Have you ever heard of the expression, “No credit is worse than bad credit?” Like most people, you’ve probably thought the complete opposite. After all, isn’t it better to have no credit at all than to walk around flaunting a lousy credit score? However, this rationale is just not true. Yes, it’s true that possessing poor credit can severely damage your financial standing, but if you are ever seeking a loan to purchase a car or new home, lenders will want you to demonstrate that you have a solid credit history.
If you’re wondering how you begin to build your credit and what measures you need to take to get there, you’ve come to the right place. Many people avoid building a credit history altogether, worried about falling into the pitfalls of being brandished with a bad credit score. The good news is, there’s plenty of positive actions you can take to move your credit standing in the right direction.
Examine How You Got Here
For starters, it’s best to gain a strong understanding of why you don’t possess a credit score to begin. For instance, maybe you just graduated high school or college and haven’t had the opportunity to engage in credit-related activities. This can be attributed to the fact that you have yet to accumulate any student loan debt. Or perhaps, you never needed to apply for your own credit card. Similarly, you may have just relocated to the States and therefore, have to build everything up from scratch. Whatever the case may be, not having any credit can work against you as you navigate through your life and career. It’s time to start working on eradicating this.
So, what should you do to build up your credit?
Get a Credit Card
The most comfortable place to start is to obtain a secured credit card. A credit card may seem like a frightening item to possess because of all the stories floating around about people submerged in credit card debt, which can quickly cause your credit score to plummet. However, owning a credit card means exercising financial responsibility. The critical thing to remember is if you’re going to make non-essential purchases, like grabbing yourself a shiny new flat-screen TV, and you don’t actually have the means to pay for it, then you are putting yourself at risk for falling into credit card debt. Instead, you want to leverage your credit card for things you usually budget for, like groceries or gas, to ensure you never miss a payment.
Unsure of what type of credit card to get? First, you’ll want to look for a credit card that doesn’t carry any annual fees, as this additional expense could be more than you can afford. Another thing to consider is applying for a credit card at a store you typically frequent, like TJ Maxx. A majority of major retailers offer credit cards, and it’s a great place to start if you know you purchase goods from one particular place consistently.
Using credit cards for gas is also a smart investment. Say every time you go to the gas station, you usually hand the cashier a twenty-dollar bill. If you use a credit card instead and immediately pay off the money you used for fuel, it’ll help you begin building your credit and help boost your score in a positive direction. It’s imperative to keep in mind that if you’ve given yourself a $500 spending limit, that you adhere to that maximum. Otherwise, you will find yourself overspending and unable to pay owed funds, which will quickly get you into trouble.
If you are just now starting, it may be a good idea to enlist the help of your parents. If they possess good credit, they will be able to co-sign for you. Having this work alongside your own application will help as well.
Another highly recommend tip to boost your credit is to lease a car. Now, you may have heard that owning a car is the way to go. Alternatively, you may have certain preconceived notions about leasing, but if you lease a car, it opens up a line of credit and allows you to demonstrate your ability to make monthly payments on time. By doing so, it’ll have a direct impact on the strength of your credit score.
Make Payments on Time
If you are a student who had to take out a loan to get through college, you are not alone. Due to the cost of American education, many young adults are forced to apply for government assistance to afford to obtain their degree. Although loan services do not require any payment while you are still pursuing your education, you’ll typically begin receiving monthly bills between six months and a year of graduating. Making steady payments to your student loan is essential for not only building a credit score but improving a poor credit score. If feasible, try to pay more than the minimum balance on your bill each month. This will help you avoid racking up an astronomical amount of interest and paying back double what you originally borrowed from the loan institution.
Another tip for those looking to build their credit is to make utility bill payments on time. You probably see a trend here, but it’s important with all bills to ensure you pay them on time. Whether it’s your car, student loan, rent, or medical bills, anything that you neglect to pay or underpay will hurt your credit score. Also, considering you are trying to build up your credit from scratch, you want to condition yourself to form good habits.
