Most of the time, when we talk about credit, we are talking primarily about the impact of open accounts. But are we underestimating the importance of closed accounts? Let’s shed some light on the less commonly addressed question of how closed accounts can affect your credit.
What Is a Closed Account on a Credit Report?
A closed account on your credit report is simply any credit tradeline that has been closed, whether it was terminated by the customer or the creditor.
There are several different reasons why an account may be closed.
If you don’t use your account for several months, it could get shut down for inactivity. Photo by Hloom on Flickr.
If you don’t use a credit card for several months, for example, you could get your credit card closed for inactivity. In this case, your credit report might say “account closed by credit grantor” for that account since the lender was the party who terminated the account.
Other reasons a credit card may be closed by the creditor include:
The credit card issuer is no longer offering that type of credit card or is replacing it with a different card The credit card issuer determined that there was fraudulent activity on the account The card was stolen or lost
Consumers may also want to close their own credit accounts from time to time, in which case the account might be notated as “account closed by consumer.” As an example, if one of your credit cards increases its annual fee or if you no longer feel that the fee is worth it, you might decide to close that account.
What Do Closed Accounts Mean on Your Credit Report? Closed Accounts and Credit Utilization
Use our tradeline calculator to calculate your credit utilization ratios.
Now that you know what a closed account is and why an account may be closed, you may be wondering what a closed account on your credit report means for your credit.
The main impact of closing an account on your credit is the effect on your utilization ratio. By closing an account, you are reducing your total available credit limit, which could increase your overall utilization ratio if you have balances remaining on your other accounts.
Therefore, if you have balances on any of your other cards, you probably don’t want to close an account that is helping to keep your overall utilization down, as well as improving your ratio of low-utilization to high-utilization accounts.
On the other hand, if you pay down all your other credit cards to 0% utilization, you can safely close an account without impacting your credit utilization.
Many people believe that once an account is closed, it will no longer count toward your credit age. However, according to an article by credit expert John Ulzheimer in The Simple Dollar, this is a myth.
“Credit scoring models like FICO and VantageScore do indeed consider the age of your oldest account and the average age of your accounts when calculating your credit scores. However, closing an account does not remove its history — including its age — from your credit reports.
Not only will the history of a closed account remain on your credit reports, but credit scoring models will continue to consider the age of the account as well. And, even better, a closed account continues to age. So, if you closed a five-year-old credit card today… in 12 months it’s going to be a six-year-old credit card.”
Are Closed Accounts on Your Credit Report Bad?
Closed accounts on your credit report are not inherently a bad thing. In fact, they can often be a good thing, as we will elaborate on below.
Closed accounts on your credit report, unless they are derogatory, are not bad for your credit. In fact, they are probably giving your credit a boost.
However, derogatory closed accounts can definitely have a negative impact on one’s credit.
For example, if you had a credit card closed due to delinquency, meaning the creditor closed the account because you had stopped paying it, the account likely still has a balance owed.
Having a closed credit account with a balance on your credit report could really hurt your credit. According to some sources, closing a credit account removes its credit limit, so a credit card account closed with a balance would be considered maxed out or over-limit.
Credit utilization is a major influence on your credit score, so maxing out your utilization by having a credit card account closed with a balance could result in a big dip in your score.
However, other sources say that a closed account with a balance will be treated as an open account until the balance is paid off, at which point you can expect some damage to your score, especially if you have balances on your other credit cards.
The specific way that closed accounts are treated may depend on which credit score algorithm is used to calculate your score as well as other variables in your credit profile.
Should I Pay Off Closed Accounts on My Credit Report?
If your account was closed with a balance but remains in good standing, maintain its good standing by continuing to make payments until the account is paid off.
If your account was closed due to delinquency, the first thing to do is call your credit card issuer to check the status of the account. If the debt hasn’t been sold to a collections agency yet, you’ll want to start paying off the account immediately to prevent it from going to collections. You could end up with bad credit if you have a collection account on your file.
If the account is already in collections, however, whether or not you should pay it off is an entirely different question that depends on your individual situation.
See our article on collection accounts on your credit report for more information on how to handle collections.
Open vs. Closed Accounts on Credit Report
In the tradeline industry, we often get questions about whether closed accounts have an impact on one’s credit and, if so, what value they hold relative to open accounts.
It is possible to have a good credit score without having any open accounts. Photo by CafeCredit.com, CC 2.0.
This is an important question, because generally when you buy tradelines you are an active authorized user for two reporting cycles, and after you are removed from the account, it will begin to show as a closed account on your credit report.
Therefore, it is useful to know what impact the tradeline might have after it converts to a closed tradeline.
From what we have seen, closed accounts often can still be a very powerful influence on one’s credit score.
Remember, the age of a closed account still factors into your credit, and accounts continue to age even after they have been closed. Age and payment history go hand-in-hand and together make up 50% of a FICO score, and since closed accounts can still contribute to these factors, this implies that closed accounts can still have a strong effect on your credit.
However, closed accounts may have a diminishing impact over time, since credit scores tend to prioritize recent events.
Can You Have Good Credit With Only Closed Accounts?
It is possible to have a good credit score while only having closed accounts in one’s credit report. We have seen examples of people with credit scores in the 700’s who only had closed accounts in their credit file.
Can I Have Closed Accounts Removed From My Credit Report?
If you have closed accounts on your credit report that are not delinquent or hurting your credit, then there is no need to remove them. They may actually be helping your credit, even though they are closed.
Accounts that were closed in good standing should automatically fall off your credit report after 10 years, while delinquent closed accounts will fall off your credit report after 7 years.
How to Get Rid of Closed Accounts on Your Credit Report
If your credit card has been closed, you can try calling your credit card issuer to ask if the account can be reopened, but don’t wait too long.
If a closed account on your credit report is reporting inaccurately, then you can dispute it and have the credit bureaus update the account with the correct information or remove it.
Contact each credit bureau or check their websites for instructions on how to dispute accounts on your credit report.
If a Credit Card Is Closed, Can It Be Reopened?
In some cases, consumers may be able to reopen closed credit cards.
If your account was closed due to fraud or delinquency, banks typically do not allow these accounts to be reopened.
If it was closed voluntarily on your part or closed due to inactivity, however, you might have a chance to reopen the account if you don’t wait too long.
Only some banks will allow this, and those that do have varying time limits as to when you can reopen an account, so check with your credit card issuer.
If you’re within the time window and your account is eligible to reopen, here’s how to reopen a closed credit card account:
Call the phone number provided on the back of your credit card (or if you don’t have the physical card anymore, look up the phone number for the customer service department for that card). Be ready to provide your personal information and answer security questions. Explain why you closed the account and why you are requesting to reopen it.
Some issuers may require a hard inquiry before they can approve your request, which could cause a small, temporary drop in your credit score.
If your bank doesn’t allow you to reopen the card, the next best solution might be to re-apply for the same card or apply for a new credit card altogether.
Take-Home Points About Closed Accounts
Accounts may be closed voluntarily by the consumer or closed by the creditor due to inactivity, fraudulent activity, or delinquency. Closed accounts are not necessarily bad and can even help your credit. Closing an account could affect your credit utilization. Closed accounts still contribute to your credit age and they continue to age even after they are closed. Closed accounts can still have a powerful impact on credit scores. Continue paying off accounts that were closed with balances to prevent them from going to collections. You can dispute closed accounts that are not reporting correctly. You may be able to reopen a closed credit card account depending on the circumstances.
FICO, the company behind the creation of the original FICO credit score and its many subsequent iterations, has announced the latest model in their line of credit scoring algorithms: the FICO Score 10 and the FICO Score 10 T. The “T” in the latter scoring model stands for “trended,” which reflects the incorporation of trended data over time into the algorithm.
Thanks to not only the trended data but also a few other major changes, the new scoring models are claimed to be superior to all previous FICO scores.
Although the majority of consumers are not likely to see a dramatic change in their credit scores, some groups of consumers may experience more extreme shifts. Ultimately, the new FICO scores are predicted to widen the gap between consumers with good credit versus those with bad credit.
However, none of that matters until FICO 10 and 10 T actually start being used, which could still be a few years away.
Keep reading to get all the facts on FICO 10, including what makes it different from previous FICO score versions, the impact it will have on credit scores, and when we will start to see lenders adopting it. Most importantly, we’ll tell you how to get a good credit score with FICO 10.
Why Did FICO Come Out With a New Credit Scoring Model?
The whole point of a credit score is to communicate a consumer’s level of credit risk to lenders so that lenders can make less risky decisions when granting credit. Lenders want to avoid extending credit to borrowers who are likely to default on a loan because defaults represent losses for the company.
So, the more accurate a credit scoring model is at predicting consumer credit risk, the more useful it is to lenders. With a predictive credit scoring model, lenders can make more informed lending decisions, which helps their bottom line.
For this reason, the goal of each new credit score is to make it better than the last version at predicting credit risk, and that is exactly what FICO 10 is designed to do.
Consumer Debt Is on the Rise—But So Are Credit Scores
According to The Balance, consumer debt has increased to record levels, and yet the average credit score in the United States has also increased to 706 as of September 2019. This can be attributed partly to economic conditions over time, but there is another major factor that has the banks worried.
The national average FICO score has been on the rise for the past decade and it surpassed the 700 mark in 2018.
It has now been 12 years since the Great Recession of 2008, which means almost all of the delinquencies and derogatory marks on consumers’ credit reports from that period of financial hardship have been removed from their records. Therefore, creditors can no longer see how consumers handled the recession and whether they were able to pay all of their bills when the economy went south.
Couple this with the fear of another possible economic recession on the horizon, and you can understand why lenders have started to feel concerned that delinquencies and defaults may soon begin to rise to a level that is not reflected in consumers’ high credit scores.
Because of these economic factors, the credit scoring system needed an overhaul that would take into account the changing economic climate as well as changing consumer behavior and allow for better predictions of credit risk and default rates.
FICO 10: More Accurate Predictions of Credit Risk
FICO predicts that FICO 10 will lower defaults on auto loans by 9% and defaults on mortgages by 17%.
Due to the changes made to the scoring model that we discussed above, especially the inclusion of trended data for the FICO score 10 T, FICO claims that the new scores perform better than all previous FICO scores by substantially lowering consumer default rates.
Here’s what else FICO has to say about their new products:
“By adopting the FICO® Score 10 Suite, a lender could reduce the number of defaults in their portfolio by as much as ten percent among newly originated bankcards and nine percent among newly originated auto loans, compared to using FICO® Score 9. The reduction in defaults is even higher for newly originated mortgage loans, at 17 percent compared to the version of the FICO Score used in that industry. These improvements in predictive power can help lenders safely avoid unexpected credit risk and better control default rates, while making more competitive credit offers to more consumers.”
How Is FICO 10 Different Than Previous FICO Scores?
Although FICO routinely updates their credit scoring algorithms every five years or so, this will be the first time that they are releasing two different versions of the same general scoring model: FICO 10 T, which uses trended data; and FICO 10, which does not use trended data.
Both FICO 10 and FICO 10 T will be drastically different than the previous FICO score, FICO 9. FICO 9 was designed to be very forgiving to consumers, which led many to believe that it produced credit scores that were higher than they should have been.
With FICO 9, for example, medical collections were given less weight than other types of collections, which was a benefit to consumers struggling with medical debt.
Furthermore, FICO 9 completely ignored paid collection accounts, meaning that if you had a collection on your credit report but then paid the balance, it would no longer affect your credit score. Many felt that this change contributed to FICO 9 overestimating the creditworthiness of consumers, which in turn led to the scoring model not being accepted by many industries.
In contrast, the FICO 10 scores represent a swing back in the opposite direction. It is designed to be less lenient toward consumers with risky credit behaviors in order to avoid understating consumers’ credit risk. In that sense, it is probably more similar to FICO 8 than to FICO 9. However, FICO 10 also rewards consumers who have successfully managed their credit.
To accomplish this, FICO made some significant changes in creating their latest set of credit scoring algorithms.
Trended Data
The new FICO 10 T score is the first FICO score to look at trended credit data.
The FICO 10 T score will incorporate trended data, which means that it will not just consider your credit profile as a “snapshot” in time, but rather, it will take into account your credit behavior over the previous 24 to 30 months and how your credit profile has changed in that time.
VantageScore 4.0, a competing credit scoring model, has been using trended data since it debuted in 2017. Now, FICO is following suit with their 10 T score.
Because of the more extensive temporal data set FICO 10 T has to draw from, it is even more predictive of a borrower’s credit risk than the basic FICO 10 score, which can only see a “snapshot” of your credit report at a given point in time.
For consumers, the trended data factor is especially significant for the credit utilization portion of your credit score. Of course, credit scores already looked at your payment history from the past seven to 10 years, but until now, they only looked at your credit utilization ratios at a given point in time.
This means that with most credit scoring models, even if you max out your credit cards one month and your credit score suffers as a result, as long as you pay down your cards again by the next month, your score can still bounce right back to where it was before you maxed out the card.
With FICO score 10 T, however, it won’t be so easy to recover from high balances, because a record of being maxed out could stick around for the next 24 to 30 months.
In addition, if your balances have been climbing higher over the last two years or if you have been seeking credit more aggressively, you could be penalized by FICO 10 T, because this kind of behavior indicates a higher risk of you defaulting in the future.
On the other hand, if you have been managing your credit well and your debt levels have been decreasing over the past two years, you will be rewarded for that behavior.
Personal loans from online lenders have exploded in popularity, but it’s best to avoid them if you want to get a high FICO 10 credit score.
Personal Loans Will Be Penalized
The vice president of scores and analytics at FICO, Joanne Gaskin, has said that the most significant change to the scoring algorithm is the way it treats personal loans.
Personal loans are growing faster than any other type of consumer debt, even credit cards. Consumers are turning to personal loans to consolidate credit card debt more frequently than in the past, and the proliferation of financial technology companies has made personal loans easier to qualify for and more accessible.
With older FICO models, personal loans are treated the same as any other installment loan. Since the balances of installment accounts don’t affect credit scores as much as the utilization ratios of your revolving accounts, with most scoring models, taking out a personal loan to consolidate credit card debt (essentially converting revolving debt into installment debt) would benefit a consumer’s credit score.
However, many consumers who take out personal loans to pay off revolving debt don’t change the spending habits that got them into debt in the first place. Consequently, after getting a personal loan and paying down their credit cards, they may run up their cards again and find themselves even deeper in debt.
According to FICO, the credit risk of such consumers is higher than you would think based on their credit scores using previous FICO models. To account for this, FICO 10 is treating personal loans as their own category of credit accounts and is potentially penalizing consumers for taking out personal loans.
