How To Improve Your Credit In Less Than Two Months
Ancient sources say that patience is a virtue. However, when it comes to your credit reports and scores, it doesn't always pay to wait for it to improve on its own. Your three credit scores play a strong role in helping you reach financial independence, and making improvements when you can is important to your credit health.
While it may take years for several unsavory details to fall off your credit report – such as foreclosures, accounts in collections, credit delinquencies and judgements – there are several steps you can take now to see an immediate uptick in your rating.
1. Check Your Credit Report
Your credit scores are calculated based on the information in your credit reports. Therefore, making sure all the information in your file is correct should be your first priority, according to Zillow. Credit reports that contain errors – even small ones – can knock points off your score and erroneously place you in the "fair" credit group, when you should really be in the "good" or "excellent" credit category.
If you find mistakes or inaccuracies, dispute them immediately to have them removed. This can lead to a quick jump in your credit rating.
2. Pay Down Your Balances
The ratio of your credit card balances to your available credit limits makes up 30 percent of your FICO score. For example, if you have a credit card with a $10,000 credit limit and you are carrying a $5,000 balance, your debt-to-credit ratio is 50 percent. High balances – typically those higher than 30 percent – can have an adverse impact on your rating, even if you pay off the balance in full each billing cycle, according to Yahoo Finance.
To improve your credit score quickly, pay off your balances to lower your ratio. If you are unable to pay your balances in full, work to get your ratio below 30 percent, and lower if possible.
3. Avoid Hasty Credit Decisions
Closing old accounts you never use or submitting multiple applications to determine which rewards credit cards you qualify for can cause credit score damage. Rather than making closing old accounts or opening new lines, focus on improving your existing accounts and paying down balances before you make any hasty decisions about other credit lines.
Several small changes to your credit behavior and diligence can have a profound effect on your credit standing in a short period. By adopting best practices for managing your accounts, you can put your finances and your credit score in a stronger financial position.
Should I Take Out A Personal Loan?
One of the most pressing issues a person can face is needing financing immediately, but having little or no access to credit. There are several avenues toward which consumers may turn when they need money, ranging from home equity to a credit card, but it's also important to consider personal loans as well.
A personal loan is a form of financing extended by a traditional bank or credit union. Unlike auto loans, student loans or mortgages, all of which are used for a specific purpose, a personal loan can be used for whatever purpose you choose. You can use it to fix up your house, pay for your children's education, purchase a new computer or even pay off other debts.
Better Alternative Than Credit Cards?
If you are unfamiliar with personal loans, it may seem more effective to simply use your credit card to make an emergency purchase. However, credit cards may not always be your best course of action.
Credit cards may carry interest rates between 9.99 and 24.99 percent, while personal loans typically impose lower rates, especially for those with strong credit reports and scores, according to Reuters. These rates can be significantly higher if you are taking out a cash advance. Therefore, taking out a personal loan, especially if you require a significant amount of financing, may help you save between hundreds to thousands of dollars on interest charges.
How Quickly Do You Need Funding?
Personal loans, which can range from a couple hundred to tens of thousands of dollars, are also quickly accessible, which may be a viable option in the event of an emergency. Most personal loans are available to consumers within 24 hours after their application has been approved.
Further, the application process is relatively quick because consumers are not required to provide the level of extensive documentation or put down assets for collateral, in the same way they would with another type of loan.
What Is The Purpose Of The Loan?
Before considering this type of financing, it's also important to think about the purpose of the loan. Many consumers rely upon this type of loan to consolidate their debts and pay off their balances under one low rate. In other instances, consumers may use the loan to make a big-ticket purchase or improve their quality of life.
In any case, taking on a personal loan is large responsibility and it's important to consider all of your financing avenues before making a decision.
Recovering From A Bad Credit Score Takes Time, But How Much?
Most Americans know the value of their three credit scores when it comes to gaining access to loans and credit lines. So when their credit ratings are less-than-noteworthy, one of the first questions many may ask is how long it will take to improve them. The answer is, it depends.
