Things Everyone Should Know About Credit Cards

January 20, 2021CreditBy toptierfinancial

Credit cards are not only a useful payment method for making purchases but also an essential component of a solid credit-building strategy.

After all, credit cards are the most common form of revolving credit, which is given more importance than installment credit (e.g. auto loans, student loans, mortgages, etc.) when it comes to calculating your credit score.

Unfortunately, credit cards often get a bad rap because it’s easy to rack up excessive amounts of debt and destroy your credit score if you do not know how to use credit cards properly.

However, when you have the knowledge and ability to use credit cards to your advantage rather than to your detriment, they can be an extremely powerful financial tool to have in your arsenal.

If you’re unsure if using credit cards is the right choice for you or confused about how they work, then keep reading to learn the basics of credit cards that everyone should know.

What Is a Credit Card?

A credit card is a card issued by a lender that allows a consumer to borrow money from the lender in order to pay for purchases.

The consumer must later pay back the funds in addition to any applicable interest charges or other fees.

They can choose to either pay back the full amount borrowed by the due date, in which case no interest will be charged, or they can pay off the debt over a longer period of time, in which case interest will generally accrue on the unpaid balance.

Each credit card has an account number, a security code, and an expiration date, as well as a magnetic stripe, a signature panel, and a hologram. Most credit cards also now have a chip to be inserted into a chip reader rather than swiping the card at the point of sale. In addition, some credit cards offer contactless payment capability.

Credit cards allow consumers to pay for goods and services with funds borrowed from the credit card issuer.

How Do Credit Cards Work?

Although using credit cards may feel like using “fake money” or spending someone else’s money, it’s important to understand that the money you borrow when you pay with a credit card is very much real money that you now owe to the lender.

Credit Cards Are Unsecured Revolving Debt

With most credit cards, the funds you borrow are considered to be unsecured debt because you are borrowing the money without any collateral. That means the credit card issuer is taking on additional risk by giving you a credit card, since there is no collateral that they can take from you if you fail to pay back the debt, unlike with secured debt, such as a mortgage or a car loan.

Furthermore, the lender allows you to decide when and how much you want to pay back the funds instead of requiring you to pay the full balance on each due date. You can choose to only pay the minimum payment and “revolve” the remaining balance from month to month, which extends the amount of time during which you owe money to the credit card company.

Most credit cards now come with a chip in addition to a magnetic stripe.

For the above reasons, credit card interest rates are typically significantly higher than the interest rates for installment loans.

However, credit cards are also the only form of credit where paying interest is optional—there is a “grace period” of at least 21 days before the interest rate for new purchases takes effect, and you only get charged interest if you do not pay back your full statement balance by the due date.

(Keep in mind that the grace period usually only applies to new purchases, as stated by The Balance. This does not include balance transfers or cash advances, which typically begin accruing interest immediately.)

Understanding Credit Card Interest Rates

To reiterate, the interest rate of a credit card technically only applies when you carry a balance instead of paying off your full statement balance each month. However, most people will likely end up carrying a balance on one or more credit cards at some point, so it is still a good idea to be aware of what your interest rates are.

APR and ADPR

The interest rate of a credit card is usually expressed as an annual percentage rate (APR). This is the percentage that you would pay in interest over a year, which can be confusing because interest on credit card purchases is charged on a daily basis when you carry a balance from month to month.

You can find your average daily periodic rate (ADPR), which is the interest rate that you are being charged each day, by dividing the APR of your card by 365.

Average Credit Card Interest Rates

The interest rate of a credit card, expressed as the APR, is important to know if you ever carry a balance on the card.

As of October 2020, the average credit card interest rate as reported by The Balance is 20.23%. However, credit card issuers are allowed to set their APRs as high as 29.99%. It is not uncommon to see APRs upwards of 20%, even for consumers who have good credit.

The highest interest rates are generally seen on credit cards for bad credit or penalty rates that credit card issuers can implement when you are 30 or more days late to make a payment. You may also get penalized with a higher interest rate if you go over your credit limit or default on a different account with the same bank, according to ValuePenguin.

Ask for a Lower Interest Rate

In our article on easy credit hacks that actually work, we suggest trying the simple tactic of calling your credit card issuer’s customer service department and asking for a lower APR. Surveys have shown that a majority of consumers who do this are successful in obtaining a lower interest rate.

Important Dates to Know

Many consumers assume that the payment due date of your credit card is the only important date you need to worry about. While it’s true that the due date is the most important date to be aware of, there are several other dates that are useful to pay attention to as well.

Billing cycle

The billing cycle of a credit card is the length of time that passes between one billing statement and the next. All of the purchases you make within one billing cycle are grouped together in the following billing statement.

This cycle is typically around 30 days long, or approximately monthly, although credit card companies can choose to use a different billing cycle system.

Statement closing date

Your credit card’s statement closing date is not the same thing as your due date, so make sure you know both.

Sometimes referred to simply as the “closing date,” this is the final day of your billing cycle. Once a billing cycle closes and the statement for that cycle is generated, the balance of your account at that time is then reported to the credit bureaus.

You can look at your billing statement to find the closing date for your account. Because of the 21-day grace period, the statement closing date is usually around 21 days before your due date.

Due Date

This is the most important date to know in order to pay your bill on time every month, which is the most influential factor when it comes to building a good credit history. To make it easy for yourself to avoid accidental missed payments, you may want to set up automatic bill payments.

If your due date is inconvenient due to the timing of your income and other bills, you can try requesting a different due date with your credit card issuer.

Promotional offer dates

Many credit cards offer introductory promotions to attract new customers, such as 0% APR, bonus rewards, or no balance transfer fees. To use these offers strategically, you will need to know when the promotional period ends so you can plan accordingly.

Expiration date

All credit cards have an expiration date past which they cannot be used.

Every credit card has an expiration date printed on it, after which you will no longer be able to use that card, although your account will still be open. You just have to get a new credit card sent to you to replace the one that is expiring.

Usually, credit card companies will automatically send you a new card before the original card expires. If this does not happen, simply call the issuer to ask for a replacement credit card.

A Common Credit Card Mistake

Some consumers think that the closing date and the due date are the same thing and therefore believe that if they pay off the full statement balance by the due date, the credit card will report as having a 0% utilization ratio. They may then be confused to find out that their credit card is still reporting a balance to the credit bureaus every month.

However, the statement closing date is usually not the same date as your due date. This is why your credit cards may report a balance every month even if you always pay your bill in full—the account balance is being recorded on your statement date before you have paid off the card.

If you do not want your credit card to report a balance to the credit bureaus, you will need to either pay off the balance early, prior to the statement closing date, or pay your statement balance on the due date as usual and then not make any more purchases with your card until the next closing date.

Credit Card Payments

With credit cards, you have several different options for payment amounts.

Minimum payment

If you only pay the minimum payments on your credit cards, it will take longer to pay off your credit card debt and you will be charged interest.

This is the minimum amount that you are required to pay by your due date in order to be considered current on the account and avoid late fees. Although this may vary between different credit card issuers, typically the minimum payment is calculated as a percentage of your balance.

If you make only the minimum payment every month, it will take you a much longer time to pay off your balance and you will be paying a far greater amount in interest than if you were to pay off your statement balance in full. Check your billing statement to see how the math works out; the credit card company is required to disclose how long it will take to pay off the balance if you only make the minimum payments.

Statement balance

This is the sum of all of your charges from the preceding billing cycle in addition to whatever balance may have already been on the card before that cycle. This is the amount you need to pay if you do not want to pay interest for carrying a balance.

Current balance

This number is the total balance currently on your credit card, including charges made during the billing cycle that you are currently in, so it will be higher than your statement balance if you have made more purchases or transfers since your last closing date. You can pay this amount if you want to completely pay off your account so that it has no balance.

Other amount

You can also make a payment in the amount of your choosing, as long as it is greater than the minimum payment. This is a good option to use if you don’t have enough cash to pay the statement balance in full, but want to pay more than the minimum in order to mitigate the amount of interest you will be charged.

Credit Card Fees

Credit cards often charge various other fees in addition to interest. Here are some common fees to be aware of.

Although you may have access to a “cash advance” credit limit on your credit cards, it is generally not recommended to get a cash advance due to the high interest rates and fees you will have to pay.

Late payment fees

If you do not make the required minimum payment before the due date, the credit card company will likely charge you a late fee somewhere in the range of $25 – $40 (in addition to potentially raising your APR to a penalty rate). If you usually pay on time but accidentally miss a payment for whatever reason, try calling your credit card issuer and asking if they would be willing to reverse the fee since you have been an upstanding customer overall.

Annual fees

Some credit cards charge an annual fee for keeping your account open. Many times this charge may be waived for your first year as a promotional offer to attract new customers. Cards with higher annual fees will often have additional perks and rewards, but there are also plenty of great options for rewards cards that do not charge annual fees.

Cash advance fees

Your credit cards may give you the option to borrow cash in the form of a cash advance. However, this is usually not advised because cash advance interest rates are often significantly higher than your regular interest rate for purchases. In addition, you will most likely be charged a cash advance fee when you first withdraw the money, whether a flat dollar amount of around $10 or a percentage of the amount you take out, such as 5%.

Foreign transaction fees

Some cards charge a fee to use your card to pay for things in other countries. These fees are typically around 3% of the purchase amount. However, there are many credit cards on the market that do not charge foreign transaction fees.

Be sure to check the terms of service of your credit cards for fees such as these so that you can avoid any unexpected charges.

How Credit Cards Affect Your Credit

Credit cards are one of the most impactful influences on your overall credit standing, and they play a role in multiple credit scoring factors.

Building Credit With Credit Cards

One of the major advantages of credit cards is that it allows you to start building a history of on-time payments, which is extremely important given that payment history is the biggest component of your FICO score, making up 35% of it.

All you have to do to get this benefit is use your credit card every so often and pay your bill on time every month.

Click on the infographic to see the full-sized version!

Revolving Accounts Are More Important

We have previously discussed why revolving accounts are more powerful than installment accounts when it comes to your credit score.

Revolving accounts such as credit cards can have a much greater influence on your credit than auto loans, student loans, and even a mortgage—for better or for worse. They must be managed properly because negative credit card accounts will also have a very strong impact on your credit.

Mix of Credit

Although your mix of credit only makes up 10% of your FICO score, it is still worth considering, especially if you aim to achieve a high credit score or even a perfect 850 credit score.

A good credit mix generally includes various types of accounts, including both revolving and installment accounts. You can see the different types of accounts in our credit mix infographic.

Credit cards may help with your credit mix if you have a thin file or if you primarily have installment loans on your credit report.

They also add to the number of accounts you have, which is a good thing for the average consumer. In fact, as we talked about in How to Get an 850 Credit Score, FICO has stated that those who have high FICO scores have an average of seven credit card accounts in their credit files, whether open or closed.

