Millennials Don’t Understand How to Build Credit

A group of friends having fun together outdoors, sharing media on their smart phones from social networks.  Taken in Capitol Hill, Seattle, Washington.

It’s confirmed—millennials don’t know how to increase their credit scores.

At least that’s what a study from LendEDU indicates. In it, 500 millennials (ages 17–37) were asked questions regarding credit scores, and based on the results, it looks like Generation Y needs to do some credit homework.

Millennial Misconception #1: Use a Credit Card More to Build Good Credit

Almost half of millennials surveyed believe you can improve your credit score by using your credit card more. That is not true. But to be fair, thinking that you should use your credit card more to build your credit score is a general misconception that reaches beyond a millennial mindset. Plenty of baby boomers perpetuate the same misunderstanding about using credit cards more.

The reality is that a “high credit utilization rate” (translation: you use a credit card a lot) lowers your credit score because it makes you look like a bigger risk to lenders,

If you want to begin improving your credit score, you can start with the basics—buy only what you can afford, and pay off your credit card balance before the end of each month.

Millennial Misconception #2: Max Out and Pay Off a Card to Increase Your Score

When asked which behaviors would improve their credit scores, around 36% of millennials selected the following answer: “Maxing out, but paying a credit card on time.” This answer couldn’t be more wrong.

Maxing out a credit card can do serious damage to your credit score. When you max out your credit card, you get a “high credit utilization ratio” (translation: you’re using 100% of your available credit). The actual recommended credit utilization ratio is “below at least 30% and ideally [only] 10% of your total available credit limit(s).”

Besides the impact on your credit score, maxing out your credit card makes you susceptible to higher credit card interest, which can be 20% or more these days. Yikes!

Millennial Misconception #3: Carry Debt for a Good Credit Score

Another 28% of millennials in the survey incorrectly believe  “carrying debt is necessary for a good credit score.” It’s true that you can build up your credit score by taking on a bit of debt, but you’ll still need to pay the balance off each month and use less than 30% of your available credit.

Perhaps the best way to dispel these credit score misunderstandings is to go back to what actually makes up your credit score.

Quick Review: How Your Credit Score Is Calculated

Whether you’re a millennial or not, it doesn’t hurt to brush up on credit score basics.

A credit score is based on a calculation of the following:

  • Payment history: 35%
  • Current credit utilization: 30%
  • Credit history length: 15%
  • New credit inquiries: 10%
  • Credit mix: 10%

Paying your credit card bills on time and keeping your debt under control (again, under 30%) account for 65% of your credit calculation. If you take care of those two, the credit history (15%) should take care of itself, and you’ll get that score moving upward.

A credit score ranges from 300 to 850, with the national average at 673 in 2016. A score of 750 or above is considered excellent, and the other ranges are as follows: 700–749 (good), 650–699 (fair), 600–649 (poor), and below 600 (bad).

Of course, the higher the credit score, the better (lower) interest rate you’ll get for a mortgage, auto loan, etc., which can save you hundreds or even thousands a year in interest payments. So a word of advice to millennials: get a copy of your credit report, and make sure you have a basic understanding of how that score is calculated—so you don’t pay for it in the future.

Image: RyanJLane

The post Millennials Don’t Understand How to Build Credit appeared first on Credit.com.

FS Build Card Review: Build Credit With This Payday Loan Alternative

Source: iStock

Credit cards for people with poor credit scores are few and far between, but FS Card is looking to change that with its first product, the Build Card, an unsecured credit card designed specifically for borrowers with subprime credit scores.

If you’re in need of a couple of hundred dollars and your credit score falls below 600, you’re not likely to get approved for an unsecured credit card. You’re considered a subprime borrower — a lending risk to banks, who worry they won’t get their money back.

But when banks refuse to lend to risky borrowers, those consumers turn to more expensive short-term borrowing options like payday loans, auto title loans, and pawn products. Annual interest rates on those products often exceed 300%, according to research from the Pew Charitable Trusts. Paying a high interest rate and a number of additional fees attached to those short-term products can trap consumers in a cycle of debt.

What is FS Card?

FS Card was founded by former Consumer Financial Protection Bureau Assistant Director of Card and Payment Markets Marla Blow in 2014 to fill what she says was a gap in the credit card industry. Blow says she began FS Card when she noticed — after the housing market crashed in 2008 — banks began “pulling back from subprime consumers in a very directed way,” because they were wary of tougher regulations on the financial industry. As a result, those consumers turned to more expensive products like payday loans, she says.

“I wanted to be able to put that consumer into a place where, rather than having to go out and get a payday loan, they could use a credit card,” Blow says. She designed the Build Card to offer subprime consumers access to something that “a lot of our economy assumes is already present” — a rotating line of credit.

Build Card overview

The Build Card is an unsecured credit card for borrowers with subprime FICO credit scores in the 550 to 600 range (on a scale of 300 to 850). The invite-only card charges a variable 29.9% APR. The rate is high for a credit card but about 10 times less expensive than some payday loans. However, it’s not a card you’d want to open unless you are seriously in need of the funds and are looking to build your credit score.

What we like about the Build Card

Payday loan alternative

Ideally, a payday loan is used to meet short-term borrowing needs — to hold you over until you receive your next paycheck. However, Pew research shows the average borrower uses them for five months at a time on average and has to pay an average $55 fee ($95 online) each time they extend the loan, which is what makes these loans so expensive. That’s $275 spent renewing a loan that’s on average $375. Furthermore, Pew research found seven in 10 borrowers use them for everyday expenses like groceries, rent, and utilities.

With access to a rotating line of credit, borrowers can extend the amount of time they have to repay borrowed money without having to pay renewal fees for a payday loan.

Unsecured credit card for subprime consumers

The Build Card is a rare unsecured credit card for those with poor credit scores. Most cards you can qualify for with a score lower than 600 are secured cards, which require a deposit to secure a credit line. For people who have a few hundred dollars on hand, a secured card is a great way to get access to credit, but many low-income Americans are not in a position to spend that kind of money.

Build your credit score

FS Card reports your activity to national credit bureau TransUnion so you can use the Build Card to improve your credit score if you maintain good credit management habits. Negative activity — like late payments and high credit card balances — will also be reported, so be sure to pay your balance on time and in full each month for best results.

Quick and easy approval process

Because you must be invited to apply for the Build Card, you are prequalified for approval. There is an excellent chance you will be approved for the Build Card, unless something on your credit report has drastically changed between the time FS Card mailed your invitation and when you apply.

No foreign transaction fees

The Build Card doesn’t charge you for using it overseas, so you don’t need to worry about racking up fees for swiping your credit card on vacation.

What we don’t like about the Build Card

Invite-only

As of this writing, the Build Card is invitation only and has more than 50,000 cardholders, Blow says. You’ll have to wait to receive a code in the mail before you can apply for the card online, which is unfortunate for anyone who is in need of short-term funds now.

FS Card selects borrowers using an algorithm to prequalify borrowers with subprime credit scores and sends invitations to potential customers monthly. The algorithm sifts through consumer credit reporting data to identify consumers who have recently done something that reflects better borrowing habits like paying off a payday loan or an account in collections.

Blow tells MagnifyMoney FS Card will offer an open application for Build Card in 2018.

