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Americans with the Lowest Credit Scores

Americans with the Lowest Credit Scores

Role models are a thing, but so is the opposite: what can we learn from Americans with the lowest credit scores?Credit scores are the backbone of financial solvency. Without a decent credit score, Americans will find it harder to get approved for home loans, car finance loans, business and personal loans. Or, to get these at an attractive interest rate, at the very least.

The average credit score is as high as it has ever been at 695. However, there exist Americans, whose credit scores dip well under 620. Who are these people, and what can we learn from them?

Are Millennials Blame-Worthy for Low Credit Scores?

At first sight, people tend to target the younger millennials, 18 to 30. These millennials are viewed as fiscally irresponsible because their credit scores are in the bad credit range. But it’s possible to give them a pass on this one, due to the 2009 CARD Act. The CARD Act has made it nearly impossible for the 18 to 21 demographic to apply for new credit cards. The outcome is young millennials struggle to build a credit track record.

The way the FICO scoring, and other similar scoring systems, work is by assessing a number of factors. These include:

  • the number of tradelines (sources of credit) a person has
  • the payment history of each (do they pay consistently and on time?)
  • their debt-to-limit ratio (over 30% of one’s credit limit will lower the score)

When young millennials cannot open enough credit, it will take years upon years to raise their credit scores to an acceptable level.

The Largest Debt Burden Falls to Growing Families

With all this being said, let’s turn our attention to the 30- to 39-year olds. This is the highest percentage demographic that has the lowest credit scores. Why do 30-somethings possess the lowest credit scores? It’s not they haven’t had enough time to build a healthy credit payment history. They’ve had a decade or more.

Evidence suggests people in this age range are debt-burdened up to their ears in student loans, lavish weddings, house payments, and starting families. We’re not including all the expenses it takes to furnish an upper-middle-class lifestyle. These include cars, vacations, school tuition, healthcare, pre-school, etc.

What compounds the settling-down-and-starting-a-family-meet-mate-and-propagate chain of events is the glaring statistic. Just 41% of adults in the U.S. put together a budget and stick to it. Is it any surprise then 30-somethings are challenged with keeping their credit scores healthy?

The Devil is in the High Interest Rates

The bug-a-boo to possessing a low credit score is the higher interest rates you must pay to get approved (provided you do) for new lines of credit. If you’re trying to manage multiple credit cards with higher interest rates, you’re going to be in debt. We dramatize the swelling of debt exponentially for a reason: to get you to take steps to rein in your lines of credit, do some repair work on them, and get with the program of learning how to manage your debt load and improve your credit score.

The 30% Solution

We repeat: never exceed 30% of your credit limits. If you’ve got a $1,000 limit on one credit card, you’re wise to stop your spending at $300. Otherwise, the big three credit bureaus will ding your credit score. Multiply this by the other credit cards you may also be carrying. If you’re exceeding 30 % of your credit limit on those too, you’re going to end up with more damaged credit. The more hits to your credit scores, the lower your credit score.

Lenders look at the aggregate of your credit accounts. This is to judge whether you’re a good credit risk for future lines of credit. If they see you’re doing a shoddy job of managing your credit cards, approval is either off the table, or excessively high interest rates will be charged if you’re approved.

Let’s Get Real

To get concrete about how bad credit can set you back financially here’s an example: If you’ve got a pretty respectable credit score of 700 (average / fair), and you sign on to a 30-year house mortgage of $300,000; at today’s interest rates you’d qualify for a 4.101% interest rate. That would come out to $1,450 for monthly house payments.

However, if your credit score is an abysmal 620 (bad), the interest rate would shoot up 1.367% to 5.468%, and now your monthly house payment would be $1,697. That $247 difference each month could add up to approximately $3,000 on just the interest each year. You can run the figures yourself, but over 30 years (interest and monthly payments combined) it would top out at nearly $2 million more you’d be paying for your home!

Takeaways

We paint a drastic scenario of what a low credit score can do to your finances and the future health and well-being of your family. All in order to get your attention on how to improve your credit score:

  • Go to the big three and pull your credit report to find errors. You may be one of the 20%, whose credit report does contain errors. Disputing those errors and resolving them could bump up your credit rating immediately.
  • Start paying down credit cards with high interest as much as you can afford. Tighten your belt and / or take a side job for the time being to help get those high interest debts as low as you can or paid in full.
  • Once again, we re-emphasize not to use more than 30% of your credit limit. Lenders look favorably upon credit card holders, who can control their spending.
  • One final word of advice: you’d be prudent to sign up for autopay email reminders. A safer route (because autopay has been known to screw up) is to set up monthly bank transfers to pay your expenses.

For more information on average credit scores in America according to age, income, state, and home buyers, including tables and charts go to https://www.valuepenguin.com/average-credit-score.

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Preparing Your Credit Score for Buying a House

Preparing Your Credit Score for Buying a House

When planning to buy a home there are two major hurdles you need to negotiate before you start house hunting: getting prequalified and cleaning up your credit report so you can attract the best interest rates. You will also benefit from having an edge over other bidders for the home of your dreams. In this blog we’ll discuss preparing your credit score for buying a house. This entails prequalifying for a home, first, and then how polishing your credit score will enhance your chances of purchasing a home you can both afford the monthly payments for and enjoy living in.