The Importance of Credit Utilization Ratios

Your credit utilization is the second most important piece of your credit score, which is another reason why credit cards are such a strong influence on your credit.

The basic rule of thumb with credit utilization ratios is to try to keep them as low as possible (both overall and individual utilization ratios), meaning you only use a small portion of your available credit. Ideally, it’s best to aim to stay under 20% or even 10% utilization, because the higher your utilization rate is, the more it will hurt your credit instead of help.

Conclusions on Credit Card Basics

Credit cards can be intimidating, especially when you don’t know how to use them correctly.

It is also true that not everyone wants or needs to use credit cards.

It’s not impossible to build credit without a credit card, but it is more difficult since you would be limited to primarily installment loans, which are not weighed as heavily as revolving accounts, and possibly alternative credit data.

However, for those who are able to use credit cards responsibly and follow good credit practices, they can be an incredibly useful credit-building tool as well as a way to reap some benefits and perks that other payment methods do not provide.

We hope this introductory guide to credit cards provides the knowledge base you need in order to feel confident using credit cards and to take advantage of their benefits.

If you found this article useful, please comment to let us know or share it with others who want to learn more about credit cards!

Read more: tradelinesupply.com

Why Did My Credit Score Go Down?

January 14, 2021CreditBy toptierfinancial

It’s never a good feeling when you notice that your credit score has dropped. You might feel confused or concerned, and you would probably wonder why your credit score took a dip. Let’s explore some of the possible reasons that could cause your credit score to decline.

Your average of accounts decreased because of a new account.

As we’ve written about many times in the articles in our Knowledge Center, the age of a tradeline is extremely important, as is your overall credit age. This is because credit age is linked to payment history, which is vitally important to your credit health.

Payment history makes up 35% of your credit score and credit age contributes 15% to your score. When you add the two together, you get 50%, which means that half of your credit score is controlled by these two connected factors.

Within the credit age category, your average age of accounts is thought to be one of the most important variables. The more age your tradelines have, the more they can benefit your credit. Therefore, anytime you decrease your average age of accounts, you run the risk of your score decreasing as a result.

So if you recently opened a new primary tradeline or if you were added as an authorized user to an account that lacks age, the decrease in your average age of accounts might be what’s behind your credit score troubles.

Your account balances increased.

Did you use credit to make a large purchase recently? Have you been accumulating more debt by not paying the full balance you charged each month? If either of these scenarios is true for you, that could explain why your credit score took a dive.

As your account balances increase, so does your credit utilization rate. This is bad news for your credit score since credit utilization contributes about 30% of your score.

If you’ve been using your credit card more often without paying it off entirely each month, that could be the source of the change in your credit score.

Low utilization is favorable since it indicates that you are not overextending yourself financially. On the other hand, high utilization shows that you are using a lot of your available credit, which means you are statistically more likely to default on a debt in the future. For this reason, high credit utilization is penalized by credit scoring models.

Fortunately, there are many strategies you can use to overcome the problem of high revolving credit utilization, such as pre-paying your credit card bill before your statement closing date, making more frequent payments throughout the month, increasing your credit limit, or getting a balance transfer card.

Read more about how to improve your utilization ratios in “What Is the Difference Between Individual and Overall Credit Utilization Ratios?”

You took out a loan.

When you open a new account, it can hurt your credit score for a few reasons. The first and most important reason is that the account has no age, which means it is going to negatively affect your average age of accounts.

In addition, there was likely a hard inquiry on your credit report as a result of applying for the new loan. In “Are Inquiries Really Killing Your Credit? What You Need to Know,” each recent hard inquiry on your report may affect your credit score by up to five points.

The new account may also have a negative impact on the “new credit” portion of your credit score. Having new credit makes you look like a riskier borrower, which means it could slightly reduce your score.

However, new credit only makes up about 10% of your credit score, so the impact of opening one new account would likely be relatively small and it would diminish over time.

You applied for credit but your application was denied.

Applying for a loan or credit card, whether your application is approved or denied, the resulting hard inquiry could damage your credit score slightly.

As we just mentioned, when you apply for credit, the lender usually has to do a hard pull (AKA a hard inquiry) on your credit report to see if you qualify.

This doesn’t always result in a new credit account being opened. Sometimes, for example, your credit application might get rejected by the lender, or perhaps you may choose to decline the terms you were offered and not proceed with opening the account. (Note, however, that when you apply for a credit card, typically the account is automatically opened when you get approved for the card.)

Unfortunately, even if you didn’t actually end up opening a new account, the fact that you applied for credit can still hurt your score. The hard inquiry still goes on your credit report whether you opened an account with that lender or not.

If you only applied for one account, then your credit score will likely only fall by a few points, if at all. If you applied for several accounts that you didn’t open within the past year, however, it’s possible that you could see a bigger dip in your score as a result of all of those inquiries on your report.

You missed a payment once or twice.

You might think that missing a payment here and there is not that big of a deal, but in reality, it can wreak havoc on your credit score. Recall that payment history is the most important factor contributing to your credit score, weighing in at 35% of your FICO score.

If you are 30 days late on making a payment even one time, this can have a significant detrimental effect on your credit, dropping your score by as much as 60 to 110 points.

If you still fail to make your payment by the following due date, then you get a 60-day late on your credit report, which hurts your credit even more.

30-day and 60-day lates are both considered minor derogatory items on your credit report, so they won’t mess up your credit as much as a major derogatory item.

However, if you get a 60-day late payment added to your credit report, do your best to catch up on payments before another 30 days pass, which is when things get even worse.

You missed a payment for three months in a row or more.

Missing a payment even once can seriously set back your credit score, but the damage will be even worse the longer you put off bringing the account current.

Once you reach 90 days past due on a credit account, that is now considered a major derogatory item, which is the worst possible type of item to have on your credit report. (Other major derogatory items include charge-offs, collections, foreclosures, settlements, judgments, repossessions, public records, and bankruptcies.)

Having a 90-day late on your credit report is certainly going to have a negative impact on your credit. A credit score drop from a major derogatory item will be even more severe and more difficult to recover from than that of a minor derogatory item. In addition, the major derogatory item could scare away potential lenders, making it harder to obtain credit in the future.

For more information on major and minor derogatory items and how they can affect your credit, see “What Is a Derogatory Item on Your Credit Report?”

One of your accounts went into collections.

If you default on a debt, meaning you did not fulfill your obligations to repay that debt, your creditor can sell your account to a collection agency, who will then try to collect the debt from you. A collection account is also a major derogatory item on your credit report, which means it can seriously hurt your score if you have an account go into collections.

Read our article on collections on your credit report to find out everything you need to know about collection accounts.

You applied for multiple credit cards in a short period of time.

Applying for multiple credit cards results in hard inquiries on your credit report, which can have a more significant impact on your score than just one inquiry.

Having too many hard inquiries on your credit report in a short period of time indicates that you are seeking a lot of new credit, which is a bad sign to lenders, and it will bring down your score.

With most credit scoring models, inquiries for credit cards are all counted separately, even if they were all around the same time. Since inquiries can each cost your credit score up to five points, that can add up quickly. (The exception to this is the VantageScore credit score, which counts all inquiries made within a 14-day window of each other as one inquiry, regardless of the type of account.)

Furthermore, if you got approved for and opened all of the accounts that you applied for, then you could also end up with too many new credit accounts on your credit report.

One of your credit cards was closed.

Many consumers mistakenly believe the credit myth that it will help their credit if they close some of their accounts. In a way, that makes sense, because it lowers the amount of available credit you have, which reduces the potential amount of debt you could get into if you were to use all of your available credit.

However, that is not how credit scores work, because unfortunately, credit scores don’t always make sense.

We dispel this common misconception and more in “Let’s Get to the Bottom of These Credit Myths.”

The truth is that closing an account almost always hurts your credit instead of helping it.

With revolving accounts, such as credit cards, closing an account reduces your total credit limit by removing the credit limit of that card. When you reduce your credit limit, that action increases your overall credit utilization ratio, meaning that you are now using a larger fraction of your available credit.

This hurts your credit score because having a high credit utilization ratio is penalized by the credit scoring algorithms, whereas maintaining a low utilization ratio is rewarded.

The worst-case scenario for your credit when closing an account is if the account is closed while it still has a balance on it. In this case, that individual account will look like it is maxed out or over the limit because it has a balance but no credit limit. That alone is enough to significantly harm your credit, and the increase to your overall utilization ratio only worsens the problem.

Depending on what else is in your credit file, closing a credit card could also negatively affect your credit mix, which could result in a small credit score drop.

On the plus side, the reason why an account was closed does not play a role in your score, so you won’t be affected more negatively if the card was closed by the issuer than if it was closed at your request.

For more information about closed accounts on your credit report, see “How Do Closed Accounts Affect Your Credit?”

There was fraudulent activity on your accounts.

Have you checked your credit card statements lately?

An unexpected decrease in your credit score could be the result of fraudulent activity on your accounts.

If you see any charges on your statement that you do not recognize, then it could be fraudulent activity that is bringing down your score. Perhaps someone was able to obtain your credit card information by phishing or through a data breach and used it to run up the balance on the card.

It’s important to monitor your credit accounts regularly so that you can catch any suspicious activity early on. Better yet, set up email or mobile notifications on your account that will alert you to fraudulent activity instantly.

If a criminal does manage to get access to your account, report the fraudulent charges to your credit card issuer immediately and ask to have the charges reversed. Most credit card companies have a zero liability policy, which means you won’t be held responsible for paying for any of the fraudulent charges.

You paid less than the minimum payment.

If your cash flow is tight, it can be tempting to send the bank or credit card company a partial payment instead of the full amount that is due that month. You may think that it’s not as big of a deal as not paying at all, because at least you are sending them some of the money.

Unfortunately, it doesn’t work that way. If you do not cover the full minimum payment by the due date, it will not be counted as an on-time payment.

If you can bring the account current before 30 days pass, you may still have to deal with a late fee from your credit card issuer (although it’s worth asking them to waive the fee), but at least the late payment will not show up on your credit report.

On the other hand, if you do not make a sufficient payment and 30 days go by, then you will have a late payment pop up on your credit report, which can definitely take a toll on your credit score.

To prevent this from happening, as soon as you know you will not be able to make the full payment, contact your credit card issuer and ask if they have a financial hardship program or try to negotiate an arrangement with them that allows you to pay what you can without damaging your credit.

You didn’t use your credit card for a long time.

Your credit card issuer might have closed your account if it had been inactive for a long time.

If you don’t use a credit card for a long period of time, it’s possible that your credit card issuer may decide to close your account due to the lack of activity.

As we discussed above, a closed credit card is bad news for your credit since the loss of available credit hurts your credit utilization and it may also damage your mix of credit.