Many fees

This card carries a lot of fees. If you’re trying to build your credit and have the funds to get a secured credit card that doesn’t charge an annual fee or has an interest-free period, you’re better off going that route, as it will be significantly less expensive.

  • Startup & membership fees: It costs Build Card customers $125 simply to open the account. FS Card charges the initial start-up fee ($53) and annual membership fee ($72) on your first statement. Although the card begins accruing interest immediately, Blow tells MagnifyMoney FS Card does not charge Build Card users interest on the start-up fees assessed to the credit card.After the first year, the annual membership is paid in $6 monthly installments, charged to the Build Card.
  • Authorized user fee: If you authorize another person to use your Build Card, you’ll be charged a $12 fee per authorized user.
  • Late/returned payment fee: Don’t miss a payment on this credit card, or you’ll be charged a whopping $35 fee.
  • Cash advance fee: Try your best not to take cash from this credit line — in addition to paying 29.9% interest, you’ll be charged the greater of $10 or 3% of the amount you take.

A $500 limit

If you need to borrow more than $500, you’re out of luck with this card. Everyone who opens a Build Card account starts off with a $500 limit. But remember, that limit is immediately reduced to $375 once you open the card and are charged $125 in fees. That also doesn’t leave you a lot of room to spend, considering it’s bad for your credit score to carry a balance close to your credit limit. Blow says the company may soon offer starting lines above and below $500.

Right now, FS Card checks every month to see if you’re managing the card wisely (read: making payments on time). If you are, you could qualify for a credit line increase to $750 in as soon as seven months. Blow says 59% of Build Card customers have gotten increases so far.

No 0% interest period

This card doesn’t come with an interest-free grace period. It will begin charging a 29.9% APR to your purchases immediately.

No balance transfer

The Build Card doesn’t come with a balance transfer offer, so you won’t be able to use the card as a debt consolidation tool. If you are in a large amount of credit card debt, you could try applying for a personal loan through online lenders like Lending Club or Prosper, which offer personal loans to people with credit scores below 600.

Who is the Build Card best for?

The Build Card is worth opening if you:

  • have a credit score between 550 and 600,
  • are ready to start rebuilding your credit score, and
  • want an alternative to payday loans in the event of an emergency but don’t have the cash on hand to open a secured credit card.

Beware: If your poor credit history resulted from poor spending habits like spending more than you could afford or making late payments, ask yourself if you’re ready to make a change. Opening this credit line won’t help your credit score any in the long run if you don’t.

How to apply for Build Card

You must be selected to apply for the Build Card. When you receive your invitation to apply, you’ll be given an offer code and application ID to enter into the application form on the Build Card website. Enter that information, your ZIP code, and the last four digits of your Social Security number to apply for approval. You should know if you’re approved or not within a few minutes.

Source: thebuildcard.com

Alternatives to the Build Card

The post FS Build Card Review: Build Credit With This Payday Loan Alternative appeared first on MagnifyMoney.

How to Build Credit Without Spending a Ton of Money

Building credit doesn't have to be expensive.

The journey to building credit can be long and difficult, but it doesn’t need to be expensive. A good credit score isn’t about how much money you have but rather how well you manage it. A poor man could have the same credit score as a billionaire — all it takes is a little work. Learn how to build credit without spending a ton of money with these tips.

Stay Active

Credit scores can only be created when there’s credit activity to report. When you’re on a budget, it can be tempting to avoid charging anything, but doing so won’t help you build credit. Keeping credit cards active doesn’t have to be costly.

Charge a Little

With credit, it’s not about how much is spent or what it’s spent on, it’s about usage. There has to be enough activity generate a score. Whether you charge your morning coffee or a wild night in Las Vegas, you’ll keep your credit issuer happy if you pay it off and monitor how much credit you have available.

If you can only afford to pay off a credit card charge of up to $30 per month, charge that amount and pay it off. Barry Paperno, a credit card expert who writes for Speaking of Credit, suggests using some credit cards for regular monthly fees, like a Netflix or newspaper subscription. This ensures cards stay active and doesn’t require much thought. Plus, you can keep these cards tucked away at home instead of in your wallet.

Become an Authorized User 

The key is finding someone trustworthy who has great credit. Being an authorized user on someone’s card can be a great credit building option. The process to be added as an authorized user is fairly easy and has no application or requirements. (Learn more by reading everything you need to know about authorized users.)

Once someone becomes an authorized user, the card is added to their credit report. If you become an authorized user on an older card, you’ll earn additional points for the length of time the card has been open, an important credit scoring factor. You also receive credit for on time payments. The only potential issue with this is if the primary cardholder starts missing payments or cultivating debt, it impacts the authorized user’s credit score, too. This method is affordable and effective, but can be slow going since some score models don’t give full credit to authorized users, Paperno said.

Try a Secure Card

Applying for a secure card is a great option for those who have poor or nonexistent credit. Secure cards require users to put down a deposit, say $300, which creates a $300 credit limit on that card. The card acts like any other and is reported to the credit bureaus as such, but your spending can’t exceed the amount of the deposit. The card can be paid off as much as you’d like throughout the month, making it a great way to limit spending while showing the credit bureaus your ability to manage credit.

The great thing about secure cards is you’re the primary user, so the credit benefits earned are even greater than being an authorized user.

Report On-Time Payments

While it doesn’t always help your credit to make on time payments for rent, utilities, etc, in some cases it can. “Keep in mind credit scores can only consider what’s on your credit report,” says Paperno. “Your landlord or utilities company has to report it to credit bureau and credit scorers must include it.”

Unless on time payments are being reported, they won’t necessarily help you build credit. Ask your landlord and service providers if they report to credit bureaus. Or, pay rent online to help build credit history or uses services like Renttrack or Rental Kharma.

Set up Automatic Payments

Automatic payments can help ensure on-time payments. This is handy for those who forget to pay bills or travel often. On-time payments help strengthen your payment history, which plays a large role in a good credit score.

Beware, if there’s not enough money in your account for payments. An unpaid balance can be reported to the credit bureaus. Generally, credit bureau information is updated every 30 days so if your payment is only a few days late, you’ll be charged late payment fees but your credit won’t be hurt. Still, it’s best not to risk it.

Keep Accounts Open

If you’ve already got cards open, avoid closing them. Credit history is a major factor in calculating credit scores, so keeping your oldest cards open and active can have major perks. So, keep that card from college, even if it’s only used to charge a monthly Netflix subscription.

Get a Credit Builder Loan

A credit builder loan, a type of installment loan, can be a simple way to build credit. Try for a credit builder loan that reports to all three national credit reporting agencies, so on-time loan payments build up your credit in reports for all three companies. Don’t bite off more than you can chew — late payments or a defaulted loan can cause your credit score to take a huge hit.

You can take out a personal loan for something smaller than a car, like a new laptop or mattress. Take one on out on something you were planning to buy anyway, to avoid spending for the sole purpose of building credit.

Monitor Utilization

Everyone knows paying on time is essential but also so is utilization, the percent of available credit you’ve used. Paperno advises keeping utilization to less than 10% of your credit limit each month. This shows you’re reasonably and responsibly using your credit within your means.

Increase Credit Limit but Not Spending

If you’ve got a decent credit history, you can probably manage to have your credit limit increased. Once your credit limit is increased, keep your spending habits the same. This can help you lower your credit utilization, making your credit even stronger.

