Top 10 Ways to Start Building Credit Today

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Are you wondering how to start building credit? It can feel like a Catch-22: If you want a loan you need a good credit score, but to get that score you need to prove you can meet loan repayments. In practice, it’s a little more logical and there are numerous ways you can build credit with or without a good FICO Score.

Check Your Credit Score Report

Stop rolling your eyes! We know you’ve probably seen this “tip” before and we understand why you might be tired of seeing it. But you may also be surprised to know that millions of Americans don’t check their credit scores regularly and many have never seen them at all.

You wouldn’t apply to a job without thoroughly checking your CV, and by the same extension, you shouldn’t apply for credit without checking your credit report. It’s free, quick, easy, and it will give you invaluable insight into your financial situation.

Apply for a Secured Credit Card

A secured credit card functions much like a prepaid card: You load your money onto it and then you use the card to spend that money. It is “secured” against your deposit, which means the provider doesn’t take a risk and you can acquire one even if you have no credit or bad credit.

Most providers report to the major credit bureaus and offer additional perks several months down the line, including unsecured credit cards.

Focus on What you Have

There are numerous ways you can build credit without applying for any additional loans or credit cards. You will need to have existing credit, however:

  • Increase Limits: Nearly a third of your score is calculated based on credit utilization, which is your available credit versus your used credit. A quick way to improve this aspect of your score is to increase credit card limits. Contact your provider to make this request. They will run some affordability checks and then make an offer. There should be no extra charge or penalties, and that additional credit (providing it’s not used) will increase your score.
  • Pay-Off: it’s an obvious one, but worth mentioning nonetheless: The higher your repayments, the less your debt and the higher your score. You should always meet minimum repayments, that’s a no-brainer, but by paying additional amounts every month, or as a lump sum, you can build your credit faster. It will improve your used credit ratio and reduce your debt, massively impacting your credit score.
  • Avoid Rash Decisions: Debt settlement, bankruptcy, and consolidation loans are great if you need them and are struggling. But they’re not for everyone and shouldn’t be seen as a Get Out of Jail Free card. Only use them if you need to and exhaust all possibilities before you reach that point as they can damage your credit for years to come.

Become an Authorized User

You can increase your credit limit, and thus improve your credit utilization ratio, simply by adding yourself as an authorized user on a partner’s/relative’s account. You don’t need to actually use the card. Just find someone who is responsible and happy to help out and ask if you can be added.

Make sure they have a good credit history and are not heavily in debt, otherwise it may do more harm than good.

Get a Co-Signer

Parents, grandparents, friends, partners—anyone who is financially responsible can help you by becoming a co-signer. The co-signer essentially assumes all responsibilities should you default on the loan, which means you get a line of credit that may otherwise be refused.

Your odds of being approved will greatly increase but you will need to find someone who trusts you and is prepared to make a potentially risky decision to benefit you.

Get an Auto Loan

Auto loans are some of the easiest to acquire because the lender can use the car as collateral. If you don’t meet the repayments, they’ll simply take back the vehicle and leave a big, ugly mark on your credit report. If you do, then your score will gradually improve.

If you’re in the market for a new vehicle, shop around and get yourself a low-interest rate installment plan. It may feel like flushing money down the drain, especially if you had planned to pay in cash, but it will help you to build credit and make future credit applications much easier.

Make Sure Your Repayments are Reported

Credit isn’t built automatically. Your credit report compiles information from lenders and updates on a monthly basis. If those lenders don’t “report” to the credit bureaus, then that information won’t be available and won’t appear on your credit report.

If you’re paying a debt or an installment plan that isn’t shown on your credit report, then contact the lender and ask them to pass the information on. All credit cards and loans should be reported regardless, but the same can’t be said for utility companies and landlords.

Try a Lending Circle

There are a multitude of non-profit lending circles that can help you build credit. They provide small loans to borrowers on low incomes and they report payment histories to the major credit bureaus. You can get the money you need for a major purchase as well as a guarantee that your repayments will be recorded and your credit will improve.

Apply in Batches

Hard inquiries should be avoided where possible as they can reduce your credit score for up to 12 months. However, if you apply for multiple loans in a short space of time it’s dismissed as “rate shopping” and your score will take just a single hit. So, if you’re applying for a new personal loan, credit card, auto loan, or mortgage, make sure it takes place within this time period.