Don’t Stress, Learn as You Go
If all of this makes you a tad nervous, don’t be. You may feel like you are setting yourself up for failure, but that’s not the case. You do not need to worry about getting credit cards and putting yourself in debt. By making a plan and budgeting accordingly, you’ll ensure that your financial picture remains in a healthy state. If you get a credit card, recognize that you are going to use it only with money that you already have to pay for things. What you don’t want to do is use your credit card responsibly on outrageously expensive items that you know you will not be able to pay off quickly. This will set you up on a bad path where you find yourself opening more credit cards just to be able to compensate for your everyday necessities. Then you will get to the point where your credit is so bad, that you won’t be able to apply for loans or mortgages. Be smart with your journey to good credit!
What kind of effect can a student loan have on your credit score? Does this question pique your curiosity? You’re not alone. Many people often wonder how taking out a student loan will influence their credit standing. Will it boost their score? Hurt it? As with any loan or credit card, the healthiness of your financial picture will be contingent upon whether or not you make payments on time. Also, student loans are subject to specific federal rules and regulations that can have an impact on your overall creditworthiness. Here’s a look at how student loans can affect your credit.
Loan Deferment and Forbearance
Contrary to popular belief, student loan deferment and forbearance will not hurt or negatively impact your credit. While it will be noted in your credit report, it will have no bearing on your score unless you miss or make late payments before receiving approval for your deferment request.
There are certain circumstances where deferment and forbearance can actually improve the likelihood of getting a loan, such as a mortgage, approved. For instance, if you can adequately demonstrate to your bank that you are (or will be) in forbearance, they will likely factor that into their decision-making process when examining if your discretionary income is enough to pay back borrowed funds.
When your student loan is reported to credit bureaus, they are treated as installment loans rather than revolving credit, which means you’re making a fixed number of payments. When it comes to your credit score, installment loans carry less weight than an item that’s classified as revolving credit, like a credit card. By properly managing your student loan payments and credit card balances, reporting agencies like Experian, TransUnion, and Equifax will use that as a strong indication that you are fiscally responsible. Debt management is an essential part of ensuring your credit score remains in good standing.
Building Credit History
The bulk of individuals who apply for a student loan are just entering college or grad school and have yet to build a strong credit history. Qualifying for a loan or new credit line can sometimes prove to be difficult when you are unable to demonstrate a strong credit history – especially if you’ve just graduated and have yet to gain employment. This is where a student loan can prove beneficial. Federal student loans do not require you to have a long-standing credit history to qualify, and they’re a high starting point to begin building your credit.
Adding Credit Diversity
One of the criteria used to calculate your credit score is the types of credit you have and how diverse those credit sources are. By adding an installment loan, such as a student loan, to your repertoire, it can help improve your credit standing. As long as your making payments on time, the more types of credit you possess, the more significant impact it’ll have on boosting your credit score.
A Good Investment
When you are borrowing funds for a student loan, it’s seen as a good education investment in your future. In other words, you aren’t applying for a loan for a luxury vehicle or something extravagant that isn’t an essential need and could likely be purchased using a credit card. Because student loans are considered smart investments, it could be used in your favor if a bank is determining whether or not to approve a loan you’re requesting.
Let’s say your credit score is negatively impacted because your account is considered delinquent. If this happens during a time when you are awaiting deferment approval, federal student loan lenders usually correct the delinquency reporting automatically by properly backdating your deferment once it’s approved. You can encounter this issue for several reasons.
For example, maybe you are back in school, pursuing your degree, but accidentally dropped the ball on mailing in your deferment form. Because of this, your account transitioned into “past due” territory. This can quickly be eradicated by sending in your deferment form and backdating the paperwork date to when you originally qualified for the deferment. Once this is processed, the lender should remove the negative report from your credit history and fix any similar issues that ensued as a result of the delinquency.
Past Due Reporting
It’s easy to start panicking when you realize you missed a student loan payment. There’s some good news. Most federal loan lenders have a 60-day policy in place where they will not report past due balances to credit bureaus before the 60-day mark. If it’s only been a few days or weeks, there’s no need to feel alarmed. There is a strong likelihood that it will not impact your credit score. While it’s never good to miss a payment, if you have a clean track record of making payments on time, one slip up won’t blemish your credit standing. Just make sure to remit payment to your lender as soon as you realize the payment was missed.
