It could prevent you from leasing an apartment or getting your dream job.

A credit report is an outline of your borrowing and repayment history.

It is important to know and keep monitoring your credit score.

By law, consumers have the right to acquire a free credit report yearly from the three credit reporting agencies, Experian, Trans Union, and Equifax.

You can do this through annualcreditreport.com.

How many Americans are checking their credit reports?

The Consumer Federation of America (CFA) and Vantage Score were surveyed in 2016.

The researchers found that 32% of Americans had never obtained a copy of their free credit report.

Furthermore, 16% had not received a copy in the previous 3 years.

32% had received a copy in the previous year, and another 19% had received a copy within the previous 3 years.

These figures would indicate that many Americans do not check their credit report regularly.

You need to beware of scams 

Like you, scammers know that you can get a free credit report each year.

They are waiting to con you out of your money, your personal information, or both.

Impostor sites will attempt to deceive you into paying for what should be free credit reports.

There is a well – known phony site that stipulates you must register for a trial subscription to a credit monitoring service to get your “free” credit report.

To register for the trial, you need to give your credit card number.

If you fail to cancel the subscription before the end of the trial period, your credit card will be charged.

This charge will continue each month until you cancel the subscription.

You could be charged for months if you are not checking your credit card statement regularly.

How common is Identity Theft?

An account takeover involves another person using either your debit or credit accounts to make transactions.

In the past five years, 46% of Americans have been the victim of credit card fraud.

The Nilson Report estimates that losses reached $24.71 billion, which is a 12% increase over the previous year.

47% of the global credit card fraud happens in the U.S.

The Bureau of Justice Statistics indicated that in 2014, 17.6 million incidents of identity theft were reported to law enforcement.

86% of victims reported fraud connected to an existing bank account or credit card.

An identity takeover is when thieves use the social security number, name, or other personally identifying information to assume the victim’s identity.

Your ID is filled with false work documents, false medical records, unpaid taxes, and criminal charges.

Cyber-criminals do this by stealing your personal information when you are not on a secure internet connection.

How does a Credit Freeze work?

A credit freeze (sometimes called a security freeze, credit lock, or credit report freeze) ensures that an individual’s credit report is inaccessible.

It is mainly used by victims of identity theft that want to stop the thieves from opening new credit lines in their names.

This will work because a creditor will access your credit report before approving new credit.

If the credit report is inaccessible, it will be evident that something is suspicious, and the application will be denied.

You will be provided with a PIN or password which needs to be used whenever you want to unfreeze the report for a specific period.

This will allow a specific third party (e.g., employer, creditor, insurer, etc.) to access the report or allow you to remove the freeze entirely.

The individual will be required to prove their identity, along with providing the PIN/password.

Creditors who have an existing relationship with you (e.g., a credit card issuer whom you have a card with) are still able to access your credit report, but it must not be used to extend new lines of credit.

What about EMV Technology?

EMV technology is a computer chip on the front of the credit card.

When a transaction is completed, the EMV chip securely communicates with the payment processor.

The transaction is authenticated through a calculation of unique data packets for every operation.

It verifies that the card is not counterfeit.

In 2015, the U.S. upgraded to EMV which made card counterfeiting almost impossible.

It doesn’t eliminate online fraud, and it resulted in fraudsters focusing on new accounts instead of existing accounts.

By the end of 2015, there was a 113% increase in new account crime which added up to 20% of all fraud losses.

Fraudsters open new accounts using stolen Social Security numbers.

How to Avoid a Scam

There are steps you can take to avoid a scam:

• Type the URL straight into your browser ensuring that the spelling is correct. Some impostor sites take advantage of misspelled sites.   Don’t open links or attachments.  Also, cyber-criminals can steal your personal information when you are on an unsecured wireless internet connection.
• Don’t disclose your credit card number. You will not be required to give a credit card number for a genuinely free credit report.  If the company is requesting a credit card number, it is probably looking for a way to charge you in the future.
• Don’t sign up for a free trial to any subscription package. You will not need to sign up for anything to receive a free credit report.
• If you do sign up for a free trial subscription, be sure to cancel before the trial period ends. Your credit card won’t be charged.
• Do not use unreliable companies that charge a fee for your credit report. You may be giving your social security number to criminals.  Make sure you have a secure connection like https before disclosing confidential information.  It is best to do business with companies you know.
• Be careful of companies that advertise free reports and then try to persuade you to order additional services you do not want, e.g., alerting you if someone accesses your credit score.

Protect Your Credit

You should be vigilant about checking your credit card statements for suspicious transactions.

Make this a daily, or at least weekly, routine.

Also, keep checking your credit report.

If you are making an application for credit, your first step should be obtaining your credit report so you can challenge erroneous items if they appear.

Steps to Take if You Are the Victim of a Scam

If you are the victim of identity theft, you need to change your online bank login, social media accounts, and passwords.

In some cases, you will need to close old accounts and change your email address.

What else can you do?

Contact Credit Bureaus – You can put a fraud alert on your credit reports by contacting one of the three national credit bureaus.

Fraud alerts can prevent a thief from opening extra accounts in your name.

You will also be contacted if an existing account is altered, and before a new account is opened.

You only need to call one of the three credit bureaus to register your fraud alert.

The company you call is compelled to contact the other two.

Within 24 hours, the three bureaus will be alerted.

File A Police Report – You should record a report at your local police station.

Contact Your Card Issue – Alert the fraud department of each card issuer and inform them of the identity theft.

File a Complaint with the Federal Trade Commission (FTC) – The FTC deals with complaints from victims of identity theft, refers complaints to law enforcement agencies, and provides information to victims.

Complaints are also referred to companies and other government agencies for further action.

The FTC will also investigate companies for infringements the agency enforces.

Account Take Over – You have been a victim of an account take over, involving another person using either debit or credit accounts to benefit from the transactions.

If you are aware of unrecognized charges or suspicious activity on your statement, immediately contact your card issuer.

Most card issuers will contact the vendor on your behalf and reverse the charges while investigations are taking place.

Under guidelines from the Federal Trade Commission and network accords, you are not liable for unauthorized charges.

By law, consumers have the right to acquire a free credit report from the three credit reporting agencies every year.

Companies will advertise a free credit report on their website.

They will then try to get money with offers of free trials for a short period.

Disclosing your credit card number could result in loss of money and at worse identity theft.

It is important to check your credit report regularly and take steps to deal with any suspicious transactions.

The safest way to do this is through the three credit reporting agencies.

The post Free Credit Report Scams appeared first on National Credit Federation.

Research has indicated that by the end of 2017 new credit card debt will reach $60 billion.

We will owe $1 trillion overall.

How do people fall into credit card debt so easily?

Well, a lot of credit cards start with 0% interest rate, then quickly increase to 25%.

This is a significant addition to a simple purchase.

Credit card interest is the primary way in which credit card issuers make their money.

When you make a purchase, the bank pays the payee and then charges the cardholder interest during the borrowing period.

Before deciding what interest rate to offer, banks will check national and international (if relevant) credit bureau reports.

This will identify the card holder’s borrowing history with other banks.

How Much of a Difference Does Interest Make?

It’s hard to comprehend exactly just how much of a difference interest can make.

So let’s break it down.

Say you have $5,000 in credit card debt.

A 18% interest rate will mean you’re paying back more than $2,900 in interest on that debt.

A 13% interest rate will mean you’re paying back $1,800 in interest on that debt.

