Can You Be Denied a Rental Home Because of Bad Credit?

denied an apartment

The most well-known consequence of having bad credit is trouble getting loans or credit cards, but a low credit score can also make it difficult to find a place to live. Landlords, especially large property-management companies, will likely check your credit report before approving your lease, and there are plenty of negative items that landlords see as deal breakers with potential tenants.

But don’t fret—you may still have options.

Is Bad Credit an Automatic Rejection?

By most landlords’ standards, the minimum credit score to rent an apartment is 620. But many landlords look past the credit score and search for specific activity on a potential tenant’s credit report.

Ben Papale, a real estate broker in Chicago, Illinois, says judgments, tax liens, and collections accounts on utilities are almost always nonstarters, but medical collections and late credit card payments aren’t as problematic in the eyes of a landlord.

Barry Maher, a property manager in Corona, California, says the 2007 recession changed his mind on bad credit. Before, he never looked at applicants with bad credit because plenty of other applicants had good credit. Then suddenly almost all the applicants had a credit problem.

“I started looking at it more closely,” Maher says. “Particularly after the recession hit, I had people who had declared bankruptcy, people who had lost their houses. But I was still able to find some incredibly good people to rent to.”

It can be difficult to get into an apartment with bad credit, but there are a handful of things you can do to improve your approval chances. Use the seven tips below to help you get into that apartment or house you’ve been eyeing.

1. Find an Apartment with No Credit Check or an Independent Owner

Large management companies are less likely to consider applicants with bad credit, so you’ll want to look for a landlord who has a small operation—who maybe owns just a few units or properties.

“They’re a lot more open to considering special considerations,” Papale says. Large management companies are unlikely to make exceptions because that opens them up to the possibility of getting sued if someone in a similar situation applies for an apartment and is denied, Papale says.

If you’re dealing with an individual, rather than a company, you may have an opportunity to tell your story and explain why you’d be a good tenant.

2. Explain in Person

Maher puts a lot of stock in personal interactions. He says he always makes reference calls himself—the one time he didn’t led to a terrible tenant, and he won’t make that mistake again. Now he knows there’s a lot of value in meeting potential renters before deciding.

“If they’re forthcoming and they meet with the person making the final decision to explain their case, they’re way ahead of the game,” Maher says.

Papale recommends renters with bad credit write personal statements to send in with their applications—to put the credit problems in context and make an argument for themselves.

3. Be Open about Your Income and Savings

When explaining your personal situation, proof of a stable income can go a long way. Come prepared with pay stubs, and show you make enough to comfortably pay rent—rent should be less than 30% of your monthly income. Knowing you’re not strapped for cash will be a comfort to your potential landlord.

If you don’t have a steady income but you do have a sizeable bank account, bring bank statements that show you have enough savings to pay at least six months’ worth of rent. A financial cushion is better than nothing, and it may bring an independent owner over to your side.

4. Make Advanced or Larger Payments

Money talks. Just like how showing your income can help your chances of getting into an apartment, making a large advanced payment can be a helpful gesture of good will. Paying a larger deposit than requested or even three months of rent in advance will elevate your renting potential in a landlord’s eyes.

5. Find a Roommate

If you don’t have your heart set on having an apartment to yourself, a roommate can be a good solution while you improve your credit. Find someone who is already secure in their lease you can move in with without needing a credit check. Or find a landlord who will let you move into a new place with only your roommate’s name on the lease.

You can save money by splitting rent with a roommate, and your landlord will feel more comfortable having at least one person with good credit living in the apartment. Just don’t hang your roommate out to dry when rent is due.

6. Consider a Guarantor or Cosigner as a Last Resort

Having a friend or family member cosign on your rental application will make getting into an apartment a lot easier, but it can strain your relationship. If you choose this route, you’ll have to find a cosigner who has a secure income and good credit that they’re willing to put on the line for you.

You also need to be certain you will be able to pay rent every month. Missing a payment means your cosigner will be forced to pay it on your behalf, which can lead to a lack of trust. Nobody wants that, so again: make sure you can pay the rent!

7. Repair Credit for Future Apartment Hunting

Once you’ve gone through all the work to get into an apartment with less-than-ideal credit, take steps to avoid this situation in the future. You can repair your credit in about one to two years if you put your mind to it.

It’s important to check your credit scores before applying for a rental. By doing so, you can not only proactively address any credit issues you have but also make sure you’re accurately representing yourself. Credit scores fluctuate constantly, so keep an eye on your score. You wouldn’t want to fill out an application thinking everything’s fine only to have a landlord think you lied because he found issues with your credit report. Get your credit score for free on Credit.com, with updates every 30 days.

Image: iStock

The post Can You Be Denied a Rental Home Because of Bad Credit? appeared first on Credit.com.

Will Debt Consolidation Help or Hurt Your Credit?

Debt isn't always a bad thing. In fact, it can help your small business thrive.

From student loans to a house mortgage, debt accumulation is stressful and overwhelming. As you make moves to get out of debt, you might want to consider consolidating credit cards or other loans to save you time and money. But that begs the question—does debt consolidation help or hurt your credit?

The answer depends on how you consolidat­e and what you do with your debt afterward.