If your account has rightfully moved into delinquency, it will negatively affect your credit standing. However, if you focus your efforts on making your student loan account current, bringing it out of “past due” territory, it’ll help raise your credit score and help paint your credit history in a more positive light. There are options available for federal student loan borrowers with delinquent accounts, repayment assistance, to help bring your account current. And, once your account is current, you can see an increase in your credit score in as little as a few weeks.
Having a good understanding of your credit and how your student loan can impact your standing for the better or worse is extremely important. Maintaining a healthy credit score will play a critical role in things like your ability to procure loans and gain employment. Because of this, you need to take every step possible to take good care of your student loan.
Whether it’s on friendly terms or not, divorce is stressful, and it can even take a considerable toll on your finances. This means you’ll likely hear phrases such as “100% liable for bills” and “child support payments” as well. In this post, we’ll go over how divorce can impact credit scores and how you can repair your credit.
How Divorce Impacts My Credit Score
Your divorce doesn’t directly impact your credit score or credit results, but the financial issues that come afterward can certainly impact it.
Here are some factors that can cause your credit score to decline:
Your Debt Racked After The Split Up Because Your Ex Was An Authorized User On Your Credit Card
This is quite the common thing with non-friendly divorces. If for instance, your ex is being spiteful, they could try to punish you by using your credit card in order to make large purchases in your name or by accessing your bank accounts.
However, since your former spouse is an authorized user, they can do this legally. What’s more, is that they’re not liable for the payment. To be frank, they can spend as much money as they want to without bearing the consequences for it.
Your Joint Accounts Are Unpaid
Married couples usually have joint accounts. Both and your spouse may share a credit card, mortgage, car loan or other forms of debt. The debt doesn’t go away even after separation because you both are still responsible for paying it off.
Paying For Bills Will Be Tough
It’s no secret that life after divorce is a tough one. During that time, you may experience trouble trying to keep up with all the bills you have stocked up as well as paying for living expenses, especially if your ex was the main breadwinner.
As a result, this damages your credit score if there are any late or missed payments. Because your credit history is the most important factor of your credit score, it would be wise of you to make the payments on time, every time.
Using Your Credit Card To Pay For Costs
If you’re using your credit cards to substitute as means of income – or lack thereof – you could likely end up with a lower credit score. You must ensure that your credit utilization ratio is less than 30%.
With that in mind, paying for legal expenses with your credit card could also affect your credit score. Although every divorce comes with fixed costs, like filing fees, other costs may wildly vary. The fees of the lawyer depend on the condition of your case and the degree to which the issues between you and ex can be contested. For example, if you’re dealing with property or custody disputes, the divorce might cost thousands of dollars and sadly, most people don’t have that kind of cash at hand.
Your Credit Limit Has Decreased
Most of the time, creditors can decide to lower your credit card limits. This may happen once the accounts of you and your former spouse have been separated, especially if the creditor discovers that you’re making much less money now.
Fortunately, there are a number of ways for you to protect your credit score after a divorce.
How to Fix Your Credit Upon Separation
You need to be proactive about your credit score, as it’s not necessarily going to be there during your divorce. This way you can protect your money and make it easier to start your new, independent life.
Here’s what you should do to fix your credit score:
- Separate all joint accounts: As soon as you’ve confirmed that you’re getting a divorce, either close your joint accounts or switch them to individual accounts immediately.
- Determine which accounts were shared, according to your credit report: Read each and every line of your credit report for any mishaps and find out which accounts you’re either partially or fully responsible for. It’s actually quite common for spouses to open accounts in their partner’s names.
- If your spouse has access to your account, remove their authorization: If your spouse does indeed have access to a bank account or credit card that is solely in your name, then remove them immediately to protect your finances.