Diversify Wisely & Carefully

Diversifying your credit with different types of loans, cards and accounts can help you build credit, but only if you have the means to pay them off. Opening accounts and taking out loans you can’t afford will only put you in the red. Before taking out loans or apply for new cards, ensure you qualify. You can check two of your credit scores for free with credit.com.

Opening new accounts and credit cards can seem like an easy way to increase the credit mix portion of your score, but proceed with caution. Opening a new card impacts the length of time your accounts have been open, a major factor in calculating your credit score. Since this number is the average of the length of time all of your accounts have been open, adding a new account can bring down your total.

As you diversify, monitor credit utilization for each individual card. If utilization is too high on one card, it can cause your entire credit score to drop. Utilization makes up 30% of your FICO credit score while different types of credit make up only 10%.

Image: Ti_ser

The post How to Build Credit Without Spending a Ton of Money appeared first on Credit.com.

Average Credit Score in America Reaches New Peak at 700

In late 2016, American consumers hit an important milestone. For the first time in a decade, over half of American consumers (51%) recorded prime credit scores. On the other side of the scale, less than a third of consumers (32%) suffered from subprime scores.1 As a nation, our average FICO® Score rose to its highest point ever, 700.2

Despite the rosy national picture, we see regional and age-based disparities. A minority of Southerners still rank below prime credit. In contrast, credit scores in the upper Midwest rank well above the national average. Younger consumers struggle with their credit, but boomers and the Silent Generation secured scores well above the national average.

In a new report on credit scores in America, MagnifyMoney analyzed trends in credit scores. The trends offer insight into how Americans fare with their credit health.

Key insights

  1. National average FICO® Scores are up 14 points since October 2009.3
  2. 51% of consumers have prime credit scores, up from 48.1% in 2007.4
  3. One-third of customers have at least one severely delinquent (90+ days past due) account on their credit report.5
  4. Average VantageScores® in the Deep South are 21 points lower than the national average (652 vs. 673).6
  5. Millennials’ average VantageScore® (634) underperformed the national average by 39 points. Only Gen Z has a lower average score (631).7

Credit scores in America

Average FICO® Score: 70088

Average VantageScore®: 6739

Percent with prime credit score (Equifax Risk Score >720): 51%10

Percent with subprime credit score (Equifax Risk Score <660): 32%11

Credit score factors

Percent with at least one delinquency: 32%12

Average number of late payments per month: .3513

Average credit utilization ratio: 30%14

Debt delinquency

Percent severely delinquent debt: 3.37%15

Percent severely delinquent debt excluding mortgages: 6.9%16

States with the best and worst credit scores

What is a credit score?

Credit scoring companies analyze consumer credit reports. They glean data from the reports and create algorithms that determine consumer borrowing risk. A credit score is a number that represents the risk profile of a borrower. Credit scores influence a bank’s decisions to lend money to consumers. People with high credit scores will find the most attractive borrowing rates because that signals to lenders that they are less risky. Those with low credit scores will struggle to find credit at all.

The Big 3 credit scores

Banks have hundreds of proprietary credit scoring algorithms. In this article, we analyzed trends on three of the most famous credit scoring algorithms:

  • FICO® Score 8 (used for underwriting mortgages)
  • VantageScore® 3.0 (widely available to consumers)
  • Equifax Consumer Risk Credit Score (used by the Federal Reserve Bank of New York)

Each of these credit scores ranks risk on a scale of 300-850. In all three models, prime credit is any score above 720. Subprime credit is any score below 660. All three models consider similar data when they create credit risk profiles. The most common factors include:

  • Payment history
  • Revolving debt levels (or revolving debt utilization ratios)
  • Length of credit history
  • Number of recent credit inquires
  • Variety of credit (installment and revolving)

However, each model weights the information differently. This means that a FICO® Score cannot be compared directly to a VantageScore® or an Equifax Risk Score. For example, a VantageScore® does not count paid items in collections against you. However, a FICO® Score counts all collections items against you, even if you’ve paid them. Additionally, the VantageScore® counts outstanding debt against you, but the FICO® Score only considers how much credit card debt you have relative to your available credit.

American credit scores over time

Average FICO® Scores in America are on the rise for the eighth straight year. The average credit score in America is now 700.

On top of that, consumers with “super prime” credit (FICO® Scores above 800) outnumber consumers with deep subprime credit (FICO® Scores below 600).

We’re also seeing healthy increases in prime credit scores, defined as Equifax Risk Scores above 720. According to the Federal Reserve Bank of New York, 51% of all Americans have prime credit scores as measured by the Equifax Risk Score. Following the housing market crash in 2010, just 48.4% of Americans had prime credit scores.20

A major driver of increased scores is the decreased proportion of consumers with collection items on their credit report. A credit item that falls into collections will stay on a person’s credit report for seven years. People caught in the latter end of the real estate foreclosure crisis of 2006-2011 may still have a collections item on their report today.

In the first quarter of 2013, 14.64% of all consumers had at least one item in collections. Today, just 12.61% of consumers have collections items on their credit report. Overall collections rates are approaching 2005-2006 average rates.40

Credit scores and loan originations

Following the 2007-2008 implosion of the housing market, banks saw mortgage borrowers defaulting at higher rates than ever before. In addition to higher mortgage default rates, the market downturn led to higher default rates across all types of consumer loans. To maintain profitability banks began tightening lending practices. More stringent lending standards made it tough for anyone with poor credit to get a loan at a reasonable rate. Although banks have loosened lending somewhat in the last two years, people with subprime credit will continue to struggle to get loans. In June 2017, banks rejected 81.4% of all credit applications from people with Equifax Risk Scores below 680. By contrast, banks rejected 9.11% of credit applications from those with credit scores above 760.22

Credit scores and mortgage origination

Before 2008, the median homebuyer had an Equifax Risk Score of 720. In 2017, the median score was 764, a full 44 points higher than the pre-bubble scores. The bottom 10th of buyers had a score of 657, a massive 65 point growth over the pre-recession average.23

Some below prime borrowers still get mortgages. But banks no longer underwrite mortgages for deep subprime borrowers. More stringent lending standards have resulted in near all-time lows in mortgage foreclosures.

Credit scores and auto loan origination

The subprime lending bubble didn’t directly influence the auto loan market, but banks increased their lending standards for auto loans, too. Before 2008, the median credit score for people originating auto loans was 682. By the first quarter of 2017, the median score for auto borrowers was 706.26

In the case of auto loans, the lower median risk profile hasn’t paid off for banks. In the first quarter of 2017, $8.27 billion dollars of auto loans fell into severely delinquent status. New auto delinquencies are now as bad as they were in 2008.28

Consumers looking for new auto loans should expect more stringent lending standards in coming months. This means it’s more important than ever for Americans to grow their credit score.

Credit scores for credit cards

Unlike other types of credit, even people with deep subprime credit scores usually qualify to open a secured credit card. However, credit card use among people with poor credit scores is still near an all-time low. In the last decade, credit card use among deep subprime borrowers fell 16.7%. Today, just over 50% of deep subprime borrowers have credit card accounts.30

The dramatic decline came between 2009 and 2011. During this period, half or more of all credit card account closures came from borrowers with below prime credit scores. More than one-third of all closures came from deep subprime consumers.

