Credit

3 Common Credit Myths That Could Damage Your Score

Posted on by Erin El Issa

Financial misinformation is rampant, and it could be hurting your credit score. A new NerdWallet survey finds that Americans hold many misconceptions about their credit, some of which could seriously damage their scores. Here are three common credit score myths and how to guard against them.

Myth 1. Leaving a balance on your credit card is good for your score

This is a sticky credit myth: Nearly half of Americans (46%) think leaving a balance on their credit card is better for their score than paying it in full, according to the survey. But carrying a balance doesn’t help your credit and can, in fact, be harmful if the balance is a large percentage of your available credit limit. That’s because it increases your credit utilization (the amount of your credit limit in use), which significantly influences your score.

Another drawback of leaving a balance on your credit card is the interest expense. Credit card debt — which you have if you leave a balance on your card, even if intentionally — is one of the most expensive types of debt due to double-digit interest rates. And while you might think leaving a small balance on your card wouldn’t be that costly, it can be because of how credit card interest is calculated.

If you don’t pay off your entire balance by the due date, interest is assessed, but not just on the remaining balance. Instead, it’s calculated on the average daily balance on your credit card. So if you leave a $10 balance on your credit card, but the average daily balance on your card over the month was $1,000, interest is charged on the $1,000 balance.

You can combat this by paying off your balance on or before the due date, which may lower your credit utilization and monthly costs.

Myth 2. Closing a credit card you don’t use is good for your credit

The survey found that close to half of Americans (46%) think closing a credit card they no longer use can help their credit score. Keeping a financial product you aren’t using seems counterintuitive, but closing a credit card can damage your score.

Closing a card may ding your credit score in two ways: increasing your credit utilization and decreasing the average age of your accounts. And while there are reasons to close a credit card account, generally, disuse isn’t enough of a reason to take the credit hit.

Even if you don’t cancel your credit card, the issuer will eventually close any account that’s not used over a certain period. To combat this, you can charge a small recurring expense — like a monthly subscription — to the card and set up autopay to wipe out the credit card balance each month.

Myth 3. A credit check won’t impact your score

More than a quarter of Americans (28%) don’t realize that a lender running a credit check can make their credit score go down, according to the survey. There are two types of credit checks, a hard inquiry and a soft inquiry. When you check your credit, it’s a soft inquiry and doesn’t affect your score. But when a lender checks your score to determine creditworthiness for a financial product, it’s a hard inquiry, and your score can go down.

There are some exceptions. For example, for certain financial products, such as a mortgage or auto loan, several inquiries made in a short period count as a single hard inquiry. The amount of time varies by credit scoring model, but it’s safest to submit all applications within a two-week period. This is known as “rate shopping” and allows you to shop around for the most favorable loan terms.

However, applying for multiple credit cards in a short period doesn’t fall under rate shopping and will result in a hard inquiry for each application. For this reason, limiting the number of card applications you submit is a good idea. Hard inquiries can stay on your credit report for two years, so before applying for a new credit card, make sure it’s available to consumers in your credit score range.

Erin El Issa writes for NerdWallet.

Image from 123rf.com

Image ID: 47720488

The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead

Posted on by Gregory Karp

Sometimes a grain of truth about a financial topic can morph into something that’s just plain misleading. One example is the 15/3 credit card payment trick — or hack — that you might have seen touted on the internet and social media as a secret tactic for improving bad or mediocre credit.

The 15/3 hack claims you can dramatically help your credit score by making half your credit card payment 15 days before your account statement due date and the other half-payment three days before.

Problem is, it doesn’t work.

“Every few years some nonsense like this gains some momentum, but there’s no truth to it,” John Ulzheimer, an Atlanta-based credit expert, said in an email. Ulzheimer has worked for FICO and credit bureau Equifax.

The number of payments you make in a credit card billing cycle — a month — does not help your number of on-time payments, a factor in widely used credit-scoring models. You’ll get credit for just one on-time payment during that month. And there’s nothing magical about 15 days and three days before your due date. In fact, it’s too late by then. At 15 days before your due date, your statement is already closed and your credit card company has likely already reported your information to the credit bureaus.

What is true about credit card payments and what can help? Making multiple payments in a month could help your credit scores temporarily by making it look like you’re using less credit, but not in the way the 15/3 hack describes.

What the 15/3 credit hack claims

Many YouTubers, blog posts and short videos on TikTok claim 15/3 is a secret sure-fire method for elevating credit scores.

We weren’t able to identify the originator of the 15/3 credit card payment method, but this is generally how it is retold in those spaces. Your credit scores will supposedly grow significantly if you:

  • Make half a payment 15 days before your credit card due date. If your payment is due on the 15th of the month, pay it on the 1st.
  • Pay the second half three days before the due date.

Some versions of the 15/3 rule swap in statement closing date for payment due date. The statement closing date comes about three weeks before the payment due date. Targeting the closing date could mean making three payments.

  • Make a payment 15 days before the statement closing date. (Not necessarily half because you don’t yet know what half is. You’re still using the card during the billing cycle.)
  • Make a payment three days before the statement closing date.
  • Pay off whatever is left after the statement closing date but before the due date so you don’t pay late fees or interest. This amount would be whatever you charged during the final three days of the billing cycle.

