Being an authorized user on someone else’s credit card can often be a valuable strategy for consumers who are looking to build credit. However, it is not true that everyone will benefit from authorized user accounts in every situation.
In some cases, being added as an authorized user may have a neutral impact, which is to say that it doesn’t have much of an impact on your credit one way or the other. Furthermore, in some cases, becoming an authorized user could even hurt your credit score, which is obviously counterproductive.
So if you are interested in potentially adding an authorized user tradeline to your credit file, how can you ensure that this action does not backfire and end up having an adverse impact on your credit?
To address this question, let’s look at some cases in which it is not a good idea to be added to someone’s credit card account as an authorized user, from the perspective of credit expert John Ulzheimer. John provided his expert opinion on this topic in a Credit Countdown video on the Tradeline Supply Company, LLC YouTube channel, which you can view below this article.
Scenario 1: Being Added to a Young Account
Being added as an authorized user to a credit card account that has little age can be detrimental due to the ways it can impact your age-related metrics.
When we talk about credit age, which is also referred to as “time in file” or length of credit history, we do not mean your personal age. (It is a myth that your age affects your credit score.)
Rather, we are talking about the age of your credit report and the tradelines in your credit report. This is determined using various age-related metrics such as the age of your oldest account and the average age of all of your accounts.
The credit age category only makes up 15% of your FICO score, but the impact can still be significant because more age means more on-time payment history, which, at 35%, makes up the largest chunk of your credit score.
It is beneficial to your credit to have as much age as possible. The longer your credit history is, the more confident lenders can be that you pay back your debts, which is why these age-related metrics are important to your credit score.
If you are added as an authorized user to a new credit card, then the low age of the account can bring down your average age of accounts. According to John, this scenario could result in either your credit score going down, or it could “dilute” the other, more beneficial aspects of the authorized user relationship.
To prevent this common tradeline mistake from happening to you, be sure to choose an authorized user account that has as much age as possible so that it will not bring down your credit age and damage your credit score. Our tradeline calculator is a great tool to help you with this.
Ideally, John recommends being added to an account that is at least 20 years old, although this is certainly not possible or practical for everyone. If that is the case for you, just aim for as much age as possible.
Scenario 2: Becoming an Authorized User on a Heavily Utilized Card
Revolving utilization, which is often called the credit utilization ratio, is an important factor that contributes 30% of your FICO score. In this case, lower is better, because if you are utilizing too much of your available credit, this indicates that you are a larger financial risk for lenders.
For this reason, when it comes to your credit score, you want your credit utilization to be as low as possible.
Many consumers seek out authorized user tradelines with high credit limits, but if these accounts also have high utilization ratios, then being added to one as an authorized user could do more harm than good by increasing your revolving utilization instead of decreasing it.
The ideal credit card to become an authorized user on would have a high credit limit, but regardless of the credit limit of a credit card, its utilization ratio should be very low in order to avoid any negative effects.
Scenario 3: If the Credit Card Has a History of Derogatory Entries or Is Currently Delinquent
Of course, it is not a good idea to become associated with a credit card account that has a history of derogatory items or if it is currently past due. Your payment history is the most important determining factor of your credit score, making up 35% of it, so it is vital to maintain a perfect payment history on any account you are added to.
If you are added to a credit card that has any negative items in its payment history, it is far more likely to hurt your credit score than it is to help.
In the event that you are added to an account that has been or is currently delinquent, fortunately, you can have yourself removed from the card. Instead of wasting your time on this type of situation, however, the best thing to do is to ensure that a card has a perfect payment history before having your name added to it.
Scenario 4: If You Already Have a Low Credit Score or Derogatory Items on Your Credit Report
If your credit score is low already, don’t assume that being an authorized user is going to fix all of your problems.
Having a low credit score means you have some negative items on your credit report, and unfortunately, these negative items can act to balance out the potential effect of the authorized user account. One account with a good payment history can only go so far in diluting the impact of derogatory items on your credit report.
As another example, if you have a low credit score because you have several credit cards with high utilization ratios, then adding one card to your credit report that has a low utilization ratio may not be enough to move the needle overall.
In this kind of situation, it is important to be realistic and reasonable with your expectations.
Scenario 5: If the Card Does Not Report to All Three Credit Bureaus
An authorized user tradeline has no value if it does not appear on your credit report, and not all card issuers report authorized users to the credit bureaus. Many card issuers do choose to report authorized user data, but they are not required to do so, so it is not a guarantee.
Therefore, when choosing an authorized user account, it’s crucial to check with the issuer of the credit card you are considering piggybacking on to ensure that they report authorized user information to all three of the major credit bureaus: Equifax, Experian, and TransUnion.
That way, you can at least be sure that the tradeline will be posted to your credit report, which is a condition that needs to be met in order for the account to potentially have an impact.
Do you agree with these times when you should not be an authorized user? Let us know by commenting on this article or on the YouTube video below. For more helpful videos about tradelines and the credit system, subscribe to our channel and take a look at our valuable content!
The “opt-out” myth is one of many myths that lead consumers astray when it comes to credit. What is the opt-out myth and why does it not work?
What Are Pre-Screened Credit Offers?
Pre-screened credit card offers are preliminary offers of credit that credit card companies send to consumers who have a credit profile that matches with that of the company’s desired customer base. The way that the banks determine this is they purchase pre-screened lists of consumers from the credit reporting agencies.