According to The Balance, the credit card company is not required to give you advance notice if they plan to close your account, so it’s best to take proactive measures to prevent this from happening.

To avoid having your card closed due to inactivity, make sure you use it to make a purchase at least once every few months. An easy way to do this is to use the credit card to pay for a subscription service that renews each month. Then, set up automatic bill payments on your credit card and the whole process will be automated.

You finished paying off an installment loan.

Making the final payment on your auto loan, student loans, or mortgage is an exciting accomplishment. Yet, when you finish paying off an installment loan, your credit score may decrease instead of increase.

Even though you now have less debt, which sounds like it would help your credit score, this may not outweigh the negative impact to your mix of credit. The paid-off installment loan will now report as a closed account, which can be harmful to your credit if all you have left is a few revolving accounts.

@LizOfficer shared a real-life example of this on Twitter.

This Twitter user commented that paying off her loan made her credit score go down since it affected her mix of credit.

An account that you are piggybacking on became delinquent.

Sometimes being an authorized user on a credit card or having a joint account can be a risky thing. You are relying on the other person to pay their bills on time and to manage their balances well, otherwise their behavior can compromise your credit.

In other words, an ideal tradeline should have a low utilization ratio, it should have a higher age than your average age of accounts and your oldest account, and most importantly, it needs to have a perfect payment history.

Therefore, you want to avoid being added as an authorized user to a tradeline that has any derogatory marks on it so that those derogatory items don’t get added to your credit file and end up damaging your credit.

That’s the danger of piggybacking on a friend or family member’s credit card—even if the tradeline is perfect when you are first added to it, there’s no guarantee that it will stay that way.

If your authorized user tradeline does get any missed payments on its record, that could definitely hurt your credit, and it would be smart to remove yourself from it immediately. To do so, simply call the credit card issuer and request to be removed from the account, as most banks allow you to do this without needing to go through the primary account holder.

Delinquency on the part of the primary account holder can cause problems if you are piggybacking on someone else’s credit account.

You declared bankruptcy.

Bankruptcy is one of the worst things you can have on your credit report. Since declaring bankruptcy essentially means you are asking to be released from the legal obligation to repay your debts, it shows lenders that you have an extremely high risk of defaulting in the future, so it can have a severe negative impact on your credit score.

There are inquiries on your credit file that you did not authorize.

Unauthorized inquiries on your credit file can unfairly drag down your credit. In our article on credit inquiries, we reported that each hard inquiry on your credit report can potentially cost you up to five points each.

Fortunately, you have the right to dispute any hard inquiries on your credit report that you did not authorize. You can learn more about the credit dispute process in “How to Fix the Most Common Credit Report Errors.”

Your credit file got merged with someone else’s.

Sometimes inaccurate information can get on your credit report not as a result of fraud or because your lender reported it incorrectly, but because your credit file accidentally became mixed with the information of another person.

This is called a “mixed credit file” or “mixed credit report” and it usually occurs with two consumers who have similar names.

If the credit history of the other consumer with whom your file has been mixed contains negative information, that would obviously be detrimental to your score, and you would need to correct the situation by filing a dispute with the credit bureau.

This is an example of why it’s important to check your credit report regularly. If there is incorrect information on your credit report that should be removed, you don’t want to find out about it when you’re trying to apply for credit. You need to catch and correct credit report mistakes early so that they don’t stand in the way of you achieving your financial goals.

You maxed out one or more of your credit cards.

Credit utilization makes up nearly a third of your FICO score, which means it’s critically important to keep your utilization low if you want to maintain a high credit score. Maxing out even just one credit card can have a significant negative impact, and if you max out multiple cards, you’ll be even worse off.

Check out our article on utilization ratios for tips on how to keep your utilization rate at an optimal level.

Someone opened an account in your name.

An account on your credit report that you don’t recognize could be an account that someone else fraudulently opened in your name.

We already covered how opening a new account can negatively affect your credit initially, but don’t forget that the same thing can happen if someone else uses your name to sign up for a new account.

If you see that your credit score has decreased, take a look at the inquiries and accounts on your credit report to see if there are any items that should not be there.

You have “double jeopardy” with collection accounts on your credit report.

Debt collection agencies are not known to be the most trustworthy entities and often do not have the best practices when it comes to keeping track of debts and contacting consumers. Information often gets lost or misrecorded when it is transferred between creditors and sometimes numerous collection agencies.

Because of this, some consumers find themselves with more than one entry for the same open collection account on their credit report, which is known as “double jeopardy.”

While the same collection may be listed multiple times due to the account changing hands, only the entity who currently owns the debt should be reporting the account as open.

Fortunately, if a collection is being reported in error, you can dispute the inaccurate information and have the information be corrected or potentially removed altogether.

Your credit report says you missed a payment even though you paid on time.

Dispute any mistakenly reported late payments so that they don’t unfairly affect your credit score.

Since payment history is the most important factor in your credit score, an incorrectly reported missed payment could severely damage your credit, especially if you are starting with very good credit. The higher your score to begin with, the more you stand to lose from a credit mistake.

This type of situation is another example that demonstrates why it’s so crucial to regularly check your credit report. If you always made all of your payments on time, you might assume that you must have a spotless credit record, only to find out at an inconvenient time that a creditor has been incorrectly reporting that you missed a payment.

Keep an eye out for errors like this on your credit report so that you can dispute them right away.

Your credit card issuer reduced your credit limit.

Sometimes, credit card issuers lower the credit limits of their cardholders, even for those who have consistently managed their accounts responsibly.

Unfortunately, they are usually allowed to do this without asking for your permission or letting you know in advance, so it may come as a nasty surprise when you swipe your credit card and get declined, or when your credit score takes a dive because your credit utilization is suddenly much higher.

There are a few reasons why your bank may reduce your credit limit, such as the following:

Credit card issuers sometimes cut credit card limits, which hurts your credit utilization ratio.

Your balances have been increasing, which indicates that you are taking on more debt and might be at a greater risk of defaulting.
You missed a payment and your account becomes delinquent.
Your account was inactive because you did not use your credit card enough.
The economy is down and lenders want to minimize their risk exposure levels.

Regardless of why your credit limit took a hit, the result is the same: with less available credit, your credit utilization increases, which is bad for your score.

If your credit card issuer slashed your credit limit, check out “How to Increase Your Credit Limit” for some useful tips, and don’t be afraid to give your bank a call to ask them to reconsider.

A collection account was deleted from your credit report.

Surprisingly, it is actually possible that getting a collection account removed from your credit report could make your credit score go down instead of up.

We talk about this in greater detail in “Collection Accounts on Your Credit Report: The Ultimate Guide” and “What Are Credit Scoring ‘Buckets?’” by credit expert John Ulzheimer, but the basic idea is that there are different credit scoring “buckets” that have slightly different methods of calculating credit scores for the consumers within each bucket.

By removing a collection account from your credit report, it is possible that you could move from one bucket into another bucket where your score will now be calculated differently. As a result of this new algorithm being applied to your credit report, your score could turn out to be lower than it was when you were in the first bucket.

You haven’t used any credit in a long time.

If you have used credit in the past but not recently, some of your old accounts may have fallen off of your credit report altogether. Accounts that are closed or inactive do not stay on your credit report forever. Positive accounts will generally stay on your credit report for 10 years, whereas negative accounts may stay on your credit report for up to 7 years.

When these old accounts age off of your credit report, you lose all of the credit history associated with them, the most important of which is the payment history. Because you are losing valuable credit history, your score could take a hit.

Those with thin credit files or those who have not used credit in several years will need to focus on building credit in order for their credit score to recover.

Conclusions

When it comes to your credit score, minor fluctuations are normal, so there’s generally no need to fret about losing a few points here and there.

If you are practicing good credit habits and paying all of your bills on time, it’s probably not necessary to watch your credit like a hawk and check your score every single week, and a change of a few points in either direction should not cause you to panic.

However, as we have seen, you don’t want to neglect your credit entirely, since mistakes can and do happen.

In addition, keep in mind that credit moves can sometimes have unexpected results, particularly in cases where you may be migrating from one credit scoring “bucket” to another.

If you see a significant drop in your credit score, that is definitely worth investigating further so that you can understand why it happened, address the issue, and hopefully get some of those credit score points back.

Read more: tradelinesupply.com

How to Get an 850 Credit Score [Infographic]

December 10, 2019CreditBy toptierfinancial

People who are serious about improving their credit often wonder what it takes to get the highest possible credit score. For the FICO 8 credit scoring model, the perfect credit score is 850.

As of April 2019, only about 1.6% of scorable consumers in the United States have the elusive 850 credit score, which is actually an increase from 0.98% in April 2014 and 0.85% in April 2009.

There are many other credit scoring models that are used for different purposes and may have different credit scoring ranges. However, since FICO 8 is the most commonly used credit score, we will use the number 850 as the benchmark for the ideal credit score.

Check out the infographic below for some fast facts on how to get the highest credit score possible, then keep reading the article for even more tips on getting the coveted 850 credit score.

Payment History — 35%

Most people who have an 850 credit score have seven years of perfect payment history.

Your payment history is the biggest slice of the credit score pie, so even one late payment or missed payment can significantly affect your score. Negative items can stay on your credit report for up to seven years, so if you miss a payment, you may not be able to achieve a perfect 850 credit score until at least seven years have passed!

To safeguard against the possibility of forgetting to make a payment, consider setting up automatic bill pay for all of your accounts. Be sure to continue to check your accounts regularly in case of any system errors.

If you do miss a deadline once in a blue moon but have otherwise been an upstanding customer, try negotiating with your creditor to see if they will forgive the late payment and wipe it from your record.

FICO says that 96% of “high achievers,” or those with FICO scores above 785, have no missed payments on their credit report.

Essentially, to get an 850 credit score, you just need to follow one simple strategy: make all of your payments on time for a long time. We will further discuss the connection between payment history and time in the “Length of Credit History” section below.

Credit Utilization/How Much You Owe — 30%

The amount of debt you owe compared to your total credit limit is your credit utilization ratio. To get a perfect credit score, you’ll want to keep this ratio as low as possible, both overall and on each of your individual tradelines.

A study by VantageScore and MagnifyMoney found that people with the best credit scores and people with the worst credit scores actually had similar amounts of outstanding debt. However, those with the best scores had an average total credit limit of $46,700—16 times the credit limit of those with the worst scores!

Therefore, for the high scorers, that outstanding debt made up a much smaller percentage of their total available credit than those with low credit limits and poor scores, which highlights the importance of the overall utilization ratio.

This study reported that the average credit card user has an overall utilization ratio of 20%, which is generally considered to be a safe number for maintaining decent credit. To become someone who has an 850 credit score, however, you’ll need to keep it around 5% or lower. As of 2019, FICO says that the average revolving utilization for those with the “850 profile” is 4.1%.

