12 million people are about to get a credit score boost — Here’s why

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.

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.

5 Ways Teens Can Start Building Credit Right Now

Here's how you can start establishing credit even before you're 18.

When it comes to building credit, most people start at a disadvantage. It takes credit to build credit, and with no substantial credit history, it’s difficult to qualify for the very credit cards or loans they need to start building credit. And if you’re under 18, you can’t even legally open a credit card in your own name.

Luckily, there are some credit building methods you can use while you’re still in high school — even before you turn 18. Here are a five ways high school students can start building good credit (plus some tips on how to maintain it). 

1. Get a Job 

OK, so getting a job doesn’t directly help you establish credit, but income is a key factor in qualifying for credit, and your job history, just like your credit history usually gets stronger with time. The more experience you have, the better your chances of getting a better, higher-paying job in the future, so get started early (without hurting your academics, of course).

The CARD Act of 2009 requires students and other young adults to demonstrate their ability to repay debt before they can open a credit card account. Having a job will help you do exactly that and strengthens your qualifications for getting a credit card when you’re old enough.

2. Get Added as an Authorized User 

When you’re under 18, one of your options is to get an adult to add you as an authorized user on one of their credit cards. As an authorized user, you can hold and/or use the adult’s credit card, but you won’t be the primary cardholder. The primary card user’s responsible card use can help boost your credit.

“As an authorized user [you] would be able to piggyback off of the more responsible person’s credit,” says Amber Berry, Certified Financial Education Instructor at Feel Good Finances. “Of course, this requires consent from the sponsoring adult because it is the card owner, not the authorized user who is ultimately responsible for making payments.”

This is only a good idea if you and the cardholder both trust each other to use or pay on the card responsibly. You’ll also want to make sure the card in question reports authorized users to the three major credit bureaus. (Still confused about what it means to be an authorized user? We’ve got a full explainer here.)   

3. Get a Secured Credit Card

If you’re already 18, another option for establishing a credit history from scratch is getting a secured credit card. Secured credit cards require a security deposit that dictates your line of credit — for instance, a security deposit of $300 would get you a $300 credit limit. Even though your card is tied to hard cash, you still use it for purchases and make monthly payments just like a normal credit card.

It’s much easier to qualify for a secured credit card, and responsible use will still help you build credit. Card providers may even raise your credit limit or offer you an unsecured credit card after a period of responsible use. You can find some of our picks for the best secured credit cards here 

4. Get a Student Credit Card 

If you’re heading to college soon, another good starter option is the student credit card. Student credit cards have more lenient qualification requirements, have low or nonexistent annual fees and often offer incentives for responsible behavior.  For instance, the Discover it Chrome student credit card offers cash back for good grades, 2% cash back at gas stations and restaurants on up to $1,000 in purchases per quarter and a cash back match at the end of the first year.  

5. Use Good Credit Card Habits  

When you do land a credit card, long-term responsible use is necessary to build and maintain your good credit. That includes paying your bills on time, carrying a low balance and paying your balance in full.

“Do your best not to carry a balance on the card. If you carry a balance and pay only the minimum monthly payment, it can take decades or more to pay off the debt,” says David Levy, Editor at Edvisors Network. “Late payments result in late fees, and some credit card issuers will increase your interest rate if you’re late with a payment. Making payments on time will help you build a good credit history.”

As you build your credit, it’s a good idea to monitor your credit reports and credit scores for errors and signs of fraud, which will also help you maintain your hard-earned credit standing. You can get your your two free credit scores, updated every 14 days, at Credit.com.

Image: wundervisuals

The post 5 Ways Teens Can Start Building Credit Right Now appeared first on Credit.com.

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.

Credit Cards: The Ultimate Present Hedonist (a.k.a. YOLO) Trap

Credit Cards

In 2014, I led a six-nation study on financial literacy with MagnifyMoney. The purpose of the study was to understand:

  • Is traditional financial literacy training sufficient to help people live financially healthy lives?
  • What role does a person’s time perspective play in how that individual makes financial decisions?
  • How does an individual’s national identity impact his or her approach to time and money?