Your credit scores are calculated based on the information that appears in your credit reports. When negative information is reported on your file, the severity of the infraction, the length of time it will remain on your report and your credit score rating prior to the black mark will impact how long it takes to improve your scores.
The Higher You Are, The Faster You Fall
As a general rule, those consumers with higher credit scores will be more adversely affected by a negative event than those with lower credit scores, according to MSN Money. While this may not seem fair, FICO data compares the credit scores of three consumers and how certain infractions may affect them. For example, a consumer with a high credit score of 780 who is 30 days late on a payment may see their score to between 670 and 690, a drop of 90 to 110 points.
In contrast, a person with a lesser credit score of 680 may only see their scores fall to between 600 and 620, a 60 to 80 point drop. The lower your score falls, the more time it may take to repair.
Big Infractions Carry Big Consequences
The type of negative information reported also plays a role in your scores. Missed payments that are 30, 60 or 90 days overdue can knock your score down significantly. However, the decline in your score will be notably less than losing your home to a foreclosure, defaulting on a loan or filing for bankruptcy. The bigger the infraction on your credit report, the longer it may take to recover your score.
Time Matters When Negative Data Is Reported
Negative information that appears on your file has an expiration date, and this may hold up the amount of time it takes to restore your credit standing. While multiple inquiries into your credit may only remain on your report for two years, delinquencies and public records information, such as liens, judgements and foreclosures, will stay on file for seven years, according to Experian.
The time it takes to bounce back from a poor score varies by several factors, meaning there is no magic timeframe to follow. However, practicing smart credit habits and monitoring your spending will allow you to make small strides toward improving your rating over time.
The Merits And Drawbacks Of Store Credit Cards
The term "credit card" relates to a broad category of products, rather than standard card most Americans rely upon. Some credit cards can be categorized as rewards cards, which encompass cash-back, gas, airline and points rewards. In other cases, credit cards may refer to the most standard products we may be used to that offer no rewards. Secured cards are another class of credit products, which are typically reserved for those with no credit history or poor credit. And finally, there are store or retail credit cards that a large demographic of the population holds.
Retail credit cards are specific to a particular chain and may only be used for purchases as that location. For example, this includes credit cards issued by Target, Banana Republic, Barnes and Noble, WalMart and other popular stores.
Millions of Americans carry these cards and use them to make purchases with their favorite store, but how beneficial are they really? After all, what is it about these cards that warrants filling out an application and using this product versus your traditional credit card?
There are several benefits that make retail credit cards more lucrative, in some cases, than using a regular credit card.
Most retail credit cards offer a rewards program that allows you to earn points for each dollar spent, according to CBS MoneyWatch. If you shop at a particular location frequently – especially big-box chains such as Target and Walmart – these cards allow you to rack up significant rewards to be cashed in at a later date.
Consumers who sign up for retail store cards often earn a percentage off of their purchases whenever they shop. For example, you may receive 5 percent off your entire purchase each time you shop at the store or benefit from an additional amount off your transaction during sales events.
3. Special offers
Holding a store card may also entitle you to special perks, such as free giveaways, one-day only sales, online incentives and other perks that lower your costs.
Not All That Glitters Is Gold
While there are several benefits to a store credit card, it's also important to note the drawbacks. This type of credit product generally imposes higher interest rates than traditional credit cards, which can make it tough to pay down a large balance, according to Consumer Reports. In addition, the available limits for this card type are often low, which can make it easy to use a large percentage of your available credit. Carrying large debt balances in relation to your limit is one of the fastest ways to damage your credit score ratings.
Before you consider a store credit card, it's important to ask if you will truly benefit from the product. For example, if you shop at Target on a weekly basis and pay your bills in full each billing cycle, obtaining a rewards credit card may interest you. However, if you only shop there for detergent once a month, it may not be worth it to sign up for a card. Factor in your shopping habits, current debt levels and payment behaviors to decide if a new card is right for you.