While consumers with 850 credit scores do use credit cards, they tend to keep their utilization ratios around 5% or lower. Photo by Ellen Johnson.

In addition, keep in mind that even if you have a low overall utilization ratio, individual cards with high utilization could still bring down your score. You can read more about this in our article on individual vs. overall credit utilization ratios.

As a hypothetical example, let’s say you have two cards: one with a $10,000 limit and a $0 balance and the other with a $1,000 limit and a $900 balance. Your total available credit is $10,000 + $1,000 = $11,000 and your total debt is $900. Therefore, your overall utilization ratio is $900 / $11,000 = 8% utilization, which is a very good number.

However, your account with the $1,000 limit has a 90% individual utilization ratio! Since you only have two accounts, that means 50% of your accounts have high utilization, and that could negatively affect your credit. According to creditcards.com, maxing out just one credit card can reduce your score by as many as 45 points.

To get around this problem, if you have any individual cards with high utilization, consider transferring the balance to other accounts to keep the utilization ratio on each account as low as possible.

You could also request credit line increases from your creditors, which can lower your utilization ratios and benefit your score. Try using the tips we provide in “How to Increase Your Credit Limit.”

Another way to help with overall utilization is to add low-utilization tradelines to your credit file.

Optimizing this factor also means not closing old accounts even if you don’t use them very often, because their credit limits could be helping your score. To ensure old accounts don’t get automatically closed by the banks for inactivity, try to use them every 1-2 months, perhaps for small, recurring bills.

Length of Credit History (Age) — 15%

This category takes into account age-related factors such as the average age of your accounts, the age of your oldest account, and the ratio of seasoned to non-seasoned tradelines. (A seasoned tradeline is an account that is at least two years old, which is when the account is believed to have a more positive impact on your credit.)

The more age your accounts have, the more they will help your credit score.

Age goes hand-in-hand with payment history, because the more age an account has, the more time it has had to build up a positive or negative payment history. Together, age (15%) and payment history (35%) make up 50% of your credit score, which shows how important it is to open accounts early and make every single payment on time.

This is also why we always say that focusing on age is the #1 secret to unlocking the power of tradelines.

According to FICO, the age of the oldest account of people who have 650 credit scores is only 12 years, compared to 25 years for people who have credit scores above 800. In addition, individuals with fair credit have an average age of accounts of 7 years, compared to 11 years for those with excellent credit.

Cultivating an 850 credit score takes years of maintaining a positive credit history.

FICO reports that the average age of the oldest account of consumers who have 850 credit scores is 30 years old.

We have an in-depth discussion of which age tiers are most significant in our article, “Why Age Is the Most Valuable Factor of a Tradeline,” but the bottom line for getting the best credit score is simply to get as much age as possible. Seasoned tradelines can help by extending the age of the oldest account and the average age of accounts.

Also, keep in mind that it may be impossible to achieve an 850 credit score without a certain amount of age, even if you do everything else perfectly. So if you have stellar credit habits but haven’t yet been able to join the 850 credit club, you may just need to wait patiently for your accounts to age.

Credit Mix — 10%

While the mix of credit is one of the least important factors in a credit score, to get a perfect credit score of 850, you will still need to consider this factor.

In this category, credit scores reward having a balanced mix of several different accounts, including both revolving credit and installment loans. This is because creditors want to see that you can successfully manage a variety of different types of credit.

As an example, a credit file that includes an auto loan, a mortgage, and two credit cards has a better credit mix than a credit file that has four accounts that are all credit cards.

About the “credit mix” credit score factor, FICO says, “Having credit cards and installment loans with a good credit history will raise your FICO Scores. People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.”

The total number of accounts is also considered, with more accounts generally being better, up to a certain point.

FICO also states that high score achievers have an average of seven credit card accounts in their credit files, whether open or closed.

Auto loans are common among people who have 850 credit scores.

If you are looking to improve your credit mix statistics, adding authorized user tradelines can increase the total number of accounts and help diversify one’s credit file.

850 scorers also have installment loans in their credit files. According to Experian, the average mortgage debt for consumers with exceptional credit scores (800 or above) is $208,617. In addition, people who have FICO scores of 850 have an average auto-loan debt of $17,030.

Experian says, “In every other debt category except mortgage and personal loan, people with perfect scores had more open tradelines but less debt than their counterparts with average scores—underscoring the value of being able to manage debt while having numerous credit accounts.”

For a more detailed breakdown of the credit mix factor of your credit score, see our article, “Credit Mix: Do You Need to Care About Types of Credit?”

New Credit — 10%

The “new credit” category of your credit score refers to how frequently you shop for new credit. This includes opening up new credit cards and applying for loans, for example. This “new credit” activity is reflected in the number of inquiries on your credit report.

Since seeking new credit makes you look like a higher risk to creditors, each hard inquiry has the potential to drop your score by a few points. Therefore, if you are going for a perfect 850, it’s best to avoid applying for new credit for a while.

However, it is possible to score an 850 with hard inquiries on your record. FICO recently stated that around 10% of 850 scorers had one or more inquiries within the past year, and about 25% had opened at least one new credit account within the past year.

If you need to shop for an auto loan or mortgage, be sure to complete all your applications within a two-week window in order for all of the credit pulls to count as one inquiry. For credit cards, however, each inquiry will be typically be counted individually.

Fortunately, inquiries only remain on your credit report for two years, and FICO scores only consider inquiries that occurred within the past year, so it shouldn’t take long for your credit to recover if you do have new inquiries on your credit report.

Inquiries aren’t the only thing that matters when it comes to the new credit factor of your credit score, however. It also includes data points such as the number of new accounts you have, the ratio of new accounts vs. seasoned accounts, and the amount of time that has passed since opening new accounts. The main idea if you want to maximize your credit score is to not open too many new accounts at once, which can make you look riskier to lenders and bring down your score.

More Tips on How to Get an 850 Credit Score

In addition to optimizing each of the above five categories that factor into your credit score, it is also important to regularly check for errors on your credit report and dispute any inaccurate information both with the credit bureaus as well as with the lenders who furnish the data to the bureaus.

In addition, those with very high credit scores rarely have serious delinquencies or public records on their credit reports, such as bankruptcies or liens. Obviously, this will be easy to avoid if you follow all of the suggestions above, but if you have a history of bad credit in your past, it could take up to 7-10 years to recover enough to get an 850 credit score.

850 Credit Score Benefits

What are the benefits of being in the 850 credit club? In reality, you’ll be able to take advantage of the benefits of having an excellent credit score whether you have a 760 credit score or an 850 credit score. You don’t need to score a perfect 850 to get the best credit cards or the best interest rates on loans.

Essentially, the main benefit of having the best possible credit score is bragging rights!

Final Thoughts on How to Get the Perfect Credit Score

While it’s probably not necessary to get an 850 credit score, it is smart to work toward the goal of having excellent credit by managing your credit wisely, which will eventually get you into the upper levels of high credit score achievers.

The most important factors of your credit score are payment history, utilization, and age. Therefore, to keep your credit in pristine condition, you’ll need to make all of your payments on time, keep your utilization as low as possible, and maximize your credit age. Beyond that, you’ll also want to maintain a balanced mix of accounts and minimize new credit inquiries.

Finally, take advantage of your three annual free credit reports to make sure your credit reports are free of damaging errors.

To summarize, here’s an example of what the credit profile of someone who has an 850 credit score might look like, as we illustrated in the infographic above:

No missed payments or delinquencies within the past seven years
A high total credit limit
The overall utilization ratio is 5% or lower
Individual credit cards each have low utilization, around 5% or lower
The oldest account is likely about 25-30 years old
The average age of accounts is at least 11 years
Typically has at least seven credit card accounts (whether open or closed)
Usually has an auto loan and/or a mortgage loan
May have additional installment loans
Minimal inquiries within the past year
No damaging errors on their credit report

Have you ever achieved the perfect 850 credit score? Is it a goal that you are currently working toward? Share your thoughts with us by leaving a comment below!

Read more: tradelinesupply.com

What Is a Derogatory Item on Your Credit Report?

October 31, 2019CreditBy toptierfinancial

Derogatory items on your credit report can be a big problem for your finances. These negative marks can stay on your credit report and damage your credit scores for several years. Fortunately, there are some things you can do to avoid getting derogatory marks as well as reduce the damage if you do end up with a negative item on your credit.

We’ll help you understand minor and major derogatories, how derogatory items affect your credit score, and what you can do about them.

What Is a Derogatory Credit Item?

The word derogatory simply means negative, so a derogatory credit item is a negative item on your credit report.

Derogatory items hurt your credit score and can impact your chances of getting approved for credit.

There are two types of derogatory items: minor derogatories and major derogatories.

Minor Derogatory Items

A minor derogatory is a payment that was past due, either 30 days late or 60 days late. If, after the 30- or 6-day late, you brought the account current again, then it is considered a minor derogatory mark. However, if you are currently 30 to 60 days late, it is considered a major derogatory, which we will discuss below.

30 Days Past Due

Lenders cannot report your account as late to the credit bureaus until 30 days have elapsed since the missed due date, so if you pay your bill anywhere between one to 29 days after the due date, you should not see a derogatory item reflected on your credit report.

However, your lender may charge a late fee, so it’s still best to pay all of your bills on time. If you’ve never been late on the account before, you can contact your lender and see if they can waive the late fee for the accidental late payment. Many lenders are willing to do this for account holders that otherwise have good records.

In addition, if you have a promotional interest rate, you will most likely forfeit the promotional rate if you miss a payment, even if you were only a few days late.

A 60-day late payment could result in an interest hike from your credit card issuer.

60 Days Past Due

If you miss your due date twice in a row and become 60 days late, the situation becomes more serious. At this point, the credit card issuer can hit you with a penalty APR of up to 29.99%.

Not only will this high interest rate apply to all your purchases for at least the next six billing cycles, but in this case, the bank is also allowed to apply the penalty rate to your existing balance as well. Not all credit cards have penalty APRs, however, so check the terms of your card to see if you could be subject to one.

Thankfully, “universal default” is a thing of the past—the practice of credit card companies raising consumer’s interest rates if they were late on any loan with any lender was banned by the Credit Card Act of 2009.

However, the exception is if you have multiple cards with the same bank. In this case, if you miss a payment on one of the cards, the bank is allowed to raise your rates on all of the cards you have with them.

Major Derogatory Items

A court judgment against you is a major derogatory.

A major derogatory credit item is typically defined as an account that is 90 days past due or more. If you have a major derogatory on your credit report, that is a huge red flag to lenders, and it may hinder you from being able to qualify for credit.