And a 10% interest rate will mean you’re paying back $1,200 in interest on that debt.

As you can see, a 8% difference in rates will mean the difference of $1,700!

With some credit cards having an interest rate as high as 25%, it’s not hard to see how someone can dig themselves a big hole.

Terms and Conditions

Being familiar with the terms and conditions is important.

Check the agreement copy you received when you opened the account.

The agreement will state when the interest rate will change to the prime rate.

Usually, the higher price will come into play at the start of the new billing cycle after the prime rate increases.

The Bank of America’s World Elite Mastercard’s rate will increase on the first day of the billing phase that starts in the same month in which the index is published.

The margin and the index make up a variable rate.

The margin is the unchanging part of the price and it makes up the bulk of what you will pay in interest.

The card issuer governs it.

The index is the fluctuating part of the rate.

It is the prime rate calculated by and published in the Wall St Journal.

When the margin rate is 10%, and the index is the prime rate of 3.25% your total interest rate will be 13.25%.

When the prime increases by a quarter point, the rate will rise to 13.5%.

How to Contend with Rising Rates

The best way of combating rising rates is to keep a zero balance.

Pay off your credit card monthly.

This will eliminate concern over interest rates, and you will get free use of the money until the due date.

There is a period in your billing phase when you can make purchases without being charged interest.

It starts on the first day of the statement phase and ends on the payment due date.

This is a bonus if you use your credit card to get bonuses or a short-term cash flow.

If you purchase on day 1, you would have 55 days to pay it off before you have to pay interest.

A purchase made on the second day would get 54 days interest-free.

A purchase made on day 30 would mean you had 25 interest-free days.

If you are in a lot of debt, this is not always possible, and you will need to negotiate with the card issuer.

You can ask for a review of the interest rates.

Contact the card issuer to see if they can reduce the interest rate or give you a fixed rate.

You will have a better chance if you have a reliable payment record.

When negotiating with the card issuer:

• Emphasize the length of time you have been with the financial institution.
• Refer to other accounts.
• Summarize the history of on-time payments.
• Research deals with different cards and shows them to your credit card company. Check if they will match the rate.

It is also important to be aware of your utilization ratio.

This is the amount of revolving credit you are presently using divided by the total amount of free revolving credit.

Basically, the amount you owe divided by the credit limit.

Let’s say you have 2 credit cards.

Together, the credit limit is $10,000.

You have a balance of $5,000 on one of the cards.

This means your credit utilization ratio is 50%.

Do you have a high-interest rate that makes it impossible or difficult to make your payments?

Request a new payment plan that is suitable for your budget.

However, a longer payoff interval may mean you will pay more in total interest charges.

A survey conducted by Princeton Survey Research Associates International in 2016 determined that all you have to do is ask.

A represented sample of 1495 adults were contacted.

Of these 981 had a major credit card.

9 out of ten (89%) who requested that their late fee was waived were granted the request.

More than 3 out of 4 (78%) who asked for an interest rate reduction were successful.

A recent survey in 2017 showed similar results.

According to the survey results, everyone should be asking for these benefits.

The survey found that only a small number of credit card users, about 1 in 5, had made each kind of request.

These days it’s a lot more expensive to procure a customer than it is to keep one.

The credit card provider will do what they can to retain one.

Transfer Your Balance

Utilizing a credit card balance transfer can be an efficient way to pay off debt quicker and save hundreds of dollars on interest (even after paying a balance transfer fee on the new card).

Let’s say you have a $3,500 balance on a card with a 17% Annual Percentage Rate, and you are not paying any more than the minimum $95 due each month.

At this rate and if you have stopped using the card, it will take 53 months to pay it off.

Adding the interest will mean you will pay almost $5,000.

If you can get a card with an 18 month 0% APR on transfers, you’d have to pay about $195 a month to pay off the balance before the promotional APR expires.

That is only $100 more than your present minimum payment.

You would pay the balance off faster and save hundreds on interest payments.

You can also merge multiple balances on one card.

This will simplify your finances.

Is a Balance Transfer the Right Move for You?

If you are in a good financial place (e.g., your credit card balances are modest and not maxed out, you have a good credit score and a stable job) transferring a high APR balance to save money and pay it off faster makes sense.

However, if most of your credit cards are maxed out, or your credit score has been adversely affected by late payments, you should consider other options.

The reasons for this are:

• You will need a good credit score to get a balance transfer credit card. That rules out most people who are in a lot of debt or have made late payments recently.
• If you are in a lot of debt a balance transfer could make it worse. Balance transfers provide immediate relief from high-interest rates.  However, they give you more credit that you will use when you need it.

After You Get the New Rate

You need to pay on time as late payments will result in an interest rate hike again.

Maintain a credit utilization ratio of under 35%.

If you are maxing out your credit limit it will decrease your credit score, and in turn increase your interest rate again.

 You are Protected Under the Law

The Credit Card Accountability Responsibility and Disclosure Act (CARD) of 2009 is a federal-based law.

It essentially changed consumer rights and credit card issuers’ practices.

Restricted Interest Rate Increases – increases on existing balances are only permitted under certain conditions:

• The cardholder makes a late payment
• When a promotion rate finishes
• There is an adjustable rate

Credit card providers can only increase interest rates on new operations after the first twelve months.

The card issuer is required to give 45 days notice before significant changes come into effect.

Restricted Universal Default – credit card providers can no longer raise interest on existing credit card balances based on a customer’s payment accounts with other distinct credit issuers (other creditors and utility businesses).

If at least 45 days notice is given universal default can still be used on potential credit card amounts.

Credit card issuers can raise interest on future card purchases, and there is no limit to how high-interest rates can go.

If credit card accounts are founded on variable APRs (as most are), when the prime rate goes up, interest can increase.

Research has indicated that most Americans get into massive credit card debt.

The interest charged by credit card providers accounts for a significant proportion of this debt.

Many credit card holders are not negotiating with their banks to get better terms.

Try bargaining, and if this is not successful, you can apply for a credit card balance transfer and get an interest free period to allow you to pay off your debt.

Essentially you aim to make monthly payments and work towards a zero balance.

The post How To Lower Interest Rates On Credit Cards appeared first on National Credit Federation.

Every time a lender accesses your credit file, they leave an inquiry as evidence of your application with them.

When you check your credit report, you will find a part entitled Credit Inquiries or Regular Inquiries.

They can stay on the report up to 2 years.

There are hard and soft inquiries, which affect your score differently.

The number and rate of inquiries within a 2-3-year period can have a huge negative effect on your credit history.

Types of Credit Inquiries

A hard inquiry is noted on an individual’s credit report when a third party sights the report after a credit application.

These inquiries will reduce your score by 5 – 10 points.

A soft inquiry is usually instigated by the individual to check for errors.

You need to order your report through an authorized organization such as my FICO to avoid the inquiry affecting your credit score.

Also, existing creditors may request a report.

Other circumstances soft inquiries might be initiated:

• Insurance Companies or prospective landlords to assess risk.
• Future employers doing background checks.
• Credit Card Companies before sending approved promotional offers.

FICO Scores

Fair Isaac Corporation instigated FICO scores over 25 years ago.

90% of the best lenders use these scores to assist them in making billions of credit related choices every year.

They are regularly apprised to indicate changes in lending practices and consumer behavior.

The score is devised using multiple scorecards.

Each card is modified to assess risk for a precise customer segment.

What Effect Does an Inquiry Have on Your Score?

Usually, credit inquiries have minimal impact on your FICO scores.

