Credit Scores & Improving Credit | Clever Girl Finance

Why Did My Credit Score Drop? 11 Reasons

Sarah Sharkey — Sat, 09 Mar 2024 13:00:21 +0000

Your credit score is an important number that can have a big impact on your life. Although it is just three digits, it can tell potential lenders a lot about your creditworthiness. If you regularly monitor your finances, you may notice when your credit score lowers. If it happens unexpectedly, you might ask, “Why did my credit score drop?”

Why did my credit score drop? 11 Common factors
Expert tip: Don’t panic if your credit score changes slightly
Why did my credit score go down when nothing changed and how can I tell?
4 Ways to increase your credit score after a drop
How long does a credit score drop last?
Why is my credit score so low when I have no debt?
Articles related to credit scores
It’s possible to rebuild your credit!

In this article, I’ll walk you through some of the reasons behind a drop in credit score. Plus, I’ll also highlight ways to get your credit score back on the right track.

Why did my credit score drop? 11 Common factors

A credit score is a reflection of your credit report. The factors that affect your credit score can pull it down or build it up depending on your choices and things like length of credit history, payment history, and more.

So wondering, “Why did my credit score drop?” Let’s look at eleven common reasons for a decrease in your credit score.

1. Too many hard credit inquiries

When applying for new loans, you are likely keeping a close eye on your credit score. You may notice a sharp drop while you are in the midst of applying for new loans.

In this case, the drop in your credit score is likely a result of too many hard credit inquiries. When you apply for credit, lenders and credit card issuers will pull your complete credit report to determine your creditworthiness.

Although credit inquiries play a small role in your overall credit score, it could be the reason behind your most recent drop.

If you’ve applied to several new lines of credit in the past month, this is the most likely reason for the drop. If you’re concerned that checking your credit score lowers it, know it is not considered a hard inquiry. You’ll only need to worry about hard inquiries if you apply for a new loan or line of credit.

2. Late and missed payments

A late payment can blemish your credit report, decreasing your credit score. That is especially true if you make late payments consistently. If you missed a payment altogether, that could cause your credit score to drop too.

Lenders favor borrowers who can make on-time payments regularly. A lower credit score could indicate to potential lenders that you aren’t consistent about making on-time payments.

3. Growing balances

The balance of revolving credit lines—like credit cards—can fluctuate each month.

For example, if you have credit card debt, it can grow each month that you don’t pay off your credit card account balance in full.

A growing amount of revolving debt leads to an increase in your credit card utilization ratio. If you have a $10,000 credit limit with a balance of $5,000, then you have a utilization rate of 50%.

In the FICO scoring model, around 30% of your FICO score comes from amounts owed. Knowing this, I recommend keeping your credit card and other revolving balances as low as possible. Many experts recommend keeping your credit utilization rate under 30% to prevent a negative impact on your score.

4. Why did my credit score drop after closing an old account?

Although it can be tempting to close an account because you may think it’s the best way to get out of debt, that can lead to a drop in your credit score.

FICO credit scores factor in the length of your credit history when calculating your score. Older accounts are considered a positive feature of your credit history.

After all, if you’ve been able to manage your credit for a long period of time responsibly, then lenders want to work with you. As you close older accounts, the average age of your credit accounts will fall and possibly drag your credit score down as well.

5. Bankruptcies on your credit report

Foreclosures and bankruptcies can significantly impact your credit score. A big dip in your credit score could result from a recent foreclosure or bankruptcy.

In most cases, this kind of mark on your credit report will have a large negative effect on your score. Unfortunately, the effects could impact your credit score for years.

6. Identity theft

Why did my credit score go down when nothing changed?

This question gets asked a lot. After all, why would your score drop if nothing has changed in your financial situation? One reason is identity theft.

Being a victim of identity theft is one of the worst reasons there is a drop in your credit score. If this happens, people can use your identity to apply for loans such as credit cards, open utility accounts in your name, and even steal your tax refund!

That’s why I suggest monitoring your credit regularly so you can ensure everything on it is legitimate. If someone is racking up debt and not paying bills in your name, it can be detrimental to your finances.

7. An error on your credit report

Another answer to the question, “Why did my credit score go down when nothing changed?” is simply a mistake on your credit report.

It’s sometimes possible that creditors made an inaccurate report to the credit bureaus (Equifax, TransUnion, and Experian). The error, in turn, impacts your score.

As soon as you identify an error, contact the reporting company to dispute the error on your credit report. You might also want to contact the credit bureaus to inform them of the error.

8. Credit limit was reduced

Another reason you could have a drop in your score is if a credit limit was reduced due to lack of use or due to changes in your credit. It could reduce your overall debt-to-credit ratio, which could impact your score.

You can contact the company to ask why they decreased your limit and possibly have it restored if possible. Also, paying down the balance will improve your score, so work on a debt reduction strategy and pay off your card monthly.

9. Paid off a loan

“I paid off a loan, so why did my credit score drop?”

While paying off a loan is a good thing—after all, you’re getting out of debt!—it can negatively affect your credit score. There are a few reasons for this:

You reduced your credit mix.
You closed the last account of a certain type of credit.

Paying off a loan reduces the amount of debt you owe and the type of credit accounts you have. Part of your credit score for most scoring models includes your credit mix and how many different types of credit you have.

