Tag: credit

 

Credit Score Ranges: Where do You Stand?

When it comes to your money and improving your financial situation, you may wonder: What’s a credit score?

Your credit score is a three-digit number that lenders use to measure how responsible you are when it comes to managing your money. While FICO scores are the most widely used credit scores, some lenders also look at VantageScores when you apply for a loan or upgrade from a debit card to a credit card. 

Regardless of which scores lenders use, it’s helpful to know exactly how your credit score measures up. Read on to learn all you need to know about credit scores. 

What are credit score ranges?

In simple terms, a credit score range represents all the possible credit scores you have, based on a particular scoring model. Credit score ranges have a high end and a low end, with the remaining scores landing in the middle. 

Both FICO and VantageScore 3.0 use the same range for personal credit scores. The lowest credit score you could have with either scoring model is 300. The very highest score you could achieve with either one is 850. 

It’s worth noting that with FICO and VantageScores, there’s more than one score model that could be used. 

For example, there’s FICO 8, which is widely used by lenders for credit card and loan decisions. But there are other versions of FICO that are industry-specific. So if you’re applying for a car loan, for instance, the lender might use a version of FICO that’s just for car loans. Likewise, a mortgage lender might use FICO versions 2, 4 or 5. With these alternate FICO scoring models, the credit score range can go from 250 to 900. 

VantageScore 2.0 also follows a different scoring range. With this VantageScore version, the numbers run from 551 to 990.

It’s up to lenders to decide whether to use FICO scores, VantageScores or both.

Credit score ranges: What’s good credit vs. bad credit?

Within the range of possible credit scores, there are different divisions. These cutoff points essentially tell lenders whether your credit is great, terrible or somewhere in-between

Both FICO and VantageScore have their own guidelines for what makes the cut as excellent or good credit and what doesn’t. Here’s a side-by-side look at how they compare:

  FICO   VantageScore
 Exceptional 800+  Excellent 781-850
 Very good 740-799  Good 661-780
 Good 670-739  Fair 601-660
 Fair 580-669  Poor 500-600
 Poor Below 580  Very poor Below 600

As you can see, the two scoring models don’t align exactly the same way.

If you’re curious about how your credit scores are calculated, the numbers are based on what’s in your credit report. With FICO scores, there are five key factors that affect your credit scores. They are: 

  1. Payment history – 35% of your score
  2. Credit utilization – 30% of your score
  3. Credit age – 15% of your score
  4. Credit mix – 10% of your score
  5. Inquiries for new credit – 10% of your score

VantageScores are based on these 5 factors:

  1. Total credit usage, balance and available credit
  2. Credit mix and experience
  3. Payment history
  4. Age of credit history
  5. New accounts

VantageScore doesn’t specify exactly how much weight each one carries when it comes to scoring. But overall, total credit usage, balances, and available credit are most influential. New accounts have the least influence. 

Why knowing your credit score range matters

Your credit score can affect your financial life in multiple ways. The biggest is borrowing money. 

If you need a car loan, want to open a credit card or even buy a home, lenders are going to look at your credit score. Now, those aren’t the only things they consider. Your income, debt, assets, and employment history can also come into play. But credit scores can trump those things when it comes to getting approved for a loan or credit card. 

Not only that, but your credit scores can also influence the interest rates you pay to borrow. A higher credit score can translate to a lower interest rate and vice versa. When you’re borrowing, even if it’s a small amount of money, you want the lowest interest rate possible. This keeps more of your money in your pocket since you’re paying less in total interest over time. 

Credit scores can also affect other parts of your financial life. For example, if you’re trying to rent an apartment, the landlord might perform a credit check. A poor credit score could be a dealbreaker for getting a lease.

In addition, you might have to undergo a credit check if you’re trying to get a cell phone or utility services in your name. Employers can also pull your credit, with your permission, if you apply for a job. And if you need a second chance banking account, improving your credit can help you get back on track financially. 

How to improve your credit score

If you haven’t checked your credit score, that’s something you should do. 

You can check your credit report for free at Annual Credit Report.com. Once you know where you stand score-wise, you can work on raising your score to move up to the next scoring range. 

Some of the most effective ways to do that include: 

  • Paying your bills on time every month
  • Keeping the balances on your credit cards low
  • Not applying for new credit unless you absolutely need it
  • Keeping older credit accounts open
  • Using different types of credit, such as loans or credit cards

For FICO scores, payment history and maintaining low balances are the most important things to work on. One way you can ensure that you’re paying bills on time each month is to set up automatic payments from your checking account. With Chime, you can also set up direct deposit and get paid up to two days early.