For the majority of people, one additional credit inquiry will mean that less than five points is taken off their score.

The total range for FIFCO scores is 300 – 850.

Inquiries will have a greater effect if you have a short credit history or few accounts.

There will be an increased risk from a large number of queries.

Research has indicated that people with 6 or more inquiries on their credit reports could be up to 8 times more likely to file for bankruptcy.

This is compared to those with no inquiries.

If you have numerous inquiries on your credit file, lenders will perceive you as a high risk borrower.

There is a concern that other borrowers have declined you for reasons of which they are not aware.

Rate Shopping

If you are looking for a student, mortgage, or auto loan, numerous lenders may request your credit report.

You may only be looking for one loan, but there could be multiple inquiries.

To counterbalance this, FICO scores disregard the number of loan inquiries made in the 30 days before scoring.

They consider this rate shopping, so the number of inquiries made during this time will not influence your score.

FICO Scores also examine your credit report for student, mortgage, and auto loan inquiries older than 30 days.

If some are found, your score will reflect inquiries that fall in an average shopping period as just one inquiry.

For FICO scores determined from the newest descriptions of the scoring method, this shopping phase is any 45 day duration.

Those learned from older versions means the shopping phase is any 14 day period.

Each lender selects a version of the FICO scoring procedure which the credit reporting agency will use to estimate your score.

How to Avoid Unwarranted Credit Inquiries

Unlike judgments or defaults, excessive credit inquiries can be avoided by:

• Making it clear that you will not sanction access to your credit file until you agree to the terms and conditions. Creditors have left inquiry “footprints” without the knowledge of the applicant.
• Reading the terms and conditions online before providing personal details. If accessing your credit file during the review stage is included find another credit provider.
• Being aware as a director or business owner that creditors can record credit inquiries on both your commercial and personal credit file history.

Disputing an Unauthorized Inquiry

The Fair Trading Reporting Act Section 64 states that a creditor needs written permission from the consumer to access credit information.

The exception is a court-ordered access or a request by a state or local government agency concerning child support.

You can challenge the inquiry with the credit bureau.

Do this by asking for the removal of the investigation stating that it is unauthorized and the creditor did not have permission.

Challenging an investigation through the credit bureau will result in a fraud alert being enforced on your credit.

This lasts for 90 days and informs lenders they must confirm your identity before allotting any credit.

You need to be ready for requests for hard copies of your personal information when looking for credit approval.

It will be challenging to dispute an inquiry, but there are professional credit restoration services that can help you.

You need to be aware that under the Fair Credit Reporting Act (FCRA) businesses other than prospective creditors with permission can legitimately access your credit file.

These include:

• Debt Collectors – they can utilize your credit report to obtain personal information.
• Insurance providers – some use your credit score to determine the prospect of a claim being filed.
• Current and Prospective Employers – they may check your credit report before offering you certain positions such as upper-level management and financial positions.
• Government Agencies – they may check your credit report before providing certain licenses.

Companies accessing credit files under false deceptions or for illegal usage are in violation of Federal law.

Reasons to Check Your Credit Report

Potential lenders will check your credit report as it shows how you handle credit.

So what good reasons are there for you to check your credit report?

1. You’re getting ready to buy a house or a car.
   Your credit score will determine your interest rate, so fix any errors you find a year before you intend to apply.
2. You’re planning to rent a new apartment.
   Many property management companies and landlords conduct credit checks. A low score could diminish your chances of getting the apartment because there may be a concern that you won’t pay the rent at all. Or, you might have to pay a higher security deposit.
3. You’re deciding to make a major purchase.
   You may need your credit card issuer to increase your credit limit. A report showing delinquent accounts or missed payments means you might not get your request.
4. You’re looking for a new job.
   According to the Society for Human Resource Management, almost a third of American employers carry out credit checks on some candidates.  This applies particularly to jobs that involve handling money or require a special security clearance.  Credit issues could raise doubts about your suitability for the position.
5. You’re planning to refinance.
   Are you trying to refinance your loan at a reduced interest rate? Inaccuracies or high balances might give the lender a reason to deny your refinance request.
6. You’ve noticed something suspicious.
   You may have received a notice from the IRS that doesn’t apply to you, a collection call for another person, or details about a credit card you didn’t open. Checking your report will reveal any fraudulent activity.
7. You haven’t checked for a while.
   You are eligible to receive a free copy once a year from the three major credit reporting bureaus – TransUnion, Experian, and Equifax. It makes sense to keep checking your credit even if you are not planning to borrow money. Fixing inaccurate information or fraudulent accounts can be time consuming.  It makes sense to start the process sooner, rather than miss out on a job opportunity or new apartment.

Conclusion

Your credit report will influence your financial affairs and lifestyle.

Credit inquiries from prospective lenders will have a detrimental effect on your score.

These are hard inquiries and lenders will require written permission to access your credit file.

It is advisable to check the terms and conditions before giving permission.

The law also allows other establishments with legitimate reasons to access your file.

Numerous inquiries may label you as a high risk candidate for future loans.

It could be you have too much debt, or you are in financial difficulties and looking for credit to assist you.

It is advisable to regularly check your credit report for fraudulent accounts or false information so you can ensure it’s in the best possible standing.

The post How Do Credit Inquiries Affect Your Score? appeared first on National Credit Federation.

This might be a new car, a new house, a credit card, or a new cell phone plan.

Most landlords, cell phone service providers, and lenders will check your credit rating before accepting your application.

Good credit will result in getting access to the best personal loans.

It will also be easier to acquire a credit card or loan with favorable terms and rates.

The FICO Score Versus the Vantage Score

In the mid – 1980s, the FICO score was generated by Fair Isaac (now called FICO).

It was created to assist lenders in working out which debtors were most likely to default.

In March 2006, the three principal credit bureaus – TransUnion, Experian, and Equifax launched the Vantage Score.

It was a new credit score created to give consistency with the scores provided by any of the three credit bureaus.

There are fundamental differences in the two credit scoring models.

The FICO and Vantage Scores Breakdown

The FICO scoring model is the most famous score used in more than 90% of lending decisions.

The score is composed of five distinct categories of information each with a different weight attached to it:

• Payment history 35%
• Amounts owed 30%
• Length of credit history 15%
• Types of credit used 10%
• New credit 10%

Scores range from 300 to 850. The higher the score, the better.

You will never have a rating of 0, but it will take 3 to 6 months of regular activity to calculate your initial score.

The Vantage Score doesn’t have a precise breakdown, but gives this approximation:

• Hugely influential factors – payment history
• Highly influential factors – age and type of credit, the percentage of credit used
• Moderately influential factors – total debt balances
• Less influential factors – recent behavior, inquiries, and available credit

A report was published in May 5, 2015 by the Consumer Financial Protection Bureau (CFPB).

It compared information from December 2010 with the 2010 census data.

The Bureau found that 26 million US citizens were “credit invisible.”

One in ten adults had failed to establish a credit history with a nationwide consumer reporting agency.

The report also determined that Hispanic consumers, Black consumers, and consumers in low-income neighborhoods are more liable to no credit history with an agency or not sufficient current credit history to produce a credit score.

How Long Does It Take to Build a Credit Score?

Your score is calculated when there is sufficient information on your credit report.

For FICO, you need:

• At least one account open for six months or longer.
• At least one account reported to the credit bureau within the past six months (this can be the same account that covers requirement 1).
• No report of ‘deceased’ on the credit report.