A Balance Transfer May Not Always Be In Your Best Interest
Swimming through piles of credit card bills can be stressful for any person. If you're finding that your interest charges are inflating your bill faster than you can pay it down, you may be considering a balance transfer. On the face of it, transferring a balance to a card with a zero percent introductory rate seems like a sweet deal, and you may not see any potential drawbacks. After all, an interest-free credit card may allow you to make larger payments and start improving your three credit scores again.
But once you look a little closer, it's important to notice potential red flags that may make you think twice. Consider the below factors before making the decision to go forward with a balance transfer.
1. How High Are The Fees?
Because you are essentially getting an interest-free credit card for a period of time, lenders need to find another way to make money, and fees are their most common strategy, according to CreditCards.com. Balance transfer fees may vary by lender, with most charging between 3 and 5 percent. It's important to take the amount you owe into consideration before making your decision. For example, if you owe a smaller amount – such as $500 – a 5 percent fee would translate into $25, which is manageable. However, if you owe $10,000, this same fee would tack an additional $500 onto your bill.
2. How Long Does The Teaser Rate Last?
Balance transfer introductory rates can be helpful in allowing you to pay only a small amount or even nothing in interest charges for a certain period of time, which allows to you make bigger payments toward your debt. However, teaser rates are most effective when you can pay off your full balance before it ends. If not, you will start incurring interest again, potentially at a higher rate than your previous card. For this reason, calculate how much you have to put toward your card each billing cycle to pay it off in full before the intro rate ends. This may help you decide whether a particular product is right for you.
3. How Are Other Transactions Priced?
If you're struggling to pay down debt, it's unlikely that you will make additional charges to your balance transfer credit card during your repayment period. However, if you do, it's important to know that these may be calculated at a different rate than your zero percent introductory rate, according to finance website Bargaineering.com. This means that if you fall short on cash one month and charge $100 for groceries or cover a $300 emergency car repair, you may be paying an interest rate ranging between 9.99 to 24.99 percent or higher for these transactions.
4. What Happens If You Miss A Payment?
Lenders may be missing out on earning more interest while your introductory rate is in place, so they may not look as kindly on you if you make a late payment or miss one altogether. Late or missed payments can not only prompt a lender to expire your introductory rate early, but they may also impose penalty rates – which can be as high as 25 percent – and make it tough to pay down your remaining balance. For this reason, it's important that you know your lender's policy and adhere to a strict repayment timeline.
Balance transfers can be useful if you understand them fully and abide by your lender's terms. However, before you enter into an agreement, make sure you read your banks's disclosure agreement carefully.
Home Equity Loan Vs. Line Of Credit: Which Is The Better Option For You?
When consumers are strapped for cash and need financing quickly, a large percentage of them turn to the equity in their homes for money. When you have been a homeowner for a number of years and made payments toward the purchase of your home, the amount you put in is known as equity. In some cases, you can borrow against your home to meet your needs. Homeowners often choose equity loans for their financing needs because their credit reports and scores have a very small impact on whether they qualify for financing. This is primarily because your home will instead be used as collateral to secure the loan.
There are two primary types of equity credit products you may hear when you start researching your options: home equity line of credit – or HELOC – or a home equity loan. If you're pursuing either of these options, it's important that you understand the differences between the two.
Home Equity Loan
A home equity loan is a fixed amount that will be given to you in one lump sum. The loan will be structured like any other loan, in that it will have an interest rate and a monthly payment that you will send to your lender until the loan is repaid in full. Home equity loans typically impose a fixed rate of interest and a fixed repayment term. Because they are structured in this form, you will have a fixed monthly payment each billing cycle that may last over a period of 10 to 15 years, the Wall Street Journal explains.
Home Equity Line of Credit
A home equity line of credit works differently from a loan, in that you are extended a maximum amount of financing that you can borrow against when you need the funds. It can be helpful to think of a line of credit in the way that you would a credit card. You receive a maximum limit – such as $10,000 – and you may draw on $500 one day and $100 the next as needed, but you cannot draw more than the limit. You will also be responsible for making monthly payments each month.