Having a manageable mix of auto loans, student loans, mortgage payments, and credit cards can help show lenders you’re a responsible borrower—regardless of the type of credit being offered. When you pay off a loan, like a car loan, you’re removing a type of credit from your credit report.

10. Charge-offs on unpaid balances

If you simply stopped paying your debts, your creditors might write off the debt as uncollectable, known as a charge-off. It doesn’t mean you don’t have to pay your debt, but you may be paying a debt collection agency instead of your original lender.

Having a charge-off on your credit report can have negative effects. A charge-off can show up on your credit report for years to come. This makes improving your credit score or securing new credit accounts even harder.

Luckily, you may be able to remove a charge-off from your credit report.

11. Debt settlement

Debt settlement is negotiating with creditors to pay off your debt for a smaller amount than you owe. While this might sound like a good way to reduce debt, your credit score will feel the effects of settling debt.

When you settle a debt, you and your creditors are agreeing that you will never have the funds to pay all of the amount owed. The creditor takes a loss on the debt in the hopes of recouping some of the money they’re owed. This agreement is reported to the credit bureaus, who add it to your credit report.

Debt settlement is generally preferable to bankruptcy, but it can cause similar problems to your credit score. Settled debts tend to stay on your credit report for seven years, according to Experian. When a new lender sees that you settled a debt, they may be wary of lending money to you.

Expert tip: Don’t panic if your credit score changes slightly
Credit scoring models, like FICO, use formulas to calculate credit scores. Small changes in these formulas can cause your credit score to fluctuate slightly.

If you find your score went up or down slightly, it’s not usually a cause for concern. I recommend focusing on making payments on time, paying off debt, and watching your credit score for any big changes.

Why did my credit score go down when nothing changed and how can I tell?

The best place to start is by regularly monitoring your credit score. I have two favorite resources that will allow you to monitor your credit report for free:

Credit Karma

Credit Karma is a user-friendly site that will send you helpful alerts about your credit score. If there is a drop, then you’ll be able to act quickly.

With Credit Karma, you’ll have access to your credit score and credit reports from two of the three major credit bureaus.

The reports are updated weekly, so you’ll be able to check your credit report whenever you’d like to.

Annualcreditreport.com

The name gives away the services offered by this site; you’ll be able to see a credit report every 12 months. With this free credit report, you can check to ensure all your information is accurate every year.

Both options are trusted and useful ways to monitor your credit score. Take a minute to consider these options and decide which option will work best for you.

4 Ways to increase your credit score after a drop

If you’ve noticed a recent drop in your VantageScore or FICO credit score, rebuilding your credit might be a top priority. Luckily, it is completely possible to rebuild your credit.

As you improve your credit score, you’ll unlock better loan terms and rates for big purchases such as a house down payment or car. Better loan terms can result in thousands of dollars of savings over the lifetime of your loan.

If you implement the strategies below, you might be surprised how quickly your score can rebound. Let’s take a closer look at the best ways to start improving your credit score.

1. Pay down revolving debt balances

Revolving debt is associated with lines of credit that you can access with ease, such as your credit card or your home equity line of credit. Each month, you can potentially increase or lower the amount of this revolving debt.

These loans differ from installment loans, such as a personal loan with a scheduled repayment timeline and monthly payment. If you’ve allowed your credit card balances to grow, that will likely hurt your credit score, causing it to drop.

The solution is to pay down credit cards fast. Although becoming debt-free can be challenging, paying down your debt is completely possible.

Consider using the snowball method to kickstart your debt repayment journey. Along the way, you may need to consider starting a side hustle to increase your income or meal planning to stay on budget.

As you start to pay down your debt, celebrate the small wins. Every dollar you pay down is progress on your journey. It may not be an overnight path, but every step you take will bring you closer to being debt-free.

Plus, you’ll likely raise your credit score in the process.

2. Make on-time payments

Lenders value borrowers who can consistently make on-time payments to their debts.

In fact, making on-time payments is one of the fastest ways to improve your credit score. One way to consistently make on-time payments is to automate your finances.

Automation can be the key to learning how to manage your money efficiently. You’ll no longer need to worry about whether or not you remembered to pay your bills. Instead, all of your debt payments will be made on time without any headaches for you.

3. Credit builder loans

A credit builder loan is a surefire way to improve your credit score if you can make on-time payments. If you take out a credit builder loan, the loan amount will be held in a bank account until you repay the loan. Throughout the loan, you will make on-time payments that the lender reports to the credit bureaus.

The payments you make along the way will include both principal and interest. At the end of the loan term, you will receive the money the lender has been holding in your account. You’ll be able to build your credit score and learn how to save money at the same time.

4. Take our free course on how to build good credit

Since a good credit score can save you thousands of dollars, it is vital to take action. If you want to learn more about the ins and outs of building credit, then our free “Build Good Credit” course is a great resource.

You’ll learn more about the factors that affect your credit score.

Additionally, you’ll learn more about specific action steps that you can take to improve your credit score.

How long does a credit score drop last?

The amount of time a drop in your credit lasts depends a lot on what caused it to drop in the first place. Using a large amount of your credit card limit or having a few hard inquiries on your credit report, for example, often only drops your score temporarily.