For the Vantage Score, you need an account open for one month or longer and an account published in the past two years.

How Can You Build Good Credit Quickly?

Credit cards are a very valuable credit tool. If you use them wisely they will help you build your credit.

Open a credit card account. 

If you have already created some credit history, search for a card with a low spending limit.

Make small charges that you will be able to pay off straight away and pay the total balance every month.

This will allow you to establish a profile on your credit report of reliable payment and responsible credit use.

Acquire a secured credit card.  

If you have a negative or minimum credit history, a secured card may be the best option.

They are connected to a savings account.  The limit on the card is usually the account balance, or a percentage of the account.

If you’re having difficulty acquiring your own credit card, you can build credit by opening a joint account with someone who has a good credit history.  Another alternative is becoming a certified user on someone else’s account.

You can also get a secured loan. 

Some banks will offer you a passbook loan, CD loan, or credit builder loans.

These are low-risk loans intended specifically to assist you to build credit.

You deposit a specific amount into an interest bearing bank account, and borrow against that amount.

The deposit is the collateral, and interest will be paid at a higher price than interest earned by your deposit.

For passbook or CD loans, some banks will permit you to use an existing certificate of deposit or bank account as collateral.

You need to check with the lender that your on time payments will appear on your credit report.

Your Age & Your Credit Score

There is a wide disparity in credit scores by age.

Usually, the younger an individual is, the lower their credit score will be.

A credit score about 680 is considered good for a college student.

A college student would probably not need a score above 780.

A score of 640 – 680 would suffice.

However, by the time an individual is in his late forties that score is not as good when compared with others in this age bracket.

The older one gets, the easier it is to build up a diversity of credit accounts and the average age of credit.

How to Raise Your Credit Score

Scoring models use the following types of credit report information to compute your credit score.

Have you paid bills on time?

Payment history will be a considerable factor. 

Your score will be adversely affected if:

• You have overdue bills
• Had an account sent to collections
• Declared bankruptcy

Are you at the maximum?

Many scoring systems compare the amount of debt you hold to your credit limits.

If the owed amount is near your credit limit, its likely to affect your score negatively.

While it is considered an advantage to have established credit accounts, too many may negatively affect your score.

Also, many scoring systems consider the kind of credit accounts you have.

How to Repair Your Credit

Apply to get the recent copies of your credit reports.

By law, you are eligible to receive a free credit report from each of the three credit bureaus each year.

Review your credit report for errors.

Read through your credit reports thoroughly and decide what needs repairing.

This could include:

• Erroneous information including payments that have been reported late, accounts that aren’t yours, etc. (You have the right to challenge any information in the report that is incomplete, inaccurate, or can’t be verified).
• Past due accounts that have been sent to collections, charged off, or are late.
• Maxed out accounts over the credit limit.

Tackle past due accounts.

Your payment history affects your credit score more than any other element.

It’s 35% of your score.

Your objective is to have all your past due accounts registered as current, or at least paid.

Bring high account balances below your limit.

Your credit utilization compares your total debt to your total credit.

It is 30% of your score.

The greater your balances are, the more it adversely affects your credit score.

Having maxed out credit cards will cost you precious points.

Your credit score reacts better to credit card balances less than 30% of the limit.

The ideal is below 10%.

To Sum It Up

We all know the advantages of having a good credit score.

And, it shouldn’t be too hard to get yourself in a favorable position.

If you’re just starting out, it will take you a month to establish an account with the Vantage Score, and 6 months in order for FICO to report your credit.

Getting started is the easy part though.

Once your credit score is established, the most important thing is to make sure you do everything you can to keep building positive credit.

The post How Long Does It Take To Build Credit? appeared first on National Credit Federation.

Student loan debts are on the rise compared to any other debt. While not historically the highest it has ever been, consumer debt relative to the gross domestic product (GDP) is still extremely high compared to historical rates.

For some people, this debt has become overwhelming.

People fall behind on payments. It just happens.

Sometimes it’s due to medical issues, a lost job, or unexpected events. And then suddenly their creditor is telling them that they have “charged off” their debt.

This term has left many consumers confused and leads them to ignore the debt altogether. But this could have consequences that reach far beyond the near future.

What Is Charge Off?

Charge off is a term that creditors and other financial institutions use to describe a debt that they think is unlikely to be collected. This term can apply to any type of debt including car loans, credit card debt, and student loans.

For example, if someone has a credit card balance and they do not pay on it for a long period, the creditor will “charge off” the account.

That means that in their accounting books, they do not plan on collecting that debt.

However, this does not mean that the debt is forgiven. The creditor has not given up on collecting the money.

When Does It Happen?

Accounts are charged off if a consumer has not paid on the account for an extended period of time.

This period will be different depending on what type of debt the person has.

Credit card debt generally gets charged off after 180 days or approximately six months.

Installment loans, such as those taken out to buy cars, have a shorter period.

These types of accounts usually become charged off after 120 days or 4 months.

Many people think that an account will not be charged off if they continue making payments, even if that amount does not meet the minimum monthly payment required.

Unfortunately, this is not true.

If full minimum monthly payments are not made, the account can still be charged off.

This may cause serious harm to your credit score.

Do I Have to Pay It Back?

When people learn that charged off means the creditor does not expect to collect, they think that means they no longer have to pay it back.

This could not be further from the truth.

When creditors say they don’t expect to collect on an account that does not mean they will not try.

They have an arsenal of tactics and methods to retrieve the money a consumer owes them.

When collecting on an unpaid account, creditors will usually try to obtain from you directly first.

They will most likely call and send you letters or emails.

After that, there are a few options.

The company could sell your debt to a collection agency or take you to court.

What to Expect

First and foremost, you will still have to pay this debt.

It takes a long time for shares to become “stale, ” and no longer collectible.

Most creditors will get you to court before that ever occurs.

The most common route that creditors take is to send your debt to a debt collecting agency.

The debt collectors then make it their business to make sure you pay.

They will call you, mail you letters, and try to work on payments with you. This can be a frustrating experience.

When dealing with debt collectors and creditors, there are a few ways you can get a little peace and still pay back your debt.

Often, they will happily work out a payment plan for your debts.

If you can pay off a significant amount of the debt in full, they will often reduce the debt.

So be sure to negotiate as much as you can.

If you have filed for bankruptcy due to financial issues, let your lawyer sort it out and have it discharged during the bankruptcy.

If you need a hand in figuring out how to pay back a debt, contact a debt relief agency that can help sort out your financial situation.

Also be aware of what collectors cannot do.

They cannot contact anyone outside of your lawyer or spouse about your debt.

They also cannot bother you at work if you ask them not to.

Collectors must not call at unreasonable hours and cannot swear at you.

They also cannot take protected funds such as disability, social security, or pensions.

If you feel a debt collector is acting unlawfully, tell them to stop, document the behavior, and file a complaint with the Federal Trade Commission.

As a debtor, you should never ignore the debt collectors. These companies can and will most likely take you to court. So ignoring them will not work in your favor should it end up in court.

Additionally, consumers should be aware that charged off accounts will affect their credit score significantly.

Charged off accounts remain on credit scores for seven years, even if they have been paid off.

What to Do

The best thing you can do with a charged off account is to pay off the remaining balance as quickly as possible.

This will prevent debt collectors or creditors from taking you to court and will also reduce any stress or anxiety.

In fact, working with the original creditor is far easier than dealing with a collection agency. So try to negotiate the charged off account before it has been sold to a debt collection agency.