Examples of major derogatory credit items include:

Charge-offs – This is when a creditor writes off your account as a loss because you are so delinquent on the debt that they assume that the debt is unlikely to be paid. This typically happens after six months have passed without payment.
Collections – After your account has been charged off by the lender, they may try to regain a portion of their losses by selling the account at a discount to a debt collector, who then becomes the owner of the debt and will try to collect the funds from you.
Court judgments – A judgment is when a lender or debt collector sues you over an unpaid debt and the court orders you to repay it. A court judgment gives the lender or debt collector more powerful options to collect the money you owe them, such as garnishing your wages or putting a lien on your home.
Foreclosures – This happens when you become so delinquent on your home loan that the bank takes possession of the home so that they can try to recover the balance of the loan by selling the property.
Settlements and short sales – A settlement is an agreement between you and your lender that you will pay back part of the debt you owe them. The lender will then stop trying to collect more money from you after you have paid the settlement amount, but since you did not pay the full amount you owed, it is a derogatory item. A short sale is considered to be a type of settlement since the lender is agreeing to sell the property for less than the mortgage balance you owe.

Bankruptcy is the most serious derogatory credit item.

Repossessions – This is when the lender takes back possession of something such as your car or your house because you defaulted on the payments.
Public records – Public records such as delinquent taxes, liens, unpaid alimony, and unpaid child support, are derogatory items that can be severely damaging to your credit, especially if there is still a balance owed.
Bankruptcy – Filing bankruptcy means you are asking to be legally released from paying back some or all of your debts. Because of this, and because it affects several credit accounts, not just one, it is the most damaging derogatory item. It will almost certainly devastate your credit score and reduce your chances of getting approved for credit for a significant amount of time, although it is possible to recover from bankruptcy eventually.

How Do Derogatories Affect Your Credit Score?

As you may have guessed, any derogatory mark on your credit report can seriously damage your credit score. However, they do not affect everyone equally. There is no predetermined amount of points that is associated with any given credit action.

Here’s how credit expert John Ulzheimer put it in an article on The Simple Dollar:

“There is no fixed value to any derogatory entry. Their value is always relative to the presence or absence of other similar derogatory entries on a credit report. So, the answer to the question ‘how much?’ varies from ‘not at all’ to ‘a whole lot’ — and everything in between.”

In other words, the effect of a derogatory item could range from a significant drop in your credit score to potentially no difference in your credit score at all. It is going to depend on 1) what else is already in your credit file and 2) the severity of the derogatory information.

For those who have pristine credit records, even one 30-day late payment can do some serious damage to their credit scores. On the other hand, if you already have some delinquencies on your report, additional delinquencies won’t have as great of an impact.

Derogatory items will also have a larger impact on those with thin or short credit files, meaning they do not have very much positive credit history to help soften the blow of a negative mark. In contrast, those with a thicker file or longer credit history will have more positive history in their file to help balance out any negative events.

Credit scorecards, or “buckets,” can affect the impact of a derogatory item on your credit score.

Another complication is the concept of credit scoring scorecards or “buckets,” which score groups of consumers differently based on certain characteristics of their credit profile.

As a hypothetical example, there could be a scorecard for consumers with no major derogatories and a scorecard for consumers with one major derogatory. In this case, getting your first major derogatory mark could put you into a different scorecard, wherein your score would be calculated in an entirely different way than it was before.

While the impact of a derogatory item is going to vary from person to person depending on their unique individual credit history, one thing we do know for sure is that derogatory items become less impactful to your credit as time passes.

In fact, it is still possible to have good credit with a derogatory mark on your credit report if it is an old item and you have balanced it out with positive credit history since then.

How Late Payments Affect Your Credit Score

In terms of how bad late payments are for your credit, it’s not so bad to miss a payment on one account for one or two months, according to an article on The Balance. However, missing payments on several different accounts for one to two months will be worse for your credit. And finally, missing even one payment for three months in a row will be equally as harmful as a charge-off or collection since they are all major derogatory items.

The Impact of a Derogatory Item May Depend on the Credit Scoring Model

VantageScore and FICO scores treat certain derogatory items differently.

When it comes to collection accounts, for example, collections that have been paid off and small-balance collections have different impacts depending on which credit score is used.

FICO 8, the most widely used credit score, considers both paid and unpaid collections to be major derogatories. That’s one reason why paying off a collection account may not always increase your credit score.

FICO 9 and VantageScore 3.0 and 4.0 disregard collection accounts altogether once they have been paid. In addition, these three scoring models assign less weight to medical collections. FICO 8 and FICO 9 ignore collections that had an original balance of less than $100.

Paying the past-due balance does not make the derogatory mark disappear, but it is usually still a good idea.

Does Paying the Past-Due Balance Delete the Derogatory Mark?

Unfortunately, simply bringing the account current by paying the past-due balance does not make the derogatory mark disappear. It does not negate the fact that you were late paying your bill, which is important information that helps determine your credit score and helps lenders decide whether they want to do business with you.

Payment history is the most important part of both your FICO score and your VantageScore for a reason. It is highly predictive of how much of a credit risk you represent to lenders. For that reason, accurate derogatory information must stay on your credit report even after you have caught up on payments.

However, can still be beneficial to pay off the derogatory items on your credit report. Experian says, “While paying off a derogatory account won’t automatically remove it from your credit history, it will be updated to show it has been paid, and lenders may view a paid derogatory more favorably than an unpaid one.”

How to Minimize the Credit Score Impact of a Derogatory Item

Although bringing an account current will not remove the negative information from your credit report, it is still a good idea. Having made a late payment in the past and then catching up is better for your score than currently being late.

Moving forward, do your best to make sure you’re not late again.

Maintaining a positive credit history from now on is the most important thing you can do to minimize the effect of a derogatory item and restore your credit back to health.

Once you have done all you can to mitigate the damage of a derogatory item, then it simply becomes a matter of waiting until the negative mark ages off your credit report.

How Long Can Derogatory Credit Items Stay on Your Credit Report?

In general, derogatory marks can be reported for up to seven years after the account was first reported as late, which is referred to as the date of first delinquency (DOFD).

If you get a court judgment against you, however, that will remain on your credit report for seven years after the judgment was issued, not seven years from the date you were first late on the original debt.

Certain types of accounts can stay on your credit report even longer. Depending on the type of bankruptcy, for example, bankruptcy may stay on your credit report for up to 10 years.

According to Experian, since a Chapter 13 bankruptcy requires you to pay some of the debts you owe, this type of bankruptcy is removed from your credit report after seven years. With a Chapter 7 bankruptcy, you don’t pay back any of the debt, so it is removed 19 years after the date of filing instead of seven years. The individual accounts associated with the bankruptcy will still disappear seven years after the DOFD for each account; filing for bankruptcy does not affect the seven-year timeline.

Dispute derogatory items on your credit report that are inaccurate via mail.

Besides a Chapter 7 bankruptcy, all other delinquencies are required by law to be deleted from your credit report after seven years. However, the impact of a derogatory mark on your credit score will decrease over time, especially if you maintain a positive credit history going forward that can help outweigh the negative items.

Removing Derogatory Credit Items From Your Credit Report

If you have inaccurate negative items on your credit report, it’s in your best interest to dispute the derogatory items on your credit report as soon as possible.

Your credit reports should have instructions on how to dispute derogatory credit items that have been put on your credit report in error. The best way to dispute inaccurate negative information is to send a separate letter for each dispute via certified mail, along with any accompanying evidence that is needed to verify the validity of your claim.

Make sure to dispute the derogatory items on your credit report with the credit bureaus as well as with the creditor that is furnishing the data.

You can read more about how to dispute inaccurate derogatory items in our article, “How to Fix the Most Common Credit Report Errors.”

Should You Write a Letter Explaining Derogatory Items on Your Credit Report?

You may need to write a letter explaining derogatory items on your credit report when applying for a mortgage.

A letter of explanation is a letter that you write to a lender explaining the reason for negative marks on your credit report. This may be required by your lender when you apply for a mortgage, particularly when applying for a home loan that is subsidized by the government, such as an FHA loan or VA loan.

Your mortgage lender needs to be certain that you will be able to pay off your home loan. They will want to understand the circumstances of any derogatory items on your credit report in order to determine whether you have learned from your mistakes and taken steps to improve your situation or whether you may still be at risk of defaulting on a loan in the future.

A good letter of explanation should be truthful, clear, and detailed. If there were extenuating circumstances that led to you becoming behind on your bills, explain what happened and how you resolved the problem. As with a credit report dispute, be sure to include any documentation that supports your story along with your letter of explanation. Try looking up sample letters of explanation online if you need help.

How to Avoid Getting Derogatory Marks on Your Credit Report

Since accurate and timely derogatory information can’t legitimately be removed from your credit report, the best strategy is to prevent them from happening in the first place.

If you accidentally miss a payment, call your creditor right away to see if they can waive your late fee.

Here are some tips to help you keep your credit in the clear.

To ensure you never miss a payment, set up automatic payments for all your loans and credit cards.
As an additional precaution, also set up notifications that alert you when your statement is available and when your due date is coming up so that you can keep an eye on your accounts and make sure that the payments are going through. Knowing exactly when your bill is due and how much you need to pay will also allow you to make sure that you have sufficient funds in your bank account to make the required payments.
If you are in a period of financial hardship and can’t afford to make the minimum payment, contact your creditor and try to work out an arrangement with them to temporarily reduce or defer payments.
If you accidentally miss a payment but you usually pay on time, bring the account current by making the payment as soon as possible. Then, contact the lender and ask if they would be willing to waive the late fee. If you pay before 30 days have passed since your original due date, you can avoid getting a derogatory mark reported to the credit bureaus. If you’re 30 to 60 days late, you’ll have a minor derogatory on your credit report, but not a major derogatory. Try your best to pay before the account becomes 90 days past due, at which point it will count as a major derogatory.
Regularly check your credit reports for derogatory items that don’t belong to you so you can dispute the errors and have them removed from your credit report.

Conclusions

Having derogatory items on your credit report, particularly major derogatories, can be highly damaging to your credit for a long time. If there are derogatory items in your past, balance out the negative effects by adding positive payment history going forward, and use smart credit strategies to avoid getting derogatory marks in the future.

Read more: tradelinesupply.com

Why Age Is the Most Valuable Factor of a Tradeline

October 8, 2019CreditBy toptierfinancial

Length of credit history, also referred to generally as credit “age,” is one of the five main factors in the credit score algorithm, making up roughly 15% of one’s credit score.

FICO breaks up this general category into three parts:

How long each individual account has been open
How long certain types of accounts have been open (e.g. revolving accounts vs. installment accounts)
The amount of time since those accounts were last used

Since a longer credit history provides more evidence that you have responsibly handled credit, generally, those with longer credit histories tend to have higher credit scores than those with shorter credit histories. When it comes to age, more is always better.

Account Age & Payment History Are Linked Together

Age always goes hand-in-hand with payment history, which contributes about 35% of your credit score, making it the most heavily weighted category. Obviously, an account needs to have age in order to have a payment history, and as an account ages, it acquires more payment history.

