Offers to transfer credit card balance to a low-interest card might be seductive. I’ll save money and lower my parents, you might think.
Not so fast! Before you transfer a credit card balance, be sure you understand how the process can benefit you or hurt your credit score. That’s right—it could hurt you.
Let’s take a look at how the process of transferring a balance from one credit card to another works. Traditionally, the process begins with a credit card with a large balance or a high interest rate. Once another card offers you an opportunity to transfer your balance to a new card with a lower rate, you may decide to put part or all of your balance on the new card. By doing this, you can pay off the old credit card, secure a new and better interest rate, and possibly enjoy the rewards, options, and specials associated with the new card. However, you should be mindful of two things before taking advantage of this seemingly smart strategy.
Transfer Credit Card Balances? Consideration #1: Pay attention to your credit card balances. It may seem like a straightforward idea to put all your balances on the card with the lowest interest rate, but keep in mind how credit-scoring bureaus come up with their ratings. Thirty percent of your overall credit score is produced by the balance you carry versus your credit limit, or your utilization rate. To keep a solid credit rating, your utilization rate should never be more than 30 percent of your limit. Many people rack up balances in excess of a 30 percent utilization rate after transferring money to new cards, and as a result, their credit score takes a big hit.
In fact, you should always wait until the card is opened to transfer credit card balance. Do not transfer the entirety of your balance while opening the account. Most creditors will decide your limit depending on the amount that you request to transfer. If you transfer $6,000, for instance, the creditor will determine credit limit to be $6,000, giving you a very dangerous utilization rate of 100 percent. The smarter way to proceed is to act cautiously: open the account first and transfer balances from other credit cards only after you know the limit and calculated the utilization rate. Then, only transfer 30 percent.
Transfer Credit Card Balances? Consideration #2: Never open a card just to transfer the balance. Having a ton of credit cards might lower your credit score as the credit bureaus know that you have the opportunity to dig yourself into massive debt and start missing payments. In a perfect world, you would have between three and five credit cards. If you already have five cards, don’t close them (this could also hurt your score), but don’t open new ones either, even if you think you’ll be saving money by transferring balances and lowering interest payments. In fact, you might end up lowering your credit score so much that you pay extra interest payments on all future loans. You should always make sure that all of your credit cards help with an overall credit-building strategy, so never open a card just so you can take advantage of a low introductory rate.
Once you have dodged these pitfalls, you might be ready to transfer credit card balance. As always, though, be sure to thoroughly read all the related fine-print associated with credit card offers. Some cards may have specific restrictions or fees associated with transfers. Making sure that you understand the extra benefits as well as restrictions of new cards could allow you to shrink your balances and perk up your credit score.
Author: br_admin
Credit Cards and Credit Scores: The Intimate Relationship
Many people wonder about the relationship between credit cards and credit scores. While credit cards can be great tools in enabling you to purchase goods and services without having the cash on hand, they can also present an almost irresistible temptation to spend money you don’t have and mess up your credit score. What you might not realize is that credit cards can be your secret weapon in obtaining an excellent credit score. By understanding the impact your credit cards have on your credit score, you can take charge of your credit cards and leverage this knowledge into a higher credit score.
Credit cards and credit scores go hand-in-hand in several ways. First, take a look at the number of credit cards you own. Credit-scoring bureaus reward consumers the most if they can manage to responsibly balance between three and five credit cards. Credit card companies want to see that you can manage more than one or two credit cards at the same time, so if you have only a couple of cards, you may get a boost by obtaining an extra card or two.
Warning, if you have more than five credit cards, you shouldn’t immediately cancel a bunch of cards. First, this may damage your credit score by reducing the average age of your credit accounts. The length of your credit accounts determines fifteen percent of your credit score, so closing two or three credit card accounts may cause your credit score to drop. Second, you may be able to maintain and increase your credit score even with more five credit cards if you can pay down your balances to as close to zero as possible on any credit cards you rarely use.
Another important part of understanding credit cards and credit scores is the utilization rate. To get the best credit score, you should maintain a utilization rate of 30 percent or less. Your utilization rate is the ratio of your credit card balances against your credit card limits, expressed as a percentage. Therefore, if you have $600 worth of debt and your credit limit stands at $1,000, your utilization rate is 60 percent. Credit-scoring companies will award you a higher credit score with a sub-30 percent utilization rate, so if you can pay down your debt below this threshold, you will likely see a quick boost to your score.
