How Your Tax Refund Can Help Your Score Better Credit

Use your tax refund the right way and it could help build your credit.

If you’re getting a tax refund this year, you’ve got three major options when it comes to using the money: You can save it. You can invest it. Or you can splurge. But break things down a little further, and that check (back) from Uncle Sam can help you build credit, too. For serious.

Here are six ways your tax refund could help you build — or even establish — your credit scores.

1. Pay Down Credit Card Balances

Second rule of credit scores: Keep your debt level below at least 30% (and ideally 10%) of your total available credit. Anything beyond that is bad for your credit utilization ratio. If you’re over that limit or, worse yet, bumping up against your limits, putting your tax refund toward your credit card balances can help improve your credit score. Better yet …

2. Pay Off High-Interest Credit Card Debt

Because those balances are going to spike pretty fast. Plus, you’ll be saving money in the long run. Good rule of thumb when it comes to dealing with multiple credit card balances: Make all your minimums, but put more money toward either the smallest (because motivation) or the one with the highest annual percentage rate (because, like we said, it’ll cost you less). You can see how your credit card use is affecting your credit by viewing two of your scores, updated every 14 days, on Credit.com.

3. Get a Secured Credit Card …

If you’ve got thin-to-no credit, consider using your tax refund to open a secured credit card. Secured credit cards are easier to get than other types of credit cards because they require the cardholder put down a deposit (usually $200 to $300) that serves as the credit line. (Or vice versa. That’s a little bit of a chicken-or-the-egg thing.) In any event, if you’re close to cash-strapped, you can use your tax refund to open the card. That line of credit will help you establish a payment history, the most important factor among credit scores — so long as you pay your charges off by their due date, of course.

4 … Or a Credit-Builder Loan

Credit-builder loans, available at your local bank or credit union, are essentially the installment loan version of a secured credit card. You “borrow” money (that’s where you tax refund comes in), which gets put in a savings account, then you make a series of monthly payments and get access to the money once the “loan” is paid in full. Credit-builder loans usually involve paying some interest on the money you’re borrowing/depositing, but they basically provide people who otherwise don’t have credit with the opportunity to build some.

5. Pay Off That Collections Account

OK, here’s the thing: Paying a collection account probably won’t get that item off of your credit report. Legally, it can stay there for seven years plus 180 days from the date of the delinquency that immediately preceded collection activity (more on how long other stuff stays on your credit report right here). And there’s no guarantee it’ll boost your score once it’s paid off.

Still, most credit scoring models treat paid collections differently than unpaid ones (they tend to carry less weight) and the newest scores actually ignore paid collections entirely. Plus, some collectors are changing their tune when it comes to pay for removal deals and immediately reporting the account to the credit bureaus.

Quick side note: We’re talking about legitimate collection accounts here, so if a collector comes calling, be sure to verify the account belongs to you. There are debt collection scammers out there and it’s not unheard of for a legitimate collector to get the wrong guy. Under federal law, collectors are required to send written verification of a debt to a debtor five days after first contact, so that slip of paper should give you an idea of whether you’re liable for the payment.

6. Start an Emergency Fund

Yeah, we know, money in a savings account isn’t going to do anything for your credit score … right now. But socking away some dollars for a rainy day can keep you from going to the old credit card when one comes. And that’ll keep your credit utilization on the right side of 30%. Plus, you’ll skip the interest. If you’re not carrying any debt and your credit is in OK shape, consider putting Uncle Sam’s check in a high or at least higher-yield savings account. Your credit score may thank you down the line.

Not getting a tax refund this year? No worries, we’ve got more ways you can fix your credit here.

Got more questions about building credit? Ask away in the comments section and one of our experts will try to help!

Image: portishead1

The post How Your Tax Refund Can Help Your Score Better Credit appeared first on Credit.com.

Hate Credit Cards? There’s Still a Way to Build Credit & Avoid Debt

hate-credit-cards-but-need-credit

If you want to build credit, don’t want to go into debt and don’t want to use a credit card, you’ve got a bit of a problem. You can definitely build credit without going into debt, but that generally requires using a credit card. There are plenty of ways to build credit without using a credit card, but they generally require going into debt. It’s frustrating, we know.