Age also affects the power of blemishes in your payment history. For example, a missed payment can cause a big drop in your credit score at first, but as the account ages, the effect will gradually be diminished until the missed payment falls off of your credit report completely.

Since the length of credit history (i.e. age) and payment history categories are closely linked, we can add them together to find out their combined power, which turns out to be 50% of a credit score! Therefore, age-related factors are going to be extremely important when it comes to choosing tradelines.

Some Age Levels May Hold More Weight Than Others

Since age is such a big part of credit, there is a lot of speculation about the specific age-related factors that may play a role in credit scoring algorithms. For example, it is commonly believed that there are certain age levels after which an account has a more powerful positive impact on one’s credit.

In other words, the positive effect of age on an account is not thought to be a gradual and continuous increase in score over time, but rather, a series of jumps upward that happen at certain points in time, such as after a specific number of years or months have passed.

As we said, many speculate on this topic, and we don’t pretend to have the definitive answer. FICO, VantageScore, and other credit scoring companies intentionally keep the details of their credit scoring formulas under wraps. However, based on the examples that we have seen, we have come up with our own observations on the question of which age levels are particularly beneficial for credit.

Age Bracket Experiment

To test out our theory, we conducted an experiment. We chose to use the myFICO Score Estimator specifically since this credit score estimator is owned by FICO themselves, who are the creators of the most widely used and trusted credit score. It stands to reason that using a product straight from the source of the FICO score would give the most accurate findings.

Educational scores such as the VantageScore use different algorithms and are not widely used by lenders. Therefore, since our priority is to understand our FICO score, the FICO score estimator will be the most useful.

We used this credit score estimator to estimate credit score ranges with a different age of oldest account each time, holding all other inputs constant. To minimize any negative impact from other factors that could affect the results, such as late payments or high balances, we chose the options that should represent the best impact on credit while still establishing a credit history.

How Do Credit Card Age Levels Affect Credit?

Here are the answers we gave to each question in the credit score estimator:

How many credit cards do you have? 1

How long ago did you get your first credit card? (This is what we were testing, so it changed each time.)

How long ago did you get your first loan? (i.e., auto loan, mortgage or student loan, etc.) Never
How many loans or credit cards have you applied for in the last year? 0
When was the last time you opened a new loan or credit card? More than 6 months ago
How many of your loans and/or credit cards currently have a balance? 0-4
Besides any mortgages, what is the total balance on all your loans and credit cards combined? Less than $500
When did you last miss a loan or credit card payment? Never
How many of your loans and/or credit cards are currently past due? 0
What percent of your total credit card limits do your credit card balances represent? 0% to 9%
In the last 10 years, have you ever experienced bankruptcy, repossession or an account in collections? No

FICO’s Age Brackets

If you take the quiz, you’ll notice that the myFICO credit score estimator gives a hint as to potentially important age levels right in the first question.

The myFICO credit score simulator gives a hint as to potentially important age levels in the first question.

We tested each of the options shown in the screenshot while keeping all other answers the same, as we described. Keep in mind that the score estimator does not give a single number for the answer, but a range of 50 points (e.g. 730-780). You can see the results of our credit score experiment below.

The myFICO Score Estimator predicts that when all other factors are held constant, credit score increases occur after 2 years, 5 years, 8 years, 10 years, and 20 years. The biggest jumps happen at 2 years and 10 years, but the highest credit score can be achieved after 20 or more years.

The myFICO credit score simulator shows credit score boosts after 2 years, 5 years, 8 years, 10 years, and 20 years.

Based on this information, here’s how we would divide up the age levels of tradelines:

Level 1
0.5 – 2 years

Level 2
2 – 5 years

Level 3
5 – 8 years

Level 4
8 – 10 years

Level 5
10 – 20 years

Level 6
20+ years

Why Age Is Top Priority When Buying Tradelines

We have already discussed why we believe age is usually the most important factor when making the decision to purchase tradelines in our buyer’s guide to choosing a tradeline. Since age and payment history are always interconnected, together making up half of the power of a credit score, it is usually most effective to focus on getting a tradeline with as much age as possible.

The information we learned from the myFICO score simulator just goes to show how true that is. There can be a significant difference in the power and value of a tradeline that is 11 years old versus 9 years old or one that is 2 years old versus 1 year old.

Also, keep in mind the importance of your average age of accounts. According to FICO, those with the highest credit scores have an average age of accounts of about 12 years, compared to just 6 years for those with fair credit. Recall from our buyer’s guide that you might be surprised by how old a tradeline would need to be in order to get your average age of accounts up to the next level!

FICO also says that those with credit scores of 795 and above have 27 years of credit history on their oldest tradeline, while those with credit scores of 635 only have 12 years of history on their oldest account.

Credit score
Average Age of Accounts
Age of Oldest Account

795+
12 years
27 years

635
6 years
12 years

Source: FICO

Conclusion on the Importance of the Age of a Tradeline

When attempting to understand any system, it is always best to go straight to the source to acquire the most accurate information. Fortunately, FICO provides tools such as their myFICO Score Estimator for everyone to use to experiment with their own credit-related variables.

The payment history of an account is always attached to time; in other words, the age of a tradeline will automatically include the payment history as well. With the length of credit history representing approximately 15% of your credit score, combined with payment history representing approximately 35%, together these add up to approximately 50% of your credit score. This is why the age of a tradeline is almost always the most important variable to consider.

As we can see from the results from this case study, it is also clear that there are key age brackets that hold more weight than others. Knowing this information allows you to set strategic goals and allows you to plan your credit growth more effectively.

Therefore, when choosing tradelines you should keep age as a top priority and aim for the age thresholds that hold the most weight. Make sure to use our tradeline calculator to help you with these calculations so you get the most out of your tradelines.

Read more: tradelinesupply.com

Let’s Get to the Bottom of These Credit Myths

September 22, 2019CreditBy toptierfinancial

Myths and misinformation about credit scores, credit reports, and credit repair are extremely common. Unfortunately, many people believe these myths, and their credit suffers as a result of taking incorrect actions.

Let’s get to the bottom of these credit myths and learn the truth about them so you can start improving your credit the right way.

Myth: Everyone automatically has a credit score.
Fact: 1 in 5 adults in the United States do not have credit scores.

A report by the Consumer Financial Protection Bureau (CFPB) found that one-fifth of adults in the United States do not have enough credit data to calculate a credit score by traditional methods. These consumers are called “credit invisibles.”

Low-income consumers are particularly susceptible to credit invisibility due to lack of access to traditional credit products. Some consumers may be credit invisible for other reasons, such as a voluntary decision not to use credit.

For those that do not use credit for whatever reason, it is likely that they do not have enough of a credit history to generate a credit score.

Consumers that are credit invisible may be able to generate a credit record by piggybacking on the good credit of others, but don’t assume that everyone has a credit score just by virtue of existing.

Myth: Checking your credit report will hurt your credit score.
Fact: Checking your own credit will not hurt your score.

Checking your own credit report results in what is known as a “soft pull,” which means the inquiry does not affect your credit score.

To understand the difference between hard and soft inquiries and how they affect your credit score, see our article, “Are Inquiries Really Killing Your Credit?”

Myth: Your income affects your credit score.
Fact: Your credit score does not look at your income.

However, your income can affect your credit indirectly in that it influences the “five C’s” that have been shown to predict credit performance: capacity to pay off debts, the collateral backing a loan, capital available to repay a loan, conditions that affect income and expenses, and the character of the borrower.

Your capacity to pay off debts as well as the collateral and capital they have available to repay loans may all have a relationship with your income.

That’s a big part of the reason why low-income consumers are 8 times more likely than high-income consumers to have no credit score at all. In consumers that do have credit scores, those who reside in low-income areas have lower credit scores. In addition, low-income consumers are 240 percent more likely to have their credit file originated due to derogatory items such as collections.

So while your income is not technically incorporated into your credit score, it can definitely influence your ability to repay debts, which is the basis of a credit score.

Myth: You only have one credit score.

Each consumer can have dozens of different credit scores.

Fact: There are many different credit scores.

There are two general types of credit scores: FICO scores, developed by Fair Isaac Corporation, and VantageScore, developed by the three major credit bureaus (Equifax, Experian, and TransUnion).

FICO 8 is the credit score most commonly by lenders today, but in some industries, older models or industry-specific models are used instead. For example, there are FICO scores tailored specifically toward auto loans and credit cards, and mortgage lenders are known to use the older FICO score versions 2, 4, and 5. Plus, FICO scores are different for each credit bureau.

VantageScore, which is increasingly used by some lenders as well as for consumer credit education, also has a few versions. The latest version is VantageScore 4.0, but VantageScore 3.0 is still the most commonly used version today.

Altogether, between the many versions of FICO scores and VantageScores, consumers can have dozens of different credit scores.

Myth: Paying half of your minimum payment twice a month counts as two full payments and tricks the system into giving you twice the credit score boost.
Fact: Dividing your bill in half and making two payments is the same as paying the full amount once.

This credit myth is unfounded yet often repeated.

If this “credit hack” sounds a little too good to be true, that’s because it is. It is simply not true that you can “trick the system” into thinking you have made two full payments by making two half payments.

Making a payment on a credit account affects two main factors of your credit score: payment history and credit utilization. Let’s discuss each factor individually.

When it comes to your payment history, making a partial payment that is less than the minimum amount due does not satisfy the requirement and will not count as an on-time payment. Only once you have made the second payment for the other half of the amount due will you have satisfied the requirement to be considered paid on time. Therefore, you do not gain any extra benefit to your payment history from dividing your payment into two parts instead of paying the full amount at one time.

As an example, let’s say you have a bill due on the 30th and the minimum amount you must pay is $50. We have laid out the two payment scenarios in the table below.

Scenario 1: Pay the full amount in one payment
Scenario 2: Make half of the payment twice

Date
Amount Paid
Payment Status
Date
Amount Paid
Payment Status

15th

15th
$25
Insufficient payment—$25 still due

30th
$50
Paid on time
30th
$25
Paid on time

As you can see from the table, in both scenarios, you only get the benefit of paying your bill on time once per billing cycle, not twice.

Now let’s discuss the utilization factor. Continuing with the same example, the total amount you are paying toward the account is $50 in both scenarios. Therefore, the overall improvement in your utilization ratio is going to be the same either way.

Now, if the reporting date for that account is in between the first and second payments, since you have already sent a partial payment, you may temporarily get a small boost from having a slightly lower utilization ratio when the account reports to the credit bureaus. But at the end of the billing cycle, the result will be the same.

If you don’t have any credit history, you can being building credit by piggybacking on someone else’s good credit.

If you decide to make extra payments in addition to your minimum payment, which is ideally what all responsible borrowers should be doing, that can certainly help your credit score by speeding up your debt repayment. But simply splitting the minimum payment into two payments won’t do anything to boost your score.