Another way to strengthen the relationship between your credit cards and credit scores is review your credit report. Make sure you are regularly reviewing your credit report to keep track of whether your credit limits have been accurately reported.
If your credit card company reports your limit as $2,000 instead of $4,000, the $1000 balance on your card goes from being an attractive utilization rate to a negative factor that will drag down your credit score. In other words, rather than showing a 25 percent utilization rate, your credit card will show a 50 percent utilization rate. Unfortunately, credit limits are frequently misreported, so this should a mandatory item for you to double-check when you are reviewing your credit report.
One of the advantages of keeping on top of your credit cards and credit scores is being able to save money. Once you’ve built your credit score by using your credit cards wisely, you can flex your financial muscles. Call your credit card companies, point to your steady and responsible behavior, and ask for a lower interest rate.
A Dirty Little Secret that Hurts Credit
People already know that bankruptcies, foreclosures, repossessions, and collections will hurt credit. And it’s no big secret that late payments are one of the causes of bad credit.
But I bet you don’t know about some of the things that hurt credit! Today’s blog is about the the dirty little secret that will hurt your credit score.
HURT CREDIT SECRET #1: Credit card companies often omit or inaccurately report credit card limits, and this causes your score to drop. About half of all consumers are missing at least one credit limit on their credit reports. And in other instances, credit card companies intentionally report a lower limit than you have.
Why does this hurt credit?
The credit-scoring systems place a lot of weight on something called a utilization rate. The utilization rate represents your credit card balance as a percentage of your limit. If your limit is $1000 and your balance is $300, you have a 30 percent utilization rate. If your balance increases to $500, your utilization rate would increase to 50 percent. In other words, you would be utilizing 50 percent of your available limit.
The credit-scoring formula responds more favorably to people who have a utilization rate that is no higher than 30 percent.
Now let’s imagine that you have a $300 balance on a credit card with a limit of $1000. Your utilization rate is 30 percent. Good news for your credit score, right?
Not so fast. If the credit card company is only reporting a $500 limit, you will appear to be carrying a 60 percent utilization rate. And this hurts your credit score.
There are a lot of theories as to why the credit card companies do this. One is that credit card companies buy lists of borrowers whose limits are, for example, more than $10,000. The companies then send credit card offers with enticing interest rates to the people on these lists. Their goal is to encourage borrowers to switch cards.
Your credit card company does not want your name on that list. They want to make sure that you remain a loyal customer. In an effort to keep you as a client, some experts say credit card companies report a lower credit limit than you actually have, or they do not report your limit at all.
This makes you less appealing to other credit card companies.
This might be good news for their client list, but it causes hurt credit.
Are you a victim of this scam? If so, take the following steps:
1. Pull your credit report from www.720ficoscore.com.
2. If the credit card companies are inaccurately reporting any credit limit of yours, immediately begin the process of correcting this mistake.
Student Loans and Credit: 9 Things You Must Know!
What’s the relationship between student loans and credit scores? You might be surprised! In this article, we take a look at the nine things you should know about student loans so that you can build a great credit score.
Nine Things You Should Know About Student Loans and Credit
First a little background. Student loans are unsecured loans (without any collateral backing them) issued to help with the costs of tuition, books, board, and other school-related expenses. As with any other loan, your credit score is deeply impacted by your student loan. When you make your student loan payments on time, your credit score will improve. If your payments are late or if you skip a payment, your score will drop.
Student loans are a great way for young adults to begin the all-important task of showing lenders that they can handle debt. If lenders see that you can make payments on time and in full, your credit score will go up and you will be more likely to get larger loans in the future.
This is important because you will need credit upon graduating from college. Your first employer might run a credit check, assuming that your credit score is a good indication of whether you are responsible or not. And a landlord will definitely run your credit before renting a home to you.
With all this in mind, here are nine things you should know about student loans and credit.
Student Loans and Credit, Fact #1:
When you apply for a student loan, your credit might or might not be pulled. Some lenders do require a credit score, but others do not. If your credit score is pulled, a credit inquiry will be added to your credit report. This might cause your score to drop, but the impact will be minimal.
