Debt settlement can be a lifeline for individuals struggling with overwhelming debt, offering the possibility of reducing their debt burden and achieving financial freedom. However, it’s essential to understand the ins and outs of debt settlement to make informed decisions about whether it’s the right option for you.
In this comprehensive guide, we’ll cover everything consumers should know about debt settlement, including when it’s a good idea, when it isn’t, how to initiate the process, and more.
Understanding Debt Settlement
Debt settlement is a debt relief strategy in which a debtor negotiates with creditors or debt collectors to settle their debts for less than the full amount owed. Instead of repaying the entire debt, the debtor agrees to make a lump-sum payment or series of payments to satisfy the debt, typically at a reduced amount.
When Debt Settlement Is a Good Idea
Debt settlement may be a viable option for individuals facing significant financial hardship and unable to repay their debts in full. Here are some situations in which debt settlement may be a good idea:
Overwhelming Debt: If you have substantial unsecured debt, such as credit card debt or medical bills, that you’re unable to repay through traditional means, debt settlement may offer a way to resolve your debts and avoid bankruptcy.
Financial Hardship: If you’ve experienced a significant loss of income, medical emergency, or other financial hardship that has made it impossible to keep up with your debt payments, debt settlement can provide relief by reducing your overall debt burden.
Avoiding Bankruptcy: For individuals who want to avoid filing for bankruptcy but are unable to repay their debts in full, debt settlement offers an alternative solution that may allow them to negotiate more favorable repayment terms with creditors.
When Debt Settlement Isn’t a Good Idea
While debt settlement can offer relief for some consumers, it’s not the right solution for everyone. Here are some situations in which debt settlement may not be a good idea:
Limited Financial Resources: Debt settlement requires a lump-sum payment or series of payments to settle your debts, which may be challenging if you have limited financial resources or are unable to save money for settlements.
Negative Impact on Credit Score: Debt settlement can have a negative impact on your credit score, as settled accounts may be reported as “settled for less than the full amount” on your credit report, which can lower your credit score and make it harder to qualify for credit in the future.
Potential Tax Consequences: Depending on the amount of debt forgiven through settlement, you may be required to pay income tax on the forgiven amount, which can result in a significant tax liability.
Initiating the Debt Settlement Process
If you’re considering debt settlement as an option, here are the steps to initiate the process:
Step One: Assess Your Financial Situation
Start by assessing your financial situation, including your total debt load, monthly income, and expenses. Determine how much you can realistically afford to offer as a settlement to your creditors.
Step 2: Contact Your Creditors
Reach out to your creditors or debt collectors to inform them of your intention to settle your debts. Be prepared to negotiate with them to reach a mutually acceptable settlement amount.
Step 3: Get Everything in Writing
Once you’ve reached a settlement agreement with your creditors, make sure to get all the terms of the agreement in writing, including the agreed-upon settlement amount, payment schedule, and confirmation that the debt will be considered satisfied.
Step 4: Make Payments
Fulfill your end of the settlement agreement by making the agreed-upon payments to your creditors. Be sure to follow the payment schedule outlined in the agreement to avoid any potential complications.
Step 5: Monitor Your Credit Report
After completing the settlement process, monitor your credit report to ensure that the settled accounts are accurately reported. If there are any discrepancies, dispute them with the credit bureaus to have them corrected.
Seeking Professional Help
Navigating the debt settlement process can be complex, so it may be beneficial to seek professional assistance from reputable debt settlement companies or credit counseling agencies. These organizations can help you negotiate with creditors, develop a customized debt settlement plan, and provide guidance on managing your finances more effectively.
Debt settlement can offer a lifeline for individuals drowning in overwhelming debt, providing a path to financial freedom and relief from creditor harassment. However, it’s essential to carefully consider whether debt settlement is the right option for your financial situation and to understand the potential risks and consequences involved. By following the steps outlined in this guide and seeking professional guidance when needed, you can navigate the debt settlement process with confidence and take control of your financial future.
If you’re trying to perfect your credit score, it’s important first to understand what makes up your credit report and credit score. Your credit score is determined by an advanced algorithm developed by FICO and pulls the data from your credit report to determine your score. When calculating your credit score, the following information is going to affect your credit score in the corresponding percentages:
35 percent: History of on-time or late payments of credit.
30 percent: Available credit on your open credit cards
15 percent: The age of your lines of credit (old = good)
10 percent: How often do you apply for new credit?
10 percent: Variable factors, such as the types of open credit lines you have
Many of this may be common sense or information that you’ve already learned over time, resulting in a good credit score but possibly not a perfect score. If you have a bad credit score, it could take a lot of time and work to increase your score and you may first want to consider repairing your credit. If your credit score is already above 700 but you’re trying to shoot for that perfect score of 850 to ensure the best deals and interest rates, here are 5 ways to perfect your credit score:
5 Ways to Get a Higher Credit Score
1. Maintaining Debt-To-Limit Ratio
To increase your credit score, it’s recommended that you keep your debt-to-credit ratio below 30% and, if possible, as low as 10%. The debt-to-limit ratio is the difference between how much you owe on a credit card versus how much your credit limit is. For example, if one of your credit cards has a credit limit of $5,000, then you should always keep the balance below $1,500 but preferably around $500. As you can see above, 30% of your credit score is determined by the available credit on your open credit cards, so keeping the debt-to-limit ratio will increase your available credit and also show that you’re responsible with your credit.
2. Keep Your Credit Cards Active
Make sure that you use your cards at least once a year to keep them shown as “active” credit and make sure that you never cancel your credit cards. 15% of your credit score is determined by the age of your lines of credit, so you should always keep your credit cards active to lengthen the age of your line of credit. Many people tend to cancel cards that they no longer use – many times because the rates aren’t very good or because they have another card with better benefits – but even if you don’t use the cards very often (just once a year is fine), you should keep them active. Typically, someone with a credit score over 800 has credit lines with at least 10 years of positive activity.
