home buyer chooses to settle in. Doing a deep dive into a desired neighborhood can help inform a more realistic decision on where to buy a house.

8. Kicking off the House Hunt

Once the neighborhoods are whittled down, the loan is secured, the real estate agent has been signed, and the savings are set aside, the official house hunt can begin.

For 55% of buyers, the most difficult step in the home buying process was finding the right property. Some had to undergo a considerable process before making the final purchase, with most searching for 10 weeks and seeing a median of nine homes first.

With the help of a trusted real estate agent and a housing market with adequate inventory, most home buyers can begin to book showings, attend open houses, and formally put down an offer on a house they like.

In particularly “hot” markets, houses could receive several offers, so home buyers might want to be prepared to go through the bidding process with a few properties before they get to that glorious final sale.

Home buyers might wish they could snap their fingers and move into their dream house as quickly and painlessly as possible. While that is not realistic, SoFi can help simplify the mortgage loan process.

Without any hidden fees or prepayment penalties, a SoFi home loan could be the right option for many homebuyers. For questions about buying a home, SoFi offers home loan resources, guides, and tips to steer future homeowners through the process. There are a lot of steps, but managing them can be easier with a helping hand.

Learn more about how SoFi home loans make the mortgage process as quick and painless as possible.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’swebsite .
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.


Source: sofi.com

Understanding Credit Scores: FICO Score Calculation

  • Raise Credit Score

Credit bureaus aren’t exactly forthcoming when it comes to detailed credit score algorithms. But while exact scoring methods are unknown, they have released data relating to rough credit score ranges and this can help us to make accurate predictions.

If you’re looking to improve your credit score, making it easier to acquire a loan, mortgage or credit card, then take this information on board.

How FICO Credit Scores are Calculated

Your credit score is a three-digit number ranging from 300 to 850. It’s calculated based on your credit report, which is available via all three major credit bureaus (TransUnion, Experian, Equifax). You can request a free credit report once a year from all these credit bureaus and see the score for yourself.

We’ll discuss the individual factors that can affect your score below, but first, let’s look at how credit scoring systems like FICO break everything down:

  • Payment History (35%): Your payment history covers all the tradelines on your credit report. It changes every month as credit reporting agencies take note of every payment that you make and miss, as well as every account that is cleared or delinquent.
  • Total Debt Usage (30%): Also known as a credit utilization ratio, this score compares the credit available versus the debt accumulated. It’s best to keep this as low as possible if you want a good credit score.
  • Age of Accounts (15%): Older is better where your credit report is concerned. You need to show lenders and reporting agencies that you can be trusted to meet payment obligations, which means they need to have been active for at least a few months.
  • Types of Accounts (10%): Variety is key. A good credit score is built with many different types of debt, from credit cards to home loans and the occasional car loan. It only accounts for a small percentage of your total score, however, so it’s not worth opening new lines of credit just to improve it.
  • Application History (10%): This is where all of your inquiries go, once rate shopping has been accounted for. A lot of hard inquiries suggest that the borrower is desperate and seeking to acquire lots of new debt, which is never a good sign.

Factors that Determine Your Credit Score

A number of things can impact your credit score. The exact damage will depend on how strong your credit report is to begin with, but all damage can be undone and bad credit can turn to good in time.

What Positively Affects Your Credit Score?

As discussed in our guide to quickly improving your credit score, there are a few things you can do to boost your score in as little as 30 days. However, most of those improvements come with time and perseverance.

Increased Credit Limit

Credit utilization accounts for a huge 30% of your final score, making it essential for building a good credit score. Every time you reduce debt and/or increase credit, this improves and your overall score improves with it.

Of course, this is easier said than done. You don’t need us to tell you that clearing your debts will help your credit score and you’ve no doubt realized that while acquiring new credit cards will improve your credit utilization score, it will also impact your inquiries and average account age.

One of the best ways to improve this score without applying for new credit cards is to increase the credit limit on the accounts you already have. This won’t negatively impact any part of your score, but it will improve your utilization, which should see your score increase as well.

Most credit card companies are happy to increase limits if you have a solid payment history and aren’t using too much of your existing credit.

Clean Payment History

A clean account that has been running for at least 6 months will positively impact as much as 50% of your score thanks to the focus on payment history and age. There isn’t much you can do to improve this aspect in the short-term—just keep meeting those monthly payments, avoid late payments at all costs, and know that every clean month will keep you on the right track.

You can check your current payment history on your credit report. If you notice any discrepancies, including missed payments that weren’t actually missed, dispute them with the credit bureaus providing your report.

