Charlene Crowell By Charlene Crowell In recent years, consumer finance protections withered through a series of harsh attacks that either outright rejected or significantly diminished financial guard rails in the marketplace. But a new consumer victory, urged by a groundswell of support … Continue reading →
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Department of Education announced an additional $55.6 million of student loan debt canceled Friday. Biden administration has now canceled $1.5 billion of student loan debt. The Department of Education canceled an additional $55.6 million in student loan debt for 1,800 … Continue reading →
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Americans Are at Least $27.6 Billion in Debt to Courts By Walker Bragman States and municipalities are increasingly relying on court fees as revenue streams, creating at least $27.6 billion in debt for Americans. To handle that debt’s collection, those … Continue reading →
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The case was brought by shareholders of Fannie Mae and Freddie Mac, who said the law that created the agency was unconstitutional. WASHINGTON — President Biden on Wednesday removed the chief of the Federal Housing Finance Agency, which oversees the … Continue reading →
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We’ve written before about the problem of credit invisibility, which is when a consumer does not have a credit score. Millions of consumers are credit invisible in the United States, which represents a serious obstacle in the path to financial success in a society where credit is interwoven with so many aspects of our lives. You yourself may even be credit invisible and looking for a way to become credit visible by gaining credit history.
If you do not have a credit score, credit expert John Ulzheimer explained why this may be the case in a recent Credit Countdown video on the TradelineSupply Company, LLC YouTube channel. Keep reading for the text version or scroll to the bottom of this article to see the video.
What Are the Minimum Credit Scoring Criteria?
In order to be able to generate a credit score, your credit report has to meet certain requirements. These requirements are slightly different depending on whether the credit scoring model being used is a FICO score or a VantageScore.
FICO Score Minimum Credit Scoring Criteria
You must have at least one undisputed tradeline.
A tradeline is an account on your credit report. This may include credit cards, lines of credit, installment loans, etc. (Other items on your credit report that are not accounts and therefore are not considered tradelines include collections, judgments, tax liens, bankruptcies, and inquiries.)
In order to be included by credit scoring models, the tradeline cannot be disputed.
The undisputed tradeline must be at least six months old.
At least six months of credit history are needed in order to accurately predict your likelihood of defaulting in the future, which is what credit scores are designed to do. Trying to come up with a credit score using fewer data points might cause the score to be less predictive of your actual credit risk, which could create problems for lenders.
You must have recent activity on your credit report (within the past six months).
To meet this requirement, you must have at least one undisputed tradeline that has been updated within the past six months. Don’t worry, this can be the same tradeline that qualifies you for the prior two criteria as long as it has reported activity within the past six months, or it can be a different account.
You cannot be listed as “deceased” on your credit report.
Credit scores cannot be created for individuals who are deceased (or appear to be deceased due to an error).
If your credit profile satisfies these criteria, then you will be able to qualify for any FICO score regardless of which generation it may be.
VantageScore Minimum Credit Scoring Criteria
Compared to FICO scores, the VantageScore credit scoring models have less stringent requirements on who can qualify for a credit score.
You cannot be listed as “deceased” on your credit report.
Like FICO scores, VantageScores also do not calculate credit scores for deceased consumers.
You should have at least one or two months of credit history with any credit bureau.
According to MoneyCrashers.com, “the VantageScore model typically produces scores for consumers with one to two months of credit history, regardless of which bureau reports that activity.” The account or accounts do not need to have six months of age in order to be scored.
The company claims that the VantageScore 4.0 and 3.0 models can provide credit scores to 40 million consumers who cannot be scored using other types of credit scoring models since it is easier for consumers with limited information in their credit files to meet the minimum scoring criteria.
What the Lender Sees When You Do Not Have a Credit Score
If a lender tries to pull your credit score and you do not have one for any of the above reasons, they will instead receive what is known as a “reject code” or a “failure code.”