Missing several payments or settling a debt, on the other hand, will likely cause a large drop in your score—and therefore take longer to build back up.

The best thing you can do if your credit score drops (after checking for fraud) is to continue making on-time payments and working to lower the amount of credit you use.

Why is my credit score so low when I have no debt?

There are lots of reasons why your score might be low even if you’re not carrying debt—and your lack of debt may be part of the cause. Creditors generally like to see a mix of different credit types when looking at your credit score.

For example, a person with a good credit mix might have a car loan, mortgage, and credit cards with on-time payments.

This post offers much information to answer, “Why did my credit score drop?” To find out more about credit, check out these other great reads!

It’s possible to rebuild your credit!

A good credit score can unlock better loan terms for the big purchases in your life. With better loan terms, you can potentially save thousands of dollars over the lifetime of these major purchases, such as a home.

Remember, at the end of the day, it’s all about using credit wisely. For more terrific financial tips on improving your credit, ditching debt, saving money, and building wealth, tune in to the Clever Girls Podcast and YouTube channel!

The post Why Did My Credit Score Drop? 11 Reasons appeared first on Clever Girl Finance.

How To Remove A Charge-Off From Your Credit Report

Tara Seboldt — Thu, 09 Jun 2022 11:51:14 +0000

What happens if you simply stop making payments on a debt? In most cases, your creditor will eventually write off your debt as a lost cause. This is called a charge-off, and it can seriously hurt your credit score — and your opportunity for getting new credit in the future. Luckily, you can learn how to remove a charge-off from your credit report.

In this article, we’ll go over how a charge-off affects your credit score and how to request to remove it. We’ve also included templates of a sample letter to remove charge-off from credit report.

What is a charge-off?

If you stop paying a debt, your creditor might give up on trying to collect it. If so, they’ll decide the debt is uncollectable and write it off as a loss to the company. This is known as a charge-off.

Charge-offs can happen to any type of credit account, including:

Credit cards
Student loans
Auto loans
Personal loans
Personal lines of credit
Mortgages
Certain overdue medical bills

Most creditors don’t use a charge-off until you’ve missed payments for several months. You probably won’t have to worry about a charge-off if your payment’s late by a couple of days.

If you have missed payments for a few months, you're probably wondering how to remove a charge-off from your credit report. Having a charge-off on your credit history can hurt your score for years to come.

Do you have to repay a charge-off?

Yes, you’re still expected to pay your debt — even if your creditor writes it off. A charge-off is not the same as debt forgiveness. Most lenders sell a charged-off debt to third-party collections agencies.

The collection agency will start contacting you to repay the debt. Debt collectors can be annoying, but they have to follow debt collection rules.

You can report debt collectors who don’t follow the laws to the Federal Trade Commission, Consumer Financial Protection Bureau, plus your state attorney general.

How does a charge-off impact your credit score?

When a company writes off your debt, they report it to the major credit bureaus. The charge-off is then added to your credit report. Having a charge-off on your report is one of the worst things to happen to your credit score.

It’s easy to see why. Paying on time is the biggest factor in your credit score. If you start missing payments, your score is going to take a hit.

But a charge-off won’t just make your credit score drop like a missed payment. Charge-offs stay on your credit history for up to seven years. Even if you make all of your other payments on time, potential lenders can see the charge-off.

You’ll find it harder to get approved for new credit like credit cards or a mortgage, so it's important to know how to remove a charge-off from your credit report.

Paid versus unpaid charge-off

What happens if you pay back your charge-off amount in full? Does it still hurt your credit?

Unfortunately, paying off a charge-off doesn’t automatically remove it from your credit history. Lenders will still see a charge-off and may not want to lend you money.

However, a paid designation is added to your credit report if you pay what you owe in full. Some lenders may see a paid charge-off more favorably than an unpaid charge-off.

How to remove a charge-off from credit report

Lenders don’t have to remove a charge-off from your credit report, even if you pay them back. That being said, it’s still in your best interest to try and figure out how to remove a charge-off from your credit report. The worst that could happen is your request being denied.

The process of asking to remove a charge-off can also help you verify your debt. Lenders and collections agencies do make mistakes. Examining any charge-offs will help you determine if a debt is legitimate and accurate.

Disputing an inaccurate charge-off

If your credit report has an error, such as an inaccurate charge-off, you can report it. You need to write a letter disputing the error and send it to the major credit bureaus. You should also send a copy to the institution that supplied the inaccurate data, such as your bank or credit card company.

Be sure to collect any supporting documentation to go with your dispute letter. This could include statements, contract agreements, or letters from your lender. You need to make a strong case to show that the charge-off is inaccurate.

For example, say you pay off an overdue credit card balance in full before it goes to collections. Your credit card company sends out a letter to you acknowledging you paid the debt.

However, they also accidentally report your non-payment as a charge-off. You would include the letter from the credit card issuer as documentation of the inaccuracy.

Details of your charge-off can be inaccurate as well. That means you could still have a charge-off, but the amount could be wrong.

Let’s say you owe $1,000 on your car, but your lender reports a charge-off for $2,000. You can dispute the inaccurate amount.

Talking to your creditors

What can you do if the charge-off is accurate? Your first step is to talk to your creditors as soon as possible.

