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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Your credit score isn't the only number that matters for your finances — you should keep a close eye on your credit card balances, too
Summary List Placement A credit card balance is the amount of money charged to your...Summary List Placement A credit card balance is the amount of money charged to your credit card, and it represents how much you owe to the credit card company. It's crucial to avoid carrying a large balance on your card from month to month, because you'll need to pay your bank interest for covering your expenses. Your credit card balance has a big impact on your credit score, too. The lower your balance, the higher your score. If you have a big credit card balance, you may want to consider transferring it to a card with a low APR. See Business Insider's guide to the best credit cards » If you're new to the world of credit cards, you're probably looking at welcome offers and hoping for a high number: a large sign-up bonus that can reward you with tens of thousands of points. In order to make that high number pay off, though, you need to keep another number very low — that number is your credit card balance. What is a credit card balance? Your credit card balance reflects how much money you owe your bank at any given time for all the transactions that have posted to your account. Each time you swipe, insert, or tap your credit card, your bank approves it, and the amount is tacked on to your balance. At the end of each billing cycle, your bank tallies up all you owe. Then, the bank sends you a statement balance with a full rundown of all the charges it has fronted for you. Based on the amount you owe, the bank will ask you to make a minimum payment. It's often a tiny fraction of the total statement balance. If you make the minimum payment, the rest of the money simply rolls over to a new billing cycle, but it doesn't stay the same; it gets even bigger. Even if you don't make another transaction, your bank charges interest to your credit card balance. So here's the simple rule for your credit card balance: Keep it as close to zero as possible. By paying the full amount each month by your due date, your credit card's APR won't matter, and you won't wind up paying finance charges. Related Product Module: Related Product Credit Cards What your credit card balance does to your credit score Your balance will do more than impact how much you pay your bank for using your credit card. It can also play a role in how much you pay for other financial products, like a mortgage or a car loan. That's because your credit card balance is a key factor in determining your credit utilization ratio, which is an important component of your overall credit score. The lower your balance, the better your credit utilization ratio. Let's say you have a credit card with a credit limit of $10,000, and right now, you have a balance of $1,000. Your credit utilization ratio is 10 percent. That's good – most experts say you want to keep that ratio under 30 percent. Now, let's say you have a balance of $5,000 on the same card. Your credit utilization ratio leaps to 50 percent. If you decide to apply for a loan to buy a condo, that big balance and less-than-stellar ratio is going to raise some eyebrows at the bank that is deciding whether to let you borrow the cash. Your application could be denied, or you could wind up paying a higher interest rate for the mortgage. Why? Because carrying too much on your credit card makes you look like you could struggle to pay all your bills. You look like a greater risk of default. You can transfer your balance to a new card, but it's not free If you wind up carrying a credit card balance, you might be tempted to transfer that balance to a new credit card that offers an introductory APR of 0%. That rationale makes sense: If you don't have to pay interest, you can focus on getting rid of your balance. However, it's important to note that most cards charge a percentage fee on the balance. For example, you might want to transfer a balance of $5,000. Before you do, make sure you read the fine print of the new card to get a complete understanding of what that will cost. It's likely the new card will charge you between 3% and 5% of the amount. So, a 5% fee on a $5,000 transfer would mean an additional $250. If you're paying an APR of 15% on your existing card, though, that transfer fee can be well worth it. Keep a close eye on your credit card balance. If it starts to increase into uncomfortably high territory, it's time for you to take a closer look at your spending habits to avoid falling in to a debt trap. Related Content Module: More Credit Card CoverageJoin the conversation about this story »
A bankruptcy will stay on your credit report for 7 to 10 years, but there are ways to rebuild your credit
