How to Build Credit if You Have a Small Income

Posted on September 30, 2014 by VP of Marketing and Business Development Jessica

Building and maintaining a good credit score is one of the best moves you can make for your financial health. It might seem intimidating at first – the credit scoring system is definitely complex – but when it comes time to apply for a mortgage or other loan, you’ll be happy you made building a solid score a priority.

How does the picture change if you make a small income? As it turns out, not much. You don’t need to be a Rockefeller to achieve good credit. Take a look at the details below to learn how to build a great score, no matter how large or small your paycheck is!

First, know what makes a good score.

Before digging into specific recommendations, it’s important to understand the factors that affect your credit score. The FICO scoring model – which is the most widely used credit scoring system in the United States today, takes a lot of variables into account to create your score. These include:

• Payment history
• Amounts owed
• Length of credit history
• Mix of credit accounts
• Recent credit inquiries

You’ll notice that income is not one of the factors used to determine your credit score. This means that earning a big salary doesn’t equate to earning a high credit score. Even if you have a small income, you can succeed at scoring high, as long as you’re using the right strategies.

Obtaining credit is an important first step.

It’s empowering to know that the steps to good credit are about financial behaviors, not the size of your bank account balance. But what exactly should you be doing to get there?

Above all, it’s important to start using a credit account responsibly as soon as you can. Proving to potential lenders that you can be trusted with borrowed money is the best way to start building your credit momentum.

One of the easiest ways to do this is with a credit card. If you’re not earning much money, you might be shying away from plastic to avoid the temptation to overspend. But this may in fact stall your efforts to build good credit.

If you’re not interested in getting a credit card, obtaining another type of loan to establish a credit history is a good idea. You might have trouble getting approved if your income falls below the lender’s requirements. In this case, offering a big down payment or securing a co-signer might help you qualify as well.

Keep up with good habits.

Once you’ve gained access to credit, keeping up with good habits is essential to building your score further. Specifically, you should focus on a few important behaviors.

The two most important factors the FICO score looks at are:

Payment history – Are you making the minimum payment required on time every time? This accounts for 35% of the FICO Score.
Credit Utilization – Are you keeping the balances on revolving credit (typically credit cards) below 30 percent of your available credit? This accounts for 30% of the FICO Score.

In short, paying your bills on time and in full are the two most powerful things you can do to create and hold onto a good credit score.

And just to be clear: Neither requires a big income. Spend and borrow within your means, and it will be easy to manage your payments properly.

The takeaway: Those with small incomes have the same opportunity as their high-earning counterparts to build good credit.

Use the tips above to get started today!

Article Source: Lindsay Konsko of NerdWallet

http://www.usatoday.com/story/money/personalfinance/2014/09/01/credit-score-financial-health/13628811/

3 Ways Moving Can Hurt Your Credit Score and How to Combat Them

Posted on September 19, 2014 by VP of Marketing and Business Development Jessica

Whether you are moving because it’s an upgrade to go along with a higher salary, or simply a change of scenery, many of us love to hate moving – and do so frequently. But between asking around for free boxes and trying to comprehend how you’ve acquired so much stuff, watch out for your credit! Here are three ways moving could impact your credit score and how to deal with them.

1. A credit check will initiate a hard inquiry.

When you apply for a new apartment, your apartment management company will likely pull your credit to see whether you’re responsible with money. This will trigger a hard inquiry, which can pull down your credit score a few points. Hard inquiries remain on your credit report for two years and affect your credit score for one.

Because of the minor impact of a hard credit pull, it’s generally not a huge concern. However, if you’re initiating multiple hard inquiries each year, you could hurt your score more significantly. Hard inquiries may include: applying for credit — such as credit cards, mortgages, and loans, or applying for a service that requires financial responsibility, such as a cell phone.

Solution: To keep your credit score from suffering multiple inquiries, you should limit your annual credit applications and take advantage of rate shopping when possible. This will keep your inquiries low and your credit score high.

2. Bills that go to your old address may go unpaid.

A new study released by the Urban Institute states that over 1/3 of Americans have an account in collections. But what does this have to do with moving? An account can easily end up in collections because it isn’t forwarded correctly, instead being sent to an old address. There are two easy things you can do to prevent such a mix-up.

Solution: First, change your address with the U.S. Postal Service before you move. It will forward your mail to your new address for one year. By that time, you should have your address changed on all of your accounts. Remember to update your address on your accounts as soon as possible.