With FICO 10 T, recent missed payments will matter even more than they already do with other FICO score versions.
Therefore, with FICO 10, the strategy of consolidating credit card debt with a personal loan might not help your credit score as much as you hope and might even hurt it. However, the negative impact of taking out a personal loan can be mitigated by steadily working to reduce your overall debt level.
On the other hand, if your overall debt load stays the same or continues to increase after you take out a personal loan, that could hurt your credit score because it shows lenders that you are getting deeper into debt and not managing your credit well.
Recent Missed Payments Will Be Penalized More Heavily
Payment history has always been the most important part of a FICO credit score, but it is even more important with FICO 10 T, the trended data score.
Using historical data, it can assign late and missed payments even more weight based on your behavior in the past 24 months. For example, if you’ve been getting progressively farther behind on payments over time, the negative impact on your credit score could be even greater than it would with a previous FICO score.
If you have delinquencies that are at least a year old, though, then those older negative marks on your credit report won’t hurt your score as much, according to MSN.
How Will the FICO 10 Scoring Model Affect Credit Scores?
Overall, it is predicted that the new FICO 10 scoring models will have a polarizing effect on consumers’ credit scores, which means that some consumers who have bad credit scores may see them drop even further, while those who have good credit scores because they are on the right track may be rewarded with even higher scores.
40 million consumers are likely to experience a credit score drop of 20 or more points with FICO 10 compared to previous models. This could push some consumers over the edge into a lower credit rating category.
FICO has estimated that approximately 100 million consumers will probably experience minor changes of less than 20 points to their scores. The company also estimates that about 40 million consumers will see their credit scores drop by 20 or more points, while another 40 million could see their scores increase by the same amount.
You are likely to see a credit score drop if you took out a personal loan to consolidate debt but then kept accruing more debt instead of paying it off, or if you have credit card debt that you are not paying down.
You are most likely to see a credit score increase if you have been penalized for having high balances from time to time, since the temporal data from FICO 10 T will help to average out the peaks in your utilization rate.
While a decrease of 20 points in your credit score isn’t catastrophic, it could be enough to make a difference in your chances of being approved for credit or the interest rates you could qualify for. This is especially true for those whose credit scores sit near the lower border of a credit score category.
For example, if someone with a credit score of 595 with FICO 8 is considered to have fair credit. If FICO 10 gave them a credit score that is 20 points lower, their credit score would be 575, which is considered bad credit. That could very well make or break your chances of getting approved for a loan or a credit card.
On the other hand, the inverse is true for those who stand to gain 20 points. If a 20 point increase pushes a consumer over the edge from fair credit to good credit, for example, this could certainly be beneficial when applying for credit.
It’s estimated that 80 million consumers will see a significant change in their credit scores with FICO 10, which may move them into different credit score ranges.
Less Severe Score Fluctuations
As you may recall from How to Choose a Tradeline, the more data there is contributing to an average, the more difficult it is to affect that average.
Since FICO 10 T looks at your credit utilization for an extended period of time instead of just the current month, it is likely that your credit score will not change as drastically from month to month based on your utilization ratios at the time.
In other words, your utilization data from the past 24 to 30 months will have a stabilizing effect on your score that will protect it from being heavily penalized if you occasionally have high balances. For example, if you spend extra on your credit cards in December to prepare for the holidays, your score that month won’t be hurt as much as it would without the trended data (as long as you pay it off quickly).
Greater Emphasis on Trends and Recent Data
FICO 10 T will especially reward consumers who have a trend of improving their credit over time.
The inclusion of trended data with FICO Score 10 T and extra emphasis on recent data means that your credit score is not based solely on what your accounts look like today, but instead, it will give more importance to whether your credit is getting better or getting worse.
Hypothetically, it’s possible that two consumers with the same amount of debt and derogatory items could have different credit scores based on the trend in their debt levels.
If one consumer has $10,000 of credit card debt, but they have been making progress on paying that down from a starting point of $20,000 of debt, then their credit score would be helped by FICO 10 T because their debt level is demonstrating a trend of improvement over time.
If the other consumer also has $10,000 of credit card debt, but they used to only have $1,000 of revolving debt, that trend shows that they are getting deeper into debt, and their FICO 10 score would be hurt by that pattern of increasing debt.
A Polarizing Effect on Credit Scores
One of the major effects of FICO 10 is that it is likely going to polarize the pool of consumers’ credit scores. In other words, those near the top of the credit score range will get even higher, while those with low credit scores will sink even lower along the scale.
According to CNBC, consumers with scores of lower than 600 will experience the largest reductions in their credit scores with FICO 10. Those with scores of 670 and above could possibly gain up to 20 points.
This creates a distribution of credit scores that is more concentrated at the two extremes, as opposed to most consumers’ credit scores being concentrated around the average.
Unfortunately, that means the negative effects of the new FICO scores will disproportionately impact consumers who are already struggling with debt. This will make it even harder for consumers to get out of debt and may force them to seek out costly, predatory loans, which only accelerates the downward spiral of debt.
This perpetuation of inequality in the credit scoring system is not new, but it seems that FICO 10 will only serve to increase credit inequality rather than improve it.
Ultimately, FICO’s clients are the banks, and their products are designed to give banks the upper hand, not consumers.
When Will the New FICO Score Be Rolled Out?
By widening the divide between consumers with good credit and those with bad credit, it seems that FICO 10 will exacerbate credit inequality.
According to FICO, the FICO Score 10 Suite of products will be available in the summer of 2020. The vice president of scores and predictive analytics at FICO, Dave Shellenberger, told The Balance that Equifax will be adopting the new score shortly thereafter.
As to when lenders will actually start to use the new credit scoring system, that is a different question.
Lenders Are Slow to Adapt to New Credit Scoring Systems
The financial industry adapts very slowly to systemic changes. As we discussed in “Do Tradelines Still Work in 2020?”, there are many, many different versions of FICO, and the majority of lenders are still using versions of the score that are years or even decades old.
Before FICO 10, the latest version had been FICO 9, which has largely gone unused by lenders.
FICO 8 is the credit scoring model that is currently being used by the three major credit bureaus and it is also the most widely used model among lenders today. FICO 8 debuted in 2009, which means it has now been around for over a decade.
There are certain industries that rely heavily on FICO score versions that are even older than FICO 8. In the mortgage industry, the most popular FICO scores are versions 2, 4, and 5, the earliest of which debuted in the early 1990s. Auto lenders may use FICO scores 2, 4, 5, or 8, while credit card issuers use models 2, 3, 4, 5, and 8.
Furthermore, many industries and even some large lenders have their own proprietary FICO scoring models which have been customized for that particular institution and the consumer base they serve.
Lenders have amassed huge troves of data based on a specific credit scoring model. Having reliable data is crucial to minimizing risk during the underwriting process. If lenders were to change to a new scoring model, all of the credit scoring information they have collected so far would no longer be applicable, since it was calculated using a different algorithm.
It is likely that the FICO 10 T score will take longer to implement than the basic FICO 10 score because FICO 10 T will require businesses to train employees to use a new set of reason codes.
They would essentially be starting from scratch, which would mean taking on more risk until they have tested the new model for long enough to understand how it works for their businesses. Because of this, lenders are often reluctant to upgrade to a newer scoring model and slow to implement it.
Therefore, we can make an educated guess that it will most likely take at least a few years for FICO 10 to gain traction with lenders on a large scale. According to Shellenberger of FICO, it may take “up to two years” before lenders start using the new model, although based on past examples, it seems likely that it could take a lot longer than that.
FICO 10 T Will Be More Challenging for Lenders to Adopt
According to FICO, the standard FICO 10 score uses the same “reason codes” as older FICO scores. Reason codes, also referred to as “adverse action codes,” are the codes that lenders must provide if they have rejected your application for credit based on information from your credit report. These codes usually consist of a number and a brief statement of something that is impacting your score in a negative way, such as revolving account balances that are too high compared to your revolving credit limit.
Because FICO 10 shares the same reason codes with previous versions of FICO scores, this means it will be compatible with lenders’ current systems, at least with regard to reason codes.
In contrast, FICO 10 T comes with a new set of reason codes, which means it will be a more extensive undertaking for banks to implement the new score and train employees on how to use it.
For this reason, it seems likely that the basic version FICO 10 may see widespread use among lenders before FICO 10 T does.
How to Get a Good FICO 10 Credit Score
Although some significant changes have been made to the FICO 10 credit scoring products, the overall principles of managing credit remain the same. Most importantly, make all of your payments on time, every time, and try to keep your credit utilization low.
However, there are a few specific points to keep in mind if you want to get a good credit score with FICO 10.
Think twice about taking out a personal loan
Since personal loans will be more heavily penalized with FICO 10 scores, you’ll want to avoid taking out a personal loan unless it’s absolutely necessary. Instead of relying on personal loans to support your spending, try to save up for large purchases in advance, and start funneling some cash from each paycheck into an emergency fund in case you run into financial hardship.
If you do end up needing to use a personal loan, try to pay it down as quickly as you can. In addition, don’t run up the balances on your revolving accounts again, because the FICO 10 T algorithm does not reward this behavior, and your credit score will reflect that.
Consider setting up automatic payments for all of your accounts so that you never accidentally miss a payment.
Never miss a payment
Avoiding late or missed payments is of the utmost importance with any credit score, but it is even more important with the new FICO scoring system. Late and missed payments may be assigned more weight based on your recent credit history, especially missed payments that occurred within the past two years.
To avoid missing any payments, set up all of your accounts to automatically deduct at least the minimum payment from your bank account before your due date each month. Also, it’s a good idea to get into the habit of checking your accounts regularly to make sure there haven’t been any errors or issues with processing your automatic payments.
If you do accidentally miss a payment, pay the bill as soon as you notice and consider asking your lender to waive the late fee. If you manage to catch up before 30 days have gone by, then you can avoid getting a derogatory item added to your credit report.
In the event that you find yourself with a 30-day late (or worse) on your credit report, then you will need to be extra vigilant about making payments on time for at least the next one to two years if you want your score to recover.
Pay off your credit cards in full every month
Paying off your credit cards in full is always a good idea in general because that way, you can avoid wasting money on interest fees. In addition, paying off your full balance each month prevents your credit utilization from increasing from month to month, as opposed to carrying over a balance and then adding more to it each month.
With trended data playing a large role in your FICO 10 T score, consistency is key, and paying your bills in full every time will help boost your score.
If you want to get a good credit score with FICO 10 and FICO 10 T, try to keep your revolving debt low by paying off your credit cards in full every month.
Lower your credit utilization ratios
With FICO 10 T, it will be more important than ever to be vigilant about maintaining a low credit utilization ratio. Since the trended scoring model accounts for patterns in your credit utilization over the past 24 months, it won’t be so easy to get away with maxing out your credit cards one month and then quickly paying the balance down to improve your score again the next month.
High credit utilization at any point in the past two years could be factored into your credit score, especially if your utilization has been increasing over time.
For this reason, if your credit is being scored with the FICO 10 T model, you’ll get the best results if your credit utilization has been consistently low or if it has shown a pattern of decreasing over time.
However, just because you pay off your credit card in full every month doesn’t mean it will report a zero balance. The balance that reports to the credit bureaus is the balance that you have at the end of your statement period. If your balance happens to be high on that date, then it could negatively affect your score, even if you pay off the balance soon after.
One way to get around this is to pre-pay your credit card bill before your due date and your statement closing date. That way, the balance will be low when the card reports to the credit bureaus, which is better for your credit score.
Another helpful credit hack is to spread out multiple smaller payments throughout the month so that the balance never climbs too high to begin with.
Requesting a credit line increase can be an easy way to improve your utilization rate, but this method should be used with caution if you think it might encourage you to rack up more debt.
Increase your credit limit
One way to easily lower your utilization rate is to increase your credit limit. Spending $1,000 on a card with a credit limit of $5,000 is a lot better than spending the same amount on a card with a credit limit of $2,000.
Increasing your credit limit might be easier than you think. It could be as simple as calling up your card issuer on the phone or applying for a credit line increase online. Most people who ask for a higher credit limit get approved, according to creditcards.com.
However, this strategy is not encouraged for consumers who may be tempted by the higher credit limit to spend even more on the card.
For tips on how to get a larger credit limit, as well as some pitfalls to watch out for before requesting an increase, check out “How to Increase Your Credit Limit.”
Work to improve your credit health over time
With FICO score 10 T including more information about your credit history over the past 24 months, it will be important to demonstrate an improvement in your credit over time. Consumers who have been working to manage their credit responsibly and who have reduced their amount of revolving debt over time will be rewarded.
On the other hand, those whose credit health has been declining due to increasing debt levels or a series of missed payments will see their credit scores take a dive.
Will the New FICO 10 Score Affect the Tradeline Industry?
First, remember that it’s likely that it’s going to take at least a few years for FICO 10 to be widely adopted by lenders (if lenders choose to use it in the first place, which they may not), which means that nothing is changing for the tradeline industry in the near future.
Secondly, many lenders may choose to adopt only FICO 10 and not FICO 10 T because it will be technically easier to implement. For lenders using FICO 10 without the trended data, there is no change to how authorized user tradelines work.
However, things get more interesting when considering the impact of FICO 10 T on buyers and sellers of tradelines. Until FICO 10 T is adopted by major lenders, we can only speculate as to the changes that will result, but here is one possibility.
What If FICO 10 T Reveals a Tradeline’s Balance History?
One concern that consumers may have is that FICO 10 T will expose a tradeline’s previous high balance if it had one at any point during the past 24 to 30 months. That may be true, but we also know that FICO 10 T places a lot of importance not just on the numbers themselves, but on how they change over time.
All of the tradelines on our tradeline list are guaranteed to have a utilization ratio of 15% or lower. If a tradeline had a higher balance at some point in the past two years or so, then it would show a trend of the balance decreasing, since the balance would have been brought down to under 15% in order to participate in the tradeline program.
FICO 10 T rewards downward trends in utilization, so it seems that authorized user tradelines would still provide value even if higher balances can be seen in the past.
If a tradeline has not had a high balance in the past two years, then that means it will show a pattern of consistently low utilization, which is also beneficial.
Conclusion: What Does the New FICO 10 Credit Score Mean for Consumers?
A lot of speculation and bold claims have been circulating about the new FICO scores, FICO 10 and FICO 10 T. Naturally, consumers and tradeline sellers alike are concerned with the question of how these new scores might affect authorized user tradelines.
It is true that FICO has made some significant changes to their latest credit scoring model, and it’s also likely that some consumers may experience marked increases or decreases in their credit scores compared to previous FICO scoring models. Fortunately, however, there is no need to panic.