Part I: Which Comes First the Chicken or the Egg?

How does the prequalifying process work? Nobody we know has written a primer on it, but here are a couple of pointers to light your path through the prequalifying process:

  • First of all, don’t put the cart before the horse. What we mean is: don’t set your heart on a home only to find out you can’t afford the down payment, or the monthly mortgage payments.
  • Get prequalified the moment you know you want to purchase a new home, not when you start dealing with a realtor. Some folks get confused about the process, but it goes like this: your bank or mortgage lender will assess your credit situation in prequalifying you. When you finish the prequalifying process, your lender can then let you know what price range you can comfortably afford with both a down payment and monthly mortgage payments.

So now you’ve been given a reality check, you’ll set your sights on what you can afford rather than suffer disappointment when you discover the house you desire is beyond your financial means.

When you are prequalified you can be among the first bidders on a home that’s in great demand. Another reason to be prequalified is sellers often are not interested in buyers, who haven’t been prequalified.

Part II: Credit Scores and Prequalifying

As part of the prequalifying process, the state your credit is in will largely determine your success in prequalifying for a home loan.

There may be issues that could detract from your credit score being optimal. These need to be addressed. This process could take time before your credit report reflects your creditworthiness at its best. A pockmarked credit report can stand in the way of your ability to successfully bid on a home. It can also garner a favorable interest rate.

If your credit report is blemished with late payments or derogatory statements, you need a lead time of six to nine months to resolve such issues.

Standard home loans ask for a minimum of three tradelines. If you don’t already know, tradelines refer to a mixture of credit: for example, credit cards, car finance loans, student loans, etc. These credit sources must have been in use within the last one to two years. If you have under three tradelines, you can’t get a mortgage. So in order to qualify you will need to get more credit with a major card issuer like MasterCard, Visa, or Discover. You must also establish a track record with your new credit cards: at a minimum of six months of purchases.

When you charge on your credit cards don’t use up in excess of 30% of your credit limit. And it’s a good idea to pay the entire balance every month.

Another way to enhance your credit score is to not close older accounts, even if you use them infrequently. In fact, put some purchases on them every now and then, and pay them off. This shows lenders you can handle credit cards wisely.

Credit Bureau Risk Logic

We’ve advised you to open new credit cards to convince lenders you’re a good credit risk for a home loan. Also, do not open new credit cards within six months of prequalifying for a mortgage. Why? Because credit bureaus can’t predict in advance you’ll responsibly manage new credit cards, and they’d rather not take the risk. Instead they’ll lower your credit score.

Up to the point your funds are in escrow, don’t chance exceeding 30% of your credit limit. This is even though you want new items for your new home. It could backfire and you’ll lose your loan. Put all new big ticket items on hold until your loan has been closed.

Knowing the rules of prequalifying, and how to maximize your credit score will give you a leg up on the competition when bidding on a home you’re dying to live in. And being confident you can comfortably negotiate the asking price and afford the mortgage payments.

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Your Personal Credit Score’s Impact on Your Business

Your Personal Credit Score’s Impact on Your Business

For business people, who are uninitiated in the ways of personal credit as it affects your business, this is blog is for you. It will discuss personal credit as it relates to sole proprietorships, LLCs, and corporations. It will also discuss your personal credit score’s impact on your business. This includes to what extent, as well as what makes up a good credit score.

We want to begin with the type of business you’ve chosen for your operations, and how each business type affects an owner’s personal credit or not.

Sole Proprietorships

A sole proprietorship is not considered a legal business at the state level, and therefore is not registered with the state as a legal business. Business credit is not used for a sole proprietorship, only personal credit, which becomes your business credit.

Creditors don’t view your business expenses apart from your personal expenses. So, if your personal credit score is below average, lenders will not be so keen to hand out business loans. If they do, they will charge a higher interest rate than if your credit were in better shape. They may also raise your credit limit or open new lines of credit for you.

Even though you can submit an application for a business credit card or a business loan, they will not be opened under your business’s name, only under your own name. This puts the onus on you to pay your debts. To put a fine point on it, your business is not liable for debt burdens, you personally are.

Your personal credit score, which is also your business credit score,will be affected by any late or skipped payments. If you suffer from bad credit, lenders will be loathe to give you any new loans. Or if you’re fortunate enough to be approved for a new loan, it will come with higher interest rates. You can look to your poor credit score and payment history as the reason lenders turn you away for new or more credit.

LLCs

A limited liability corporation (LLC) is not as affected by your personal credit. LLCs are legally known as “pass through entities”. In this instance business finances are reported separately from your personal finances on your income tax. Don’t use your social security number, used for sole proprietorships. Instead, your LLC can file under a business tax ID, the Employer Identification Number (EIN), using Schedule C.

Using an EIN your business becomes a separate entity and creditors will be examining your business tax return, and sometimes your income statement to base their decision on whether to grant you credit.

