Know the Facts Before Opening — or Closing — a Credit Card Account

A well-meaning choice on your part could do more harm than good

Most consumers understand that one more obvious way to earn a good credit score is to pay bills on time. However, there are other actions that are less intuitive. It’s important to know how doing something as simple as closing an old account can affect your credit score.

That old credit card may actually be helping your credit score

In all likelihood, your oldest account may have been opened when you had little to no credit history. It may have a lower credit limit and/or a higher interest rate, and probably offers no rewards — and for those reasons you may not be using it. Intuition might tell you to close that account if you’re trying to boost your credit score, but the reverse may actually be true for several reasons.

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Lesser Known Factors That Can Lower Your Credit Score

Your credit score is a predictive tool used by lenders, insurance companies and even employers to evaluate your credit risk. It can vary from month to month based on a variety of factors — some of which are more widely known than others.
Payment history is generally the primary factor that influences a person’s credit score; in fact, it may amount to 35 percent of the total score. Paying bills late or not at all, having an account charged off or in collections, foreclosure and bankruptcy can all have serious negative effects on your credit score. Most consumers are aware of the importance of having a strong payment history, but what are some other things that can lower your score?

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choose the right auto loan

Beware of Auto Loans That Can Break Your Budget

High finance charges and long payment terms can make a car loan seem more like a mortgage

You need transportation — that’s a given. For most people, that means owning a car and, often, making monthly payments on it. When you purchase a car, whether it’s new or pre-owned, you’re careful to make sure it’s in excellent running condition. Do you put the same effort into finding the loan that best fits your budget?

If you have less than ideal credit, you may not qualify for the best terms or the lowest interest rates, but you still need to determine a monthly payment that you can afford. It’s important to consider your other bills and budget when making a car payment decision. While there’s no way around the fact that most of us need a car, try to make sure you don’t sign for a loan that may undo everything you’ve done to improve your credit history.

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Do authorized users build credit?

Do Authorized Users Build Credit? Pitfalls and Alternatives

In an effort to build credit, consumers that have no credit history or need to repair negative credit history frequently become authorized users (AUs) on other people’s accounts or credit lines. AU’s take this approach thinking the payment history of the card’s primary user will appear on the their credit report and improve their credit. However, as an AU, you may receive and use a credit card with your name on it, but you’re not legally responsible for repaying the balance.

A quick online search of the phrase “Authorized User” will result in various blogs and articles stating that being an AU is a viable way to establish credit. Though it may be a widely accepted practice, becoming an AU has many pitfalls and delivers no guarantee that it will build a good credit history or repair a bad one. Consider these negative possibilities before deciding to become an AU.


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secured credit card

A Secured Credit Card — Your Stepping Stone on the Path to Building Credit

Many people find themselves in need of a credit card but are unable to qualify for one. For younger people without enough credit history, or someone that’s trying to repair bad credit, a secured credit card can be a good option.

Unlike an unsecured credit card, a secured card requires you to make a security deposit that serves as collateral for your credit line when the account is opened. Any deposit in excess of your account balance is refundable once you close the account.  You cannot use your security deposit to pay your monthly bill, otherwise a secured card works like any other credit card and offers significant advantages over a prepaid card, such as the opportunity to build a positive credit history, as payment behavior is reported to the major reporting agencies.


Secured card features

As with all credit cards, there are many choices for secured cards and it’s a good idea to do some research on which card fits your needs best.

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The shelf life of bad credit

The Shelf Life of Bad Credit

When a credit card bill, loan payment or other financial obligation is not paid as agreed, lenders may send a negative report to credit reporting agencies such as Equifax, Experian, and TransUnion, known in the U.S. as “the big three.” According to Equifax, consumers inquire most often about how long negative information will remain on their credit report.1 Considering the importance of a good credit profile and credit scores, it’s not surprising that this is a topic of great concern among consumers. As you might know, a bad credit score can affect your ability to qualify for a loan, rent an apartment or even get a job.

According to the Fair Credit Reporting Act (“FCRA”)2, negative information can remain on your credit report for up to seven years.3 Additionally, bankruptcies will follow you for 10 years, and unpaid tax liens stay in your credit history indefinitely. Those kinds of scenarios can be very daunting. For example, in the next seven to ten years you may need a new loan, such as a car loan or credit card. A low credit score can cause you to be denied for a loan, or may mean a higher interest rate, or larger down payment requirement.

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Myths and facts about your credit score

The Truth and Fiction About Your Credit Score

As with many financial topics, credit scores are often misunderstood, creating myths about them and how they may affect you. Understanding how credit scores work is important because it can impact so many aspects of your daily life. Here are a handful of myth busters to help you get a better picture of the truth and fiction of credit scores:


Errors — You may have thought that your credit report is generally very accurate. However, the Huffington Post reports that 80 percent of all reports contain a big error.1 That means it’s probably in your best interest to be proactive and check your report routinely. Don’t wait to find out that you have an issue.


Inquiries — Many believe that pulling your own credit report will negatively affect your credit score. Actually, those types of inquiries have no effect on your score. However, when a lender pulls your credit because you’ve applied for a loan, their inquiry (also known as a “hard inquiry”) may have a small negative impact. Keep in mind that if you apply for several credit accounts, which create hard inquiries, in a short period of time, collectively they may have a greater impact on your credit. The exception is applying for loans when you are shopping for an auto loan or mortgage. The reporting agencies tend to see those types of inquiries as single versus several when they occur in a relatively short period of time.2


Cash — When someone has credit problems, their first inclination might be to go to cash only to fix their problem. While there’s nothing wrong with using cash to manage your budget or finances, just using cash will not correct any credit issues you have. Besides, you can’t build a healthy credit profile unless you use your credit and use it wisely.


Quick Fixes — Debt settlement and consolidation services may promise a quick fix, but as with most challenges, there simply aren’t any. The most effective way to improve your credit score is to pay your creditors on time and pay down the amounts you owe them.


More Income = Better Credit — Income level actually has no impact on your actual score. People that have a higher income do not automatically have a higher credit score, or a better credit history. However, income can play a role in lending decisions, along with your score, your employment history and the amount of debt lenders believe you can manage.


Credit Scores from the Big Three are the Same — Most lenders and creditors now report information to the three big credit-reporting agencies — TransUnion, Experian and Equifax. They are all separate companies, so the rate at which they update reporting information and what information gets updated is different.3 Thus, your score will likely be different with each at any given time.


Perhaps the biggest lesson learned here is that when it comes to your credit, it’s important to always know where you stand and to understand how your credit can both work for you and hurt you. For more information and insight on credit scores, check back for other articles on the topic.


1 http://www.huffingtonpost.com/robert-siciliano/10-credit-score-truths-an_b_4631238.html

2 http://www.myfico.com/crediteducation/factsfallacies.aspx

3 http://www.bankrate.com/finance/debt/11-credit-report-myths-1.aspx

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Credit Reporting Agencies

Fiscal Fitness Part II — Understanding the “Big Three” Credit Reporting Agencies

This second article in our Fiscal Fitness series outlines the basics of how the “big three” credit reporting agencies (CRAs) work. Understanding how CRAs impact your credit score is another great step to take in keeping your credit in shape.

1. Who are the credit reporting agencies?

The three largest U.S. credit reporting agencies— Experian, TransUnion and Equifax — are known as the “big three.” Their two-fold function is to collect information about consumers and report it to lending institutions and other creditors upon request. CRAs are mysterious entities to many consumers. You know they exist and how they can affect you. But how can you work with them and take an active role in maintaining a good credit score?

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