Why the 15/3 credit hack is wrong

The main problems with the 15/3 hack:

  • Wrong date peg. Typically, on or near your statement closing date — not the payment due date — your credit card company reports to the credit bureau or bureaus with such information as your balance and credit limit. It does this only once a month. Your due date comes about three weeks after that. So targeting the due date makes no sense. Making a payment 15 days and three days before the credit card due date, as the 15/3 hack suggests, is too late to influence credit reporting for that billing cycle.
  • Multi-payment myth. You don’t get extra credit, so to speak, for making two payments instead of one, or making a payment early. Your creditor only reports to the bureaus once a month.
  • 15/3 is random. If you use the 15/3 definition pegging payments to your closing date, that can help, for reasons we’ll discuss below. But 15 and 3 are irrelevant. You might as well make a single payment prior to the closing date. The creditor is just reporting what your balance is at the end of the billing cycle.

“There’s no relevance to when you make the payment or payments prior to the statement closing date,” Ulzheimer said. “You can make a payment every single day if you like. Fifteen and three days doesn’t do anything different than paying it off one or two days before the statement closing date.”

What’s the truth?

The grain of truth in the 15/3 hack is that credit utilization matters to credit scores.

Credit utilization is simply how much credit you’re using vs. how much credit you have. Scoring models award you a higher score if you have lots of available credit, but use very little of it.

Your credit score is a snapshot in time reflecting your creditworthiness. Purposefully lowering your utilization on a certain date is like applying lipstick before the photo is taken.

But your effort to pretty-up your utilization only lasts one month — until the next month when your creditors report your balances and limits again and you have a new utilization ratio. So unless you were going to apply for a loan or otherwise needed to show a handsome credit score on a specific date, your effort was wasted.

It’s like you put on a fine suit but sat home alone. Nobody saw it, or cared.

Credit utilization ratio details

For a single credit card, the relevant dollar figures are your last-reported balance compared with your last-reported credit limit. If you’re using $1,000 of a $2,000 credit limit on the card, you have a 50% credit utilization, which is considered somewhat high.

Generally, credit scores react best to utilization below 30%, and below 10% is ideal. With our example of a $2,000 credit limit, that means keeping your balance under $600 or $200, respectively. Of course, that’s not possible for everybody, especially not for those with relatively low credit limits. A $500 credit limit can get used up fast in a month.

Credit utilization accounts for nearly one-third of your credit score — 30% in the popular FICO score model. So lowering your utilization can, indeed, polish your scores. But with credit cards, your utilization bounces up and down during the month as you make charges and pay them off.

Overall, the 15/3 hack attempts to make your utilization look better, which is a fine goal and standard advice. It just misses the mark by offering the wrong time peg and irrelevant numbers of days before that time peg.

“This is neither novel nor some sort of a secret hack to the scoring system,” Ulzheimer said.

What really helps your credit score

Your credit score is affected by these factors, and generally in this order of importance, according to FICO:

  • Payment history.
  • Credit utilization.
  • Length of credit history.
  • Mix of credit types.
  • Recent applications for credit.

While the 15/3 hack won’t help your credit directly, it could indirectly if it keeps you disciplined to pay your credit card bill on time. Or, for example, maybe it helps you time your payments to coincide better with your paychecks.

But paying early according to the 15/3 rule generally has no merit.

“The truth is paying your bill before the due date will never, ever increase your scores by some drastic amount,” Ulzheimer said.

—

The article The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead originally appeared on NerdWallet.

Image from: 123rf.com

Image ID: 147675464

The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead

Posted on by Gregory Karp

The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead

Sometimes a grain of truth about a financial topic can morph into something that’s just plain misleading. One example is the 15/3 credit card payment trick — or hack — that you might have seen touted on the internet and social media as a secret tactic for improving bad or mediocre credit.

The 15/3 hack claims you can dramatically help your credit score by making half your credit card payment 15 days before your account statement due date and the other half-payment three days before.

Problem is, it doesn’t work.

“Every few years some nonsense like this gains some momentum, but there’s no truth to it,” John Ulzheimer, an Atlanta-based credit expert, said in an email. Ulzheimer has worked for FICO and credit bureau Equifax.

The number of payments you make in a credit card billing cycle — a month — does not help your number of on-time payments, a factor in widely used credit-scoring models. You’ll get credit for just one on-time payment during that month. And there’s nothing magical about 15 days and three days before your due date. In fact, it’s too late by then. At 15 days before your due date, your statement is already closed and your credit card company has likely already reported your information to the credit bureaus.

What is true about credit card payments and what can help? Making multiple payments in a month could help your credit scores temporarily by making it look like you’re using less credit, but not in the way the 15/3 hack describes.

What the 15/3 credit hack claims

Many YouTubers, blog posts and short videos on TikTok claim 15/3 is a secret sure-fire method for elevating credit scores.

We weren’t able to identify the originator of the 15/3 credit card payment method, but this is generally how it is retold in those spaces. Your credit scores will supposedly grow significantly if you:

  • Make half a payment 15 days before your credit card due date. If your payment is due on the 15th of the month, pay it on the 1st.
  • Pay the second half three days before the due date.

Some versions of the 15/3 rule swap in statement closing date for payment due date. The statement closing date comes about three weeks before the payment due date. Targeting the closing date could mean making three payments.

  • Make a payment 15 days before the statement closing date. (Not necessarily half because you don’t yet know what half is. You’re still using the card during the billing cycle.)
  • Make a payment three days before the statement closing date.
  • Pay off whatever is left after the statement closing date but before the due date so you don’t pay late fees or interest. This amount would be whatever you charged during the final three days of the billing cycle.