Protect Yourself from Fraud

Many credit reporting agencies now provide fraud detection as a premium service. Last year, Americans lost close to $1.5 billion to fraud, an increase of more than a third from the previous year. It’s much more common than you might realize and if it happens to you then it can destroy your credit.

Some users don’t discover they are the victims of fraud until several years after it has happened, which is why it’s important to stay on top of things. A fraudster can steal your identity and use it to take out loans, credit cards, and more. All of this will hit your credit report and undo all of your hard work.

Fraud detection services can warn you when this is happening and help to put a stop to it. They can also detect when your name, address, email, and other personal details are being sold on the Dark Web.

Source: pocketyourdollars.com

Credit Counseling FAQs: What is Credit Counseling?

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Debt is a big black hole that millions of Americans find themselves being pulled into every year. It can obliterate your credit score, leave you stressed, angry, and feeling like you have nowhere to turn. Credit counseling was created to provide an outline, an opportunity, an escape.

Often provided as a free service by nonprofit organizations, credit counseling is a financial-focused advisory service designed to help you manage your debts and the stress that goes with them.

What Credit Counseling Service is the Best?

When searching for a reputable counselor, take your time, check reviews, and see what the different companies have to offer you.  

  • How Long Does It Last? Credit counseling begins with a phone call, which typically takes between 20 and 60 minutes. 
  • How to Start? Look for a company that provides a free credit counseling service, even if their goal is to get you to sign up to their program. If they start pressure selling, you can always hang-up.
  • Is it Free? The initial credit counseling program should always be free, but there may be some costs involved with any programs that they refer you to.

What Does it Do?

The goal is to help you get your finances under control. A credit counselor will ask for details of your incomings and outgoings, before trying to pinpoint where you might be going wrong. They will give you some free advice regarding budgeting and may also review your credit report with you.

Many credit counseling services will aim to sell you additional materials, including webinars, workshops, and books. This is true even for so-called “nonprofit” counselors. Remind them that you’re heavily in debt and can’t afford to spend any money right now. If they start pressure selling and you don’t feel comfortable, you can always end the call.

Does it Work?

Credit counseling may seem like an oversimplified way of fixing a very complicated issue, but it really can help. Many debtors have their heads in the sand. They can’t envisage a way out and may not even know how much debt they have. It’s common to feel this way but getting some insight into your situation can really help and that’s what credit counseling provides.

Not only do they force you to take a cold, hard look at your finances, but they can advise where you might be going wrong, what you need to do to fix it, and more. They may then suggest a debt management plan, which is created in combination with your creditors to help you manage your debts better.

Is Credit Counseling a Good Idea?

It’s a great idea, especially if you have no deliquesces or other major issues and are looking for a simple solution. In this sense, credit counseling can be seen as a first resort, one you take before considering debt consolidation or debt settlement.

Unlike consolidation and settlement, your credit score won’t take a hit and there are (usually) no costs involved.

Is Credit Counseling Bad for Your Credit?

An initial credit counseling session will not appear on your credit report and will therefore not impact your score. If you agree to a debt management program then a note may be added to your report alongside that specific debt, but this should not reduce your score. 

Of course, it’s a different matter entirely if you fail to make payments on time and the debt becomes delinquent.

How Long Does It Remain on Your Credit Report?

Credit counseling notes will remain on your credit report throughout your enrollment period and for five years afterwards.

What Can it Help With?

Credit counseling can help with all forms of debt. Unlike debt settlement, the goal is not to clear these debts with a single payment, nor will it look for loopholes so they can be forgiven. Instead, it will teach you how to manage them better, before potentially putting you on a debt management plan that makes repayments more affordable.

Credit counseling can help with all the following and more:

  • Car Loans
  • Personal Loans
  • Payday Loans
  • Student Loans
  • Credit Card Debt

As for how it can be used:

  1. Can it Stop Wage Garnishing? Legally, no. If a court has ordered that wage garnishing should take place, there’s very little you can do. If not, your counselor may be able to convince a creditor to pursue a different course of action.
  2. Can it Stop a Lawsuit? They can advise on what you can do to prevent the lawsuit, if indeed it can be prevented, but simply signing up for a credit counseling service will not stop a lawsuit from going forward.
  3. Can It Clean my Credit Report? A counselor may advise regarding how you can dispute mistakes on your report and in the long-term they can make changes that improve your score and clean your report. However, there is no magic wand they can wave to fix your score in the short-term.