Cleared Accounts

Every account you clear moves you one step closer to that maximum 850 score. There is no points bonus for clearing an account and no direct way that it can positively impact your score. However, a cleared account looks great on your payment history, creates a wide gulf between available credit and used debt, and also leaves a permanent mark with regards to tradeline age and variety.

If the cleared accounts are credit cards, make sure you keep them active. If you have a $10,000 credit card debt and a $10,000 loan debt, with $5,000 on each account, you’ll have a utilization score of 50%. If you clear the former and then close the account, your total debt will be $5,000 while your available credit will be $10,000, which means your utilization score is still 50%.

Keep the account open, keep the limit high, but refrain from using it.  

What Negatively Affects Your Credit Score?

It can take months for your credit score to improve and there are only a handful of things that can help it, but your score can drop in a heartbeat following a simple mistake or oversight.

Late Payments

Once you miss a payment then the ball starts rolling, gaining momentum with every month that you don’t meet the minimum payment. It takes just 1 missed payment for your credit score to suffer but further missed payments will have more of an impact and remain on your credit report for years to come.

Fight every late payment that you don’t believe was your fault and do all you can to avoid these from happening in the first place. 

High Credit Card Balances

A maxed-out credit card gives you a 100% credit utilization ratio, which can send your credit score plummeting. Credit cards also charge high-interest rates and this is compounded, which means you pay interest on interest, forever growing your debt and leading to a situation where you’re spending hundreds of dollars a month and paying very little toward the principal.

If all your debt is tied-up in credit cards, then the Account Type aspect of your score will also suffer.

Identity Theft

If you’re a victim of fraud then your credit report may be filled with accounts you didn’t open, queries you didn’t make, and debt you don’t have. The sooner you check your credit report, the sooner you can find and deal with these issues. 

It can be a scary and frustrating time and it can have a massively negative effect on your score in the short-term, but it will correct itself before long. 

Multiple Hard Inquiries

As discussed before, all credit reporting agencies allow for something known as “rate shopping” whereby all similar inquiries are bundled into one. However, this doesn’t apply to credit cards and if you apply for many cards in a short space of time, your score will drop.

The FICO Score can drop by as much as 5 points for every inquiry, which makes credit card comparison shopping a very risky thing to do. Make sure the inquiries are soft and you’re only initiating a hard inquiry when you’re ready to sign on the dotted line.

How Your Credit Score is Used

Your credit score is used by mortgage lenders, credit card providers, and other lenders to determine your creditworthiness. A bad credit score can make your life very difficult, reducing your chances of acquiring new lines of credit and greatly increasing the interest rates on the credit you’re offered.

Who Has Access to Your Credit Score?

Banks, credit unions, credit card providers—all lenders have access to your credit score, but they’re not alone. Your credit report, and all the details contained within can also be accessed by employers and may be used during job applications and security clearance checks.

Your credit report may also be checked by credit card companies at random. In such cases, they’re looking to pre-approve borrowers in bulk, before sending them credit card offers in the mail. This ensures they don’t waste time and paper on customers that will fail the final part of the application.

In most cases, only your name, address, and date of birth are needed to access your credit score.

Summary: FICO Score Calculation

Whether you have your eyes set on a big house in the country, a brand-new car, or a rewards credit card, your credit score is one of the most important things to consider. It has a massive impact on your life and could mean the difference between a high rate or a low rate; a big house or a small apartment; a flash new car or a bus pass.

It could save you thousands, make your life easier and even improve your health. After all, financial difficulty is one of the biggest causes of stress in the United States, and stress has been linked to many of this country’s biggest killers, including heart disease.

The first step to mastering your credit score is understanding the ins and outs, becoming familiar with how it’s calculated, and educating yourself on how it is positively and negatively affected. 

By now, you should have a firm grip on all of these things and can begin building a positive, life-affirming credit score today!

For more information take a look at our guide to running a free credit check as well as our guide on debt-to-income ratio calculators.

Source: pocketyourdollars.com

The Difference Between Credit Card Refinancing and Debt Consolidation

  • Credit Card Debt

Average credit card debt in the US changes depending on who you ask and where they get their information. In 2019, Experian estimated this to be $6,194, while a leading credit site produced a figure closer to $8,000. At the same time, data pooled from the US Census and Federal Reserve calculated a more modest $5,700, which is likely to be the most reliable figure.

In any case, there’s one thing that researchers can agree upon: This is a growing problem and it won’t be going away any time soon.