For example, a credit card issuer could request a list of a million consumers who have a credit score between 650 and 725, do not have any bankruptcies on their records, and have not opened a new credit card in the past six months. The credit bureaus would then compile a list of consumers who fit that set of criteria and sell this list to the lender so that the lender can offer credit cards to these consumers.
Is It Legal for the Credit Bureaus to Sell Your Information on Pre-Screened Lists?
Yes, it is completely legal for the credit reporting agencies to include your information on pre-screened lists of consumers for lenders to purchase. It is not a controversial practice.
In fact, credit card issuers very commonly use these pre-screened lists as a way to acquire new consumers, as you may already know if you regularly receive such offers in the mail yourself.
Do You Get Inquiries on Your Credit Reports From Pre-Screened Credit Offers?
Because your credit report is generated and accessed by a business during the pre-screening process, this results in you getting a soft inquiry on your credit report.
For this reason, you may see soft inquiries on your credit report from companies you do not recognize who may have extended a pre-screened offer to you.
Can You Get Your Name Taken Off These Pre-Screened Lists?
You have the right to order the credit reporting agencies to not include your name on the pre-screened lists that they sell to banks. In other words, you are allowed to “opt out” of the pre-screening process.
Opting out is free and easy to do. All you have to do is go to www.optoutprescreen.com, which is a website that is operated by the credit bureaus because they are obligated under the Fair Credit Reporting Act to allow consumers the ability to opt out of having their names on these pre-screened lists.
At this website, you can opt out permanently, or, alternatively, you can choose to opt out for just five years.
If you want your mailbox to stop filling up with pre-screened credit card offers, then opting out via this website is the way to do it.
What Is the Opt-Out Myth?
The myth regarding opting out is the belief that if you opt out of receiving pre-screened credit offers, your credit score will go up.
The reasoning behind this myth comes from the misconception that soft inquiries on your credit report will hurt your credit score.
Soft Inquiries vs. Hard Inquiries
There are two types of credit inquiries: hard inquiries and soft inquiries.
Hard inquiries on your credit report are the result of you applying to obtain credit from a lender. When you do this, the lender pulls your credit report to see if you are creditworthy by their standards.
Because your credit report has been accessed by a lender for the purpose of approving or denying your application, a hard inquiry goes onto your credit report, indicating that you are actively looking to borrow. This implies that you are now a higher credit risk, so your credit score may go down a few points as a result of a hard inquiry.
Soft inquiries, on the other hand, may show up on your credit report when businesses check your credit for other reasons, such as a landlord pulling your credit before approving you for a rental or a prospective employer looking at your credit report as part of the job application process. This also applies to credit card issuers including you in groups of pre-screened consumers in order to solicit your business.
That means you can be confident that being pre-screened for credit offers only results in soft inquiries being added to your credit report.
Soft inquiries do not represent applications for credit on your part, which means they do not reflect your risk level as a borrower. For this reason, they do not impact your credit score at all. They just serve as a record of who has accessed your report.
Why the Opt-Out Myth Is Wrong
The myth that opting out helps your credit score would make sense if we were dealing with hard inquiries on your credit report because hard inquiries can hurt your score.
However, as we pointed out, the only inquiries you get from the pre-screening process are soft inquiries, and while soft inquiries do appear on your credit report, credit scores do not consider them as a scoring factor. Credit scoring systems don’t even know whether you are opted in or opted out of pre-screened offers.
Therefore, pre-screened credit card offers do not affect your credit score at all, so opting out of receiving them will not make a difference to your score either.
Avoid Opt-Out Scams
If you try searching for information about the opt-out myth, you might come across some offers to “help” you opt out and increase your credit score—for a fee. Avoid scam artists who try to sell you products and services to accomplish something that:
Will not actually improve your credit score, You can do yourself, Is free to do, and Takes just about a minute.
Conclusions on the Opt-Out Myth
Despite the fact that misinformation about this topic is commonplace, we can safely say that opting out of pre-screened credit card offers will not help your credit score because being pre-screened does not affect your score in the first place.
However, if you do not want to be included on lists of pre-screened consumers for other reasons, you can quickly and easily opt out on www.optoutprescreen.com for free.
View the Credit Countdown video on this topic below and then check out our YouTube channel for more informative videos!
Credit cards are often vilified for their high interest rates, which can be very costly to consumers who carry a balance from month to month rather than paying off the full balance that was accrued. Credit expert John Ulzheimer believes that credit cards do not deserve the bad reputation they have earned.
In a Credit Countdown video on our YouTube channel, John explained why credit cards are not necessarily as bad as they are made out to be and how to use them responsibly without going into credit card debt.
Keep reading to learn more on this topic and watch the video below!
Credit Card APRs
It’s true that credit cards do have high interest rates compared to other forms of credit, even if you have a good credit score. For this reason, once you get into credit card debt, it can be a very deep hole to climb out of, because the interest charges keep adding to your total amount of debt.
However, as John points out in the video, no one forces you to open a credit card or go into credit card debt, so in his opinion, it seems unfair to blame the credit cards with high interest rates for actions that consumers choose to take.
If you choose instead to pay off your balance every month, then you do not have to pay interest on your purchase, so the APR of the card is irrelevant. Therefore, if you are going to use credit cards responsibly, then there is no need to choose a credit card based on its APR.
Always Pay Off Your Credit Cards in Full
The most important rule when it comes to using credit cards correctly is this:
Only charge as much as you can pay off in full every single month.