VantageScores tend to focus more on how much you owe compared to your total credit limit. Your best bet there is to avoid maxing out your cards and pay off your balance in full each month, if possible. 

Credit scores are an important part of your financial picture

The more you know about credit, the better off you’ll be.

Getting some savings under your belt can help you use credit wisely and avoid adding to your debt in an emergency. If you don’t have a savings account yet, consider opening one with Chime. This way you can also use automatic savings deposits to grow your emergency cushion in no time. 

 

Bad Credit vs. No Credit: Which is Worse?

If you don’t have credit history because you’ve never had a loan or credit card in your name, you might think that makes you more financially responsible

Yet, while not opening loans or credit cards can help you avoid debt, zero credit history can work against you when you decide you’re ready to borrow money. 

Indeed, having no credit – or worse, bad credit – can make getting approved for car loans, mortgages or other lines of credit more challenging. And, if you are able to to get approved, you may find yourself paying higher interest rates on the amount you borrow. 

This guide explains what you need to know about bad credit versus no credit and what to expect when you have either one. 

What’s the Difference Between Bad Credit & No Credit?

No credit and bad credit are both ways to describe your credit history but they have different implications on your ability to borrow money. 

When you have no credit that means you have no credit score or credit report to speak of. Having bad credit, by comparison, means that you have or have had credit in your name at some point but there are negative marks on your credit history. 

So, is no credit worse than bad credit? Let’s take a deeper look so you can understand the difference. 

Having No Credit

Your credit report is a collection of information about your credit history. It includes basic things, such as your name, social security number and address history, along with details about your credit. For example, your credit history would include the types of debt you have or have had, how much you owe on your loans, and your payment history for debts listed on your credit report. 

Your credit report and the information in it is used to calculate your credit score, which is a three-digit measure of how financially responsible you are. 

When you have no credit score because you don’t have a credit history, borrowing can be problematic. You end up looking risky to lenders because with no credit score to consider, they don’t have a way to gauge how likely you are to pay back borrowed money. The good news is: There are several ways you can begin building credit from the ground up. For example, you can open a secured or unsecured credit card in your name, ask someone you know to add you to one of their credit cards as an authorized user, or take out a small credit builder loan. 

5 Ways to Build Credit From Scratch

Having no credit is not an ideal financial situation, but it’s one you can remedy. As mentioned already, there are a number of ways to establish and grow your credit score even if you’re starting from scratch. Here are some steps you can take to begin building a healthy credit footprint. 

1. Open a Secured Credit Card

A secured credit card is a type of credit card that requires a cash deposit to open. You give the credit card issuer a set amount of money for your deposit, which may be a few hundred to a few thousand dollars, depending on the card. That deposit doubles as your credit limit. You can then make purchases and repay them with interest. By charging purchases against your credit limit and paying your monthly bill on time, you can establish a pattern of responsible credit card use, which can help build a positive credit history. 

2. Sign Up for a Student Credit Card

Student credit cards are credit cards designed for college students. These cards may be secured or unsecured and some can even offer rewards on purchases. The 2009 CARD Act requires you to be at least 21 to open a credit card, unless you’re at least 18 and have proof of income. Like a secured credit card, the best ways to build credit with a student credit card include charging purchases, maintaining a low balance or paying in full, and paying your bill on time or early each month. 

3. Take Out a Credit-builder Loan

Credit-builder loans are an alternative to establishing credit with a credit card. These loans can work in one of two ways. The first option is to borrow a set amount of money, using cash that you have in savings as collateral to secure the loan. You pay the loan back and at the end of the term, your savings collateral is returned to you. The second option is slightly different. You borrow a set amount of money but instead of giving it to you, the bank holds it in an interest-bearing account. You repay the loan and once it’s paid in full, the money in the interest-bearing account, along with interest earned, is released to you. Meanwhile, your credit score can improve when you make your payments on time and pay the loan in full. 

4. Become an Authorized User of Someone Else’s Credit Card

Becoming an authorized user means that you have charging rights on another person’s credit card. You don’t necessarily need to use the card to make purchases to reap a credit score benefit. The primary cardholder’s positive account history will show up on your credit report, helping to establish and grow your credit score. The caveat is that to enjoy a positive effect, the primary cardholder must pay bills on time and use the card responsibly. If they pay late or max out their card, that can hurt both of your credit scores. 