Follow the general guidelines of good credit to get a high score with any credit scoring model.
First, let’s remember that FICO 10 is not in use yet, and it’s probably going to take a few years or more for the majority of lenders to adopt it. In addition, the scoring model that people are most concerned about, FICO 10 T, will take even longer than FICO 10 to reach mainstream popularity since it requires lenders to learn how to start using a new set of reason codes.
For this reason, consumers do not need to worry about lenders seeing the past two years of their credit histories just yet. However, knowing that widespread use of trended data may be on the horizon, you may want to start preparing your credit now. That way, when trended data credit scores become more popular, your credit will be strong and ready to withstand the changes.
To achieve a high credit score with FICO 10 and FICO 10 T, avoid taking out personal loans if you can, as they will be penalized more heavily than in the past. It’s also important to demonstrate either an improvement in your credit over time or consistently good credit habits, which will be rewarded.
Aside from these special considerations, FICO 10 and FICO 10 T still rely primarily on the same credit score factors you are already familiar with: payment history, credit utilization, length of credit history, credit mix, and new credit. While the peripheral details of different scoring models may vary, the core components always remain the same.
Ultimately, if you work on developing good credit practices in these general areas, your credit will be in great shape no matter which scoring model is used.
Balance transfers are a somewhat controversial topic in the world of credit repair and debt payoff.
They can be a wonderful tool for helping consumers get out of credit card debt without being crushed by sky-high interest rates. On the other hand, if you’re not careful, they can also enable you to get yourself even deeper into debt than you were before.
If you’re interested in learning more about how balance transfers work, the pros and cons of balance transfers, and whether or not one could benefit your credit, then look no further: this article contains everything you need to know about balance transfers.
What Is a Balance Transfer?
A balance transfer is exactly what it sounds like: it is the process of transferring a balance from one credit card to another, typically one with a lower interest rate. By transferring your balance from a higher-interest card to a lower-interest card, you can save money on interest while paying down your debt.
Essentially, it’s kind of like using the lower-interest credit card to pay off the higher-interest card.
If you carry a credit card balance from time to time, you may have received from balance transfer offers in the mail from various credit card issuers, eager for you to apply for their credit card and transfer your debt to it. And you may have wondered, what’s in it for the banks? Why do they want to take on debt that you have with another bank?
A balance transfer is a way for a bank to get you—and your debt—to switch over to them from a competitor. To incentivize you to do this, they may offer a great deal on your balance transfer, such as 0% interest on your balance for 18 months.
Of course, the bank doesn’t make any money when you are not paying interest, so what are they gaining from this?
Firstly, the banks charge a small fee for each balance transfer (typically around 3% – 5%; more on this below). They also earn money on transaction fees when you swipe your card if you make purchases with the new card.
In addition, the bank is hoping that they will eventually be able to make money off of you in one or more of these scenarios:
You still have a balance left on the account when the promotional low-interest offer ends, and they can then begin to charge you a higher interest rate on the remaining balance. You make purchases with the card, which they can charge the normal interest rate interest on, and which makes it more likely that you will still have a balance at the end of the introductory period. You miss a payment for two months in a row and get a 60-day late on the account, which allows the bank to increase your interest rate to a high penalty APR of up to 29.99%.
If you make any of the above mistakes, then your account suddenly becomes very profitable for the bank instead of interest-free credit for you.
If you miss a payment for 60 days, your credit card issuer can bump up the APR from 0% to a high penalty rate.
The banks know that a certain percentage of customers will ultimately end up generating profit for them, which means that offering balance transfers is an effective marketing tool even if some customers “beat the system” by paying off their entire balance without paying a cent of interest.
If you’re smart about making a plan to avoid potential pitfalls, you may be able to save yourself a lot of money and pay down your debt faster by using a balance transfer to your advantage.
What Is a Balance Transfer Credit Card?
A balance transfer credit card is a credit card that has terms that were specifically designed to encourage customers to transfer a balance to the card. It can still be used for purchases, just like a normal credit card (although that’s usually not a good idea, as we’ll explain later on), but its primary purpose is for balance transfers.
What Is a Good Balance Transfer Credit Card?
A good balance transfer credit card is any card that offers a low balance transfer fee and an introductory period during which there is a low APR or, ideally, no interest charged at all.
In addition, in the interest of minimizing costs, you’ll probably want to look for cards that do not charge an annual fee.
To summarize, the perfect balance transfer credit card would ideally have the following three things:
0% introductory APR for at least 12 – 18 months 0% introductory balance transfer fee No annual fee
However, it is more typical to find cards that have a combination of two out of the three. For example, you might apply for a balance transfer card that has a 0% APR for 18 months and no annual fee but a 3% balance transfer fee.
Some balance transfer credit cards may also double as reward cards that offer cash back or rewards points on purchases. While this might be a nice feature to have down the road, it’s best to avoid making purchases on your new balance transfer card while you pay off the balance. The promotional balance transfer APR usually doesn’t apply to purchases, which means they will begin to accumulate interest at the regular rate immediately.
Although some balance transfer credit cards may also offer cash back rewards, it’s best to avoid using them for purchases until you have finished paying off your balance.
Plus, the credit card company can choose to apply your payments first to the balance you transferred, instead of new purchases, so it’s possible that interest on those charges could keep racking up until you are finished paying off your entire balance transfer.
Which Balance Transfer Card is Best?
For specific credit cards that are good for balance transfers, you can browse online resources, such as Credit Karma’s list of the best balance transfer cards. Creditcards.com and NerdWallet have similar roundups of their favorite balance transfer cards.
Compare and contrast the terms for each card you are interested in to find the best balance transfer deal. Many resources also estimate what credit score range you may need in order to get approved for different cards.
Using an Existing Card for a Balance Transfer
You don’t necessarily have to apply for a new credit card in order to transfer a balance—you may already have a credit card that you could use for a balance transfer. Sometimes banks will offer balance transfer promotions with 0% APR to their existing customers, so keep an eye out for any balance transfer deals from your credit card issuers.
You could even consider potentially transferring a balance to another credit card without any sort of promotional offer if it already has a significantly lower interest rate.
How Does a Balance Transfer Work?
When you apply for a new balance transfer credit card or accept a promotional balance transfer offer with an existing card, you provide information about the account you want to transfer a balance from.
Alternatively, if you are applying for a new card, you could wait and see what credit limit you are approved for first, and then contact the issuer of your new card to set up a balance transfer.
Once you have been approved for the new card (if applicable) and submitted your balance transfer information, the issuer of the card you are transferring a balance to will contact the other bank in order to pay your balance.
It may take a few weeks for the transfer to be completed. In the meantime, you will need to keep making payments on your existing account as usual so that you don’t miss a payment while waiting for the balance to be transferred. Once the transfer has gone through, then you can start making payments toward the new account.
What Is a Balance Transfer Fee?
Most credit card issuers will charge a fee for conducting a balance transfer. This fee is a certain percentage of the balance you are transferring. Typically, balance transfer fees range from 3% to 5%. They may also have a minimum fee of around $5 to $10 that is assessed for smaller balances.
For example, if you want to transfer $5,000 and the balance transfer fee is 5%, then you would be charged $250 for the balance transfer ($5,000 x 0.05 = $250).
Your credit card issuer may supply you with balance transfer checks, which you can use to pay off the balance on your higher-interest credit card.
You pay the balance transfer fee to the bank that provides the credit card that you are transferring the balance to. The bank will simply add the fee to your balance. In the above example, when your balance transfer is complete, you would end up with a balance of $5,250 on the account.
What Is a Balance Transfer Check?
If you regularly carry a balance on your credit cards from month to month, then you may have seen balance transfer checks before. Credit card issuers often send them in the mail along with a promotional balance transfer offer.
Balance transfer checks are checks that the issuer of your balance transfer credit card may supply to you which you can then use to pay off the balance that you want to transfer from another card. To do so, you would simply make out the check to the credit card company you want to pay for the amount you want to transfer.
Some banks may allow you to write the checks to yourself and deposit the money directly into your bank account, which you can then use to pay another credit card company. If this option is available to you, before rushing out and cashing the checks in your name, first check to see whether the credit card issuer will consider it a cash advance, in which case you would likely get charged a cash advance fee as well as a higher interest rate on the balance.
Can You Transfer a Balance Online?
While using balance transfer checks is one way to complete a balance transfer, it is often easier and faster to complete the process online or over the phone.
If you apply for a balance transfer card online, it is likely that you will have the chance to provide the account information for the account you’d like to transfer a balance from so that your new credit card company can make the payment for you.
You can request a balance transfer online as part of your application for a new balance transfer credit card.
Alternatively, you can call your new credit card issuer and provide the necessary information to complete the balance transfer over the phone.
Can You Transfer a Balance Between Products From the Same Bank?
You can usually transfer a balance between most banks, and you can sometimes even transfer other types of balances, such as installment loan debt, to a credit card.
Typically, however, credit card issuers will not allow you to transfer balances between different credit cards you have with the same issuer, including branded cards that are issued by the same bank.
For example, if you have two different credit cards with Chase, you likely wouldn’t be able to transfer a balance from one to the other. However, you could transfer your balance from your Chase card to, say, a Bank of America or Discover credit card.
The reason for this is that the banks are trying to use balance transfers as an incentive to gain new customers, which equate to new sources of revenue. An existing customer transferring a balance between two cards with the same bank doesn’t create any profit for the bank, so they have nothing to gain by offering balance transfers between their own credit cards held by current customers.
What Types of Debt Can You Transfer to a Balance Transfer Card?
Some credit card issuers may allow you to transfer other types of debt, such as installment loans.
Other types of debt that you may be able to transfer to a balance transfer credit card include student loans, personal loans, home equity loans, and auto loans. NerdWallet has a detailed list of the types of transfers that are accepted by several major credit card issuers.
Since installment loans typically have significantly lower interest rates than credit cards, it usually only makes sense to transfer installment debt to a credit card if you are confident in your ability to pay it off while you still have 0% interest on balance transfers.
What Is a Balance Transfer Credit Limit?
When you get approved for a balance transfer credit card, the card issuer will assign you a credit limit, which is the maximum amount of credit that you can carry on the card. Often, the amount that is available for balance transfers may either be the same as your total credit limit, meaning you can use your entire credit limit for balance transfers.
Other times, the credit card company may impose a separate balance transfer credit limit, which is the maximum amount of credit that you can use for balance transfers.
The balance transfer credit limit is not an additional amount that can be added on top of the total credit limit; rather, it is a specific portion of your total credit limit that can be used for transfers.
For example, if you get approved for a card that has a $5000 credit limit and a $4,000 credit limit, that means you can use $4,000 of the $5,000 of available credit for balance transfers. If you use the full balance transfer credit limit, after that, there will be $1,000 of your credit limit remaining, which will only be available for purchases.
It’s important to remember that balance transfer fees count toward your credit limit, so unless you find a card with no balance transfer fees, you won’t be able to transfer the full amount of your credit limit.
Therefore, you should calculate the total amount of the fees you will be charged before transferring to make sure you are staying below your credit limit. As an example, if your balance transfer credit limit is $10,000 and the balance transfer fee is 3%, that means you should transfer a balance of no more than $9,700 to leave room in your credit limit for the $300 fee ($10,000 x 0.03 = $300).
Although there is no hard limit on how many balance transfers you can do, it’s usually recommended to transfer a balance no more than once or twice.
How Many Balance Transfers Can You Do?
When it comes to the number of balance transfers allowed on one card, it depends on the policy of your balance transfer card issuer. For example, they may limit you to a maximum of three balance transfers when applying for the card, in addition to keeping the total amount transferred under your balance transfer credit limit.
More generally, in theory, you could do as many balance transfers as you like. In reality, of course, transferring a balance several times isn’t the best idea.
Having a lot of balance transfers on your record might lead creditors to assume that you don’t intend to or aren’t able to pay back your credit card debt quickly and that you are just transferring your debt between different credit cards to avoid paying interest, according to Discover.
Eventually, creditors might stop approving you for balance transfer cards, leaving you with a high interest rate when your promotional APR expires.
Plus, transferring a balance multiple times before paying it off might make you feel like you are making progress, when you are really just moving your debt around from one card to another without implementing an effective plan to pay it off.
Instead of falling into a cycle of endless balance transfers, which won’t help you pay off your debt, make sure you have stopped the cycle of spending that may have gotten you into debt in the first place and ask yourself whether you can create a plan to feasibly pay off your debt after your first balance transfer.
Will a Balance Transfer Close My Account?
If you are wondering whether the account that you transferred a balance out of will be closed after the balance transfer is complete, rest assured that it will not. The only thing that will happen is the balance of that account will decrease by the amount of the transfer.
Closing your credit card account is up to you. If you would like to close your account once there is no longer a balance on it, then you can contact your credit card issuer and request for them to close your account. You may want to close the account if it has an annual fee or if you think that having no balance on the account might encourage you to max it out again.
A balance transfer will not automatically close your old account. In fact, you should keep the old card open and in good standing so that it can help your credit utilization ratio.
However, unless you have a strong reason to close the account, such as the examples above, then it is typically recommended that you leave the account open.
As you may know from our article on how closed accounts affect your credit, the main reason that keeping accounts open is preferable is that they can only help your revolving credit utilization ratio when they are open. By closing an account, you take away the credit limit of that account from your utilization ratio, thus increasing your overall credit utilization.
So if you want to help out your credit score by maintaining a low credit utilization ratio, consider keeping the account open after the balance transfer. You don’t have to spend a lot on the card to keep it open.
Instead, you can charge something small every few months or use it for a recurring subscription service charge and simply pay it off when the bill is due. Even better, set up automatic bill pay so you don’t have to worry about remembering to pay the bill, which is a great credit hack!
How Much Does a Balance Transfer Cost?
To determine the cost of a balance transfer, all you have to do is simply multiply the amount of debt that you want to transfer by the balance transfer fee that your credit card issuer will charge.
For example, if you plan to transfer a balance of $8,000 and the balance transfer fee that will be assessed is 5%, then the fee associated with your balance transfer will cost you $400 ($8,000 x 0.05 = $400).
This amount would be added to the balance of the account that you are transferring to for a total new balance of $8,400.
However, the cost of a balance transfer may not be limited to the balance transfer fee. It is important to consider the interest that will be charged on your balance transfer as well.
If you can take advantage of a promotional 0% interest rate, then, obviously, you do not have to worry about interest charges as long as you pay off the balance by the end of the promotional period.
On the other hand, if you think you do not think that you will have finished paying off the balance by the end of the promotional period, then you should take into account the interest that will be applied once the time is up.