When you pay your bill in full each month, since you are not paying interest, it is essentially free to use credit cards. The exception to this is if your credit card has an annual fee, but for some consumers, the annual fee on some credit cards may be worth paying in order to reap the rewards offered by the card.
If you want to be a responsible user of credit cards, it is essential to pay off your balance in full every month rather than carrying a balance and paying interest.
Maintain a Low Balance-to-Limit Ratio
If you want to have a good credit score, it’s important to keep a low balance-to-limit ratio (also commonly called the credit utilization ratio). The closer your balance is to your credit limit, the fewer points you can earn toward your credit score.
Don’t take this to mean that you cannot use your credit card often or make large purchases with it. Just be aware that since a higher balance-to-limit ratio means a lower credit score, you may want to avoid doing anything to substantially increase your balance before you apply for a loan, especially a large loan, like a mortgage loan or an auto loan. Otherwise, you could end up with a higher interest rate that could cost you thousands of dollars in additional interest over the course of the loan.
Do Not Skip a Payment
Credit card issuers sometimes offer “skip a payment” programs that allow you to “skip” a payment for one month, especially around the holidays, when consumers may rely more on their credit cards.
John recommends never signing up for these programs because by skipping a payment, you are obviously opting not to pay in full that month. Since you are carrying the balance to the next month, you will be charged interest on the debt and you will have even more debt to pay back the next month.
Instead of skipping a payment, the more responsible thing to do is to go ahead and pay the statement in balance in full just as you normally would.
Conclusions
While credit cards may be risky in the wrong hands, responsible consumers do not need to forgo using them altogether. It is possible to benefit from using credit cards as a financial tool without going into debt or paying interest.
To that end, make sure you always pay your balance in full and maintain a low balance-to-limit ratio, and never skip a payment.
To hear from John directly, check out the video below. Follow our YouTube channel to see more of our Credit Countdown videos!
When you are paying for purchases, is it better to use a debit card or a credit card?
The answer depends on which features and advantages are important to you. In a Credit Countdown video, credit expert John Ulzheimer compares the pros and cons of credit cards and debit cards in regards to several different metrics, such as fraud protection and credit-building ability.
Read the article about this subject below and then catch the Credit Countdown video at the bottom of the page or on our YouTube channel.
The Basics: How Debit Cards and Credit Cards Work
Credit cards and debit cards may look very similar and feel similar when you make a purchase, but the two payment methods work completely differently.
A debit card is linked to your checking account. When you pay for something using a debit card, the money you spent is being debited directly from your bank account. In other words, you are using your own money to pay for the item immediately.
A credit card is, of course, a form of credit, meaning that you are borrowing someone else’s money. In this case, the credit card issuer is your lender. When you swipe a credit card, you are essentially borrowing money from the bank to pay for the purchase with the agreement that you will pay back the debt, plus any applicable interest charges and fees, later.
Credit cards are revolving credit accounts, which means you have the option to carry a balance from month to month while making only the required minimum payments instead of paying the full balance when you get the bill.
Fraud Protection
If a fraudster gets ahold of your card, which type offers better protection?
With a debit card, fraudulent purchases have already deducted the funds from your checking account, and it may be difficult to get your money back.
If your credit card is stolen, it’s the bank’s money that is directly at risk, not yours. Beyond that, credit cards generally have excellent fraud protection policies.
The Fair Credit Billing Act (FCBA) mandates that you, as a consumer, can only be held liable for a maximum of $50 in the event of credit card fraud. Even better, the major credit card networks all offer $0 fraud liability policies, which means nothing has to come out of your pocket if your credit card is used fraudulently.
Credit cards provide strong fraud protection policies to limit your liability if your credit card information gets stolen.
Credit Building
There’s no comparison when it comes to credit building: only credit cards can help you build a credit history. The credit card issuer reports your activity to the credit bureaus, allowing you to accumulate credit age and on-time payment history if you manage the account properly.
The credit limit of your credit card also contributes to your revolving utilization, which may help your credit score as long as there is not a high balance on the account.
Obviously, debit cards are not a form of credit because you are not borrowing money. Therefore, you do not make payments to a lender and so your activity is not reported to the credit bureaus. For this reason, debit cards do not show up on your credit reports and cannot help you build credit.
Spending Capacity (Buying Power)
The buying power of a debit card is limited by how much money you keep in your bank account. It’s not necessarily a good idea to keep a lot of money in your checking account, where it is likely earning very little interest compared to what you could earn by investing the funds elsewhere.
Credit cards, on the other hand, typically provide more buying power because you are only limited by the credit limit set by the credit card issuer, which may be quite generous if you have a decent credit score. Since you do not need to pay off the balance immediately, you do not have to worry about maintaining a large stash of cash in your bank account.
To boost your credit card spending capacity even more, try some of the tips in our article on increasing your credit limit.
Usability
Certain transactions require you to use a credit card or are much easier to complete with a credit card.
This includes many activities related to traveling, such as renting a car or paying for a hotel room. In addition, such businesses may place a temporary “hold” on your account, which is not as much of an issue when you have available credit on your credit card compared to having a hold placed on your checking account, which could cause other transactions to be declined.
Budgetary Control
This is the category where debit cards excel. If you struggle to control your spending and stay within a budget, it’s actually a good thing to have less buying power and no access to credit.
Credit cards, if used correctly, don’t require you to get into credit card debt in order to get the advantages of using a credit card. However, the higher spending limit and the ability to carry a balance can be powerful temptations to buy more than you can afford to pay off.
Summary
So, which payment method wins in your opinion? Use the table below to decide.
Debit Cards Credit Cards
Source Your bank account The credit card issuer
Fraud Protection Limited Strong
Credit-building Ability No Yes
Buying Power Limited to the balance of your bank account Limited by your credit limit
Usability Limited in some situations Widely accepted
Budgetary Control Yes No
Check out the Credit Countdown video with John Ulzheimer on our YouTube channel for more information about credit cards vs. debit cards!
Secured credit and unsecured credit are types of credit that are very different in terms of risk to consumers and lenders.
In a Credit Countdown video on our YouTube channel, credit expert John Ulzheimer explains the benefits and drawbacks of each type of credit and how different types of credit can affect your credit score. Read what he has to say below and watch the video on our channel!
What Is Secured Credit?
Secured credit is a form of credit that is backed by some sort of physical asset as collateral. If the borrower defaults on a secured loan, the lender can take the asset in order to recoup the loss.
Examples of Secured Credit
When you take out an auto loan, the loan is secured by your vehicle. Technically, the lender is the owner of the car until you finish paying off the debt. If you fail to repay the loan as agreed, the lender can take back the car using the process of repossession.
Similarly, when you take out a mortgage, that loan is secured by your home, and the bank still “owns” the home until you pay it off. In this case, not paying your mortgage can lead to the bank foreclosing on your home, meaning that they evict you from the home and then can sell it to someone else.
Pawn shop loans and title loans are also examples of secured loans.
While most credit cards are typically unsecured, secured credit cards do exist for consumers who may not be able to qualify for unsecured credit cards due to bad credit or a lack of credit history. With a secured credit card, you make a security deposit that counts toward your credit limit that the lender can keep in the event that you are not able to make the required payments on your credit card.
Mortgage loans are secured by your home.
What Is Unsecured Credit?
Unsecured credit is credit that does not have a physical asset as collateral, so the lender cannot take back an asset if you default on the debt.
Examples of Unsecured Credit
A student loan is an example of an unsecured loan because there is no material asset that can be taken away if you do not pay your student loans. Student loans are used to pay for an education, and obviously, the lender cannot “take back” the education you have already received.
Credit cards are generally extensions of unsecured credit, except in the case of secured credit cards, as we described above.
Secured Credit Unsecured Credit
Auto loans Unsecured credit cards
Mortgage loans Student loans
Home equity lines of credit Unsecured personal loans
Secured credit cards Unsecured lines of credit
Motorcycle loans
Boat loans
Pawn shop loans
Title loans
The Impact of Secured and Unsecured Debt on Your Credit Score
Secured and unsecured accounts are treated equally by credit scoring models, according to John. You are not penalized or rewarded by credit scores based on your accounts being unsecured or secured.
Different types of accounts are still treated differently by credit scores due to other factors (e.g. credit cards are treated differently than installment loans), but this particular factor does not play a role.
Secured Credit Cards: Use Them Carefully
Secured credit card accounts are commonly used by consumers to establish credit or rebuild their credit after having bad credit. This is a valuable credit-building strategy, but you should be cautious about how much you spend on your secured credit card.
Why? Because secured credit cards often have very low credit limits. That means you can quickly get to a high utilization ratio on the account even from modest spending. For example, if your secured credit card has a credit limit of $500 and you spend $250, you already have a utilization ratio on that account of 50%.
Having heavily utilized credit card accounts can have a significant negative impact on your credit score, so if you’re trying to keep your credit score as high as possible, you’ll want to keep an eye on the balance of your secured credit card and not let it creep too high relative to your credit limit.
Myths about credit, unfortunately, are extremely common, even among people who purport to repair credit. We’ve previously compiled a list of common credit myths, which you can find in our Knowledge Center.
In this post, we’re going to focus on the top three credit myths that just won’t seem to go away, according to credit expert John Ulzheimer in a Credit Countdown video on the topic. Check out the video version at the end of this post.
Myth 1: Your revolving utilization ratio is worth 30% of your credit score.
While the general category of how much debt you owe does contribute 30% of your FICO score, the specific metrics regarding revolving utilization are just part of that category, not the whole thing. There are several other metrics included in this category, which FICO lists on their website. These include:
The total amount you owe on all of your credit accounts. The amounts you owe on different types of accounts, such as installment loans and credit cards. The number of your accounts that have balances on them. The ratio of how much you still owe on your installment accounts, such as auto loans and student loans.
Therefore, your revolving utilization must necessarily be worth less than 30% of your credit score, although it is true that it is a highly valuable metric.
Myth 2: Closing an old credit card means the age of the card no longer counts toward your credit score.
Prominent sources in the credit arena often advise consumers not to close their oldest credit cards, claiming that this will cause consumers to lose the benefit of the card’s age. In theory, this idea makes sense because your credit age is worth 15% of your credit score and it is directly connected to your payment history, which is worth an additional 35% of your score.
However, the problem with this advice is that you actually do not lose the age of a credit card once you close the account. In fact, according to John, credit cards continue to increase in age and contribute to your average age of accounts even after they have been closed.
Still, it is important to remember that closing a credit card is not completely free of consequence. When you close a credit card account, you no longer get the benefit of the unused credit limit that was associated with the account, which was likely helping your credit score.
Myth 3: Employers can check your credit scores.
In truth, this myth likely exists because employers can check your credit reports, but credit reports and credit scores are not the same thing. Your credit report contains information about your credit accounts, while your credit score is a three-digit number that represents how creditworthy you are deemed to be by the credit scoring model.
Furthermore, the credit reports that employers receive are different from the versions that are provided to lenders, and these credit reports do not come with credit scores.
If there are other credit myths you think we should cover, leave a comment on this article or the accompanying video on our YouTube channel!
The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: I took on too much debt and went without a job for 23 months. I am now employed and currently paying off my last, charged-off credit card. Should I open a new line of credit or just continue to pay my debt to rebuild my credit?
Getting back on your feet after a period of unemployment and high debt is a huge accomplishment. Rebuilding your credit depends on multiple factors and on where you stand with your overall credit and finances. So, in your situation, I recommend doing it all: pay all your bills on time, continue to pay down your debt, and rebuild your credit health with positive account activity and a new line of credit.
As you work to improve your credit, you should know which factors influence your score and learn how to use them to benefit your score. These factors include paying your bills on time, keeping your utilization ratio low, how often you get new credit, the types of credit you have, and for how long you’ve had credit.
Ways to Improve Your Credit
Arguably, the most important thing you can do for your credit is always paying your bills on time. This should become second nature so that you build your credit now and maintain a good score in the future. Then, if you don’t have an active account on your credit files, you could apply for a new credit card in order to generate a positive credit history on your credit reports. One sure way to open a new account is to apply for a secured credit card. Secured credit cards are offered by many banks and have a variety of perks and fees. Apart from looking and acting like any other type of credit card account, the primary differences are that you are approved without a credit check and you need to send a security deposit when you open the account. This deposit typically becomes collateral that establishes your credit limit and it’s returned to you if you close the account or if your account is upgraded to an unsecured credit card.
Be Strategic
Once you have your credit card, use it strategically. This means paying on time and keeping your utilization ratio below 30%. Your utilization ratio is how much of your available credit you are using. So, when you have high credit card debt, you appear at risk of losing control of your financial stability, which brings your score down. That’s why you should continue to pay off your debt in order to reduce your utilization ratio.
The other factors—the age of your credit, the types of credit you have, and how often you use your credit—are also important to a lesser degree. How old your credit is only will improve with time, so be patient. The mix of credit looks at the type of credit you have—credit cards and loans. But, right now, let’s focus on the primary factors. And last but not least, that’s how often you apply for new credit. When you ask for a new credit line, a hard inquiry is generated, and it remains on your report for 24 months. Too many inquiries bring down your score. So, you must be selective and strategic about getting new credit lines.
As you can see, building your score comes down to being strategic about how you use your credit in every transaction. When you have the tools and the right plan to improve how you manage your credit, it becomes easier to make financial decisions that build a stronger credit rating. If you need help with more personalized strategies to work on your credit, you can reach out to an NFCC Certified Financial Counselor.
Using a credit card is easy — you use the card to buy things and then pay the credit card bill.
A credit card can sometimes be difficult, however, when dealing with your credit file.
From a missed payment to a loan that isn’t yours that’s incorrectly listed on your credit report, there are all kinds of ways your credit score can drop.
And not all of them are from something you did wrong.
What Is the Fair Credit Reporting Act?
Consumers have protections under the law regarding their credit reports — which is where credit scores and credit problems are listed for lenders to check before offering you credit.
Errors on a credit report can drop your credit score, making it harder to get a loan, credit card, rent an apartment, or qualify for insurance coverage, among other things.
The main law that protects consumers from credit errors is the Fair Credit Reporting Act, or FCRA.
Your Rights Under The FCRA
Here are some of the rights you have under this law and how to use it to protect your credit:
View Credit Reports
The FCRA entitles you to review your credit file from each of the three main credit bureaus for free once every 12 months.
You can do one check every four months from each of the three — Equifax, Experian, and TransUnion — if you really want to be on top of it.
Start by going to AnnualCreditReport.com to request your credit file online.
Only use that website and don’t use a copycat site that charges fees for what should be a free service.
You’ll need to verify your identity to get online access. You can also request your credit file through an automated phone system or the mail.
The FCRA applies to all consumer reporting agencies.
You can also look at reports from other consumer reporting agencies that collect noncredit information about you.
These include rent payments, insurance claims, employers, and utility companies.
The Consumer Financial Protection Bureau lists the reporting companies and how to request a free report from each.
DISPUTING ERRORS
Getting a credit report in your hands can lead to all sorts of eye-opening concerns. Anything that’s listed as negative should be checked for accuracy. Here are some things to look out for:
Eviction that wasn’t legal. Creditor listed that you didn’t have an account with. Loan default. Wrong name. Wrong address. Wrong Social Security Number. Incorrect loan balance. Closed account reported as open. A loan you didn’t initiate.
Some errors may be simple to resolve and others you may need to do more research on before disputing them to ensure they’re incorrect.
For example, you may not recognize the name of a creditor and assume you don’t have an account with them. But it may just be a store credit card you recently applied for that is listed by the issuing bank’s name. Or maybe a home or auto loan was sold to a new loan servicer.
Other errors could be reason to suspect identity theft, or there could just be wrong information that’s bringing down your credit score.
If you suspect identity theft, such as someone taking out a credit card in your name, then file a police report and report it to your credit card company and the credit reporting agencies.
To dispute erroneous information, use certified mail to send the credit bureau a letter and copies of documents explaining the error. If a loan still shows an outstanding balance and you have written proof that it was paid off, for example, send a copy to the credit agency.
Credit agencies have 30 days to investigate and respond to your dispute, unless they deem it frivolous.
If it corrects an error, it must send you a free copy of your credit report through AnnualCreditReport.com so you can see that the corrections have been made.
Check Your Credit Score
The law allows you to request a credit score, though it’s legal for credit agencies and other businesses to charge you a fee for this service.
Some credit cards provide scores for free, so check with your credit card issuer first.
A credit score isn’t the same as a credit report.
Information in a credit report determines a credit score, and each credit bureau can use a different scoring model that requires it to provide different information.
You have different credit scores, depending on which factors are weighed more heavily.
Monitoring your credit is vital. Make sure that you review your credit report for any inaccuracies.
Know Who Can View Your Credit Report
The FCRA doesn’t allow a credit reporting agency to share your credit file with someone who doesn’t have a valid need.
Some inquiries, such as from a potential employer or landlord, require your written consent.
And, they can only check your credit report, not your credit score.
The credit reporting agencies can share your credit report for legitimate reasons, such as when you’re applying for credit, insurance, housing, or with a current creditor.
A Time Limit To Negative Information
The FCRA doesn’t allow credit bureaus to report negative information that’s more than seven years old, though it allows some forms of bankruptcy to remain on a credit report for 10 years.
There’s also a time limit for positive credit information such as on-time payments and low balances — up to 10 years after the last date of activity on the account.
Rejections Based on Credit Report
If your application for credit, job, insurance, or housing has been denied because of information in your credit report, the law gives you the right to know this information.
The landlord, employer or other entity that denied your application must notify you and give you the name, address and phone number of the credit reporting agency that provided the information.
The FCRA allows you to get a free copy of your credit report from that reporting agency within 60 days of the action against you. That’s in addition to the three free credit reports allowed annually.
To best deal with a potential rejection ahead of time, it’s smart to check your credit report before applying for credit, rental unit or related use of your credit report and check it for errors. Give yourself enough time to fix them.
The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: I need some advice in regards to my credit report and good ways that I can begin to build up my credit. I have no credit at all. Eventually within five years once I’m out of school I want to buy a house.
Building credit from scratch will take some time and effort, just like getting a job after graduating from school. You can think about good credit as a means to an end: you need good credit to finance big purchases and get the best interest rates and repayment terms on loans and mortgages. So, getting your credit ready is an excellent start to buying a home in the near future.
What is on Your Credit Report?
Your credit is a record of your monthly financial credit transactions. Your creditors report your activity to the three credit bureaus, Equifax, Experian, and TransUnion, and they use that data to generate a credit score. Your credit report also includes your personally identifying information such as your name, addresses, social security, and some public records such as bankruptcies and judgments and tax liens, if you have any. To start generating data for your credit report, you need to get a credit line. The easiest way to do that is to get a secured credit card. Many banking institutions issue secured credit cards, and they work pretty much like a regular credit card. The main difference is that these cards are backed by a cash deposit, which usually corresponds to the card’s credit limit.
Be Strategic
Learning how to use your credit card strategically is equally as important as getting that credit line. Your credit score takes into consideration several factors. The factor that influences your score the most is whether you pay your accounts on time and as agreed. Late or insufficient payments are very detrimental to your credit history. So, you should plan to pay in full and before your due date. Another important factor is your utilization ratio, which is how much you owe compared to your available credit. To have a balanced ratio, experts recommend that you use only 30% or less of your available credit in every billing cycle. For instance, if you have a $500 credit limit, you should be using less than $150.
Yet another factor is the age of your credit history. The older your credit history, the more history and data you’ll have to establish a solid credit history. Achieving this will just require time and your continued effort. The other two factors to keep in mind are the mix of credit you have (credit cards and loans) and how often you ask for new credit. Too many new credit inquiries reflect negatively on your score, so it’s important that you only apply for new credit sporadically. In your case, you should keep your secured credit card for at least a year before applying for a regular credit card. In some cases, your creditor may even upgrade your secured credit card to a regular one and return your cash deposit.
It’s never too soon to start building your credit. And once you learn healthy credit management habits, it will be very easy for you to manage your credit and use your credit cards responsibly on a daily basis. If you feel you need additional guidance or personalized help to get you started, you can always reach out to an NFCC Certified Financial Counselor. They are ready to help over the phone, online, and in-person if it’s available in your state. Good luck!
Credit cards are not only a useful payment method for making purchases but also an essential component of a solid credit-building strategy.
After all, credit cards are the most common form of revolving credit, which is given more importance than installment credit (e.g. auto loans, student loans, mortgages, etc.) when it comes to calculating your credit score.
Unfortunately, credit cards often get a bad rap because it’s easy to rack up excessive amounts of debt and destroy your credit score if you do not know how to use credit cards properly.
However, when you have the knowledge and ability to use credit cards to your advantage rather than to your detriment, they can be an extremely powerful financial tool to have in your arsenal.
If you’re unsure if using credit cards is the right choice for you or confused about how they work, then keep reading to learn the basics of credit cards that everyone should know.
What Is a Credit Card?
A credit card is a card issued by a lender that allows a consumer to borrow money from the lender in order to pay for purchases.
The consumer must later pay back the funds in addition to any applicable interest charges or other fees.
They can choose to either pay back the full amount borrowed by the due date, in which case no interest will be charged, or they can pay off the debt over a longer period of time, in which case interest will generally accrue on the unpaid balance.
Each credit card has an account number, a security code, and an expiration date, as well as a magnetic stripe, a signature panel, and a hologram. Most credit cards also now have a chip to be inserted into a chip reader rather than swiping the card at the point of sale. In addition, some credit cards offer contactless payment capability.
Credit cards allow consumers to pay for goods and services with funds borrowed from the credit card issuer.
How Do Credit Cards Work?
Although using credit cards may feel like using “fake money” or spending someone else’s money, it’s important to understand that the money you borrow when you pay with a credit card is very much real money that you now owe to the lender.
Credit Cards Are Unsecured Revolving Debt
With most credit cards, the funds you borrow are considered to be unsecured debt because you are borrowing the money without any collateral. That means the credit card issuer is taking on additional risk by giving you a credit card, since there is no collateral that they can take from you if you fail to pay back the debt, unlike with secured debt, such as a mortgage or a car loan.
Furthermore, the lender allows you to decide when and how much you want to pay back the funds instead of requiring you to pay the full balance on each due date. You can choose to only pay the minimum payment and “revolve” the remaining balance from month to month, which extends the amount of time during which you owe money to the credit card company.
Most credit cards now come with a chip in addition to a magnetic stripe.
For the above reasons, credit card interest rates are typically significantly higher than the interest rates for installment loans.
However, credit cards are also the only form of credit where paying interest is optional—there is a “grace period” of at least 21 days before the interest rate for new purchases takes effect, and you only get charged interest if you do not pay back your full statement balance by the due date.
(Keep in mind that the grace period usually only applies to new purchases, as stated by The Balance. This does not include balance transfers or cash advances, which typically begin accruing interest immediately.)
Understanding Credit Card Interest Rates
To reiterate, the interest rate of a credit card technically only applies when you carry a balance instead of paying off your full statement balance each month. However, most people will likely end up carrying a balance on one or more credit cards at some point, so it is still a good idea to be aware of what your interest rates are.
APR and ADPR
The interest rate of a credit card is usually expressed as an annual percentage rate (APR). This is the percentage that you would pay in interest over a year, which can be confusing because interest on credit card purchases is charged on a daily basis when you carry a balance from month to month.
You can find your average daily periodic rate (ADPR), which is the interest rate that you are being charged each day, by dividing the APR of your card by 365.
Average Credit Card Interest Rates
The interest rate of a credit card, expressed as the APR, is important to know if you ever carry a balance on the card.
As of October 2020, the average credit card interest rate as reported by The Balance is 20.23%. However, credit card issuers are allowed to set their APRs as high as 29.99%. It is not uncommon to see APRs upwards of 20%, even for consumers who have good credit.
The highest interest rates are generally seen on credit cards for bad credit or penalty rates that credit card issuers can implement when you are 30 or more days late to make a payment. You may also get penalized with a higher interest rate if you go over your credit limit or default on a different account with the same bank, according to ValuePenguin.
Ask for a Lower Interest Rate
In our article on easy credit hacks that actually work, we suggest trying the simple tactic of calling your credit card issuer’s customer service department and asking for a lower APR. Surveys have shown that a majority of consumers who do this are successful in obtaining a lower interest rate.
Important Dates to Know
Many consumers assume that the payment due date of your credit card is the only important date you need to worry about. While it’s true that the due date is the most important date to be aware of, there are several other dates that are useful to pay attention to as well.
Billing cycle
The billing cycle of a credit card is the length of time that passes between one billing statement and the next. All of the purchases you make within one billing cycle are grouped together in the following billing statement.
This cycle is typically around 30 days long, or approximately monthly, although credit card companies can choose to use a different billing cycle system.
Statement closing date
Your credit card’s statement closing date is not the same thing as your due date, so make sure you know both.
Sometimes referred to simply as the “closing date,” this is the final day of your billing cycle. Once a billing cycle closes and the statement for that cycle is generated, the balance of your account at that time is then reported to the credit bureaus.
You can look at your billing statement to find the closing date for your account. Because of the 21-day grace period, the statement closing date is usually around 21 days before your due date.
Due Date
This is the most important date to know in order to pay your bill on time every month, which is the most influential factor when it comes to building a good credit history. To make it easy for yourself to avoid accidental missed payments, you may want to set up automatic bill payments.
If your due date is inconvenient due to the timing of your income and other bills, you can try requesting a different due date with your credit card issuer.
Promotional offer dates
Many credit cards offer introductory promotions to attract new customers, such as 0% APR, bonus rewards, or no balance transfer fees. To use these offers strategically, you will need to know when the promotional period ends so you can plan accordingly.
Expiration date
All credit cards have an expiration date past which they cannot be used.
Every credit card has an expiration date printed on it, after which you will no longer be able to use that card, although your account will still be open. You just have to get a new credit card sent to you to replace the one that is expiring.
Usually, credit card companies will automatically send you a new card before the original card expires. If this does not happen, simply call the issuer to ask for a replacement credit card.
A Common Credit Card Mistake
Some consumers think that the closing date and the due date are the same thing and therefore believe that if they pay off the full statement balance by the due date, the credit card will report as having a 0% utilization ratio. They may then be confused to find out that their credit card is still reporting a balance to the credit bureaus every month.
However, the statement closing date is usually not the same date as your due date. This is why your credit cards may report a balance every month even if you always pay your bill in full—the account balance is being recorded on your statement date before you have paid off the card.