3. Always Pay Bills On Time
Probably the most well-known factor of a credit score and the factor that has the biggest impact on your credit score (35% of your score) is your history of paying your credit payments on-time. If you have a history of always making your credit card, mortgage, and car payments on time, you will greatly improve your credit score. This can also have an adverse effect as well, should you ever make a late payment. Unfortunately, it only takes one late payment to severely reduce your credit score so it’s crucial that you make sure to always make credit payments on time.
4. Dispute Errors On Your Credit Report
If you don’t already, make sure that you request a copy of your credit report once every year and review it for errors. It is actually quite common for credit reports to contain errors which can be disputed and potentially allow you to have negative items removed from your credit report. If, for instance, your credit report shows a late payment on a credit card but contained errors in the record, you can dispute the negative item and request to have it removed from your report. Having a negative item, like a late payment, removed from your report can improve your credit score significantly. While disputing errors on your credit report can be tedious and take a lot of time, it is usually worth it. Another option would be to contact a credit repair agency to help you dispute any negative items on your credit report.
5. Reduce The Number of Credit Inquiries
While this may only affect 10% of your credit score, keeping the number of credit inquiries down can still help to build that perfect credit score but is often ignored. You should never have more than one credit inquiry per year but many people do not realize how often this is done and often times have their credit checked more than once per year. If you’re applying for a car loan, checking your credit score online, or applying for a new credit card, these type of actions will almost always result in a credit inquiry and should be avoided if you’ve already had a credit inquiry earlier in the year. Make sure you do your research on what will result in a credit inquiry so that you don’t accidentally have more than one a year without realizing it.
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The credit approval process varies based on the type of credit you seek. Credit cards can take several days, loans can range from days to weeks, and mortgages can take weeks to a month.
Lenders consider multiple factors when you apply for loans and credit cards, including your credit score and current finances. While the algorithms that determine your creditworthiness may be complex, the credit approval process itself is fairly straightforward.
We’ll clarify the credit approval process and share several helpful tools like personal loan and mortgage calculators. Credit.com also has credit card suggestions for bad credit and no-credit applicants that may offer higher approval rates.
Key Takeaways:
Credit approval lengths vary based on the type of credit you apply for.
The law requires Issuers to explain why they didn’t approve you.
Checking your credit report before applying can help you prepare.
Table of Contents:
What Is the Credit Approval Process?
Once you fill out an application, a lender will pull a version of your credit report and credit score. They’ll use this credit profile and other factors, like your income or debt-to-income ratio (DTI), to determine if you meet their underwriting standards.
Underwriting standards are a lender’s benchmarks for deciding who can qualify for their loans and the terms they’ll receive. A lender will offer a loan contract if you get approved, or they’ll send an “adverse action” notice if you don’t.
Thanks to the Fair Credit Reporting Act‘s risk-based pricing rules, lenders must provide a copy of the credit report and credit score used in the decision-making process when they deny someone a loan or offer less favorable terms on the financing.
How Can I Tell if I’ll Be Rejected?
Many lenders disclose general parameters regarding their underwriting standards on their websites and you can also call them directly to ask about what credit profile is needed to apply for a particular product.
Checking your credit report before applying can also help you get a better sense of your approval odds. Credit.com provides a free credit report card that highlights five factors such as your age of credit and your credit mix. You’ll also receive suggestions of where to work to improve your credit and credit approval odds.
How Do I Apply for a Credit Card?
The fastest way to get approved for a credit card is to apply online. Many issuers offer instant approval to online applications that can give you an answer within minutes. You can also apply by mail or phone for most commercial institutions.
When you apply for a credit card, an issuer will pull your credit—which acts as a hard inquiry that briefly impacts your credit. Issuers will also ask you for additional information, like your income, to determine whether to approve you for credit and a certain credit limit.
Once approved, you’ll likely receive a physical credit card within 10 business days. Issuers might also let you add a card to your digital wallet shortly after you’ve been approved. If you are turned down for a credit card, issuers must send you a letter explaining their decision.
How Do I Apply for a Loan?
Applying for a car loan or personal loan is also an easy process, with many lenders offering online applications. You can find out if you are likely to be approved before you apply by asking about the minimum credit standards required for the loan.
Some lenders list credit qualifications, such as minimum credit scores, right on their websites. How quickly you are approved for a loan depends on the lender, but you may receive an answer within 24 hours or even within the hour. If a lender turns you down for a loan, they will send you a letter explaining why you did not qualify.
How Do I Apply for a Mortgage?
Applying for a mortgage involves more paperwork—and time—than credit card or loan applications. However, getting preapproved for a mortgage can speed up the homebuying process.
After you complete the preapproval process, you may have to supply some additional supporting documents. Once all the necessary documents are submitted and reviewed, you will receive one of four possible decisions on your home loan—approved, approved with conditions, denied, or suspended.
If your loan application is suspended, more documentation is required. If your loan application is approved with conditions, there are specific criteria you must meet before you will receive the full approval of your loan. And if your mortgage application is denied, you will receive a notice in writing explaining why.
What Are the 5 C’s of Credit Approval?
The 5 C’s of credit approval are a group of factors issuers use to appraise applicants. They serve as catchall considerations for factors, such as income and credit history.
Here’s a brief explanation of each of the 5 C’s.
Capacity: This gauges if an applicant has the financial capacity to handle a loan based on their cash flow.
Capital: This is the amount of money and assets that a borrower has overall.
Character: This measures an applicant’s creditworthiness, credit history, and personality to an extent.
Conditions: This refers to the conditions of the economy at the time an application is submitted.
Collateral: These are the assets an applicant can offer to help secure a loan.
How Can I Improve My Credit Approval Odds?
The 5 C’s of credit can all increase your credit approval odds. Here are a few examples of this idea in action.
Showing proof of employment can display your capacity to handle new credit.
If you have the capital to do so, making a large down payment can drastically boost your credit approval odds.
Consistently making timely payments can demonstrate strong character when applying for credit.
Spacing out your applications across six months could result in better conditions for credit approval.
Offering collateral such as real estate, cash, or rare items can increase your approval odds and lower your interest rate.