Unlike home equity loans, lines of credit typically have variable interest rates and you must pay interest charges on the amounts you take out. In addition, the terms of the credit line generally give you five years to draw on the amount of your credit line. After this period has expired, you may have 10 years to repay the amount you took out.
Which Is The Better Option?
Choosing between a HELOC and a loan is not a one-size-fits-all decision, and you must look at your particular circumstances to make the best decision for you.
For example, if you know exactly how much you need to borrow – say for a medical bill, to purchase a new car or to cover your child's tuition – a home equity loan may be preferable because you can receive a lump sum for the exact amount you need. In addition, the fixed interest rate ensures you know exactly what your monthly payments will be. However, if you are using the funds to cover costs that are not written in stone – such as a home remodel or new business – a HELOC may be a good alternative because you can still draw more money if your initial estimate was too low.
The Federal Trade Commission also encourages you to consider other options before turning to your home equity. This is primarily because failing to repay a home equity loan can put you at risk of losing your home. If your needs are small, a credit card or personal loan may be viable options as well.
There are several financing options available to you when you're short on cash. Before you rely on your home to help you meet your needs, make sure you understand the different products available, the benefits and drawbacks of each and how they will impact your long-term finances.
Renting An Apartment With A Limited Credit History
When young adults graduate from college, most are excited about the prospect of "entering the real world." And for many, this involves moving out of their parent's house and getting their first grown-up apartment. What many of them don't know is that their limited credit history may not have allowed them to develop the credit score ratings needed to rent an apartment.
Many landlords are now pulling the credit files of potential applicants to measure whether they have the credit background to meet their rent obligations. If they see that a person has defaulted on credit cards, loans or other responsibilities, a landlord might assume that the person is more likely to be irresponsible with their rent. The similar line of thinking may exist for those with no credit history. If a landlord has not proof that you have managed your money responsibly, he or she may be hesitant to extend a lease.
Recent graduates are not the only demographic facing this problem. Underbanked Americans, those who do not hold traditional financial products and rely primarily on cash, may also have a stunted credit file that makes it hard to find housing.
Explore Other Options When Your Credit History Is Bleak
While it can be more difficult to secure an apartment with a limited credit file, it's not impossible. There are several steps you can take to improve your chances.
1. Start working on your credit
One of the most obvious things you can do to improve your apartment-hunting prospects is start focusing on your credit scores, according to Mint.com. Obtain a credit card, even if it's a secured one, to start building an adequate file. Keep in mind that while this option is not the most expedient way to get an apartment – as it may take months of positive credit management for your score to register – it is still a smart move to take. After all, you're going to need a healthy credit score at other points in your life as well, such as when you purchase a car or take on a mortgage. The earlier you start building a solid report, the better off you may find yourself down the road.
2. Find a co-signer
While most young adults want to wean themselves off relying on their parents, this is one of those times where mom and dad may really come in handy. People who have relatives and loved ones with positive credit histories agree to take on more liability for rent payments by cosigning the lease may put landlords at ease and improve their chances of securing an apartment, according to U.S. News and World Report.
3. Steer clear of large professional agencies
Most apartment buildings that are professionally managed by a large real estate group will run a thorough background check that includes a credit examination. These buildings are typically those that will not accept college students, save for graduate students. Instead of seeking out apartments in these locations, consider landlords with a smaller number of apartments or those with only one or two buildings. These landlords may be more lenient with their credit requirements are more sympathetic to young adults who have simply not yet established a credit history.
If you're having difficulties finding a place to live, don't become too anxious. There are several strategies and options for overcoming the credit background check while still finding a nice place to live in a good neighborhood. Even negotiating to put down a larger security deposit with a landlord may change his or her mind when it comes to extending a lease. If you continue running into issues, simply speak with landlords to find out which avenues will make them feel more comfortable about renting to you.