We conducted the study in the United States, United Kingdom, Germany, Sicily, Hong Kong and Brazil. Every participant was given:

  • A traditional financial literacy exam
  • A “financial health” exam, which determined whether an individual was living a financially healthy life. Someone who is financially healthy would have retirement savings, an emergency fund and a good credit score. Someone who is financially sick would be in debt, have a bad credit score and possibly could have suffered bankruptcy or other defaults.
  • The Zimbardo Time Perspective Inventory, to determine an individual’s approach to time.

The results were groundbreaking. We found millennials are less financially literate than their boomer counterparts, but are actually more financially healthy. 33% of the American population tested as financially healthy, with the United Kingdom coming in with 54% and Brazil only 14%. Most importantly, we uncovered that an A+ math student doesn’t correlate to being financially healthy. What does matter, is the direct link of a person’s approach to time with financial behaviors.

The Failure of Traditional Financial Literacy and The Importance of Time Perspective

Traditionally, financial literacy training focuses on mathematical aptitude. A traditional financial literacy exam would ask people to understand inflation-adjusted returns and to calculate the impact that an interest rate change would have on the price of a bond. The implicit assumption underpinning traditional financial literacy education is that by understanding math, you can live a financially healthy life.

However, our study conclusively demonstrated that simply “understanding the math” was not sufficient to live a financially healthy life. A high financial literacy score did not translate into a high level of financial health. That does not mean that we encourage people to stop learning math. Quite the contrary. Instead, the data demonstrated that financial acumen is necessary but not sufficient to live a financially healthy life.

It’s a person’s time perspective that can really predict how financially health they are.

An individual’s approach to time has a big impact on financial health. People who took our quiz and scored a very high “past negative” score (meaning they have negative associations with past events in their lives) tended to be financially healthy.

But why?

Aversion to risk can be bad for your social life (keeping people from enjoying life and falling in love) but great for your finances. Because you are afraid of what might happen, you are more likely to save. Because you don’t trust people, you won’t buy into their next big speculative investment.

People who start saving early and invest consistently, without emotion, in a diversified investment portfolio do extremely well over time and are the most prepared for retirement. It seems that being past negative actually does have a benefit: when the next Ponzi scheme comes along, a past negative individual will reject it. Imagine your wise grandmother who lived through the Depression. She might not be able to calculate compounding interest, but she knows how to save and isn’t a fool. Your grandmother probably has more money sitting in her bank account than her flashy neighbors.

We found the strongest statistical relationship between “present hedonists” and financial sickness. And while intuitively this finding is not surprising, we now have data from six nations validating our intuition. Present hedonists want to enjoy the moment without thinking about the consequences. Imagine the investment banker making millions every year. He understands the complexities of derivatives, but he is unable to say no to a first class air fare and the VIP room at a club. Although he makes millions, he spends it all (and then some) as part of one big adrenaline rush. Present hedonism helps him work 80 hours a week on a big financial deal, completely focused on the outcome. But it also helps him lose all of his money on champagne and the other addictions found in close proximity to champagne.

And when we compared the different geographic limitations, we saw time perspective at work. The most “financially sick” country was Brazil, which is culturally a much more present hedonist than other surveyed nations.

While we might not worry too much about the intoxicated investment banker, we should worry about present hedonists and their impulsive indulgences. A single mother living on minimum wage knows that she needs to save. But she buys those concert tickets because they make her feel better. The hard-working husband knows that he needs to save for his children’s education. But during a trip to Vegas, the temptation of the tables proves to be too much for him. Present hedonists often make very bad financial (and life) decisions. They might feel fleeting regret, but it doesn’t last. They will search out their next present hedonist treat and repeat the pattern.

Since our study in 2014, we have been looking at financial products that bring out the worst in present hedonists. And we have focused on one product in particular: credit cards.

Credit Cards: The Perfect Present Hedonist Trap

Present hedonists are driven by two key driving forces:

  1. They want it now. There is a strong desire for instant gratification.
  2. They do not want to think about the consequences. And if you force a present hedonist to think about the consequences of their actions, they might move on to the “next easiest adventure.”

Credit cards have been designed to take full advantage of a present hedonist.