Why the 15/3 credit hack is wrong

The main problems with the 15/3 hack:

  • Wrong date peg. Typically, on or near your statement closing date — not the payment due date — your credit card company reports to the credit bureau or bureaus with such information as your balance and credit limit. It does this only once a month. Your due date comes about three weeks after that. So targeting the due date makes no sense. Making a payment 15 days and three days before the credit card due date, as the 15/3 hack suggests, is too late to influence credit reporting for that billing cycle.
  • Multi-payment myth. You don’t get extra credit, so to speak, for making two payments instead of one, or making a payment early. Your creditor only reports to the bureaus once a month.
  • 15/3 is random. If you use the 15/3 definition pegging payments to your closing date, that can help, for reasons we’ll discuss below. But 15 and 3 are irrelevant. You might as well make a single payment prior to the closing date. The creditor is just reporting what your balance is at the end of the billing cycle.

“There’s no relevance to when you make the payment or payments prior to the statement closing date,” Ulzheimer said. “You can make a payment every single day if you like. Fifteen and three days doesn’t do anything different than paying it off one or two days before the statement closing date.”

What’s the truth?

The grain of truth in the 15/3 hack is that credit utilization matters to credit scores.

Credit utilization is simply how much credit you’re using vs. how much credit you have. Scoring models award you a higher score if you have lots of available credit, but use very little of it.

Your credit score is a snapshot in time reflecting your creditworthiness. Purposefully lowering your utilization on a certain date is like applying lipstick before the photo is taken.

But your effort to pretty-up your utilization only lasts one month — until the next month when your creditors report your balances and limits again and you have a new utilization ratio. So unless you were going to apply for a loan or otherwise needed to show a handsome credit score on a specific date, your effort was wasted.

It’s like you put on a fine suit but sat home alone. Nobody saw it, or cared.

Credit utilization ratio details

For a single credit card, the relevant dollar figures are your last-reported balance compared with your last-reported credit limit. If you’re using $1,000 of a $2,000 credit limit on the card, you have a 50% credit utilization, which is considered somewhat high.

Generally, credit scores react best to utilization below 30%, and below 10% is ideal. With our example of a $2,000 credit limit, that means keeping your balance under $600 or $200, respectively. Of course, that’s not possible for everybody, especially not for those with relatively low credit limits. A $500 credit limit can get used up fast in a month.

Credit utilization accounts for nearly one-third of your credit score — 30% in the popular FICO score model. So lowering your utilization can, indeed, polish your scores. But with credit cards, your utilization bounces up and down during the month as you make charges and pay them off.

Overall, the 15/3 hack attempts to make your utilization look better, which is a fine goal and standard advice. It just misses the mark by offering the wrong time peg and irrelevant numbers of days before that time peg.

“This is neither novel nor some sort of a secret hack to the scoring system,” Ulzheimer said.

What really helps your credit score

Your credit score is affected by these factors, and generally in this order of importance, according to FICO:

  • Payment history.
  • Credit utilization.
  • Length of credit history.
  • Mix of credit types.
  • Recent applications for credit.

While the 15/3 hack won’t help your credit directly, it could indirectly if it keeps you disciplined to pay your credit card bill on time. Or, for example, maybe it helps you time your payments to coincide better with your paychecks.

But paying early according to the 15/3 rule generally has no merit.

“The truth is paying your bill before the due date will never, ever increase your scores by some drastic amount,” Ulzheimer said.

Gregory Karp writes for NerdWallet. Email: gkarp@nerdwallet.com. Twitter: @spendingsmart.

The article The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead originally appeared on NerdWallet.

Image from: 123rf.com

Image ID: 120839797

How to Score Points in the Credit Game

Posted on by Bev O'Shea

Credit scoring can feel like a frustrating game — falls can be sudden and swift, and climbing is a slow slog.

In reality, “all scoring models and lenders are aiming to do the same thing, which is to minimize risk,” says Jeff Richardson, senior vice president of marketing and communications for VantageScore, one of the two leading credit scoring companies. He says creditors see things like missing payments and high balances as indicators of risk.

The traditional advice of paying on time and keeping balances low will eventually result in decent credit. But you can speed it up.

Check your credit

To start, take a look at your credit reports by using AnnualCreditReport.com. Check to see that the information is accurate, especially for addresses you don’t recognize, since that can suggest fraudulent accounts or same-name mix-ups. Also make sure account numbers and activity are what you expect. You can dispute errors, and the change in score after a successful dispute could be significant.

Avoid costly missteps

Next, avoid doing things that work against building your credit. These include:

  • Paying late — the impact is large and lasting.
  • Closing credit cards — it can reduce your overall credit limit and the length of your credit history.
  • Applying for a lot of credit at once — credit checks can nick your score.
  • Letting card balances stay above 30% of the limit — credit utilization, or the portion of your limit you have in use, has a major impact on scores.

While paying down balances is a good idea, it’s not always realistic.

Be strategic

If you’re whittling down credit card balances, be strategic. The number of cards with balances influences credit scores, says credit expert John Ulzheimer. The “snowball method” of debt repayment focuses on wiping out your smallest balances first.

Relatedly, if you have only one credit card, Ulzheimer says adding a card or two could be useful. Assuming your spending stays about the same, the credit limits on the new cards will reduce your overall credit utilization. And if your card is lost or stolen, you still have access to credit.

You can move credit card debt to a personal loan or even a 401(k) loan, essentially making it disappear from credit utilization calculations. But if you have not addressed the circumstances that led to the high balances, a new loan could be a step deeper into debt.

Add positive information

Credit slip-ups can hurt, but adding positive information to your credit reports can help counteract the damage. There are at least five ways to get on the credit radar or to rehabilitate a damaged score.