Student Loans and Credit, Fact #2:
About 30 percent of your credit score is determined by your outstanding debt: the ratio of how much you owe versus how much you have paid. The more you have paid and the less you owe, the better your score. If your payments are being deferred until you have graduated, or if you have deferred payments for another reason, the ratio will not be in your favor, and your score might drop. However, it will start to increase after about six months of timely payments.
Student Loans and Credit, Fact #3:
With this in mind, consider that students who are positioned to pay back their loans before graduating will enjoy a faster ride to good credit. Even though a lot of student loans do not require repayment until you have graduated, your credit score might be higher if you start repaying the loans immediately. Keep in mind that some employers will run a credit check when you apply for your first post-college job, so having a high credit score could behoove you.
Some people have speculated that if borrowers pay back their student loans too fast, they will lose credit points (presumably because the maximum interest on the loan will not be accrued if the loan is paid off early). I think this is a bogus claim. The exact details of credit-scoring formula have not been released, so I cannot definitely confirm this theory one way or another, but I seriously doubt its accuracy. Credit-scoring bureaus are not interested with your creditor’s ability to earn the most interest, but rather with your ability to repay your loan on time. The bureaus want to know that you will pay your debts on time. Paying your student loans sooner rather than later is a wise thing to do because your debt-to-principal ratio will drop and your score should increase.
Student Loans and Credit, Fact #4:
Before you leave college, avail yourself of the opportunity to receive exit counseling, a service most schools offer to prepare their students to repay federal student loans. This counseling can provide you valuable information about your rights and responsibilities and the terms and conditions of your loans.
Student Loans and Credit, Fact #5:
Once you begin repaying your loan, never miss a payment. Here’s something you might not know about student loans and credit: 35 percent of your total credit score will be drawn from your payment history on credit cards and loans.
Student Loans and Credit, Fact #6:
If you cannot make a payment, ask for forbearance, a short-term agreement that allows you to make smaller payments, or no payments at all. Otherwise, you will harm your credit score. Keep in mind that if you do not make payments, interest will continue to accrue and the amount due will grow larger.
Student Loans and Credit, Fact #7:
Keep in touch with your lender. If you are struggling with your payments, never wait until the lender approaches you or until a delinquency notice is logged on your record. Instead, initiate communication with your lender. Talk about forbearance or student loan consolidation.
Student Loans and Credit, Fact #8:
Student loans can never be discharged during bankruptcy.
Student Loans and Credit, Fact #9:
Making regular payments on your student loans is a great way for young adults to begin building their credit score, setting the foundation for better loan terms and lower interest rates on future loans, and saving bundles over the course of a lifetime. But this isn’t enough. As you move on after school, you should try to incorporate different types of credit into your finances while keeping current on your payments. The mix of credit you have makes up 10 percent of your score. The credit scoring bureaus want to see that you can handle a variety of types of loans—from credit cards to student loans to car loans.
Now that you know the nine important facts about student loans and credit, be sure you learn the 35 facts the banks don’t want you to know! These money-saving tips and insider secrets about credit scores can help you save a bundle and position yourself for success.
How Is a Credit Score Calculated?
How is a credit score calculated? This is a question I’m asked often, and the answer is not a simple one. In fact, there are a lot of people who sell something they call a “credit score,” but they are actually selling garbage. This blog clarifies the players, how they work together, and what you can do to make sure that you get your hands on your true credit score.
How Is a Credit Score Calculated? The Players
Let’s start with the three main players:
1. Your creditors,
2. The credit-reporting bureaus, and
3. The credit-scoring formula.
Your creditors are those banks, lending institutions, people, and entities that report to the three credit-reporting bureaus. They consist of:
- Banks and lending institutions that have granted you with a loan or a credit card, or that have considered a loan or credit card application.
- People, entities, or companies that are pursuing you for unpaid debt. If you fail to pay a bill or debt, a creditor will attempt to collect this debt. For instance, you might have a tax lien or a judgment against you. In either case, a creditor will attempt to collect the unpaid money. If you fail to pay a bill, it will be turned over to a collection agency, which will attempt to collect the debt.
It is important to note that the following companies do not report information to the credit-reporting bureaus, unless you fail to pay them bills, in which case they will be turned over for collection and reported to the credit-reporting bureaus:
- Utility companies
- Cell phone companies
- Landlords
Alimony and child support payments are also not reported to the bureaus, unless you fail to pay.