However, banks are showing an increased willingness to allow customers with poor credit to open credit card accounts. In 2015, more than 60% of all new credit card accounts went to borrowers with subprime credit, and 25% of all the accounts went to borrowers with deep subprime credit.

State level credit scores

Consumers across the nation are seeing higher credit scores, but regional variations persist. People living in the Deep South and Southwest have lower credit scores than the rest of the nation. States in the Deep South have an average VantageScore® of 652 compared to a nationwide average of 673. Southwestern states have an average score of 658.

States in the upper Midwest outperform the nation as a whole. These states had average VantageScores® of 689.

Unsurprisingly, consumers across the southern United States are far more likely to have subprime credit scores than consumers across the north. Minnesota had the fewest subprime consumers. In December 2016, just 21.9% of residents fell below an Equifax Risk Score of 660. Mississippi had the worst subprime rate in the nation: 48.3% of Mississippi residents had credit scores below 660 in December 2016.35

These are the distributions of Equifax Risk Scores by state:37

Credit score by age

In general, older consumers have higher credit scores than younger generations. Credit scoring models consider consumers with longer credit histories less risky than those with short credit histories. The Silent Generation and boomers enjoy higher credit scores due to long credit histories. However, these generations show better credit behavior, too. Their revolving credit utilization rates are lower than younger generations. They are less likely to have a severely delinquent credit item on their credit report.

Gen X and millennials have almost identical revolving utilization ratios and delinquency rates. Compared to millennials, Gen X has higher credit card balances and more debt. Still, Gen X’s longer credit history gives them a 21 point advantage over millennials on average.

To improve their credit scores, millennials and Gen X need to focus on timely payments. On-time payments and lower credit card utilization will drive their scores up.

A report by FICO® showed that younger consumers can earn high credit scores with excellent credit behavior. 93% of consumers with credit scores between 750 and 799 who were under age 29 never had a late payment on their credit report. In contrast, 57% of the total population had at least one delinquency. This good credit group also used less of their available credit. They had an average revolving credit utilization ratio of 6%. The nation as a whole had a utilization ratio of 15%.39

Sources

  1. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  2. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  3. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  4. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  5. 2016 State of Credit Report” National 2016 90+ Days Past Due, Experian. Accessed May 24, 2017
  6. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed May 24, 2017.
  7. 2016 State of Credit Report” National 2016 Average VantageScore®, Experian. Accessed May 24, 2017.
  8. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  9. 2016 State of Credit Report” National 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  10. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  11. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  12. 2016 State of Credit Report” National 2016 90+ Days Past Due, Experian. Accessed July 23, 2017.
  13. 2016 State of Credit Report” National 2016 Average Late Payments, Experian. Accessed July 23, 2017.
  14. 2016 State of Credit Report” National 2016 Average Revolving Credit Utilization Ratio, Experian. Accessed July 23, 2017.
  15. Quarterly Report on Household Debt and Credit May 2017” Percent of Balance 90+ Days Delinquent by Loan Type, All Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  16. Calculated metric using data from “Quarterly Report on Household Debt and Credit May 2017” Percent of Balance 90+ Days Delinquent by Loan Type and Total Debt Balance and Its Composition. All Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017. Multiply all debt balances by percent of balance 90 days delinquent for Q1 2017, and summarize all delinquent balances. Total delinquent balance for non-mortgage debt = $284 billion. Total non-mortgage debt balance = $4.1 trillion$284 billion /$4.1 trillion = 6.9%.
  17. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  18. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  19. Ethan Dornhelm, “US Average FICO Score Hits 700: A Milestone for Consumers,” Fair Isaac Corporation. Accessed July 23, 2017.
  20. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  21. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  22. Survey of Consumer Expectations, © 2013-2017 Federal Reserve Bank of New York (FRBNY). The SCE data are available without charge at http://www.newyorkfed.org/microeconomics/sce and may be used subject to license terms posted there. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.
  23. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  24. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  25. Quarterly Report on Household Debt and Credit May 2017” Number of Consumers with New Foreclosures and Bankruptcies, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  26. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  27. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  28. Quarterly Report on Household Debt and Credit May 2017” Flow into Severe Delinquency (90+) by Loan Type, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  29. Quarterly Report on Household Debt and Credit May 2017” Flow into Severe Delinquency (90+) by Loan Type, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  30. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  31. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  32. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  33. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed July 23, 2017.
  34. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  35. 2016 State of Credit Report” State 2016 Average VantageScore®, Experian. Accessed July 23, 2017.
  36. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  37. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  38. 2016 State of Credit Report” National 2016 VantageScore®, Experian. Accessed July 23, 2017.
  39. Andrew Jennings, “FICO® Score High Achievers: Is Age the Only Factor?” Fair Isaac Corporation. Accessed July 23, 2017.
  40. Quarterly Report on Household Debt and Credit May 2017” Third-Party Collections (Percent of Consumers with Collections), from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.
  41. Quarterly Report on Household Debt and Credit May 2017” Third-Party Collections (Percent of Consumers with Collections), from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 23, 2017.

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12 Million People Are About to Get a Credit Score Boost — Here’s Why

12 Million People Are About to Get a Credit Score Boost

Some serious tax liens and civil judgments will soon disappear from millions of credit reports, the Consumer Data Industry Association announced this week. As a result, millions of consumers could see their FICO scores improve dramatically.

(This post was originally published on March 15, 2017.)

The CDIA, the trade organization that represents all three major credit bureaus — Equifax, Experian, and TransUnion — says they have agreed to remove from consumer credit reports any tax lien and civil judgment data that doesn’t include all of a consumer’s information. That information can include the consumer’s full name, address, Social Security number, or date of birth. The changes are set to take effect July 1.

Roughly 12 million U.S. consumers should expect to see their FICO scores rise as a result of the change says Ethan Dornhelm, vice president of scores and analytics at FICO. The vast majority will see a boost of 20 points or so, he added, while some 700,000 consumers will see a 40-point boost or higher.

Even a small 20-point increase could improve access to lower rates on financial products for these consumers.

“For consumers, the news is all good,” says credit expert John Ulzheimer. “Your score can’t go down because of the removal of a lien or a judgment.”

The change will apply to all new tax lien and civil-judgment information that’s added to consumers’ credit reports as well as data already on the reports. Ulzheimer says consumers who currently have tax liens or judgments on their credit reports that are weighing down their credit scores will be able to reap the rewards of removal almost immediately

“The minute the stuff is gone, your score will adjust and you’re going to find yourself in a better position to leverage that better score,” says Ulzheimer.

But, importantly, he notes that just because credit reporting bureaus will no longer count tax liens or civil judgments against you, it does not mean they no longer exist at all. Consumers could still be impacted by wage garnishment and other punishments associated with the liens and judgments.

“This is the equivalent of taking white-out and whiting it out on your credit report. You can’t see it any longer, but you still have a lien, you still a have a judgment,” Ulzheimer says.

Solution to a longstanding problem

Many tax liens and most civil judgments have incomplete consumer information.

The changes are part of the CDIA’s National Consumer Assistance program that has already removed non-loan-related items sent to collections firms, such as past-due accounts for gym memberships or libraries. The program also has set a 2018 goal to remove from credit reports medical debt that consumers have already paid off.