In this case, it is key to separate your business finances and not lump them in with your personal finances.

Corporations

Corporations like LLCs use an EIN to file taxes and can own personal bank accounts and credit cards. But when you submit an application for new credit or loans the lender can consider your personal credit as part of doing an assessment of the business and its solvency or lack thereof.

Business Credit Score vs. Personal Credit Score

To get down to it, let’s find out what makes a good business credit score, because it operates differently from a personal credit score.

A business credit score departs from a personal credit score in that the business credit score is not standardized like the FICO rating system that rates credit from 300–850

Instead, the rating scales for credit scores vary according to the particular business credit bureau. Experian’s business credit rating Intelliscore Plus ranks credit scores 1–100. Equifax’s Small Business Credit Risk Score for Financial Services’ system ranks business credit scores 101–992.

Ensure your business credit score is acceptable to vendors, manufacturers, as well as lenders. To do so, get them acquainted with the business credit bureaus serving them. Learn more about business credit scores and how some business credit bureaus rank credit.

Three Rules to Follow for Good Business Credit

Some basic principles apply to achieving and maintaining good business credit.

  1. The simplest and most important rule to follow in getting a good credit score to pay on time, with no excuses for late or skipped payments. If you don’t, your credit will be damaged before you know it.
  1. Use your credit wisely. Take on as much as you can reasonably manage because lenders will look upon your company as a good credit risk. But don’t be foolish and get in over your head.
  1. Trade credit provided by vendors, suppliers, and manufacturers is extremely important. Making payments on time will grease the wheels for a rewarding relationship whenever you need their goods, products, and services. And will help to keep your credit score strong and healthy.
application

7 Things to Know Before Applying for a Credit Card

7 Things to Know Before Applying for a Credit Card

Maybe you’re applying for a new credit card as a person with an already-established credit history. Or, you’re a newbie and need to establish a credit history. Regardless, there are 7 things to know before applying for a credit card. This information will improve your chances of being approved for a credit card.

Starting Out

If you’re applying for a credit card for the first time, there three ways to approach it.

The first way is to find a bank that offers secured credit cards. What this means is you’ll be required to make a modest cash deposit, which will secure your line of credit. Your credit limit will most likely not exceed the cash deposit. Consider it a probationary period of sorts, in which you’ll be monitored to see how well and responsibly you handle your credit card. That means no late or skipped payments, and no over-the-limit purchases.

Once you’ve established a credit history of impeccable standing for six months, up to a year, it gets easier. You will increase your odds of getting approved for an unsecured or standard credit card.

A second way of getting a credit card as a first-timer, or someone who has bad credit, is to get a co-signer, who will cover your debt if you fail to make payments for whatever reason. It’s necessary for your co-signer to possess good credit, so choose wisely. With a co-signer, whose credit is in good standing, you’ll have a better-than-even chance you’ll be approved.

A third way to increase the likelihood of being approved for a credit card is to make an application for a credit card where you bank, and have already opened a savings and / or checking account.

Don’t Apply Too Often

Don’t submit an application for several credit cards all at the same time. What happens is your credit score will take a hit, and lenders will look askance and consider you a bad risk for repayment.

Be prudent and bide your time searching for the appropriate card you qualify for. If you want to build a credit history quickly, keep your credit requests infrequent, no more than twice in any one year.

The Two Pillars of Credit

Credit reports and credit scores are what you will build your credit with. Familiarize yourself with these two terms before you begin filling out a credit application.

Credit reports are produced by a triad of credit bureaus: Transunion, Experian, and Equifax. Each credit bureau compiles all the information that makes up a credit score. Your credit score will differ from credit bureau to credit bureau. This is because all creditors do not submit credit information to all three bureaus.

Therefore, look at all three credit bureaus to determine the status of your credit. You’ll discover as you receive your credit reports from each credit bureau neither your credit reports nor credit scores will be the same. To find out your credit scores, go on AnnualCreditReport.com for a free credit report each year. Visiting the credit bureau websites themselves you will pay a modest fee.

Checking your credit scores on any of these major credit bureaus is only one half of learning to monitor your credit. The other half is checking to see all the information is accurate. Any error your credit report may contain could have an adverse effect on your credit score, and weaken the health of your credit.

It’s sad to say, but credit report errors show up all too frequently. The FTC reports 20% of consumers find errors in their credit reports. However, you can have the error(s) deleted by requesting a dispute claim form from the credit bureau. Fill it out, send it, and follow up to make sure it has been expunged from your credit record. Be vigilant about checking your credit reports for errors, so you’re always aware of what shape your credit is in.

The Anatomy of a Credit Score

Credit scores are rated according to three categories: excellent, good, and average. The FICO rating system is a scale starting at 300 and ending at 850. Any score below 670 is below average or bad credit. 670 to 699 is considered good, 700 to 850 excellent.

FICO uses five variables to figure out your credit scores. The largest percentage of your credit score is your payment history (35%). Timely payments will strengthen your score, late payments diminish it. Next is the amounts owed (30%), followed by your credit history (15%), new credit accounts (10%), and forms of credit (10%).