Some balance transfer deals may offer a low interest rate for a longer period of time rather than a 0% APR. If this is the case for you, then you might want to try out a credit card repayment calculator, such as this one from Credit Karma, to help you determine how much you could end up paying in interest.
It’s important to do the math before committing to a balance transfer offer in order to ensure it’s a smart move financially.
Will a Balance Transfer Save You Money?
A balance transfer may very well save you a significant amount of money, but it’s not necessarily a guarantee. As with most things in the world of credit, the potential costs and benefits depend on your individual situation and must be considered on a case-by-case basis.
If you are a typical consumer who has a few thousand dollars of credit card debt, then most of the time, it is probably fair to assume that a balance transfer could save you money if done correctly. That’s because many credit cards today have interest rates of 15% – 20% and often even higher, up to nearly 25%!
If you are paying that much in interest on any significant amount of credit card debt, then you could almost certainly save money by finding a balance transfer deal with a low interest rate and a low balance transfer fee.
However, it’s still important to crunch the numbers to make sure that a balance transfer is an option that makes sense for you. In order to easily determine whether a balance transfer could save you some money, you can use a balance transfer calculator.
Alternatively, if you’d rather do the math yourself, you can again use the credit card repayment calculator. Follow the steps below:
First, find out how much money it would take to pay off your debt without doing a balance transfer by entering the numbers that are applicable to your current credit card repayment scenario (i.e. the balance owed and interest rate of your current credit card and your expected monthly payment or ideal payoff time). Then, enter the figures that would apply if you were to transfer your balance to a different card. For example, you could plug in the interest rate from a promotional balance transfer offer that you have been pre-qualified for. Also, don’t forget to add on the balance transfer fee to your balance owed in this scenario, which you can easily figure out as we described in the above section. Once you’ve done that, the repayment calculator can tell you how much money you would end up paying toward your debt if you were to transfer your balance. Finally, compare the two results that you got in step 1 and step 2. If the number that you got in step 1 (your current repayment scenario) is lower than the number from step 2 (the balance transfer scenario), then that means you would pay less by staying the course with the repayment strategy you have now. If instead, the amount you calculated in step 2 is lower than the amount you calculated in step 1, then that indicates that a balance transfer with those parameters could save you money!
Comparing balance transfer offers and reading the fine print can help you decide whether a balance transfer will save you money in the end and which balance transfer card is best for you.
Beware of Retroactive Interest Rate Increases
One more important thing to consider when assessing the costs and benefits of a balance transfer is whether you will be charged retroactive interest if you cannot pay off the full balance by the end of the introductory low-interest period.
A retroactive interest rate increase means that you can be charged a higher interest rate on the balance you already transferred to the account in the past, back when you had a lower interest rate.
In other words, not only will you be charged interest on the balance that has not yet been paid, but you will also have to pay the higher interest rate “backdated” to the date you first transferred the balance—and on the original balance amount.
While it is rare for most major credit card issuers to charge retroactive interest, also called deferred interest, many retail store cards and some co-branded credit cards often do.
Although the Credit Card Accountability Responsibility and Disclosure Act (also known as the CARD Act) of 2009 banned banks from arbitrarily increasing credit card interest rates, retroactive rate hikes are still allowed if the contract you signed with your bank permits it.
Make sure to check the terms of your balance transfer card carefully so that you don’t get hit with a ton of surprise interest charges down the road. In addition, be aware that the banks are legally required to give you a minimum of six months at the introductory rate before they are allowed to ramp up the interest rate on your account.
Is a Balance Transfer Good for Your Credit?
In most situations, it is likely that a balance transfer can be beneficial to your credit, especially if you go the route of =opening a new credit card to which you can transfer your balance.
Opening a New Balance Transfer Credit Card
If you open a new balance transfer credit card, this can help your credit by adding available credit to your credit profile and thereby decreasing your overall utilization rate.
Opening a new account does have some drawbacks for your credit, such as the small negative impact of the hard inquiry and the reduction in your average age of accounts. These factors may hurt your score slightly. However, the benefit to your credit utilization will likely outweigh these factors, especially over time, as the impact of the inquiry diminishes and as you keep paying down your balance.
Transferring a Balance Between Existing Cards
The other balance transfer scenario is when you do not open a new balance transfer credit card, but rather, you transfer a balance between credit cards that you already own.
A balance transfer could potentially help both your individual and overall credit utilization ratios.Photo by Marco Verch, CC 2.0.
In this case, there is not as much potential to boost your credit score because you are not adding any additional available credit, which means your overall utilization ratio will stay the same. However, you may still be able to benefit by manipulating your individual utilization ratios.
As you know from our article about the difference between individual and overall utilization ratios, your individual utilization ratios can often be even more important than your overall utilization ratio. For this reason, if you max out even one credit card, that can have a significant impact on your credit.
If you can use a balance transfer to adjust your individual utilization ratios to more ideal levels, then this could improve your credit score. Let’s consider an example to help illustrate how this would work.
Example: Credit Card A has a $1,000 credit limit and is maxed out with a $1,000 balance, so it has an individual utilization ratio of 100%. Credit Card B has a $5,000 limit and no balance, so its utilization ratio is 0%.
What happens if we transfer the $1,000 balance from Card A to Card B?
Card A will then have a $0 balance and 0% utilization ratio, while Card B will then have a $1,000 balance and a 20% utilization ratio ($1,000 balance / $5,000 credit limit x 100% = 20% utilization).
Before the balance transfer, one of the accounts had a $0 balance and the other was completely maxed out. After the balance transfer, one account again has a $0 balance, but the other is only at 20% utilization, which is certainly a lot better than 100% utilization!
This example shows how it’s possible to use a balance transfer to improve the credit utilization portion of your credit score without actually changing the amount of debt you have.
If you’re considering trying this strategy, use our tradeline calculator to help you calculate both your individual and overall utilization ratios so that you can decide whether a balance transfer could help your credit utilization.
Do You Need Good Credit to Qualify for a Balance Transfer Credit Card?
Generally, good or excellent credit is needed in order to qualify for the best balance transfer offers, such as a long 0% APR introductory period and/or no balance transfer fees.
Generally, the best balance transfer offers are reserved for consumers with good or excellent credit.
According to NerdWallet, consumers who have good credit (i.e. a 690 or higher FICO score) might be able to qualify for a balance transfer card with an introductory 0% APR for a period of 12 to 18 months. Some cards may offer even longer introductory periods of up to 21 months.
In addition to having a high credit score, credit card issuers also want to see that you’re not already maxed out on all of your credit cards, which indicates to them that you are desperate for credit and may not be able to pay back all of your debt obligations.
Money Under 30 says that you’re most likely to get approved for a balance transfer card if you can get your overall revolving utilization ratio under 50%. Having at least a few years of credit age under your belt is also a good sign to lenders.
If you have fair credit (580 – 669 FICO score), then it will be more difficult to get a good balance transfer card. You may be able to qualify for a balance card transfer that doesn’t have all the perks of a balance transfer card for excellent credit. For example, it may have a shorter introductory period, a higher APR, or a higher balance transfer fee.
In this case, it’s even more important to do the math before going through with your balance transfer in order to make sure it will still save you money overall despite the fees.
Consumers who have a bad credit score are unlikely to qualify for a balance transfer credit card. Lenders don’t want to take on your debt if they think you are not likely to pay it back, which is what a low credit score indicates. However, there are other things you can do to reduce your credit card debt even if you have bad credit.
What to Do if You Can’t Get a Balance Transfer Card
If you’re not able to get approved for a new balance transfer credit card, don’t give up hope on paying off your debt. There are still a few options that may be a good fit for you.
Transfer Your Balance to a Card You Already Have
Check your existing roster of credit cards and see if any of them 1) have a lower interest rate than what you’re currently paying on your balance and 2) have enough available credit for a balance transfer. If the answer to both questions is yes, then it might be worth transferring your balance to the lower-interest card. However, you should always run the numbers first to be sure.
Get a Secured Balance Transfer Credit Card
Although the offers won’t be as appealing as those for excellent credit, it may be possible to qualify for a secured credit card with a lower introductory balance transfer APR than the rate you’re paying now. Keep in mind that you will need to have some cash on hand for the security deposit required for a secured credit card.
Having someone with good credit cosign with you may improve your chances of getting a better balance transfer offer.
Get a Co-Signer to Boost Your Chances of Approval
As you may recall from our article about “The Fastest Ways to Build Credit,” getting a co-signer with good credit can help you get approved for credit that you might have trouble qualifying for on your own.
If you can find a co-signer willing to accept responsibility for the debt if you cannot repay it, then you may have better chances of getting approved for a decent balance transfer card.
Get a Personal Loan to Pay Off Your Credit Card Debt
Another option for paying down debt with fair credit or bad credit is to apply for a personal loan and use the funds to pay off your credit cards, which is known as a debt consolidation loan. A debt consolidation loan allows you to combine all of your debt into one loan with one monthly payment and a lower interest rate.
However, personal loans for bad credit and fair credit can come with high interest rates and fees, so be sure to read the terms carefully before committing and steer clear of predatory lenders. In addition, watch out for loans that have prepayment penalties, especially if you know you’ll want to try to pay off your loan early.
Ask Your Credit Card Issuer for a Better Interest Rate
Don’t be afraid to call your credit card issuer and ask for a lower interest rate. Most people who request a better rate are successful!
One of the easiest credit hacks that can help save you money on interest and pay down your credit card debt faster is to call your credit card issuer and simply ask them for a lower interest rate. Make your case by explaining why you’ve been a good customer and why you feel that they should lower your rate.
Most people who do this are successful in getting a lower interest rate, so why not give it a try? One phone call could save you a significant amount of money on interest charges and help reduce your credit card debt burden.
Seek Credit Counseling and Create a Debt Management Plan
In extreme cases of credit card debt, it may be necessary to consider working with a credit counseling organization to create a debt management plan. With this option, a credit counselor can help you outline a plan to repay your debt and negotiate with your creditors on your behalf to lower your monthly payments and interest rate.
Keep Building Up Your Credit Score Until You Can Qualify for a Balance Transfer Card
Hopefully, you can use one or more of the above strategies to help make a dent in your debt repayment, but it’s also important to keep focusing on improving your credit over time. With time, patience, and good credit management, you may be able to qualify for a good balance transfer card in the future.
A balance transfer is a good idea when you have determined that it will save you money in the long term and when you have a plan to pay off your balance in the time allotted.
Generally, balance transfers may be a viable option for those with less than $15,000 in debt who can also afford to repay the balance in 21 months or fewer, according to NerdWallet.
On the other hand, a balance transfer may not make sense if you don’t have very much debt or if the interest rate you are currently paying is already fairly low. In these cases, it may not be worth paying the balance transfer fee just to save a little bit of money on interest.
Another important step in deciding whether a balance transfer would be a smart financial move for you is to think about your own psychology and behavior patterns. If you think that having extra credit available to you as a result of a balance transfer may tempt you to spend even more on your credit cards, then a balance transfer may ultimately do more harm than good.
How to Make Sure a Balance Transfer Will Work for You
If you’ve decided that a balance transfer might be a good debt repayment strategy for you, follow these tips to avoid paying interest and ensure that your balance transfer actually saves money in the end.
Choose the right balance transfer credit card.
Choose a card that’s going to be a good fit for you. Look for one with no annual fee, a long 0% APR introductory period, and low balance transfer fees. Read the terms of the card closely and watch out for contracts that allow for retroactive or deferred interest charges.
Crunch the numbers first.
Instead of just assuming a balance transfer is always a good idea, you need to do the math first to ensure that you’ll actually come out ahead in the end.
Don’t miss any payments.
Becoming 60 days late on a payment could sabotage your promotional interest rate and land you with a high penalty APR instead. Not only that, but you would get a derogatory mark on your credit report. Set up automatic bill pay on your account so that you never miss a payment.
Make a plan to pay off your balance before the introductory APR expires.
The point of a balance transfer is to tackle your debt faster while saving on interest, but in order to do so, you need to be able to pay off your balance before the end of the 0% APR introductory period. Make a plan to finish paying off your debt before your interest rate goes up and do your best to stick to it, even if your cash flow is a little tight for a while.
Don’t spend on the balance transfer credit card—or your old card.
Although it might be tempting to use your new balance transfer card for purchases or to run up the balance on your old card again after clearing the balance from it, this is just going to make it even harder for you to get out of debt.
In fact, having extra available credit from opening a new credit card means you could potentially get yourself into an even bigger mess than you were in before.
If you can’t pay off your balance by the end of the introductory period, consider whether you might want to do another balance transfer to a different card.
If you’re going to use a balance transfer as a way to help you pay off debt, then you first need to make sure you have addressed the spending habits that got you into debt in the first place, or the strategy could backfire and end up costing you more instead of saving you money.
If you don’t finish paying off your balance by the end of the promotional period, consider transferring your balance again to another 0% interest card.
Even the perfect plan can go awry when something unexpected happens, such as if you lose your job and can’t pay as much toward your debt as you would like. In other cases, your balance may simply be too large to realistically pay off during the introductory period.
Either way, if for some reason you aren’t able to finish paying off your balance by the end of the introductory promotional offer, then you may want to consider taking advantage of another 0% APR balance transfer offer. This will allow you to have some additional time to pay down your balance without accumulating interest.
Conclusion: Is a Balance Transfer Worth It?
A balance transfer can be a valuable option for those in the process of paying down high-interest debt. It could help you consolidate your payments, save money on interest, and chip away at your debt faster.
However, it’s not an instant cure-all for credit card debt.
You need to change the behaviors that got you into debt before looking into a balance transfer, otherwise, you might end up right back where you started, or even worse off than you were before.
If you do choose to do a balance transfer, it’s imperative to read the fine print, be aware of the terms of your balance transfer offer, and have a realistic strategy in place for paying off the balance.
For a quick summary of the main points of this article, check out NerdWallet’s video about balance transfers below.
Here’s a number that may shock you: about one in five American adults do not have a credit score.
About 26 million consumers are what the Consumer Financial Protection Bureau calls “credit invisible,” which means they don’t have any credit history. Another 19 million consumers have credit records that cannot be scored by a commonly used credit scoring model.
Added together, that means 45 million consumers in our country—nearly one in five adults—lack a credit score.
Without a credit score or a sufficient credit record, it can be extremely difficult to navigate modern society. Credit scores indicate a consumer’s credit risk and therefore serve as the basis for most lending decisions, along with income. It can be difficult or even impossible to obtain credit without one.
Credit scores may also be used by landlords to evaluate prospective tenants, by insurance providers to determine rates, and by utility companies when assessing deposits. Employers may pull prospective employees’ credit reports in order to make hiring decisions.
