Tag Archives: credit score

 

Aug15

How Does Maxing Out a Credit Card Impact Your Credit Score?

Posted: August 15, 2018 by Brittney Mayer

While an increasing number of consumers are aware of their credit scores, a good deal of confusion still exists about what does — and doesn’t — impact your score. For example, there is a popular myth that carrying a balance from month to month will somehow help your credit.

 

This is not true, however. While you do need to occasionally use your card to build up payment history — you can’t have a payment history if you don’t, you know, make payments — which is an important part of your credit score, you don’t need to carry that balance beyond your due date to reap the benefits.

 

And, more importantly, you shouldn’t carry a balance beyond your due date because that’s when interest fees will start to come into play. Interest fees compound daily, which can get expensive even if you have a card with a relatively low APR.

 

However, there are other reasons to avoid carrying a balance or, worse, maxing out your credit cards beyond the inevitable interest fees. The most important of which is the potential impact on your credit score.

 

The Direct Impact is to Your Utilization Rate

 

Each month, usually around the time your statement period ends, your credit card issuer reports your card balance to the credit bureaus to be updated on your credit reports. This balance is used by credit scoring agencies and lenders to determine your utilization rate or ratio, which is the ratio of how much debt you have to your total available credit.

 

For example, if you have a balance of $500 and a total credit limit of $2,000, then your utilization rate is 25%. A high utilization rate is seen as risky by models and creditors because it means you may be struggling to pay off your debts.

 

So much so, in fact, that your utilization rate — both overall across all cards as well as per individual card — is worth up to 30% of your FICO credit score. As a result, having one or more credit cards with an extremely high utilization rate, such as cards that are maxed-out or near their maximum limit, can cause your credit score to drop by dozens of points.

 

On the bright side, that damage isn’t permanent. Paying down your balances to reduce your utilization rates can help your score rebound in a month or two when the new, lower balances are reported to the credit bureaus. However, there could be more lasting repercussions.

 

Watch Out for Secondary Consequences

One of the most common consequences of maxing out a credit card is that the issuer may see the high utilization rate as a sign of financial trouble — which means you suddenly seem like a high-risk investment. Some issuers may respond by reducing your credit limit to the current balance on your card (or lower) to avoid the potential of your debt level rising, which can cause your utilization rate to increase even more.

 

In extreme cases, issuers may decide to cut their losses and cancel your card entirely, leaving you with a limited window to pay off your balance. Issuers can close your account at any time, and they’re under no obligation to provide notice if they choose to close your account.

 

Additionally, maxed out credit cards can negatively contribute to your debt-to-income ratio, which is an evaluation of the total amount you owe on your debts each month versus your monthly income. A high debt-to-income ratio is a red flag for lenders and credit card issuers, one that can cause you to be denied for new credit if creditors don’t believe you can repay your debts.

 

Dealing with Maxed-Out Credit Cards

 

The most obvious solution to maxed out credit cards is also the most basic tenant of responsible credit card use: Only charge what you can afford to repay that month and pay your bill in full. If you need to make purchases that will put your balance close to your limit, consider making multiple payments during the month to avoid having a high balance reported to the bureaus.

 

Another way to avoid maxing out any specific card is to spread out your purchases when possible. A low to moderate amount of debt spread out across multiple cards will tend to be better for your credit score than the same amount of debt on a single card.

 

Alternatively, credit card consolidation with a personal installment loan can shift debt from a maxed out credit card to a loan, thus reducing your credit utilization rate. Even better, if you can get a loan with a low APR, you could save on interest fees, as well. Keep in mind that consolidation may not help with your debt-to-income ratio, however, and that opening a new account may have its own credit repercussions.

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Feb27

How to Best Use Your Tax Refund to Pay Down Debt

Posted: February 27, 2018 by Ashley Dull

Despite the fact that it starts out as our money in the first place, it’s all too easy to think of your tax refund as “bonus” money. Once you know that check or direct deposit is on its way, you may be tempted to start daydreaming of a new big screen or that oft-postponed family vacation. Before you start shopping or packing, however, you should consider the positive impact that refund can have on your bottom line, particularly if you have outstanding debt.

