Becoming an authorized user for someone else’s credit card has benefits well beyond being able to hop onto someone else’s credit limit. It’s one of the easiest ways to quickly build history on your credit report if you’re just getting started using credit. But what if you reach a point in your life when you want to…Read more...
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My credit score dropped 11 points when I bought a house, but I'm confident the mortgage will actually boost my credit in the long run
After closing on a mortgage to buy a house, my score dropped by 11 points,...After closing on a mortgage to buy a house, my score dropped by 11 points, but I'm not too worried, because I understand why my score dropped and how a home loan could actually improve my credit in the long run. Before approving me for my mortgage, my lender did two hard pulls on my credit, which lowered my credit score by about two points each time. My home loan also increases my total debt, which increased my credit utilization ratio. This ratio accounts for 30% of my FICO score, and a lower credit utilization is better. As long as I make on-time payments on my mortgage, my credit score could actually get even higher in the long run. Having a mortgage also improves my credit mix, which can positively impact my score. Personal Finance Insider's email newsletter is coming soon! Sign up here » During the two years I spent preparing to buy a house, aside from saving up money towards my down payment, I also knew that I had to start babying my credit score. I made a point of making all my payments on time and paying my balances off in full every month. Plus, I made sure to avoid applying for any new credit cards or line increases. In the end, my hard work paid off. When I applied for my mortgage, I had my highest credit score ever and I was able to use it to secure an affordable interest rate on my loan. What I wasn't quite prepared for was the fact that my score would drop after closing on my new home, just as I had gotten used to having great credit. Despite the fact that my score has taken a dip, I'm not too worried. In fact, I think taking on additional debt in the form of a home loan will actually help improve my score in the long term. Here's a closer look at why I'm betting I'll ultimately see my score go up. How credit scores are determined Before getting into specifics, it's important to understand how credit scores are determined. The reality is that your score with each of the credit bureaus is based on a mix of factors that each account for a different percentage of the number you're given. This is how your FICO score breaks down: Payment history (35%): Whether or not you have a history of making your payments on time has the greatest impact on your overall score. To that end, it's crucial to make sure that you pay your credit card bill on time, every time. Credit utilization rate (30%): Your credit utilization ratio looks at what percentage of your total available credit you've used. For the best results, you should try to keep this ratio under 30% whenever possible. Length of credit history (15%): While you can't really do much to speed this one up, the longer your accounts have been open and you have a history of making timely payments, the higher your score will be. Credit mix (10%): Credit scores take into account the total amount of outstanding debt that you have, as well as the different types of credit that you use. Your FICO score tends to favor having a variety of loan types on your credit report, including installment loans and revolving credit. Recent applications (10%): Every time you apply for a loan, the lender does what's known as a "hard pull" on your report in order to check your credit score. Each pull will ding your score by a few points and stay on your report for about two years. Having too many pulls on your report at one time can also hurt your score. Why my score took a temporary hit Throughout the process of buying a house, my score dropped 11 points in total. However, given the above information, it honestly makes sense that it took a dip. In applying for and eventually receiving my mortgage, several things happened that impacted my score, including: New hard pulls on my credit: My lender pulled my credit twice during the application process, once when I initially applied for the loan and once right before the loan was issued to ensure that nothing had substantially changed. Each time there was a credit pull, my score dropped about two points. New open account: Opening a new account can also negatively impact your score in the short term. In this case, it did because it added to my overall debt. Before getting a mortgage, I only had a few thousand dollars' worth of student loans left to my name. Now, I also owe hundreds of thousands of dollars in housing debts. Why I'm betting I'll have an even better score in the future Ultimately, though, I'm guessing that the drop in my score will only be temporary. In fact, I have reason to believe that, over time, taking on more debt in the form of a mortgage will actually make my score higher than it was when I was approved for my loan. It all comes down to the following factors: Updated payment history: According to Experian, the dip in scores from opening new accounts is only temporary. It advises that as long as I continue to make timely payments on my new account, my score should rebound shortly. Lowered amount of total debt: As I continue to make payments toward my mortgage, the total amount of debt that I have to my name will go down, which will help my credit utilization ratio. Better credit mix: By adding a new installment loan to my credit report, I am diversifying. Before I got a mortgage, the bulk of my profile was made up of revolving credit or credit cards. Now, the distribution is more even. 