Therefore, consumers who are credit invisible or credit unscorable may face serious challenges in obtaining credit, housing, insurance, utilities, and employment.
Unfortunately, but perhaps not surprisingly, the problem of credit invisibility is concentrated among certain demographics of consumers.
In this article, we’ll address who is most impacted by credit invisibility and the consequences of lacking credit history. In addition, we will discuss potential solutions to this issue and explain how tradelines can help consumers become credit visible.
Defining Credit Invisibility and Unscorability
The Consumer Financial Protection Bureau published a report on credit invisibility in 2015 in which the Bureau determined how many Americans are lacking credit histories.
For the report, they analyzed a nationally representative data set containing the anonymized credit reports of nearly 5 million consumers. The CFPB purchased these anonymized credit reports from one of the major credit bureaus.
By subtracting the number of credit records in a census tract from the total number of adults living in the census tract, they were able to estimate the number of credit invisible consumers in each census tract.
Nearly 20% of consumers in the U.S. do not have a credit score due to a lack of credit history.
Overall, the CFPB found that more than 80% of the adult population in the United States (188.6 million consumers) have credit records with at least one of the major credit bureaus that contain enough information to be scored by the commercially available credit scoring model used for the CFPB’s research.
In contrast, 8.3% of adults have credit records that cannot generate a credit score using this credit scoring model. This group of 19.4 million consumers is divided about equally between consumers whose credit reports do not contain enough information to be scored (“insufficient unscored”) and consumers whose credit history is not recent enough to be scored (“stale unscored”).
This leaves 11% of the adult population who are completely credit invisible, meaning they do not have a credit record at all with any of the major credit reporting agencies.
What Are the Consequences of Being Credit Invisible or Unscorable?
The credit reporting agencies and credit scoring companies have been extremely successful in marketing their products to other industries. As a result, credit checks are now a standard procedure in many essential aspects of modern life. This means that being credit invisible can have devastating consequences for consumers.
Credit May Be Unattainable or Very Expensive
The “credit catch-22” is that in order to qualify for credit, you must already have a history of using credit. Lenders want to see a pattern of responsible borrowing before they take the risk of extending you credit.
Therefore, the obvious problem with having no credit history or minimal credit history is that it bars access to mainstream credit products such as loans and credit cards.
This lack of access to conventional credit options leads credit-invisible and unscored consumers to turn to “alternative financial service providers” (AFSPs), which include businesses such as payday lenders, pawn shops, and check-cashing stores. Unfortunately, services provided by AFSPs typically come with much higher costs than traditional credit products offered by banks.
Consumers who are credit invisible may turn to high-cost AFSPs such as payday lenders if they cannot access traditional credit products.
As most consumers do, those who are credit invisible or unscorable have legitimate credit needs, but unfortunately, their options are usually limited to high-cost AFSPs.
Housing May Be Difficult to Find and More Costly
Renting a home almost always involves a credit check for the prospective tenants. Often, landlords will simply reject applicants who do not have a credit record.
Some landlords may accept tenants who don’t have any credit history, but since it’s financially risky for them, they will likely charge more for the deposit or ask the tenant to prepay multiple months of rent.
Utility Providers and Wireless Carriers May Require a Deposit
Providers of utilities such as gas, electricity, water, trash, internet, and phone service also typically conduct credit inquiries on consumers. Knowing your credit score helps these companies judge how likely they think you are to pay your bills on time.
If you don’t have a credit score, they can’t make that judgment with confidence. To hedge their bets, the utility companies may ask you to pay a larger deposit upfront.
Insurance Could Be More Expensive
Credit scores are often considered as a factor when insurance companies decide on your rates for auto insurance as well as homeowner’s insurance, according to credit.com. If they can’t use a credit score to help determine your rate, they may end up charging you more.
Who Is Most Likely to Be Credit Invisible or Unscorable?
As you may remember if you’ve read our article on the topic of equal credit opportunity, the likelihood of being credit invisible isn’t the same for all consumers. In fact, there are strong correlations between credit invisibility and race, age, geography, and income.
Black and Hispanic Consumers Are More Likely to Lack Credit History
The CFPB discovered that consumers who are Black and Hispanic are more likely to be credit invisible or unscorable.
Compared to consumers who are White or Asian, Black and Hispanic consumers are more likely to be credit invisible or to have credit records that cannot be scored, according to the CFPB’s report.
Only 9% of White and Asian consumers are credit invisible, compared to about 15% of Black and Hispanic consumers. Similarly, only 7% of White adults have unscorable credit records, in comparison to 13% of Black adults and 12% of Hispanic adults.
The CFPB observed that this pattern was consistent across all age groups, which demonstrates that the differences between racial groups are established early on and never go away.
Credit Invisibility Is Correlated With Age
Younger consumers are far more likely to lack credit history than older adults. The CFPB report states that the vast majority (80%) of 18 to 19-year-olds are either credit invisible or have unscored credit records.
For the 20 to 24-year-olds age group, less than 40% are credit invisible or unscored. After the age of 60, however, this percentage begins to increase with age, although it’s not clear exactly what causes this effect.
Because credit history is gradually established over the course of one’s life, it makes sense that credit invisibility and unscored credit records would be more prevalent among young adults.
Income May Affect the Ability to Acquire Credit History
The CFPB found a strong correlation between income and having a credit record that can be scored. In low-income neighborhoods, nearly 30% of consumers are completely credit invisible, while another 15% are unscorable. In total, nearly half of consumers in low-income areas either have no credit history at all or not enough credit history to generate a credit score.
In contrast, in higher-income neighborhoods, only 4% of consumers are credit invisible and an additional 5% have credit files that cannot be scored.
These results aren’t particularly surprising. Income is often even more important than credit score when it comes to qualifying for credit. Even without having any credit history, a consumer with a high income will likely find it easier to qualify for credit than a low-income consumer and thus is more likely to open credit cards or take out loans than a low-income consumer.
Rates of credit invisibility are especially high in low-income neighborhoods.
On the other hand, since low-income consumers may have difficulty accessing traditional sources of credit, they may turn to AFSPs such as payday lenders, which typically do not report to the credit bureaus. This hypothesis may help partly explain why there is such a stark difference in the likelihood of credit invisibility between higher-income and lower-income consumers.
When consumers in low- and moderate-income neighborhoods do become credit visible, according to the CFPB, they tend to make the transition later in life than consumers in middle- and upper-income neighborhoods.
In addition, the CFPB report on “Becoming Credit Visible” concluded that consumers who reside in low-income neighborhoods are three times as likely than consumers in high-income neighborhoods to first acquire credit history from non-loan items such as collection accounts or public records (27% of low-income consumers versus just 8% of high-income consumers).
In contrast, consumers in upper-income neighborhoods are much more likely to start their credit records by opening credit cards.
Since the non-loan credit products are generally derogatory items like collections, this statistic suggests that low-income consumers are far more likely to start off their credit history with bad credit. The negative marks could hinder these consumers from being able to qualify for credit for a long time, which means they would likely have few, if any, opportunities to improve their credit profile with on-time payments toward loans or credit cards.
Geographic Regions of Credit Invisibility
Another CFPB report, this one from 2018, looked at geographic patterns in credit invisibility, such as differences between urban and rural areas as well as the problem of “credit deserts.”
Credit Deserts
Credit invisibility tends to be more common in rural areas.
A “credit desert” is generally defined as an area that lacks access to traditional financial service providers. However, they may have access to AFSPs such as payday lenders.
In these areas, rates of credit invisibility may be higher due to a lack of access to traditional sources of credit.
Urban vs. Rural Areas
The highest proportion of credit invisible consumers is found in rural areas, even in upper-income neighborhoods. This may be related to a lack of access to the internet in rural areas.
What Is Being Done to Solve Credit Invisibility?
Credit invisibility in America is a serious problem that is not going to be solved overnight. It’s going to take overarching structural changes to address the root causes of credit invisibility and credit inequality.
Let’s explore the potential solutions currently being researched by the U.S. government and by the credit scoring and reporting companies to address credit invisibility and credit inequality.
Government Programs to Support Credit Access
In the CFPB’s Annual Financial Literacy Report for 2019, the Bureau described their efforts to support inclusion and serve historically underserved communities by assisting local governments that are working to address credit invisibility in their cities.
These municipal programs typically focus on helping consumers build good credit by providing consumers with credit education, credit services, and credit products.
The CFPB worked with four cities in the fiscal year 2019 (Atlanta, Georgia; St. Louis, Missouri; Shawnee, Oklahoma; and Klamath Falls, Oregon), so it appears that government efforts to combat credit invisibility thus far have been localized and small-scale.
Alternative Credit Data
Using alternative data, consumers may be able to get credit for their rent and utility payments.
Alternative credit data is data derived from sources other than traditional credit reporting information. This may include data from ASFPs, utility payments, rent payments, full-file public records, and financial information that consumers can choose to share, such as bank account information (known as “consumer-permissioned data”).
While alternative data does have the potential to help millions of consumers become credit visible, for a majority of them, that may not be a good thing. FICO’s preliminary research using their alternative data scoring model showed that two-thirds of newly scored consumers ended up with a score that was below 620, which is considered bad credit.
Having bad credit can be even worse than having no credit, so for these consumers, the use of alternative data would hurt more than it helps.
Furthermore, the National Consumer Law Center has argued that the negative effects of such a credit scoring system would disproportionately impact people of color and low-income consumers.
Alternative data may represent a possible solution to credit invisibility, but it should be implemented in a way that does not simply perpetuate and amplify the credit inequality that consumers already struggle with.
How to Become Credit Visible
It’s clear that credit invisibility, lack of access to credit, and inequality in the credit system are not going away anytime soon.
For now, however, we can at least discuss some strategies that individual consumers can use to start building credit and transition from being credit invisible to credit visible in a way that sets them up for success.
Becoming Credit Visible Through Credit Piggybacking
It’s incredibly difficult to get approved for a primary account when you don’t have any credit history to show lenders that you can be trusted. However, you can start to build credit history even without opening a primary account by piggybacking on someone else’s credit.
Piggybacking on another person’s credit can help consumers transition out of credit invisibility.
Credit piggybacking is when you become associated with someone else’s credit record for the purpose of building credit. This is actually a fairly common way for consumers to start establishing credit.
In “Becoming Credit Visible,” the CFPB noted that about 15% of consumers opened their first credit account with a co-borrower, while another 10% first created their credit record by becoming an authorized user on someone else’s tradeline. This means that in total, about one in four consumers initially gain credit history with the help of someone else via credit piggybacking.
There are three main ways to credit piggyback.
1. Get a Cosigner or Guarantor
When you can’t get credit on your own, having someone who has good credit who can vouch for you as a cosigner or guarantor can make a huge difference in your chances of being approved for credit.
However, it can be difficult to find someone to take on this role, since it not only requires someone with good credit but someone who would be willing to be on the hook for your debt if you cannot repay it.
2. Open a Joint Account With Someone
A joint account is an account that you share with another person. Both parties have access to the account and both people can be held responsible for the debt.
If you know someone with good credit who is willing to open a joint account with you, their positive credit history can help the two of you get approved, similar to getting a cosigner or guarantor. Since both parties jointly share responsibility for the account, you should only open an account with someone you trust completely.
Joint credit cards are not very common, so your options for opening a joint account may be limited.
3. Become an Authorized User on a Credit Card With Age and Positive Payment History
Credit invisible consumers can add credit history to their credit reports by becoming authorized users on seasoned tradelines.
While the previous two credit establishment strategies involve opening a new primary account, which means you’d be starting out with no credit age, the authorized user method provides a shortcut to gaining years of credit history.
When you become an authorized user on a seasoned tradeline (an account with at least two years of age), often the full history of that account is reflected in your credit report as soon as the next reporting date for that account. In other words, you can add years of credit age and positive payment history to your credit file in just a few weeks and sometimes even faster.
The CFPB’s research showed that 19% of consumers (about one in five) had at least one authorized user account on their credit record, and over half of these consumers had transitioned out of credit invisibility as a result of one of their authorized user accounts. On average, consumers gained at least two years of credit history from authorized user accounts.
Not all banks report authorized user data, but when you buy tradelines from Tradeline Supply Company, LLC, you can be confident that we only work with banks that have been proven to reliably report authorized user information.
In addition, authorized user tradelines can increase the total credit limit of your profile.
For these reasons, the authorized user strategy is the fastest and easiest way for those who lack credit history to start building credit.
Once you’ve established some credit history through credit piggybacking, you can look into opening your own primary accounts.
Credit-Builder Loans
A credit-builder loan is a good option for those without credit history since they are easier to get approved for than traditional loans.
A credit-builder loan is a type of installment loan designed for those who are just starting out on the path to building credit. Lenders are able to offer these loans to consumers with thin credit files or no credit history because they are set up so that the borrower makes all the payments toward the loan before receiving the funds.
See our article on credit-builder loans for more information on how they work and whether a credit-builder loan could help you.
Secured Credit Cards
Those with limited credit history may also benefit from opening a secured credit card. Secured credit cards require you to make a security deposit, the amount of which then becomes your credit limit. Secured cards typically have low credit limits, but they can help you build credit by reporting your payment history to the credit bureaus.
Retail Store Credit Cards
A retail store credit card may also be a good option for those who do not have a credit history, as they tend to be easier to get approved for than bank credit cards. Just be careful not to carry a balance from month to month since retail cards also tend to have higher interest rates.
For example, the CFPB’s report on becoming credit visible found that low-income consumers were significantly less likely than higher-income consumers to use credit piggybacking methods to establish credit.
Consumers in low- and moderate-income neighborhoods were found to be 48% and 25% less likely, respectively, than consumers in middle-income neighborhoods to become credit visible through a joint account.
Similarly, consumers in lower-income neighborhoods who had recently transitioned out of credit invisibility were less likely to have authorized user accounts on their credit files compared to those in higher-income areas.
In addition, lower-income consumers were less likely to become credit visible via an authorized user tradeline. Lower-income consumers who did have their credit records created as a result of an authorized user tradeline gained less credit history than higher-income consumers.
Since credit piggybacking requires you to partner with someone who has decent credit and/or income, it would seem that perhaps low-income consumers simply do not have access to these resources and partnerships within their social networks.
In the words of the CFPB, “…a lack of co-borrowers may be an important contributor to credit invisibility in low- and moderate-income neighborhoods.”
Today, authorized user tradelines are affordable and accessible to more consumers than ever before.
As we learned earlier, credit invisibility is significantly more prevalent among Black and Hispanic consumers. Altogether, the data suggest that consumers who are Black, Hispanic, or low-income are at a severe disadvantage when it comes to establishing credit and building a credit history.