I will explain the trap in a moment. But first, it is important to understand that this is not an indictment of credit cards for everyone. A financially healthy past negative individual can make excellent use of a credit card. He or she can find a credit card to be a convenient way of paying. Credit cards can be a convenient way to make transactions all over the world. A responsible individual could earn rewards or airline miles, which can result in free trips. And so long as the individual does not spend more than he or she can afford, most credit cards are virtually free. If you pay the credit card balance in full and on time every month, you will never pay any interest expense. So, for a financially responsible individual, a credit card can be both a convenience and a way to earn rewards. In fact, credit card companies lose money on responsible people. But they more than make up for it with present hedonists who overspend.

And for a present hedonist, a credit card is like a loaded gun.

Why is a credit card so dangerous for present hedonists? Because it’s a carefully designed product to trap those willing to live beyond their means:

A credit limit that is much higher than your monthly gross income.

When you apply for a credit card, you will be assigned a credit limit. Most credit card companies will assign a credit limit that is significantly greater than your monthly gross income. If you make $3,000 a month, you might get a $6,000 or even $10,000 credit limit.

The credit card company charges a minimum due that is usually 1% of the principal balance (and includes any interest that accrues). For example, if you have a $10,000 balance on your credit card, your minimum monthly payment would only be only $225. The credit card company will be happy if you only pay $225 a month (the minimum due) because $125 of the payment would go towards interest. And for someone making $3,000 a month, a $225 payment could be affordable.

But that big credit limit is a huge temptation for a present hedonist. In the heat of the moment, a present hedonist has at least $10,000 available that could make today more fun. Do you see shoes that you would like to buy? Do you see a new iPhone you would like to buy? Your big credit limit makes it easy.

There is no “pain of paying.”

Present hedonists want to enjoy the moment without any thought of the consequences. At the moment of the transaction, any barriers to that payment removes fun, slows down time and makes the consequences more visible. With credit cards, a payment is instant and easy. A simple swipe of the plastic and the purchase is complete.

A credit card makes it possible to spend very large quantities of money with very few barriers or moments to create thought. Retailers are willing accomplices. At Amazon, you can make a purchase with just one click. Retailers and credit card companies have created a world where present hedonists can indulge quickly and easily, with no thought of the consequences.

Automate Payments and Eliminate Statements

Credit card companies offer the ability to automate your monthly payment. You can easily set up a recurring monthly payment that only covers the minimum payment due. You can also sign up for electronic statements, which removes the monthly physical reminder of the decisions you made and the cost of those decisions.

Tactile therapy has proven an effective way of helping present hedonists. A monthly, physical statement would force a present hedonist to stop and think about his or her financial statement. But once those are turned off, all can be forgotten.

What to Do

Because of the importance of time perspective, individuals must self-diagnose. Financial literacy training should include a mandatory self-assessment using the Zimbardo Time Perspective Inventory.

Present hedonists need to know and understand who they are. They should consider cutting up their credit cards. Perhaps cash is the best way to ensure financial health. If the money in the wallet is gone, there is nothing to lose.

Credit card companies should consider creating tools to help people reduce their credit limits and limit their spending. For example, maybe a credit card would allow people to turn off the ability to make transactions after 10 PM, making it impossible for the hedonist to spend wildly in dangerous situations.

But one thing is certain: teaching a present hedonist how to calculate compounding interest and then handing him or her a credit card is not the way to ensure a financially healthy life.

The post Credit Cards: The Ultimate Present Hedonist (a.k.a. YOLO) Trap appeared first on MagnifyMoney.

Does Opening Multiple Credit Cards Help Me Build My Credit Faster?

does-having-multiple-credit-cards-help-credit-score

You may have heard that getting a credit card is one of the easiest ways to build good credit. It’s true: There are credit cards for people with bad credit or no credit, and if you can get one, you can use it to build up the most important parts of your credit history, payment history and debt use. If you make your payments on time and keep your balance on that credit card low, you can start building a good credit score.

So if one credit card can help you do that, would two credit cards help you accomplish that faster? We get that question a lot, and the answer isn’t clear-cut. Here’s why.