Check out your finances and decide how much you could realistically pay on your debt. The more you can pay as a lump sum, the better. A lender is much more likely to remove a charge-off if you can pay back what you owe in full.

Even if you can’t afford to pay your debt in full, your lender may be open to working with you. You could qualify for an income-based payment plan or other repayment programs.

Remember, it’s better to ask and be told no than it is to simply accept a charge-off on your credit history.

Tips to remove a charge-off

Figuring out how to remove a charge-off from your credit report doesn’t have to be complicated. Try these tips to help make the process easier and increase your chances of successfully removing a charge-off.

Find the details of the debt

Creditors often sell debt to collectors soon after reporting a charge-off. Collection agencies also buy and sell debt from other collectors. That means your debt could have been bought and sold several times after the charge-off.

Start by getting a free credit report to verify the details of your debt. You can ask for a free report from each of the three major credit bureaus once every 12 months.

The information you should look for includes:

Current creditor/owner of the debt
Amount you owe
Age of the debt

Negotiate the payment amount

Once you know who owns your debt and how much you owe, it’s time to start negotiating. There are usually three options for negotiating your payment amount:

Paying the debt in full
Partial lump sum payment
Installment payments/payment plan

Your creditor prefers that you pay the debt in full in one lump sum payment. However, many creditors would rather recoup some of their money than nothing at all. It's possible they'll work with you to set up a payment plan to agree to a lower lump sum.

When negotiating a lump sum payment for a partial amount, try starting your offer low. This gives you more room for negotiation so you’ll end up with a final amount that fits your budget.

For example, you can afford to pay up to 60% of your debt in one payment. You offer your creditor a lump sum settlement of 25%. They counter back with 75% and eventually agree to 50%.

If your debt has been sold, you’ll likely have a better chance of paying less than you owe. Most collectors buy debt for a fraction of the original cost. They can still make a profit even if you pay less than the actual amount owed.

Request a “pay for delete” agreement

Pay for delete agreements let you leverage payment for the money you owe to remove the charge-off. When learning how to remove a charge-off from your credit report, using a "pay for delete" agreement is extremely important.

In the agreement, you’ll offer to pay back all or part of your debt. In exchange, your creditor will agree to remove the charge-off from your credit report.

Note that your creditor has no obligation to approve your “pay for delete” agreement. Once they charge off the debt, there’s no guarantee they’ll agree to remove the charge-off.

However, as I mentioned before, it’s far better to ask if they’ll remove the charge-off than to not try at all.

Find the right person

Getting your pay for delete request into the right hands is essential to successfully remove a charge-off. An entry-level employee won’t be able to help you get the charge-off off of your report.

You also don’t want to send your charge-off removal letter to the generic correspondence address for your credit.

Instead, try to find a manager or executive-level employee who has the power to change your account status.

Get everything in writing

No matter what a creditor or collector says over the phone or in person, get your payment or removal agreement in writing.

Ideally, you’ll get the agreement on a copy of the company’s letterhead and signed by the manager or executive who agreed to it.

This protects you from the company backing out of the agreement. Don’t make any payments on your debt until you have the agreement in writing.

How to remove charge-off from credit report by contacting your creditors

The letter you send your creditor to remove your charge-off is called a “pay for delete” letter or a goodwill letter. Generally, you send a pay for delete letter if you haven’t paid the debt and a goodwill letter if you’ve already paid.

When wondering how to remove charge-off from credit report easily, a letter may be your best bet. How you construct your letter can make or break your chances of successfully removing a charge-off from your credit history. In addition to addressing your letter to the right person, remember these tips:

Use a clear, professional tone
Be polite
Avoid blaming the creditor or collector
Don’t make excuses
Keep it as direct as possible

Keep reading to see a sample letter to remove charge-off from credit report for paid and unpaid balances.

Sample letter to remove charge-off from credit report

If you still owe the money from your charge-off account, there’s some good news. Your repayment is the leverage you can use to help convince creditors to agree to a pay for delete arrangement.

Your removal letter should focus on the benefit to the creditor. That is, your lender will get all or some of their money back if they agree to remove the charge-off.

Pay-for-delete sample letter

[Date]

[Your name]

[Your address]

[Lender/collector’s name]

[Lender/collector’s company]

[Company address]

Re: Account Number [Your account number]

Dear [Lender/collector’s name or “Collection Manager” if unknown],

This letter is in reference to the alleged debt owed on the account listed above, [account number]. I wish to settle this debt, saving us both time and effort.

Please note that this letter is neither an acknowledgment that I owe the debt nor an acceptance of the debt. I retain the right to ask for verification of this debt and do not consent to make any payments unless I receive a written agreement to the terms below.

I'm willing to pay [this debt entirely (or) $X as settlement for this debt] in return for your agreement to remove the “charge-off” status of this account from all credit reporting agencies.

This payment is offered in exchange for your written and signed confirmation of the removal of this debt from all records of credit reporting agencies.

If you agree to these terms, please accept them in a letter written on your company’s letterhead. The letter should be signed by a representative with the authority to make this agreement. Once your approved agreement letter is received, I will send a payment for the debt in the amount of [$X].