As you are paying off the balance, make sure that every other item that affects your credit score is in good standing.

Keep your credit utilization low.

Do not take out new loans.

Be sure to make all other payments on time and pay at least the minimum monthly amount due.

If you are taken to court, be aware that the judge can order wage garnishment. So it is always better to avoid a court room if possible.

A charge off stays on your credit report for seven years from the date the account became delinquent.

If you had a good credit score before a charge off, it could drop your score by 100 points or more.

If your credit was already low, it may only drop your score 30 points.

Either way, a charge off is a detriment to your score. Unpaid charge offs can prevent you from receiving loans for a house or car.

There are, however, some ways to get the negative mark removed from your credit report.

But, it will take work and persistence so be prepared to invest some time.

If you are negotiating with the original creditor to reduce the debt for a lump sum payment, include the stipulation that they remove the negative credit status.

Lenders will often allow this to be included in the negotiation, which can help save your credit score.

Make sure always to obtain a written agreement for any negotiated sum. Without a written contract, the creditor has no obligation to follow through on their side of the deal.

If the debt has been sold to a debt collection agency, you will have two negative marks on your report. One from the original creditor and one from the collection agency.

This makes the situation a bit more complicated.

First, negotiate with the debt collection agency just as you would with the original creditor.

Work towards a lump sum lower payment and an agreement to remove the negative mark from your credit score.

Get the agreement in writing.

Then, send what is called goodwill letter.

This letter lets the creditor know that a payment plan has been worked out with the company it was sold to. It also gives you an opportunity to describe the circumstances that lead to the debt issue in the first place.

Include a copy of your agreement with the debt collection agency.

If you do not get a response, be persistent.

Make phone calls and send letters as needed.

Goodwill messages do not always work, but when they do they can significantly help your credit score.

Conclusion

Charge offs are not something anyone wants to deal with.

Consumers have to invest a lot of time and energy into taking care of them. As well as trying to recover a credit score that has been damaged by a charge off.

However, there is hope.

With a few steps and diligence, you can work through a charge off.

The post What Happens When an Account Is Charged Off appeared first on National Credit Federation.

The truth is that about 10% of your FICO score is made up of what is called “new credit.” This new credit has a broad range of meanings and impacts on your score.

Have you ever wondered how new credit affects your credit score?

Individuals today tend to have more credit and shop for new credit more often than any time in recent memory. Credit scores mirror this reality.

Opening a few new credit accounts in a brief time frame can be dangerous – particularly for individuals who don’t have a long financial record.

Your FICO score consider a few components, including how you look for credit.

What happens when you open a new account?

Opening a new credit card can help your credit if it is your first card.

In different circumstances, opening another credit card could hurt your FICO rating.

Another credit card brings down your average credit age.

Fifteen percent (15%) of your FICO score depends on your credit age. This is a measure of how long you have been utilizing credit.

As a rule, the more experience you have with credit, the better your credit score will be.

Two different ages factor into your credit score in the new credit portion. There’s the age of your most established record, and the combined average age of your accounts.

Opening another card will bring down the average age, particularly if it’s been awhile since you last opened a credit account.

An inquiry is put on your credit report when you open another card. These constant dings on your report can build up in the long run and have a negative impact on your report.

Contingent upon the other data in your credit report, an extra inquiry could cost you a couple of credit points immediately.

It may not seem like much, but it could be the difference between a good and bad credit score!

How Your Credit Score Affects Your Interest Rate

Opening another card could increase your utilization ratio on the off chance that you make a significant charge on it that day.

That is because 30% of your FICO score is dependent on the amount of your available credit being utilized.

So when the credit utilization ratio increases, your credit score drops.

Watch outif you’re opening up a store charge card and putting your purchase on the new record.

Store charge cards are known for their low credit limits, and a major buy could spike your credit utilization ratio.

Opening a New Credit Card Isn’t All Bad

Sometimes, opening another charge card can improve your credit score.

If you don’t make any new purchases on your charge cards, your average credit usage will drop, and your FICO score could increase.

Opening another charge card and utilizing it well can help support your FICO score over the long haul..

Make certain that you charge just what you can stand to pay on your new card and make your regularly scheduled payments on time.

Adding an extra credit line with a good history can help your score by bringing down your overall credit use ratio.

 When we talk about new credit? What are we really talking about? What is considered new credit?

In general, new credit can be categorized in a couple of different ways.

However, the overall understanding of what a new account is when it comes to your credit score is pretty straightforward.

Installment loans, such as auto loan, student loans, furniture purchases, etc. are all included as installment loans.

But, they have a lesser effect on your credit score then revolving credit does.

Opening a new credit card as opposed to a student loan is going to have a much bigger effect on your credit score.

Lenders look at new accounts to see what kind of credit account you are opening and try to hazard a guess as to why you need new credit in the first place.

Also included in the catchall category of a new credit:

• Credit cards from retail stores such as an Amazon credit card
• Gas station credit card
• General credit cards
• Any loans that you take out from the bank
• Mortgage loans
• Student loans
• Any other new account that you may open

What is the overall takeaway from learning about new credit?

Opening a new credit account can potentially increase your credit score.

But, don’t open more accounts than you need. This can have an adverse impact on your credit score.

Especially in the case of credit cards, many people think that opening many new accounts will improve their credit since it decreases their credit utilization ratio.

However, studies have shown that if you have more credit available, you often spend it.

This is because you perceive it as being your own money that you earned, especially with incentives from the credit card company to spend more often.

There are a couple of different ways in which opening a new account can often decrease your credit score.

Because it means that you will have to open an inquiry into your credit score, this will automatically reduce her score by a few points.

Also, it decreases your average account age by a long shot because you have a brand new account. This gives off the perception that you don’t have more of an established credit history.

It is not worthwhile to continue opening new accounts when they decrease your average account age and worsen your credit score.

Essentially, you should avoid unnecessary new accounts at all costs.

You should focus on keeping your credit utilization ratio low by lowering your spending rather than opening new accounts.

Do not sign up for retail cards or other new accounts with low credit limits.

The constant hard inquiries add up to cause damage to your score.

The best tips to keeping your credit score intact when getting new accounts include:

• Not applying for multiple cards at a time
• Knowing your credit utilization ratio
• Keeping older accounts open
• Keeping the average age of auditors high
• Not having more accounts than you can handle.

Here’s how credit score is determined outside of New Credit:

1. Payment History
2. Credit Utilization Ratio
3. New Credit
4. Length of Credit History
5. Type of credit

This concludes part 5 of 5 on how a credit score is determined and why it’s so important for you, an American financial consumer to understand this.

The post How Credit Score Is Determined Part 5 – New Credit appeared first on National Credit Federation.

Well, lucky for you, it actually can in some ways.

That’s because a major aspect of your credit score makeup comes from the length of your overall credit history. As well as the average length of credit history on individual accounts you have.

This article will break down this crucial element of your credit score, and help you to understand how and why this has an impact on your economic and financial health.

Should I Close My Credit Card Account If I Don’t Use It Anymore?

So, there are two different ways of looking at the issue of whether or not you should close your old accounts.

The first side is pretty complex.

Closing an old account that is no longer in use, or is rarely in use, makes it more difficult for people to steal your identity. Additionally, it might help you avoid some annual fees on accounts which charge you to use the card each year.

What happens if there’s still a balance on the card that you’d like to close?

It’s usually possible to close the account while still making payments. However, you’ll need to confirm that there won’t be any additional fees if you choose to do this.