A Chapter 13 bankruptcy can stay on your credit report for up to seven years,...A Chapter 13 bankruptcy can stay on your credit report for up to seven years, while a Chapter 7 bankruptcy can remain for a maximum of 10 years. Credit scores can drop by 100 points or more after bankruptcy is added to a credit report. To rebuild your credit score after bankruptcy, you'll want to continue making on-time payments to your non-bankruptcy accounts and may want to consider obtaining a secured credit card. Get your free credit score with Credit Karma » If you're feeling overwhelmed by your debts, bankruptcy is a legal process that can help you find relief. Filing for bankruptcy could stop a foreclosure or car repossession, protect your wages from garnishment, or keep your utilities from being turned off. But bankruptcy also has its fair share of disadvantages. First, navigating a bankruptcy will typically require the help of an attorney, which can be expensive. Second, your credit score will take a hit after bankruptcy. And damaged credit can make it more difficult to get approved for a line of credit in the future, especially credit with attractive rates and terms. But the good news is that a bankruptcy won't hurt your credit score forever. Eventually, the bankruptcy will fall off your credit report and will have zero future impact on your score. Here's how long it takes for that to happen. How long does bankruptcy stay on your credit report? Bankruptcy typically stays on your credit report for a minimum of seven years and a maximum of 10 years. While there are many types of bankruptcy, two of the most common types are Chapter 7 and Chapter 13. With Chapter 7 bankruptcy, all eligible debts are discharged immediately. With Chapter 13 bankruptcy, you agree to a three- to five-year repayment plan to partially or fully repay your debts. A Chapter 13 bankruptcy can stay on your credit report for up to seven years. A Chapter 7 bankruptcy can stay on your credit report for up to 10 years. It's important to point out that each delinquent account included in the bankruptcy will also remain on your credit report up to seven years. But the seven-year clock for delinquent accounts begins when they were first reported as late, not when you filed for bankruptcy. So if some of the accounts included in your bankruptcy were already delinquent before you filed, they will fall off your credit report before the bankruptcy does. Any accounts that were current until you filed, however, will be removed from your report at the same time as the bankruptcy. How does bankruptcy affect your credit score? Unfortunately, bankruptcy is considered a seriously negative event by scoring models like FICO and VantageScore. As such, if a bankruptcy is added to your credit report, it can have a severe negative impact on your credit score. According to myFICO, someone with a score in the mid-600s or 700s could expect their score to fall by 100 points or more — even 200+. Also, the more accounts that are included in your bankruptcy, the heavier an impact it's likely to have on your score. Thankfully, the negative impact of a bankruptcy on your credit report will diminish over time. So even though a bankruptcy will still be on your credit report five years down the road, its impact on your score will be much less than it was in the year that you filed. Can you remove a bankruptcy from your credit report? Unfortunately, if a bankruptcy that's appearing on your credit report is legitimate and is being reported accurately, it's highly unlikely that a creditor or credit bureau would agree to remove it. Credit repair companies don't have any special powers to make this happen either. So don't allow yourself to be scammed into paying an upfront fee to a company that says it can remove legitimate negative items from your reports. However, you'll want to check your credit report to make sure that the right accounts were reported as being involved in the bankruptcy. You'll also want to make sure that all the accounts that were part of the bankruptcy are showing a balance of zero. If accounts that weren't part of the bankruptcy are being reported as included, you can dispute the errors to have them removed. Or if included accounts are still showing an outstanding balance, you can dispute this as well. How can you rebuild your credit after bankruptcy? While your credit score will take a hit after bankruptcy, there are steps that you can take to begin building a positive credit history again. First, if there are any credit accounts that weren't included in your bankruptcy, make sure that you continue to make on-time payments on them each month. Second, applying for a secured credit card can be one of your best options for rebuilding your score. Since these cards require a security deposit, which limits the issuer's risk, they're easier to qualify for with poor or damaged credit. Payment history on secured cards is reported to the credit bureaus just like regular credit cards. So making consistent on-time payments on a secured card can improve your score over time which can open up more credit opportunities for you down the road. Before you apply for a secured card, check to make sure that it reports cardholder payment activity to all three major credit bureaus. And to see the biggest positive impact on your score, try to keep the credit utilization rate on your secured card below 30%. Final thoughts Remember, bankruptcy is just one of various debt relief options. Depending on your situation, you may want to explore other options first, like taking out a debt consolidation loan or trying to work out a repayment plan with your creditor on your own or with the help of a credit counselor. If you're looking for advice on how best to manage your debts, you may want to consider setting up an appointment with a NFCC-certified credit counselor. In some cases, you may find that a different debt relief strategy would save you money while also having less of a negative impact on your credit score. But if you do decide to file for bankruptcy (or already have), know that the damage to your credit score will be temporary. Ultimately, the biggest cure to your bankruptcy-related credit score ailments will be time. If you're patient and commit to following good credit habits, your credit score will slowly but surely rise. 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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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