5. Get a Cosigner

A cosigner is someone who agrees to apply for and sign off on a loan alongside you. Each cosigner to a loan or line of credit is equally responsible for the debt. Asking someone to cosign can help you get a loan in your name but it’s important to understand how you both can be impacted if you fail to keep up with payments. If you pay late or default on the loan altogether, the negative payment history will show up on your credit history and your cosigner’s. In addition, you can both be sued for the debt. So, if you’re considering getting a cosigner, it’s extremely important to make sure you can afford the loan payments. 

Having Bad Credit

What is bad credit? Generally, bad credit refers to a credit history that includes negative marks, such as late payments or collection accounts. In terms of what is considered bad credit, it helps to understand credit score ranges. FICO credit scores, which are the scores used by 90% of top lenders in lending decisions, range from 300 to 850. According to myFICO, a poor or bad credit score is a score below 580

Some of the factors that can contribute to a poor credit score include:

  • One or more late payments
  • Using a higher percentage (>30%) of your credit limit 
  • Applying for multiple credit card or loan accounts in a short period of time
  • Closing credit card accounts, which shortens your average credit age
  • Collection accounts, defaults and delinquencies
  • Bankruptcies or foreclosure proceedings
  • Public judgments 

Repairing bad credit isn’t impossible but it can take months or even years. It may require you to take smaller steps to start, depending on your score. For example, you might be able to open a bank account with bad credit right away, but you may need to work at improving your score for a while before a credit card or loan is within reach. 

4 Ways to Fix Bad Credit

If you have bad credit, raising your score should be a financial priority. Doing so can make it easier for you to qualify for credit cards or loans. It can also work in your favor if you’re looking to upgrade your bank account. For example, you may have second chance banking now but a better credit score can help you gain access to premium checking or savings products. While this can take time, here are three things you can do to get the process started. 

1. Pay Down the Balance on Your Debt

FICO credit scores are based on five factors, with payment history being the most important. Second to that is credit utilization, or the percentage of your available credit you’re using at any given time. The lower this number is, the better for your score. A simple step in the right direction to improving bad credit is paying down some of your existing debt. The wider the gap you can create between your balance and credit limit, the more you can potentially improve your credit score. 

Read more: A Guide to Debt Consolidation

2. Request a Credit Limit Increase

Paying down your balance can take time but there is a way to improve your credit utilization ratio fairly quickly. Asking your credit card issuer to raise your credit limit can have an immediate impact on your utilization ratio, since you now have a larger credit line compared to what you owe. The key to using this strategy to improve your credit score is resisting the temptation to make new purchases against your higher credit limit. Doing so can work against your credit score, rather than help it. 

3. Look for Errors on Your Credit Report and…Report Them

Your credit report includes information about all of your credit accounts and you can get a report from these three firms: Equifax, Experian and TransUnion. You can also obtain a free copy of your credit report through AnnualCreditReport.com. If you haven’t checked your credit reports lately, it’s a good idea to get your free copies and review them for errors. The Fair Credit Reporting Act gives you the right to dispute errors and you can do this online through each credit bureau’s website. By law, errors must be removed or corrected, which can help your score. But this only applies to errors. Negative information related to bad credit card habits wouldn’t be eligible for dispute. 

4. Pay the Minimum Payment Twice Per Month

If your credit card or loan has a minimum payment, consider doubling up on those payments each month to pay down your balance more quickly. Making biweekly payments can help reduce what you owe, improving your credit utilization ratio. You can also improve your payment history by paying on time. If you can’t do this across all of your debts, focus on doing so with the debt that has the highest interest rate. This way, you can pay the balance down more quickly, reducing the total amount of interest paid in the process. 

Good Credit Is Essential

Having credit history is important because there are so many ways that credit can affect your daily life. Beyond helping you qualify for a car loan, refinance your student loan debt or get a home mortgage, you may also be subject to a credit check when you apply for a job or sign up for cell phone service in your name. 

Yet, it’s not enough to just have credit. It matters whether that credit is good or bad. And, remember this: Good credit can be the key to unlocking the best interest rates on loans, credit cards and lines of credit. The less you pay in interest, the more money you can save in the long-run. 