1. Debt Consolidation Loans

Getting a new loan to pay off other debts is the most popular way to consolidate. It’s certainly what most people think of when they consider consolidation. But finding a loan that has decent terms and is designed specifically for the purpose of consolidation can be challenging—especially if your credit scores are a bit lower due to the balances you’re carrying.

It’s certainly not impossible, though. Look for reputable debt consolidation companies that will work for your specific situation.

Tip: Triple check lenders’ certifications to make sure you’re dealing with a legitimate site if you’re shopping for a loan online. Scams abound.

Effect on Your Credit: Consolidating credit cards with high balances using an installment loan (i.e. a loan with fixed monthly payments) may actually benefit your credit rating, especially if you use the loan to pay off credit cards that are near their limits. At the same time, any new loan can cause a short-term dip in your credit scores—so don’t be too surprised if you see your credit score change slightly when taking out a new loan.

2. Debt Management Plans

Debt management plans are often confused with debt consolidation—however, they’re very different programs. Debt management plans (DMPs) are offered through credit counseling agencies and, much to many people’s surprise, they don’t actually consolidate your debt.

Instead, you make a “consolidated” payment to the counseling agency, which then pays each of your creditors—usually at a reduced interest rate. Even though you’re making only one or two monthly payments, the counseling agency doesn’t actually pay off your creditors for you—it simply acts as a middle man to help you repay your debts and ensure that the creditors get the money they’re owed. These programs are available regardless of credit scores, so if you are having trouble consolidating, a DMP might be worth considering.

Tip: If you choose to move forward with a DMP, you should close or suspend your credit card accounts. Unfortunately, you’re not permitted to use credit cards while enrolled in a DMP.

Effect on Your Credit: If you have a good credit score and adhered to a creditor’s repayment terms in the past, a DMP could have a negative impact on your credit as it indicates that you are experiencing or have experienced difficulty with payments. Also, since a DMP directly impacts payment terms, credit reporting agencies might ping your DMP commitment because it designates a change in payment policies.

3. The Credit Card Shuffle

Transferring a high-rate credit card balance to a card with a lower rate is another way to consolidate. Carrie Rocha, author of Pocket Your Dollars: 5 Attitude Changes That Will Help You Pay Down Debt, and her husband paid off some $60,000 in debt, and taking advantage of low-rate balance transfers was one of the strategies they used to dig out. However, if you decide to go this route, you must be very disciplined in your approach. Otherwise, you may fall into traps such as getting stuck with a balance at a high interest rate after the introductory period ends.

Tip: Read the fine print. Keep your eyes peeled for any “but” or “until.”

Effect on Your Credit: It depends on how you use a transfer. You’ll often see a temporary dip in your credit score when opening any new card. If you use a substantial portion of the available credit (on the card) to consolidate balances from other cards with lower balance-to-available-credit ratios, your credit scores may drop from that as well. Finally, you may also lose points if you open a new card and use a majority of the credit line to consolidate.

However, if a 0% card allows you to save money and pay off your debt faster, you can come out ahead in the long run, both financially and credit score–wise.

The End Goal: Less Debt Equals Stronger Credit

Paying down debt can have a tremendous impact on your credit scores. According to FICO, the company behind most of the credit scores used by lenders, consumers with high credit scores (e.g. 785 and above), tend to keep their balances low. Specifically, two-thirds of consumers with good credit carry less than $8,500 in non-mortgage debt, and they use an average of 7% of their available credit on their credit cards.

That means that paying off debt—whether you use a consolidation loan or just put every penny you can toward your debt—will often improve your credit ratings in the long run. The biggest risk, though, is that it’s easy to run up new balances on the cards you paid off in the consolidation—and that’s definitely not a good move for your credit or your bottom line. As you make progress on paying off your loans, periodically check your free credit report to see where you stand.

Remember, moving debt is a means to your end. The goal is to pay off those balances and free up cash flow as well as to help build strong credit. So whether it’s a consolidation loan, credit card shuffle, or DMP, know your options so you get there just a little faster.

Image: mapodile

The post Will Debt Consolidation Help or Hurt Your Credit? appeared first on Credit.com.

1099-Cs and Your Taxes: What You Should Know

Photo of a young couple going through financial problems

Not many know what a 1099-C is or why they receive it. But these forms can be a little scary because they’re tax documents—and no one wants to mess up their taxes. When you get one, it’s because you had a portion or all of a debt canceled.

It’s important to understand what a 1099-C is and what to do about it to ensure you are filing your taxes correctly. Here’s what you need to know.

What’s a 1099-C?

A 1099-C falls under the 1099 tax form series of information returns for the Internal Revenue Service (IRS). These forms let the IRS know you’ve received income outside of your W-2 income. Any company that pays an individual $600 or more in a year is required to send the recipient a 1099. You often receive a 1099-C when $600 or more of your debt is forgiven or discharged.

When you use credit or take out a loan, that borrowed money is still currency you can use—even if you don’t pay it back. So when debt is canceled, that money is considered ordinary income and is therefore taxable (if over $600), which means you have to report it on your tax return. Yep, Uncle Sam gets a cut of the portion of your debt that was forgiven or discharged.