The good news is that credit scores are improving, and debtors have never had more options for clearing their debts, including consolidation and refinancing.

In this guide, we’ll look at both of these options and more, covering cash-out refinance plans, balance transfer consolidation, and more, giving you the knowledge and tools needed to clear your credit card debt and get back into the black. 

What is Credit Card Refinancing?

Credit card refinancing generally refers to a balance transfer, although it has also been used to refer to debt consolidation. In both cases, you refinance one loan or debt with another, often keeping the same balancing but adjusting the terms to something more manageable.

We’ll show you how you can properly refinance your debts in this guide as we look at both consolidation and refinancing.

How Does it Work?

A balance transfer moves all your credit card debt onto a new card provided by a new lender. These cards offer 0% APR introductory rates to tempt new customers and these rates mean you can avoid paying interest throughout that period, which typically lasts for 12 to 18 months.

If you have a $5,000 balance with a 20% APR, this switch could save you $500 in the first year. That’s $500 more towards your balance and if you continue making the monthly payments, the debt will reduce significantly by the end of the year and the 0% introductory period.

If that sounds too good to be true, it is. Sort of. These cards can help to shoulder some of your financial burdens and in certain circumstances, they are lifesavers, but there are a few downsides. Firstly, these cards typically charge a fee that can be as high as 5% of the balance. On the aforementioned $5,000 debt, that’s $250. 

Secondly, at the end of the introductory period, the interest rate will kick-in and this is often charged at a premium. If you use this period to avoid paying interest and not to reduce your debt, you could end up in a worst position than when you started.

Who is Refinancing Right for?

You will need a fairly clean credit report and a respectable credit score to get a high-limit credit card. There are multiple cards with 18-month introductory periods, 3% transfer rates and APRs that go as low as 16% once the 0% period ends. 

As soon as you drop below the 700s, you’ll struggle to get any of these and if you drop below 580, you’ll find it difficult to get anything at all, let alone something large enough to cover your current credit card debt.

How Does Refinancing Credit Cards Affect Credit?

If you finance your credit card debt you’ll see an instant improvement in your debt-to-income ratio, which compares your gross income to all debt payments (including student loan debt, credit card debt, mortgage debt, etc.). This figure is imperative for your financial health and needs to be considered before you shop for mortgage rates or acquire any new debt, because if it’s too high then you may struggle to make payments and could face financial ruin.

An improvement in this ratio, therefore, is always beneficial. The problem is, it doesn’t have any impact on your credit score. One of the ways that refinancing will impact your score is by initiating a hard inquiry, which follows all new loan and credit card applications. This can reduce your score by as many as 5 points.

Opening a new account will also reduce your score. If you’re consolidating several debts into one, then those debts will clear and that will improve your score in the short-term and the long-term. Generally speaking, it’s always beneficial for your long-term credit score and financial wellbeing but be prepared for a short-term reduction. 

Can You do a Balance Transfer with Multiple Cards?

You can generally transfer anywhere up to five balances, providing they all remain within the specified credit limit. Balance transfer applications often include sections for multiple debts and cards. Input the details of all your credit card debt into these sections and then wait for them to finalize the decision process, being sure to keep making your payments while you do.

You cannot, however, transfer money into cards offered by the same lender. This may seem counterintuitive, but it’s important to remember that balance transfer cards and their 0% introductory rates are used to attract new customers, hopefully beginning a process that will see the customer fall into a cycle of debt. If they already have you as a customer and you’re already trapped in that cycle, they don’t have much to gain by offering you a 0% balance transfer. 

Credit Card Refinancing vs Debt Consolidation

Debt consolidation is often used interchangeably with refinancing and there are many similarities and programs that provide both options. The ultimate goal of these options is also the same, but there are some key differences.

How is Credit Card Refinancing the Same as Debt Consolidation?

The goal of consolidation is to swap many large minimum payments and escalating interest rates for one manageable monthly payment and respectable interest rate. Refinancing works in a similar way and aims to achieve the same result, albeit with some key differences.

The main difference between these two concerns how the original debts are dealt with. With refinancing, you’re moving all current debt to a new credit card via a balance transfer. Your original credit card debt is repaid, and your attentions shift to your new card.

When you consolidate credit card debt, your original debt is paid off and your focus is shifted to a new debt, preferably with a lower annual percentage rate and more favorable interest terms.