This reject code indicates to the lender that you have failed to meet the minimum credit scoring criteria and which criteria you did not satisfy.
Watch the video on this topic featuring seasoned credit professional John Ulzheimer below, or go to our YouTube channel to subscribe and see more credit-related videos!
Read more: tradelinesupply.com
Credit cards are often vilified for their high interest rates, which can be very costly to consumers who carry a balance from month to month rather than paying off the full balance that was accrued. Credit expert John Ulzheimer believes that credit cards do not deserve the bad reputation they have earned.
In a Credit Countdown video on our YouTube channel, John explained why credit cards are not necessarily as bad as they are made out to be and how to use them responsibly without going into credit card debt.
Keep reading to learn more on this topic and watch the video below!
Credit Card APRs
It’s true that credit cards do have high interest rates compared to other forms of credit, even if you have a good credit score. For this reason, once you get into credit card debt, it can be a very deep hole to climb out of, because the interest charges keep adding to your total amount of debt.
However, as John points out in the video, no one forces you to open a credit card or go into credit card debt, so in his opinion, it seems unfair to blame the credit cards with high interest rates for actions that consumers choose to take.
If you choose instead to pay off your balance every month, then you do not have to pay interest on your purchase, so the APR of the card is irrelevant. Therefore, if you are going to use credit cards responsibly, then there is no need to choose a credit card based on its APR.
Always Pay Off Your Credit Cards in Full
The most important rule when it comes to using credit cards correctly is this:
Only charge as much as you can pay off in full every single month.
When you pay your bill in full each month, since you are not paying interest, it is essentially free to use credit cards. The exception to this is if your credit card has an annual fee, but for some consumers, the annual fee on some credit cards may be worth paying in order to reap the rewards offered by the card.
If you want to be a responsible user of credit cards, it is essential to pay off your balance in full every month rather than carrying a balance and paying interest.
Maintain a Low Balance-to-Limit Ratio
If you want to have a good credit score, it’s important to keep a low balance-to-limit ratio (also commonly called the credit utilization ratio). The closer your balance is to your credit limit, the fewer points you can earn toward your credit score.
This goes for both FICO credit scores and VantageScore credit scoring models.
Don’t take this to mean that you cannot use your credit card often or make large purchases with it. Just be aware that since a higher balance-to-limit ratio means a lower credit score, you may want to avoid doing anything to substantially increase your balance before you apply for a loan, especially a large loan, like a mortgage loan or an auto loan. Otherwise, you could end up with a higher interest rate that could cost you thousands of dollars in additional interest over the course of the loan.
Do Not Skip a Payment
Credit card issuers sometimes offer “skip a payment” programs that allow you to “skip” a payment for one month, especially around the holidays, when consumers may rely more on their credit cards.
John recommends never signing up for these programs because by skipping a payment, you are obviously opting not to pay in full that month. Since you are carrying the balance to the next month, you will be charged interest on the debt and you will have even more debt to pay back the next month.
Instead of skipping a payment, the more responsible thing to do is to go ahead and pay the statement in balance in full just as you normally would.
Conclusions
While credit cards may be risky in the wrong hands, responsible consumers do not need to forgo using them altogether. It is possible to benefit from using credit cards as a financial tool without going into debt or paying interest.
To that end, make sure you always pay your balance in full and maintain a low balance-to-limit ratio, and never skip a payment.
To hear from John directly, check out the video below. Follow our YouTube channel to see more of our Credit Countdown videos!