When you get a 1099-C, you can find the reason you received it in the sixth box of the form. Some common reasons you may get a 1099-C are included below:

  1. You negotiated a settlement to pay a debt for less than the amount you owed and the creditor forgave the rest.
  2. You owned a home that went into foreclosure and there was a forgiven deficiency (a difference between the home’s value and what you owe on it).
  3. You sold a home in a short sale where the lender agreed to accept less than the full amount you owe.
  4. You didn’t pay anything on a debt for at least three years and there has been no collection activity in the past year.

Are My Debts Erased with a 1099-C?

If you know you received a 1099-C because of a settlement agreement, where you paid off debt for less than the full amount due, then you don’t owe anything. If the form was filed because you haven’t made payments for three years and they haven’t tried to collect recently, then you may still owe the debt. Your state’s statute of limitations may determine what debt you are and are not responsible for.

Anytime you receive a 1099-C, check the form for errors. If you find any, first work with your creditor to get the information corrected. If that doesn’t resolve the issue, then you can include an explanation with your tax return. To find out if a 1099-C has been filed, you can request a wage and income transcript from the IRS for the tax year or years in question. The transcript should list any 1099-Cs that were filed under your Social Security number.

Do I Have to Pay Taxes on the 1099-C Amount?

The IRS will automatically assume that the amount listed on the 1099-C is accurate and will expect you to include that amount in your ordinary income when you file your tax return. Depending on the other income you earn and your tax bracket, you could receive a larger tax bill or a smaller refund. However, if you can demonstrate that you qualify for an exclusion or exception, you may be able to avoid paying taxes on part or all of that phantom income.

One of the most commonly used exclusions is the insolvency exclusion. It works like this: you are insolvent to the extent that your liabilities (what you owe) exceed your assets (what you own). If the total amount by which you are insolvent is larger than the amount listed on the 1099-C, you can exclude the entire amount listed on the 1099-C from your income. You’ll have to file Form 982 with your tax return to claim this exclusion.

If the amount by which you are insolvent is less than the amount on the 1099-C, then you may be able to avoid including part of that amount in your income. However, the insolvency exclusion may not be the perfect fit for everyone—there may be another exclusion that fits your situation better.

What if I Don’t Receive a 1099-C for Canceled Debt?

Even if you don’t receive a 1099-C, you are still responsible for reporting canceled debt as taxable income. Make sure you do not leave any forgiven or discharged debt off of your tax return. If you do, you will more than likely hear from the IRS in the future for failure to pay, which will cost you more money in the long run. Look at your credit report to ensure you don’t have any unpaid debt from the last three years.

What if I Receive a 1099-C for Old Debt?

Be careful when it comes to old debt and 1099-Cs. Creditors who follow IRS guidelines should send out 1099-Cs when a debt lies dormant for three years and there has been no significant collection activity for the past year.

Specifically, the IRS 1099 instructions state that debt is canceled “when the creditor has not received a payment on the debt during the testing period. The testing period is a 36-month period ending on December 31.”

However, the creditor can rebut this cancelation if “the creditor (or a third party collection agency on behalf of the creditor) has engaged in significant bona fide collection activity during the 12-month period ending on December 31.”

If a creditor sends out 1099-Cs years (or decades) after the 1099 deadlines, the responsibility falls upon the taxpayer to explain to the IRS why they believe it should not have been filed that year. Again, there is no specific form for reporting this kind of dispute. You’ll have to include an explanation, and you may wind up arguing with the IRS to get it resolved.

What if I Receive a 1099-C for Debts Canceled in Bankruptcy?

You don’t have to pay taxes on personal debts discharged in bankruptcy. And creditors aren’t required to file 1099-Cs for those debts. If they do, however, you can file Form 982 and claim an exclusion because the debt was included in bankruptcy.

Don’t panic if your bankruptcy occurred long ago and you don’t know where to find a copy of your bankruptcy papers to prove the debt was discharged. Although it’s anyone’s guess why a creditor would send an unrequired 1099-C years after the fact, you likely won’t have to jump through hoops to prove the debt was discharged.

Getting a 1099-C can be confusing, especially if you don’t have a handle on your credit. Avoid future credit surprises by using Credit.com’s free credit report tool.

Image: David Sacks

The post 1099-Cs and Your Taxes: What You Should Know appeared first on Credit.com.

1099-Cs and Your Taxes: What You Should Know

Photo of a young couple going through financial problems

Not many know what a 1099-C is or why they receive it. But these forms can be a little scary because they’re tax documents—and no one wants to mess up their taxes. When you get one, it’s because you had a portion or all of a debt canceled.

It’s important to understand what a 1099-C is and what to do about it to ensure you are filing your taxes correctly. Here’s what you need to know.

What’s a 1099-C?

A 1099-C falls under the 1099 tax form series of information returns for the Internal Revenue Service (IRS). These forms let the IRS know you’ve received income outside of your W-2 income. Any company that pays an individual $600 or more in a year is required to send the recipient a 1099. You often receive a 1099-C when $600 or more of your debt is forgiven or discharged.

When you use credit or take out a loan, that borrowed money is still currency you can use—even if you don’t pay it back. So when debt is canceled, that money is considered ordinary income and is therefore taxable (if over $600), which means you have to report it on your tax return. Yep, Uncle Sam gets a cut of the portion of your debt that was forgiven or discharged.