While you’re updating your address, you may also want to enroll in paperless statements and automatic bill pay. In an increasingly paperless world, it’s best to handle your financial dealings electronically. If you don’t want to use auto pay, have statements sent to your primary email so you can pay them before the due date.

3. You’re putting too many moving expenses or new purchases on credit cards.

Moving can be expensive. Between paying for a moving truck and covering your security deposit and first month’s rent, it may be tempting to put moving-related expenses on credit cards. This is all well and good, but only if you have the funds to pay off your credit card in full before the due date to avoid accruing interest.

It’s also easy to fall into the trap of charging new items for your home. After all, new digs require new furniture, right? Wrong! Unless you can reasonably pay for your new purchases, resist the urge for now.

Solution: Save money well before your move-in date to cover all moving-related expenses. And in the case of buying new things for your new place, purchase the decor of your dreams slowly as you have the money. Your home shouldn’t be a source of stress, so make sure it isn’t filled with things that are hurting your finances.

Bottom line: Moving can hurt your credit score, but only indirectly. To keep your credit from being damaged by your upcoming move, avoid getting too many hard inquiries in any given year, change your address with the USPS and switch to paperless billing, and try not to buy anything moving-related or otherwise that you can’t pay for before your credit card due date.

How to Pay Down Credit Cards to Boost Your Credit Score

Posted on June 3, 2014 by VP of Marketing and Business Development Jessica

If you know anything about credit scores, you know carrying high credit card balances is a problem. In fact, your debt-to-credit ratio (how much you owe vs. your total available credit) makes up about 30% of your overall credit score. And revolving debt, like credit cards, weigh heavier than other outstanding debt – like your mortgage or a car loan. So if you’re carrying a bunch of maxed-out credit cards, your credit score is likely not great.

The most straightforward way to improve your debt-to-credit ratio is to simply pay down those balances. But chances are if you’re in a lot of debt, you can’t pay off all the balances right away.

Here’s the good news: You don’t have to pay your credit cards off to boost your credit score. But to get the most credit score traction out of every extra payment, you do need to come up with a plan for paying down your credit cards in a certain way.

The Snowball Method

The snowball method is excellent for paying off debt quickly and efficiently. Basically, you throw extra money at one debt, and when it’s paid off, put the extra plus the old debt’s minimum payment toward the next debt. Repeat this until you’re debt-free.

This is an excellent way to get out of debt, if just getting out of debt is your goal. But what if your goal is to get out of debt while also boosting your credit score as quickly as possible? Maybe you’re hoping to apply for a mortgage soon, or a car loan?

In this case, the snowball method probably isn’t how you want to start. Eventually, you might switch to that, but you may want to begin by evening out your credit card balances instead.

Lowering Your Debt-to-Credit Ratio

When your credit score is calculated, your overall debt-to-credit ratio is reviewed, but also the individual debt-to-credit ratios of your various credit cards and other revolving debt accounts.

Here’s an example:

•Card 1: $5,000 balance/$10,000 limit = 50% debt-to-credit ratio.

•Card 2: $4,500 balance/$5,000 limit = 90% debt-to-credit ratio.

•Card 3: $500 balance/$1,500 limit = 33% debt-to-credit ratio.

•Overall: $10,000 balance/$16,500 = 60% debt-to-credit ratio.

In this case, your overall 60% debt-to-credit ratio will ding your credit score pretty severely. A “good” debt-to-credit ratio is around 30%, and you’re nearly doubling that.

But since your score also accounts for individual credit cards, you can see that Card 2 is hurting you the most — it’s nearly maxed out, which is not good. Card 3 is posing the smallest problem, since it is nearly in that “good” range.

In a situation like this, you’ll boost your credit score if you focus on paying down Card 2 first. Depending on the interest rates of each of these cards, you might choose to pay that card down all the way.

Or if it’s a card with a lower APR, consider putting money toward the balance until it’s at or near $1,500 to reach the 30% debt-to-credit ratio. Then move on to Card 1 or whichever card has the highest interest rate.

Now, this strategy isn’t guaranteed to add hundreds of points to your credit score. But because you’re improving individual debt-to-credit ratios for each of your credit cards, you will make progress more quickly than if you just snowballed your debt in this situation.

Still, you need to combine this with some aspects of the debt snowball, including the intensity with which you pay down your debt. After all, the only way to try to achieve credit score perfection is to pay your credit cards off completely, and refuse to carry a balance again.