Now let’s talk about the three credit-reporting bureaus: Equifax, TransUnion, and Experian. Your creditors report information to one, two, or all of the credit-reporting bureaus. For instance, your Visa credit card company might report your payment history to Experian and Equifax. A bank that provided you with a small line of credit might report only to TransUnion, whereas your mortgage lender would most likely report to all three.
The credit-reporting bureaus do two primary things:
1. They collect information from your creditors.
2. They report your credit score by applying a credit-scoring formula.
So that brings us to the credit-scoring formula. Your credit score is computed using an intricate formula that considers a variety of factors.
Here is where it gets confusing. The credit-reporting bureaus apply a different credit-scoring formula depending on who is asking for your credit score.
Let’s say that you apply for a rental unit. The landlord is concerned primarily with your history of mortgage payments, as well as any evictions you might have on your record. Now let’s imagine that you also apply for a car loan. The bank considering your car loan is concerned with your history of installment payments and whether you have any repossessions on your record.
Equifax, Experian, and TransUnion know that the landlord and the car company are interested in different things, so they apply a different credit-scoring formula depending on who is asking for your credit score.
Important to note is this: 90 percent of all lenders use a credit-scoring formula called a FICO Score. None of them use something called the Consumer Score. We will discuss this in detail later. Just remember this: Of all the credit scores you can buy, the FICO score is the most important. A consumer score is the least important.
Before we get into that, let’s talk about how the players work together.
How Is a Credit Score Calculated? How the Players Work Together to Determine Your Credit Score
In summary, your creditors report to one, two, or all three of the credit-reporting bureaus. When a person or lender inquires into your credit score, the credit-reporting bureaus determine which credit-scoring formula is most appropriate. They apply the formula, and then report your credit score.
Because not all creditors report to all of the credit-reporting bureaus, the three bureaus do not have identical information. Therefore, if a bank pulls your credit score from the three credit-reporting bureaus, the bank might end up with three different credit scores. Experian might give you a 650 score, TransUnion might determine that your score is 672, and Equifax might determine that your score is 714.
The banker would ignore the high score and the low score, and just take a look at the score that falls in the middle. In this case, the bank would consider the score provided by TransUnion (672) to be your credit score.
How Is a Credit Score Calculated? Getting Your Hands on the Right Score
Remember a few paragraphs ago, when I told you to remember that the FICO score is the most important score, and that the Consumer Score is worthless? Let’s talk about this now.
As I’ve mentioned, the credit-reporting bureaus have a lot of different formulae they can apply to determine your score. They chose the formula based on who is asking for your credit score.
If you pull your own credit report and buy your credit score, most often, the Consumer Score will be applied. This is a generic credit score that no lender, landlord, or employer will ever use. Only the consumer sees a Consumer Score.
In this way, the Consumer Score is worthless. And unfortunately, it is often a lot higher than a FICO score. This means that if you buy your credit score from most places online, you will receive a Consumer Score that gives you an artificial sense of security about your credit score.
Almost all lenders use a FICO score. If you buy your credit score, make sure it is a FICO score so you have an accurate idea of where you stand. A consumer can buy FICO scores from both Equifax and TransUnion at www.720FICOScore.
However, Experian does not sell FICO scores to consumers. If you want to see all three scores, a lender will have to pull your credit score. The benefit of this is that you have all three scores. You can ignore the high score and the low score, knowing that the middle score is the credit score a lender would use to determine your interest rates.
The downside of getting your credit score from a lender is that a hard credit inquiry will be added to your credit report.
How Is a Credit Score Calculated? The Difference Between Credit Scores and Credit Reports
In considering the question, “How is a credit score calculated?” I have spent a lot of time talking about credit scores. I want to make an important note: There’s a difference between a credit score and a credit report. A credit score is the three-digit number that predicts your likelihood of paying your bills on time. A credit report is a listing of all the information that was considered in your credit score.
Once a year, you can get a free annual credit report. If you want to look at your credit report so that you can identify errors, go ahead and download your free annual credit report. However, you should never, never buy a credit score from www.annualcreditreport.com as this site sells consumer scores only. Remember that the only place to get a FICO score is from FICO itself or from your lender.
This concludes my lesson in “How is a credit score calculated?” I know this is a complicated subject, so if you have any questions, be sure to leave them in the comments!