Creditors and Debt-to-Limit Ratio

Creditors, when they look at your credit reports, want to see you have a debt-to-limit ratio that is 30% debt to 70% of your accessible credit limit. For example, if you have a credit limit of $5,000, don’t put more than $1,500 in purchases on your credit card.

Spread It Around

Handle different forms of credit, such as cash back, frequent flyer miles, personal, business, and student loans. Having different types of credit will impress your creditors, especially if you pay all of them on time. What this says to creditors is you’re capable of managing various types of credit. This means you’re lower risk, which makes you a highly desirable applicant.

Promptness Results in a Better Credit Score

It almost goes without saying. Be prompt with your payments in all your financial responsibilities, not just with your credit cards and loans. This includes the rent or mortgage, phone bills, heating and cooling bills, cable, and so on.

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How to Get a Good Credit Score in Your 20s

How to Get a Good Credit Score in Your 20s

If you’re in your 20s, now is the time to charge forward and work towards a good credit score. Far too few people in their 20s give any consideration to a credit score let alone the steps necessary to acquire credit. However, the foundation you build early on will carry on for the decades to come, from when you purchase a car to when you apply to rent an apartment.

Tips for a Good Credit Score in Your 20s

Ensure rent payments are on file

When you first start renting, encourage your landlord to sign up for electronic payments so that each of your rent payments will be on file. Do this even if you’re using someone like a parent to be your cosigner.

Turn on automatic payments

Sign up for automatic payments when you pay things like your electricity bill or your health insurance. By setting up automatic payments, you can avoid any type of late payment.

Pay bills on time

Following the second point, pay all credit card bills on time. A credit card is not meant to be used as a way to pay for things that you cannot afford. When you’re in your 20s, your interest rate on your credit card is likely to be very high. This is because you have little to no credit history. Don’t fall into the credit debt trap, which can quickly spiral out of control.

Use your credit card wisely

Use your credit card to pay for the things you would purchase anyway. One such example is to set up your regular bills like Internet, cell phone, or electricity. You can pay them with your credit card each month and then immediately pay your credit card bill that same month. This gets you double the credit, so to speak, because it shows that you paid your all your bills on time.

Beware of the fine print

Understand the fine print of your credit card. Make sure you don’t accept any additional services or fees that you don’t understand or want. If you aren’t 100% aware of what you are agreeing to, you might end up with $60 per month in service fees for services you don’t need. This is where many young adults get into trouble. They might leave the credit card in their pocket thinking that it’s something to save for a rainy day or an emergency. In such cases those regular monthly fees add up.

Create a budget

Create a budget, and stick to it. At a simple level, if you’re making more money than you’re spending, then you’ll be able to achieve a good credit score in your 20s. By having a budget, you can ensure that you’re always in the black, not the red.

Why establishing credit in your 20s is important

It’s important to realize why getting a good credit score in your 20s is a good thing. The other way to ask this question is: what happens if you don’t? This is detrimental in three ways.

Build credit

The first is that you’ll miss out on the opportunity to build imperative credit. Usually when you’re in your 20s, you might have some in helping you out to get a car. Or, you live in student housing paid by your parents. In all these cases, you might fail to learn why your credit is important. However, once you no longer have a crutch to lean on like your parents’ wallets, your credit score will be used to judge your worthiness to take out loans or to rent a new place.

Avoid mistakes

The second way that it hurts you is if you make mistakes. Many credit-based mistakes, like not paying credit card bills regularly and letting your credit card go to collections, will haunt you for 10 years. These “small” things can severely hurt your credit score when you set out into the real world and try to get your first car, or even get a job. Though it’s possible to repair your credit score, it’s much easier to avoid these mistakes in the first place.

Help your job search

The third way is that it can impact getting a job. Today more than ever before, companies check the credit score of the people they might consider hiring to determine if they are responsible. This is particularly true if you want to get any job related to finance. Even an entry-level position like that of personal assistant or legal secretary might task you with the responsibility of verifying different receipts, keeping track of payments made in a ledger, something which requires you to handle financial data.

Takeaways

Ultimately, it’s important to realize the seriousness of establishing a good credit score in your 20s. Even more fundamentally, you’ll develop solid personal finance habits that will carry you for the rest of your life.

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Achieving a Good Credit Score May be Harder for Women

Achieving a Good Credit Score May be Harder for Women

It’s hard to believe today that there was a time when women could not apply for credit on their own. Believe it or not, their husbands needed to sign the credit card application before a woman would be issued a credit card! It wasn’t until 1974 that women were able to take charge of their own financial affairs. The Equal Credit Opportunity Act of 1974 gave women the right to apply for credit independent of their spouse’s approval.

Even though women are now empowered to handle their finances, inequities still exist between men and women regarding three areas of financial parity: employment, retirement savings, and credit stability.

Employment Issues

The American Association of University Women (AAUW) issued a report in the fall of 2016, which shows American women still earn less than men. The difference is drastic: women earn 80 cents for every dollar a man earns.

Women’s lesser status as bread winners doesn’t stop at pay inequity. Their role as primary caregivers of both children and aged parents is looked at as a disqualifying factor when it comes to handing out promotions.