Myth: If you don’t have credit history, you’ll never be able to get credit.
Fact: You can start building credit by piggybacking.

While it can definitely be more difficult to get credit when you don’t have any credit history to begin with, it’s not impossible. There are credit products out there designed for people with no credit or bad credit, such as secured credit cards and credit-builder loans.

Another way to start building credit fast is by piggybacking off of the good credit of someone else. You could have someone you trust cosign on a loan or open a joint account with you, or you could become an authorized user on someone else’s seasoned tradeline.

If you are not lucky enough to know someone who has a seasoned account with perfect payment history that they could add you to, consider purchasing tradelines from a reputable tradeline company.

Myth: Paying off a collection will “re-age” the debt because the account falls off your credit report based on the date of last activity.
Fact: Collections fall off your credit seven years after the initial delinquency and cannot legally be re-aged.

It is illegal to “restart the clock” on collections.

If you’ve read our article about collections on your credit report, then you know that it is the date of first delinquency (DOFD) that determines when the collection will be removed from your credit report, not the “date of last activity” (DLA).

The reason why some people may believe this myth is because shady debt collectors sometimes illegally change the date of first delinquency to the date of last activity in an attempt to re-age the debt.

As we said, this practice is illegal. If you notice that a debt collector has improperly changed any information about a collection account on your credit report, you have the right to dispute the inaccurate information.

Myth: Paying off a collection will boost your credit score.
Fact: Paying off a collection may or may not raise your score depending on which credit score is used.

While it makes sense to assume that paying off a collection should increase your credit score, that is not always the case. In fact, more often than not, this is not the case, although it depends on which credit score is being used.

With FICO 8 and all previous FICO scores, both paid and unpaid collections are categorized as major derogatory items on your credit report. Therefore, paying off the account will not change how it is considered by the credit scoring algorithm, which means your score may not go up at all.

On the other hand, FICO 9, VantageScore 3.0, and VantageScore 4.0 ignore paid collection accounts, so your score should recover after paying off a collection if one of these credit scoring models is being used.

Myth: You should close accounts you’re not using.
Fact: You should keep accounts open and use them periodically.

While you might think that closing accounts you don’t need will help your credit score, the opposite is actually true, especially when it comes to revolving accounts such as credit cards.

The main reason for this is that credit utilization is an important part of your credit score, and closing credit card accounts will hurt your utilization ratio by decreasing your credit limit.

It could also hurt your mix of credit, although that’s a less important factor.

In addition, payment history is the number one factor that helps your score. It’s better for your credit to keep the account open, use it for small purchases here and there or a monthly subscription, and pay it off every month to keep building more positive payment history.

The exception to this is if an account comes with an annual fee that’s no longer worth the price or if you can’t resist the temptation to overspend.

Myth: Closed accounts don’t affect your credit.
Fact: Closed accounts can have a significant impact on your credit.

Although we just discussed why you shouldn’t necessarily close old accounts, that’s not to say that closed accounts don’t impact your credit. They certainly can, particularly when it comes to your credit age.

Closing an account does not remove its payment history or age from your credit report, so closed accounts still contribute to your credit age. In addition, accounts can continue to age even after they have been closed.

So although it’s best to keep accounts open if you can, having closed accounts on your credit report is not a bad thing. If the account was closed in good standing, it will likely continue to help your credit.

Carrying a balance on your credit cards is expensive and does not help you build credit. Photo by Hloom on Flickr.

Myth: Carrying a balance on your credit cards will help your credit.
Fact: Carrying a balance will not help you build credit and it will cost you interest fees.

While it is important to use credit regularly when building credit, it’s not necessary to carry a balance on your credit cards from month to month. If you do this in an attempt to build credit, you will be wasting money by paying unnecessary interest.

The best way to build credit using your credit cards is to use them responsibly and then pay the full balance due each month, or even make multiple payments each month to keep your utilization ratio as low as possible.

Myth: Shopping around for the best rates on a loan will hurt your credit score.
Fact: Getting loan estimates from multiple lenders will not hurt your score if you complete the process within a specific time window.

Credit scoring algorithms understand that it’s smart to shop around for the best rates on a loan, not risky. Therefore, credit scores typically have ways of preventing the series of multiple inquiries that result from this process from hurting your score excessively.

If you are applying for student loans, mortgages, or auto loans, FICO scores allow a certain time frame for you to shop around, only counting one hard inquiry to your credit report for this time period. For older FICO scores, the time window is 14 days; for newer FICO scores, the time window is 45 days.

In addition, FICO scores have a 30-day hard inquiry “buffer,” meaning that the algorithm ignores any inquiries that occurred within the past 30 days when calculating your score.

VantageScore uses a simpler method: it groups all inquiries made within a 14-day window of each other together and counts those all as one inquiry, regardless of what types of accounts the inquiries were for.

Myth: You can fix your credit by disputing everything on your credit report.
Fact: Disputing everything on your credit report could get you in legal trouble and may not even help your credit.

If there is information on your credit report that is inaccurate, outdated, incomplete, or unverifiable, of course you would want to dispute those items with the credit bureaus. But it’s not necessarily a good idea to dispute negative items on your credit report that are accurate.

First of all, the derogatory items won’t necessarily get deleted from your credit report, especially if you don’t provide proof that they are inaccurate. They might just get updated with the correct information, or they may get deleted temporarily until an investigation determines the items are valid and they go right back on your credit report.

Furthermore, the credit bureaus don’t have to investigate disputes that are deemed “frivolous,” and they could decide that some of your disputes are frivolous if you are disputing every item in your credit file, regardless of accuracy.

Plus, lying on a credit dispute could be considered fraudulent. According to the FTC, “No one can legally remove accurate and timely negative information from a credit report.”

Even if you were to get away with disputing everything on your report, this might not necessarily help your credit as much as you hoped. If you’ve gone through an aggressive credit sweep and have nothing left on your report, then you essentially have no credit history and likely no credit score, which could be just as problematic as having bad credit.

Myth: CPN numbers can be used in place of social security numbers to create a new, clean credit file.

Using a CPN to apply for credit is a federal crime. Photo via seniorliving.org.

Fact: CPNs are illegal and using one to apply for credit is a federal crime.

Although you might have heard some people claim that “credit profile numbers” or credit privacy numbers” are a legitimate way to protect your privacy or wipe your credit slate clean, in reality, there is no legitimate or legal source for CPN numbers.

Most of the time, these numbers are either fake social security numbers that have not been created yet or real SSNs that have been stolen from children, the elderly, deceased people, people who are incarcerated, and people who are homeless. Either way, using a CPN means getting involved in identity fraud, which is a federal crime.

The Social Security Administration and the Federal Trade Commission have both explicitly stated that applying for credit using a CPN is illegal and that those who sell CPNs are scamming consumers.

Learn more about the dangers of CPNs in our article.

Myth: The credit score you check online is the same one lenders see when they pull your credit.
Fact: Lenders often do not use the same credit scores that are provided for free online.

When you check your credit score for free online, the credit score you see is most likely going to be a VantageScore. This is the score most commonly used by free online services such as Credit Karma.

The majority of lenders, however, primarily use FICO scores, although some lenders are now starting to use VantageScore. Just keep in mind that the score you see online may not be the same as the score lenders see, as there can often be a significant difference between your VantageScore and your FICO score.

If you want to check your FICO score for free, check with your credit card issuer, since many now offer this service.

Myth: If you don’t have any debt, you will have a good credit score.
Fact: You need to use credit to build your credit score.

Having good credit doesn’t just come down to the amount of debt you have—that’s just one part of your credit score. Payment history is the most important part of a credit score, so if you’ve never had debt and you don’t have any payment history, you might not even have a credit score at all.

To get a good credit score, you have to use some form of credit and demonstrate that you can use credit responsibly by building up a positive payment history over time.

Myth: There’s no need to check your credit report until it’s time to apply for a big loan.
Fact: It’s important to monitor your credit regularly.

Waiting to check your credit score until you need to apply for credit is a mistake because there could be errors on your credit report bringing your score down. Studies estimate that about one-fifth of consumers have at least one error on their credit report, some of which could be serious enough to result in higher interest rates, less favorable loan terms, or being denied credit.

It’s important to keep an eye on your credit so that you can correct errors and fight fraud as soon as possible instead of waiting until it’s too late.

Myth: A late payment will make your score go down by 50 points.
Fact: There is no set amount of points that is associated with any particular item on your credit report.

While it is certainly possible that a 30-day late payment could cause a 50-point drop (or more) in someone’s credit score, this is not always going to be the case. There is no fixed number of points that your score will go up or down by for each item on your credit report. Rather, the way in which a late payment affects your score is always going to depend on your individual credit profile.

There is no set amount of points associated with missing a payment.

Credit scoring algorithms are very complex and they incorporate hundreds of variables, such as how recent the late payment is, whether you have other late payments in your credit history, and how severe the delinquency is, not to mention the myriad other variables associated with the other categories within a credit score.

Because delinquencies on your credit report are always going to be relative to whatever else is in your file, there is a “diminishing returns” effect where the first late payment hurts your score the most and each subsequent late payment tends to have a smaller impact. Someone who has a high credit score and has never missed a payment before is going to experience a severe drop from their first missed payment, whereas someone who already has lates on their record and a lower credit score is going to be hurt less by a subsequent late payment.

According to credit expert John Ulzheimer in a blog article, “Delinquencies, like inquiries, do not have independent value… It is entirely inappropriate and incorrect to say that ‘X’ lowered my score by ‘Y’ points.”

He continues, “The late payment didn’t lower your score but because adding a late payment to a credit report moves other things around it caused your score to be different than it was before the late payment was added. If your score is 50 points lower it’s not as if the new late payment lowered your score 50 points…but because the addition of that item caused a different evaluation of EVERYTHING on your credit reports…the new reality for you is 50 points lower.”

The same principle goes for other items on your credit report as well, not just late payments.

Myth: You don’t have to worry about your kid’s credit.
Fact: You should keep an eye on your kid’s credit report, too.

The proliferation of scammers and hackers stealing people’s private information means even your kid’s credit profile could be at risk of identity theft. When people use “credit profile numbers” (CPNs), for example, these numbers are often real social security numbers stolen from children.

Make sure you monitor your kid’s credit in addition to your own.

You don’t want to wait until your child is grown up and ready to apply for credit to realize they have bad credit as a result of identity theft. Consider freezing your kid’s credit to prevent fraudsters from opening accounts in their name.

Myth: Everyone’s credit score is calculated in the same way.
Fact: Credit scores have “scorecards” that categorize consumers and score them differently.

You already know that credit scoring algorithms are extremely complex, but what many people don’t know about is the “scorecards” or “buckets” within each credit scoring model. These “buckets” consist of different categories of consumers.