When Multiple Cards Can Help

As we mentioned before, your level of debt is one of the most important aspects of your credit score. As far as credit cards go, you need to focus on your credit card balance(s) and your overall credit card limit. You want to use as little of that limit as possible: The lower your overall credit card balance is relative to your credit card limit, the lower your credit utilization rate will be. Companies that make credit scores have long recommended people keep their credit utilization rate lower than 30% or, ideally, lower than 10%. So if you have a combined $1,000 credit limit, you’ll want to charge no more than $300 (or, ideally, $100) to your cards before paying the bill.

“Opening multiple cards may be necessary for score building if the credit limit on a single card is too low to handle your charging needs,” Barry Paperno, who has more than two decades of experience working in the credit scoring industry, said in an email.

Say you want to charge $200 a month, but your only credit card has a $500 limit. Unless you decrease the amount you spend on that credit card, one of the only other ways to decrease your credit utilization rate is to get a higher overall credit limit. Opening another credit card could accomplish that — as long as you continue to only spend $200 on your credit cards each month and pay off the balances.

Getting another credit card isn’t the only solution to that problem.

“You can keep a low-balance reporting on a single card without curtailing your charging by making multiple payments during the month,” Paperno said.

When Multiple Cards Can Hurt

If you’re considering applying for multiple credit cards, keep in mind that each credit card application will add a hard inquiry to your credit report, which can hurt your credit score. They don’t hurt your score for very long — about 6 months to a year, and they age off your credit report after 2 years — but you’ll see the negative effects in the short term, so your strategy could backfire.

“If someone were to suddenly apply for several new credit cards, there would likely be a negative impact to their credit scores,” Kristine Snyder, a spokeswoman for the credit bureau Experian, said in an email. “Because there is no payment history associated with the new accounts, credit scoring systems don’t know how to interpret them. That unknown often results in a temporary decline in scores, not an instant improvement.”

Then there’s the challenge of managing multiple cards. If you’re trying to show you can make payments on time and use credit responsibly, it’s probably easier to focus on doing that with just one account.

“For most consumers, taking it slow with a single card during the first credit-building year can lead to a good score as quickly as with multiple cards, and be easier to manage,” Paperno said.

It generally takes 6 months of using credit to have enough of a credit history to produce a credit score. You can track how your credit-building efforts are going by regularly reviewing your credit scores. You can do that for free on Credit.com, where you can get two free credit scores, updated each month.

More on Credit Reports & Credit Scores:

Image: Petar Chernaev

The post Does Opening Multiple Credit Cards Help Me Build My Credit Faster? appeared first on Credit.com.

Does Opening Multiple Credit Cards Help Me Build My Credit Faster?

does-having-multiple-credit-cards-help-credit-score

You may have heard that getting a credit card is one of the easiest ways to build good credit. It’s true: There are credit cards for people with bad credit or no credit, and if you can get one, you can use it to build up the most important parts of your credit history, payment history and debt use. If you make your payments on time and keep your balance on that credit card low, you can start building a good credit score.

So if one credit card can help you do that, would two credit cards help you accomplish that faster? We get that question a lot, and the answer isn’t clear-cut. Here’s why.

When Multiple Cards Can Help

As we mentioned before, your level of debt is one of the most important aspects of your credit score. As far as credit cards go, you need to focus on your credit card balance(s) and your overall credit card limit. You want to use as little of that limit as possible: The lower your overall credit card balance is relative to your credit card limit, the lower your credit utilization rate will be. Companies that make credit scores have long recommended people keep their credit utilization rate lower than 30% or, ideally, lower than 10%. So if you have a combined $1,000 credit limit, you’ll want to charge no more than $300 (or, ideally, $100) to your cards before paying the bill.

“Opening multiple cards may be necessary for score building if the credit limit on a single card is too low to handle your charging needs,” Barry Paperno, who has more than two decades of experience working in the credit scoring industry, said in an email.

Say you want to charge $200 a month, but your only credit card has a $500 limit. Unless you decrease the amount you spend on that credit card, one of the only other ways to decrease your credit utilization rate is to get a higher overall credit limit. Opening another credit card could accomplish that — as long as you continue to only spend $200 on your credit cards each month and pay off the balances.

Getting another credit card isn’t the only solution to that problem.

“You can keep a low-balance reporting on a single card without curtailing your charging by making multiple payments during the month,” Paperno said.