Tips for Credit Card Refinancing

If you’ve decided that credit card refinancing is the best way to clear your credit card debt, then keep the following in mind to ensure you get the best deal:

Monitor Your Credit Score

Your credit score will play a massive role in determining the sort of rate you’re offered. 50 points could be the difference between a card that has a short introductory period and a high-interest rate, and one that has 0% for 18 months and provides a respectable APR. Those 50 points can be gained in as little as a month or two depending on your situation.

We have a complete guide on How to Improve Your Credit Score Quickly that you can read to better understand what your options are, but here are a few quick tips to help:

  • Pay More: If you have extra cash at the end of the month then use it to pay towards the debt with the highest interest rate. This will reduce the compounded interest, which in turn will reduce the term and the total amount you pay. Both of these will improve your score long-tern, but the greater balance reduction will also help the next time your score is calculated.
  • Increase Limits: You can increase limits of active credit cards to give your credit utilization a boost. This accounts for 30% of your total score, so it makes a big difference.
  • Look for Mistakes: If you notice any mistakes on your credit report, dispute them. These are much more common than you might think and by disputing them you can remove them and improve your score.
  • Be Careful with Hard Inquiries: Credit scoring systems allow something known as “rate-shopping” whereby all applications for the same type of loan are included in one hard inquiry providing they take place in a fixed period. However, this is not true for credit cards, and all applications will count as a separate inquiry. Be very careful when comparing balance transfer cards and make sure you don’t agree to any hard inquiries unless they are absolutely essential.

Look for an Introductory Period

You need a 0% introductory period of at least 12 months, but there are many cards that extend this to 18 months. Anything less may not give you the time you need to get your finances in order and start making those crucial payments.

Check the Transfer Rate

The transfer rate is displayed as a percentage and can vary considerably. Even a difference of 2% (between the lowest average of 3% and the highest average of 5%) can account for $400 on a debt of $20,000.

Don’t Neglect Rates and Penalties

If a card is offering terms that seem too good to be true, you need to do a little digging. Look at the terms and conditions to discover what the APR will be when the introductory period ends and what sort of penalties they charge. The 0% introductory period is a massive positive, so it’s okay if the other terms are a little worse than what you have now. But there’s a line, and you don’t want to go from 16% interest to 26%, for instance.

Start Repaying

The purpose of these cards is not to give you a break from interest payments so that you can pump more money into your vacation fund or buy that new games console you’ve had your eye on. That might be what the lender (secretly) wants, but to get the maximum benefit out of balance transfers you need to repay all or most of your debt during the introductory period.

Use this opportunity to reduce the debt by as much as you can because every cent you pay is one less cent for future interest to be calculated against.

Keep it Open

Don’t be tempted to cancel the card as soon as your debt has been repaid as this will greatly reduce your credit utilization ratio, which will impact your credit score. Instead, keep the card active, but try not to use it except for in emergencies and when you’re 100% confident you can clear the balance at the end of the month.

Tips for Acquiring a Consolidation Loan

There are companies that specialize in providing consolidation loans, both in the form of student loans and personal loans. These companies work by repaying your debts with a single, large consolidation loan—leaving you with just one payment to make every month and one debt to worry about.

But much like refinancing, consolidation is not without its issues. To make sure you get the best deal and are mot burdened with more debt than you can afford, remember to:

Check the Total Interest

Many consolidation loans work by reducing the interest rate and minimum payment but increasing the term. On the surface, it looks like you’re getting a great deal, but in reality, you could be paying two or three times as much during the lifetime of the loan.

Use a loan calculator to determine how much the consolidation loan will cost you over the term. A lower interest rate and monthly payment is great and in the short-term, it can provide a huge boost to your finances, but you don’t want to be stuck with a loan that requires you to pay more in interest than the principal.

Understand the Impact on your Credit Report

Some consolidation loan companies, particularly those in the debt management sector, will insist that you close all but one credit account. This removes temptation, but once those old accounts close and are replaced by a brand new one, it will also remove a sizeable chunk of your credit score.

This is not true if you do it yourself using a personal loan, but this can be a risky option and isn’t suitable for anyone with a less-than exceptional credit score.

Don’t Miss a Payment

It should go without saying, but it’s crucial that you never miss a payment on your new loan. Doing so could drastically reduce your credit score and reduce your chances of acquiring a loan or line of credit in the future. 

If you’re on a debt management plan, missing a payment could result in the lenders scrapping their agreement and demanding that you return to your original terms. Even if you have a personal loan it’s important to keep meeting those payments on time as each late payment will appear on your credit report and reduce your credit score.