Your Bank’s Big Lie About How Credit Scores Affect You
I recently conducted a private class for the parishioners of a church about how credit scores affect you. After the class ended, one of the participants, Lori P., sent an email that shows how banks lie to their customers.
‘I am involved in an entrepreneurial program that helps people become business and home-loan ready, as well as get them ready for business start-up. Four of us in the program had attended a meeting with a founder of a minority bank here in Los Angeles that explained to us how to become loan-ready for his bank. He mentioned that all we needed was a 630 credit score along with other criteria.
‘I thought, “Wow, only 630? That seems easy.”
‘Then when I listened to your program, it made sense why we only needed a 630: It would be money in the bank’s pocket.
-Lori P.”
I was livid when I received this email. Lori is helping people from her community take control of their financial future, and the banker is thrilled to charge them higher fees because of a lower credit score. How are hardworking Americans ever supposed to get back on their feet when their banks are ripping them off?
And this happens all of the time. Every single day—every single hour and probably every single minute—a banker neglects to tell a customer about the easy steps people can take to fix a bad credit score.
Instead of telling the truth about how credit scores affect you, banks across the country are letting their customers pay an arm and a leg in interest rates.
For instance, the banker Lori met with isn’t telling her that the difference between a 630 credit score and a 720 credit score is $63,720 over the course of a 30-year loan on a $216,000 mortgage.
The bank is deceiving its customers to the tune of $63,720!
I wrote 7 Steps to a 720 Credit Score because I wanted to help my mortgage clients learn how to build credit and lower their interest payments. Then I decided I wanted to spread the word about how credit scores affect you. I went to bank after bank, telling them I would give them access to my book so that their clients could how to raise their credit scores and negotiate lower interest rates.
Guess how many banks signed up.
Not one. Why would they do the right thing when they could pocket $63,720?
This is so typical of what happens every day. While the “little guy” struggles to get his head above water, the government is busy bailing out big business because they are “too big to fail.” And these very same businesses turn around and lie to their customers. This is flat-out unfair and wrong.
Learn how credit scores affect you, and stop the banks from stealing more of your hard-earned money. Download The 35 Things Your Bank Doesn’t Want You to Know About Credit.
How to Fix a Bad Credit Score the Easy Way
People who have fallen onto tough financial times always want to know how to fix a bad credit score. In their attempt to learn how to build credit, they will spend thousands of dollars on credit repair services that promise to wipe their credit reports clean of all errors. Some people even try to create a new credit identity, as if they can sweep past errors under the rug.
The big secret, though, is that most of these services do not work. At best, these credit “repair” services will only temporarily suppress credit problems by using illegal methods to briefly suspend errors from your report—errors that will resurface only after the company has walked away with your dollars. At worst, they will expose you to lawsuits by using illegal methods of attempting to remove delinquent information from your credit report.
The good news is that there are tons of ways to fix your credit score that are both effective and legal. If you want to learn how to fix a bad credit score, keep these two components in mind:
How to Fix a Bad Credit Score, Rule #1: Be strategic.
As you can tell, I am not a fan of credit repair strategies that purport to increase your credit score by surreptitious methods. However, there are legal and effective strategies you can use to raise your credit score fast:
1. Build your credit score fast by adding yourself as an authorized user to a family member’s credit card, so long as it is in good standing.
2. One of the fastest ways to build credit is to transfer your credit card balances to your spouse.
How to Fix a Bad Credit Score, Rule #2: Focus on current behavior.
Think of it from the credit bureaus’ perspective. Wouldn’t you be much more impressed with someone who positively changed his behavior than someone who tried to weasel out of past mistakes? Instead of arguing with the credit-scoring bureaus about all of your late payments, try taking a few simple but effective ways to let the credit-scoring bureaus know you have changed your habits.
This strategy works because credit-scoring bureaus place more weight on current behavior than on past behavior. If you made a mess of your credit score two years ago, the credit-scoring bureaus will pay less attention to this if you are making smart decisions today. This means that you should:
- Pay your bills on time.
- Keep your credit card balances as low as you can – preferably below 30 percent.
- Keep three to five credit cards active. Use them at least once a month, but pay your balances as much as possible each month.