Read more: tradelinesupply.com
Congress is considering multiple new bills that could dramatically overhaul credit reporting for private student loan borrowers and other consumers. One bill, the Comprehensive Consumer Credit Reporting Reform Act, would create a private student loan rehabilitation program that would allow … Continue reading →
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Americans seem to be regaining an appetite for auto loans and leases, credit cards and personal loans, The Wall Street Journal (WSJ) reported. The demand for these types of borrowing shot up 39 percent year over year in April, and … Continue reading →
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The defendant debt collection agency in Hunstein v. Preferred Collection & Mgmt. Servs. Inc. and ACA International both recently filed letters of supplemental authority with the 11th Circuit Court of Appeals under Federal Rule of Appellate Procedure 28(j). The letters bring … Continue reading →
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Things aren’t always what they seem, and sometimes what seems like a “no brainer,” can actually turn out to be quite a headache. This rings true particularly in the realms of credit management and personal finance. Often, you might think that you are taking a course of action that’s in your best interest, only to find out later that it wasn’t.
In particular, there is one very simple-sounding strategy often touted to people who are taking action to improve their financial well-being: CLOSE ALL YOUR CREDIT CARDS.
On the surface, it’s a very simple idea. If credit cards have been leading you to into debt, why not close them? But it isn’t always the right answer. Let’s take a quick look at each side of the argument: why you might not want to close your credit cards vs. why you should consider closing cards.
Don’t Close Your Credit Cards: Negative Credit Score Impacts
If credit cards have presented some financial challenges for you, then the idea of closing them may be very appealing. Just get rid of them, and everything will fall into place, right? Well, not so fast. If one of your financial goals is to improve your credit score, particularly in the short-term, then closing credit cards may work against you.
Closing, or cancelling, a credit card generally has a negative impact on two components of your credit score: credit utilization and average age of accounts.
Your utilization is affected because when you close an account you will have less available credit, which inflates how much available credit you are using as a percentage. Similarly, when you close an account, the age of that account will no longer contribute to your average. The higher your average age, the better. This means that if you close an account that has been open for a long time, your score will likely take a hit. The drop will likely be larger if the accounts that remain open are significantly younger than the one you close.
If you are considering cancelling a credit card because of the annual fee, you might be thinking that the money you will save by closing the card outweighs the credit score impact. You might be right, and in general extra money in your pocket each year that’s not going toward a fee is probably better. However, before you close a card solely for this reason, be sure to call the credit card company to see whether the card has a free downgrade option. If so, you can essentially change to a card without an annual fee while avoiding any of the negative consequences of cancelling, because your history on the original card (with the fee) will carry over to the new card (without the fee).
In general, avoid closing cards if there isn’t a compelling reason to do so. You’ll potentially improve, or at least maintain, two important factors in your credit score. And the great thing is that you don’t have to pay interest on these cards or even use them to reap these benefits. Yes, it seems counterintuitive, but an old credit card sitting in a drawer is likely to do more for your credit score than cancelling the card.
The Case for Cancellation: A Lifestyle Change
Everything we just said above is true. However, we made the argument inside of a vacuum, completely void of any considerations of human behavior. Let’s be real, the main reason people often recommend closing credit cards is so they won’t create more debt for you! And that can be very good advice.
Credit cards aren’t always little pieces of plastic that can sit unused in a drawer! For some of us, they have been avenues to significant spending—sometimes on things we didn’t need at all, and other times on food, clothing and other essentials. We are all in different stages of our financial journeys, and learning to manage credit wisely and have a healthy relationship with our money takes time. Credit cards make negative decisions much easier to make. So, if getting rid of them altogether by closing and cancelling the cards is a mental victory over the cards, that may be worth far more than any boost in credit score.
Bottom Line
When it comes to credit, be wary of general advice, and always think about the specifics of your situation. Closing credit cards is not always a great move and can hurt your credit score. But, worrying about your credit score often isn’t as important as learning to manage credit and improving your own financial habits. So, if you’re thinking about cancelling a credit card, be sure to weigh these pros and cons and consider your own financial strengths in the process.
Remember, the NFCC can help with managing your credit, building a budget, and working toward your other financial goals. You can get started with a credit counselor for a free counseling session today.
The post Should you Cancel a Credit Card? (Credit Score Impact vs. Avoiding Debt) appeared first on NFCC.
Read more: nfcc.org