- Change your security information: Improve the security of your credit and debit cards by changing their PIN code, as well as the password on sites and apps that link to your bank account. You can also change the security questions so that your spouse doesn’t easily guess them. And if you have moved, change the address so that your credit reports and bank statements are delivered straight to your new location.
- Change your lifestyle to match your income: Most divorcees – especially those who relied on the income of their spouses – struggle financially to maintain their lifestyles. If this is so, then you may want to cut back on the spending. For instance, you should consider moving into an apartment, get rid of your cable, and also sell your car for a less expensive one. The best way to know what you can and can’t afford is to make a budget. Give greater priority to your most important expenses and try to stay ahead of payments that could directly affect your credit score, like credit cards and loans.
- Work out an agreement about joint debt payments: Try to work out the specifics of joint debt payments, with or without the help of a divorce decree, and then get it in writing.
- Keep a check on your ex’s payment due dates on joint accounts: If your former spouse doesn’t pay on time, you can make the minimum payment on your joint account and save your credit score. Later, you can report the non-payments to the courts and get your money back.
- Boost your income: During your divorce, you should prioritize earning more and spending less. Besides lowering your expenses, you can earn more money by either working overtime or do some freelancing on the side.
Having good credit is essential if you want to obtain a loan for a house or a new vehicle, open a credit account at a retail store or even get a cell phone contract. Even some employers look at credit scores when determining whether or not to hire an applicant.
According to Experian, it’s estimated that 30% of Americans have poor credit, bad credit, or no credit at all. When speaking of credit scores, most reporting agencies use a model that scales credit from 300 to 850, and the cutoff for what’s considered to be bad credit is anything below 499.
Most people need credit at some point in their lives, so it’s essential that you keep your credit score above 661 if you want the benefits of being able to get a loan or open a credit account.
In this article, we’re going to look at what causes your credit score to go down and how to fix it.
What Determines A Credit Score
It’s easy to fall into bad habits and find yourself behind when trying to keep up with your credit score. So, how does one get bad credit? Well, let’s take a look at the factors that go into determine your score.
- Late Payments — 35% of your credit score is determined by your payment history. In fact, it’s the most important factor in determining your credit score. If you’re consistently late with payments, your credit score will remain in the ‘bad’ range. Also, note that bankruptcies and charge-offs fall under this category too.
- Amount Owed — This represents 30% of your credit score and it includes the amounts you owe on each individual account as well as the total amount you owe in relation to the amount of credit you have.
- Credit History — 15% of your credit score is your credit history or how long your accounts have been open and active.
- New Credit — 10% of your score is determined by any new accounts that have been opened and the number of inquiries that have been made to your credit history.
- Types Of Credit — 10% of your score is made up of the varying types of credit you carry; it looks better on your report to have a few credit cards, an installment loan and a mortgage rather than having all of your credit tied up in credit cards.
How To Fix A Poor Credit Score
Now that we know what goes into your credit score, we can look at how to set it right.
The first thing to do is to get hold of your credit report and monitor it. You can do this if you have a smartphone by downloading an app that lets you view and track your credit. Most of these apps will even alert you any time you have a change in your score so it’s a good idea to start there, because you can’t know where to go if you don’t know where you stand.
Once you’ve seen your credit score and determined it’s in need of fixing, you can set about doing that.
Now that you have your credit report, check it for inaccuracies and dispute anything you see that’s not right. You can dispute these errors you find online, and while there’s no guarantee you’ll be successful, there’s no reason you shouldn’t try.
The first step is to get payments up to date and make them on time; this is the most important step you can take and you must be vigilant. Set up autopay or reminders if you’re forgetful, make sure every payment is made on time.
The next thing you have to do is to work on getting your debts paid down quickly; that may mean paying more than your monthly payment, but whatever you have to do, pay off your balances as soon as you can, starting first with the accounts with the highest interest.
Another thing that can help is getting another credit account. We get it, you’re trying to get out of debt, not go deeper in! But here’s the trick. If you open a new account, but don’t carry a balance on it, that increases your credit to debt ratio, and will improve your score.
How Long Will It Take?