Authorized user: If you have a friend or relative with a long credit history, a high score and relatively high credit limits, ask if they are willing to add you as an authorized user. Authorized user status allows additional good data to your credit history, such as on-time payments, credit age and low credit utilization. Authorized user status is most powerful for people who have no credit report or a thin file. Its impact can be felt as soon as it’s reported to the credit bureaus.

Store credit card: Retail credit cards typically have more flexibility in approving applications, says Max Axler, deputy chief credit officer of Synchrony, a consumer finance company that issues credit cards across a variety of industries. He says Synchrony uses VantageScore 4.0 as part of its decision making and may also consider other factors, such as banking activity, customer history and cell phone payments. Store credit cards tend to carry high interest rates, so try to pay in full every month or finish a 0% promotion plan well before it ends.

Secured credit cards: As their name implies, secured credit cards are secured by a deposit with the issuing bank. Your credit limit is typically equal to your deposit. As with any other credit card, it’s best to keep your balance well under 30% of the limit.

Credit-builder loans: These turn traditional loans upside down. Instead of getting a lump sum at the beginning and then paying it back, you make payments and get the lump sum at the end of the loan term.

Co-signed credit: Some lenders will approve you for a loan if someone with stronger credit co-signs the loan. It can help credit even if the primary borrower was never expected to pay (as with parents buying their child a car). However, both signers are fully on the hook for the loan, and the loan could limit the co-signer’s borrowing power. If the primary borrower doesn’t pay or pays late, the co-signer’s credit is on the line.

This article was written by NerdWallet and was originally published by The Associated Press. 

Bev O’Shea writes for NerdWallet. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

The article How to Score Points in the Credit Game originally appeared on NerdWallet.

Image from: 123rf.com

Image ID: 110993788

For Young Adults, Building Credit Starts Now

Posted on by Colin Beresford

Sooner than you may realize, your credit score will start to matter.

A solid credit score can be the difference between qualifying for an apartment or a low-interest car loan or missing out. So to have credit ready when you need it, the time to start building a good and lengthy credit history is now.

There’s more than one way to build credit, and it could be as simple as reporting your ongoing bill payments to the major credit bureaus. But keep in mind: Building credit takes diligence, particularly since missing payments can hurt your score for years to come.

What is credit and why does it matter?

Your credit score is a number that typically ranges between 300 and 850 and is calculated based on how reliably you’ve paid past debts, such as credit card bills. Lenders use your credit score to predict how likely you will repay debt.

Your credit score helps determine the loans you can receive, the interest you’ll be charged, the credit cards you can qualify for and the properties you can rent. An employer can even check your credit history. Having a good credit score can save you money later on, mainly through lower interest rates when you secure a loan.

If you’re starting with no credit history, you aren’t alone. In the U.S., nearly 40% of people between the ages of 20 and 24 have little to no credit history to generate a score, according to the Consumer Financial Protection Bureau. Unfortunately, the same is true for roughly 20% of the population.

Building your credit might seem overwhelming if you haven’t thought about it before, but there are many strategies to employ, even if you’re just beginning. Start by establishing good habits with managing debt, such as not taking on more debt than you can afford, says Brittany Mollica, a certified financial planner based in Chapel Hill, North Carolina. Missing payments will damage your score and can become a burden when you need to borrow money in the future.

“Getting in good habits of always paying your bills is really important,” Mollica says. “You don’t want to have to be climbing out of a hole of all sorts of credit card debt that you’ve piled up, especially starting out early on.”

Credit cards — and alternative cards

Credit cards can be a great tool to establish credit, but they can also damage your score if you take on more debt than you can handle.

If a parent or another trusted person in your life has a high credit limit and a long history of making timely payments, you could become an authorized user on their account and benefit from their good credit. This is one of the easiest ways to lengthen your credit history, says Blaine Thiederman, a certified financial planner in Arvada, Colorado.

Becoming an authorized user will also impact your credit utilization rate, or  the amount of money you owe to lenders divided by the total credit available to you, which can help your credit score.

If you have your own income, you can apply for a credit card when you’re 18 years old; otherwise, you have to wait until you are 21. A secured credit card is typically the best credit card to start with. A cash deposit backs these cards, and since the credit card company can take that deposit if you miss payments, people with short or poor credit histories can qualify.

The deposit you have to make for a secured credit card could be a burden, and if that’s the case, an alternative card might be better for you. These cards use income and bank account information to determine your creditworthiness rather than your credit score.

Monthly bills

If you live independently, payments for rent, utilities and phone bills can all be reported to credit bureaus. So paying those bills can build your credit if they’re on time and you have them reported.

Unlike credit card payments, these payments aren’t reported automatically and can require a third-party service, such as Experian Boost, to make the credit bureaus aware of your payments.

Remember, these services sometimes require a fee and reporting your bill payments may not always impact your credit score; instead, they may just appear on your credit report.

Loans

Making regular payments on loans can also help you build your credit. And even if you don’t have any credit history, some loans are available.

Credit-builder loans rely on income rather than credit for approval. If you’re approved, the loan sits in a bank account and becomes available once you pay it off. Your monthly payments are reported to the major credit bureaus.

Student loans are another loan you can use to build your credit when you’re just starting. Federal student loans don’t require credit to qualify, while most private student loans do. Paying off your loans will help you grow your credit history, and you can get started while you’re still in school by making interest-only payments.

This article was written by NerdWallet and was originally published by The Associated Press.

Colin Beresford writes for NerdWallet. Email: cberesford@nerdwallet.com.

The article For Young Adults, Building Credit Starts Now originally appeared on NerdWallet.