AAUW’s report revealed employers are not as prone to giving women leadership roles. The employer’s assumption is women aren’t capable of handling senior positions of authority due to childrearing and elderly dependent care responsibilities. According to Career Services Manager, Lisa Andrews, PhD, “Women are definitely called upon to be more flexible…it can create all kinds of difficulties in the workplace.”

So working women find it tough to find harmony between home and work responsibilities. Women run the risk of being denied a job promotion. On the other hand, men with families go on to get fatter paychecks and climb the corporate ladder faster.

Retirement Planning

The difference for women generally gets worse with age. In general, the pay difference increases as women climb the ranks to mid- and upper-level management. This leads to a bigger difference in financial security for older women versus men.

Consumer advocate, Eleanor Blayney of Certified Financial Planning Board of Standards relates to this. “The probability is extremely high for women [that] they will be single in their retirement years.” Because financial planning is an area is which women have been undereducated, this cripples their resolve to put away funds for retirement.

Society didn’t trust baby boomer women and their mothers to be able to comprehend investment strategies. Women may have handled the bill paying, but beyond that, it wasn’t expected of them to have knowledge of financial instruments. Understanding CDs, mutual funds, IRAs, money market accounts, or other various tools of investment were above their understanding, supposedly. This necessary skill would have helped them to save for the long years of retirement.

For the modern woman, their outlook is better, but with the pay gap and investment strategies geared towards men, retirement planning may still be difficult. Women on general do have a different salary peak and longevity. Ellevest is an robo investment advisor geared towards women, taking these differences into account.

What Steps Can You Take to Gain Financial Stability?

  1. Apply for jobs at companies with an equal opportunity employment policy. The Financial Services Gender Equality Index is a list of financial firms that have committed to advancing the careers of women employees. The National Association for Female Executives also has a list of companies that seek to hire women for upper-level management jobs. They also list companies that offer flex-time work schedules and the opportunity for advancement.
  2. Make educating yourself about investing a top priority. Learning how to invest is challenging but necessary if women want to control their financial lives. Certified financial planners (CFP) are in the business of educating you, having your best interests front and center. They are obligated to do so under their CFP certification.
  3. Build a credit history apart from your partner’s, establishing accounts in your name only.
  4. Build and maintain an a-one payment history. Never pay late or skip a payment. It will damage your credit score significantly; 35% of it is based on your payment history alone.
  5. Limit the amount of debt you carry. Financial professionals suggest you maintain recurring credit balances at 30% of your credit limit. And if you can swing it lower than 10%. To give an example of how this works, let’s say your credit limit is $8,000. At 30% that would come out to $2,400; at 10% $800. The best way to control your spending is to pay off your credit card balances each month, saving on the interest charges as well.

Parting thoughts

Unfortunately, women still suffer from gender bias when it comes to pay equity, child and family leave. These lead to obstacles for career advancement. However, they can begin the journey toward financial security. For instance, peruse the lists provided by The Financial Services Gender Equality Index and The National Association for Female Executives. Begin catching up with men in earning equal pay, invest intelligently, and learn the credit game.

Misleading free credit scores

Are Free Credit Scores Misleading?

Are Free Credit Scores Misleading?

For several years, many websites have offered free credit scores. Understandably, credit scores have a significant impact on consumers’ spending choices, possibilities, and habits. A credit score is a calculated number that is based on the information found in a credit report. Lenders use this information to determine if an individual’s likelihood of repaying a loan. Because consumers have multiple places to get their credit score, it begs the question: are free credit scores misleading?

In January, credit bureaus were forced to pay millions of dollars in fines due to their poor marketing. They failed to effectively explain the types of credit scores they offer. Ultimately, consumers created and implemented financial plans based on a credit score that were not used by lenders. Each credit bureau vowed to be more specific in the future, but until then, it is up to the consumer to educate themselves on the types of scores they receive.

Credit card companies use free FICO scores to provide credit scores on cardholder’s statements. Other websites like Credit Karma and Credit Sesame claim to offer free credit scores for those who sign up through the company’s website. At first glance, a person may think it is a legitimate way to get their credit score for free. However, many people do not realize that companies and bureaus can offer free credit scores if they are considered “educational scores.” These education scores are not used for decide whether a consumer qualifies for a service

It is important to note that there is not a single credit score for anyone. Each credit bureau creates an individual credit score based on the details from the credit report. So, what’s the difference between them, and which are some of the free credit scores misleading?

The Difference in Credit Scores

According to credit.com, a FICO score is a calculation based on “predictive analytics.” This means they use information obtained in a credit report to predict the consumer’s credit worthiness. While FICO itself is not a credit reporting agency, they pull details from Transunion, Equifax, or Experian to create a score.

Vantage Score is a model that was created by the three credit reporting bureaus. Designed to offer a competitive alternative for the FICO score, the score is used to give individuals an overall picture of their credit standing. It is ideal for those with little credit history. These reports are largely advertised at free or low-cost for consumers.