Things like utility payments and rent are sometimes reported to the credit bureaus and are factored into a few credit scoring models, but it’s far from the industry standard right now. There’s some good news, though: There’s a debt-free, low-maintenance, credit-building strategy you might not despise.

Step 1: Check Your Budget for a Recurring Bill

Most people have at least one consistent monthly expense. These are often subscriptions (like Netflix or a magazine) or small bills (like an insurance premium or a cell phone bill). Many of these can be set to automatic payments, and many of them can be paid with a credit card without an additional credit card processing fee. See if you can find one. Got it? OK, you’re not going to love this next step, but give it a chance before you freak out.

Step 2: Get a Credit Card (Wait, What?)

Yes, this strategy requires a credit card, but you hardly ever have to use it. You may never take it out of your wallet (and, really, you could probably just keep it locked up at home). If you don’t have a credit card, you’ll first want to check your credit score, which you can do for free on Credit.com, to see what you might be able to qualify for. There are credit cards for people with bad credit and no credit, but keep in mind that some credit cards carry annual fees or require a deposit in order to access a line of credit. Still, you can get a credit card for a relatively low cost (or for free), and if you pay off the balance on time every month, your purchases won’t accrue interest. (See? No debt.)

Step 3: Pay Your Small, Recurring Bill With Your Credit Card

Set up your automatic payment to hit your credit card.

Step 4: Pay Your Credit Card Bill

You can either manually pay your credit card bill as soon as the other bill payment hits, or you may want to set up another automatic payment, this time for your credit card. Make sure you’re paying it on time and in full each month, because that’s what’s going to build a positive credit history and keep you from going into debt.

Step 5: Check Your Progress

It’s easy to “set it and forget it,” and that’s sort of the idea here, but you don’t want to forget it and accidentally miss a payment because you haven’t updated your account or a payment didn’t go through as it was supposed to.

Some Extra Tips

When you’re deciding if this strategy is right for you (and it’s not for everyone), remember that part of what builds a good credit score is using as little of your available credit card limit as possible. So, if you have a very low credit limit on your credit card, the bill you choose to pay with it should be fairly inexpensive, if you want to get the most out of this strategy. Making sure this goes right requires attention to detail — it can backfire if you miss a credit card payment, max out the credit card or miss the bill payment and it ends up in collections — and it’s also a good idea to check your credit score regularly to make sure it’s having the effect you want it to.

Find the perfect credit card for you using our credit card finder tool.

Image: eclipse_images

The post Hate Credit Cards? There’s Still a Way to Build Credit & Avoid Debt appeared first on Credit.com.

Do You Start With a Credit Score of ‘0’?

what_is_the_lowest_credit_score

When you think about it, credit scores have a lot in common with the SATs: They stress people out, involve tough-to-answer questions and play a huge role in determining whether your applications (albeit for financing) get denied.

There’s another notable similarity, too, which you may not know about: When it comes to credit scores, you can’t get a zero.

The Lowest Possible Credit Score

Most major credit scoring models, including standard FICO and Vantage Scores, have a range of 300 to 850, with 300 representing the lowest, or worst, possible score and 850 representing the highest, or absolute best. (You can learn more about what constitutes a good credit score here.)

Some specialty scores, including the FICO Industry Option scores, have a lower minimum (250), but, generally, no matter what model we’re talking about, “you don’t start at zero and, let’s say, work your way up to a respectable score over time,” Barry Paperno, a credit scoring expert who worked at FICO for many years and now writes for SpeakingofCredit.com, said in an email.

You also don’t really start at a 350. That’s because until you meet a model’s minimum criteria, you won’t have any score at all. In that case, the credit bureaus will let a lender (or landlord or cable company or anyone else requesting your credit as part of their application process) know that you’re score-less.

“When a score can’t be computed because the credit report doesn’t meet the minimum scoring criteria, an alpha or numeric ‘exclusion code’ is transmitted to the requester indicating one, that no score can be calculated, and two, a general reason why the credit report didn’t meet the minimum scoring requirements,” Paperno said.