Image from: 123rf.com

Image ID: 75086141

Care About Your Credit Score? Get Strategic With Card Limits

Posted on by Amanda Barroso

If you have credit cards in your wallet, you might track your balances to keep your budget in check, but knowing each card’s credit limit off the top of your head is another story. However, actively managing how much of your credit limits you are using — also known as your credit utilization ratio — can make a big impact on your credit score.

Your credit score is a mix of many factors, including your credit usage. If you want to build your credit score, focusing on using less of your credit limits is a powerful way to do it. People with excellent credit tend to have low credit utilization ratios.

According to credit expert John Ulzheimer, utilization is one of the more actionable ways to improve your credit: “To the extent you have the ability to pay down your credit card debt, then your ratios are going to go down. That’s just a fact.”

Even if you can’t reduce your balances, a few other strategies can help reduce credit utilization.

What is a credit limit and who determines it?

Your credit limit is the maximum amount you’ve been approved to spend by a creditor, based on factors like your payment history, income and credit score. A credit limit is not set in stone and is likely to change over the life of the account: Your card issuer can increase or decrease your limit without warning, and you can also ask for a credit limit increase (more on that later).

The way you use your credit limits can help your score

Make sure you know your credit limits. Try checking your latest bill or banking app to find the limit for each card. With your limits in mind, you can focus on keeping your balances low.

Ideally, you want to use no more than 30% of the credit limit on any card. The lower that credit utilization ratio, the less risky you seem as a potential borrower. People with the highest scores tend to use less than 10% of their limits. You can calculate your credit utilization ratio by dividing your balance by your credit limit. Multiply that number by 100 to get a percentage. Or you can use an online credit utilization calculator.

Keeping tabs on your credit usage is as simple as setting an alert once you’ve reached a certain spending threshold. Most cards will let you do that. Many personal finance websites and apps also have a dashboard that shows your utilization.

Other strategies can help you keep credit utilization low. “Pay an amount before you get your statement,” says Chi Chi Wu, an attorney at the National Consumer Law Center. “Because utilization is calculated from what the balance is at the end of the billing cycle, if you pay it beforehand you now actually reduce that utilization.”

Ulzheimer suggests two additional ways to keep your usage low: Start by trying to reduce your credit card balances if you’re carrying debt from month to month. Or you can ask to increase your credit limit, which not only offers you more flexibility to make bigger purchases but also helps lower your credit utilization ratio.

“If you can do both at the same time — lower balances and more credit limits — then again, you have lowered your ratio,” Ulzheimer says.

This works only if you can keep your balance low and resist any temptation to increase your spending. Also note that applying for a higher limit can temporarily ding your credit score.

The COVID connection

For a real-life example of how credit utilization and credit score are connected, look no further than the COVID-19 pandemic. Recent data from credit scoring company FICO shows that in 2020, many Americans took advantage of reduced spending and government stimulus checks to pay down their consumer debt. According to FICO, average credit card balances decreased by 10.9%, and the average FICO score rose 8 points between April 2020 and April 2021.

Doing something simple — like using extra cash to pay down existing credit card balances or making several payments throughout the billing cycle — can improve your credit, even during trying financial times.

This article was written by NerdWallet and was originally published by The Associated Press. 

Amanda Barroso writes for NerdWallet. Email: abarroso@nerdwallet.com.

The article Care About Your Credit Score? Get Strategic With Card Limits originally appeared on NerdWallet.

Image from: 123rf.com

Image ID: 141928822

What 6 Financial Planners Wish They’d Known About Credit Cards

Posted on by Kimberly Palmer

As a boy, Travis Tracy watched his mom struggle with credit card debt. Consequently, he avoided credit cards until age 23. John Bovard, Ron Strobel, and Marcus Blanchard grew up hearing horror stories about credit card debt and so they steered clear as young adults. Marguerita Cheng says she was initially afraid of credit since her father warned her early on about the risks of interest and fees. And Justin Green wasn’t taught much of anything about credit cards, so he didn’t use one until he was 22.

And yet, Tracy, Bovard, Strobel, Blanchard, Cheng and Green each grew up to be certified financial planners who now use credit cards regularly to their advantage.

Here is what these pros wish they had known earlier:

Credit cards aren’t inherently bad

Tracy, a CFP in Durham, North Carolina, and founder of Fortitude Financial Planning, grew up as the oldest child in a single-parent household. “My mom always got in trouble with credit card debt, so in my mind, it seemed like a bad idea,” he says. That’s why he waited until he was 23 before he got his first credit card, which he only applied for because he was moving and needed to finance some purchases.

He carefully paid off his debt, and as his comfort level with credit cards increased, he started using rewards cards to earn cash back. Now, at age 31, he earns cash back on his everyday purchases and makes sure to pay off the balance each month to avoid interest. “My biggest lesson was how important credit cards are to your overall financial purchasing power,” he says.

They can help you build your credit

“I was always hesitant; there were stories about people trying to sign you up for credit cards, and I was told, ‘Don’t do it,’” recalls Bovard, now a CFP in Cincinnati and owner of Incline Wealth Advisors. “In Cincinnati, cash is king, and credit cards are bad. My parents emphasized that message, too.” He also remembers being told that credit cards could lead to a lot of debt.

As a result, Bovard stuck with debit cards until his early 20s. That’s when he realized that if he wanted to get approved for a mortgage at some point, he would need to build his credit history. “I was nervous about it, especially around the fear of forgetting to make a payment,” he says. He avoided that risk by checking his balance frequently and eventually setting up automatic payments.

Now 32, he says he wishes he had opened a credit card sooner, as soon as he started earning income, so he could have started building his credit earlier. “That could have led to a better credit history,” he says, which he now knows can translate to lower mortgage rates when you apply for a loan.