Full Credit Approval vs. Prequalification
Full credit approval paints a clear picture of the terms and conditions that an applicant will receive with a loan. Lenders usually offer full approval after thoroughly reviewing an applicant’s employment history, income, and credit.
Prequalification, however, occurs when lenders make offers based on a cursory look at an applicant’s information. It’s worth noting that prequalified offers aren’t always exact—you may receive a prequalification letter in your mailbox for a 5% APR credit card, but that number could change when you apply.
Manage and Build Your Credit With Credit.com
Credit plays a significant role in qualifying you for attractive loans, mortgage rates, and new credit cards. Credit.com can help you learn where your credit currently stands and offer tips on what areas of your credit you need to work on to help you steadily improve your scores.
When you’re considering starting home shopping, it’s important to put yourself in the best possible position. To do this, you’ll want to shore up your finances and increase your credit score. Follow these simple steps to get you closer to your homebuying dream.
1. Check Your Credit Score
Your credit score will be one of the main considerations in your mortgage application, so check yours to see what needs the most work. A credit score is based on a number of factors: payment history, credit usage, types of credit, age of credit, and recent inquiries. Though you can’t impact all of these in a short period of time, you can take steps to improve in some areas.
Make sure you’re paying all of your bills on time, as on-time payments have a huge impact on your score. Don’t apply for new lines of credit, but you can request a credit limit increase to current credit lines to improve your usage percentage. If you see any errors on your credit report, dispute them so that errors can be removed or corrected, and target credit usage when you make your budget.
2. Assess Your Finances
To know what you have to do to buy the home of your dreams, you need to know where you stand. Write down everything you have coming in and going out each month first. Some of these expenses, such as your car and student loan payments, stay the same over time and will come with you to your new home. Others are variable and change from month to month, including how often you eat out and your entertainment expenses, and these expenditures can most likely be shaved down or eliminated entirely with a budget.
Because homebuying comes with many expenses–a down payment, inspection fees, closing costs–your budget should be tighter in the period before you buy than normal. You’ll also want to budget for a home warranty; see if a home warranty is worth the money. When developing your budget, focus on eliminating your high-interest debt and saving for those homebuying expenses.
Lenders will also look at your debt-to-income ratio or DTI which is the amount of money you have coming in each month versus the expenses you have. Though it varies between lenders, many lenders will not give a mortgage to someone whose DTI is higher than 43%.
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3. Understand Homebuying Costs
For nearly every type of mortgage, a down payment is required. A down payment of no less than 20% is suggested to have better home options and lower monthly costs. Conventional loans allow 20%, however, you can also have a down payment of as little as 3%; for down payments below 20%, PMI (private mortgage insurance) is required. Other types of loans, like an FHA loan, require between a 3.5-10% down payment, depending on your credit score. Make sure you understand how much you’ll be spending on your new home by using a mortgage calculator.
Other homebuying fees can add up quickly and be more variable. You will likely have a loan origination fee, inspection fee, appraisal fees, and other fees. You may be able to control some of these by choosing your own professionals. However, others will be selected by the seller, real estate office, or mortgage company.
A brokerage commission may be paid to real estate agents on closing. Your home warranty, property insurance and taxes, and any points you wished to pay to lower your mortgage rate as well as current interest rates will all go into your final costs. Account for all of these expenses when deciding how much mortgage you can afford.
Take steps to improve your creditworthiness and your DTI, and know what you’re looking for when you begin shopping for a lender to work with so you get the best rate possible. With the right moves, you’ll be closing on your dream home in no time.
Graduating college can come with a lot of implications and responsibility, and those associated with your finances are certainly no exception. On top of the need to get your career off the ground, you should also think about how this impending career and salary will help you get your relationship with your personal finances in good shape, as well.
Prior to college, you probably did not have any credit. And during college, if you weren’t using a credit card or participating in other practices that establish and build credit, you’ll basically be starting from scratch. This can be a great spot to be in because it sets you up to grow your financial reputation without having to rebuild it from any previous blemishes on your record. At this transitional and vulnerable time in your life, think about your future, and be sure to include those future thoughts in your decision-making so that you can (somewhat) effortlessly stay on track. This is some of the money advice college grads never get, but definitely should.
Student Loan Repayment
If you took out student loans to fund your education, you’re likely feeling a tad overwhelmed by the outstanding balance and impending payments to pay it all back. While this type of debt is sizable, it’s not something to fear to the point of disregard. So, many people use student loans to cover college costs, which is good news for you because there’s no shortage of tips on repayment strategies for you to consider.
Paying your monthly minimum each month is going to help you begin to establish credit. While it’s acceptable to follow this strategy, it might not get you where you want to be in terms of growing your credit score. If you can, think about ways to dedicate more money towards repayment each month so that your debt-to-income ratio can become more favorable to you, faster.
Read More: What is the Average Student Loan Debt?
A savvy way to accomplish this is through refinancing. Although you’re just starting the process of paying back your student loans, that doesn’t disqualify you from refinancing. The rates that were in effect when you took your loan out might be higher than they’re now, in that case, a refinance can shave years off your payments simply by decreasing your total interest. Your monthly rate will likely decrease as well, which means that potentially you can pay down principal faster if your budget that allowed for the previous, higher amount, is still manageable.
Get Professional Guidance
Like it or not, money is essential in life. While the amount you have doesn’t determine the level of importance, the simple fact that you need money to be able to get through life is undeniable. At this beginner stage, consider meeting with a credit counselor. These professionals can help you identify goals, discuss different strategies, and help you decide if it is right for you at this time.
Since this is likely your first time managing your money independently as an adult, and at this level, the habits you build now are probably going to be the ones that stick. Your credit score is sensitive but powerful. As you walk through various stages of life, that number is going to be what determines things like mortgage rates, car loans, and even your ability to start your own business even if that’s years from now.
Budget Appropriately
After having spent a few years scraping pennies together to split a pizza three ways with your roommates, you’re going to be tickled to receive that first job salary, and the paychecks that come along with it. But don’t get careless. Before you cash your first check, examine your finances, and set a budget for yourself. Some of the best budgeting methods are simple and straightforward, which is ideal for a beginner. A great piece of advice here is to continue to live as you did in college and operate on a shoestring budget as far as your extra money goes.