When you get a 1099-C, you can find the reason you received it in the sixth box of the form. Some common reasons you may get a 1099-C are included below:

  1. You negotiated a settlement to pay a debt for less than the amount you owed and the creditor forgave the rest.
  2. You owned a home that went into foreclosure and there was a forgiven deficiency (a difference between the home’s value and what you owe on it).
  3. You sold a home in a short sale where the lender agreed to accept less than the full amount you owe.
  4. You didn’t pay anything on a debt for at least three years and there has been no collection activity in the past year.

Are My Debts Erased with a 1099-C?

If you know you received a 1099-C because of a settlement agreement, where you paid off debt for less than the full amount due, then you don’t owe anything. If the form was filed because you haven’t made payments for three years and they haven’t tried to collect recently, then you may still owe the debt. Your state’s statute of limitations may determine what debt you are and are not responsible for.

Anytime you receive a 1099-C, check the form for errors. If you find any, first work with your creditor to get the information corrected. If that doesn’t resolve the issue, then you can include an explanation with your tax return. To find out if a 1099-C has been filed, you can request a wage and income transcript from the IRS for the tax year or years in question. The transcript should list any 1099-Cs that were filed under your Social Security number.

Do I Have to Pay Taxes on the 1099-C Amount?

The IRS will automatically assume that the amount listed on the 1099-C is accurate and will expect you to include that amount in your ordinary income when you file your tax return. Depending on the other income you earn and your tax bracket, you could receive a larger tax bill or a smaller refund. However, if you can demonstrate that you qualify for an exclusion or exception, you may be able to avoid paying taxes on part or all of that phantom income.

One of the most commonly used exclusions is the insolvency exclusion. It works like this: you are insolvent to the extent that your liabilities (what you owe) exceed your assets (what you own). If the total amount by which you are insolvent is larger than the amount listed on the 1099-C, you can exclude the entire amount listed on the 1099-C from your income. You’ll have to file Form 982 with your tax return to claim this exclusion.

If the amount by which you are insolvent is less than the amount on the 1099-C, then you may be able to avoid including part of that amount in your income. However, the insolvency exclusion may not be the perfect fit for everyone—there may be another exclusion that fits your situation better.

What if I Don’t Receive a 1099-C for Canceled Debt?

Even if you don’t receive a 1099-C, you are still responsible for reporting canceled debt as taxable income. Make sure you do not leave any forgiven or discharged debt off of your tax return. If you do, you will more than likely hear from the IRS in the future for failure to pay, which will cost you more money in the long run. Look at your credit report to ensure you don’t have any unpaid debt from the last three years.

What if I Receive a 1099-C for Old Debt?

Be careful when it comes to old debt and 1099-Cs. Creditors who follow IRS guidelines should send out 1099-Cs when a debt lies dormant for three years and there has been no significant collection activity for the past year.

Specifically, the IRS 1099 instructions state that debt is canceled “when the creditor has not received a payment on the debt during the testing period. The testing period is a 36-month period ending on December 31.”

However, the creditor can rebut this cancelation if “the creditor (or a third party collection agency on behalf of the creditor) has engaged in significant bona fide collection activity during the 12-month period ending on December 31.”

If a creditor sends out 1099-Cs years (or decades) after the 1099 deadlines, the responsibility falls upon the taxpayer to explain to the IRS why they believe it should not have been filed that year. Again, there is no specific form for reporting this kind of dispute. You’ll have to include an explanation, and you may wind up arguing with the IRS to get it resolved.

What if I Receive a 1099-C for Debts Canceled in Bankruptcy?

You don’t have to pay taxes on personal debts discharged in bankruptcy. And creditors aren’t required to file 1099-Cs for those debts. If they do, however, you can file Form 982 and claim an exclusion because the debt was included in bankruptcy.

Don’t panic if your bankruptcy occurred long ago and you don’t know where to find a copy of your bankruptcy papers to prove the debt was discharged. Although it’s anyone’s guess why a creditor would send an unrequired 1099-C years after the fact, you likely won’t have to jump through hoops to prove the debt was discharged.

Getting a 1099-C can be confusing, especially if you don’t have a handle on your credit. Avoid future credit surprises by using Credit.com’s free credit report tool.

Image: David Sacks

The post 1099-Cs and Your Taxes: What You Should Know appeared first on Credit.com.

US Credit Card Debt Sets New Record—But Is That a Problem?

Toy car and calculator on the table.

US consumers broke through quite a barrier earlier this year, when total credit card debt topped $1 trillion for the first time since the Great Recession. Then in June, total credit card debt reached $1.021 trillion, besting the previous record set back in April 2008, just as the Great Recession began.

There’s a natural impulse to see this as a bad sign: the last time credit card debt hit $1 trillion, things didn’t end so well. High revolving-debt levels can be an indication that consumers are struggling to make ends meet or that their incomes aren’t keeping up with expenses. It can also indicate that lenders are giving away credit too easily.

Or, it might mean that economic activity is increasing and consumers are optimistic about the future.

Underlying data suggest a bit of both. Read on to learn more about the good and bad, as well as where there may be reason for concern.