How Much Can a Credit Counselor Save Me?

A credit counselor won’t help you to save huge amounts like a debt settlement program will. The goal and the process are different, and unless you’re making huge mistakes that a counselor can spot and remedy, you won’t save a great deal.

However, they will help you to make your debt more manageable and may save you some money by agreeing to new terms with your creditors.

Is Credit Counseling Needed During Bankruptcy?

In the majority of cases, you will need to apply for credit counseling before receiving bankruptcy protection. You will also be required to undertake some form of financial education, helping you to better understand money and debt management and thus reducing the chances of a future bankruptcy filing.

It’s worth noting, however, that there are two main forms of personal bankruptcy and each state has their own laws governing how these are filed.

How Can I Find Credit Counseling:

For Seniors? There are a few options, including the National Foundation for Credit Counseling.

Source: pocketyourdollars.com

VantageScore vs FICO: Differences, Methods, Ranges

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Credit scores were created for the benefit of the lender, not the consumer. They tell the lender whether a loan applicant is trustworthy and reliable, or risky and irresponsible. But these scores can also be used by the consumer to better understand how lenders perceive them.

Every consumer has a credit score, a specific number tied to their activity and their history, and this can be found on an individual’s credit report. It’s designed to be simple for both parties and to provide a quick and convenient way to determine an individual’s creditworthiness and monitor their financial situation.

However, individuals are often confused by the fact there are multiple credit reporting agencies and two major credit score algorithms. With that in mind, let’s look at how VantageScore and FICO Score compare and detail how these two credit scoring services operate.

FICO Score

Fair Isaac created the FICO Score in the 1980s (FICO originally stood for Fair, Isaac and Company, but the organization has since changed its name to Fair Isaac Corporation). In the mid-90s, it was used by both Freddie Mac and Fannie Mae during the mortgage application process and before long it became the gold standard of credit scoring systems.

The FICO Score remains the most common credit scoring system and is used by banks, credit card providers, and other lenders. The score is generated by a credit report, which is processed by one of the leading credit bureaus, and can differ from report to report due to the variances in how information is processed by different bureaus.

FICO Scores generally range from 300 to 850, with 300 being the lowest/worst and 850 being the highest/best. There are other variants of the FICO Score used, including the FICO Auto Score, which has a range of 250-900, but the Classic/General FICO Score is the one that most consumers are familiar with.

According to a 2019 report, the average score is 706, which is considered “good”. Anything below 620, however, is considered “bad”, and countless American consumers are struggling with such a score.

VantageScore

The VantageScore credit scoring system was established as a joint venture between the three leading credit bureaus (TransUnion, Equifax, and Experian). It was launched in 2006 under the name VantageScore Solutions, LLC, which is owned by the aforementioned companies.

VantageScore was created to standardize credit scores across the main bureaus. There have been several iterations of the scoring system since its launch, with VantageScore 3.0 being the most popular and widespread (there is a VantageScore 4.0, but 3.0 remains more common).

Unlike previous versions, VantageScore 3.0 adopted the same scoring range as FICO (300-850), thus simplifying the process for consumers.

VantageScore vs FICO: The Algorithms

Your credit score is calculated based on a variety of factors and is ever-changing and readily accessible. The two credit scoring systems use similar algorithms to generate your score, but with a few slight differences.

A FICO Score is calculated based on the following parameters:

  • 35% Payment History
  • 30% Debt vs Credit
  • 15% Credit History
  • 10% Types of Credit
  • 10% New Accounts

Read the following guide for more in-depth information on how a FICO Score is calculated.

As for VantageScore, it is calculated (roughly) as follows: 

  • 40% Payment History
  • 20% Age/Type of Credit
  • 20% Credit Utilization
  • 10% Credit Balances
  • 10% Recent Credit

At first glance, these two algorithms seem vastly different and there are certainly some areas where that is the case. However, they are both heavily reliant on Payment History, which is determined by whether or not you meet your monthly repayments, and Credit Variety/Age.