Paying your bills on time is going to help you improve your credit score at a steady and consistent pace, so you won’t want to fall behind. The occasional splurge is fine, but make this the exception and not the rule. It might not feel the most exciting or fun to dedicate your first job finances towards responsibility. However, if you put this into practice now, you’ll have to work at it less and less over time. Then, maintaining your good credit will be a natural consequence of your habits instead of something you have to consciously work at.
Related Read: Side Hustles for College Students
Use Credit Cards Strategically
One of the best ways to build credit is by using credit. Keep your momentum alive by applying for a credit card, one with perks that appeal to you, and terms that you can manage. You might not yet be able to qualify for a traditional credit card, but a secured credit card should be well within your capabilities. Your credit limit will probably be low, but that is ok. The point here is to get into the practice of using a card, and paying it off, on time and at least at the minimum, consistently month to month.
A credit card should work for you in terms of what you get back from it. Not all cards are created equal so definitely shop around before you just randomly pick one. Perks like airline miles and cash back are very popular places to start. If you take out a card and begin to use it and quickly notice that you’re not savvy enough to manage this responsibility yet, cut the card up. Closing credit accounts is one of the bad credit habits to avoid and can negatively impact your score. So you are better off cutting the card up, ceasing to use it, and continuing to pay down the balance without adding to it.
The average tax refund in 2021 was $2,827. And while getting a tax refund often means you overpaid to begin with, that hefty chunk of change hitting your bank account can spawn some great feelings. Before you drop all that dough on your next vacation or an impulse buy, consider whether you can do something more responsible with it. For example, did you know you can use your tax refund to build credit?
How to use Your Refund to Build Credit
6 Tips for Using a Tax Refund to Build Credit
Just getting a decent amount of money in your checking account doesn’t mean your credit goes up. And in reality, there aren’t guarantees about your credit score.
However, here are some tools and methods that tend to move credit in a positive direction or help you impact your score in a positive way over time.
Consider using some of your tax refund to pay for an ExtraCredit account. This subscription lets you get access to 28 of your FICO® credit scores and credit reports from all three bureaus, so you know what’s going on with your credit. Once you gain that access, you can also use some of your tax refund to invest in other tools, getting rewards and potential cash back through ExtraCredit.
For example, if you find your credit score is lackluster and discover that it may be because of inaccurate information on your report, you could invest in credit repair services with a trusted leader in credit repair. If you sign-up through your ExtraCredit Restore It feature, you get an exclusive discount on the credit repair service. Challenging that inaccurate information and getting it corrected could give you a more accurate credit report and possibly improve your score!
2. Get a Secured Credit Card
If you have poor credit and know that everything on your credit report is accurate, you may need to take some other actions to build credit in the future. One option is applying for a secured credit card.
A secured credit card requires you to put a deposit down to secure your line of credit. That’s where your tax refund comes in. Once you use the card and make timely payments for a certain period of time, you may get your security deposit back. You could also get approved for a higher credit limit and/or lower interest rate. And all those timely payments also get reported to the credit bureaus, which can be good for your score. Make sure to choose a card that reports to all of the major credit bureaus.
3. Open a Credit Builder Account
Credit builder accounts are locked savings accounts that work somewhat like loans. The exact way they work varies, but the concept tends to be the same:
You secure a “loan” with a deposit. That deposit is put into a locked savings account and held for you.
You pay the loan as agreed, typically making monthly payments.
The on-time monthly payments are reported to the credit bureaus, and this helps build your credit.
Once you pay off the loan, the savings account is unlocked and you get access to that money.
4. Pay Down Your Debt
Dropping some money on your existing debt can also help improve your credit, especially if it’s revolving credit. That’s because your credit utilization rate plays a big role in your credit score.
Credit utilization refers to the amount of your open credit you’re using. So, if you have a credit card with a $2,000 limit and a balance of $1,000, your credit utilization rate is 50%. That’s considered high.
Using your tax refund to pay down one or more high credit card balances brings down your utilization percentage. That might have a positive impact on your credit.
5. Open a Savings Account
You may already be working on your credit and just worried about making continual progress in the future. In this case, you might want to open a savings account and put the money away to support needs later. You could use the money to ensure you can cover payments on future debts in a timely manner.
6. Pay Any Late Bills
On the other hand, if you’re running late with bills, you might use your tax refund to catch up. That puts you in a better position to make timely payments going forward, which is important for your credit score.
Other Responsible Ideas for Using Your Tax Refund
Of course, you don’t have to use your tax refund to build credit. Perhaps your credit is already good or excellent. In that case, you might want to consider a different type of responsible action with your refund. Here are a few options.
1. Start an Emergency Fund
Put the money away for a rainy day. An emergency savings fund helps you pay for unexpected expenses, such as medical bills or car repairs. Some people like to save up around six months of expenses to help cover a gap if they lose income or a job, and your tax refund might help you jump start such a savings.
2. Invest in Retirement
You might be able to add to your 401(k) or IRA accounts. Instead of putting your tax return directly into those accounts, use your tax return to cover normal daily expenses. Then, up the percentage of your paycheck that goes into your retirement account. That lets you save more while getting a tax advantage on the savings. And if your employer matches retirement contributions, you could save even more.
3. Donate to a Worthy Cause
If you’re already fairly set financially, you may want to support a charitable cause. You could donate to COVID-19 relief funds, your church, or a favorite nonprofit organization. Get a receipt so you can claim the donation on your taxes next year to help potentially increase next year’s refund!
4. Support Small Businesses
Small businesses took a huge hit during the COVID-19 pandemic. If you’re looking to give back with your tax refund and also spurge on yourself, consider making big purchases with small businesses.
5. Invest Some Money
If you’ve ever wanted to invest in the stock market or buy some cryptocurrency, your tax refund might make that possible. Just remember to do your research or consult people who know what they’re doing before you drop all your cash into an investment app.