“Some creditors may have liked having inaccurate credit reports, as long as they were skewed in their favor. That’s not the way the system is supposed to work. This action is just one more proof that the CFPB [Consumer Financial Protection Bureau] works, and works well, and shouldn’t be weakened by special interest influence over Congress,” says Edmund Mierzwinski, consumer program director at the U.S. Public Interest Research Group.

The move is likely the result of several state settlements and pressure from the Consumer Financial Protection Bureau, the federal financial industry watchdog.  Beginning in 2015, the reporting agencies reached settlements with 32 different state Attorneys General over several practices, including how they handle errors. The CFPB also released a report earlier this month that examined credit bureaus and recommended they raise their standards for recording public record data.


Time to start shopping for better loan rates?

High credit scores can lead to long-term savings. Borrowers who expect their scores to improve as a result of these changes may find better deals if they can wait a few months to buy a new house, refinance a mortgage, or purchase a new car. Even a 10-point difference can lead to lower rates on loans.

If you expect the credit reporting changes might benefit you, Ulzheimer suggests holding off on taking out new loans or shopping for refi deals, such as student loan refinancing.

“Let it happen, pull your own credit reports to verify the information is gone, then take advantage of the higher scores,” Ulzheimer says.

Ulzheimer also says the changes may not be permanent. “There is a possibility that if the credit reporting bureau is able to find the missing information, the negative information could reappear on consumer credit reports,” he says.

There isn’t anything in the law that forbids the reporting of liens and judgments anymore, and lenders can still check public records on their own to find missing information.

Ulzheimer says if he were the CEO of a reporting agency, that’s exactly what he would do.

“I would embark on a project to get this information immediately back in the credit reporting system,” he says, then adds all he’d need to do is find an economic way to populate the missing data.

“From a business perspective, I would do it in a New York minute. Because I would immediately have a competitive advantage over my two competitors,” says Ulzheimer.

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Guide to Adding an Authorized User to Your Credit Card

Disclaimer: Though we have done our best to research information regarding this topic, be aware that issuing banks may have unique rules and agreement terms that apply to their particular credit card accounts. Contact issuing banks directly for questions on terms and policies relevant to specific credit card accounts.

What Is an Authorized User?

An authorized user on a credit card account is any person you allow to access your credit card account. Not to be confused with a joint account holder, an authorized user can only make purchases and, in some cases, have access to certain card benefits and perks. Joint account holdership is becoming extremely rare, but typically occurs when two people apply for a credit card together. In joint account ownership, both people are liable for charges and can access and make changes to a credit card account.

An authorized user can be a spouse, relative, or employee. When you designate an authorized user on your credit card account, this person usually gets a card bearing their name with the same credit card number as the primary cardholder. In this scenario, the primary cardholder is liable for all transactions made by themselves as well as by any authorized user tied to their account.

Why Would You Add an Authorized User to Your Credit Card Account?

There are many reasons you might think about designating an authorized user for your credit card account. It all comes down to convenience and extending benefits that a credit account offers: access to credit, related perks, and credit card rewards, as well as the potential to improve the credit score of the authorized user.

For example, couples that share expenses might find it easier to designate one or the other as an authorized user to avoid passing a single card back and forth to make purchases. Perhaps you have a relative who lives far away, and it would be easier to give them access to your credit account for emergency purchases. You may also have a child that you want to assist in building credit history to increase their credit score. Adding them as an authorized user could help with this, but we’ll cover that more in another section.

Additionally, if you are an employer whose employees need to make purchases on behalf of the company, it would make sense to make them an authorized user. Without this designation, it could be extremely inconvenient for them to not have a company credit card at their disposal.

In some cases, adding an authorized user can also accrue reward points connected to a credit card account. These reward points can be used to make purchases or receive discounted pricing on things like travel and retail products. Typically, points are accrued from reaching credit card spending amounts within a certain time frame. Sometimes, the act of adding an authorized user can garner additional rewards as well.

How Can I Add an Authorized User to My Credit Card Account?

As the primary cardholder you are the only person who can designate an authorized user. The authorized user cannot contact the credit card issuer and add themselves to your account. You will have to contact the issuing bank and request to add one or more authorized users to your account.

Depending on the bank and the technology in place, you may be able to handle this process entirely online. Some banks allow you to log in to your banking portal to designate additional authorized users, create their own bank login and profile as well as determine the level of access you’d like them to have to your account. Levels of access can range from being able to view transactions only to making purchases. If your bank doesn’t have this technology in place, usually a phone call is sufficient.

Who Can Be an Authorized User on My Account?

An authorized user can be anyone you choose, whether they are related to you in some way or not. In most cases, the bank will request identifying information such as name, birthdate, Social Security number, and address. Some card issuers require that authorized users meet age requirements, and others do not have age requirements. As always, check with the bank to understand the criteria authorized users must meet for your card.

The Fees

Some credit cards will charge an additional fee for more additional authorized users, while others will offer this benefit at no charge. Make sure you read the fine print in your cardholder agreement so that you are aware of all the fees associated with having one or more authorized users on your account.

Fees can range from less than $100 to a few hundred dollars and beyond each year. Business accounts especially can carry higher fees when multiple authorized users are associated to one account.

Liability

As the primary account holder, you must understand that you are 100% solely liable for any and all charges made on your account by both yourself and your authorized user. If you have been designated as an authorized user, you do not legally share liability for purchases made on the credit card account. However, you may have a personal arrangement with the primary account holder to pay your share of charges when the bill is due.

What Can an Authorized User Do?

This can depend on the level of access you’ve chosen with your card issuer for your authorized user. If there are not varying levels of access to choose from, check with the card issuer to find out exactly what an authorized user can and cannot do.

In most cases, an authorized user cannot make changes to an account. They cannot close an account, request changes in bill due dates, change account information, or request limit increases or a lower annual percentage rate.

Again, this varies from card issuer to card issuer, but there are many other things an authorized user can do.

Here are some possible capabilities based on the terms of your credit card issuer:

  • Make purchases
  • Report any lost or stolen cards
  • Obtain account information
  • Initiate billing disputes
  • Request statement copies
  • Make payments and inquire about fees

Benefits of Adding an Authorized User

As mentioned before, adding an authorized user to a card can be for convenience, accruing rewards, or sharing card perks and benefits. An authorized user can be incredibly convenient in the case that you don’t have your personal card or for some reason don’t have immediate access to it.

Having an authorized user can help a primary user reach limits to earn reward points for some cards. One of the most effective marketing strategies of credit card companies is to offer bonuses and rewards for adding authorized users to your account. Adding another user to your account could add a few thousand extra reward points you would not have earned without adding the user. Then, there’s always the chance that the authorized user will make purchases that contribute even more to your attempt to accrue reward points.

Finally, there are a number of credit cards that offer perks or benefits that can extend to your authorized users. Depending on your credit card, benefits like car rental insurance, lost luggage reimbursement, and extended warranties could apply to all purchases made, including those by your authorized users, on your credit card account.