VantageScore includes Credit Balances and Credit Utilization, which is rarely mentioned with regards to a FICO Score. However, these two factors are basically the same thing as the Debt vs Credit. In Debt vs Credit, for instance, your FICO Score will look at how much credit you have available versus how much of this is being used, which is also known as Credit Utilization.

Benefits of VantageScore versus FICO Score

There are some key areas in which VantageScore differs from FICO Score and the main one affects consumers with very little credit history. With a FICO Score, you generally need to have at least 6 months of processable data before you will be given a score. With VantageScore, you may be given a score with just 1 account being active for just 1 month.

VantageScore is more willing to ignore collections that have been paid in full. This is also true for some new models of the FICO Score, but many older models are still in use that do not dismiss collections so easily.

VantageScore versus FICO Score: Which is Better?

VantageScore was created by credit bureaus, who it’s fair to say have a lot of experience when it comes to collecting, organizing, and reporting on financial data. It was designed to make their lives easier and to give lenders a more accurate and reliable score, while also giving consumers a little more consistency.

However, both VantageScore and FICO Score take the same things into consideration and provide very similar results. It’s rare for a consumer to have a good VantageScore and a bad FICO Score, or vice versa. In fact, unless there has been a major oversight or mistake, this simply won’t happen.

The Future of Credit Scoring Systems

We mentioned that VantageScore has undergone several transformations over the years, including a notable shift towards the same scoring range used by FICO. But FICO is also constantly evolving and improving. It adapts to changing trends and is constantly looking at ways to improve its accuracy and reliability.

Both of these scores will likely be around for many years to come and will no doubt experience a number of evolutions in the next decade or so. But regardless of how many times they change and how many iterations we see, the principle will remain the same: Extensive credit histories and minimal debt will generate good scores; extensive debt and minimal credit histories will generate bad scores.

Source: pocketyourdollars.com

Understanding Credit Scores: How are they Calculated?

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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

Why Did My Credit Score Drop? Reasons and Solutions

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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

Understanding Credit Scores: FICO Score Calculation

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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

Understanding Derogatory Marks on your Credit Report

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A derogatory mark can remain on your credit report for up to 10 years and cause a lot of damage to your credit score. But what exactly is a derogatory mark (also known as a negative mark or derogatory account) and how can it affect your credit score, and can it be removed?

What is a Derogatory Mark on Your Credit Report?

A derogatory mark is a negative mark that appears on your credit report following a financial mishap. It generally refers to any adverse outcome that has a long-lasting impact on your score, which means it includes bankruptcy and missed payments, but not hard inquiries.

Derogatory marks can appear on your credit report via one of two ways:

  • Reported Information: Lenders send information to credit reporting agencies and this information is used to build your credit report and calculate your credit score. It includes all data pertaining to your payment history, including derogatory marks from collection accounts and late payments.
  • Public Records: A credit bureau can add information to your credit report that is public record. This tends to be very damaging and can last for up to 10 years. It includes bankruptcy filings and tax liens, as well as civil judgments.

The many things that can cause derogatory marks include:

  • Miss a payment (can include a student loan, credit card, or any other debt).
  • Allow an account to enter collections or to be charged-off.
  • Settle your debt via a debt settlement company.
  • File for bankruptcy.
  • Your home is foreclosed.
  • You have unpaid tax debts.
  • You owe a debt through the courts.

How Derogatory Items Affect Your Credit

The way that a derogatory mark impacts your credit will depend on a number of factors, including your current credit score and credit history. If you have a bad credit score, the reduction may be minimal; if you have a good score it could remove up 150 points from your total.

This may not sound like much when you consider credit scores run from 300 to 850, but 150 is enough to send a previously “Exceptional” borrower into the “Fair” range, bypassing “Very Good” and “Good” on the way and greatly reducing their chances of securing low-interest loans.

You won’t see as big of a drop if your score is already low, but you could easily become one of the 16% whose scores are in the lowest possible “Very Poor” range, at which point you’ll be rejected for nearly all types of loans and credit cards.

Of course, it also depends on the type of derogatory mark. Bankruptcy, for instance, will impact your score much more than a late payment.

Open and Closed Derogatory Marks

There are two main types of derogatory mark: Open and Closed. These refer to the status of the account. An account that is in collections, for instance, will be classed as “Closed”, as is the case with ones that have been charged-off. An account that continues to receive monthly payments is classed as Open.