- Open new lines of credit after a financial disaster, like bankruptcy or foreclosure. The credit-scoring bureaus need proof that you can manage several lines of credit. If you wipe your hands of credit, they will not have this proof, and your credit score will not increase. Your bad credit score will increase if you have between three and five credit cards, as well as an installment loan, all in good standing. Bear in mind that your credit score will initially drop upon opening a new line of credit. But after six months of timely payments, it will begin to increase.
So here’s the big secret: If you want to know how to fix a bad credit score, don’t turn to credit repair companies that make promises that seem too good to be true. Repairing a credit score is simple, but it cannot be achieved with the wave of a wand.
The Fastest Way to Build Credit
Question: What is the fastest way to build credit? I am applying for a business loan, and I need to bump my score up by about 60 points.
Answer: There are a lot of reasons you might want to raise your credit score, and raise it fast. In today’s environment, you might not qualify for a loan if your credit score is not at least 720. About 60 percent of employers run credit checks on potential employees. Landlords won’t rent to people with bad credit. You will pay more in interest if you have bad credit. The list goes on and on …
Fortunately, if you want to learn how to build credit fast, I have a great trick. This works best for married people, but single folks can use it as well. Let’s start by assuming you are married. Later, I will explain how to modify this example if you are single.
The Fastest Way to Build Credit: A Tip for Married People
To build your credit fast, transfer as much of your credit card debt into your spouse’s name. To do this, simply have your spouse “buy” your debt by paying your balance(s) with his or her credit card(s). Assuming you both have individual credit cards, this will cause your score to jump quickly.
You see, the credit-scoring bureaus place a lot of weight on something called a utilization rate. Each of your credit cards has a utilization rate, which is a number that describe how much of your limit you are utilizing. For instance, if a credit card has a $1000 limit and you have a $100 balance, you are utilizing 10 percent of your limit. Your utilization rate, therefore, is 10 percent.
Credit-scoring bureaus respond best if your utilization rate is below 30 percent, so if you want to learn how to fix credit, you should always lower your utilization rate.
Start by transferring balances to your spouse’s credit cards. Of course, this might lower your spouse’s credit score, but you will buy the debt back (thereby increasing your spouse’s score) once you have qualified for the loan.
In short, you will have better loan terms, and your spouse’s score will be lowered only temporarily.
The Fastest Way to Build Credit: A Tip for Single People
If you are single and also want to know the fastest way to build credit, you can modify this tip and use the same strategy with a family member or a loved one. However, be sure to put some structures in place so that your family member/loved one is protected. For instance, you might want to structure a proper contract by hiring a lawyer or using an online service such as Virgin Money. You might also give your family member/loved one collateral. Is your car paid off? Do you have an expensive piece of jewelry? One way or another, be sure that you never jeopardize family relationships just to raise your credit score!
And be sure to download our free ebooks about how to secure home and car loans during this tight lending environment.
Top Ten Things that Will Hurt Your Credit Score: Part II
In my last post, I talked about five of the top ten things that will hurt your credit score. Here are the final five:
Things That Will Hurt Your Credit Score #6: Not Pulling Your Credit Report Regularly.
A lot of people worry that if they pull their credit report, they will hurt their credit score. While it is true that 10 percent of your score is based on the number of inquiries by lenders into your credit report, pulling your own credit report does not hurt your score. You can pull your own credit report each and every day, and your score will not budge.
In fact, failing to pull your credit report could hurt your score. How will you know if someone opens an account in your name? How will you know if your account limits are being inaccurately reported?
At a minimum, pull your credit report from www.720FICOScore.com at least every six months.
Things That Will Hurt Your Credit Score #7: Closing an account.
15 percent of your score is based on the age of your credit accounts. The older your accounts, the better your score.
For instance, let’s say you have five accounts:
- Account #1 is five years old,
- Account #2 is twelve years old,
- Account #3 is seven years old,
- Account #4 is eight years old, and
- Account #5 is nine years old.
The average age of all of your accounts is 8.2 years. Now let’s imagine that you close account #2, which is twelve years old. Now the average age of your accounts is only 7.25 years.
And this is just one reason closing an account can hurt your score. If you close an account, the account will show a $0 limit. So if you have a balance on this account, your balance-to-limit ratio will be sky-high.
Don’t forget, too, that 10 percent of your score is based on the type of credit you have. The credit-scoring bureaus like credit reports with a healthy mix of credit, and they prefer that you have at least three credit cards. If you close an account, you might have too few credit cards, or you might not have a healthy mix, both of which will hurt your score.