 

 

A Complete Guide to Debt Consolidation

Getting into debt can happen gradually. Perhaps you open a credit card account or two, and take out a personal loan. Throw in your student loans and a car payment and before you know it, you’ve got more debt obligations than you can manage. 

It’s easy to get overwhelmed but there is a possible solution: debt consolidation

What Is Debt Consolidation?

In a nutshell, consolidating debt means taking multiple debts and combining them into a single loan or line of credit. This can help make your debt load more manageable so that you can work on paying down what you owe

When debts are consolidated, you have one single payment to make towards the balance each month. You pay one interest rate, which can be fixed or variable depending on how your debts are combined. 

Assuming you’re not adding to your debt, consolidating is a strategy that can help you get ahead financially.

What Are the Benefits of Consolidating Your Loans?

Debt consolidation can offer several advantages. If you want to know whether debt consolidation is a good idea for you, take a look at these pros: 

  • You may end up with a lower interest rate. 
  • You may save money. When you have a lower interest rate, you’ll pay less in interest, saving money in the process.
  • You’ll have a single payment. Keeping up with one loan payment each month is easier than trying to juggle multiple payments. 
  • Your payment may be lower. Consolidating your debt can help you get a lower combined payment.

There’s also a credit score component involved with debt consolidation. If you’re merging your debts together by opening a new credit card or taking out a loan, you may see a slight dip in your credit score initially. 

Over time, however, you could see your score rise if consolidating allows you to pay down your debt faster. Having just one payment could also give your score a boost if you’re consistently making that payment on time every month. 

What Kinds of Debt Can You Consolidate? 

You may have more than one kind of debt and be wondering which ones you can consolidate. The good news is: consolidation can cover many different types of debt. It’s helpful to know which types of loans can be combined as you plan your payoff strategy. Take a look:

 

  • Student Loan Debt

 

If you took out multiple student loans to pay for your education, then consolidating can be a good way to get a handle on your payments. 

For example, you might owe multiple loan servicers with payments spread out throughout the month. Consolidating can whittle that down to just one loan servicer. This is a good thing because different loan servicers may have different rules when it comes to repayment. One servicer, for example, may offer an interest rate reduction when you autopay while another doesn’t. So, look for a lender that allows you to consolidate your loans with the best terms overall. 

 

  • Medical Debt

 

Getting sick or hurt can be a pain in the wallet if your health insurance requires you to pay a lot out of pocket or you don’t have coverage at all. Unpaid medical bills can turn into a bigger financial headache if your healthcare provider turns your account over to collections. 

Yet, it’s possible to consolidate medical bills into a single loan, which can ease some of the stress you might feel. This can be particularly helpful if you have a large medical debt related to an unexpected illness or injury that your insurance and/or emergency savings doesn’t cover. 

 

  • Credit Card Loans

 

Credit cards are convenient for spending money. Some even save you money if you can earn cash back, points or miles on purchases. 

The downside of credit cards is that they can come with high interest rates. If you’re only paying the minimum amount due each month, a higher rate can make it that much harder to chip away at what you owe. 

With credit consolidation, however, you can turn multiple card payments into one. Even better, you can get a lower rate on your balance. For example, you might qualify for a credit card that offers an introductory 0% APR for 12 to 18 months. That’s an opportunity to pay your credit card balance down aggressively to avoid interest charges and get out of debt faster. 

 

  • Additional Eligible Debt to Consolidate

 

Aside from credit cards, student loans and medical bills, there are a few other types of debt you can consolidate. Those include:

  • Retail store credit cards
  • Secured and unsecured personal loans
  • Collection accounts
  • Payday loans

What Are Some Ways to Consolidate My Debt? 

The great thing about debt consolidation is that you have more than one way to do it. Transferring a balance to a credit card with a 0% APR is one possibility that’s already been mentioned. You can also combine balances using a debt consolidation loan

Both have their pros and cons and one isn’t necessarily better than the other. What matters most is choosing the option that’s right for you and your budget. As you’re comparing consolidation methods, it also helps to know how they work and what the benefits are, especially when it comes to your credit score. Read on to learn more about balance transfers, debt consolidation loans and other types of debt management programs.

 

  • Balance Transfer

Transferring a balance means moving the balance you owe on one credit card to another credit card. Ideally, you’re shifting the balance to a card with a low or 0% APR.

A balance transfer can be a good way to manage debt consolidation if your credit score allows you to qualify for the best transfer promotions. Plus, if you get a 0% rate for several months, this may give you enough time to pay off your debt in full without interest. 