Benefits of Becoming an Authorized User

Though the credit-reporting landscape is changing, there’s still the potential to “piggyback” on a primary account holder’s credit history for a card in good standing. But not all credit card companies report information to credit bureaus for authorized users in all circumstances. However, to know for sure what will be reported to the credit bureaus in regard to your authorized user status, speak with your card issuer for the details of what information is reported and when to credit bureaus.

Another benefit is having access to more credit. If you are in a bind and have emergencies that come up, access to credit can be helpful. Plus, exercising diligence in managing purchases and bill payment can help you develop good credit habits.

You should also know that being an authorized user may grant you access to certain perks for account holders and their primary users. There are benefits like access to travel lounges, Global Entry or TSA PreCheck application, travel credits, and discounts an authorized user could be privy to as well.

What Could Go Wrong?

If for some reason the credit card account doesn’t remain in good standing, the credit score of both the primary account holder and the authorized user could be affected. If you are a primary account holder, make sure your authorized user understands the terms under which they can make purchases. If they make purchases that cause your payments to be delinquent, your credit score could suffer.

Even if you did not give this person permission to make purchases with your credit card account, the fact that you designated them as an authorized user is evidence that you at some point trusted them with your credit card access. A claim of criminal or fraudulent activity in this instance would be extremely difficult to prove, so choose your authorized users wisely.

Though not as common with an authorized user, your credit score could be negatively affected if an account becomes delinquent. Because tradeline reporting for authorized user accounts to credit bureaus varies from card to card and scenario to scenario, a delinquent account status could still appear on your credit report. If you will be added to someone’s account as an authorized user, find out whether or not the credit history of the account will be reported to credit bureaus under your authorized user status.

Removing an Authorized User from an Account

Either the primary cardholder or the authorized user can remove an authorized user from an account by contacting the credit card issuer. You may be asked to verify your information as well as the information of the primary account holder.

In many cases, only one card number is issued between one or more users. Your credit card company may deactivate the primary cardholder’s credit card number and reissue a new card and number once an authorized user is removed from an account.

If your status as an authorized user does show up on your credit report for the credit account after you’ve been removed from a credit card account, you may have to contact credit bureaus to have it removed.

The Best Way to Manage Shared Credit Access

Designating someone as an authorized user is not something to be taken lightly. Even a small misunderstanding of credit card issuer terms and your own interpersonal credit arrangement can cause problems. Before adding an authorized user to your account, set ground rules around card use that covers access to perks and making purchases.

Some things to consider and discuss with your authorized user include:

  • What is the goal in having the authorized user on the account?
  • Will the authorized user have a physical card?
  • When is it OK to use or not use the credit card to make purchases or access card perks?
  • The credit history of both the primary cardholder and the authorized user
  • Good credit habits that will prevent identity theft and fraud
  • Setting up monitoring alerts with the credit card company or an identity theft protection service

The ability to add an authorized user to a credit card account can be a double-edged sword. On one hand, convenient benefits of access to credit and credit card perks can make life easier in so many ways.

On the other hand, this same convenience can cause problems if both the primary cardholder and the authorized user don’t understand the rules of engagement with each other or the terms set forth by the credit card company.

Adding an authorized user to your account has the potential to be incredibly convenient and mutually beneficial if handled the right way. Make sure you follow best practices to get the most out of this financial arrangement.

The post Guide to Adding an Authorized User to Your Credit Card appeared first on MagnifyMoney.

Collection Accounts Don’t Always Hurt Your Credit for Seven Years

When you fall behind on a bill, you might get charged a late fee and your late payments could be recorded in your credit reports. If a bill goes unpaid for long enough, your creditor may send or sell your account to a collection agency.

The collection agency will then attempt to collect the balance from you — sometimes aggressively — and often reports its possession of your account to the credit bureaus. A new account with the collection agency’s name will then appear on your credit reports, and this can have a significant negative impact on your credit scores.

You might think that paying off the debt clears everything up, but that isn’t necessarily the case.

Generally, if you pay the amount you owe or settle for a lower payment, the collection account on your reports will be updated and marked paid in full, settled, or something similar. The impact of a collection account on your credit scores diminishes over time, and a paid account could look better to creditors than an unpaid account. But like other derogatory marks, the account can remain on your reports for up to seven years and 180 days since the account first became delinquent (your first late payment with the original creditor).

After an account is removed from your credit report, collection agencies can still continue to attempt to collect payment as long as the account isn’t outside the governing statute of limitations (state laws determine how long a creditor can attempt to collect certain debts).

Even so, removing a collection account could improve your credit scores, making it easier and less expensive to open new loans or lines of credit. Here are a few exceptions to the standard timeline and instances when a collection account won’t affect your credit score.

You’re a New York state resident. For current New York state residents, satisfied judgments and paid collection accounts must be removed five years from the date filed or date of last activity, respectively.

The collection account was for a medical bill that your insurance paid. A settlement between New York Attorney General Eric Schneiderman and the three nationwide credit bureaus — Experian, Equifax, and TransUnion — in March 2015 resulted in new national credit-reporting policies. Now, medical debt can’t be reported to the credit bureaus for 180 days, and medical collection accounts that are being paid, or are paid in full, by an insurance company must be removed from your credit report.

You didn’t have a contractual agreement to pay the debt. Another result of the settlement in New York was that credit reporting agencies can no longer report debts that aren’t a result of a contract or agreement you signed. In other words, if your debt from a parking ticket or library fine gets sent to a collection agency, it won’t be added to your credit reports.

The collection agency agrees to a pay for delete. Also known as pay for removal, a pay-for-delete agreement with a collection agency is an arrangement in which you agree to pay some or all of the amount owed the collection agency and requests the credit bureaus delete the collection account from your reports.

You’ll want to get a written agreement from the collection agency before sending a payment, but this could be difficult because in general a pay-for-delete agreement is considered a little shady. “Right now, the credit reporting standards do not allow for deletion of accurate collections simply because they’re paid,” says credit expert John Ulzheimer, formerly of FICO and Equifax. “That doesn’t mean it doesn’t happen, simply that it’s counter to the standards that debt collectors have been given by the credit reporting industry players.”

It requires the collection agency to stop reporting an account that legitimately existed, which may violate the agreement the collection agency has with one or more of the credit reporting agencies.

Midland Credit Management bought your debt. In October 2016, Midland Credit Management, a subsidiary of Encore Capital Group, one of the largest debt collection agencies in the world, announced a new policy.

If MCM bought your debt and you begin payments within three months, and continue making payments until the account is paid off, the company won’t report the account to the credit bureaus (i.e., it won’t appear on your credit reports).

Additionally, if it’s been more than two years since the date of delinquency and you pay the account in full or settle the account, MCM will request the credit bureaus delete the collection account from your credit reports.

The account isn’t yours. If a collection account is on one of your credit reports and you don’t owe the debt, or it’s a type of collection account that meets one of the above criteria for removal, you may be able to dispute the account. The Fair Credit Reporting Act requires the credit bureaus and data furnishers (such as a collection agency) to correct inaccurate information.

Your lender uses one of the latest credit-score models. You might have paid or settled a collection account and still have to wait for the account to drop off your credit reports. However, if your lender is using the latest base FICO Score, FICO 9, or the VantageScore 3 scoring model, paid or settled collection accounts won’t affect your credit score. FICO Score 8 and 9 don’t consider collection accounts if your original balance was under $100.