While many financial institutions and websites claim to offer free credit scores, it is important for consumers to understand that not all credit scores are the same. Several companies use various formulas to arrive at a final credit score. For example, Discover’s It Card uses FICO scores for its cardholders, while Credit Karma uses Vantage Score. Additionally, the three main credit bureaus use different computations and score ranges to give to lenders and individuals. Experian scores range from 330-830, Equifax scores are from 280-850, and Transunion scores range 300-850. This information is important because if the same person requests their credit score from each bureau, it is a strong possibility they will have a different score from each one. A score discrepancy of a mere 20 point could increase interest rates or result in a denial from a lender.

Perception Versus Reality

Consumers expect their credit score to reflect the information found in their credit report. However, since many companies can use varying criteria to determine a person’s credit score, details from the credit report are not evaluated the same. It is very common for the same person to have a FICO score that is significantly higher or lower than their Vantage Score.

There are countless amounts of people signing up for free credit scores under the assumption that all credit scores are the same. For the most part, all credit scores are computed based only on what the three credit bureaus report. The information is not weighed the same, causing different credit reporting companies to arrive at different numbers. For example, some educational scores may base their score on the last six months of credit activity, while a FICO score could be based on the last 2 years or more. Both credit reporting companies used the same credit reports for their scores, but the content of the reports were weighed differently. Many consumers do not know or understand this, and never see the credit report lenders see when they are applying for loans and credit.

Are Free Credit Reports Misleading?

Some credit monitoring companies work exceptionally hard to market their financial products to consumers. Television ads and sponsored web searches are glittered with promises from these businesses. Credit Karma is an example of a financial agency promising free credit reports and scores. However, it is not clearly advertised or explicitly stated that the credit score they provide is not the same as the score lenders use. Most lenders use FICO scores to evaluate a person’s credit. Like Credit Karma, many credit reporting companies do not disclose or clearly market their scores are different from FICO scores. Each year, banks can make millions of dollars due to “add-on” services. By offering a free credit score, they could persuade people to purchase other credit monitoring products. If it is not clearly communicated that the information and credit scores are not the same criteria used by lenders, it is misleading.

Which Type of Report Is Better?

Liz Weston, a Nerdwallet personal finance columnist suggests getting a FICO score if you’re going to pay for credit score. A FICO score is the best option if you are in the market for a huge purchase, such as a car or mortgage. Home mortgage companies still rely heavily upon FICO scores.

The Vantage Score is the most common score advertised in free credit score marketing. It’s ideal if a person wants an idea of how their credit is doing. Weston also points out that the FICO score and Vantage Score are different. However, the same behaviors, such as paying bills on time, can positively impact the score.

Obtaining a free score

Credit scores are different from credit reports. Obtain your credit score free of charge once per year from each credit bureau. Typically, FICO credit scores must be purchased. There are some circumstances in which a FICO credit score must be furnished without cost to the consumer. These situations include when:

  • A person is applying for a mortgage
  • A lender uses credit scores to determine pricing of a product, loan, or service
  • An individual is denied credit based on credit

If any of these situations occur, you should make a written request to ask which credit score is used.

Making financial decisions can be challenging, especially with myriads of products promising to have the most accurate information. When obtaining free credit scores, it is important to distinguish between a FICO score and newer alternative scores. Understanding the difference between scores could impact the next financial decision you make.

Mortgage Affects Credit Score

How Getting a Mortgage Affects Your Credit Score

How Getting a Mortgage Affects Your Credit Score

Having a good credit score is important for major life purchases like mortgage. But what a lot of people don’t realize is the reverse: getting a mortgage affects your credit score. Here’s why.

Each credit score inquiry and loan application may hurt your credit score, so many people wonder whether getting a mortgage is actually good for them. This is not an unwarranted fear. However, the degree to which you worry might be unwarranted.

Overall, there are some potential negative ramifications. Getting a mortgage affects your credit score. At first, you may see a small decrease, but over time your credit score will rise beyond where you started.

What your credit score is made out of

First, it’s important to understand that your credit score is made up of five areas:

  1. Payment History (35%) Whether you pay your bills on time and how much you pay them off every month.
  2. Debt (30%) How much debt you have versus the credit limit and original loan amount.
  3. Length of Credit History (15%) Based on your age, the age of your accounts and the age of each individual account on your credit report.
  4. New Credit (10%) If there’s any new credit such as a newly opened credit account.
  5. Credit Mix  Lenders want to see that you were able to handle many types of credit responsibly. Having a good mix of credit including an auto loan, credit card, and a mortgage will help.

 

How your mortgage may lower your credit score

The mortgage itself will add a credit application inquiry to your new category credit. Once you have a loan, it will count as a new account. Only inquiries from the past year are considered with your credit score. So, that negative impact of checking your credit won’t last for very long.

You might be worried about these inquiries, because naturally you’ll want to shop around to find the best interest rate. There’s a special rule for this particular case. If you apply for more than one mortgage in a two week timeframe, so as to find the lowest interest rate, it only counts as one inquiry. Therefore, you don’t have to worry about shopping around trying to find the best rate. Just make sure you do it quickly within those two weeks.