The offer will be valid for 15 days from receipt, after which I will rescind it and request a full verification of the alleged debt.

I look forward to resolving this matter for our mutual benefit.

Sincerely,

[Sign your name]

[Print your name]

[Your address and contact information]

Sample goodwill letter to remove paid charge-off

If you’ve already paid the charge-off debt, you’ll want to try to remove it using a goodwill letter. Essentially, this letter acknowledges your missed payments and repayment and asks for forgiveness from the creditor.

Unlike a pay for delete letter, a goodwill letter doesn’t have the leverage of an unpaid account. Your creditor already has your payment, so there may be less incentive to remove the charge-off. However, with a bit of luck and politeness, you might be able to get your charge-off removed from your credit history.

Use this sample goodwill letter to remove paid charge-off to help you get started.

Goodwill removal sample letter

[Date]

[Your name]

[Your address]

[Lender/collector’s name]

[Lender/collector’s company]

[Company address]

Re: Account Number [Your account number]

Dear [Lender/collector’s name or “Collection Manager” if unknown],

Thank you for making the time to read my letter. This letter is in reference to [account ID/number], which was [paid in full/settled for $x/etc] on [date of payment or settlement].

I acknowledge that this payment was made after a previous non-payment on the account due to [quick description of your personal circumstances, such as losing a job or mistaking the due date]. As evidenced by my payment, I have made the effort to rectify my mistake.

I am currently trying to apply for a mortgage [change reason to best fit your situation]. The status of the above-referenced account is hindering my chances of approval.

I would like to request a goodwill adjustment to remove the charge-off status of this account reported to credit agencies. I believe this will significantly increase my approval odds for future credit.

Thank you for your time and consideration, and I look forward to hearing your response.

Sincerely,

[Sign your name]

[Print your name]

[Your address and contact information]

Start learning how to remove a charge-off from your credit report

While there’s no guarantee your creditor will remove a charge-off from your account, it’s always best to try.

If successful, you’ll avoid having a major negative credit event on your credit score for up to seven years.

Don’t wait for debt collectors to start calling — get your latest credit report and check that all of your debts are up to date and accurate today. And check out our free debt repayment course to help you succeed.

The post How To Remove A Charge-Off From Your Credit Report appeared first on Clever Girl Finance.

What Does Insufficient Credit History Mean? How To Improve Yours

Kate Braun — Mon, 06 Jun 2022 12:26:39 +0000

Have you been excited to add a new credit card to your financial arsenal—or apply for a car loan or apartment—only to be told you have an insufficient credit history? Don’t worry! This is perfectly normal, especially when you’re young. We all start out with insufficient credit experience until we take steps to establish some.

Let’s look at what insufficient credit history means, why establishing credit is important, and how to improve your limited credit history.

What does insufficient credit history mean?

In short, having insufficient credit history means you don’t have enough experience with loans/credit for the credit bureaus to assign you a credit score yet. That could mean you have no credit history at all. You’ve never had a credit card before, taken out student loans, gotten a car loan, etc.

Or, it could just mean that you have a limited credit history, and your accounts aren’t old enough to count yet. (More on this later!)

If you have insufficient credit experience, there’s no need to worry. No credit is not the same thing as bad credit. It really just means that you have a blank slate to start writing your story on.

How having insufficient credit history could affect your finances

While insufficient credit by itself isn’t necessarily a bad thing, it can make certain things more difficult at first. Yes, creditors don’t have any bad information about you, but they also don’t have any good information. You’re a total unknown, which does make you risky to lend to.

In practice, this means that you’ll have more difficulty getting approvals for loans or other applications that check credit. But these struggles will disappear as soon as you’ve established a less limited credit history. (And we’re here to help with that!)

Why having good credit is important

Let’s quickly look at a few of your incentives to improve your insufficient credit history. Having good credit can open a lot of doors for you, whether it’s:

Qualifying for a new apartment
Getting a good rate for a car loan
Being approved for a mortgage
Paying lower insurance premiums
Getting credit cards with good rewards
And more

Ultimately, credit scores in the United States can affect your life in a lot of ways. If you practice smart credit habits from the beginning, you’ll set yourself up for success from the get-go.

How much credit history do you need?

Is it difficult to build up a good credit score? Good news: it’s really not! If you start now, you can have a good credit score within the year.

FICO is right now the most widely used credit scoring model. In order to generate a FICO score, they state that you need at least one account that has been open and reporting to the credit bureaus for at least six months.

While you probably won’t catapult yourself into the “Excellent” range with one six-month-old credit account, you can certainly lay a good foundation.

4 steps to improve your limited credit history

If you have no credit history or a very new one, you should know that improving an insufficient credit history takes time. But you have a great opportunity to build a clean credit record from scratch!

Follow these steps to turn that insufficient credit experience into a great score that will benefit your future.

1. Apply for a beginner-friendly credit card

Because you’re a complete unknown to creditors, you aren’t going to qualify for top credit cards or high credit limits right away. Luckily, there are several options that won’t rule out people with insufficient credit history!

Check out cards in these categories:

Student cards

Obviously, college students aren’t expected to have extensive credit histories. If you’re a current college student, check out student credit cards to build up your credit history early. My original credit card was a Discover student card!