However, lenders may use older credit-scoring models, which means a collection account could affect your score for as long as it’s on your credit reports and regardless of the original debt.

The post Collection Accounts Don’t Always Hurt Your Credit for Seven Years appeared first on MagnifyMoney.

7 Signs You’re Working With a Shady Credit Repair Firm

It’s natural to want a quick fix for your credit problems, but be wary of any practice that seems deceptive — even if it could work in your favor.

In September 2016, the Consumer Financial Protection Bureau filed a lawsuit against Prime Marketing Holdings, a credit repair firm based in Van Nuys, Calif. In its complaint, the CFPB alleged the company charged customers advance fees “totaling hundreds of dollars” and misled customers about their ability to remove negative items from their credit reports.

The case is still active, but it’s just one example of the proliferation of credit repair abuse in the U.S. And it gives rise to the question: How do I know if a credit repair company is legitimate or just another scam?

We’ve put together a litmus test of seven signs you could be working with a shady credit repair company.

  1. They ask you to pay before they start working.

One of the biggest red flags in the credit repair business is requiring an upfront fee before any services are rendered. Under the Credit Repair Organizations Act (CROA), credit repair companies can’t charge advance fees before rendering services.

In some cases, advance fees can be only a couple of hundred dollars. But some companies have been found to ask for thousands of dollars upfront. In 2011, the Federal Trade Commission sued Doug and Julie Parker, owners of a Texas-based credit repair firm called RMCN Credit Services, Inc. The FTC claimed the couple charged customers a staggering $2,000 retainer fee before they completed any work. In the end, the Parkers were fined $400,000 by the federal watchdog.

  1. They try to give you a new “credit identity.”

Another dodgy credit repair practice is when a company tries to convince clients to create a “new credit identity.” To establish this identity, the firm may offer to issue the client a nine-digit “credit profile number” or even prompt them to apply for an employer identification number with the IRS. With the new number in place, the firm could them encourage the client to apply for new credit and stop using their real Social Security number.

Don’t be fooled — this practice is completely illegal. An EIN is only used to identify businesses, and it is not a substitute for a Social Security number. Additionally, that credit profile number could easily be someone else’s stolen Social Security number. “These companies may be selling stolen Social Security numbers, often those taken from children,” the FTC warns. If you fall for this trap, you are essentially committing identity theft.

  1. They ask you to lie on credit applications.

Some credit repair organizations may also ask you to lie on credit applications in order to qualify for more credit. For example, they may ask you to report more income than you earn. It’s illegal to make false statements on credit applications.

  1. They dispute correct information on your credit report.

Yet another way credit repair companies try to manipulate the system is by misinforming consumers about the rules surrounding credit reports. They may tell consumers that they can fight every single item on their credit report — even if the item is accurate.

This is not true. If there is a negative item on your credit report that you feel is an error, you absolutely can fight to have it removed. But if it’s negative because you were, indeed, late on your bill, or did, in fact, file for bankruptcy, you cannot file to have it removed by claiming it is inaccurate.

  1. They promise to get you a perfect credit score.

When a company promises they can improve your credit score or even get your score up to a specific number, don’t believe their hype.

In 2015, the FTC filed suit against a company called FTC Credit Solutions for making exactly these types of claims. The company’s representatives told customers they would get their credit score into the 700s and promised any negative credit report information could be removed. On top of that, they also charged advance fees before rendering any services. The case was settled very quickly to the tune of a $2.4 million penalty against the defendants.

  1. They claim they are affiliated with a government agency.

Some repair firms fraudulently claim they are affiliated with the FTC or another government agency. If you are filing bankruptcy, it is true that you’ll be required to get some kind of credit counseling. But that counseling must be from a government-approved organization. There’s a full list of approved credit counseling firms on the U.S. Trustee Program website. If you’re thinking of working with a firm that isn’t on that list, you might want to reconsider.

  1. They don’t want you to contact the credit bureaus on your own.

Don’t believe a company that tells you they are the only way to contact the credit bureaus. By law, any consumer can contact credit bureaus directly without a third party. You also have the right to access your credit report from each of the three credit bureaus once per year for free. If you’ve been rejected for anything for credit-related reasons, you have 60 days to request a free copy of your report. This enables you to keep potential creditors honest.

If a company ever tells you that you are not allowed to contact the credit bureaus on your own, walk away — fast.

How to Repair Your Credit All by Yourself

The MagnifyMoney team highly recommends taking simple steps to improve your credit on your own, without the risk of working with a shady credit repair firm.

Read MagnifyMoney’s full, in-depth guide to repairing your own credit.

Start by getting a copy of your free credit report from each of the credit bureaus. The simplest way to do this is by requesting copies at AnnualCreditReport.com, which is a government-sponsored website.

From there, look over your information to make sure everything is accurate. If there are late payments listed, did you actually pay late? Does it show closed accounts accurately? Do you recognize all of the accounts?

Sometimes reports do have errors. If you find one, consider the fact that you may be a victim of identity theft and take appropriate steps as necessary.

If you’re instead the victim of an honest mistake, contact the credit bureaus directly. You will have to do so online and via written letter. You will also have to contact the entity that incorrectly reported the line item. You can get a sample letter here.

Be sure to keep copies of all of your paperwork and follow up on your dispute. The credit bureaus have 30 days to investigate. If all turns out well, they will remove the item, which could result in a higher credit score.

If they do not find in your favor, you can request that a copy of the dispute be attached to your credit report moving forward, but you will have to pay a fee to do so. While this will not improve your credit score, it could potentially alert future creditors to the fact that you do not agree with the negative item.

There are also rare cases where you can attempt to get an accurate item removed from your credit report. If you were not aware of a debt, but you quickly paid it off once you were properly notified, the creditor may be willing to remove the item from your report. This kindness may also be extended if you were experiencing a temporary illness or life emergency. These removals are rare, but are most often rewarded when you are an otherwise responsible steward of your debts.

To make your case to your creditor, you will need to write them a letter of goodwill. In it, explain that you understand why the item is on your report, but also explain why you temporarily were unable to fulfill your obligation. Stress the fact that you are an otherwise responsible borrower, and point out specific instances in your business relationship where this has proven to be true.

It’s also a good idea to appeal to their human side. Explain what the removal of the debt would mean for you. Is there a major milestone coming up, such as a job interview or a mortgage application? Thank them sincerely for the time they’re taking to review your case and cross your fingers. Goodwill letters do not have a high success rate, but you will have a zero percent success rate if you don’t try.

Read MagnifyMoney’s full guide on letters of goodwill.

Finding Legitimate Solutions

Even though there are a lot of scammers out there, it’s good to remember that there are legitimate credit repair organizations, too. However, before you pay a company to help you repair your credit, read our guide on repairing your credit on your own and our guide on credit counseling. At the very least, properly vet a credit repair firm before you sign up for their services — and watch out for the warning signs we covered before.

Another potentially safer way to go about credit repair is by working with a not-for-profit credit counselor. These organizations have a lower rate of deceptive practices and can work with you in a more holistic manner to resolve not just your credit report woes but also your current debt situation.

The post 7 Signs You’re Working With a Shady Credit Repair Firm appeared first on MagnifyMoney.