The good news is that bad credit isn’t forever. If you follow the steps outlined and use credit wisely, your credit score will improve. The short answer to how long it takes is: it depends. It depends on how low your score was to begin with and what kind of negatives you had. But you can expect the process to take anywhere from six months to a year. The key is to be patient and keep monitoring your score every month to see the progress.
Unless you’re independently wealthy, chances are you will to have to purchase things on credit now and again. And, if you don’t have a good credit score, you’ll have a much tougher time getting loans for things like buying a house or a vehicle or getting a credit card.
So, it’s essential that if you want to enjoy many of the things that life has to offer, you’re going to need to have a good credit score. Traditionally, a credit score above 700 is considered good and means you’re more likely to be approved for loans and credit cards with favorable interest rates than if you had bad credit.
There are a variety of factors that go into your credit score, including:
- Payment History
- The Amount You Owe
- Types of Credit (i.e. loans, credit cards, retail accounts, etc.)
- Length of Credit History
However, of all those factors, payment history is the number one factor that affects your credit score.
In this article, we’re going to look at how late payments affect your credit score and how to improve your credit score.
Late Payments and Credit
It can’t be overstated that late payments are the number one factor to affect your credit score, and according to Equifax “If you miss a payment on one of your credit accounts, be it a credit card, mortgage, or other loans, you could see your credit score drop.”
Keep in mind that each credit reporting agency is different in how they score, but all of them take a negative view on late payments.
Now, while a late payment will ding your credit score, it’s not all gloom and doom. Credit reporting agencies look at several factors in regarding late payments, such as how late, and if you have a history of late payments. For example, if your payment is 90 days late, it will be a bigger black mark on your credit score than if you’re only 30 days late. Keep in mind that the longer your bills go without payment, the worse your score will get, so it’s vital that if you do miss a payment, you make it as soon as possible. Missing a payment by one or two days won’t hurt as much if at all.
How Much Of A Drop Do Late Payments Cause
Again, it depends on how late the payment is, but in general, according to Credit.com “A recent late payment can cause as much as a 90-100 point drop on a FICO Score of 780 or higher.” That much of a drop is enough to pull you out of ‘good credit’ range and into ‘fair credit’ range, which then makes it more difficult for you to get credit in the future until you get that score back up.
It’s also important to keep in mind that the better your credit is, the more likely you’re going to feel the negative impact of having a late payment on your credit score.
How To Fix Late Payment Credit Scores
The first thing to do is to keep track of your credit. It’s easy to do if you have access to a smartphone. There are many apps you can get that will help you monitor your credit score and alert you when a lender makes an inquiry to your credit or if you have a rise or drop in your score. You should always know where you stand so you know where you have to go.
Once you know what your credit score is, you can begin to take steps to improve it. The most important thing is to become obsessive about making your payments on time. And one of the best ways to do this is to sign up for auto pay with your accounts. Auto pay means you authorize your lender to deduct funds from either your checking or savings account when it’s due. This is by far the best way to ensure that your payments are on time.
If you’re concerned about security or don’t feel comfortable authorizing creditors access to your accounts, you can set up reminders for each bill to tell you that it’s due and that it’s time to pay. Again, if you have access to a smartphone, there are a variety of reminder apps available that will help you keep your bills paid on time.
Another trick is to make your payments on a weekly basis. Some people find the monthly payment too much, so making smaller, weekly payments will keep you up to date and not drain your account so quickly.
It’s not uncommon for people to be late with a payment now and again, and while it will negatively affect your credit score, you can fix your credit by getting and staying on time.
Considering buying a home? Wondering how to get started? Or when to start the process? You stomach gets all tight just thinking about purchasing what could be your biggest financial investment to date. Understanding the process and having a plan may remove some of those butterflies. The biggest key to a successful stress reduced transaction is to start early and reduce the chances of last-minute surprises.
Up to 1 Year Out from Purchase
- Check your credit report. If you have items on your report the earlier, you tackle the issue(s) the more time there is to raise your credit scores. You can check your credit for FREE through AnnualCreditReport.com, the only free online credit report authorized by Federal law.