When comparing balance transfer credit card promotions, it’s helpful to check your credit score so you know which cards you’re most likely to qualify for. Then, check the terms of the promotional offer so you know what the APR is and how long you can enjoy an interest-free period. 

Also, factor in any balance transfer fee the card charges. It’s not uncommon to pay 2%-3% of the balance you’re transferring to the credit card company as a fee. 

In terms of credit score impact, opening a new credit card can ding your score slightly. But you can get some of those points back over time by paying down the transferred balance. The key is not to add any new credit cards to the mix while you’re paying down the transferred balance.

 

  • Personal Loans

A personal loan is a loan that can meet different financial needs, including consolidating debt. Personal loans are offered by banks, credit unions and online lenders.

Every personal loan lender differs in how much they allow you to borrow and the rates and fees they charge. The rate terms you qualify for will hinge largely on your credit score and income. 

Some personal loans are unsecured. This means you don’t need to give the lender any collateral to qualify. A secured personal loan, on the other hand, requires you to offer some kind of security – such as a car title or money in your savings account – in exchange for a loan. You’d get your collateral back once the loan is paid off. 

A personal loan will show up on your credit score. The credit score impact is a little different than a balance transfer, however. Credit cards are revolving credit, which means your score can change based on how much of your available credit you’re using. 

Personal loans are installment loans. The balance on your loan can only go down over time as you pay it off. Making regular payments and making them on time can help improve your credit score after consolidating debt. 

 

  • Debt Management Programs

Debt management plans or debt management programs are not loans. These programs help you to consolidate and pay down your debt by working with your creditors on your behalf. 

A debt management plan works like this:

  • You give the debt management company information about your creditors, including the amounts owed and minimum monthly payment.
  • The debt management company negotiates new payment terms with your creditors.
  • You make one single payment to the debt management company each month.
  • The debt management company then divvies up that payment to pay each of your creditors. 
  • The process is repeated each month until your debts are paid off. 

A debt management program can be a good choice if you don’t want to take a loan or transfer a credit card balance. Your debt management company can help you combine multiple payments into one. They may even be able to negotiate a lower interest rate or the waiver of certain fees. 

The downside is that debt consolidation services may only apply to credit card debts. So, if you have student loans or other debts to consolidate, you may not be able to enroll them in the plan. 

Something else to watch out for is any fees the debt management company charges for their services. And of course, you’ll want to work with an accredited company. You can reach out to your local nonprofit credit counseling agency to get recommendations on reputable debt management programs. 

Who Should Avoid Debt Consolidation?

Debt consolidation may not be the best way to handle debt in every situation. Here are some scenarios where you might want or need to consider a different debt repayment option:

  • You don’t have enough income to make the monthly minimum payment required for a debt management program.
  • Your credit score isn’t good enough to qualify for a low-rate credit card balance transfer or personal loan. 
  • You’re worried that applying for a new loan or credit card could knock more points off your score. 
  • Consolidating debt would mean paying fees or upfront costs that would only add to what you owe. 
  • You’re not able to consolidate all the debt you have in one place. 
  • Your debt load is too high, and filing bankruptcy may make more sense. 
  • You have the income to pay down debt but you just need a plan. 

It’s important to do your research thoroughly to understand what debt consolidation can and can’t do for you. For example, consolidating debt through a debt management program may not be necessary if you just need help creating a payoff plan. That’s something a nonprofit credit counseling agency can help you with for free. 

Keep in mind that if you’re consolidating debt, you should also make sure you don’t add new debt to the pile. Cutting up your credit cards may be a little extreme but you can put them away and resolve not to use them until your debt is paid off. From there, you can work on creating new credit habits and using your cards responsibly. For example, only charge what you can afford to pay off in full each month. 

Remember the End Goal: Freedom From Debt

Paying off debt can take time and it’s important to stay committed and consistent. Persistence can go a long way in helping you achieve financial independence. While you’re working on your debt payoff, remember to look at your bigger financial picture. This includes budgeting wisely and growing your savings.

Chime has tools that can help you with both. You can use Chime mobile banking to stay on top of your spending and stick close to your budget. Setting up direct deposit from your paycheck into your savings or establishing an automatic transfer from checking to savings each payday can put you on the path to growing wealth. 

And remember: The more well-rounded you can make your financial plan, the better off you’ll be over the long term! 

 

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