No Panic Necessary

Thin-to-no credit can certainly make it harder to secure a loan, but there are lines of credit specifically designed to help people in that demographic (see secured credit cards, student credit cards or credit-builder loans) establish a credit history. And, after you get ahold of some starter credit, it shouldn’t be too long before a model is able to calculate your score. For instance, the minimum criteria for the FICO scoring models, Paperno said, generally includes:

  • At least one account opened more than six months ago
  • At least one account reported to the credit bureau within the past six months
  • No indicator on the credit report that the consumer is deceased

Moreover, once you meet this criteria, you could conceivably find you have a decent score — so long, of course, as you’re using your credit account(s) responsibly.

“For instance, you can be 18-years-old with a secured card opened six months ago, pay on time every month, keep a low utilization, and your first score can be in the high 600s,” Paperno said.

Remember, to build good credit in the long-term, you want to make all loan payments on time, keep the amount of debt you owe below at least 30%, and ideally 10%, of your total available credit limit(s), and add a mix of accounts to your credit file as your score and your wallet can handle it. You can track your progress toward building good credit by viewing two of your credit scores for free each month on Credit.com.

Image: PeopleImages

The post Do You Start With a Credit Score of ‘0’? appeared first on Credit.com.

I Don’t Need a Credit Card But Want to Build Credit. What Can I Do?

build_credit_without_credit_card

Good credit is essential if you hope to borrow money one day for things like a new car or home. But good credit can also be important for smaller things like renting an apartment or even landing a new job. And one of the easiest ways to build the credit necessary for these things is by getting a credit card.

If you have no credit, or even bad credit, and you’re averse to getting a secured credit card to help improve your credit, there are other ways to go about establishing and building good credit.

Here are three other options for building credit and improving your credit scores.

1. Get a Credit-Builder Loan

A credit builder loan is a loan with a set amount you pay back over a set period of time (referred to as an installment loan). Most have repayment terms ranging from six months to 18 months, and because these loans are reported to one or more of the three national credit reporting agencies, on-time payments will help build up your credit.

Here’s how it works: A lender places your loan into a savings account, which you can’t touch until you’ve paid it off in full, allowing you to build credit and savings at the same time. And because loan amounts for credit builder loans can be quite small (just $500) it can be much easier to make monthly loan payments.

Credit-builder loans are best for people with no credit or bad credit. But, if you have good credit but don’t have any installment accounts on your credit report, a credit-builder loan could potentially raise your score since account mix is another major credit-scoring factor.

2. Pay Your Rent 

If you’re in the process of moving or need to do so in the near future, it’s a good idea to find a landlord who reports your rent payments to the major credit bureaus. Depending on what credit report or credit score is being used, these on-time monthly rent payments can give you a quick and easy credit reference and help you qualify for a loan (or at least another apartment down the road).

3. Become an Authorized User

Asking your spouse, partner or even your parent to add you onto one of their accounts as an authorized user could give your credit a boost. If the account they put you on has a perfect payment history and low balances, you’ll likely get “credit” when that account starts appearing on your credit reports. You won’t necessarily need to use the card to benefit from this strategy. It is a good idea to have your friend or family member check with their issuer to be sure that it reports authorized users to the three major credit reporting agencies (not all do).

Remember, one of the most important things in building good credit is making timely loan and bill payments. Bills like rent or utilities may not be universally reported to the credit bureaus, but if they go unpaid long enough, they can hurt your credit, especially if they go into collection. (You can see how any collections accounts may be affecting your credit by viewing your two free credit scores, updated each month, on Credit.com.)

If your credit is in rough shape, due to a collection account or other payment history troubles, you may be able to improve your scores by paying delinquent accounts, addressing high credit card balances and disputing any errors that may be weighing them down. And remember, you can build good credit in the long term by keeping debt levels low, making timely payments and adding to the mix of accounts you have as your score and wallet can handle it.

[Offer: If you need help fixing your credit, Lexington Law can help you meet your goals. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

More on Credit Reports & Credit Scores:

Image: Jacob Ammentorp Lund

The post I Don’t Need a Credit Card But Want to Build Credit. What Can I Do? appeared first on Credit.com.