- Check your FICO credit score. The FICO score indicates your creditworthiness and determines your interest rates and terms of the loan. The higher the FICO credit score the more options are open to you as a buyer.
- Reduce your outstanding debt. Get your outstanding debt (Credit Cards & Store Cards) below 30% of the approved limit on the credit account and if possible, get it down below 10% of the limit. Be sure you are paying on time and early if you must use the card, to keep it below these levels before reporting date. If you have a large number of cards and balances you might want to meet with a credit counselor, like Joe Camacho with Phenix Group to get a plan together.
- Saving! The higher the down payment you have the more options you have with mortgage companies. So, start saving what you will need now. You will need to prove you have had your down payment balances in your account’s months in advance of closing as proof of funds.
The above-mentioned items may mean a change of your spending patterns. You are going to want to look at cutting back on frivolous expenditures, expensive vacations and forgo luxury purchases at least until after closing. It is so sad to see someone do all this hard work, get approved for their dream home then go out and make a last-minute purchase of furniture or a vehicle. Then no longer be able to qualify for their home loan. It unfortunately happens more than you would think.
Around 6 Month Point Prior to Purchase
- Start researching you mortgage options. There are many different types of mortgages and first time buyer programs. We will expand upon these programs in future articles. Do research and find out the risks that can incur with different types of mortgages? At this point, you may want to sit down with a FREE consultation with Real Estate + Credit Professionals.
- Look into Typical Unforeseen Home Ownership Costs. These can include, but not limited to, Homeowners Associations (HOA) fees, Home Warranty Products, Special Assessment Zones, and Utilities Rates to name a few.
- Recheck you credit status and scores. Have you made the progress you need to qualify for a mortgage? If not, you will need to kick you credit repair into overdrive. At this point, you need to consider hiring a credit counselor, like Joe Camacho with Phenix Group to assist you getting to the scores you desire.
3 Month Point – Critical Credit Period
- You will need to reduce credit usage. FICO score is affected by how much of your available credit lines you have outstanding. Learn when your credit provider reports balances outstanding on your card to the bureau. This typically, does not correspond with your debt’s payment date. Try to pay down any balances before reporting date. Keep your balances below 30% and as close or below 10% if possible.
- It is very important at this point to not open or close any accounts. You are now close to starting the home buying process and these steps can have a serious impact on your credit scores. This is critical to remember even after you have a letter from your mortgage lender qualifying you for a home mortgage and up and to and including closing the transaction.
- Begin researching neighborhoods and real estate agents. What is considered a great neighborhood is going to be the items important to you like; distance to work, good schools, shopping, parks, activities and great amenities. We are adding this suggested task at the 3-month period, but nothing wrong about starting this process much earlier.
The “Home” Stretch – 2 Months Out
- You need to be very cautious during this period in having your credit pulled for any type of financial transaction. You should have considered the different mortgage options out there already and only have a limited amount of mortgage companies pull your credit report. However, if you are shopping mortgage companies do them in a short period of time and they will be counted as one pull
- Check mortgage rates and programs like 1st time buyer assistant programs. Know you FICO score to get mortgage rates, they don’t have to pull your credit to discuss rates with you
- Once you have selected your mortgage company you want to get pre-qualified for a mortgage. This way you know how much you can afford. Plus, you will need this letter for your agent to submit offers for you. The seller wants to know you can afford to purchase the home for purpose of reviewing and accepting the contract.
You should now be prepared with a better credit score, larger down payment and information on mortgages to go out and find your dream home to make a confident offer on! Good luck out there.
By: Bryan Shobe, JB Goodwin REALTOR®
Website: Real Estate + Credit Professionals
This information is Provided by: Bryan Shobe, JBGoodwin REALTOR®, Direct Line: (210) 753.4110 E-mail: firstname.lastname@example.org, Texas Real Estate Salesperson License #701379. Texas Law requires all real estate licensees to give the following information about brokerage services: Texas Real Estate Commission Information About Brokerage Services: