It May Increase Your Credit Mix
Even if you don’t yet have a credit card, you may have other forms of credit, such as a personal loan or auto loan. These are installment loans: You borrow a set amount, pay it off in monthly installments, and once paid, the account is closed.
Credit cards, on the other hand, are considered revolving credit. Revolving credit allows you to borrow over and over up to a set limit as long as you make at least a minimum payment every month. Any unpaid balance rolls over, or revolves, monthly. Interest will be charged on whatever balance remains unpaid.
If you only hold installment credit, getting a credit card will increase the types of credit you maintain, known as your . Having both installment and revolving credit shows lenders you can manage different types of credit accounts . This can help your credit score, as credit mix accounts for 10% of your FICO® Score, the scoring model most commonly used by lenders.
Why Does Your Credit Limit Matter
When lenders consider your creditworthiness, they look at one or more of your credit reports and scores from the three major credit bureaus: ExperianTM, Equifax® and TransUnion®.
Your credit scores are calculated using different factors in your credit report. A large part of your score is made up of your payment history, so its critical to pay all your bills on time. But your credit utilization ratio, the percentage of your total credit card balances compared to your total credit limit, makes up another large part of your credit scores.
A lower credit utilization ratio has a more positive impact on your credit scores. To demonstrate how credit utilization works, lets look at a couple of scenarios.
- Charlie has one credit card with a $5,000 limit. Their balance is $2,500. Therefore, Charlies credit utilization ratio is 50%.
- Alex has two credit cards, each with a $5,000 limit. Their total credit card limit equals $10,000. Alexs total credit card balance equals $2,500, just like Charlies. But because Alex has a higher credit limit, their credit utilization ratio is only 25%, which could be better for their credit.
If Charlie wants to decrease their credit utilization ratio, they can pay down their credit card balance which could save money on interest, too. But if Charlie cant afford to pay off their credit card balance right now, they can either apply for another credit card or request a credit limit increase with their current credit card.
Things That Don’t Affect Credit Scores
There are a lot of myths out there about what does and does not affect credit scores. The following 5 things do not impact credit scores negatively or positively: using your debit card, your income level, checking your own credit report, interest rates, and having an application denied.
Using your debit card
Using your debit card does not involve any type of credit. You are limited to the funds in your account, which prevents you from overspending or missing a payment. If you are trying to increase your credit score, using a debit card won’t help. But it also won’t decrease your score either.
Your income level
Your income level does not impact your credit report or score. But it may affect your borrowing capacity. Lenders use something called a debt service ratio when calculating how much money to lend. The higher your income, the more money you may have access to borrowing.
Checking your own credit report
Checking your own credit report is known as a soft inquiry and does not affect your score in any way. Regularly checking your report for errors or fraud is a sound financial practice. And you can see your information for free from both Transunion and Equifax once a year.
Having a high-interest rate loan
Having high-interest rate loans or credit cards does not directly impact credit scores. But missing a payment on this type of loan can cost you a lot of money in interest charges.
Having a credit application denied
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How Many Hard Inquiries Is Too Many
The effect of a hard inquiry on your credit scores ultimately depends on your overall credit health. In general, adding one or two hard inquiries to your credit reports could lower your scores by a few points, but its unlikely to have a significant impact.
Having a lot of hard inquiries within a short time frame though will likely have a greater impact on your scores. This is because lenders and in effect, credit-scoring models look at multiple credit applications in a short amount of time as a sign of risk. Though there can be exceptions when youre shopping for specific types of loans, like car loans, student loans or mortgages.
Tips On Managing Multiple Cards
Having an array of credit cards can allow you to earn the maximum available rewards on every purchase that you make with a credit card.
For example, you might have a Discover it Cash Back card to take advantage of its rotating 5% cash-back categories so that in certain months, you can earn 5% back on purchases such as groceries, hotels, restaurants, and gas . You might have another card that always gives you 2% back on gas. Use this card during the nine months of the year when Discover isnt paying 5% cash back on gas.
Additionally, you might have a card that offers a flat 1% back on all purchases. This card is your primary card for any purchase where a higher reward isnt available. For example, you might be able to earn 5% on all clothing purchases in October, November, and December with your Discover card the rest of the year, when no special bonus is available, you would use the 1% cash-back card.
Another consideration is store-branded credit cards that can only be used for purchases in that particular store or on their website. Opening a new store credit card that offers a significant discount on those purchases can be a huge benefit if youre doing a lot of shopping in one place for example, back-to-school shopping, holiday shopping, or a major purchase like appliances for your home. Getting such a card and paying it off right away can be advantageous to get the discount, but it may also be a good idea to close the store card afterward if it is no longer needed.
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Fact: Opening A New Credit Card Account
When you apply for any type of credit or loan, the creditor will run a hard credit check, meaning they pull your credit report before deciding to approve or decline your application. Only 54% of consumers realized this lowers their credit score.
Hard credit checks don’t decrease your credit score that much. With a FICO® Score, the average drop from a hard inquiry is less than five points. But these can add up if you submit multiple applications for new credit in a short period of time, unless you’re rate shopping for the same type of loan. In that case, FICO allows you to shop around without lowering your credit on each application.
What To Do If You Pre
When you submit a pre-qualification form, you’ll typically receive several credit card offers that you have good approval odds for. Once you choose an offer, you still need to submit an official application.
Here are two steps to take after you pre-qualify for a card:
- Compare credit cards. Pre-qualification is a great way to shop around for the best credit card offers without hurting your credit score. We recommend submitting multiple pre-qualification requests so you can compare the fees, rewards and added perks to find the card that provides the most value for your needs.
- Submit an official application. Once you decide which card is the best fit, submit an official application. You’ll typically receive a decision immediately, though it can take longer in some cases. If you’re approved, great! If you’re denied, you can submit an application for one of the other cards you were pre-qualified for.
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Build Your Credit History For 6 Months
Whichever type of credit you choose, pay it off responsibly for at least six months. Make sure to make all of your payments on time. If you have a secured credit card, try to pay off the balance in-full every month.
After roughly six months to a year, you should have enough credit history to qualify for other financing. If you want to apply for large-scale financing such as a mortgage, you may wish to consult with a or housing counselor. These experts can help analyze your credit and make recommendations to help you get the approval you want.
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Examples Of Hard Credit Inquiries And Soft Credit Inquiries
The difference between a hard and soft inquiry generally boils down to whether you gave the lender permission to check your credit. If you did, it may be reported as a hard inquiry. If you didnt, it should be reported as a soft inquiry.
Lets look at some examples of when a hard inquiry or a soft inquiry might be placed on your credit reports. Note: The following lists are not exhaustive and should be treated as a general guide.
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How To Establish Credit With A Credit Card
Your credit report is created when you open your first credit account, whether its a credit card, auto loan or some other type of credit. Building a strong credit history takes both time and good financial habits. Keep these guidelines in mind as you establish your credit history:
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CARD DETAILS
Security deposit: None for most membership plans.
Fees: None with the free membership tier.
WHY WE LIKE IT
The Grow Credit Mastercard is a virtual card issued by Sutton Bank that is friendly to those with poor credit or no credit. Grow Credit has proprietary technology that looks at income to evaluate creditworthiness. To weigh that information, the company requires you to link a bank account through Plaid.
With the card, you choose one of four membership plans that help you build credit as you pay for eligible monthly subscriptions or bills. For example, if you normally pay $8.99 a month for Netflix, you can make that payment with the Grow Credit Mastercard. The payments, if made on time and in full, will build your credit. The Grow Credit Mastercard reports payments to all three major credit bureaus.
DRAWBACKS
You can’t use the card for any transactions other than the qualifying bills and subscriptions. You also can’t carry a balance from one month to another.
Two of the paid membership plans the Grow membership tier and the Accelerate membership tier are not worth the cost. That’s money you won’t get back. You’re better off with Grow Credit’s free membership plan or secured membership plan. It’s also worth exploring a secured credit card that offers a chance to get your deposit back.
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Fact: How Long You’ve Been Using Credit
With your FICO® Score, the length of time you’ve been using credit counts for 15%, making it the third-most-significant factor. Less than half of consumers knew this, which is a serious issue. If you don’t realize that the length of your credit history matters, you may end up canceling cards you’ve had the longest, which can cause a big drop in your score.
Fact Or Fiction: What Does And Doesn’t Affect Your Credit Score
by Lyle Daly |Updated July 21, 2021 – First published on Nov. 29, 2019
Image source: Getty Images
How much do you know about what affects your credit score?
Unfortunately, that misinformation about your credit score can cost you. It may lead to a lower credit score, meaning you’ll pay higher interest rates and have more trouble getting approved on credit card or loan applications.
Consumer beliefs on what affects their credit scores were investigated in Equifax’s 2019 Financial Literacy Survey. Here’s a closer look at the factors that do and don’t affect your score, along with the number of consumers who got each of these right.
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Best No Credit Check Credit Card Tips
If none of the credit cards available without a credit check suit you, the next best thing is to minimize the impact of the credit check that will occur when you apply for your chosen card. There are two ways to do that: by finding a card with high approval odds so you only have to apply once, and by scheduling your application so its not within six months of any loan application.The second part is pretty straightforward. If you dont need to put your best credit score forward in the near future for a financial transaction with a lot of money involved, like a mortgage or car loan, temporary credit score damage shouldnt be an issue. But finding a card with high approval odds is a bit tougher. Dont worry, well lay out some tips below.
If The Information On A Credit Reference File Is Wrong
If you think any of the information held on your credit reference file is wrong, you can write to the credit reference agencies and ask for it to be changed. But you can’t ask for something to be changed just because you don’t want lenders to see it.
You can also add extra information about your situation. For example, you can add information if you have had a past debt but have now paid it off. This is called a notice of correction. This might help you if you apply for credit in the future.
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Carrying A Balance On My Credit Card Boosts My Credit Score
False. Carrying a balance on your credit card doesn’t help your credit score, it only has the potential to hurt it and it will end up becoming expensive over time paying interest. Not to mention, it’s a waste of money to pay interest on your balance if you can afford to pay off your credit card bill in full each month.
Lingering balances on your account directly affect your . The higher your credit card balance, the higher your utilization rate, which can in turn hurt your credit score.
If you’re already carrying a balance on a credit card, consider transferring it to a balance transfer credit card, such as the Discover it® Balance Transfer. This can help you save money in the long run, if you commit to paying off your balance during the 18-month introductory 0% APR period .
I Don’t Need To Worry About My Credit Score Until I’m Older
False. The minimum age at which you can apply for credit is 18 and that’s when you should start worrying about your credit score. Financial experts recommend young people start building credit as soon as possible. The length of your credit history is a big factor in your credit score, so the sooner you establish credit the better.
For those just beginning their credit journey, check out Select’s recommendation for the best first credit card. If you’re a student, check out our list of the best cards for college students.
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Sorting Out The Exs Benefits
Dear Liz: I am 68 and plan to delay starting Social Security until Im 70. I was married for 15 years prior to an amicable divorce 15 years ago. My ex just turned 60 and remains unmarried but may possibly marry at some future time. Does she qualify for survivor benefits? If so, what can I do to help ensure that she can efficiently apply for that benefit? We have already reviewed her option to assume my benefit upon my demise, but our benefits are virtually at identical levels and so that option does not seem applicable.
Answer: You seem to have confused divorced survivor benefits with divorced spousal benefits. She may well be eligible for both, but the only way you can help her get survivor benefits is to die. Its great that you two are still friends, but that may be taking friendship a little too far.
Your ex is too young to claim a divorced spousal benefit, which isnt available until she turns 62. She wouldnt be able to get the full amount, which is 50% of your benefit at your full retirement age, until she reaches her own full retirement age. If she was born in 1959, then her full retirement age is 66 years and 10 months.
Furthermore, she would get a divorced spousal benefit only if thats larger than her own benefit. If your benefits are virtually identical, thats not likely to be the case.
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