Both Open and Closed derogatory marks can seriously damage your credit score.

How Long Does It Take to Get a Derogatory Mark Removed?

There are a few ways you can remove derogatory marks quickly and with relatively minimal fuss. However, in most cases, they will remain for the term, which can vary depending on the type of mark. 

  • Bankruptcy: Whether you file for Chapter 7 or Chapter 13 will dictate whether the mark remains for 7 or 10 years.
  • Foreclosure: If you fail to make mortgage payments then your house may be repossessed, with the derogatory mark remaining for 7 years from the date of foreclosure.
  • Short Sale: A short sale can appear as a settlement or charge-off and will remain on your credit report for 7 years.
  • Collections: A collection will show for 7 years plus an additional 6-months from the date it was due. This may be true even if you clear the account in that time, although this isn’t always the case.
  • Tax Liens: Will remain for 7 years from the date they were filed, providing they have been paid.
  • Judgments: Both paid and unpaid judgments typically remain for 7 years, but it depends on the statute of limitations in your state of residence and on whether or not the judgment has been renewed.

What are the Permanent Effects?

Bankruptcy is one of the most damaging derogatory marks you can have, so let’s use that as an example. The average American credit score is around 700 (based on the latest FICO Score) and based on this score, bankruptcy can reduce it by between 130 and 150 points.

That’s a big hit to take in one go, especially if you have additional problems coming your way in the near future. However, once those problems have been dealt with, your score will gradually improve. There are ways that you can expedite this process and improve your credit score, but regardless of whether you employ a credit repair process or not, the effect of that bankruptcy will gradually reduce over time.

Once the 7- or 10-year period has elapsed, it will disappear completely and will no longer influence your credit report. There’s a good chance your credit utilization score will be low, as high-limit, low-balance credit cards are not exactly easy to come by during bankruptcy, so you’ll need to work on improving your score. But the worst of the process will be over and the effects of that derogatory mark will no longer be felt.

How to Avoid Derogatory Marks on your Credit Report

Everyone is at risk of getting a derogatory mark because no one is infallible. If you have active accounts, there’s always a chance that you will miss a payment or two, triggering a domino effect that ultimately results in a plummeting credit score and a litany of negative marks.

Keep your credit score strong and your credit report positive by following these simple rules:

  1. Be Aware of Your Credit Reports: Check with all credit bureaus at least once a year. You are legally entitled to a free credit report from each one every year and there are multiple free credit report services that can keep you informed all year long.
  2. Follow Through: Contact doctors and hospitals after appointments to make sure there is no remaining balance. As discussed in our guide to Medical Debt and Your Credit Score, medical bills are not added to your credit report unless they enter collections. Some debtors only learn about unpaid medical bills when they receive a derogatory mark or a demand from a debt collector. 
  3. Pay All Debts: Don’t assume you have gotten away with debt just because it doesn’t show on your credit report. It may appear eventually and if you don’t make payments it could enter collections. Pay all debts or at least learn more about them to better understand your options.
  4. Make All Payments: Every monthly payment has to be made on time. The longer you delay, the more damage it will do to your credit score and the longer it will take you to recover and repair your credit.
  5. Use Debt Relief: If your debts are too high, consider debt management, debt consolidation or even debt settlement, but always read about them beforehand and make sure you’re aware of the pros and cons before you commit.

Strategies to Remove Derogatory Entries on your Credit Report

Contrary to what you might have been promised elsewhere, there is no sure-fire way to remove derogatory marks from your credit report if they are accurate. There are companies that promise to do this, but the vast majority are outright scams seeking to sell you on a service that doesn’t exist while the rest offer risky and immoral strategies such as buying tradelines.

These scams prey on the desperate and make a killing by exploiting the debt relief industry. Stay clear of them and trust your instincts—if it sounds too good to be true…well, you know the rest.

Check your Credit Report

Credit reporting agencies aren’t as reliable and flawless as you might think, far from it. They can, and often do make mistakes. An FTC study found that 1 in 4 consumers has an error on their report that is severe enough to impact their score. 20% of these have their reports fixed after filing a dispute with the credit bureau responsible; 80% experience modification of some kind.

The first step in any credit repair process, therefore, is to check your credit report and become acquainted with the specifics. Not only will this allow you to identify and deal with fraud and errors, but it will also ensure you’re fully prepared to tackle your financial issues head-on.