The other side of the coin is that closing the account might have a negative impact on your credit score in the end.

This has a lot to do with maintaining a low debt-to-credit ratio.

If you close an account, that essentially means that your debt remains the same (via the balance you have on other cards and accounts) but your available credit decreases by whatever the upper limit on the card you closed was.

For example, if you have a total credit limit of $4,000 and two credit cards, and you have a balance of $,1000 on one card and $0 on the other, you might think about closing the old card which you are not using.

However, if both cards have a limit of $2,000, then your available credit just dropped from $4,000 to $2000, while your debt remains the same.

Therefore, your utilization ratio increased from 25% to 50% by closing this old account.

This is the main drawback to closing an account.

Total length of credit history and average length

The other aspect closing an account can affect is your total and average credit history length.

Credit bureaus use average account length to see if you have a reliable and long credit history.

Let’s say your oldest account is 5 years old. Closing that account will decrease your total credit history since it will no longer be factored in. Whichever account you opened afterwards will now become your oldest account.

The general consensus is that you shouldn’t close your oldest credit account, even if you aren’t using it. This is because it will decrease the overall length of your credit history, which has a negative impact on your credit score.

What’s The Average Credit Score For Americans?

The above information may lead you to wonder what is considered to be a good credit score in America anyways?

The average score for the United States is 687, according to the Census Bureau.

However, that definitely ranges by state. Many states in the southeast are reporting generally lower scores and states in the west coast and northeast generally report higher scores.

A good credit score is considered to be above 600.

But, it is all about context, and your credit score definitely isn’t the only thing that matters in determining financial health.

What’s the average account age for Americans?

Research shows that the average age of accounts for Americans has been increasing over time, as more Americans are working on increasing their credit history.

The average age of credit history is about 5-6 years.

However,  this will vary by state and also by demographic group and age group in the general population.

The Best Length of Credit For Certain Types of Credit

The best average length of credit history will definitely vary depending on what kind of credit account it is.

For example, a credit card account has a very different impact than a mortgage.

The best average age for a mortgage is older, whereas the best average age for a credit card is about mid-range.

Having a long history on your mortgage will do more to build your credit score than having a long history on a credit card.

But in both scenarios, the improvement banks on making regular and timely payments each month and staying within your reasonable credit limits.

Your credit history and credit mix account for about 10% of your total credit score.

This is essential in making sure creditors and potential lenders can see that you have a responsible credit history and will be reliable in paying back your loans.

Things you should never do when it comes to keeping your credit score healthy

In terms of length of credit history, there are some hard and fast tips you can follow about what not to do if you want to keep your credit healthy.

First off, never close multiple accounts at once.

This is pretty much a guarantee of decreasing your credit score because your credit utilization ratio will go up.

Also, never just throw away your credit card, because it will not actually close the account.

Go online or to the bank in person to close your account.

Lastly, never put all your balance on one card and none on the others.

This will also mess up your utilization ratio.

Conclusion on how to have a good average mix of account history lengths

In general, your want your average account age to be as old as possible.

You don’t want too many accounts, and try to keep your balances low.

Why does it matter?

Well, the longer your account history, the more evidence a lender has to judge whether you will be a responsible borrower.

From their perspective, the more information, the better.

The credit history duration shows how experienced you are with working in the credit system.

If you have a long history, it can be presumed that you know how it works and what is expected of you.

The specifics of how a certain choice could influence your overall history of loan repayments relies on which calculation metric and system is being utilized.

It’s advantageous to keep your most established credit accounts open and use them at least every once and a while.

Regardless of whether the impacts of shutting down your oldest accounts are quick or postponed, doing so will typically mean your credit score will drop.

Try to open up a few credit cards early in your credit history, and then keep them for a while without opening new accounts after a couple of years.

Doing this will give you a stable and growing credit score.

It’s your score to keep up. So remain well-informed on the elements that may influence your credit well being and settle on the choices that are appropriate for you.

Here’s how credit score is determined outside of Length Of Credit:

1. Payment History

2. Credit Utilization Ratio

3. New Credit

4. Length of Credit History

5. Types of Credit

This concludes part 4 of 5 on how credit score is determined and why it’s so important for you, an American financial consumer, to understand this.

The post How Credit Score Is Determined Part 4 – Length of Credit History appeared first on National Credit Federation.

Many people think that if they only master these two aspects, they will have a perfect credit score.

But, those two factors are not the only things that determine your credit score. As much as those two things matter, the different types of credit you have determines about 10% of your credit score.

This is called your “credit mix.”

Credit bureaus consider your mix of credit  to include credit cards, student loans, real estate-related loans, and other things.

Having different types of credit which are all managed responsibly has a significant impact on your credit score. This is because it demonstrates that you are dependable in repaying your loans.

This article will explain a few different types of credit you can have and how to manage them responsibly.

Your credit mix is a crucial aspect for lenders to figure out whether they are comfortable lending you money.

How Many Types of Credit Are There?

A tradeline is essentially an account added to your credit history.

One common type of trade line is called an installment loan. An installment loan has frequently scheduled payments that are repaid over a set period of time.

For example, an installment loan might require the borrower to make a payment every month (the most common form) or twice a month, or even once a week.

The time it takes to repay an installment loan can range anywhere from just a few months to over 30 years like a typical mortgage. There is also a set amount of interest on an installment loan.

Installment loans come in many different forms, which will be detailed below.

Mortgage

A mortgage is an installment loan you take out to purchase a home. In place of paying rent each month, you pay off a set portion of the mortgage, plus interest.

The total balance on your installment loan is not the most important factor when it comes to your credit score. The most important factor is payment history.

Consistent payments will demonstrate active borrowing and spending behavior. This will make it possible for you to obtain a lower interest rate in the future.

Taking out a mortgage can either benefit or hurt your credit score depending on how many other credit lines you have open and your patterns of repayment.

Bank Credit Card Loan

A bank credit card loan is another type of installment loan. Getting a credit card is ideal for short-term pain expenses, but it’s not the best way to build up your credit score.

Getting a personal loan from the bank will have a better impact on your credit than taking out a credit card. Since credit cards are revolving debt, they have the ability to have a greater undesired impact on your credit score in the long run.

Retail Credit

Retail credit cards have a similar impact on your credit score as bank credit cards. However, you can only use them at one particular location, so it may be harder to rack up debt on them.

If you keep your balance down and make payments on time,  your credit score should not suffer.

Gas Station Credit

Gas station credit cards are exactly what they sound like they are. They are credit cards which can only be used at a gas station from which it is issued.

They show up just like any other credit cards on your credit report.

If you can demonstrate responsible repayment, it will have a positive impact on your credit history. If you do not repay your debt on a gas station credit card with regularity, it will have negative consequences.

Collections

Collections agencies are organizations which purchase debt from lenders on the penny after it has been determined that the person probably won’t pay back their debt.

An account at a collections agency has an awful impact on your credit score. Even worse, it will stay there for up to 7 years depending on the state.

Tax Lien

A tax lien is enforced by law when you do not pay your taxes.

A lien is the government’s claim on a consumer’s assets due to tax debt which is owed.

It’ll have an adverse impact for multiple years.

It is a severe negative ding on your credit report.

Bankruptcy

Depending on your state, bankruptcy shows up as an account on your credit report for up to ten years.

The longer they’ve been on your credit report, the less important they become to your credit history.