Most issuers will verify your school enrollment in order to approve you. Many student cards don’t require you to have a credit score; they’ll just start you with a low limit at first.

Secured credit cards

Secured credit cards are kind of like a hybrid between credit and debit cards. You essentially put down a security deposit with the issuer, so they’re not taking any risks by lending to you.

Once they have your deposit, you’ll use the card just like any other credit card.

Make purchases and pay your bill on time each month. When your credit score is improved enough, you can upgrade or close the secured card and receive your deposit back.

You don’t have to get a credit card to establish a credit score, but it definitely helps!

2. Become an authorized user with someone else’s card

Got a trusted family member or BFF with a good credit score? They might be able to help you with your insufficient credit history by adding you as an “authorized user” with one of their credit cards. Your name and SSN will then be attached to that account, so you can share a bit of their good credit history.

The credit card issuer will send a copy of the card with the authorized user’s name on it. You can use it, but be wise and protect your relationships. Ultimately, the primary cardholder is still responsible for any charges made with cards connected to their account.

That said, the authorized user doesn’t even have to use the card in order to benefit from it! This is the beauty of it—there’s no financial stress or risk to either party involved.

I added my brother to one of my card accounts when he was looking to establish credit. When his card arrived, we just tossed it in a drawer and he never used it. Drawer or no drawer, it helped his credit just by being attached to my account.

If you become an authorized user, you can work out your own terms with your friend or family member. Maybe you need a credit card to pay a certain bill every month, so you use the authorized user card and then reimburse them with cash or a money transfer. It’s up to the two of you!

3. Look into “credit builder” loans

Credit builder loans are a lot like secured credit cards: loans that you back with an equivalent amount of collateral. You can choose the loan term and monthly payment amount that fits you. Your security deposit stays safely in a connected bank account until the end of the loan, at which point you can get it back.

In addition to helping fix your insufficient credit history, these loans can also help you save money! Unless you default on the loan, you’ll get all your money back (minus any applicable fees and interest) at the end. This keeps the money in a secure location and helps you meet short-term savings goals.

4. Pay your bills on time in full

No matter what kind of card or loan you start out with, there’s one single key to success. Always pay your bills! This shows that future creditors can trust you to pay your debts and loans, which boosts your score.

Paying your bills on time in full also saves you from paying late fees and interest. If you use credit cards wisely, you’ll never pay a single cent of interest! Pay off your entire statement balance each month and credit card debt won't ever be a source of worry for you.

Time to turn your insufficient credit history around!

Once you have a minimum of six months of history with some form of loan or credit line, you should be on the map with a shiny new score and less limited credit history! Improved credit history can help you with many things like buying a house or getting a new credit card.

As you continue to learn about credit and money, Clever Girl Finance is here for you! We offer multiple free courses to increase your financial knowledge, as well as our podcast for more money info.

The post What Does Insufficient Credit History Mean? How To Improve Yours appeared first on Clever Girl Finance.

Does Checking Your Credit Score Lower It?

Ashlee Sang — Fri, 25 Mar 2022 12:17:00 +0000

You've probably thought about checking your credit score every now and then. You may be pulling your report occasionally from the credit bureaus or you may have active credit monitoring in place (recommended!). Either way, this question may have crossed your mind; does checking your credit score lower it, and if it does, why does this happen?

There is more than one explanation for credit score changes. We'll discuss this in detail but first a quick overview of your credit score. Find out what impacts it and what isn't a big deal.

Overview of your credit score

Basically, your credit score shows how well you manage the credit available to you. Some factors that determine your score include how much credit you use, how quickly you pay off that balance, how long you’ve been using credit, and if you have any dings against your record (such as foreclosures and bankruptcies). These are all things you want to keep in mind as you consider your credit score.

This brings us back to the big question: does checking your credit score lower it? The short answer is, yes and no. So, why does checking your credit score lower it?

A key factor to this is any inquiries made on your credit. Hard inquiries can affect your score while soft inquiries don’t. Let's go over how these credit inquiries work to decide: does checking credit score lower it when related to these things?

Types of credit inquiries

There are two credit inquiry types, and they don't all affect your score in the same way. Hard inquiries will make your credit take a hit, whereas soft inquiries will not. Let's look in detail at the differences.

Hard credit inquiries

While it’s a little ironic, applying for a loan or other big purchase and having your credit checked will likely lower your score. These hard inquiries signal that an increase in debt is probably on its way, and they are done so the lender can see what you'll be like as a borrower.

While these aren't a problem on an occasional basis, it's important to be aware of how often a hard credit inquiry is done so your credit score doesn't suffer.

Hard inquiries typically occur when you apply for credit. For instance a mortgage, a car loan, a credit card, student loans, or personal loans. They also occur with things like renting an apartment depending on the rental process.

These hard inquiries (or hard pulls) will likely stay on your record for about two years. You can minimize their impact by being strategic about when you authorize them. Know exactly what's happening with your credit at all times.

For example, FICO scores may not even be affected by multiple inquiries if they’re made within 30-45 days of acquiring a new loan. This allows you to shop around and have multiple lenders check your score. (Learn more about how your FICO score affects your finances).

Hard inquiry mistakes or questions

Also, mistakes happen, including on your credit score. Your report may show a hard inquiry that occurred without your permission. This could be identity theft, an authorization you simply forgot about, or some other error.