The Good: Responsible Consumers Are Building Credit

The credit card debt record isn’t a surprise to people who have been following the industry. In May, TransUnion revealed that access to credit cards had reached its highest level since 2005: a total of 171 million consumers had access to a card, the credit bureau said. Meanwhile, credit limits for the best credit card customers—those with particularly high (or super-prime) credit scores—have also risen quickly; the average total credit line for super-prime consumers rose from $29,176 in 2010 to $33,371 earlier this year. More cards and higher credit limits lead to more spending and more borrowing—and the new debt record.

“The card market went through a transformation after the recession as more lenders opened up access to subprime and near-prime consumers. The competition for super-prime consumers has become fierce, and we are seeing it manifest in higher total credit lines,” said Paul Siegfried, senior vice president and credit card business leader for TransUnion.

The American Bankers Association (ABA) released similar data in late July. It found that the number of new accounts had increased by 8.8% in Q1 compared with the same period the previous year.

“A stronger labor market continues to serve as a bright spot in the US economy, putting more Americans in a better position to establish and build credit,” according to Executive Director of ABA’s Card Policy Council Jess Sharp.

More consumers with access to more credit is generally a good thing. It’s hard to be a US consumer—to rent a car, to book a hotel, and so on—without access to credit cards.

But within these reports lurk some ominous signs.

The Bad: Subprime Card Holder Numbers Are Growing Fast

Subprime credit consumers are the fastest-growing segment of the credit card market, TransUnion found. There are now 2.3 million more subprime credit card holders than there were in early 2015. The growth rate for subprime card holders was 8.9%—much higher than the 2.6% rate of all other consumers. And the ABA found that the average size of initial credit lines being granted to new subprime borrowers was growing at a faster rate than all other categories.

In other words, the increase in card debt might be the result of this fast-growing subprime borrower market.

Credit card delinquency rates are also growing—from 1.50% in 2016’s first quarter to 1.69% in 2017’s first quarter. TransUnion attributes this to the increase in subprime card users but also notes that it wasn’t unexpected.

“The recent surge in subprime cards has contributed to an increase in the card delinquency rate at the start of the year, but from a pre-recession, historical perspective, we are still at low levels of delinquency,” Siegfried said.

That was little comfort to investors earlier this year, when both Discover and Capital One announced a surprise increase in defaults. Shares of both fell about 3% in one day on “here we go again” fears.

The Larger Context: Credit Debt Doesn’t Exist in a Vacuum

All this is happening with the backdrop of recent concerns about the suddenly slumping auto sales market. A huge increase in subprime car loans helped fuel record auto sales in the past several years, but rising delinquencies have contributed to an alarming slowdown in overall auto sales—and loose comparisons to the subprime mortgage bubble that fueled the Great Recession.

However, it’s far too early to suggest that subprime credit card lending is a sign of trouble, let alone big trouble. Credit card debt is easy to misinterpret because those numbers are meaningless without context. A consumer who charges $6,000 and pays that balance off each month is much better off than one who charges $1,500 and struggles to make minimum payments.

It’s important to remember that the majority of Americans don’t carry a credit card balance from month to month. The ABA says 28.8% of account holders pay their balance in full each month (the so-called “transactors” in the image below), and another 27.2% don’t use their cards at all. The remaining category is the one to watch: the “revolvers,” who carry a balance and often pay high rates. Currently, 44% of card holders carry a balance each month. Their ranks rose 0.3% in the most recently reported quarter, while the share of transactors fell by 0.3%.

So that’s a number to watch—much more important than average balances or total credit card debt. If more people can’t pay their whole credit card bill every month, there’s a real problem brewing. And while that group has increased slightly, it’s still below the recession peak.

Perhaps the most positive finding from the ABA report is that outstanding credit card debt as a share of consumer disposable income isn’t climbing. In fact, it fell by a small fraction, to 5.3%. That’s a good indicator that consumers aren’t struggling to pay their credit card bills or increasing their plastic spending at a rate faster than their incomes are growing.

Protect Yourself from Whatever the Market May Hold

So the new record credit card debt is truly a mixed signal. With subprime lending and defaults up, auto loans in a bit of trouble, and some investors worried, this milestone is a good time to pause and evaluate whether America is once again heading down the road of too-easy credit followed by recession. But by itself, $1.02 trillion is just a number, and it might not indicate anything.

Either way, it’s a good idea to stay on top of your credit report—which you can check for free at Credit.com—to ensure you’re in a good place, regardless of what the coming years might bring.

Image: istock

The post US Credit Card Debt Sets New Record—But Is That a Problem? appeared first on Credit.com.

Here’s What You Need to Know About Credit Utilization

Credit scoring is a mystery to many people, and for good reason. It’s not easy to understand the grading process or which factors matter most.

Credit scoring is a mystery to many people, and for good reason. It’s not easy to understand the grading process or which factors matter most.

While every lender has its own method for deciding which customers are worthy of financial trust, more than 90% of top U.S. businesses rely on the FICO score when reviewing credit and loan applications, according to the company. Of course, you have more than one FICO score, so you might be feeling confused all over again, but here’s the good news: When it comes to credit health, it’s best to narrow your focus to five main factors:

  • Credit length
  • Payment history
  • Account diversity
  • Inquiries
  • Credit utilization

Why Is Credit Utilization So Important?