During bankruptcy the debt is discharged and permanently forgiven, but it will have a major adverse effect on your credit history and your credit score.

How Does Your Credit Typically Start?

The average American has a few different types of credit accounts, somewhere between 3-5. This usually includes one or two credit cards, a student loan, a mortgage, and auto loan.

A student loan is typically the first installment loan which shows up on someone’s credit history. This is becoming more and more common in recent times as students have had to take out more loans to pay off their university tuition and other costs.

It is evident that student loans are growing and growing. Some people never even end up paying off their student loans.

However, since it is often the first type of installment loan that will be on your credit history, it is crucial to demonstrate responsible borrowing habits early on and set a good precedent for future loans.

How to build up your credit

1. Try a secured credit card

If you have no credit history, you need to start with a credit card. A guaranteed card means it is backed by a cash deposit you make up front, so you can never actually spend beyond your means here.

You use it like you would any other credit card: Buy things and then make a payment by the due date.

The money you deposited is utilized as security if you neglect to make payments. You’ll get the deposit back when you close the account. So in a way, it’s kind of like a savings account.

2. Co-signers

You might be able to use a cosigner to help give you some credit in the loan industry.

However, that person needs to trust you, because they are the ones who will suffer if you end up not paying it back.

3. Consider applying for a credit builder loan

Normally, the cash you get is held by the moneylender in an account and not discharged to you until the loan is paid off.

It’s a constrained savings fund in many ways, and your installments are accounted for to credit authorities.

These advances are frequently offered by credit unions or group banks.

4. Work on the length of your accounts

Keep accounts up and open for as long as you can. Try not to open new accounts.

You want your average account history to be as old as possible to keep your credit score healthy.

There are some times when you really should close out your old accounts, because you don’t want to have too many accounts open at any given time, but length matters more than numbers.

5. Always make payments on time

Set up timers, phone alarms, and autopay to keep you accountable with paying your bills and loans.

Try to pay off your balance on credit cards in full each month to work on keeping your credit utilization ratio low.

If you work on the positive aspects of your score, you will set yourself up for success and spend less time doing damage control down the road.

How else is credit score determined?

1. Payment History
2. Credit Utilization Ratio
3. New Credit
4. Length of Credit History
5. Type of credit

This concludes part 3 of 5 on how credit score is determined and why it’s so important for you, an American financial consumer, to understand this.

Click here to go back to part 2

The post How Credit Score Is Determined Part 3 – Types Of Credit appeared first on National Credit Federation.

What happens if you keep less of a balance on all your credit cards, but sometimes forget to make payments? Or, even worse, what happens if you have a high balance on your credit card and miss payments often?

This article aims to help you understand how much making timely payments has an impact on your credit score.

All in all, it is one of the most important factors in determining your credit score.

Missing payments on a regular basis are one, or possibly the most important, aspect which goes into your credit score.

For example, say you carry $100 on a credit card with a limit of $1,000. Your credit utilization ratio is excellent in this example, only 10% of available credit being used.

What would happen if you missed payments on this card for three months, even though your balance is not high?

The truth is that your credit score will tank because missing payments makes you an extremely unreliable borrower. Your credit score is what helps lenders know whether or not you are likely to pay back your loans. Knowing whether you will pay them back on time is treasured information for lenders.

What happens when you go late on a payment?

This section will explain in detail what happens after one month, two months, and three months of missing payments.

The average american credit score, according to Experian, is 687.

Now, you don’t have to fret if you’ve only missed a payment by three or four days. This short of a payment delinquency usually will not ever be reported to the credit reporting agency.

Most banks and credit card companies only really care if you’re late on your payment by 30 days or more.

That is not to say that you should consistently be paying multiple days late. But, it is not the end of the world.

However, credit card companies and banks certainly have the right to administer their late fees. These are often extremely harsh, so don’t push it. Creditors also have the right to increase your interest rate if you have missed even one single payment

First, let’s discuss what happens if you end up 30 days late on a payment.

Because your payment history and appropriate payment behavior is the most important factor in your credit score, it is critical to understand the consequences of missing a payment, even by only a month.

This applies to any loan payment, be a credit card, your mortgage payment, your auto loan, or student loans.

According to FICO, if you have a perfect credit history with no late payments ever, a single payment which is late by 30 or more days will have an impact of 90 to 110 points being lost from your credit score.

Considering that the range of credit scores is only a couple hundred, this is a huge impact and will mess up your reputation it was current and future potential lenders.

Not only does it lower your credit score, but it also subjects you for late fees and other consequences.

It is not guaranteed that it will lower your credit score. It is up to the creditor whether they choose to report the incident to credit reporting agencies or not. But, better to play it safe and assume that they probably will say it.

Now, let’s discuss what happens if you miss the same payment by 60 days instead of 30 days. Your credit score will drop by an additional 60 to 80 points, possibly in addition to the first loss of points.

These late payments can remain on your credit report for up to seven years, even just with one late payment.

However, over time the delayed payments have a lesser impact on your credit report, and it will not ruin your financial life, so it is nothing to be too stressed over.

After 90 days, you will likely experience another drop of 60 to 80 points on your credit report.

This means that if you have a perfect credit history, one late payment of over 90 days and possibly drop your credit score up to close to 300 points.

However, situations may arise where you cannot always pay off your debts promptly.

Instead of panicking and coming anxious about the situation, you should always try to contact your lender and try to make additional arrangements or come up with a modified payment plan.

Most lenders, if treated respectfully, will understand your situation and would rather try to work with you and report an unpaid installation on loan.

Long Term Affects On Your Credit Score With A Bad Payment History

It’s possible to have never made a late payment, but carry a high balance, and still have a credit score over 700. However; no matter how little your balance on your credit card or loans is, making timely payments is crucial when factoring your credit score.

Even if the credit card balance is low, if a person has paid multiple late payments on a consistent basis, it is unlikely that their credit score will be any higher than five or six hundred.

Even though it would seem like someone who borrows a lot of money would have a lower credit score, that is not the way it works.

The amount isn’t the matter, but the patterns of behavior about repayment are everything.

It doesn’t matter how much money you borrow, as long as it is within your means to make consistent and timely payments.

When lenders and future potential creditors look at your credit history, if they see that you borrow a lot of money and pay off on time, they don’t have any problem lending you more money because that is a benefit to them because they get to charge you high interest rates anyways.

The most important thing is to make timely payments, always.

What if I never pay off my debts?

If you continue to hold your delinquent loans and never pay it off, there are a few different stages of the process which will happen to you as lenders try to enforce the repayment of the loan they have given you.

Most lenders will not simply let that go because they know they can try to mine as much money as possible out of consumers who are in dire financial straits.

This is why it is crucial never to let the system wear you down, and know that your value as a person far surpasses your debt. There are just a few logistical things you need to be aware off if you choose not to repay your debts.

First of all, there is always a way to make it work. Set up a payment plan, ask for lower interest rates or extensions on making payments, or something else.

Lenders are human beings too, and they don’t necessarily want to make you broke and miserable.

Here are the things which will happen if you don’t pay off your debt:

• A chargeoff is when the lender writes off your debt and says that it is unlikely ever to be repaid. This is the functional equivalent of saying it is a lost cause. After six months of not making a payment, that is when the charge-off usually occurs.
• After this point, the lender essentially sells the debt to a collections agency. They make a dollar or two off of the debt. At that point, it is up to the collections agency to decide if they are going to try to push for the debt to be repaid. If it is a tiny amount, it is not usually worth their effort. But if it is a significant amount, they will likely never stop badgering you unless you move to stop them.
• Sometimes, debt collectors will sue a debtor for non-repayment. If they take the debtor to court, the court will file a judgement for or against the debtor. That decision becomes public record like any other criminal or civil suit.
• Garnishment is when you fail to repay your debts, and the lender withholds some of your pay by force. It is questionable whether this is constitutional. But they can garnish up to 33% of your wages from a paycheck.