These are just a few of the many ways in which inequality is manifested throughout the credit system. Simply put, privileged consumers have the opportunity to build credit through credit piggybacking while many others are denied this opportunity.
Historically, the strategy of building credit by becoming an authorized user was primarily limited to the wealthy. Today, however, a marketplace exists where consumers of all backgrounds can take advantage of the benefits of authorized user tradelines.
In addition, there is a wealth of information online that consumers can use to educate themselves on the credit system and start off on the right foot when it comes to building credit.
As a leader in the tradeline industry, Tradeline Supply Company, LLC has opened the door to equal credit opportunity for thousands of consumers. By offering some of the lowest tradeline prices in the industry, we have made tradelines more affordable and accessible to the consumers who need them most.
Revolving accounts and installment accounts are both important account types when building credit, but they are not equally powerful when it comes to your credit score. Which type of account has a greater impact on your credit score? Keep reading to find out.
Revolving Debt vs. Installment Debt: Definitions Revolving Credit Account Definition
A revolving credit account is an account that allows you to “revolve” a balance, which means you do not have to pay the full outstanding balance on the account every month.
Revolving accounts typically have a credit limit up to which you can charge up to. You can choose how much to borrow from the account; you do not have to use the full credit limit. Once you make payments against the balance, that amount of credit is then available for you to use again.
Revolving accounts include lines of credit and credit cards.
Installment Credit Definition
Installment credit, in contrast, is credit where the full loan amount is disbursed at one time. You then make regular payments of a fixed amount toward the debt over a certain period of time.
Installment debt includes mortgages, auto loans, student loans, personal loans, credit-builder loans, and any other type of loan that has a regular payment schedule of fixed payments.
How Installment and Revolving Debts Affect Your Credit Score Revolving Accounts and Your Credit Score
Five main factors are considered by FICO scores.
As you know from our article on credit scores, there are five main factors that influence your FICO score:
Revolving accounts can have a significant effect on each of these five factors.
As far as payment history, it’s important to pay your bills on time every single month just like any other account. However, with revolving accounts, you do not have to pay off the full balance every month. Instead, there is likely a minimum payment amount that you will be required to make. If you make a payment that is less than the minimum payment, your account will still be considered delinquent.
A lot of the power of revolving accounts comes from their influence on your utilization. This is because the credit utilization factor of your credit score places much more importance on the utilization of your revolving accounts.
Having high revolving utilization means that you are using a large portion of your available credit, which indicates to lenders that you might be at an increased risk of default. That’s why high credit utilization is bad news for your credit score.
If you run up a balance on a credit card and then only pay the minimum payment each month, you will be increasing your credit utilization. Since utilization makes up 30% of your FICO score, carrying a balance on your revolving accounts can seriously reduce your score.
Credit age is also important since it goes hand-in-hand with payment history. The longer you keep your revolving accounts open, the better. Even after they are closed, they can still continue to age and impact your average age of accounts.
Having a few different revolving accounts is also beneficial to your credit mix. Consumers with FICO scores of 785 and up have an average of seven credit cards in their credit files, including both open and closed accounts. In fact, if you don’t have enough revolving accounts, you can get dinged for a “lack of revolving accounts,” because without them there is not enough information to judge your creditworthiness, according to Discover.
Having too many inquiries for revolving accounts or too many new revolving accounts can hurt your credit score. Typically, each application for a revolving account is counted as a separate inquiry.
Installment Loans and Your Credit Score
When it comes to your credit score, installment loans primarily impact your payment history. Since installment loans are typically paid back over the course of a few years or more, this provides plenty of opportunities to establish a history of on-time payments.
Since installment loans typically don’t count toward your utilization ratio, you can have a high amount of mortgage debt and still have good credit.
Having at least one installment account is also beneficial to your credit mix, and installment debt can also impact your new credit and length of credit history categories.
What installment loans do not affect, however, is your credit utilization ratio, which primarily considers revolving accounts. That’s why you can owe $500,000 on a mortgage and still have a good credit score. This is also why paying down installment debt does not help your credit score nearly as much as paying down revolving debt.
This is the key to understanding why revolving accounts are so much more powerful than installment accounts when it comes to your credit score. Credit utilization makes up 30% of a credit score, and that 30% is primarily influenced by revolving accounts, not installment accounts.
In addition, with a FICO score, multiple inquiries for certain types of revolving accounts (mortgages, student loans, and auto loans) will count as just one inquiry as long as they occur within a certain time frame. As an example, applying for five credit cards will be shown as five inquiries on your credit report, whereas applying for five mortgage loans within a two-week period will only count as one inquiry.
Why Are Revolving and Installment Accounts Treated Differently By Credit Scores?
Now that you know why revolving accounts have a more powerful role in your credit score than installment accounts, you might be wondering why these two types of accounts are considered differently by credit scoring algorithms in the first place.
According to credit expert John Ulzheimer in The Simple Dollar, it’s because revolving debt is a better predictor of higher credit risk. Since credit scores are essentially an indicator of someone’s credit risk, more revolving debt means a lower credit score.
Since revolving accounts like credit cards are usually unsecured, they are a better indicator of how well you can manage credit.
Why is it that revolving debt better predicts credit risk than installment debt?
The first reason is that installment loans are often secured by an asset such as your house or car, whereas revolving accounts are often unsecured. As a result, you are going to be less likely to default on an installment loan, because you don’t want to lose the asset securing the loan (e.g. have your car repossessed or your home foreclosed on). Since revolving accounts such as credit cards are typically unsecured, you are more likely to default because there is nothing the lender can take from you if you stop paying.
In addition, while installment debts have a schedule of fixed payments that must be paid every month, revolving debts allow you to choose how much you pay back each month (beyond the required minimum payment). Since you can decide whether to pay off your balance in full or carry a balance, revolving accounts are a better reflection of whether you choose to manage credit responsibly.
How to Use Revolving Accounts to Help Your Credit
Since revolving accounts are the dominant force influencing one’s credit, it is wise to use them to your advantage rather than letting them cause you to have bad credit.
Here’s what you need to do to ensure your revolving accounts work for you instead of against you:
Make at least the minimum payment on time, every time. Don’t apply for too many revolving accounts and spread out your applications over time. Aim to eventually have a few different revolving accounts in your credit file. Keep the utilization ratios down by paying off the balance in full and/or making payments more than once per month. Use our revolving credit calculator to track your utilization ratios. Avoid closing revolving accounts so that they can continue to help your credit utilization.
Revolving Accounts vs. Installment Accounts: Summary
Revolving accounts are given more weight in credit scoring algorithms because they are a better indicator of your credit risk. Revolving accounts play the primary role in determining your credit utilization, while installment loans have a much smaller impact. High utilization on your revolving accounts, therefore, can damage your score. With a FICO score, inquiries for installment loans are grouped together within a certain time frame, while inquiries for revolving accounts are generally all counted as separate inquiries. Therefore, inquiries for revolving accounts can sometimes hurt the “new credit” portion of your credit score more than inquiries for installment accounts. Use revolving accounts to help your credit by keeping the utilization low and keeping the accounts in good standing.
What is credit piggybacking? If you’re not sure what this strange term could possibly mean, you’re definitely not alone.
Credit piggybacking, also referred to as “credit card piggybacking” or “piggybacking credit,” is a commonly used credit-building strategy. However, many people are still unaware of how to access this strategy and use it to their advantage.
In this article, we’ll define what piggybacking for credit means and how it can help your credit.
Credit Piggybacking Definition
The general definition of credit piggybacking is building credit by sharing a credit account with someone else. For example, spouses, business partners, and parents and children are all common examples of people who often share credit.
There are three main ways in which credit piggybacking can take place, which we discuss in more detail in “The Fastest Ways to Build Credit”:
Opening an account with a cosigner or guarantor is one way to piggyback on someone’s good credit.
Opening an account with a cosigner or guarantor, which is someone who promises to be responsible for the debt if the primary borrower cannot repay it. If the cosigner or guarantor has good credit, the borrower may be able to qualify for credit that they could not qualify for on their own or qualify for better terms. Opening a joint account with another person, which means both parties have full access to the account and are both held fully responsible for the account. By opening a joint account with a partner who has good credit, a person with less-than-ideal credit may be able to open an account that they wouldn’t have qualified for on their own or get more favorable terms. Becoming an authorized user for the purpose of credit card piggybacking, meaning you are not responsible for the debt, but the entire history of that account may be reflected in your credit file, regardless of when you were added to the account.
When people talk about piggybacking credit, they are usually referring to the method of piggybacking using authorized user tradelines.
How Does Authorized User Piggybacking Work?
Here’s how piggybacking works as an authorized user:
When you are added as an authorized user to someone’s credit card, often (depending on the bank), the full history of that account will then be shown in your credit report, regardless of when you were added to the card. Therefore, piggybacking can almost instantly add years of perfect payment history to the authorized user’s credit file. Authorized user tradelines can affect many important credit variables, such as your average age of accounts, age of oldest account, overall utilization ratio, number of accounts, mix of accounts, and more. Historically, only the wealthy and privileged were able to use piggybacking as a credit-building strategy. Now, there is a marketplace where tradelines can be bought and sold, which is helping to democratize the credit system and provide equal credit opportunity.
The issue of piggybacking went all the way to Congress, which upheld consumers’ rights to use authorized user tradelines.
Is Piggybacking Credit Legal?
While Tradeline Supply Company, LLC does not provide legal advice, we can provide evidence that supports the idea that piggybacking credit is legal.
Firstly, piggybacking for credit is an extremely common practice that has been in use since the advent of credit cards. Studies estimate that 20-30% of Americans who have credit records have authorized user accounts in their credit file.
In addition, about 25% of people who have credit reports initially established their credit files by piggybacking in one way or another.
Many banks actually encourage consumers to add authorized users for the express purpose of boosting their credit scores.
You may have heard about FICO trying to take away authorized user privileges in 2008. But what you probably didn’t hear about was FICO backing down after a congressional hearing that involved the Federal Trade Commission and Federal Reserve Board.
During the hearing, FICO admitted that they could not legally discriminate between spousal AUs and other users, because this would unlawfully violate the Equal Credit Opportunity Act.
Since the U.S. Congress has upheld consumers’ rights to use authorized user tradelines, it seems reasonable to conclude that authorized user tradelines are legal.
However, it is important to get your tradelines from a reputable source. Some tradeline companies use illegal credit profile numbers (also known as CPNs) to mislead creditors as well as consumers. That’s why consumers should only work with tradeline companies that don’t use or sell CPNs—learn more about CPNs and why Tradeline Supply Company, LLC does not accept them.
Does Piggybacking Credit Still Work?
As we discussed in “Do Tradelines Still Work in 2020?”, credit piggybacking still works, and we think it will be around for a long time.
Piggybacking credit is a well-established credit-building strategy that has been defended in Congress and promoted by banks. It is a significant part of our credit system.
Thanks to the Equal Opportunity Credit Act, authorized user tradelines are still a very important factor in credit scoring models.
Not only that, but even if FICO were to devise an algorithm intended to exclude piggybackers, it would be quite some time before lenders could implement it on a large scale. The slow-moving financial industry is still using FICO scores that were developed decades ago.
Piggybacking companies bring together buyers and sellers of authorized user tradelines.
What Do Piggybacking Companies Do?
Friends and family will often allow each other to piggyback, but for many people, it’s difficult to find someone with good credit to piggyback on. A third party can play a role in helping to connect people who are looking to purchase seasoned tradelines with people who have high-quality tradelines to offer.
Piggybacking companies, more commonly referred to as tradeline companies, simply facilitate the buying and selling of authorized user tradelines.
The tradeline company acts as an intermediary by marketing the tradelines to consumers, protecting the identities of the clients, and preventing fraud.
At Tradeline Supply Company, LLC, we provide an innovative platform through which users can buy and sell tradelines entirely online. We also provide educational resources so consumers can familiarize themselves with the credit system and how piggybacking works.
How Long Does Piggybacking Credit Take Before I See the Tradelines on My Credit Report?
The account you are piggybacking on can show up on your credit report in as little as 11 days, depending on several factors relating to the particular tradeline.
Each piggybacking tradeline has its own reporting cycle, and Tradeline Supply Company, LLC provides a “purchase by date” before which you must purchase your tradeline in order for us to guarantee that it will post in the coming reporting cycle. If you miss the purchase by date, it will simply show up in the following cycle.
If you have purchased a seasoned tradeline that you believe has not posted, first, check to make sure that the entire reporting period has passed, then check your credit reporting service again to verify that it still has not posted. If you take these steps and determine your tradeline has not posted, please reach out to us for support and we will rectify the situation.
Can Piggybacking Hurt Credit?
If credit piggybacking is done incorrectly, it can actually backfire and hurt your credit.
Because the full history of the credit account is reflected in the credit file of the piggybacker, that means any derogatory factors will show up, too.
For example, if the account has any late or missed payments, that could hurt the authorized user rather than help. Similarly, a high utilization ratio on the account could also damage the authorized user’s credit.
That’s why we recommend going with a reputable piggybacking company who guarantees a perfect payment history and a low utilization ratio (15% or lower) on all tradelines. This will virtually eliminate the risk of your credit being hurt by these factors.
The only other way piggybacking could hurt your credit is if you choose the wrong piggybacking credit card. It’s essential to choose the right tradelines for your credit file. To do this, you’ll need to figure out your average age of accounts and how adding a tradeline could affect this statistic.
For example, if your average age of accounts is five years and you decide to piggyback on a tradeline that is two years old, this would bring down your average age of accounts, which is the opposite of what you want to achieve with tradelines.
If you’ve just resolved some errors on your credit report or paid down your balances and you’re wondering how to update your credit report information fast so that you can improve your credit rating quickly, you may be interested in something called a rapid rescore. You can find the answers to all of your questions about rapid rescores in this article.
What Is a Rapid Rescore?
A rapid rescore is a process that mortgage lenders use to manually update your credit report information with the credit bureaus so that your score can be recalculated quickly. Instead of waiting for your creditors to report your information to the bureaus periodically, your mortgage lender can provide the information to the bureaus and request that they update your credit report right away.
When Would You Need a Rapid Rescore?
Since mortgage loans are time-sensitive, a rapid rescore can definitely be a useful tool in certain situations. If you are in a situation where there’s been a change to one or more of your tradelines that has not yet been reflected in your credit report, and you need to rapidly increase your credit score in order to qualify for better mortgage terms, you may want to consider requesting a rapid rescore.