You have the power to dispute it with the credit bureau, or even reach out to the Consumer Financial Protection Bureau. Just remember that you can’t dispute a hard inquiry simply because it lowered your score. You can only flag hard pulls that occurred without your permission.

Soft credit inquiries

There are different types of inquiries. Maybe you're wondering, does checking my credit score lower it every time? This is a common question and fortunately, there's a simple answer.

The counterpart to the dreaded hard inquiry is a soft inquiry. These “soft pulls” aren’t tied to official credit or loan applications and don’t affect your credit score. If you check your credit score on a site like Credit Karma, your score is not going to drop.

Soft inquiries are more general, rather than being tied to a specific loan application. The most common soft inquiry is when you check your own credit score. You may do this to see what you can do to make changes before a purchase.

It’s standard practice for credit card companies, lenders, and insurance agencies to use these checks to pre-qualify or pre-approve you for offers. Soft credit checks are also used by employers and landlords during background checks. That said, some credit bureaus do still record the soft inquiry on your report.

The main difference between a hard and soft inquiry

The main difference between a hard and soft inquiry is whether you’re actually applying for credit or a loan. An actual application means you've given the lender permission to check your credit for that application. If you did, it will likely be tracked as a hard inquiry.

Otherwise, the check is generally reported as a soft inquiry. This includes when you check your own credit. And this is a good tool to use, especially when you're building a better credit score.

How does checking your credit score lower it?

Are you wondering, "Does checking my credit score lower it?" No, not in most cases. Soft inquiries—like when you want to keep tabs on your own score or background checks—should NOT affect your credit score.

It’s the hard inquiries that will temporarily lower your score. These hard pulls are a necessary sacrifice when you’re ready to make a big financial decision, like a loan or new line of credit. Don’t be afraid to ask the person or business you’re working with if their check will be classified as a hard or soft credit inquiry so that you can plan accordingly.

The United States has three major credit bureaus. These are Equifax, Transunion, and Experian—which aggregate data from many sources into a single report. You can also check your report before any major loans to make sure you’re in good shape before a hard inquiry comes your way.

If you want, you can also get a free credit report from annualcreditreport.com. But why does checking your credit score lower it? As you now know, checking out your free credit score won't affect your finances, it's just the hard inquiries.

What does lower your credit score?

Several things can positively and negatively impact your score. Does checking credit score lower it? Not when you do it as a soft inquiry, but there are still other things that could change your score.

You should be aware of these and work to make your credit better over time. But remember that credit is determined by a number of factors. It's important not to get overly concerned about your credit score on a daily basis, but do be ready when you know that a hard inquiry is on its way.

Payment history

If you don't make a payment on time, this can negatively impact your score. Stay up to date on all payments to ensure that this massive part of your score helps you. Try to make sure every payment you make is early and not late.

Types of credit

The types of credit you have, like student loans and credit cards, matter quite a bit, and more diversity is usually better. Installment and revolving credit mixes are best, which means both credit cards and long-term loans. Be sure that your credit is showing that you can handle various credit situations.

Length of credit history

You want a long credit history. The more time you've had credit for, the better. Seven years is a good amount of time to make a positive impact on your score, so start as soon as you're able.

Credit utilization ratio

Your utilization ratio is important. Utilizing higher than 30% of your credit at one time could have a negative impact. When you put something on a credit card, know your utilization ratio and if the purchase will put you over this percentage, consider waiting.

Potential new credit accounts

If you're still asking why does checking your credit score lower it, remember that a hard credit inquiry will happen when you apply for credit. So think twice about those credit card offers beforehand, as your score will be lowered a bit.

This doesn't mean never applying for new credit cards, but be strategic.

Track and maximize your credit score

Now that you no longer have to wonder if checking your credit score lowers it, you can stay more informed of your credit status. As you work your way toward that perfect score, remember that you do have some say in how your report looks. In fact, there are several factors that you control.

Avoid any credit missteps you can. Your score may drop with late and missed payments or when you allow your credit debt balances to grow. And closing an old account can also cause a dip in your score, as well as any bad marks on your credit report.

While your credit score doesn’t give a full picture of your financial health, it’s a key piece to your overall money puzzle and creating a financial plan. Having a great credit score can really improve your life. This is especially true as you do things like rent an apartment or buy a house, or apply for a loan.

A lowered credit score depends on many factors

So now you know, does checking your credit score lower it? It depends on the type of inquiry. Hard inquiries may lower your credit score, while soft inquiries generally do not.

Having a higher score can mean better terms on new loans, mortgages, and credit cards. These things on their own don’t add much value to your life, but they’re tools you can leverage to reach your goals. So it's important to try to keep your score high.

If you are working towards a higher credit score, don't give up! Remember to be mindful of inquiries and check your own score on occasion. Your hard work will pay off and you'll soon discover the benefits of having great credit.

The post Does Checking Your Credit Score Lower It? appeared first on Clever Girl Finance.

FICO Score VS Credit Score: How Your FICO Score Affects Your Finances

Bola Sokunbi — Fri, 18 Jun 2021 02:31:23 +0000

Credit is a huge part of your financial life. Before you go and apply for credit, it’s important to understand your FICO score vs. credit score, where your credit stands, and how it works. Knowing if you have a good FICO score is helpful because it's how lenders will determine whether to offer you a loan.