Ratio Of Employers Who Check Applicants’ Credit Histories Declines, But Doesn’t End
When you're applying for a job, you typically take great pains to ensure your resume is tailored and informative and that your cover letter presents you in the best light. But one of the less frequent actions most job applicants take is checking their credit reports and scores before applying to their dream job.
Many Americans may be unaware that their wealth of experience and career accomplishments will only take them so far during the job application process. To help narrow down the applicant pool and find a worker who epitomizes the level of responsibility a company is looking for, many human resource departments will also factor in your credit history. Similarly to lenders, insurance companies and landlords, an employer may use your credit standing to make determinations about how responsible you are. The common line of thinking is, if you manage your finances and credit accounts responsibly, it is likely that you will handle the other areas of your life with an equal level of care and maturity.
In addition, some industries – such as government agencies and financial companies – have relied on the practice to weed out those with a spotty credit history that might be tempted to engage in theft or other criminal activity for their own financial gain. While a poor credit history is not synonymous with crime, many agencies who divulge sensitive financial information to employees don't want to take the risk that individuals in a precarious financial position may use their knowledge for personal gain.
However, the use of consumers' credit reports and scores in hiring practices has sparked some controversy among consumer groups, and several pieces of legislation are being considered to bank the practice.
According to a recent study conducted by the Society for Human Resource Management, fewer employers are using credit information in their hiring decisions as of late. For example, 53 percent of employers said they do not utilize credit checks in their hiring practices, compared with 40 percent who gave the same response in 2010. Of those companies that do look into the credit background of applicants, most said they examine their credit histories dating back two to seven years, while only six percent said a person's entire borrowing history is important.
"Human resources professionals are looking more closely at the job-relatedness of these practices," said SHRM vice president of research, Mark Schmit. "As a result, fewer employees are using background checks, and checks are often done for specific jobs or to comply with the law."
Will The Practice Ever End?
Although the issue remains a contentious one, it's difficult to determine if the practice of using credit checks in hiring decisions will ever cease. However, the topic has garnered more attention as a result of the economy.
Millions of Americans who were laid off following the recession may have lost their homes to foreclosure or been forced to rely on credit due to circumstances beyond their control, which may have ultimately ruined their credit scores. In addition, many young graduates are leaving school with limited credit histories and tight credit conditions that make it challenging to establish credit. Consumer advocates argue that this may unfairly inhibit their abilities to secure a job.
Currently, only seven U.S. states prohibit the use of credit in hiring practices, according to the National Conference of State Legislatures. These states are California, Connecticut, Hawaii, Illinois, Maryland, Oregon and Washington. While other states have legislation in the works, no national law has yet been passed to prevent this practice.
Myth or Fact: Which Of These Actions Impacts Your Credit Scores?
For many Americans, trying to understand how to keep your three credit scores pristine can be difficult. Some behaviors make sense, such as paying your bills on time and not exceeding your credit limit. Others appear to be counterproductive, such as keeping accounts open even if you don't use them. Then, there is the task of figuring out which financial actions and behaviors affect your score versus those that have no impact.
To clarify things, the list below highlights a variety of financial subjects and how, or if, they will impact your credit reports and scores.
1. Credit Scores Are Tied To Income
This statement is false. As an MSN Money column points out, the amount of money you bring in has no bearing on your credit standing. Instead, it's how you manage your money. You can have a low income, but still have a top-notch credit score if you use your resources to manage your accounts wisely and make all your monthly payments. On the flip side, you can be a millionaire with a poor credit score if you frequently miss payments, carry high balances or allow your accounts to fall into collections. For these reasons, it's important to focus on spending your money wisely, rather than how much you're actually bringing home.
2. Your Utilities and Cellphone Bills Drive Your Credit Scores
This is another false statement. The only accounts that will impact your scores and reports are those that are listed on your credit report. This includes credit cards, personal loans, auto loans, mortgages and student loans. While you pay a monthly bill to your cellphone and utilities providers, these accounts are not included in your credit file.