Rapidly increasing your credit score before getting approved for a mortgage could mean qualifying for a lower interest rate and therefore huge savings in interest over the term of your loan.
For this reason, the best candidates for a rapid rescore are consumers who have credit scores between the mid-600s and the 720s who are five to 10 points shy of their target score, according to Bankrate. The maximum benefit of a rapid rescore is gained by borrowers who are able to get bumped up to the next credit score “tier” in order to qualify for a lower interest rate, which can ultimately save them thousands of dollars over the course of the mortgage.
If you have recently paid down some of your revolving balances, a rapid rescore could get your credit score to reflect your lower credit utilization sooner.
Of course, it’s always best to plan ahead well in advance of applying for a mortgage so you have plenty of time to get your credit score in great shape first. However, sometimes situations may arise in which a rapid rescore would be beneficial. Some examples of situations that might call for a rapid rescore include:
If you have recently received a credit line increase If you have just paid down the balance of an account If you have been added as an authorized user to an account in good standing or removed from a derogatory account If you need to dispute inaccurate negative items on your credit report, such as late payments that were being reported in error
Remember, credit utilization makes up 30% of your credit score, so any action you take to improve your credit utilization ratio, such as paying down account balances, may help boost your score and get you a better deal on your mortgage.
How to Get a Rapid Rescore
If you need to know how to improve your credit rating quickly through a rapid rescore, keep in mind that not just anyone can request one. Rapid rescores are only offered by mortgage lenders, so, unfortunately, you cannot get a rapid rescore on your own. If you are in the process of applying for a mortgage, ask your lender if they can complete a rapid rescore for you.
How Long Does a Rapid Rescore Take?
The great thing about a rapid rescore is that it can get the credit bureaus to update your credit report within just a few days, instead of waiting for weeks or even months for it to happen automatically. Once your mortgage lender submits all the necessary documentation to initiate the rapid rescore, you should see your new results in three to seven business days.
A rapid rescore can update your credit report in days instead of weeks, which can be useful when applying for a mortgage.
How Much Does It Cost to Do a Rapid Rescore?
According to creditcards.com, the cost of a rapid rescore typically ranges from around $25 – $30 for each account that needs to be updated. However, the mortgage lender should be paying for the rescore, not the consumer.
The reason for this is that a rapid rescore is considered an expedited dispute process, and the Fair Credit Reporting Act says that consumers cannot be charged to dispute inaccurate information.
Does Rapid Rescore Really Work?
When it comes to rapid rescore results, they will likely be the same as if you had gone through the normal channels to submit a dispute. Remember, a rapid rescore is essentially an accelerated credit report dispute. The rescore itself is not guaranteed to make your credit score increase.
If you are using the rapid rescore to remove inaccurate information that has been dragging down your credit score, then you should see positive results from the rescore.
However, just as in traditional credit repair, a rapid rescore cannot be used legitimately to try to remove information that is accurate. If the derogatory items on your credit report are accurate and timely (from within the past seven years), then a rapid rescore won’t be able to help you.
Rapid Rescore Companies
Companies that offer the rapid rescore service to borrowers include mortgage lenders such as banks and credit unions. Not all mortgage lenders offer the service, though, since it can end up being expensive and lenders are not allowed to charge borrowers for a rapid rescore.
If you are getting ready to apply for a home loan and you think you may want to have the option of doing a rapid rescore, ask the banks or mortgage lenders you are interested in whether the companies offer the rapid rescore service to borrowers.
If you find any rapid rescore companies advertising their services to individual consumers, use caution and watch out for possible scams.
You can use our tradeline calculator or a credit score simulator to get a general idea about whether a rapid rescore could benefit your score.
Rapid Rescore Calculator
To calculate your rapid rescore results, you don’t need a specific rapid rescore simulator. Just use your favorite credit score simulator and plug in the numbers that make sense for your situation.
If you are planning to do a rapid rescore after paying off $5000 in credit card debt, for example, you could enter that information into the credit score simulator to calculate what the results of your rapid rescore might be. You could also try our Tradeline Calculator to see how your credit utilization ratios would change as a result of paying down some of your accounts or transferring balances.
However, keep in mind that any credit score simulator is likely not going to produce the exact same results that your lender will see. Online credit score calculators typically use simplified credit scoring algorithms to produce estimates, which may not always match up with the numbers the mortgage lender sees when they pull your FICO scores.
How to Do a Rapid Rescore Yourself
Unfortunately, it’s not possible to do a DIY rapid credit rescore on your own, since only mortgage lenders can perform this service on your behalf.
What you can do is prepare thoroughly to ensure your dispute will be accepted. As with a normal credit report dispute, you’ll need to provide proof to support your claim. This often means obtaining a letter from the creditor verifying the change that you can then provide to the credit bureaus.
For example, if you have just paid down the balance on one of your credit cards, you can ask the credit card company to send you a letter verifying the updated tradeline information. Your mortgage lender can then submit this to the credit bureaus to get you a rapid rescore.
How to Update Credit Report Information
To update your credit report information yourself, you can obtain a letter from your creditor and forward it to the credit bureaus.
Although you can’t officially do a DIY rapid credit rescore yourself, you can trigger a manual credit report update by submitting your documentation directly to the credit bureaus. However, your tradeline may not be updated as quickly as when your mortgage lender pays for the privilege of an expedited update.
To summarize, follow these steps to manually update tradelines in your credit report:
Contact the creditor and request that they send you a letter that verifies the updated account information. Send this letter to the credit bureaus and request that they update the information in your credit file.
Once they receive your information, the credit bureaus should then update the information for that tradeline in your credit profile.
In addition, some banks may report a tradeline in the middle of a reporting cycle if you pay down the balance to zero.
Rapid Rescore Success Stories
If you’re interested in reading some rapid rescore success stories, you can find plenty of them online. Try searching in some online credit forums to see the rapid rescore results other consumers have been able to achieve.
Some consumers may see a credit score boost of up to 100 points after a rapid rescore, although results vary widely based on what information is being changed.
Some sources say they have seen credit score increases of up to 60 points after a rapid rescore, while others claim that a rapid rescore could potentially boost one’s credit score by up to 100 points. However, keep in mind that the result of a rapid rescore is going to depend on what information in your credit report is being updated and how severely it had been affecting your score.
Conclusions on Rapid Rescores
Although a rapid rescore won’t necessarily raise your credit score per se, it can be a very useful tool if you need to get your credit report and credit score updated within a few days rather than waiting weeks or even months for the credit bureaus to update your information normally.
When applying for a mortgage, a rapid rescore may be used to increase your chances of getting the best possible rate on your loan by getting positive changes to reflect on your credit report and in your credit score quickly.
Only some mortgage lenders offer this service, so check with your lender to see if they provide rapid rescores to their clients.
In addition, it’s a good idea to check your credit reports several months in advance so that you have plenty of time to correct any errors and pay down your balances. That way, you can decrease the likelihood that you will have to rely on a rapid rescore when applying for a mortgage.
There are plenty of articles out there about the fastest ways to raise a credit score, but the focus of this article and infographic is a bit different. Rather than giving you shortcuts on how to boost your credit score, we’re talking about the fastest ways to build credit for long-term success.
While raising a credit score can be accomplished in various ways, not all of them involve actually building your credit profile by adding more accounts. Credit repair companies may offer tactics on how to raise credit scores by removing negative, inaccurate information from your credit file, but this strategy doesn’t do anything to build your credit history by establishing new accounts. They may remove harmful inaccurate information, but they often lack in assisting with credit re-establishment.
Opening a mix of several different accounts and keeping them in good standing is crucial for building a good credit record, but this process takes time. It is well-known that a credit account needs at least two years of history to be considered “seasoned,” which is when it has enough age to show that you can properly handle the account and therefore begins to improve your credit score.
Before this point, when an account is still young, it represents a risk to the lender because they don’t know if you will use the credit responsibly. They don’t know if you are going to max out your cards, miss payments, etc. That’s why new accounts often hurt your credit temporarily.
So what can you do if you don’t have 2+ years to open new accounts and wait for them to age? What if you can’t get approved for credit on your own to begin with? How do you build good credit fast?
Piggybacking: The Fastest Way to Build Credit
The answer to how to build credit fast is piggybacking. This term refers to the practice of building credit by becoming associated with someone else’s credit accounts.
This might sound surprising, but studies have shown it is a very common practice. A study of over 1 million consumers by the Consumer Financial Protection Bureau showed that nearly a quarter of consumers transitioned out of credit invisibility by piggybacking on the creditworthiness of others. According to a survey by creditcards.com, 86 million Americans have shared a credit card account with someone else!
Additionally, a study by the Federal Reserve Board found that about 30% of consumers with a scorable credit record have at least one authorized user account on their credit record.
There are three main ways that piggybacking occurs: getting credit with a co-signer, being a joint credit account holder, or becoming an authorized user.
Build Credit Fast With a Cosigner or Guarantor
One very common strategy for someone who needs help building credit fast is to apply for credit with a cosigner or guarantor, which is a person who can be responsible for the debt in the event that the primary borrower cannot repay it. The cosigner or guarantor does not typically receive access to the funds or make payments on the debt unless the primary borrower is no longer able to.
A cosigner or guarantor can help a borrower get credit by pledging to be responsible for the debt if the primary borrower cannot repay it.
Pros:
Since the cosigner or guarantor’s credit record and income are considered when applying for credit, the primary borrower may be able to piggyback off the cosigner’s good credit to qualify for credit or get better terms.
Cons:
Getting credit with a cosigner or guarantor means opening a new account, which dings credit temporarily. It is still going to take a few years for the account to age enough to help build your credit score. It may be difficult to find someone willing to cosign on a loan or credit card since it is a risky proposition without much benefit for the cosigner. Some lenders, particularly credit card issuers, may not even allow cosigners. It may be difficult or impossible to remove the cosigner in the future, so the cosigner must be willing to potentially be permanently associated with the account.
Building Credit as a Joint Account Holder
As joint account holders, two parties apply for one account that they can both use. Both parties have full access to the account and both are held fully responsible for the account. Joint accounts are most commonly used by spouses with shared finances.
Joint accounts can help build credit, but they are most commonly used by spouses with shared finances.
Pros:
Both applicants are considered by the lender when issuing credit. By pairing with someone with good credit, a person with less-than-perfect credit may be able to open an account that they wouldn’t have qualified for on their own, or get more favorable terms. If the joint account is kept in good standing over time, it can continue to help build the credit of the user who needs to improve their credit profile. A joint account can make it easier for two people to manage their finances together. Both account holders have access to the privileges associated with the account, such as rewards. A joint account is also considered a primary account since each borrower has full access to the account and full liability for the debt.
Cons:
Opening a joint account means adding a new account to your credit report, which decreases the average age of accounts and can temporarily hurt your credit. The account will still need at least two years to age enough to help improve your credit score. Both users are fully responsible for the debt. If one person maxes out the account, the other can legally be held responsible. It’s always possible that an event such as a breakup could change the relationship between account holders, which could make it difficult to manage the account. Disagreements over the account could damage the relationship between account holders. It might be difficult to find someone to open a joint account with you if you do not have a spouse or if your spouse does not want to combine finances. Not all lenders provide joint credit accounts, so options for opening a joint account are limited. Many joint accounts do not provide the option of removing a joint account holder, so both users are often attached to the account permanently unless they decide to close it altogether.
Authorized user credit piggybacking is one of the fastest ways to build credit. Photo via seniorliving.org.
How to Build Credit Fast as an Authorized User
You’re probably already familiar with the concept of piggybacking credit as an authorized user. The classic example is parents who add their children as authorized users of their credit cards for the purpose of helping them build a credit history. Often, the young adult does not even get a credit card, so they can’t make charges to the account—the goal is solely to have the account show up on their credit report.
Pros:
The account can show up on the authorized user’s credit report as soon as the next reporting date for that credit card, which means it can build your credit fast. Only the primary account holder is responsible for the debt incurred, not the authorized user. Only the primary cardholder’s credit file is considered when the credit card company issues the card. Therefore, many times, an authorized user may be added to the account even if their credit is not as pristine as the primary cardholder. The authorized user’s credit score does not affect the credit of the primary cardholder (as long as the authorized user does not increase the utilization of the account by making charges). Being an authorized user can be a great way to build credit fast, since the full history of the account is often shown in the credit reports of both the primary cardholder and the authorized user, regardless of when the authorized user was added (with some exceptions depending on the bank). The authorized user can remove themselves from the account if they no longer want the account to appear on their credit report, such as if the account becomes delinquent.
Cons:
Authorized users don’t have the ability to make changes to the account like the primary cardholder. The primary cardholder does not even have to give the authorized user a credit card. If the account shows any negative behaviors such as a late payment or high utilization, this will be reflected on the authorized user’s credit report, which may be counterproductive to the goal of building credit. If you buy an authorized user tradeline from a reputable company, however, the tradeline should have a perfect payment history and low utilization.
What Is the Best Way to Build Credit Fast?
While there are many ways to increase your credit score quickly, not all of them are conducive to building credit, which means strengthening your credit profile with additional accounts.
Credit repair techniques may promise to boost credit scores fast, but removing information from your credit report doesn’t help you build credit. To truly build or rebuild credit, you need to add positive credit history to your credit report.
Building credit for long-term success involves establishing a mix of different credit accounts, including credit cards and loans. These foundational accounts, with time, will aid in boosting your credit score to its highest potential.
However, if you need to build credit fast, you’ll have to take a different approach. Primary accounts need time to age and accumulate positive payment history before they can start to increase your credit score. And if you are starting with bad credit or no credit at all, it can be hard to get approved for credit accounts on your own.
The only shortcut we have seen to building credit fast is piggybacking credit. Through credit piggybacking, you can benefit from someone else’s good credit, whether that is by getting a cosigner to sign on with you, opening a joint account with someone, or becoming an authorized user on an existing account.
While the first two options are still restricted by the limiting factor of time, being added as an authorized user to a seasoned account can add years of positive credit history to your credit report almost instantly.
Therefore, if you need to build credit fast, consider adding one or more authorized user accounts to the mix, whether by asking a trusted family member or friend or purchasing them online from a reputable business.
Have you tried any of these ways to build credit fast? Share your experience with us in the comments!
The worst thing that can happen after you buy tradelines is not seeing your tradelines post to your credit report. Hopefully, your tradeline company offers a money-back posting guarantee, but of course, it’s better to have your tradelines post successfully the first time around.
Fortunately, there are a few things you can do to make sure everything goes smoothly when you buy tradelines. Here are our pointers on how to get tradelines to post.