There’s a lot you can do with tax refund money. You can use your tax refund to build credit, get ahead on debt or treat yourself or your family to something. But before you can do that, you need to maximize your return.
It’s been a difficult time for everyone. But coming into the new year, many have found the past twelve months have landed them with lower credit scores than ever before. This can damage not only your financial reputation, but also your prospects. So, what’s the effect of a high or low credit score, and how can you improve yours?
Why Is a Good Credit Score Important?
It’s like a digital record of financial viability, which is reflected in a credit score. Purchases made using credit cards and monthly debt repayments boost your score. A low credit score makes borrowing money, securing credit cards with good interest rates, or qualifying for a mortgage difficult. Conversely, maintaining a good credit score can:
Increase loan amounts available
Lower interest rates on loans
Increase the probability of loan acceptance
Provide access to buy now, pay later credit offers
Boosting Your Score Is Easy
Knowing everything about your credit score is important. So, you must check it whenever possible to see where you can give it a boost. Let’s discuss eight easy ways to improve your credit score In 2021.
#1 – Know Your Score with a Free Credit Report
To improve your credit score, you need to know what it is. There’s plenty of companies out there that can give you a free credit report card, such as TransUnion, Equifax, and Experian. Most of these provide paid services to keep on top of changes. If you have the spare income to subscribe, it can significantly help your credit score. Keep reading to find out how.
With companies like Experian, you are entitled to one report free annually. And you may even be eligible for another if you’ve recently been refused a loan or employment based on a poor credit score.
#2 – Check If Your Report Is Accurate
Identity theft and credit fraud are rife these days. Once you have your report, take the time to review your accounts and dispute any you know aren’t right. Even if you don’t get lost money back, having false debts removed from your credit report can boost your score.
#3 – Pay Your Bills on Time
Perhaps the most frequent cause of lowered credit scores is late payments. To give your credit a boost, make sure to pay any bills and loan repayments on time. Using direct debits is a reliable way to make sure payments reach their destinations on time. And monthly reminders on your phone or work computer can help if you’d rather not automate your payments.
#4 – Open a Secured Credit Card
The main benefit to get this card is that you’re more than likely to get approved if you don’t have stellar credit. You’ll need to make a deposit upfront. And they often don’t require a credit check to apply. Another huge benefit is you’re going to build your credit just like any normal credit card would, if the issuer reports to the credit bureaus. When choosing any credit card to help boost your credit, make sure they report to the bureaus before applying.
#5 – Get a Credit-Builder Loan
To get a credit-builder loan, you don’t need to have a good credit score. You just need to prove that you have enough income to make the payments.
You regularly can’t get to the cash until you have completely reimbursed the advance, which implies you can work on your savings and your credit simultaneously.
#6 – Check Your Credit Report for Errors
The first thing to do is to look at your Credit Report. Second, You can get one from each of the major bureaus. You’re entitled to a free copy every 12 months. Once you receive these, pay detailed attention to any errors such as an incorrect address, the spelling of your name, open accounts being reported as closed, outdated information, and many more. Check here for more information.
#7 – Get a Credit Card, and Request More Credit
Spending credit is the best way to earn better credit. So, look for a credit card that fits your needs. You can use it for predictable expenses you can pay off as soon as you get paid. Simply using the card and paying it off at the start of every month shows you can use credit responsibly, which should allow you to request more credit to use and improve your debt ratio, which also affects your credit score. These things can help boost your credits score effortlessly.
#8 – Patience Is a virtue
Repairing your credit score won’t be fast or without hurdles. Take your time to think through all your financial choices, limit your access to new credit avenues unless they fit into your overall credit goals, and keep on top of payments. It may take months for the results to show, but once they do, it’ll be worth it. Hang in there!
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Learning how to build credit can help if you have a bad credit score or want to improve your current score. You can start by getting a secured credit card, becoming an authorized user, or getting a cosigner on a loan.
If you have bad credit due to derogatory marks, those marks can stay on your credit report for up to seven to ten years, depending on the type of mark. A low credit score leads to higher interest rates, larger deposits, and a low approval rate for loans and lines of credit. Those just beginning to build their credit will have similar challenges, but there are ways to build or work to repair your credit score.
By learning ways to build credit, you will not only improve your financial health, but it can reduce your stress around finances as well. In this article, we go over 12 tips that can help regardless of your specific credit situation.
Table of contents:
Get Added as an Authorized User
Try a Secured Credit Card
Find a Cosigner
Report Utilities and Bills
Get a Credit-Builder Loan
Pay Your Bills on Time
Regularly Check Your Credit Scores and Reports
Dispute Errors on Your Credit Report
Pay Off Collections
Open New Lines of Credit
Request a Credit Limit Increase
Have a Good Credit Mix
1. Get Added as an Authorized User
Becoming an authorized user is one of the most popular ways to build your credit score because you benefit from someone else’s good, established credit history. Also known as “piggybacking,” becoming an authorized user is when someone adds you to their credit card account.
The odds of approval on a credit application are lower if you have a low or bad credit score, so this is a way to start building credit and improve your ability to get your own card later. When you’re an authorized user, the card company will also report the payment history for your credit report when the primary account holder uses and makes payments on their credit card.
You can have a friend or family member add you as an authorized user. While this can be a great way to build credit, it’s useful to know that this can also negatively affect your or the other person’s credit should either of you miss payments or over utilize the credit line.
2. Try a Secured Credit Card
A secured credit card is a type of credit card that most people can acquire through their bank regardless of their credit score. The primary challenge of getting a credit card with a low credit score is that your credit score is one of the wayslenders evaluate risk. If you don’t have a credit history to show that you know how to manage credit or have derogatory marks on your report, credit card companies may be reluctant to loan you money via a credit card.
Secured credit cards are different because rather than borrowing from a financial institution, you borrow from yourself. You do this by depositing money into the credit card account, which becomes your credit limit. For example, if you opened a secured credit card with a $500 deposit, you will have a $500 credit limit. As you use the card and make regular payments, these will be reported to the credit bureaus to help build your credit history and potentially help improve your score.