Every factor of credit scoring is crucial, but credit utilization is responsible for 30% of your overall score, second only to your payment history’s weight of 35%. Credit utilization measures your revolving balances against your total credit limit. Lenders and credit card issuers rely on credit utilization to predict risk and future behavior. In general, the higher your utilization ratio, the greater your risk of defaulting on your balances. Risky behavior isn’t rewarded in the world of credit scoring, and you may see a decrease in your scores as your utilization ratio goes up.

To understand credit utilization, you first need to understand your line-item and aggregate calculations.

Line-Item Utilization

Line-item utilization measures your individual credit card balances against your individual limits. For example, suppose you have three credit cards, each with a $10,000 limit. Based on your current balances, your line-item utilizations break down like this:

Card A: Balance of $4,500 / Credit limit of $10,000 = 0.45 × 100 = 45% utilization

Card B: Balance of $2,000 / Credit limit of $10,000 = 0.20 × 100 = 20% utilization

Card C: Balance of $3,300 / Credit limit of $10,000 = 0.33 × 100 = 33% utilization

Aggregate Utilization

The average of your credit card utilizations is called aggregate utilization. Calculate yours by combining your current balances and dividing them by your total credit limit. In the example above, your total balance is $9,800 and your total limit is $30,000; therefore, your aggregate credit utilization is $9,800 / $30,000 = 0.32 × 100 = 32.6%

Which One Matters?

Line-item and aggregate utilization are both important factors in overall credit health, and FICO recommends keeping yours as low as possible.

How to Benefit from Credit Utilization

Credit utilization has an undeniable affect on your credit score, and there are ways to harness its influence in your favor. (Not sure where your credit stands? You can view two of your scores for free on Credit.com.)

Keep Your Balances Low

If you struggle to curb spending or rely on credit cards to make ends meet, overhauling your budget is the first step. A few monthly changes could help you avoid overwhelming debt and related credit damage.

Check Your Credit Reports for Accuracy

Your credit reports tell the larger story of your financial history and responsibility, and accuracy is key. For example, suppose Card A’s $10,000 credit limit is mistakenly listed as $6,500 on your credit reports. While it may seem like a small issue, an incorrect credit limit can alter your utilization ratio and damage your credit score in the process. In this case, your line-item utilization would increase from 45% to 69.2%, and your aggregate utilization would increase from 32.6% to 37%. You can’t afford to ignore the details. Order free copies of your credit reports to ensure that they accurately reflect your credit card balances and limits.

Request a Limit Increase

If you’re working on debt reduction but need a quick fix, consider asking your lenders for limit increases on each of your cards. For example, increasing Card B’s limit to $15,000 would lower your line-item utilization from 20% to 13.3%, and your aggregate ratio from 32.6% to 28%. Requesting a limit increase could place a hard inquiry on your credit file, costing your score a few points, but the benefits of lower credit utilization are usually worth the temporary ding.

Change Your Bills’ Due Dates

It’s difficult to benefit from credit utilization if you are constantly battling the clock. If your credit card issuers report customer balances to the credit bureaus before you pay your bill, it may seem like your utilization ratio is constantly high. The fix? Contact your issuers and ask them when they typically report to the credit bureaus, and then move your bill’s due date to the week before. This strategy allows you to take full advantage of low credit utilization by giving you time to pay your balances before the reporting date.

Image: vgajic

The post Here’s What You Need to Know About Credit Utilization appeared first on Credit.com.

Here’s How to Prepare Your Credit for a Job Search

Don't let your credit hold you back from your dream job.

Conducting a job search after graduating from college can seem like a monumental task, one filled with challenges and uncertainties. But here’s one thing recent grads shouldn’t be uncertain about when embarking on the journey to secure a job — what’s on their credit report.

Just as hours and days are devoted to creating a professional resume and poring over every last word on a LinkedIn profile, your credit report also needs to be reviewed and, if necessary, improved. The importance of one’s credit history during a job search will of course vary by profession, but there are employers who will look at your credit report as part of their application process. And if you’re applying for a job that requires you to handle cash or balance books, a blemish could hurt your chances of securing the position.

Why Does an Employer Want to See my Credit? 

“Employers will look at credit history as a measure of responsibility,” said Deidre Davis, vice president of marketing and communications for the university-based MSU Federal Credit Union. “They’re looking to see if that potential employee has successfully managed their financial obligations, because that will tell them how someone might manage overall workload and deadlines.”

According to credit-industry experts, it’s most often within the banking and financial services industry that a credit report review is part of the application process, as well as for some government jobs that require security clearance, law enforcement officers and those seeking executive-level positions. It’s important to note, however, there are about a dozen states where local laws either prohibit or severely limit the use of consumer credit reports as part of an application, according to the site Employment Screening Resources.

Plus, employers are not allowed to check your credit report without your consent, which you must provide in writing. And they won’t have access to your actual credit score, explained Davis. They’ll be looking at the credit report, which is slightly different. It shows such things as whether you’ve missed payments and are delinquent on accounts, and whether you carry large balances.