 

Once you’ve made the (wise, smart, excellent) decision to use your refund to tackle your current debt, you’ll need to determine the best way to distribute the funds. When it comes to prioritizing debts for repayment, there are two main methods that experts recommend, each with a fun winter-themed name: the avalanche method and the snowball method. While both debt prioritization methods can give you the desired results (i.e., no more debt) the methods may vary in the amount of time it takes to reach debt freedom, as well as the total cost to get there.

 

The Avalanche Method

 

In general, the avalanche method is most commonly recommended because it will save you the most money during the repayment process. That’s because you’ll essentially be paying off your debts in the order of expense, with the most expensive debt being addressed first.

 

To follow the avalanche method, you’ll need to list your debts in order of the interest they charge, starting with the debt with the highest interest rate, then the next-highest rate, and so on. For example, any cash advance or short-term loans or high-interest credit cards will likely be at the top of the list, and lower-interest installment loans or introductory 0% APR credit cards will be at the bottom of the list.

 

While you’ll need to make your minimum required payment for all your debts, you’ll focus any extra money — in this case, your tax refund — on the debt with the highest APR. If your tax refund is enough to pay off your highest-interest debt, apply the remainder to the debt with the next-highest APR.

 

As you pay off each debt and cross it off the list, use the money you were putting toward that debt to pay off the next debt on the list. By the time you reach your final debt, which will be the one with the lowest interest rate, you’ll have freed up funds from your previous debts and should be able to pay it off fairly quickly.

 

The Snowball Method

 

Although the snowball method isn’t the most cost effective of the two prioritization plans, research has shown that it may be the more successful method for many consumers. This is thanks to the motivational boost you get from paying off a debt and crossing it off your list.

 

To follow the snowball method, you’ll need to list your debts in order of how much you owe for each debt, starting with the smallest debt, then the next-smallest debt, and so on. So, if you had three debts with amounts of $5,000, $1,300, and $2,700, you’d pay them off starting with the $1,300 debt, then the $2,700, then the $5,000.

 

As with the avalanche method, you’ll need to make your minimum required payments for all of your debts, but you’ll focus any extra funds — including your income tax refund — on the smallest debt first. If your tax refund is enough to pay off this debt entirely, apply the remaining refund to the next debt on the list (and so on).

 

By focusing on your smallest debt first, you’ll be able to pay it off very quickly, giving you a feeling of progress and an important boost in motivation, which can help you stay on track and keep to your debt repayment plan. As you pay off debts, roll the money you were spending on each finished debt into the next debt. By the time you reach your last and largest debt, you’ll likely be applying a significant amount of money to that debt, making paying it down a realistic idea (rather than a simply overwhelming one).

 

Your Best Method Will Depend on You

 

While the avalanche and snowball methods can both be effective ways to prioritize your debt and start paying it off, every consumer’s financial situation is unique. The best way to use your tax refund to pay down debt may involve a combination of the two methods, or may not be according to either method. So long as you are actively working to pay down your debt — and are making at least your minimum payments to avoid credit damage — the specific method you choose is less important than the fact you are working toward debt freedom.

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Aug25

What Lenders Look for on Your Credit Report

Posted: August 25, 2017 by Ashley Dull

At the point in history when lending occurred primarily within families and small communities, many borrowers likely knew their lender — and his or her spouse and children — by name. In those days, your personal creditworthiness likely depended as much on your reputation among your neighbors as it did on your actual financial status.

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Jun17

How Much Will a Bad Credit Score Cost You?With Poor Credit, You Could End Up Paying for Your Past Mistakes

How Much Will a Bad Credit Score Cost You?

Posted: June 17, 2013 by Rachel Shepard

If you have bad credit, you have probably already noticed how difficult it makes it to acquire a loan from your average lender. Many lenders do not want anything to do with you unless your credit score reaches a certain level, and even then, you could end up paying high loan interest rates. The truth of the matter is that having bad credit can cost you hundreds of thousands of dollars in additional interest payments over the course of your life, which makes the effort it takes to improve your credit rating well worth it.

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Apr19

5 Things That Maintain a Good Credit ScorePreserving Your Credit Is Easier Than You Think

5 Things That Maintain a Good Credit Score

Posted: April 19, 2013 by Rachel Shepard

There are many things a consumer can do to help them maintain a good credit score. Here are five simple steps to keeping your credit in tip-top shape:

1. Know what a credit score entails.

Knowing how a credit score is calculated is key. Your credit score is calculated based on five different things: your loan and credit card payment history; your level of debt; your credit age, or how long you’ve had credit; the types of credit you have, which should be a mix of credit cards and loans; and recent credit. Knowing where you stand with regards to all five of those areas will help you understand how good or bad your credit score is.

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Jan15

Beyond Banks: Other Places Your Credit MattersA Good Credit Score Can Be the Key to Your Success in Many Arenas

Beyond Banks: Other Places Your Credit Matters

Posted: January 15, 2013 by Rachel Shepard

Your credit score is a seemingly ethereal number that you likely only think of when you are considering acquiring a credit card or loan. Consumers rarely give much thought to their credit score beyond this sort of scenario. What many people do not understand, however, is how vital maintaining a good credit score is for overall financial health and who considers credit scores beyond financial companies. The fact is, there are many different entities that may look at your credit score, and having a good score can potentially save you quite a bit of money all around.

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Dec14

How Your Credit Score Is CalculatedKnowing the Process Can Help You Boost Your Credit Rating

How Your Credit Score Is Calculated

Posted: December 14, 2012 by Rachel Shepard

These days, having a good credit score is key to gaining access to all kinds of things. Because of this, of course, it behooves you to do whatever you can to get your score up as high as possible. And learning exactly how a credit score is calculated is important if you want to know what you have to do to boost your score and open all sorts of new doors for you as a consumer.

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Jul20

Credit Bureaus Face Increased Governmental ScrutinyHow Will This Affect Your Ability to Acquire Bad Credit Loans?

Credit Bureaus Face Increased Governmental Scrutiny

Posted: July 20, 2012 by

These days, most everyone probably is familiar with credit bureaus and knows about the big three: Equifax, Experian and TransUnion. If you’ve ever tried to get a loan from a bank or credit union, ever attempted to acquire a credit card, or even just applied for a job recently, most likely you’ve had to submit to a thorough credit check conducted by one of the major credit reporting companies. These firms, whose job it is to basically collect all the financial details of people’s lives, are increasingly an ever-present part of modern life.

Earlier this week, the Consumer Financial Protection Bureau, a federal consumer watchdog agency established two years ago, announced that it is going to begin overseeing and supervising the largest credit bureaus this coming fall. One of the main reasons for the push to establish federal oversight over what has been a fairly unregulated industry seems to be that a sizable percentage of credit reports — the byproduct of credit checks — contain significant, injurious errors that can dramatically impede consumers’ ability to obtain various sorts of items.

On top of that, these errors, if they are even ever identified by the consumers whose credit reports are marked by them, are often extremely difficult to resolve and get corrected.

Undoubtedly, credit bureaus can serve a beneficial purpose for consumers. Through their activities, they can help individuals acquire important things that they need. That being said, however, the new regulatory stance in Washington, D.C., obviously represents a response to a real problem. The cold, hard truth is that credit bureaus can sometimes end up being more of a hindrance than help.

Which leads us to this point: Here at Bad Credit Loans, our lenders don’t require prospective borrowers to submit their credit scores and don’t look at their credit reports in determining their eligibility for our fast financial assistance. So while the aforementioned new development regarding credit bureaus may end up being a big boon to consumers in general, ultimately it won’t really affect those who are looking to us for quick cash. Doing away with stringent credit requirements is just one of many ways in which we try to make it easy for people to get the help they need, without any unnecessary barriers blocking their way.

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