Credit cards offer fraud protection

After college, Ron Strobel, CFP and founder of Retire Sensibly in Nampa, Idaho, opted to use a debit card instead of credit card because he grew up hearing credit cards could lead to debt. Then, when he was 22, his debit card was compromised with fraudulent charges, and the $900 in his checking account instantly disappeared. It took months to get the money back. After that, Strobel switched to using credit cards for the additional fraud protection.

“You should use a credit card for the fraud protection aspect. Every time you buy something, it feels different to swipe that credit card instead of a debit card, because you know you’re protected,” says Strobel, now 32.

They can help you in an emergency

When Cheng, a CFP based in Gaithersburg, Maryland, studied abroad in Japan in her early 20s, her host family’s smoking and cats aggravated her asthma. She had to quickly find new housing and buy a futon. That $300 purchase was made possible by her credit card.

“It would have been hard for me to get out of that home without the credit card. It taught me that having credit was important for emergencies,” she says. Her dad, who came to the United States in the 1960s with $17, had taught her that credit was powerful but also risky. “He would always say, ‘Don’t spend money in the dark,’ meaning fees and fines — that’s just wasting money,” she recalls.

“My dad did teach me well,” she adds. “I didn’t abuse credit. I used it wisely.” And her father was so proud of her (and concerned about her health) that he ended up paying her credit card bill for her.

You can keep your credit limit low

Blanchard, CFP and founder of Focal Point Financial Planning in Pleasant Grove, Utah, says he took out his first credit card at age 19 while serving in the Marine Corps, but then quickly closed it after hearing horror stories about credit card debt. “I didn’t really understand how it worked, how you build credit, or anything,” he recalls.

After he had a similar experience to Strobel in which his debit card information was stolen and his bank account was drained, he finally took out his next credit card. Now in his mid-20s, he was no less nervous about overspending and building up debt. “I didn’t really understand that if you pay it off, the interest rate doesn’t matter,” says Blanchard, now 30.

He says he wishes he knew that if you’re worried about overspending, you can keep your credit limit low on the card, which will cap the amount you are able to spend.

While that’s true, there is a major downside to this approach: A lower credit limit means you have less available credit. This can lead to a higher credit utilization ratio, which is the portion of your credit that you’re using, and can hurt your credit score. (Using much more than 30% of your overall available credit can have a major negative impact.) That said, once credit bureaus report that you have paid the balance down or off, the damage should disappear.

“I look back and think, ‘Dang it, I would have been better if I’d kept that first card open. My credit score would have gone from good to great,” he says.

‘Never spend what you don’t have’

“I grew up in a lower-income family, so credit wasn’t something that crossed my mind until I learned I had unpaid medical debt,” says Justin Green, CFP and founder of Assist FP, a virtual financial planning firm based in the Boston area. Then, around age 22, he took out a credit card with a relatively low credit limit of $300 and paid it off each month so he could slowly rebuild his credit.

“The main thing to consider with a credit card is that you should never spend what you don’t have in cash on the card, because it can easily rack up and get you in trouble,” Green says. “Even as someone who is personal-finance oriented, I can see how it’s very easy to spend more using a credit card, and you do have to be careful,” he adds.

Now, at age 29, Green uses multiple cards, which he pays off each month, and maximizes his travel rewards. He and his fiancé are planning to use those accumulated points to pay for their upcoming honeymoon, which will be to a yet-undetermined location. The only requirement? “Blue water,” he says.

Kimberly Palmer writes for NerdWallet. Email: kpalmer@nerdwallet.com. Twitter: @kimberlypalmer.

The article What 6 Financial Planners Wish They’d Known About Credit Cards originally appeared on NerdWallet.

Image from: 123rf.com

Image ID: 110921665

How to Fill In Your Financial Blind Spots

Posted on by Bev O'Shea

Knowing enough about money to cover your bills is a start, but it’s not enough financial literacy to provide long-term security. Most of us eventually wonder what else we should be doing — and whether what we don’t know could hurt us.

“When you have a blind spot, you don’t realize until something blindsides you,” says Mark DiGiovanni, a certified financial planner in Grayson, Georgia.

Identifying the gaps

Self-assessments, like this quiz adapted from the Financial Health Network, as well as personal finance books and websites can help shine a light on what you don’t know.

Accredited financial counselor Bret Anderson of Morrison, Colorado, has spent much of his career helping incarcerated veterans get back on their feet and has also advised high-wealth clients. He says five things frequently predict who will manage money successfully.

Two habits — saving and investing — are crucial, he says. Good money managers also:

  • Know how credit works.
  • Have a plan to build wealth and pay off debt.
  • Know what passive income is and how to create it.

If anything on that list is unfamiliar to you, that suggests a starting point for research. “There are plenty of resources just a Google search away,” says Heather Winston, assistant director of advice and financial planning at Principal Financial Group.

Nail the basics, then keep learning

Before you add complexities, be sure you are:

  • Saving. It’s an essential habit.
  • Budgeting. If you don’t have a formal budget, check online for help creating one.
  • Planning for emergencies. You can’t prevent unexpected expenses. But an emergency fund, excellent credit, insurance — or all of those — can keep them from devastating your finances.

Next, protect your money and access to credit. Here’s how:

Check your credit scores and reports, Anderson suggests. Lenders and potential landlords or employers may see those, so it’s smart to know what’s there. In addition, a big swing in your score or an account on your credit reports you don’t recognize could suggest identity theft.

You can check your credit reports for free by using AnnualCreditReport.com. Many personal finance sites and credit card issuers provide access to free credit scores.