A Beginner’s Guide to Using Credit Cards

how-to-use-credit-cards-to-build-credit

Credit cards can be useful financial tools, especially when you need to borrow money or make large expensive purchases. They also can put you in debt if you don’t manage them properly. Here is a quick guide to understanding credit cards.

1. Why It’s Important to Own a Credit Card

Credit cards can help you pursue financial opportunities in your present and your future. They allow you to borrow money for large expenses; they can even help you in an emergency. Credit cards can also help build your credit history — that is, if you consistently make payments on time and keep your debt levels low. If you build a good credit history, you can find yourself less stressed and more financially literate. You’ll also have a better chance of receiving other loans, like a mortgage or auto loan, with reasonable terms and lower interest rates.

2. How Credit Cards Work

A credit card is an agreement between you and a bank or financial entity. First, you have to apply for the credit card. Then, if your credit history meets their standards, you will most likely be approved. Depending on the card’s issuer, you may have an annual fee for the card. Each month, you will receive a bill for your credit card along with a credit card statement asking for a minimum payment on your balance. If you choose to pay only that minimum amount, you may find yourself accumulating more debt due to the card’s interest rate. To avoid paying interest on your card, you might want to consider clearing your balance before the end of the month. (Remember, too, it’s wise to keep an eye on your credit as you work to beef up your score. You can view two of your free credit scores, updated every two weeks, on Credit.com.)

3. How to Properly Use a Credit Card

It is important to use your credit card carefully and responsibly. First, make sure you pay your credit card on time every month. This is crucial. If you miss a payment, you may get hit with a fee. And if you continue to miss your payments, know this will negatively impact your credit history, which could hurt you in the future when you try to secure a loan.

So pay off your charges in full every month, if you can. This will boost your credit score, ensure you always have a positive credit history and most importantly, keep you out of debt. If you do choose to carry a balance on your credit card after making your monthly payment, then I recommend using less than 30% of your available credit. (For best scoring purposes, you may want to aim to keep your credit utilization below 10% of your available credit.) This way you will never be too in over your head.

Remember, if you rack up charges on your credit card and can’t afford to pay them off, then you will likely continue to get hit with interest rate charges until you pay those balances down, leaving you more in debt than you’d planned. (Some cards offers 0% introductory or balance-transfer annual percentage rates that let you avoid interest for a period of time.)

Lastly, it is okay to own multiple credit cards, but it’s important to treat each card with the same care. Each month, try to pay more than the minimum or maintain a $0 balance. And if you are looking to open more credit cards, it’s a good idea not to do so all at once, as having too many inquiries in a short period could raise a red flag to lenders that hurts your score.

Image: Antonio_Diaz

The post A Beginner’s Guide to Using Credit Cards appeared first on Credit.com.

How (and why) to Request a Credit Limit Increase with American Express

Pretty Young Multiethnic Woman Holding Phone and Credit Card Using Laptop.

In this first installment of our multi-part blog series about how (and why) to request a credit limit increase with various banks and financial institutions, we’ll examine how to go about requesting an increase with American Express. Perhaps the most important thing to remember as you read this blog (and subsequent ones in the series) is that when it comes to requesting a credit limit increase with any financial institution, it’s not the how part that matters most – it’s the why. There are good reasons to request a credit limit increase, and there are bad ones, and understanding the difference between the two is critical.

Why increase your limit in the first place?

Let’s get this out there right off the bat: Requesting a credit limit increase so you can spend more money each month is not a smart thing to do. As you probably well know, failing to pay off your credit card in full and paying big money in interest each month is not a great way to build wealth. So, if you’re requesting a higher credit limit just to spend more money on non-essential purchases each month, you should probably reconsider.

Now, if you are (and want to remain) a financially responsible borrower, the primary reason to request a credit limit increase is to lower your overall credit card utilization rate. Your credit card utilization rate is a measure of how much of your available credit you use each month. The math is pretty simple – just divide your total credit card balance by your total credit card limit. So, if you have a $5,000 balance and a $20,000 credit limit, your credit card utilization rate is 25 percent. Most financial experts advise maintaining a utilization rate of no higher than 20-30%, across all of your cards.

Lower utilization rate = better credit score

Lowering your credit card utilization rate is important because there’s a strong correlation between your utilization rate and your credit score because it accounts for 30% of your overall credit score. Now, credit scores are based on complex scoring algorithms that take many factors into consideration, so it’s impossible to specify the exact impact of your credit utilization rate on your overall credit score. But what we know for sure is the lower your credit utilization rate, the better your credit score is likely to be, and the easier it will be for you to borrow money at the lowest interest rates. So, going back to the hypothetical example above, if you were to charge the same $5,000 each month, but get your credit limit raised from $20,000 to $30,000, your utilization rate would drop from 25 percent to down under 17 percent. That’s a good thing.

How do banks decide?

Of course, the decision to raise your credit limit isn’t solely yours. Your credit provider has to agree to the request. There’s no great mystery here. If you have a clean credit history, a healthy income (relative to how much you charge each month), keep your monthly balance low, and make your payments on time, chances are you’ll have your request approved. In fact, if you’ve proven yourself to be a reliable borrower over a prolonged period of time, many financial institutions will proactively raise your credit limit without you even having to make the request. On the flip side, if you carry a large balance, have a checkered credit history, and have been inconsistent about paying your monthly bill on time, chances are your lender will be hesitant to increase your credit limit. If you fit into the latter category, you’re best served spending time cleaning up your financial act and proving yourself a reliable borrower before requesting an increase.

Requesting an increase from American Express

The good news is we live in a digital world, one where institutions like American Express have made it fast and easy to request a credit limit increase right online with just a few clicks. Start by logging into your account at www.americanexpress.com.

Step 1

Once you’ve logged in, click on Account Services.

Amex Screen 1

Step 2

Next, click on Credit Management.

Amex Screen 2

Step 3

From there, click on Increase Line of Credit.

Amex Screen 3

Step 4

You’ll then be asked to enter your 4-digit personal code, usually found on the right side of your card, just above your credit card number.

Amex Screen 4

Step 5

Finally, you’ll be taken to a page where you can formally request an increase to your line of credit. Note that you’ll have to enter both your new desired credit limit and your total annual income.

Amex Screen 5

For those who prefer good old-fashioned human interaction, you can also request a credit limit increase by calling the American Express customer service line at 1-800-528-4800.

A few housekeeping items to keep in mind that are specific to American Express:

  • You cannot request a credit limit increase until you’ve had your American Express card for more than 60 days.
  • If your request is approved, you’ll need to wait at least 6 months before you can request another increase.
  • If your request is denied, you have to wait at least 90 days before you can make another request.
  • In order to maximize your chances of approval, it’s generally recommended that the new credit limit you request is no more than three times the size of your current limit.
  • One of the best features of American Express is they don’t do a hard pull of your credit report for credit limit increase requests, meaning your credit score won’t be adversely affected.

Your credit limit was increased. Now what?

Let’s assume all goes well and your credit limit is increased. What should you do next? Ideally, nothing. If you started this process for the right reason – to improve your credit score by lowering your utilization rate – then having your limit increased should have no bearing on your spending habits. Simply continue spending at the same level you were before your limit was increased, and let your credit score reap the benefits.

The post How (and why) to Request a Credit Limit Increase with American Express appeared first on MagnifyMoney.