Why Not Just Spread It Around?

Why not just transfer some of the balance from Card 2 to Card 3? Or get another credit card to transfer some of that balance?

You could. In fact, moving balances to lower rate cards can be a good strategy for both boosting your credit score and getting out of debt. But just shifting your balances around isn’t going to help much here, partially because the credit limit on Card 3 is so low to begin with.

What if you do have a $0 balance card in the mix? In this case, you still don’t want to transfer another card’s balance. This is because one part of your credit utilization mix is the number of accounts that carry a balance. So having three accounts carrying a balance and one with no balance is better than having four accounts carrying a balance, even if that move improves one card’s debt-to-credit ratio.

You Can’t Game the System

In the long run, you need to focus on getting your credit card balances paid off. In the meantime, bringing cards below a 30% (or even 50%) debt-to-credit ratio may boost your credit score more quickly than simply snowballing your debt. This is especially true if your debt snowball would leave a maxed-out credit card in the mix for months to come.

7 “Not So Smart” Credit Tips

Posted on June 8, 2013 by VP of Marketing and Business Development Jessica

There’s a lot of advice floating around out there about how to manage your credit cards and other debts to maximize your credit score. The trouble is, not all this wisdom is created equal, and some tips intended to help your credit can actually have the opposite effect. Here are seven “not so smart” tips that you should steer away from.

1. Asking for a lower credit limit.

If you can’t control your spending, asking for a lower credit limit may indeed keep you out of trouble by simply capping how much you can borrow. But there’s also a risk to this approach. As MyFICO.com explains, 30% of your credit score is based on how much you owe. The formula looks at how much you owe as a percentage of how much available credit you have, otherwise known as your credit utilization ratio. So if you’re unable to pay off your debt, lowering your credit limit will increase your ratio — and damage your score. The impulse to impose external limits on your spending is understandable, and in some cases wise, but you’re better off focusing your energy on restraint.

2. Paying off an installment account early.

Paying off debt early might seem like a good way to improve your credit, but paying off an installment loan (like a car loan), too early can actually ding your score because it raises your utilization ratio. For instance, if you have a $10,000 car loan with a $5,000 balance that you pay off in one fell swoop, your debt load will drop by $5,000, but your available credit will drop by $10,000 once the account is closed.

This isn’t to say you shouldn’t pay off a debt early if you find yourself with a windfall on your hands. An earlier payoff can save you a bundle, but if you’re trying to raise your credit score – paying off a credit card sooner rather than an installment loan is the way to go.

3. Opening a bunch of cards at once.

Since your utilization ratio is so important, a lot of people think that getting as much available credit as possible — immediately — will do the trick. But it doesn’t work like this, unfortunately. “You can’t magically improve your utilization ratio by applying for a slew of cards in rapid succession because numerous inquiries and multiple brand new cards both can lower your score,” says Barry Paperno, credit expert at Credit.com. If you want more credit to improve your score, space out the process and be realistic about your situation; don’t take the hit to your score by applying for a card you know you probably won’t qualify for. (Financial institutions that aggregate credit card offers generally spell out what kind of credit score you need to obtain a particular card).

4. Settling a debt for less than you owe.

Negotiating with a lender and then settling the debt for less than you owe can be a smart move. But it can also hurt your credit if you do it the wrong way. You must get the lender or collections company to agree in writing to report the debt as “paid in full;” otherwise, it will be noted “settled for less than the balance.”

5. Using prepaid debit cards to rebuild your credit.

John Ulzheimer, president of consumer education at SmartCredit.com, says a lot of borrowers have the misconception that prepaid debit cards and credit cards are equally good credit building tools. They’re not. Prepaid cards “don’t do anything to help build or rebuild your credit and are not a viable long-term plastic solution,” he says. Although some prepaid card issuers say they help build credit, none currently report to the three major credit bureaus.

6. Never using your credit cards.

Some people approach credit like a poker game, with the mentality that you can’t lose money if you don’t play your cards. Although it’s always advisable to pay off your bill in full every month, not using credit cards at all can actually backfire when it comes to your credit score. If an issuer looks at your account and sees that there hasn’t been any activity for a while (how long varies, but more than a year is a good rule of thumb), they might close it. Losing that credit line hurts your utilization ratio, which can hurt your credit score. Try to charge a small amount regularly — maybe a recurring bill like a gym membership or airline tickets for your annual summer vacation — and paying it off every month.

7. Checking your credit daily.

Checking your credit score every day won’t hurt your score (when you request your score, it’s called a “soft pull,” which is different from the “hard pull” lenders conduct that does affect your score). But trying to parse why you gained or lost two points here or there will just give you heartburn and won’t give you any greater insight into how your score is calculated. Lenders generally report to credit bureaus every 30 days, so checking your score every day takes the focus off what really matters: how your longer-term financial habits affect your credit file.

Article Source: http://business.time.com/2013/05/06/7-smart-credit-tips-that-arent/#ixzz2SzgoxXjx

6 Smart Moves to Boost Your Credit Score

Posted on May 23, 2013 by VP of Marketing and Business Development Jessica

If you think your credit score doesn’t matter too much to you because you’re not planning on getting a mortgage or applying for a credit card anytime soon, think again. Credit scores affect more aspects of our lives than you may realize and that’s why it’s important to keep your score as high as possible.

Paying your bills on time and staying well below your credit limits are the best ways to build and maintain good credit. Together they account for more than half of your overall credit score.

A healthy payment history is the biggest contributor to your credit score, accounting for 35 percent of the total. Miss even a single deadline, and you could see your credit score drop as much as 100 points or more. To avoid those dreaded “overdue” notices and the credit blemishes they bring, set up automatic payments for any regular bills so that your lenders get the check on time, every single time.

Another 30 percent of your credit score is based on the amount of debt you carry, as measured against the amount of available credit you have — otherwise known as your credit utilization ratio. It’s a good idea to keep your outstanding balances to less than 25 percent of the money available to you to spend. If you are not able to pay down your balances ASAP, you can go at the problem from a different angle by calling your lenders and asking them to raise your credit limit.

1. Fix clerical errors.

Check your credit reports and correct errors. Of course, you want to make sure that everything is being accurately reported, from your current address to your closed accounts. (For more guidance on how to dispute an error on your credit report, look to this guide from the Federal Trade Commission). But you also want to check the details about what is being reported about your current accounts. For example, it can make a big difference to your score if your credit limit for a card is understated. Imagine that you owe $5,000 and your limit is $15,000. That means you owe 33 percent of your limit. If your credit limit is incorrectly listed as $8,000, though, it will look like you’ve borrowed 63 percent of your limit.

2. Get credit where it’s due.

When you fix errors or take actions that should boost your score, make sure that all three of the main credit-reporting agencies (Equifax, Experian, and TransUnion) know about it. By law, you can get a free copy of your credit report from each of them once a year — do so, in order to spot errors and find other score-boosting opportunities.

3. Ask nicely for a favor.

One thing few people think of is simply asking for what you want. In order to help you pay down your debt more quickly, you might ask your lender to lower your interest rate. If the lender refuses, see if you can find a lower-rate card and transfer your balance.

If you’ve got one or two glaring late payments on your credit record, you might ask your lender if they could be erased, in what’s called a “goodwill deletion.” And if you’re dealing with a collections agency over some debt, see whether they’ll delete it from your record if you pay it off. That can be well worth it.

4. Don’t delete your history.

If you’re planning on closing some of your accounts, think twice. It’s often a sensible thing to do to simplify your financial life, but closing an account can actually ding your credit score. One reason is that it actually reduces your available credit. Oddly enough, a host of seemingly sensible moves can hurt you — such as using just one card for most of your charges. Even if you prefer using a newer card, keep older accounts open and use them occasionally to keep them active. Over time, that will give you a longer history and help improve that part of the credit score calculation.

5. Don’t rush to build your record.

Opening multiple accounts in a short period of time may boost your available credit, but it sends the wrong message to potential creditors, as it makes you look desperate to get credit from any available source.

6. Prevent bad marks from being added to your report.

Here’s a valuable tip for anyone selling a home for less than they owe on it: What you’re looking at is called a short sale, and if you end up owing many thousands of dollars to your mortgage lender, you might want to get it in writing before the sale closes that the debt won’t go on your record. Ending up with a big balance owed can be a black mark on your record, reportedly as costly as a foreclosure.If a high credit score is important to you — and for most of us it should be — always consider how your financial actions will affect your score. For more information on credit scores, be sure to look at this guide from myFICO.com, which is the consumer division of the company that is responsible for the popular FICO credit score.

Article Source: http://www.dailyfinance.com/2013/04/08/how-to-boost-your-credit-score/#slide=5793242