One thing to keep in mind, however, is that if you fall behind on these payments and they fall into collections, the this information will appear on your credit report. Collections can have a severely negative effect on your credit scores and remain on your report for up to seven years, even if you pay off the balance in full. So although your positive payment history may not directly drive your credit standing, poor payment habits will.
3. Small Charges Are Too Miniscule To Impact My Scores
False, false and false. Many people are surprised to find that those late library charges they never paid or the parking violation that got lost in a drawer has caused their credit scores to plunge by a hundred points or more, the Huffington Post reports. However, in tough times, many state and local organizations – such as libraries and police departments – are less tolerant of those who don't pay their fines and are sending these accounts to collections. As a result, some Americans are finding their once-perfect credit scores drop significantly because they ignored a $5 library late fee.
4. My Bank Account Is Not Tied To My Credit
This statement is true – up to a certain level. The amount that sits in your checking account will never affect your credit standing, unless it falls into the negatives and stays there for a long period of time. Overdrawing your account will not in and of itself cause your credit scores to decline. However, leaving your account with a negative balance may prompt your bank to take action. And most of these actions, after sending countless warnings to fund your account – include sending your account to collections. Most banks require that you settle an overdrawn account within 30 days after the initial overdraft before they go this course.
Because many Americans focus solely on their credit accounts when discussing their scores, they may not realize how other financial actions drive their ratings. However, in order to maintain a healthy credit file, it's important to be well aware of all the different factors that will have a long-term impact.
Private Student Loans Can Weigh More Heavily On Young Adults
Student loans are an increasingly more common form of debt held my millions of today's recent graduates and young adults. Several analysts have weighed in on what is being labeled America's student loan crisis, which now tops $1 trillion dollars, and noted that today's youth may be impacted for decades to come by their obligations.
Many high school graduates, current college students and recent college graduates are facing or faced the same situation when they made the decision to go to college. They know that to get ahead in today's economy a college education is crucial. In order to cover the rising costs of an education, however, they must borrow thousands in student loans. Now some, faced with tens of thousands in student debt, are graduating without jobs and, according to some commentators, bleak prospects for their futures.
Personal finance columnist Susan Tompor recently authored a column in the Detroit Free Press that discusses young adults' stunted financial futures as a result of their debt burden. For example, those with heavy balances and entry-level positions may devote the good majority of their income toward paying down their balances, rather than putting money into savings, contributing to retirement, purchasing homes and engaging in the level of consumer spending needed to spark the economy.
Further, there are millions of recent graduates and young adults who are unemployed or underemployed, resulting in an inability to pay their loans. This scenario can force a young adults' three credit scores into the subprime category before they even have a chance to start building a solid score. As a result, they may face more difficulties securing a job, getting car insurance, getting approved for an apartment and even signing up for utilities without a cosigner.
Private Student Loans Can Be More Burdensome Than Federal Loans
One aspect of young adults' student debt problem that some commentators don't discuss, however, is the difference between federal and private student loans and how this impacts their futures.
Federal student loans are typically more flexible than private loans in terms of offering borrowers more reasonable payments and several repayment options. In addition, those suffering financial hardship may be able to enroll in income-contingent repayment programs or defer their obligations until they are in a stronger financial position. The same is not always true for private loans.
Private lenders tend to impose higher interest rates – which are oftentimes variable – that can make it more difficult to pay down the principal balance, according to the New York Times. In a recent column that shared the tales of student loan borrowers, the Times highlighted the story of a graduate who had significant difficulties getting private student lenders to apply additional payment amounts to the principal, rather than future payments. If she wanted this task done, she often had to call the lender on a monthly basis to put in the request.
In addition, private student lenders are often more quick to report late or missed payments to the three credit bureaus, which can result in significant damage to credit reports and scores. Unlike federal lenders, private lenders offer fewer repayment options, so when a young adult is behind on their obligations, it's more difficult for them to dig their way out.
There are several pieces of legislation currently in the works to lessen young Americans' student debt burden. However, as the cost of a college education continues to rise, it's unclear whether young adults will be able to effectively build the same type of solid financial foundation as previous generations.