3. Find a Cosigner
Similar to becoming an authorized user, you can benefit from a cosigner with a good credit score. On your own, you may not receive approval on a personal loan or car loan. When you have a cosigner with a good credit score, the lender sees loaning to you as less of a risk because the cosigner is also attached to the loan.
Although a cosigner can help with the loan approval process, like becoming an authorized user, your credit can also affect that of your cosigner, so it’s important to make full and on-time payments.
4. Report Utilities and Bills
When learning how to build credit, many people don’t realize that most utilities and bills are not reported to the three major credit bureaus. Fortunately, you can purchase services that will report your utilities and bills. Services like Credit.com’s ExtraCredit® subscription help build credit history for people with no credit history or low credit scores.
5. Get a Credit-Builder Loan
Credit-builder loans do just what you think they do—they are loans that help you build credit. Unlike typical loans, where you fill out an application and receive the funds, credit-builder loans are a sort of savings program. When a bank or financial institution provides you with a credit-builder loan, the funds go into an account, and you make payments on the amount. As you make your payments, the lender reports them to the credit bureaus to help build credit history and potentially improve your score with your on-time payments.
Many credit-building programs have higher interest rates than traditional loans due to the higher risk, but they can help your score in the long term. Once you pay the credit-builder loan off with interest, you receive the full loan amount.
6. Pay Your Bills on Time
If you already have lines of credit or loans, paying your bills on time is one of the best ways to continue building your credit score. Your payment history is 35% of your FICO® credit score, which is why paying your bills on time is helpful.
One of the best ways to ensure you never miss a payment is to set up automatic payments for the minimum amount on your credit cards and bills. You can always make additional payments, but when the money comes out of your bank account automatically, you no longer have to worry about forgetting a payment.
7. Regularly Check Your Credit Scores and Reports
A great habit for building credit or trying to maintain a good credit score is to check your credit score and report regularly. Unlike a car experiencing mechanical issues, there are no warning lights or alarms that go off when your credit score drops or a negative mark appears on your report.
Checking your scores and reports lets you know if there are any issues sooner rather than later. It can also help you stay motivated as you work to build your score as you see the number start to rise.
Although your credit report doesn’t notify you about changes automatically, Credit.com’s ExtraCredit® offers credit monitoring as part of the subscription service. Credit.com also offers a free service whereyou also get your free credit report card to analyze your current score for issues that need your attention.
8. Dispute Errors on Your Credit Report
If you regularly check your credit score and credit report, you may find errors. Sometimes, bill and credit card companies don’t properly report your payments, which can hurt your credit. Credit card fraud and identity theft are also more common than you may think, and this can also cause your credit score to drop. Should you find errors on your credit report, it’s your right to challenge them. To file a formal dispute, you need to write a dispute letter showing documentation of payments and other information to the creditor reporting the error. If you have other potential errors, you can request a verification of the reporting from the credit bureaus. They will investigate then respond with the results, typically within 30 to 45 days.
9. Pay Off Collections
As you now know, derogatory marks on your credit report can have a negative impact on your credit score. When someone doesn’t pay their bills, the account becomes delinquent and a collection agency could buy it. You can find the information about the collection agency on your credit report and then contact them to pay off the debt.
In some cases, a collection agency will let you settle the debt for a fraction of what you owe. When you agree to pay off or settle the debt, you can ask for a pay-for-delete letter. After you pay off a collection agency, the derogatory mark can stay on your credit report for years. A pay-for-delete letter is an agreement that the collection agency will have the collection item removed from your report once you pay it. Get this agreement in writing!
Before negotiating with a collection agency, it’s helpful to also know your debt collection rights.
10. Open New Lines of Credit
For those with an established credit score, a good way to continue improving your credit score is to open new lines of credit. In addition to your payment history, credit utilization is the second-most important factor for your credit score. Your credit utilization is worth 30% of your FICO credit score, and new lines of credit can help keep your utilization low as long as you don’t use them.
Credit utilization is the amount you owe compared to your overall credit limit, and ideally, your utilization should be under 30%. For example, if you have five credit cards with a combined $5,000 credit limit and owe $2,500, your utilization is at 50%. If you open up a new line of credit for an additional $5,000, raising your total limit to $10,000, your utilization is now only 25% if you owe $2,500.
11. Request a Credit Limit Increase
If you don’t want to open new lines of credit but still want to build your credit, you can request a credit increase from your credit card company. This accomplishes the same thing with regard to credit utilization as opening new lines of credit. If you have a good payment history with your credit card company, they are more likely to increase your credit limit, lowering your utilization rate.
12. Have a Good Credit Mix
Your credit mix shows that you can handle multiple types of credit. The two primary credit types are installment and revolving credit. Revolving credit is a line of credit that allows you to spend up to the credit limit, make payments, and then use the credit again. Some common forms of revolving credit include:
Credit cards
Personal lines of credit
Home equity lines of credit (HELOC)
Installment loans are lines of credit that give you an amount you pay down to $0 over time, and then the account closes. Examples of installment loans include:
Auto loans
Home loans
Student loans
Personal loans
Check Your Credit and Start Building It Today
Checking and monitoring your credit scores and credit reports is the key to building your credit and maintaining a positive score. As you continue to build your credit, you may begin to save money on interest rates and have additional financial freedom as you can access more opportunities.
If you want to begin your credit-building journey, Credit.com’s ExtraCredit subscription offers credit monitoring, bill reporting, personalized credit and loan recommendations, and more. You can also access your free credit score and free credit report card through Credit.com today.
The following is a guest post by Daniela MckVicker, a blogger for Top Writers Review.
Considering offering credit to your customers? A credit policy is a document that you need. It outlines the conditions of credit sales, giving your customers one more way to make orders. For your business, it helps encourage new sales and manage associated risks.
If you need help with writing a business credit policy, consider these guidelines.
What Is a Credit Policy?
A credit policy is a document that defines credit and payment terms for customers and policies to mitigate risk from extending credit to those who can’t meet their obligations. These guidelines are critical for businesses selling their products and services in credit.
When broken down into essential parts, a credit policy includes:
Evaluation of a customer’s creditworthiness
Decision process to extend credit to customers (terms, conditions, etc.)