It also impacts your wallet in other ways and can save you or cost you hundreds of dollars a year, if not more. In many ways, your FICO Score is a lot like a grade on how well you manage money.

What is a FICO score?

So, what is a FICO score exactly? There are many types of credit scores out in the market today, but most lenders use the FICO Score. If you’ve applied for credit in the past, it’s very likely your lender pulled your score from FICO.

FICO (formerly Fair, Isaac, and Company) is an analytics company and uses data, like your credit history, to make predictions. Their FICO Score is a type of credit score used by lending institutions to decide whether to extend credit to you. It also determines your interest rate too. (But more on that below).

The credit scores are three digits and typically range from 300 to 850. The higher the number, the better your credit. Anything over a 700 is considered a good FICO score.

Now we answered "what is a Fico score" so let's get into the difference of the fico score vs. credit scores.

FICO score vs. credit score: The difference

So, FICO score vs. credit score, what is the difference? Basically, your FICO score is one of the types of credit scores you can get. Although FICO dominates the credit industry, lenders use others like VantageScore too.

Those scores will be different since they’ll use their own proprietary technology and analytics to make their predictions about your credit. Since they use different analytics, you will notice a difference in your credit scores. It also depends on which credit report the scoring model uses.

Another difference in fico score vs. credit scores is the ability to generate a score for you. For instance, FICO requires you to have at least one account open for six months. However, VantageScore may be able to produce a score with a one-month history that has been reported in the last two years.

Which FICO Scores do lenders use?

When comparing the FICO score vs. credit scores, it’s also important to know that while FICO scores are used by 90% of the top lenders, lenders use different versions of FICO scores depending on the type of financing you plan to secure (a mortgage versus an auto loan, for example).

FICO Score 8 is still the most widely used version. But FICO Score 9 is gaining traction and includes a more nuanced treatment of medical collection accounts.

How do lenders use FICO Scores?

When you apply for financing, lenders use your credit reports and your FICO scores based on the data in your credit reports to determine your creditworthiness.

While your credit reports contain information collected on your track record of handling debt, your FICO scores summarize how likely you are to repay a new debt obligation. This includes:

Payment history
Amount owed (Credit utilization rate)
Length of credit history
New accounts
Types of credit (cards, installment loans, etc.)

These credit score factors are not all treated equally when it comes to your credit score. For example, your payment history (35%) and amount owed (30%) holds more weight than new credit (10%), credit mix (10%), and length of credit history (15%).

Depending on these variables, you can find yourself paying a low-interest rate on a credit card or not qualifying for credit at all. So, having a good FICO score can help you qualify for loans and lower rates.

How your FICO Scores are used in lending decisions

Here are some of the most common scenarios where you will want to know not just your credit score, but your FICO Scores as well.

1. Opening a credit card

You might apply for a credit card to take advantage of a beneficial rewards program or to start building a positive credit history. Many credit card issuers evaluate how much of a credit limit to extend based on your FICO Scores. Be mindful of using your credit card responsibly and paying your balance each month.

2. Financing a car

The average cost of a new car can extend to over $40,000. Many people chose to pay for a car through financing without coming up with such a large sum of money upfront. For this type of transaction, lenders typically use your FICO Auto Score 8 as part of underwriting the car loan.

In addition, the way you manage your credit and your resulting FICO Scores can also impact the cost of your auto insurance (unless you live in California, Hawaii, or Massachusetts). Drivers with bad credit pay over $1,000 more per year than drivers with good credit.

3. Refinancing student loans

One effective way to tackle student loan debt is to lower the total cost of the loans by refinancing with a new lender at a lower interest rate. Lenders who offer student loan refinancing rely, in part, on your FICO scores to decide whether you are eligible to take advantage of lower interest rates.

4. Purchasing your first home

Buying a home is one of the largest purchases you will likely make that requires financing. Along with a healthy down payment, your FICO Scores from the three nationwide credit bureaus are used by home lenders to determine whether you will be able to secure the lowest interest rate possible.

How to prepare before you apply for credit

A strong credit score is based on a solid history of positive financial habits. The best approach to establish good financial behavior and maintain strong FICO scores is:

Pay all your bills and loans on time, every time
Reduce your overall debt to credit ratio by paying down debt
Use a minimal amount of your revolving credit available
Limit unnecessary credit inquiries
Resolve errors on your credit reports

Then you will place yourself in the best position possible when seeking credit throughout your financial journey. FICO works with more than 100 financial institutions to provide consumers with access to their credit score that matters through the FICO Score Open Access program.

See if your bank participates and whether you have a good FICO score or not. You can learn more about how your FICO Scores factor into the financing process at www.myFICO.com.

A good FICO score will benefit you financially

Now that you understand the difference between the FICO scores vs. credit scores and how it impacts your finances, you can see why having a good fico score is important.

A good FICO score helps you qualify for big purchases such as a car or a home. It will also save you a ton of money because you qualify for lower rates too. Learn how to build good credit with our free course!

The post FICO Score VS Credit Score: How Your FICO Score Affects Your Finances appeared first on Clever Girl Finance.