For example, according to John Ulzheimer, “There are scorecards for thin files or those with few accounts, bankruptcy, derogatories, and those with clean credit files… Comparing like populations gives this population an opportunity to be considered based on [the] behavior of that group rather than a comparison to another, better group.”

The credit scoring formula is different for each bucket. In other words, items on your credit report can be treated differently based on which scorecard you fall into.

Sometimes your credit score changes in a way that you don’t expect. For example, perhaps an inaccurate collection account got deleted off of your credit report and your score went down, instead of up. This could be because you changed scorecards as a result of the deletion, causing your credit score to be calculated in a different way. Essentially, you might now be at the bottom of a different bucket instead of at the top of your previous bucket.

It’s always good to keep the concept of scorecards in mind, especially when trying to predict any kind of change to your credit score. You can never guess exactly how your score will change because of all the complexities and trade secrets that go into credit scores.

Conclusions

Unfortunately, there are tons of credit myths out there, and believing them may lead you to mismanage your credit and eventually end up with poor credit. We hope that this article helped to dispel many of the misconceptions about credit and helped you get started on the path to better credit.

What credit myths have you heard of? Did you use to believe any of these? We’d love to hear from you, so share your experience with us in the comments!

Read more: tradelinesupply.com

How to Get an 850 Credit Score

August 19, 2019CreditBy toptierfinancial

People who are serious about improving their credit often wonder what it takes to get the highest possible credit score. For the FICO 8 credit scoring model, the perfect credit score is an 850. Only 1.2% of consumers have the elusive 850 credit score.

Keep reading for our tips and tricks for getting the highest credit score possible: the coveted 850 credit score.

Payment History — 35%

Most people who have an 850 credit score have seven years of perfect payment history.

FICO says that 96% of “high achievers,” or those with FICO scores above 785, have no missed payments on their credit report.

Credit Utilization/How Much You Owe — 30%

According to Experian, “Among consumers with FICO credit scores of 850, the average utilization rate is 5.8%.”

While consumers with 850 credit scores do use credit cards, they tend to keep their utilization ratios around 5% or lower. Photo by Ellen Johnson.

In addition, keep in mind that even if you have a low overall utilization ratio, individual cards with high utilization could still bring down your score.

You could also request credit line increases from your creditors, which could lower your utilization ratios and benefit your score.

Another way to help with overall utilization is to add low-utilization tradelines to your credit file.

Length of Credit History (Age) — 15%

This category takes into account age-related factors such as the average age of your accounts, the age of your oldest account, and the ratio of seasoned to non-seasoned tradelines. (A seasoned tradeline is at least two years old, which is when the account is believed to have a more positive impact on your credit score.)

The more age your accounts have, the more they will help your credit score.

This is also why we always say that focusing on age is the #1 secret to unlocking the power of tradelines.

Cultivating an 850 credit score takes years of maintaining a positive credit history.

CreditKarma reports that a 2011 study found the average length of credit history for consumers with 850 credit scores to be 30 years.

Maximizing this factor also means not closing old accounts, because their age could be helping your score. To ensure old, dormant accounts don’t get automatically closed by the banks for inactivity, try to use them at least few times a year.

Credit Mix — 10%

While the mix of credit is one of the least important factors in a credit score, to get a perfect credit score of 850, you may still need to optimize this factor.

As an example, a credit file that includes an auto loan, a mortgage, and two credit cards has a better credit mix than a credit file that has four accounts that are all credit cards.

The total number of accounts is also considered, with more accounts generally being better, up to a certain point.

FICO also states that high score achievers have an average of seven credit card accounts in their credit files, whether open or closed.

Auto loans are common among people who have 850 credit scores.

If you are looking to improve your credit mix statistics, adding authorized user tradelines can increase the total number of accounts and help diversify one’s credit file.

New Credit — 10%

Since seeking new credit makes you look like a higher risk to creditors, each hard inquiry has the potential to drop your score by a few points. Therefore, if you are going for the enviable 850, it’s best to avoid applying for new credit for a while.

More Tips on How to Get an 850 Credit Score

In addition to optimizing each of the above five categories that factor into your credit score, it is also important to regularly check your credit reports and dispute inaccurate information.

In addition, those with very high credit scores rarely have serious delinquencies or public records on their credit reports, such as bankruptcies or liens. Obviously, this will be easy to avoid if you follow all of the suggestions above, but if you already have a messy credit history in your past, it could take up to 7-10 years to recover enough to get an 850 credit score.

850 Credit Score Benefits

That said, the main benefit of having the best possible credit score is bragging rights.

Final Thoughts on How to Get the Perfect Credit Score

While it’s probably not necessary to get an 850 credit score, it is smart to work toward that goal by managing your credit wisely, which will eventually get you into the upper levels of high credit score achievers.

Finally, take advantage of your three annual free credit reports to make sure your credit reports are free of damaging errors.

To summarize, here’s an example of what the credit profile of someone who has an 850 credit score might look like:

No missed payments or delinquencies within the past seven years
A high total credit limit
The overall utilization ratio is 5% or lower
Individual credit cards each have low utilization, around 5% or lower
The oldest account is likely about 25-30 years old
The average age of accounts is at least 11 years
Typically has at least seven credit card accounts (whether open or closed)
Usually has an auto loan and/or a mortgage loan
May have additional installment loans
No inquiries within the past year
No damaging errors on their credit report

Read more: tradelinesupply.com

Business Credit Starts With Personal Tradelines

June 21, 2019CreditBy toptierfinancial

Many people dream of starting their own business one day, but not everyone can fund their business ventures with their own savings. Most entrepreneurs will probably want to apply for business credit at some point.

If you are interested in building business credit, our article breaks the difference between business credit and personal credit, what business tradelines are, and how to build business credit.

What Is Business Credit?

Building business credit is similar to building personal credit, but it’s actually a completely separate system. Just as individuals have personal credit scores that are meant to represent their creditworthiness, businesses have business credit scores to represent the company’s creditworthiness.

Why Do You Need Good Business Credit?

Good business credit shows that your business has been reliable in paying creditors, which indicates that it is a good candidate to loan money to or do business with.

Establishing business credit is essential if you ever want to be able to make purchases from vendors on credit or open a business line of credit to help support your company. Virtually all business will likely want the option of using credit at some point.

What Is a Business Credit Score?

Business credit scores, however, are determined by the major business credit bureaus: Dun & Bradstreet, Equifax, and Experian. Each bureau has a different way of collecting information and determining your business credit score. FICO also offers a credit scoring service for small businesses.

Dun & Bradstreet generates a Paydex score, which rates the creditworthiness of businesses on a scale from 1 to 100, 100 being the best score. The D&B Paydex score is entirely based on payment history. Similar to a personal credit score, it helps creditors decide whether to loan money to a business and what the terms of the loan should be.

Interestingly, an on-time payment history does not earn a perfect Paydex score. To get a business credit rating of 100, a business must consistently pay creditors 30 days in advance of the due date. Merely paying on time will only result in a credit score of 80.
In addition, the Paydex business credit score is weighted by dollar amount, so larger accounts could impact your score more than smaller accounts.

Equifax has three different credit scores for businesses.

Business credit reports may include information beyond just credit accounts, such as legal filings and public records.

The business payment index is similar to the Paydex score. It ranges from zero to 100 based on whether payments were made on time.
The business credit risk score is intended to predict the likelihood that a business will become seriously delinquent on payments. Scores can range from 101 to 992.
The business failure score aims to predict the probability of a business closing within 12 months. The score ranges from 1,000 to 1,610 with a lower score indicating that the business seems more likely to fail within 12 months. With both the business credit risk score and the business failure score, a score of 0 corresponds to bankruptcy.

Experian provides a business CreditScore report that includes a credit score for businesses in addition to other relevant information such as public records and account histories. The Intelliscore, Experian’s business credit score, ranges from 0 to 100, but it is different from the D&B Paydex score because it takes into account other factors besides just payment history.
FICO’s Small Business Scoring ServiceSM ranges from 0 to 300 and is used by the Small Business Association in evaluating credit decisions. FICO’s small business credit score may actually include information from the principal borrower’s personal credit report, so your personal credit could have an impact on your small business credit score.

Business credit reports aren’t free, so if you want a business credit check, you will have to pay the bureau providing the business credit report.

How to Build Business Credit

To build up a Paydex credit score, a business needs to obtain a DUNS number from Dun & Bradstreet and establish a payment record with at least four vendors, according to NerdWallet. Since the Paydex score is solely based on how quickly businesses pay their debts, you’ll want to pay your suppliers ahead of schedule to build your Paydex business credit score.

Building business credit is much like building personal credit, although business credit has a different reporting system.

In establishing business credit, as with personal credit, the most important factor is maintaining a good credit history. However, business credit reports can often take into account additional information, such as legal filings, public records, and the age and size of your company.

Things that can hurt your business credit score include:

Slow or late repayment of debt
Missed payments
Judgments, collections, or liens on your business
Outstanding balances/high credit utilization
Not enough years of being in business

Just like personal credit reports, business credit reports can and often do contain errors. it is important to regularly check your business credit report for errors that could be damaging your score.

What Are Business Tradelines?

To get business funding, you will typically need to have solid revenue and strong personal credit, not just business tradelines.

Business tradelines are all of the credit accounts belonging to your business. Examples of business credit tradelines include business lines of credit, business loans, business credit cards, and credit accounts with individual suppliers.

Those hoping to get business credit to start or expand their own businesses may seek out business tradelines for sale to help them build their business credit rating. However, similar to buying primary tradelines, trying to buy tradelines for business credit might not be a good idea for several reasons.

Firstly, business tradelines don’t always report to the credit bureaus. Many business tradelines are not necessarily loans or credit cards, but accounts with individual vendors that allow you a certain period of time to pay your bills. Not all vendors report payment activity, so many times businesses are required to pay Dun & Bradstreet a monthly fee to verify their credit history.

In addition, getting business credit usually depends more on having strong personal credit and a healthy business revenue than having a certain number of business tradelines on file.

How to Get Business Credit

While Tradeline Supply Company, LLC does not assist with tradelines for business credit or business funding, we can share some general information on the subject.

Generally, one of the most important factors in getting business credit is to be a personal guarantor, especially for a newer business that does not have much credit history. As a personal guarantor, it is essential to have excellent personal credit.

Business lenders will likely check your personal credit even if you are not serving as a guarantor.

Even if you are not a personal guarantor, often lenders will still check your personal credit when you are applying for business funding. So while business credit may be the long-term goal, the way to achieve this goal is to first build and maintain your own outstanding credit report.

Therefore, one of the best steps you can take toward establishing business credit is building up your own credit history with high-quality tradelines so you can serve as a personal guarantor for your business. Seasoned authorized user tradelines are a great way to quickly add years of perfect payment history to your credit file. See our updated list of available tradelines now.

Read more: tradelinesupply.com

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