Having a clean credit report isn’t just important to a job search, post-college. Prospective landlords, insurers, cell phone companies, utility providers and more will check your credit when deciding whether to do business with you and/or what to charge. Of course, you’ll also need good credit to get an affordable loan.

With that in mind, here’s some advice from credit experts on getting your credit profile ready for the interview process.

1. Know What’s on Your Credit Report

The first step is to pull your credit report and conduct a thorough review of everything on it. Under federal law, you’re entitled to one free credit report every 12 months from each consumer credit reporting agency. You can pull your free annual credit reports from AnnualCreditReport.com. (And, if you’re looking for your digits, you can view two of your credit scores for free on Credit.com.)

“Know your starting point,” said Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network. “Many young adults already have credit profiles and don’t realize it. Start by finding out if you do.”

Once you’ve reviewed your report(s), correct any inaccuracies and dispute any erroneous items. (You can learn more about disputing errors on your credit report here.) Under the terms of the Fair Credit Reporting Act, credit bureaus must investigate disputed items and remove them from the report if they cannot be verified, Gallegos explained.

2. Seek Guidance From a Finance Professional

If the credit report turns up negative factors, or you simply don’t have a firm understanding of the key aspects of a credit profile, consider obtaining the advice of a professional.

“Get some tips to improve things going forward,” said Davis of MSU Federal Credit Union. “Talk to someone who can tell you, ‘For the next six months these are the behaviors that will improve your credit score.’ Sometimes people need some basic advice and guidance. That’s where going into a local financial institution can help. You can say to them, ‘Here is my credit report, how can I make it better?’ ”

According to the site LendEDU, many college students know very little about building, maintaining or repairing consumer credit. In 2016, the site surveyed 668 current college students at both two-year and four-year public and private institutions, and found that 59.3% of students could not define a credit score. In addition, 45.5% were unable to identify any of the factors used to determine a credit score, and 42.4% were unable to identify at least one way to improve a credit score.

Building good credit is important, so don’t be afraid to seek assistance.

3. Improve Your Credit

One of the most critical things you can do to improve your credit report moving forward is pay bills on time, said Gallegos.

“On-time payments are the most important factor in developing good credit, accounting for 35% of one’s credit score,” he said.

In addition, maintaining a low balance, or using only about at least 30% and ideally 10% of your available credit, will improve your score. You should also aim to pay your bills in full each month, if possible. Likewise, paying student loans on time, which are considered installment loans, can help improve your credit score. (You can find more ways to improve your credit here.)

What If You Haven’t Established Credit?

Some college graduates may not have an extensive credit history to show a prospective employer. If this is the case, there are a few ways to help establish a solid record fairly quickly.

One approach is to be added as an authorized user on a parent’s credit card, ideally a card the parent has had for a long time and kept in good standing. By being added to such a card, the payment history on the account will become part of your credit report as well.

Be aware not all credit card companies report authorized users’ names to credit bureaus because there’s a fee involved in doing so, says Davis. That means being added to the card won’t accomplish your goal of establishing a solid credit history. Always find out first if the card reports authorized users to credit bureaus.

Another approach is to open a secured credit card in your name. Secured credit cards require a cash deposit as collateral, which then becomes the line of credit. The key when opening the card, or any card for that matter, is being responsible, said Davis.

“Only use the card for small dollar purchases that can be paid when the bill comes in so that you’re not getting into debt but are showing responsible use,” she said. “Buy a pizza with the card, and pay it off. Buy a pair of tennis shoes, and pay it off. Don’t go open 15 cards. Open one and use it responsibly.”

Trying to get a full-time gig now that college has ended? We’ve got your covered. Here’s a full 50 things recent graduates can do to score their first job

Image: vgajic

The post Here’s How to Prepare Your Credit for a Job Search appeared first on Credit.com.

5 Basic Credit Lessons to Teach Your Kids

Your parents may have prepared you as best they could for the financial realities of adulthood, or they could have left you to figure it all out for yourself. But if you were taught the basics of finance and credit before you left the nest, you may have encountered less of a learning curve than your clueless counterparts. No matter your level of understanding, you likely have to do some learning yourself.

But now, if you’re the parent, one of your priorities is to prepare your kids for adulthood. Just as you would teach your children to dress themselves, ride a bike or do their laundry, you may want to impart lessons about credit to them to help them become successful and financially independent.

Here are five credit lessons you may wish to impart.

1. It’s Important to Regularly Check Your Credit Reports & Credit Scores

Credit reports and credit scores may seem like abstract concepts to teach your children. But you can use simple metaphors. School-age children can understand the concepts of grades and report cards, and these concepts apply to credit. The work you put into your credit is reflected in your credit report and credit score, which “grade” your performance. These grades can then be used to help you get “rewarded,” like by getting the best rate on a credit card or a loan, like for a car or home. (You can check out your free credit report summary on Credit.com, which includes grades on how you’re doing in the five key areas that make up your scores.) This brings us to our next lesson …

2. Credit Affects Their Life

Once your child understands the concept of a credit report and credit score, you can demonstrate how credit has affected your lifestyle. Many of your possessions — your home, car or credit card, for instance — were obtained using credit, and are examples of the power of credit. Of course, credit is not just a way to get “things.” It’s a tool that can help provide shelter, comfort and freedom.