Credit limits for customers
Methods of dealing with delinquent accounts
A sound credit policy minimizes the risk of not receiving funds from sales made on credit. So, writing this policy requires knowledge of a company’s financial capabilities, applicable laws, and risks involved.
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Before Writing: Credit Policy Do’s and Don’ts
If you’re writing a new draft or updating the current credit policy, keep these tips in mind:
Don’t keep it confidential. Everyone in your company should know how you’re going to manage credit sales.
Don’t make the policy so strict, so you have opportunities to adjust the credit decision-making process later.
Don’t make the policy too broad and/or open to interpretation. This might cause conflicting interpretations by department members or other stakeholders.
Do make credit approval limits clear for those with authority to grant credits.
Do include procedures to reduce credit risks and sales where customers are unable to pay off the debt.
Do include guidelines on keeping company and customer information private.
Do state that any unlawful or unethical behavior within the credit department is strictly prohibited.
How to Write an Effective Business Credit Policy
Let’s go over each important section in business credit policies.
1. Explain the Purpose of the Policy
The first section of a business’s credit policy is dedicated to the conditions, responsibilities, and rights of the credit department. Describe how it works and helps to meet the goals you’re trying to achieve as an organization.
For example:
“The credit department is responsible for establishing payment terms for the company’s customers and monitoring these terms to ensure compliance. The present credit policy describes alternative payment methods to customers.”
Treat this section as an introduction that you’ll later use to teach employees. Save the specifics for the subsequent parts – there’s plenty of space for that.
2. List the Roles and Responsibilities of Credit Department Members
Explain the duties of each member who works in the credit department. By doing so, you’re defining their roles and letting them know what’s expected of them.
Here are some common credit department positions, along with brief descriptions:
Chief Financial Officer (CFO). Responsible for managing the entire department, making policies and finance-related decisions
Credit manager. Organizes and controls the credit department by training personnel, setting up credit rules and procedures, and authorizing credit limits. Reports directly to CFO
Collections manager. Manages the credit collection effort by collaborating with third-party collection agencies. Reports to the credit manager
Credit analyst. Reviews financials, evaluates and assigns credit lines for customers
Billing clerk. Prepares the invoices and sends them to customers in time.
3. Describe Credit Application Process
The credit application process is the process that leads to the initiation or extension of credit to a customer. In this section, the main purpose is to explain this process and the procedure of approval.
To apply for credit, customers must also provide a number of documents. Commonly, companies request credit bureau reports, credit references, financial statements, and public records.
Some of the most important points to provide in this section:
Description of conditions on which a customer can apply for credit
Documents the customer must provide to get their application reviewed (bank references, statement of payment terms, etc.)
Identification of credit department employees responsible for reviewing customer applications
Description of the customer’s creditworthiness evaluation and relevant credit limits.
4. Decide Who Can Get Extended Credit
Obviously, your business can’t give away credits like Christmas cookies. In some cases, customers will have histories of not delivering on their obligations–so your policy should call for credit checks on every applicant.
In addition to asking customers to provide relevant documents, have your credit department also get in touch with nationwide credit reporting agencies. The three main credit bureaus are Equifax, Experian, and TransUnion, which can provide a free credit report once every 12 months.
Advise your customers on how and when to talk to a credit reporting agency about their reports. Keep in mind, however, that you’re legally required to ask customers for permission before making a credit report inquiry.
5. Set Credit Limits
The credit policy defines the credit limit for your business. In other words, it gives your employees instructions on the amount to give and when to stop extending credit. Following these guidelines will help to reduce many risks.
For small businesses, a $5,000 credit limit is reasonable. This amount could reach up to $10,000 for a mid-sized company. However, the right amount for your business depends on two things: a customer’s credit history and your liabilities.
First, take a good look at a customer’s documents (income, debts, etc.) to determine the limit they could realistically handle. Second, ask yourself if you could still pay your own liabilities if that customer failed to pay credit on time. If the answer is “no,” then reducing the credit limit should be a good idea. Make sure to include these credit limits in your policy.
6. Define Terms and Conditions of Credit Sales
These are the terms and conditions for delivering products or services on credit. They’re essential for credit applications, sales contracts, emails, orders, and invoices–all sales-related documents.
They protect your rights by setting credit limits, customer responsibilities, and other important points. For example, describe when you will begin charging interest, extension conditions, interest rate, late payment fees, early payment discounts, and deposit requirements.
7. Plan for Handling Past Due Accounts
Unfortunately, even with your best effort to manage credit risks, some customers won’t pay collections on time. That’s why you need to have a plan for pursuing unpaid debts.
In most cases, credit policies instruct to send urgent payment reminders. Consider using debt collection agencies if a customer doesn’t pay after getting notified multiple times. Should that customer fail to meet their obligations on more than one sale, close their account.
8. Make Changes
A credit policy should be “a living document.” To evaluate if their credit department helps to meet business goals, companies have to measure its performance. This is where specific goals based on the company’s strategy come in.
For example, the credit department might be tasked with reducing the average number of days it takes to collect on credit sales by 20%. Comparing credit sales data for a defined period defines if the credit department met this goal.
The effectiveness of credit department efforts measured by goals defines changes to be made in the policy. If the department struggles to meet the goals, consider making appropriate changes to the document.
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Many people with good credit scores own at least one credit card, with 82% of all credit card holders boasting credit scores of 680 and higher.
When used responsibly, credit cards can be a great tool for building credit. Here’s a complete guide on how to build credit with a credit card.
Table of contents:
5 Best Ways to Build Credit with a Credit Card
To improve your credit score with a credit card, you need to know how to best use your credit card. Responsible credit card usage is key to boosting your credit—it won’t increase simply because you got a credit card. Here are the five best ways to increase your credit score using a credit card.
1. Pay bills on time
One of the most important parts of having a credit card is paying your credit card bill on time. Payment history is the largest factor in your FICO® score at 35%, which means it can make or break your score.