Here’s how credit score can be determined outside of missed payments:

1. Payment History
2. Credit Utilization Ratio
3. New Credit
4. Length of Credit History
5. Type of Credit

This concludes part 2 of 5 on how credit score is determined and why it’s so important for you, an American financial consumer to understand this.

Click here to go back to part 1
Click here to go to part 3

The post How Credit Score Is Determined Part 2 – Payment History appeared first on National Credit Federation.

It may be because your credit score was not high enough. The unfortunate reality is that far too many people don’t know their credit score and the factors that come into play in determining it.

This article will cover in depth one of the most important aspects which goes into determining your credit score: your credit utilization ratio. The basic idea of the credit utilization ratio is how much of your available credit are you actually using on a regular basis?

A low credit utilization ratio means that you have a lot of available credit, but you are using a little of it.

Having a high credit utilization ratio means that you are using a large portion of the credit you have available.  The ideal credit utilization ratio is approximately 33%, depending on which financial advisor you ask.

That means you should try to be using only a third of the available credit you have.

Credit cards, loans, or any other credit lines also factor into this ratio. You want to have a lot of available credit, but only use a little of it.

For example, say you have four credit cards with the credit limits below.

XYZ has a $40,000 limit
ABC has a $20,000 limit
NYC has a $75,000 limit
HJI has a $30,000 limit

Each of these cards’ credit limit is report as your “high credit limit” on your credit report.

Lets say you use each of these cards regularly and they have the outstanding balances listed below:

XYZ has a balance of $13,500
ABC has a balances of $18,000
NYC has a balance of $47,000
HJI has a balance of $17,000

If this were the case you’d have $95,500 in utilized credit out of a possible $165,000 available. This would you you have a total credit utilization of 58%, which is higher then the recommended amount. (Remember the highest we suggest is 30%

According to FICO, the average utilization ratio for the nation is a bit above the recommended 33%

On the other hand, say you have those same four credit cards.

But this time, the spent balance on XYZ is $6000, ABC is $5000, NYC is $7000, and HJI is $2,000.

If this were the case, you’d be utilizing $20,000 of your available $165,000 or a 12% utilization rate.

What happens when your utilization ratio goes out of whack?

It is possible that if your balance is too high on too many of your credit cards, you end up with a high credit utilization ratio. This will cause your credit score to fluctuate negatively.

You may be wondering what is considered a high utilization ratio by credit card companies and by financial advisors.

A high utilization ratio is pretty much any ratio over 1/3, or 33%. A low credit utilization ratio is ideal in terms of contributing to a high credit score. A low credit utilization ratio is considered anywhere under 1/3 for example, 20%, 15%, or 10%, which are all considered low and healthy credit utilization ratios.

A high credit utilization ratio can lower your credit score significantly over time, which is not desirable. If you have a high credit utilization ratio over a long period of time, it signifies to lenders that you may not be reliable in paying back the money that you borrowed a timely manner. Or that you do not practice responsible spending habits in general.

However, if you have a high credit utilization ratio in the short-term, it probably have a bad affect on your credit score. This is especially true if you pay off the full balance of your credit card before the end of the monthly billing cycle.

If you put a lot of money on a credit card all at once, and then pay it off before the billing cycle changes over, it should not have an effect on your credit utilization ratio at all.

The only time it can affect your credit score is if you are carrying over a balance month to month, therefore it is appearing on your monthly statements which are seen by credit reporting agencies.

Long Term affects on your credit score with a high credit utilization ratio

In general, having a high credit utilization ratio will have the biggest impact on your credit score over a longer period of time.

A high credit utilization ratio will lower your credit score consistently over time, and these impacts can add up in the long run.

Here are 11 things your credit utilization ratio can be impacted by:

• As discussed above, your credit card balance is the biggest influencing factor which goes into determining the credit utilization ratio.
• Car Loan- A car loan impacts your credit utilization ratio by increasing both the available credit and the credit being used. As you pay off the loan, you have more available credit and less being utilized, so it improves your utilization ratio. Pretty much the same concept goes for paying off any loan: it will improve your credit score.
• A mortgage is also something which can impact your credit utilization ratio. If you have a mortgage, it means that you were taking out a loan for a portion of your home. The amount of the mortgage contributes towards your available credit. As you pay it off each month, that means there’s less of the available credit being utilized. However, the available credit is still the same, thus decreasing your utilization ratio, similarly to paying off a car loan.
• You might think that student loans are a major detriment to your credit score, but so long as you’re paying off the required balance each month, paying your student loans can actually improve your credit history. Because most student loans are in such huge quantities, that vastly increases your available credit amount. That means if you’re putting a lot of money on a credit card, it has proportionally less impact than it would have if you did not have student loans.
• Business credit cards also influence credit utilization ratio. Even if the card is for business purposes, so long as it is in your name, it will be counted towards your utilization ratio.
• Credit cards with very high credit limits are usually a great influence on your credit utilization ratio. As long as you’re not using a lot of the balance on it, a high credit limit means that you have a lot of available credit. So long as you do not use a lot of it, it will help keep your credit utilization ratio very low.
• Personal loans, similar to mortgage or car loans, can have a significant and strong influence on your credit utilization ratio. If you take out a large personal loan, you’re increasing both your available credit and your credit being utilized. That means that it could sway your credit utilization ratio either way, either making it lower or higher.
• HELOCS (home equity lines) will either impact your utilization ratio positively or negatively.
• Increasing or decreasing the number of authorized users on an account or opening a joint account will also impact your utilization ratio. This is because it will increase or decrease your amount of available credit, thus changing the ratio.
• The total number of accounts with outstanding debt also has an impact.
• The total amount of debt still owed to lenders is a major portion of the ratio, similarly to your credit card balance.

All of the above factors do not have an equal impact.

Revolving credit has proportionally an 85% impact on the ratio, while installment loans proportionally only have a 15% impact.

The reason behind this is simple:

FICO doesn’t treat all different types of accounts equally. For example, a student loan and a credit card are considered very different types of debt and come into play with different impacts. Credit cards are revolving debt, and they tend to have a lot of variation in their balances.

These are the most crucial type of debt in determining the utilization ratio. In other words, keep your credit card balance low to keep your ratio low.

Having a huge student loan or mortgage doesn’t matter so much, unless you aren’t making the required regular monthly payments. It takes longer to see the benefits of making regular payments on installment loans.

In the category of amounts owed, credit card debt is much more important. It has the biggest impact on your utilization ratio.

But, it can also do the most damage to your credit score if the ratio is high, or if you don’t make timely payments.

Closing unused or unwanted credit cards can improve your credit score, even though it can increase your utilization ratio. However, be careful not to get rid of your available credit too quickly.  Luckily, the ratio is not all that determines your credit score.

Here’s how credit score is determined outside of Utilization Ratio

1. Payment History
2. New Credit
3. Length of Credit History
4. Type of Credit

This concludes part 1 of 5 on how credit score is determined and why it’s so important for you, an American financial consumer, to understand this.

Click here to go to part 2

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