1. Remove all fraud alerts and credit freezes from your credit report
Fraud alerts, credit freezes, and any other types of blocks on your credit file prevent new information from being added to your profile. This includes authorized user tradelines. Therefore, if you have a credit freeze, fraud alert, or some other type of block on your credit file, your tradelines will not post.
Before buying tradelines, make sure to contact the credit bureaus to remove any fraud alerts, credit freezes, or other blocks on your credit report so that new AU tradelines will not be blocked. Ideally, it’s best to wait about 30 days after removing all blocks to make sure that your credit file is completely clear.
2. Plan ahead and purchase your tradelines in advance
Try to plan your tradeline purchase ahead of time so you don’t miss the purchase by date.
Each of our tradelines has its own reporting period and corresponding “purchase by” date, which is the date by which you must purchase the tradeline in order for it to report on time. The purchase by date is typically 11 days before the reporting period begins in order to allow enough time to process your payment and add you as an authorized user to the tradeline.
Therefore, if you wait too long and the purchase by date has already passed for the current month, your tradeline may not post until the next reporting period a month later.
For this reason, it’s best to plan your purchase ahead of time so that you can be sure to purchase your desired tradelines before the purchase by date. Those who wait until the last minute to buy tradelines are limited to the tradelines with the soonest purchase by date.
Alternatively, some people are in such a rush to get tradelines that they don’t even pay attention to the purchase by date, and they don’t realize that they may have just purchased a tradeline that is not due to post for another month.
In order to ensure that your tradelines post in a timely manner, make sure to purchase them before the purchase by date.
3. Consider buying more than one tradeline as a safety precaution
While we offer a money-back guarantee in the case of a non-posting, unfortunately, non-postings inevitably do happen from time to time due to incorrect reporting by the banks and credit bureaus, which we have no control over.
If you need your tradelines to post within a specific time window and cannot wait for an exchange to be processed in the event of a non-posting, it is safest to hedge your bets by buying more than one tradeline.
Additionally, when buying multiple tradelines for this reason, you may want to choose tradelines from a few different banks. That way, if there is a problem with one particular bank, it will not prevent the rest of your tradelines from posting.
4. Choose a tradeline company that only works with the best banks and has the highest posting success rate
When it comes to tradelines posting, not all banks are equally effective. Some banks report authorized user accounts much more reliably than others. In fact, we only work with a select few banks that we have rigorously tested and found to have the best posting success rates.
Almost all the other tradeline companies out there work with many more banks than we do, which may sound like a good thing, until you consider the fact that most of these banks don’t report authorized user tradelines very well. Therefore, if you buy tradelines from these companies, there is a much higher chance of your tradelines not posting.
You’ll want to stick with the most reliable banks and tradeline companies to minimize your risk of a non-posting occurring.
5. Avoid buying tradelines from banks you may be blacklisted from
Sometimes, banks may “blacklist” certain customers that have a derogatory history with them, such as bankruptcies or collection accounts. If you have been blacklisted from working with a particular bank, this could prevent any tradelines from that bank from posting to your credit file, so you would want to choose tradelines from other banks to ensure successful posting.
If you are not sure about your status with a bank, but you have a collection or bankruptcy with them, it’s a good idea to avoid that bank as a precaution.
6. Use the correct address that is on file with the credit bureaus
Make sure to use the correct address when ordering tradelines.
The banks and credit bureaus use certain data points to verify the identity of the authorized user, and one of the most important data points is the AU’s address.
If you do not use the correct address that you have on file with the credit bureaus, they may not be able to match the tradeline with your credit profile, and this can prevent the tradeline from posting.
Before buying tradelines, check your credit report with each credit bureau to verify that they have your correct address on file, and be sure to use this same address when placing your tradeline order.
7. Avoid “address merging”
As we mentioned, most tradeline companies sell tradelines from many different banks, including banks that don’t report AU data very well. Because tradelines from those banks don’t post well, most companies engage in a questionable practice called “address merging” to try to get the tradelines to post more often.
Address merging is the practice of falsely claiming that the authorized user lives at the same address as the primary cardholder. This allows the account to be matched up to the AU using the shared address as an identifying data point.
While this strategy may improve their posting rates, we do not recommend this dangerous tactic, because lying about one’s address for financial gain is considered fraud and it could get you in trouble with the law.
It is important to be aware that some companies may be doing this without your knowledge and some may not even realize that they are getting their clients involved in fraud. When choosing a tradeline company, keep in mind that if they sell tradelines from a lot of different banks, it is likely that they participate in address merging.
Instead of getting involved in the risky practice of address merging, follow all of the other steps in this article to increase the odds of your tradelines posting as much as you can.
8. Triple-check your order information for errors before submitting your order
Before finalizing your purchase, go over your information again and make sure it’s free of errors.
While your address is a particularly important data point when it comes to the credit bureaus, it’s also important to make sure the rest of your personal information is correct when placing your tradeline order.
Unfortunately, some people submit their orders with typos or misspellings, and each error increases the odds that something could go wrong.
For example, sometimes people even enter their own name incorrectly! Obviously, if the name you provide with your order is not your actual name, then that can definitely increase the chances of your tradeline not posting because the credit bureaus may not be able to match the tradeline to your credit file.
There’s nothing more frustrating than having a non-posting occur simply due to a preventable user error. To ensure this doesn’t happen to you, before placing your order, look over your information and double- and triple-check it for accuracy.
We hope these tips on getting tradelines to post were helpful to you! Let us know what you think by leaving a comment below.
Did you know that a large proportion of consumers have errors on their credit reports? Unfortunately, it’s true. In 2017, the most common complaint received by the Consumer Financial Protection Bureau (CFPB) had to do with incorrect information being reported on consumers’ credit reports.
A study conducted by the FTC in 2012 found that about 25% of consumers had at least one error on one of their credit reports. Some of those consumers were paying higher interest rates on loans as a result of those errors bringing down their credit scores.
From this information, you can see that it’s all too likely that you may have an error in your credit report. Let’s go over some of the most common types of credit report errors and how to fix errors on your credit report.
How to Get Your Credit Report
The first thing you will need to do in order to identify errors on your credit report is, of course, obtain a copy of your credit report.
You can get your credit report for free from annualcreditreport.com, which is the only website authorized by the government to provide your annual free credit report.
Under the Fair Credit Reporting Act (FCRA), you are legally entitled to receive one free credit report from each of the three major credit bureaus once every 12 months. You can choose to order all three credit reports at the same time or order each individual report at different times throughout the year.
Watch out for other websites claiming to offer free credit reports or free trials, especially if they ask you for payment information.
However, there are some reputable websites where you can view a simplified version of your credit report for free, such as CreditKarma, CreditSesame, WalletHub, and Bankrate. They are able to offer this service by advertising credit products to users.
Inspect your credit report regularly to catch errors early.
You can also request a free credit report if you are denied credit because of information found in your credit report. The credit report must be from the credit bureau that provided the original report to the lender.
In addition, you can qualify for an additional free report if you are unemployed and planning to apply for jobs, if you receive government assistance, or if you are a victim of identity theft.
Credit experts recommend checking your credit reports at least once a year, so make sure to take advantage of any opportunities to get a free copy of your credit report.
You can also pay to get your credit reports directly from the credit bureaus.
Types of Credit Report Errors Identity Errors
Your personal information is not accurate. For example, your name is misspelled or your address is incorrect. This is an indication that the credit bureau may be confusing you with another person. This can sometimes happen with family members who have similar names or live at the same address. Your file has been mixed with someone else’s. If you see accounts on your credit report that belong to someone else who has a similar name or the same address, this could mean that your credit report has been merged with another person’s report due to having similar personal information. There are accounts that you didn’t open. Accounts that you know you didn’t open but are listed in your name indicate that someone has stolen your identity and used it to fraudulently open accounts.
If there are accounts in your name that you didn’t open, your identity may have been stolen.
Account Information Errors
Accounts are reported more than once (duplicate accounts). Sometimes, the same account may be shown twice on your credit report. This can definitely hurt your credit if it’s a derogatory account that’s been duplicated. An account reports that you are the primary owner of the account when you are actually an authorized user (or vice versa). It’s possible that the credit bureaus have mixed up who is the primary owner of the account. Closed accounts are reporting as open (or vice versa). Sometimes, accounts that you have closed in the past will still be reporting as open. This can be problematic especially if it’s a negative account, such as a collection. On the other hand, if an open account is reporting as closed, that’s also a problem because it can hurt your utilization ratio. There are late payments on your report, but you were on time. Late payments are highly damaging to your credit score, so if you’ve never been late paying your bills but your credit report indicates otherwise, that’s an error you’ll want to correct as soon as possible. An account has an inaccurate open date or date of first delinquency (DOFD). If an account has an incorrect open date, this could change the age of the account, which could, in turn, impact your credit score. An incorrect DOFD on a derogatory account, such as a collection account, will affect when the negative mark falls off your credit report. Accounts show incorrect balance or credit limit information. Some credit cards do not report a credit limit at all, which could hurt your credit utilization ratio. Alternatively, your credit report may not be showing the correct balance or credit limit, which could also potentially hurt your utilization.
Clerical Errors
Inaccurate data was added back into your credit report after being corrected. If you’ve corrected an error on your credit report but then see the same error pop back up again, it could be a clerical error on the part of the credit bureaus or the data furnisher. Duplicate collection accounts with different debt collectors are all being reported as open accounts. As we explained in our article on collections, this situation is called “double jeopardy” on your credit report. If an account has been sold to a debt collector, there may legitimately be multiple accounts for the same collection on your credit report, but the original account should be updated to show that it has been transferred and should no longer show a balance owed. The collection agency that currently owns the debt should be the only entity reporting the collection as open with a balance owed. There is negative information on your credit report that is more than seven years old. Negative information must be removed from your credit report seven years after the date of first delinquency, so if any derogatory information on your credit report is older than seven years, you can have it deleted.
How to Fix Errors on Your Credit Report
To get the best results, write a letter for each dispute and send your letters by certified mail.
If there are any errors on your credit report, you can contact the credit bureau that is reporting the inaccurate information to resolve the issue. Your credit report should contain information on how to file a dispute.
1. Gather All Necessary Information and Supporting Evidence
When you submit your dispute, it’s important to provide all the information the credit bureau will need to process your claim.
This may include the following:
An annotated copy of your credit report (circle or highlight the incorrect item) Documentation to verify your identity (copies, not original documents) A letter containing additional information about the item, an explanation of why it is incorrect, and a request to update or remove the incorrect item Copies of supporting documents that provide proof of the item’s inaccuracy
2. Submit Your Credit Dispute Letter Via Certified Mail
Although it is possible to dispute credit report errors online, many credit experts recommend instead writing a letter and sending it in the mail along with documentation to verify your identity and supporting evidence.
If you try to dispute an error online or over the phone, you may not have the chance to provide enough supporting evidence, and the credit bureau may dismiss your dispute as frivolous.
It’s also recommended that you send your letters by certified mail so that you have proof that the letters have been received. In addition, it’s a good idea to keep copies of your correspondence in case you need to get outside help.
3. Send a Separate Dispute Letter for Each Error
If there is more than one error on your credit report to deal with, it is best to send a separate letter for each dispute, since the credit bureaus may reject long lists of disputes as frivolous.
4. Consider Working With a Reputable Credit Repair Company
Annotate each error in your credit report and provide documentation supporting your dispute.
If you have a lot of errors to dispute or if you have been the victim of identity fraud, you may consider hiring a credit repair service to assist with the process. [Disclosure: This article contains affiliate links.]
5. Contact the Furnisher of the Incorrect Data
You should also contact the lender that furnishes the data to the credit bureaus to ensure the inaccuracy gets corrected at the source. The FTC also provides a sample dispute letter to send to data furnishers.
If you neglect this step, the error could show up on your credit report again the next time the lender reports to the credit bureaus.
6. If Your Identity Was Compromised, Consider Placing a Credit Freeze or Fraud Alert on Your Profile
If the error on your credit report was the result of identity theft, it might also be a good idea to contact the credit bureaus to place a fraud alert or credit freeze on your account.
A fraud alert requires lenders to take extra steps to verify your identity if someone is trying to open an account in your name, whereas a credit freeze blocks anyone from viewing your credit file except for businesses that you have existing relationships with.
Keep in mind that if you are planning to buy tradelines, you must have all fraud alerts and credit freezes removed first, or the tradelines will not post.
What Happens Next?
Once the credit bureau has received your dispute, they have 30 days to investigate your claim. If their investigation cannot verify the information on your credit report, they must update it with accurate information or delete the item.
In addition, the credit reporting agency is required to provide you with written documentation of the results of the investigation.
You are also entitled to get a free copy of your credit report from the company if your credit report has been changed as a result of the dispute. This free copy is not counted as one of your annual free credit reports from annualcreditreport.com.
Upon your request, the credit bureau must notify any entity who pulled your report in the past six months about the corrections made to your report. If anyone has pulled your report for employment purposes in the past two years, you can ask to have an updated copy of your report forwarded to them as well.
What To Do If You Disagree With the Dispute Results Option 1: Add a Consumer Statement to Your Credit File
If your dispute is rejected and you don’t agree with the credit bureau’s decision, you have the option of adding a consumer statement to your credit report to explain the situation. However, this is not necessarily the best solution.
Firstly, the statement doesn’t get factored into your credit score, so it won’t help your chances when a lender uses an automated system to approve or reject applicants. If it’s a case where an underwriter is looking at your credit report, adding a consumer statement may just draw their attention to a negative item unnecessarily, especially if the item is older.
Option 2: File Another Dispute With Additional Information
Another option is to submit a second dispute with additional supporting documentation to try to get the credit bureau to investigate the dispute a second time.
Option 3: Submit a Complaint to the CFPB
If the credit bureau still fails to correct the information in your credit report, you can submit a complaint to the CFPB.
The CFPB may not be able to force the credit bureaus, as private companies, to do anything, but getting a government agency involved might encourage the credit bureau to rethink their position.
Option 4: Take Legal Action
Continuing to report inaccurate information after you have disputed it is a violation of the FCRA. If you feel that a credit bureau is violating your rights under the FCRA, you have the option of talking to a lawyer about potentially taking legal action.
Conclusions on Credit Report Errors
Unfortunately, errors on credit reports are very common, so we all need to be vigilant about monitoring our credit for fraud and inaccuracies.
Make sure to check your credit reports regularly by claiming your annual free credit reports as well as using a reputable free or paid service throughout the year. As soon as you spot any errors, try to get to the bottom of them and get them corrected both with the credit bureaus and with the data furnishers as soon as possible.
By making sure that your credit report only contains accurate and timely information, you are helping to protect your financial health and ensuring that credit report errors don’t stand in the way of future opportunities.
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