When Multiple Cards Can Hurt

If you’re considering applying for multiple credit cards, keep in mind that each credit card application will add a hard inquiry to your credit report, which can hurt your credit score. They don’t hurt your score for very long — about 6 months to a year, and they age off your credit report after 2 years — but you’ll see the negative effects in the short term, so your strategy could backfire.

“If someone were to suddenly apply for several new credit cards, there would likely be a negative impact to their credit scores,” Kristine Snyder, a spokeswoman for the credit bureau Experian, said in an email. “Because there is no payment history associated with the new accounts, credit scoring systems don’t know how to interpret them. That unknown often results in a temporary decline in scores, not an instant improvement.”

Then there’s the challenge of managing multiple cards. If you’re trying to show you can make payments on time and use credit responsibly, it’s probably easier to focus on doing that with just one account.

“For most consumers, taking it slow with a single card during the first credit-building year can lead to a good score as quickly as with multiple cards, and be easier to manage,” Paperno said.

It generally takes 6 months of using credit to have enough of a credit history to produce a credit score. You can track how your credit-building efforts are going by regularly reviewing your credit scores. You can do that for free on Credit.com, where you can get two free credit scores, updated each month.

More on Credit Reports & Credit Scores:

Image: Petar Chernaev

The post Does Opening Multiple Credit Cards Help Me Build My Credit Faster? appeared first on Credit.com.

I’m 18 & I Want a Credit Card. What Are My Options?

credit-card-application

Getting a credit card is like taking a step toward financial adulthood. It brings you into the world of building credit and paying bills, which almost everyone has to deal with at some point, so it can help to get started as soon as possible.

But the “firsts” of adulthood aren’t always easy, and that includes getting your first credit card. A Credit.com reader recently asked where to start:

Hi, I am 18 years of age, I have no credit history, and I have low income. I’m wanting to get my own place, and would love some help finding a good credit card to build my credit that will accept my low income.

There are three main things that will affect whether or not someone like our commenter could get a credit card: the person’s age, the fact that they have no credit and the amount of money they make.

1. Can You Get a Credit Card at 18?

Let’s start with age. Per the Credit CARD Act of 2009, consumers younger than 21 must have proof of independent income or a co-signer in order to get a credit card. It makes sense: If you’re going to get a credit card, you need to be able to show that you can pay your balance.

2. Do You Make Enough Money?

That brings us to income. Since this commenter referenced wanting to live independently, it seems unlikely that they’d opt for a co-signer. That means this person would need to provide proof of their income. We don’t know exactly what our commenter means by “my low income” — even if it’s not a lot, it isn’t necessarily a credit card deal-breaker. You could always try to ask a credit card issuer what sort of income they’re looking for among card applicants, but you may not get an adequate answer, given that there’s more that goes into getting approved for a credit card than income.

3. What’s Your Credit Like?

This is where credit history comes in. People with no credit don’t have a lot of options, but they can often get secured credit cards (we have an expert guide to secured credit cards you can read here, as well as a review of the best secured credit cards). Just because they’re designed for people with bad or no credit doesn’t mean you’ll get approved, because you still need to show your ability to pay your bills, and you’ll need to make a deposit (which will serve as your credit limit). Generally, that requires having a bank account from which you can make that deposit.

The only way to know for sure what credit card you can get is to apply for it, but you’ll want to do that carefully and sparingly. Each application for new credit can result in a hard inquiry on your credit report (you can read more about hard inquiries and soft inquiries here), so applying for a bunch of credit cards in a short period of time won’t make it any easier for you to get credit.

If you’re rejected for a credit card, the credit card issuer must explain why, and you can use that information to try make improvements to your finances. That way, the next time you apply, you’ll have a better chance of getting approved. After having your credit card application rejected, you may want to wait several months before trying again, so the previous hard inquiry won’t have as negative an affect on your credit. To keep an eye on your credit and how you’re progressing toward building a good credit score, you can get two free credit scores, updated monthly, on Credit.com.

Have questions on credit cards or anything else about personal finance? We’d love to hear from you. You can share your thoughts and questions in the comments section.

More on Credit Cards:

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The post I’m 18 & I Want a Credit Card. What Are My Options? appeared first on Credit.com.