The new mortgage will also hurt the category of “length of credit history.” So, at first, the mortgage will likely lower your credit score. However, the mortgage will eventually it will look like much less of a new account.

How your mortgage may increase your credit score

For all that negativity, there are also positive impacts, particularly long-term. In fact, getting a mortgage can help all five categories that comprise your credit score.

Provided that you make every monthly payment on time, your payment history category will start to take care of itself. With time, the amount you open your mortgage relative to the original amount you borrowed begins to lessen.

What’s more, with time the mortgage starts to become more of a positive factor in your length of credit history category. It will not stay in the new credit area for very long. Finally, if you’ve never had a mortgage before, getting a mortgage for the first time I have an immediately positive impact on your credit next category. While this category does only account for 10% of your total credit score it can still help you.

Parting thoughts and takeaways

The only way to know how your credit score is going to be impacted is to know what the formula for your credit score is. You might find that on average, your credit score dropped by 20 points when you first buy a home. Yet, it will start to rise after the first few months. After one year, your credit score will more than likely be higher than it was before you took out the mortgage. The reason for this is that, as discussed, the negative impact is immediate but after the first year or so all that negativity becomes a more positive impact.

That said, the most likely impact on your credit score when you take out a mortgage will be minimal but negative at first. With time, it will become much higher and much more positive. As a result, the overall long-term positive benefits will surely outweigh the short-term negative impact. If you’re still worried, you can speak with a credit specialist from a reputable credit repair company. They will be able to assist you in determining how your credit score will change after taking out a mortgage.

Things Affecting Credit Scores

7 Things That Don’t Affect Your Credit Score

7 Things That Don’t Affect Your Credit Score

Your credit score can seem like one of the most ominous of numbers in your life. With a bad credit score, it is something that hangs over your every move. However, there’s no reason to stress in every situation. Here are 7 common things don’t affect your credit score, for better or for worse.

1. Bank overdraft

If you’ve ever suffered from a bank overdraft fee, you know how expensive it can get. This is especially true if you receive many overdraft fees. It can be overwhelming, but the good news is that overdraft fees don’t move your credit score at all. There’s just one important thing to note. You have to ensure that the fees are paid off, so that the fees aren’t sent to collections. Understand though that if the overdraft fee is not paid after many weeks, your bank will send your account to a collection agency. Then, that debt collection itself will hurt your credit score.

2. Paying for insurance

Insurance companies perform a credit check when they decide if they want to give you insurance and when they calculate the insurance premium you pay. But although they’re using your credit score to make a financial decision, they don’t actually report your payments to credit bureaus. So, your insurance doesn’t change your credit score either. So, if you’ve been making timely insurance payments every month without fail, you’re unfortunately not reaping any credit score benefits.

However, much the same as an overdraft, if you missed too many of your insurance payments and the company have to send it to collections after they have canceled your policy, then it does negatively impact your credit score.

3. Paying your phone bill

Much the same as an insurance company, phone providers will look at your credit score prior to offering you a service. These phone providers often don’t give your bill payment history to the credit bureaus. They only want to see how much they should charge you as interest. Your credit score is not aided by timely bills either. So, even if you pay your cell phone bill on time every single month, it will not help your credit score at all.

But of course, like all things, if you stop paying your bills and it has to be sent to collections, the collection agency will report back to your credit score it will cause your credit score to drop.

4. Checking your own credit score

When a company looks into your credit, such as when they verify your credit in order to give you a loan, this inquiry counts against you for the first year. Every time somebody inquires for your credit score, it negatively hurts your credit score. That’s why it’s recommended that you don’t apply for multiple credit cards over the course of one year. On the other hand, you can check your credit score as often as you want. Using a legitimate third-party, you can check your credit score regularly and it won’t drop by a single point.

5. Rent payments

In most cases, your rent does not count towards your credit score. For anyone who doesn’t have a mortgage yet or is trying to repair their credit score so they can get a better loan rate on a mortgage, this might come as bad news. Naturally falling behind on your rent doesn’t hurt your credit score and your ability to get any loan in the future.

Also, you can ask your landlord to report your payments to the Experian rent bureau. This is the only aspect of rental payments which could help you with your credit score. Having this agreement set up online is a very beneficial way for you to build back your credit.

6. Credit counseling

Many people falsely believe that credit counseling affects your credit poorly, just like filing for bankruptcy. This is not true. Credit counseling appears in your credit report as an annotation but it doesn’t actually impact your score. If you are using a credit counselor to manage your credit card payments, just make sure that the creditor is making timely payments. Irony aside, if you have a credit counselor helping you and they make late payments on your behalf it will hurt your credit score.

7. Child support and alimony

Unless you fall behind on your payments and everything has to go to collections, child support and alimony payments do not affect your credit score one way or the other. However, what the other implications are of not providing child support and alimony is another story.

Summary of actions that don’t affect your credit score

Here’s a brief recap of the 7 things that don’t affect your credit score:

  1. Overdrafting your bank account
  2. Insurance payments
  3. Phone bill payments
  4. Checking your own credit score
  5. Rent payments
  6. Getting credit counseling
  7. Child support and alimony payments

For more tips, you can go to one of the best credit repair companies to seek professional help in fixing your credit score.