Right the Wrongs

If your credit score has dropped as a result of several derogatory marks, it’s fair to say that you didn’t have control over your finances. You need to change that going forward:

  • Create a list of all outgoings and incomings.
  • Calculate your debt-to-income ratio (DTI).
  • If your DTI is high, acquire a debt consolidation loan or refinance.
  • Start budgeting and making sacrifices.
  • Prepare some emergency funds to cover you in the future.

Rebuild Credit

Unsecured credit card debt and personal loans probably got you into this mess in the first place and should be avoided. However, there are a few forms of credit you can use to rebuild your score without taking a big hit in the process and without being subjected to countless refusals and high-interest rates:

  • Secured Credit Card: A card that is “Secured” against a cash sum. It’s like a phonecard—you place some money on it and then use the card to spend that money. Every month your score will gradually improve and you’ll have a clean, positive credit account to your name.
  • Lending Circles: We wrote an extensive guide to lending circles here, discussing how these programs can help you to quickly and safely build credit, without acquiring costly interest rates.
  • Store Cards: A store card is basically a credit card with a high-interest rate and a ton of perks. These cards can be dangerous if you’re impulsive and have a history of running high credit card bills, but if you’re relatively responsible and have every intention of clearing your monthly balance, they can be useful. They’ll give you an account you can use to build credit and will provide you with additional features and perks. Keep the limit low to avoid temptation and don’t spend more than you can afford to repay. 

Don’t Rush

Credit repair takes time and is not something you should rush into. Doing so could lead to regrettable and costly mistakes, such as opening new accounts you can’t afford or committing to a debt relief program that damages your score. It’s important to take your time.

Wait for 7 to 10 Years

After 7 to 10 years, the derogatory mark will disappear completely, but after just a few years you’ll start to notice its effects much less. From that point on you can begin to rebuild your credit so that when the derogatory mark finally clears, your score is in “Good” or “Very Good” standing.

Conclusion: Derogatory but Not Devastating

Derogatory marks are negative, there’s no denying that, and they can do some serious damage to your credit report. However, all this damage can be reversed with a little patience and perseverance and you can still have a strong credit report even with the odd negative mark.

So, don’t despair if you’re hit with a derogatory mark—stay cool, learn the cause, look at the solutions, and do all you can to avoid additional marks landing on your report.

Source: pocketyourdollars.com

Understanding the Three Major Credit Bureaus

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Learning about the three major consumer credit bureaus can help you to familiarize yourself with your own credit score. The three major consumer credit bureaus are:

  • Equifax
  • Experian
  • TransUnion

A credit bureau is an entity that collects information about you and how you have managed to use credit in the past. Essentially, credit bureaus store our information and use it to build us a personal track record of our financial accounts and credit file. This organized track record is better known to the average consumer as a credit report. 

Oftentimes, these three big credit bureaus are seen and referred to as one, when in reality, they are competitors in the business of supplying creditors with information. 

So, what is this data used for?

The data that Experian, Equifax, and TransUnion collect is generally used for:

  • Calculating credit scores.
  • Lenders to make decisions about whether or not to offer a consumer a credit card or a loan and at what interest rate. 
  • Some pre-employment screening background checks.
  • Evaluating lease applications.
  • Insurance companies to determine what rates to give. 
  • Deciphering whether or not the consumer is required to pay a utility deposit. 

As a consumer, you have a right to check your credit and are entitled to one free annual credit report from each major credit bureau. 

How credit reporting agencies collect information

The services provided by these credit bureaus are beneficial to creditors when they are trying to decide whether or not they want to offer credit to a consumer. That means that even though creditors are not legally required to report information to the credit bureaus, most of them will do it anyway, since it helps their business. 

So how do credit bureaus get their information?