Keep your identifying information safe and practice good cyber hygiene. That means avoiding public Wi-Fi, being careful about what you post on social media, not opening email attachments or links you weren’t expecting, and using strong passwords. Consider freezing your credit — and that of your child — to reduce the likelihood that you’ll be victims of identity theft. Setting alerts on your credit card accounts can also let you know when they’re used.

Learn to recognize scams. Scammers try to create a sense of urgency so that you pay first and think later. They know how to make phone, email or text communications seem real. Pause before acting, independently confirm the contact information and initiate communication yourself. And remember that no one legit asks for payment by gift card or prepaid debit card.

Set goals for yourself and remember that those are individual. “One of the most critical lessons to learn is to stay focused on your needs, not on what someone who doesn’t know you, your goals or your life is saying,” Winston says. Consider working with a fee-only, fiduciary financial planner or a financial coach for help with identifying your own goals and path.

Avoid overconfidence. If you’ve had some success investing in a bull market, for example, you might not be an investing genius. Feedback from a professional may help you decide whether you were smart or just lucky, DiGiovanni says.

Help your children become financially literate. And put guidance in language they understand, Anderson says. He recalls his mother putting money aside in a “rainy-day fund,” which made no sense to him because where they lived, it seldom rained. Help children see how money is relevant, he suggests. Let them see how you make financial decisions, then let them make a few of their own.

Learn as needed

You don’t need to become a walking financial encyclopedia. There are things you may never need to know or that you can learn when they become relevant. Examples include:

  • Financial consequences of big life changes, such as marriage, divorce, parenthood or retirement.
  • Refinancing a mortgage.
  • Rent vs. buy decisions.
  • Saving for college.
  • Mandatory retirement withdrawals.
  • Income tax implications of side jobs.

Don’t wait

While no one wants to make a mistake, the costliest one may be waiting until you have “extra money” or feel more confident about financial decisions. The sooner you start saving and investing, the more compound interest can grow your wealth.

“People don’t understand the time value of money,” DiGiovanni says. “Every day you postpone is another day you will have to work.”

Bev O’Shea writes for NerdWallet. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

The article How to Fill In Your Financial Blind Spots originally appeared on NerdWallet.

Image provided by 123rf.com

Image ID: 56033768

Here’s how student loans show up on your credit report and impact your credit score

Posted on by Elizabeth Gravier

Student loans are a type of installment loan, which means they appear on your credit report.

If you have student loans in your name, you can find them on your credit report under installment loans.

Similar to an auto loan or mortgage, student loans are a type of loan that gives borrowers a finite amount of money to pay back in a fixed number of monthly “installments” over a specified amount of time.

Because student loans appear on your credit report, they also get factored into your credit score. Here’s what you need to know.

How student loans show up on your credit report

Student loans show up on your credit report in two ways.

Firstly, when you apply for a student loan and the lender does a credit check, it will result in a hard inquiry on your credit report (if done in the last two years). Whenever you apply for a credit card or any other type of loan, the lender or credit card issuer will pull your credit report from one of the three main credit bureaus (Experian, Equifax or TransUnion), also known as a hard inquiry (or “hard pull”). A hard inquiry can actually ding your credit score a few points, regardless if you end up being approved or denied for the new credit.

Secondly, the actual student loan will show up on your credit report under “installment loans” once you are approved and take the loan out. Even though your student loans show up on your credit report, however, your actual loan balance doesn’t matter as much as your payments on that loan do. Lenders want to see that borrowers make on-time payments on their loans as long as they are in active repayment.

If you end up falling behind on payments or defaulting on your student loan, that’s where the loan’s appearance on your credit report can be damaging. “The negative account information will likely appear on your credit file for seven years from the original date that the account was first reported as past due,” Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC), tells CNBC Select.

How student loans on your credit report impact your score

Student loans on your credit report can be good or bad for your credit score.

Since student loans are a type of installment credit, having them on your credit report adds to your “credit mix,” which makes up 10% of your score calculation. This is good for your credit since it adds variety to the kind of loan products you have and shows you can manage different types of debt. Take note, however, that there are risks to carrying a big installment loan, such as a substantial amount of student debt. The continuous payments may make it more difficult to save. In addition, the large debt load boosts your debt-to-income (DTI) ratio, which can influence your ability to borrow more, such as a mortgage loan.

How else student loans affect your credit score depends a lot on how you manage your monthly payments. Payment history is the most important factor in determining your credit score, accounting for 35% of its calculation.

If you make your monthly payments on time, student loan debt won’t necessarily harm your credit score. On the other hand, if you are late on payments (considered “delinquent”), in default (late on payments for 270+ days) or see your debt go to collections, this can cause your credit score to drop.

“Any delinquent account that appears on your credit report can have a noticeable and negative impact on your score,” McClary says.

Exactly when your late student loan payments get reported to the credit bureaus differs between whether you have federal or private loans. Generally, however, federal student loans are a bit more lenient with borrowers.

Federal student loan borrowers won’t see their delinquency, or missed payments, reported until they are 90 days past due. If you had one missed payment or you didn’t have the money at the time, this means you have about three months to catch up.

Private student loan borrowers may not have as much time since private lenders can make up their own rules. Since each lender is different, contact your servicer as soon as you think you will be missing any payments to see what your options are.

Bottom line

Treat your student loan the same way you would treat any other loan product, and that means making your payments on time each month.

In the current state of affairs amid the pandemic, remember that President Biden has extended the payment pause and interest waiver for federal student loan borrowers until at least October 2021. This student loan forbearance will not have an impact on your credit score.