How credit scores are used: for example, to take out a home mortgage.

How Credit Scores Are Used

How Credit Scores Are Used

Understanding how credit scores are used is important for financial and life planning. From applying to credit cards to home mortgages to paying for school, credit scores are used in a wide variety of functions.

Why Are Credit Scores Used

Simply put, lenders want to do business with people who have a history of being responsible with their debt obligations. The three-digit number can affect how lenders do business with you in three main ways:

  • Whether you’re someone they’d like to business with
  • How much it will cost to do so
  • Which options lenders will offer you

Why are credit scores used as opposed to a different way of analyzing responsibility with debt obligations? Here’s a before and after of credit scores:

Before Credit Scores

Lenders used the applicant’s credit report to choose whether to grant credit before credit scores. A lender might have denied credit based on a subjective judgment. This method may have also been time consuming and subject to mistakes.  Lenders may have made decisions based on personal opinion rather than whether the applicant was able to pay back the debt.

The Emergence of Credit Scores

Credit scores started being widely used in the 1980’s. Credit scores help lenders calculate risk more fairly because they’re more consistent and objective. Your credit score simply reflects how likely you would repay debt responsibly, no matter who you are as a person. Credit scores are now dependent upon past credit history in addition to your current credit status.

Credit scoring 101

How is my credit score calculated?

The information that impacts a credit score differs based on which score is used. Overall, your credit score is affected by factors in your credit report including the following:

  • The total number of late payments
  • The severity of the late payments
  • Account age, number, and type
  • Total amount of debt
  • Types and number of recent inquiries

How Your Credit Scores Are Used

If you’re looking into getting credit, the following are some things you should keep in mind:

Applying for Credit Cards

Companies usually look at your credit score as one of many factors in figuring out whether to approve your credit card application. The formula each company uses is a heavily guarded secret.

  • The precise impact of your credit score will depend on which company is reviewing
    your decision
  • Your credit score may allow you to receive additional perks from a credit card company
  • Credit card companies can also use your credit scores to determine credit limits, interest rates, and other credit terms they offer you

Getting loans for school, a car, or a home

Many federal loans don’t look at your credit score. There are still some things to consider.

  • If you apply for a private student loan, however, banks typically are curious about your credit score and credit report history.
  • Your credit report and credit score also affect the loan approval and interest rate of the loan you’ll receive.
  • Auto lenders also look at your credit score to figure out if they will approve a car loan or lease.
  • Credit scores affect the interest rate in addition to the loan length.
  • The requirements for approval are usually stricter for mortgages.
  • Each lender will have their guidelines they’ll follow. However, it’s universal that your credit score is a significant data point that lenders will use.

Because of the latest housing crisis, some lenders may use the credit score as a higher factor in their analysis.

Other Situations

There are other situations where your credit score surprisingly plays a role.

  • Insurance companies are using credit scores to determine whether they want to provide coverage, how much they’ll cover, and how much they’ll charge.
  • This applies to home and auto insurance. When it comes to renting apartments, landlords often use credit scores to determine how much of a security deposit they may want from you.
  • If you need a payment plan to a buy a cellphone, companies may look at your credit score to figure out the type of payment plan options they’ll offer you and whether they’ll want a deposit.
  • Utility companies may take a look at your credit score to determine whether they want a security deposit from you and how much

How Credit Scores Benefit You

Finally, a way to understand how credit scores are used is to see how they benefit you and society as a whole.

Get loans approved more quickly

These days, the majority of credit decisions can be made in a matter of minutes. Credit scores allow department stores, websites, and additional lenders to make credit decisions almost instantly. Mortgage applications can be approved in a short-time frame hours as opposed to weeks.

Get fairer credit decisions

Things like gender, nationality, marital status, race and religion are not used in credit scoring. This allows lenders to be less biased and only focus on the relevant facts related to credit risk.

Credit mistakes are less important

Credit scoring doesn’t negatively impact you forever if you’ve had bad credit previously. More recent on-time payments will be in your credit report, while past credit problems fade away as time passes. Credit scoring takes into account a holistic view of credit-related information. Thus, your overall credit report is a much better view of your risk from the creditor’s perspective. This is in contrast to borrowers turning people down solely on a past problem in their files.

Obtain more credit

Credit scores gives lenders the confidence to offer credit to more people. This is because lenders have a better understanding of the risk they are taking on. Most lenders have their own individual guidelines. So, if you get rejected by one company, you can still get accepted by another. Instead of a simple yes versus no, lenders can offer a choice of credit products for different levels of risk. Credit scores allows lenders to identify more individuals to perform well in the future. This is true despite the fact that their credit report shows past problems.

Get lower overall credit rates

Automatic credit processes, such as credit scoring, allow for credit granting to be more streamlined and cheaper for lenders. The lenders, in turn, charge less for their service downstream to their customers. Lenders also control credit losses using credit scoring. This allows lenders to make rates lower overall. A great example is the fact that interest rates for mortgages are lower in the US compared to Europe. This is at least partially due to the fact that lenders have credit scores available to them.