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Your credit score is an important measure of your financial health that can be a...Your credit score is an important measure of your financial health that can be a deciding factor in getting approved for a new credit card or loan. Popular credit score models from FICO and VantageScore use a 300 to 850 scale to measure your credit. There are many misconceptions about what shows up on your credit report and influences your credit score. Activity on credit-related accounts like credit cards or loans generally shows up on your credit report. On the other hand, things that aren't related to lending — like checking and savings accounts — don't affect your credit score. Your income and assets don't affect your credit score either. See Business Insider's list of the best credit cards for average credit. Your credit score is one of the most important numbers for your personal finances. Your credit score can be a determining factor in getting approved for a new loan. And if you're approved, it can decide your interest rate. For a mortgage, for example, that difference in interest rate can be worth tens of thousands of dollars over the life of a loan. Understanding what goes into your credit report — which reflects all the information factored into your score — is important for your long-term financial health. However, there are many common credit report and credit score myths and misconceptions — let's separate fact from fiction to make sure your finances move in the right direction. Here's a list of what can and can't affect your credit score. What affects your credit score Payment history The biggest factor in your credit score is your payment history. Paying on time every month is the single best thing you can do for your credit. Under the most popular credit score model, your payment history is 35% of your FICO credit score. It takes seven years for a late payment to fall off of your credit report. Setting up automatic recurring payments can help you avoid an accidental late payment. Credit balances Your credit balances and utilization are the next biggest factor in your credit score, making up 30% of your score. As a general rule, to get the best results from this part of your credit score, you should keep your credit card and line of credit balances as low as possible. Your credit utilization is your total outstanding credit card balances divided by your total credit card limits. Try to use less than 20% to 30% of your credit for a good credit score. Keeping it as close to 0% as possible is best for your credit.If you have high credit card balances, one of the fastest ways to raise your credit score is to pay off your cards. That's often easier said than done, but it's a smart strategy if you're able to do it. Credit account age A long history of well-managed credit accounts is evidence that you are a responsible borrower. The average age of your credit accounts is the third-biggest factor in your credit score, with a 15% weight. A bunch of new accounts lowers your average account age, while accounts that you've had the longest help your average account age. Avoid opening new credit accounts unless you need them, and avoid closing old accounts unless to get the best results here for your credit. Keep in mind that if you want to stop paying for a card with an annual fee, you can downgrade your card to a no-annual-fee option instead of canceling it. This will preserve the age of your original card's account, avoiding any damage to your credit score. Mix of credit accounts Just as a long credit history shows you can handle credit well, a mix of different types of credit account types helps your credit score. That means you're best off if you have credit cards and installment loans, like a mortgage or auto loan. More unique types of loans is best for your credit. However, that doesn't mean you should get a new loan just to help your credit in most cases. Instead, just apply for the credit you need and watch as your score slowly rises over time when you manage your loans well. Your credit mix makes up 10% of your credit score. New credit The last main category is the pursuit of new credit. As a general rule, new credit is bad for your credit score, but only temporarily. New credit applications lead to an inquiry on your credit report, which slightly hurts your credit score.In addition, if you're approved, a new credit account lowers your average age of credit. This negative impact goes down over time and eventually becomes a positive factor. But in the short term, new credit is bad for your credit. What doesn't affect your credit score Bank accounts Contrary to popular belief, bank overdrafts don't hurt your credit. In fact, nothing from your check or savings accounts directly shows up on your credit report or in your credit score. Banks use a different system, known as ChexSystems, to track overdrafts and other banking information. You can request a free ChexSystems FACTA report here. Utility and phone bills Your power, water, gas, and phone bills don't generally show up on your credit report. These companies may check your credit when you open a new account, but they typically don't send your payment information to the credit bureaus for credit reporting. That's slowly starting to change, however, as optional credit-boosting programs like Experian Boost start offering to give you "credit" for paying non-credit bills on time. Your income and assets It doesn't matter to the credit bureaus if you make $1 per year or $1 million per year. Your credit report is all about paying your credit-related bills on-time and managing the balances well. Even if you have a ton of money in the bank, you can have a bad credit score if you miss payment due dates. Checking your credit score yourself Services like Credit Karma, Credit Sesame, and personal credit-reporting tools from your bank don't hurt your credit score. These are considered soft inquiries, which are visible to you but not to lenders. When you apply for new credit, the hard inquiry on your credit report does impact your credit score. Rate-shopping If you're buying a new car or home, it's not a bad idea to shop around for the best interest rates. While each application will generate a new inquiry, the credit bureaus typically bundle inquires from a short period of time and treat them as a single inquiry for credit scoring purposes. Anything from a non-credit account Investments, insurance, and other accounts that don't involve any borrowing generally don't show up on your credit report in any way. Credit reports and credit scores have the word "credit" right in the name. Non-credit means it's a non-factor for your credit score. Actively manage your credit for an 800+ credit score While you should avoid opening new accounts regularly, particularly if you plan to get a mortgage in the next six months, it's a good idea to keep tabs on your credit and work to improve your credit score over time. Good credit is extremely valuable for your financial health. Now that you know what's involved, and what isn't, you can work to join the 800+ club of excellent credit scores where you get the best rates and credit cards available. You might not need your credit today, but it's a good asset to have while managing your financial life. 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As the coronavirus pandemic continues to develop, you might be concerned about the long-term impact any...As the coronavirus pandemic continues to develop, you might be concerned about the long-term impact any changes to your finances could have on your credit. Relief checks and delayed payment timelines are helpful, but can they ultimately hurt your credit score or history?Read more...