If you do not want your credit card to report a balance to the credit bureaus, you will need to either pay off the balance early, prior to the statement closing date, or pay your statement balance on the due date as usual and then not make any more purchases with your card until the next closing date.
Credit Card Payments
With credit cards, you have several different options for payment amounts.
Minimum payment
If you only pay the minimum payments on your credit cards, it will take longer to pay off your credit card debt and you will be charged interest.
This is the minimum amount that you are required to pay by your due date in order to be considered current on the account and avoid late fees. Although this may vary between different credit card issuers, typically the minimum payment is calculated as a percentage of your balance.
If you make only the minimum payment every month, it will take you a much longer time to pay off your balance and you will be paying a far greater amount in interest than if you were to pay off your statement balance in full. Check your billing statement to see how the math works out; the credit card company is required to disclose how long it will take to pay off the balance if you only make the minimum payments.
Statement balance
This is the sum of all of your charges from the preceding billing cycle in addition to whatever balance may have already been on the card before that cycle. This is the amount you need to pay if you do not want to pay interest for carrying a balance.
Current balance
This number is the total balance currently on your credit card, including charges made during the billing cycle that you are currently in, so it will be higher than your statement balance if you have made more purchases or transfers since your last closing date. You can pay this amount if you want to completely pay off your account so that it has no balance.
Other amount
You can also make a payment in the amount of your choosing, as long as it is greater than the minimum payment. This is a good option to use if you don’t have enough cash to pay the statement balance in full, but want to pay more than the minimum in order to mitigate the amount of interest you will be charged.
Credit Card Fees
Credit cards often charge various other fees in addition to interest. Here are some common fees to be aware of.
Although you may have access to a “cash advance” credit limit on your credit cards, it is generally not recommended to get a cash advance due to the high interest rates and fees you will have to pay.
Late payment fees
If you do not make the required minimum payment before the due date, the credit card company will likely charge you a late fee somewhere in the range of $25 – $40 (in addition to potentially raising your APR to a penalty rate). If you usually pay on time but accidentally miss a payment for whatever reason, try calling your credit card issuer and asking if they would be willing to reverse the fee since you have been an upstanding customer overall.
Annual fees
Some credit cards charge an annual fee for keeping your account open. Many times this charge may be waived for your first year as a promotional offer to attract new customers. Cards with higher annual fees will often have additional perks and rewards, but there are also plenty of great options for rewards cards that do not charge annual fees.
Cash advance fees
Your credit cards may give you the option to borrow cash in the form of a cash advance. However, this is usually not advised because cash advance interest rates are often significantly higher than your regular interest rate for purchases. In addition, you will most likely be charged a cash advance fee when you first withdraw the money, whether a flat dollar amount of around $10 or a percentage of the amount you take out, such as 5%.
Foreign transaction fees
Some cards charge a fee to use your card to pay for things in other countries. These fees are typically around 3% of the purchase amount. However, there are many credit cards on the market that do not charge foreign transaction fees.
Be sure to check the terms of service of your credit cards for fees such as these so that you can avoid any unexpected charges.
How Credit Cards Affect Your Credit
Credit cards are one of the most impactful influences on your overall credit standing, and they play a role in multiple credit scoring factors.
Building Credit With Credit Cards
One of the major advantages of credit cards is that it allows you to start building a history of on-time payments, which is extremely important given that payment history is the biggest component of your FICO score, making up 35% of it.
All you have to do to get this benefit is use your credit card every so often and pay your bill on time every month.
Click on the infographic to see the full-sized version!
Revolving accounts such as credit cards can have a much greater influence on your credit than auto loans, student loans, and even a mortgage—for better or for worse. They must be managed properly because negative credit card accounts will also have a very strong impact on your credit.
Mix of Credit
Although your mix of credit only makes up 10% of your FICO score, it is still worth considering, especially if you aim to achieve a high credit score or even a perfect 850 credit score.
A good credit mix generally includes various types of accounts, including both revolving and installment accounts. You can see the different types of accounts in our credit mix infographic.
Credit cards may help with your credit mix if you have a thin file or if you primarily have installment loans on your credit report.
They also add to the number of accounts you have, which is a good thing for the average consumer. In fact, as we talked about in How to Get an 850 Credit Score, FICO has stated that those who have high FICO scores have an average of seven credit card accounts in their credit files, whether open or closed.
The Importance of Credit Utilization Ratios
Your credit utilization is the second most important piece of your credit score, which is another reason why credit cards are such a strong influence on your credit.
The basic rule of thumb with credit utilization ratios is to try to keep them as low as possible (both overall and individual utilization ratios), meaning you only use a small portion of your available credit. Ideally, it’s best to aim to stay under 20% or even 10% utilization, because the higher your utilization rate is, the more it will hurt your credit instead of help.
Conclusions on Credit Card Basics
Credit cards can be intimidating, especially when you don’t know how to use them correctly.
It is also true that not everyone wants or needs to use credit cards.
It’s not impossible to build credit without a credit card, but it is more difficult since you would be limited to primarily installment loans, which are not weighed as heavily as revolving accounts, and possibly alternative credit data.
However, for those who are able to use credit cards responsibly and follow good credit practices, they can be an incredibly useful credit-building tool as well as a way to reap some benefits and perks that other payment methods do not provide.
We hope this introductory guide to credit cards provides the knowledge base you need in order to feel confident using credit cards and to take advantage of their benefits.
If you found this article useful, please comment to let us know or share it with others who want to learn more about credit cards!
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