Look at Other Options

When you have taken the above into consideration, you need to ask yourself if a consolidation loan is the best option for you. Is it the cheapest, easiest, and most hassle-free way for you to escape debt? Are there other debt relief options that are more suitable?

There are other ways to consolidate credit card debt. Refinancing might be a more viable alternative, but you can also look into debt settlement. We have written about debt settlement extensively already and while it’s not perfect and can make your situation worse, it’s also ideal for people who feel like they are at the end of the line and are being rejected by lenders despite having access to a steady income.

Choosing Between a Debt Consolidation Loan and Credit Card Refinancing

Refinancing is a great option if you have a lot of credit card debt and a high credit score, as that way you’re almost guaranteed a prolonged introductory period and a high fixed rate of interest. However, if your score is low, your options are a little more limited. There is no origination fee to worry about, but there is a balance transfer fee, there may be high penalties, and the interest rate you’re offered at the end of the introductory period will be high.

In such cases, you should look into debt management or a fixed-rate loan, both of which will seek to clear all of your credit card debt and leave you with more manageable payments. Your credit score may take a significant hit in the short-term, but you’ll be much better off a few months later and can look forward to a brighter financial future.

Source: pocketyourdollars.com

How Many Credit Cards Should I Have?

There’s no perfect answer to how many credit cards you should have. In general, if you’re looking to build good credit, it’s a good idea to have at least one or two credit cards.

According to a 2019 report from Experian, the average American has four credit cards with an average credit card balance of nearly $6,200. Another recent study from FICO found that consumers with a credit score above 800 had an average of three cards.

Four credit cards

Why Do I Need Multiple Credit Cards?

If you already have one credit card that you diligently pay every month, you may be wondering why you would want or need to apply for more.

While you should never apply for more credit cards than you can handle, there are some strategic benefits to having a few different credit cards.

  • Different networks ensure you’re covered with all merchants. If you have a credit card from each of the major networks — American Express, Discover, Mastercard, and Visa — you’ll have a backup in case a certain merchant only accepts one card type.
  • Multiple cards means a diverse array of rewards programs. Opt for credit cards that have different rewards programs. Look for a card with a cash back program and another with airline points to maximize your reward potential.
  • Greater total credit limit means more buying power. Say you have one credit card with a limit of $3,000. This means you have a total buying power of $3,000 — however, using more than 30 percent of your credit limit ($1,00 in this case) may hurt your credit score. Now say you have three credit cards all with a $3,000 limit. Your total buying power has now increased to $9,000, giving you the freedom to spread out your purchases evenly and spend that same $3,000 without hurting your credit score.

Maxing out a credit card

Now that you’re familiar with the benefits of multiple credit cards, you may be wondering — how many is too many?

Can Having Too Many Credit Cards Hurt My Credit Score?

Your credit score won’t take a hit simply because of the fact that you have multiple credit cards. However, there are a few factors associated with multiple credit cards that may decrease your score, so keep the following things in mind:

  • Don’t apply for too many new credit cards at once. Any time you apply for a new credit card, a hard inquiry is recorded on your credit history. Too many hard inquiries within a short amount of time will lower your score.
  • Don’t open a new credit card if you’re about to buy a house or car. Lenders like to see a stable credit history, so avoid opening any new lines of credit within four months of applying for a mortgage or auto loan.

No matter how many or how few credit cards you ultimately decide to have, responsible credit management is key. Good credit isn’t as much about how many credit cards you have as it is about how well you manage them.

The Importance of Good Credit Management

When you have multiple credit cards, organization and discipline are of the utmost importance. Make sure to keep the following best practices in mind:

  • Pay on time. Set a reminder. Write a sticky note. Set up autopay. Do whatever you need to do to make sure your payment history is solid, as it makes up 35% of your credit score.
  • Keep your credit accounts open. The age of your credit history plays into your credit score. Responsibly paying off credit cards for years may increase your score, while having only new accounts will likely hurt it.
  • Only use 30 percent of your credit limit. No matter how many credit cards you have, strive to use only 30 percent of each one at any given time. The average consumer with a credit score of 800 or higher uses just 4 percent of their limit, according to FICO.

Average consumer credit score

Remember that only you can decide how many credit cards you feel comfortable taking on. You certainly don’t want to have so many credit cards that you can’t keep track of payments. If you’re ever unsure of your bandwidth, consult a financial advisor.

By keeping your utilization low and your credit score high, you’ll have a greater likelihood of proving trustworthiness to lenders and opening up more financial possibilities for your future.

Sources: CNBC | Experian | FICO

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