Things That Will Hurt Your Credit Score #8: Collections.
Collection accounts are particularly harmful because they are always preceded by late payments. A collection account should stay on your credit report for seven years from the date of activity that sent the account into collections. For instance, if you fail to pay your credit card bill on March 1, 2010, this is the traditional course of action:
1. A 30-day late payment will be added to your account on approximately April 1.
2. A 60-day late payment will be added to your account on approximately May 1.
3. A 90-day late payment will be added to your account on approximately June 1.
4. A 120-day late payment will be added to your account on approximately July 1, and the account will be sent to collection.
5. Assuming you make no further payments on the account, the collection will remain on your credit report for seven years after the original late payment. In other words, it will fall off your credit report on approximately March 1, 2017.
Things That Will Hurt Your Credit Score #9: Paying a bill in collections.
Now let’s add a payment into the mix. Let’s assume all of the above, but that in March 2012, you make a partial payment on the collection account. Guess what? This renews the date of last activity, meaning that the collection account will stay on your report until March 2019!
It’s crazy but true. Paying a collection account will often hurt your credit score.
In 7 Steps to a 720 Credit Score, I describe this process in detail, and I provide you with all the forms and worksheets necessary to get that collection account off your credit report!
Things That Will Hurt Your Credit Score #10: Late payments.
You probably already knew that late payments will hurt your credit score. Here’s the good news: The credit-reporting bureaus pay more attention to recent behavior than past behavior. If you follow the steps for building your credit score, the damage will be all but erased in as little as two years!
Top Ten Things that Will Hurt Your Credit Score: Part I
You might be surprised by some of the things that will hurt your credit score. Over the next two blog posts, I’ll reveal the top ten things that will hurt your credit score, in no particular order.
Things That Will Hurt Your Credit Score #1:
No credit.
I always say that no credit is just as bad as bad credit. The credit-scoring systems have certain criteria by which they determine a person’s credit score. Without that information, they have no way of telling whether a person is creditworthy. Better safe than sorry, they think, and they assign a poor credit score to that person.
Ideally, you should have between three and five credit cards, an installment loan, and a mortgage.
Things That Will Hurt Your Credit Score #2:
Bankruptcy.
You probably already know that a bankruptcy is one of the worst things that can happen to your credit score. Not only does the bankruptcy hurt your score, but so do the late payments and collection accounts that led up to the bankruptcy.
Here’s what you don’t know: You can repair credit after bankruptcy in as little as two years!
Things That Will Hurt Your Credit Score #3:
High credit card balances.
Your credit score is comprised of 22 criteria, and a whopping 30 percent looks at your outstanding debt. Among other things, the credit-scoring bureaus want to see a low balance-to-limit ratio. If you carry a balance that exceeds 30 percent of your credit card limit, your score could be lowered. For instance, if you have a limit of $1000 on your MasterCard, keep your balance below $300 at all times.
Things That Will Hurt Your Credit Score #4:
An incorrect credit limit.
Here’s a dirty little secret that will hurt your credit score: Almost half of people have a credit card limit that is being incorrectly reported to the credit-scoring bureaus. Say, for instance, that your MasterCard has a $1000 limit. The credit card company might be reporting your limit as only $500.
Now let’s imagine that you have a $250 balance on that credit card. This is only 25 percent of the $1000 limit (see #3). But because of the credit card company’s mistake, your balance-to-limit appears to be 50 percent!
Failing to correct this mistake is one the ten biggest credit mistakes to avoid.
Things That Will Hurt Your Credit Score #5:
A foreclosure, repossession, judgment, or lien.
Ouch. Each of these things will cause your credit score to drop. The key to recovering after a foreclosure, repossession, judgment, or lien is to be proactive. You can raise your score to 720 in just two years if you start the process of rebuilding your credit score.
Too often, though, people feel overwhelmed by their finances, so they adopt a do-nothing approach and hope the problem just disappears. This only delays recovering. Instead, decide that you are going to take simple steps to rebuilding your credit, and that you are going to start today. If you follow an easy plan to rebuild your credit, your score will start to increase, and in just two years, you can enjoy all the perks of a 720 credit score.
Be sure to come back next week for #6 through #10 of the top ten things that will hurt your credit score.
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