3. There Are 5 Main Influencers of Credit

As your kids get older and have a firmer grasp on these concepts, they may be able to better understand how they can make credit work for them. You can show them credit is determined by five main factors:

  • Payment history
  • Debt usage
  • Age of accounts
  • Types of accounts
  • Credit inquires

If you own credit cards, have loans and monitor your credit report, you have teachable moments built into your financial routine. When your children are old enough, you can involve them as you pay a bill or check your credit report, explaining the process as you go.

4. Mistakes Can Cost You

Mistakes can be valuable life lessons for young people. But when it comes to credit, mistakes can be costly and their effects can be long-lasting. One late payment can cause your credit score to drop dramatically. And negative items such as accounts in collections and judgments can stay on your report for at least seven years. To a young person, seven years can be a long time to have difficulty obtaining loans or credit cards. You can also show them how errors on your credit report can be fixed by using this guide.

5. Credit Cards Are Merely Tools

Credit cards are not a magic wand for reckless spending, but they are also not inherently risky items to be avoided. They are tools. They can be invaluable to build credit and financial independence, but they can also be damaging if wielded incorrectly.

It’s no secret that young people can have trouble with impulse control. But you may want to impart that credit cards can be used responsibly or irresponsibly. The results will depend on the user.

Image: Liderina

The post 5 Basic Credit Lessons to Teach Your Kids appeared first on Credit.com.

7 Simple Hacks for Building Better Credit

Believe it or not, there are a few things you can do to quickly boost your credit.

Sure, credit-scoring models are complicated (all that algorithm-ing and such). But, when you get right down to it, the secret sauce to building good credit is actually pretty straightforward: Take a whole bunch of on-time loan payments, keep a pinch of debt, stir in some new accounts, and let the thing bake. Seriously — building and rebuilding credit takes some time.

Still, there are a few seriously simple ways to hack your credit. And while they’re no substitute for the good old traditional recipe, these maneuvers could give a so-so credit score a quick boost. (Not sure if you need one? You can see where you stand by viewing two of your free credit scores, updated every 14 days, on Credit.com.)

Here are a few ways to hack your credit score.

1. Pay Off Big Credit Card Balances

Because if you’ve got ’em, there’s a good chance they’re messing with your credit utilization ratio. That’s how much debt you’re carrying versus your total credit. It’s recommended you keep that ratio below at least 30%, and ideally 10%, of your limits. So paying off purchases putting you over that threshold — in total and on individual cards — can help.

2. Ask for a Credit Limit Increase

If you can’t address those balances right away or you’re saddled with a seriously low credit limit, you can ask your issuer to up your limit. Some notes before you do: They’ll likely pull your credit to see if you can handle the increase. If your credit is bad, you might be met with a resounding “no.” Whether approved or denied, that credit pull will leave a hard inquiry, which will cost your score a few points. That ding is worthwhile if you get what you’re asking for but less so if you don’t. You can find more on asking for a higher credit limit here.

3. Become an Authorized User

Consider this a credit card with training wheels. Authorized users, who are added to an existing credit cardholder’s account, get credit for using that card, even though they’re not responsible for making payments. In other words: You can capitalize on a loved one’s good credit and, if things take a turn for the worse, you can ask to be removed from the account and have it scrubbed from your credit report.

4. Look for Errors

The hack here, sadly, is that you might have a mistake needlessly bringing down your score. According to the Federal Trade Commission, one in five people do. If you’re among them, be sure to dispute the misinformation with the credit bureau in question (here’s how). Your credit score will likely thank you for it. (FYI: You can do a complete credit check by pulling your free annual credit report from each of the major consumer credit reporting agencies at AnnualCreditReport.com.)

5. Open a New Account

OK, bear with us here for a second, because we’re not suggesting you take on financing you can’t afford. That’s a terrible idea. We are trying to draw attention to a very important nuance of credit scores: They reward you for responsibly managing different types of credit. So, if all you’ve got is a student loan, getting a credit card could ultimately improve your score. And if all you’ve got is a credit card, taking out an installment loan, like an auto loan or mortgage, could do the same — though in that scenario, you’d definitely be upping your debt load, so it’s best to only add that financing as you actually need (and can afford) it.

6. Group Your Credit Applications

Most credit scoring models group credit inquiries for like financing as one hit to allow you to comparison shop. (It’s technically called de-duplication.) So, if it is time to add a mortgage or auto loan, make sure you keep all applications within a 30- to 45-day window. Credit cards are a different story — each one of those can generally be held against you, though VantageScore does group all inquiries made in a 14-day window.

7. Keep Old Credit Cards Open

It can be tempting to formally close those old credit cards that got you into trouble in the first place. But don’t make that call quite so fast. Closing a credit card can hurt your credit utilization rate and, you guessed it, your credit score. Leaving that card open, on the other hand, could help your score out, especially if you’ve sworn off using its limit. There may be times when closing a credit card is, in fact, the right call, but carefully consider your options (can you simply put the thing on ice?) before officially cutting ties.

Image: pixelfit

The post 7 Simple Hacks for Building Better Credit appeared first on Credit.com.