Get into the habit of paying your bills on time every month and watch your score grow. Setting up automatic payments for a few days before your bill is due can help make sure you never miss a payment and give a cushion of time for the payment to go through.
2. Keep your utilization rate low
Your credit utilization rate, or credit utilization ratio, is the amount of credit you’re using divided by the amount of credit available to you (your credit limit).
Let’s say your credit limit is $500. This is the maximum amount you can spend on your credit card before payments are denied, but that doesn’t mean you should spend that much.
It’s best for your credit score to keep your utilization rate under 30%—under 10% is even better! This is because the amount of money you owe impacts 30% of your FICO score and the lower this number is, the better. But how much can you actually spend with your credit card?
If your credit limit is $500, 30% of that is $150. So, you should aim to never have a balance over $150 on your credit card. Even better, shoot for a balance under $50 (10% of your limit).
3. Don’t overspend
You don’t need to carry a balance on your credit card to improve your credit score. Paying off your balance in full every time, not just making the minimum payment, is the best practice.
Carrying a balance can cost you more in credit card interest and late fees. Plus, it may increase your utilization rate and damage your credit score. Do your best to avoid credit card debt and treat your credit card like a debit card—only spending money you have.
4. Use your card regularly
Using your first credit card requires a delicate balance. You don’t want to spend too much and go over your utilization rate, but if you don’t use it regularly enough, the lender may close your account. Using some of your available credit is one of the best ways to boost your credit.
The solution is to use your card to make regular, small purchases. This could include purchases like:
Gas
Groceries
Small, recurring bills
Inexpensive meals
After a while of making these regular purchases and paying them off on time, your credit card provider will probably increase your credit limit, allowing you to spend more with your card. Until then, using your card for these types of purchases can help you establish responsible credit card habits and keep your credit utilization low.
5. Avoid opening more cards
Every time you apply for a new credit card, the creditor makes a hard inquiry on your credit, which drops your credit score a few points. You’ll be able to earn back those points in the long run, but in most cases, if you apply to a bunch of credit cards at once, those hard inquiries will add up and take a toll on your credit.
For this reason, you should only apply for one credit card at a time and make sure it’s a good match for you. When you’re first building your credit, it’s best to start small with one card and take your time to practice building credit with it before opening more accounts.
How to Use Credit Cards to Start Building Credit
To recap, here’s a step-by-step guide to increasing your credit score with your first credit card.
Apply for a credit card you can qualify for.
Connect your bank account for automatic monthly payments.
Make small purchases to use under 30% of your credit limit (under 10% is better).
Pay your balance in full and on time each month.
Avoid opening new credit cards.
Regularly monitor your credit report.
If you’re not sure what kind of credit card to apply for, here are the types of credit cards you can use to start building credit and the advantages of each.
Unsecured credit card: An unsecured credit card, or standard credit card, is great if you qualify for one. They don’t require a deposit to use and often offer rewards.
Secured credit card: This type of card is great if you can’t get approved for a standard credit card. Secured cards require a deposit but then they work like any other credit card.
Student credit card: If you’re a student, it’s typically easier to qualify for a student card than a standard credit card. These cards can have decent rewards too!
Store credit card: Store credit cards can sometimes be easier to qualify for than standard cards. Be sure to choose one for a store you shop at often or can be used at other places besides the specific store.
Authorized user for a credit card: A family member or friend can add you as an authorized user on their credit card. You’ll be able to make purchases and receive credit score benefits but won’t be responsible for charges.
How to Build Credit without a Credit Card
If you’re not ready for a credit card or can’t get approved for one, here are some ways to build credit without a credit card.
Credit-builder loans
Credit-builder loans are a lot like what they sound like. They’re low-interest rate loans that help borrowers with poor or no credit build credit, and they function differently than your typical loan.
With a standard loan, you receive the money you’re borrowing upfront, but with a credit builder loan, the money is held in a savings or CD account until you pay it off. This makes it very low-risk for the lender, as your payments are also adding your collateral to the savings account.
You make monthly payments, including interest on the loan, and making these payments on time will help build your credit. Once you pay off the loan, you get all the money back and in some cases, interest if it was incurred while your savings collateral was being held.
Rent reporting
The three major credit bureaus, Equifax®, Experian® and TransUnion®, only include rent payment information on your credit report if they receive it. Most landlords don’t report this information, but it could benefit your score if you consistently pay your rent on time.
You can ask your landlord to report your rent payments or find a rent reporting service that will let you submit the information yourself. Ideally, your rent payments should be reported to all three bureaus for maximum impact.
Passbook loans
This type of loan is very similar to credit-builder loans, except it uses the money you already have in your savings or CD account as collateral. Interest rates for passbook or CD loans are typically lower than credit cards or personal loans.
Like credit-builder loans, you build credit as you make payments on the loan each month and can access the money once you’ve paid it off. Check that your bank will report your payments to all three credit bureaus before taking out this type of loan.
Building Credit with a Credit Card FAQ
Have more questions about how to use a credit card to build credit? Check out the answers to these common credit card questions.
When should you pay your credit card bill to build credit?
You should pay your credit card bill by its due date, at the very least. Paying your bill early (before the end of your billing period) or making extra payments if you’re planning to carry a balance may help boost your credit score even more since it will reduce your utilization rate.
How fast does a credit card build credit?
While it may take a while to build credit, you can help establish a baseline credit score if you have an account open and active for 6 to 12 months, to allow your FICO® score to be calculated. You may be able to establish a baseline credit score after 6-12 months of making credit card payments on time. With consistent and responsible credit card usage, you should see a positive impact on your credit over time.
Do you need a credit card to build credit?
No, you don’t need a credit card to build credit. Responsible credit card usage is one of the easiest ways to build credit, but it may not be the right answer for everyone. There are other ways to improve your credit score, like taking out loans, reporting rent and utilities or being added as an authorized user to someone else’s credit card.
A credit card is a great way to start building credit. If you’re looking for more ways to boost your credit score, check out our resources on Credit.com and the features included with ExtraCredit. ExtraCredit is a full- credit score monitoring service that can help you understand what areas of your credit you need to work on to build and maintain your good credit.