  1. Creditors: In the world of consumer finance and credit accounts, creditors are often known as “data furnishers.” Banks and credit card companies usually report your payment history and how you’ve handled credit cards and loans to either one bureau, two or all three. This is why if you check your credit report from each bureau, you might notice a slight difference between the three at times. 
  2. They purchase or collect information: There are some types of data that the big credit bureaus have to buy. Oftentimes, reporting companies like LexisNexis will sell credit information such as bankruptcy records and government tax liens to the big credit bureaus. The credit bureaus also seek out information from public records to collect information on any repossessions, bankruptcy filings or foreclosures you may have undergone. Usually, common consumer accounts like utilities and rent won’t show up on your credit report unless you make late payments that consequentially turn into a debt collection issue. 
  3. They share it with each other: Yes, sometimes these three competing credit bureaus do share information with each other, but not like you might think. There are certain instances in which the credit bureaus are required to share information with one another. An example of this is when a consumer experiencing identity theft places an initial fraud alert through only one of the credit bureaus. The credit bureau that receives the fraud alert must then notify the other two bureaus. 

So, what information are these credit bureaus collecting?

  • Information surrounding your identity including your name, birthdate, Social Security number and past and current addresses. 
  • A list of your credit account history including your current accounts.
  • Payment history; record of whether or not you’ve paid on time. 
  • Missed payments, collections accounts, bankruptcies, repossessions, and foreclosures. These are considered negative marks, but they aren’t permanent. After seven years, they are usually removed from your report. 
  • A record of who has pulled up your credit report. For example, the times that you have applied for credit or have been screened for preapproval will usually be included on this record.

Why your credit score might not show up on your credit report

By law, the credit bureaus must make the information in your credit reports available to you, however that doesn’t necessarily include your credit scores. 

Out of the several different types of credit scores, there are two that are the main players in the game: FICO and VantageScore. 

Both of these data analytics companies generate your credit score by taking the information from your credit reports and running it through an algorithm they each have created. Since their algorithms are not exactly the same and both companies have probably acquired different sets of data, your credit score might vary depending on the scoring model that was used. 

How to get credit reports from each credit bureau

As a consumer, you have a right to obtain a free annual credit report from each of the three main credit bureaus. 

Use this as an opportunity to look over your reports and check if there are any mistakes. It’s in your best interest to check your credit report carefully for identification mistakes and/or incorrect account information. Mistakes like these could be causing harm to your credit if they exist, so you’ll want to take care of this right away. 

Since each of the three major credit bureaus work separately from one another, it’s important for you to check all three. 

How to take care of mistakes on your report 

Mistakes on your credit report can mean a lot of things, whether it’s an innocent mishap or a case of identity theft. Fortunately, if you find a mistake on your credit report, you can dispute it. 

Disputing an error on a credit report means that you will need to file a formal complaint that the bureau must legally respond to. However, each bureau’s error disputing process is a little different, which is why it’s important that you check all three reports. 

If you find that the same mistake is on all three reports, it’s extremely important that you file a complaint with all three bureaus as credit reporting companies do not share this information. 

Listed below are the links to dispute an error:

Other Important Credit Bureaus 

Experian, TransUnion and Equifax are the main three players in the credit bureau game, but other credit bureaus do exist. See the Consumer Financial Protection Bureau (CFPB) for a listing of dozens of consumer credit bureaus categorized based off of the type of information that they collect and make available to creditors. 

If you’re interested in learning more about these different credit bureaus and what they do, take a look at the CFPB website for a full listing complete with their phone numbers and addresses. 

These are three credit bureaus you may also want to familiarize yourself with:

    • ChexSystems: Focuses on gathering and reporting information on closed checking and savings accounts. 
    • National Consumer Telecom and Utilities Exchange (NCTUE): Focuses on gathering and reporting information on the utility industries, telecommunications, and pay TV.
  • Comprehensive Loss Underwriting Exchange (C.L.U.E.): This bureau is owned and operated by LexisNexis and focuses on collecting information related to insurance and create consumer auto and personal property reports. This information could be used by insurance companies when coming up with an insurance premium. 

Key Takeaways

Credit bureaus exist and they play a major role in our credit score. Whether they are one of the major three or they are a smaller credit bureau, there are several different credit bureaus using a broad selection of sources to gain information and put together credit reports. 

The data and algorithms used to calculate your credit score vary from credit bureau to credit bureau, which is why your score might look slightly different at times. 

Go online, mail in, or call the credit bureau to request a report. If you find an mistake on one of your reports, you can file a claim and the credit bureaus are legally required to evaluate and correct the error as necessary.  

Some of these credit bureaus offer free credit reports, but you may need to submit a mail-in request or call to request your report.

Source: pocketyourdollars.com