For private student loan borrowers specifically, ask your servicer what relief options are available to you and, if you have good credit and a stable income, you might consider taking advantage of low interest rates and refinance any private loans that are costing you too much over time.

The article Here’s how student loans show up on your credit report and impact your credit score originally appeared on https://www.cnbc.com/

Image provided by Getty Images

5 Credit Card Red Flags to Avoid

Posted on by Funto Omojola

Choosing the right credit card can be difficult, especially if you have poor credit (FICO scores of 629 or lower) or are new to credit cards entirely.

Plenty of cards can help those with limited choices, but some options — including certain unsecured credit cards for bad credit — are more costly and potentially more perilous than others. These “subprime specialist issuer” cards, as they’re often referred to, might be easier to qualify for, but they typically come with soaring rates and unnecessary fees that make them quite expensive to carry.

To end up with the right card in your wallet, it’s important to steer clear of predatory options. Here are five red flags to look out for.

1. Excessive fees

An annual fee on a credit card may not be ideal, but it doesn’t necessarily qualify as excessive. In fact, if you have poor or thin credit or are unbanked, a card with an annual fee may be your best and only option. Annual fees can also be worth paying if the card offers ongoing rewards, perks or other incentives to offset it.

Still, the yearly cost of holding onto a card shouldn’t be outlandish. Many decent ones for those with poor or thin credit offer a relatively low and manageable annual fee, often $50 or below.

But annual fees aren’t the only costs you can incur. Many so-called fee-harvester cards feature charges that can sneak up on unknowing consumers. Examples include application fees, activation and processing fees, and monthly maintenance or membership charges. These fees are often unnecessary and avoidable, but they are common on some unsecured cards for bad credit — meaning cards that don’t require a security deposit as collateral.

Before deciding on a card, be sure to read its terms and conditions so that you’re aware of what fees you may face.

2. Exorbitant interest rates

If you don’t carry a balance month to month, then a credit card’s interest rate is irrelevant; you’ll never owe any interest. But financial hardship and other factors can make it necessary to carry debt, which can be convenient but expensive.

As of November 2020, the average annual percentage rate for cards that accrued interest was 16.28%, according to the Federal Reserve. The rate you’ll be charged will depend on your creditworthiness, which indicates to the card issuer the amount of risk it is taking by extending you credit.

Generally speaking, the lower your credit scores, the higher your APR will be. But some credit cards aimed at consumers with poor credit charge APRs that are truly dizzying, sometimes up to 30% or more.

Credit cards that offer low or promotional interest rates typically require good credit (FICO scores of at least 690), but there are options for others that can make carrying a balance less costly:

  • Secured credit cards require you to make a refundable security deposit that will act as your credit limit — and your collateral. They can be easier to get because the bank is taking less of a risk on you. Secured cards, especially those that also charge annual fees, sometimes have lower ongoing APRs.
  • Depending on your credit score, you may be able to qualify for a card from a credit union, which may offer lower interest rates than products from major banks. Still, to get such a card, you’ll need to join the credit union, and there may be restrictions on membership.

3. Low credit limits

Some starter credit cards or unsecured cards for bad credit will advertise a credit limit range. The limit you qualify for will depend on your creditworthiness, but it’s worth understanding how a low credit limit can hamper you.

For starters, if the card also charges an annual fee, that often means you’ll need to subtract that amount to determine your actual credit limit. For instance, if you’re approved for a credit limit of $300 on a card with an annual fee of $50, then your initial credit limit is really $250 until you pay that fee. Essentially, you’re in debt immediately, and you’ve lost about 17% of your credit limit before you even use the card for the first time.

A low credit limit can also have implications for your credit utilization ratio, which is a significant factor in your credit scores. Credit utilization is the amount you owe as a percentage of your available credit. So if you have a $1,000 credit limit and a $500 balance on the card, your credit utilization is 50%.

A typical recommendation is that you keep your credit utilization below 30%. But in general, the lower that percentage, the better for your credit scores.

And lastly, if the card earns rewards, a low spending limit means a low limit on how much in rewards you can rack up.

Nerd tip: Some credit cards advertise the possibility of an eventual credit limit increase with responsible credit card use.

4. Partial credit reporting

For building credit, you’ll ideally want a card that reports to all three major credit bureaus — Equifax, Experian and TransUnion. These bureaus compile the credit reports that form the basis of your credit scores.

Cards with incomplete credit reporting can be problematic because you won’t necessarily know from which bureau a future lender might be pulling your credit report.

For example, if a lender pulls reports from TransUnion, but your card reports only to Equifax and Experian, then the lender may not be able to see your credit activity.

5. No upgrade path

If you use your secured or starter card responsibly, it can strengthen your credit. At that point, you may be looking to transition to a credit card with better terms, richer rewards or more generous perks. To that end, it’s preferable if your existing card makes that an easy process.

The best credit cards for poor credit — primarily secured cards — typically offer upgrade paths, either automatically (with responsible card use) or upon request. This means you may eventually qualify to “graduate” to a better card within that issuer’s family of products without having to close your existing account. And if your account is in good standing when you upgrade, you’ll get your deposit back.

Cards that don’t offer a path to upgrade can still be useful. But in the long run, you’ll be stuck with a product that you’ve outgrown, which can be particularly costly if you’re paying an annual fee. While you can choose to close the card outright, doing so can negatively impact your credit scores.

Funto Omojola writes for NerdWallet. Email: fomojola@nerdwallet.com.

The article 5 Credit Card Red Flags to Avoid originally appeared on NerdWallet.

Image provided by 123rf.com

Image ID: 56812638