Financial and lending institutions use credit scores to determine how likely someone is to repay a loan. According to FICO, the average credit score in the United States stands at 716, but that number varies significantly by state. Credit scores range from 300 to 850, and each number corresponds to a different level of credit risk.
A high credit score means you’re a low-risk borrower, which could lead to lower interest rates on loans and other lines of credit. On the other hand, low credit scores could mean higher interest rates and a greater chance of not being approved for a loan.
While most people know they have credit scores, they may not understand why these score numbers matter or how they are determined. Read on as we explore how different credit score ranges map to financial situations and tips on how you can improve your credit score.
What Credit Score Ranges Should Mean To You
Different credit score ranges correspond to varying levels of risk. Knowing your credit score is incredibly helpful when it comes to determining whether you will qualify for a loan or credit card.
Credit card companies and lenders use credit scores to determine your loan qualification, credit limit, and applicable interest rate. Lenders often give more appealing interest rates to people with high credit scores because there is a lower chance of the debt not being repaid by the borrower.
Since people with low credit scores are considered high-risk borrowers, they may have trouble getting approved for various financial products, including personal and credit cards. As a result, they could be charged higher interest rates or denied credit entirely.
What Are the Credit Score Ranges?
Credit scoring companies like FICO use multiple credit scoring models to determine your credit score. FICO scores dominate the market, and the most popular versions range from 300-850, with each number indicating how likely you are to be a responsible borrower. Below are the different credit score ranges and what they represent financially:
Commonly used FICO credit scores range from 300 to 850.
Exceptional 800-850
Consumers with exceptional credit scores have consistently excellent credit usage behavior. They have low balances on their credit card accounts, maintain their credit utilization ratios around 10% or lower, and have a long history (decades) of on-time monthly payments. Borrowers within this range are offered higher credit limits and can qualify for lower rates on personal loans, credit cards, lines of credit, and mortgages.
The highest possible credit score you can have on the FICO scoring system is 850. While it is possible to obtain a perfect 850 credit score, it is not necessary to do so in order to get the best credit offers, nor is it a practical goal. Getting an 850 credit score requires that every single credit scoring factor must be perfect, which is simply not possible for most consumers.
Consumers with credit score ranges that are very good or exceptional will get the best interest rates on mortgages and other loans.
Very Good 740-799
A score between 740 and 799 is in the very good credit range. These borrowers generally have good financial responsibility regarding credit and money management. They have lower credit utilization ratios, a good history of on-time payments, and few derogatory marks on their credit reports.
Most lenders are still comfortable extending lines of credit to these borrowers, so people within this range are likely to get approved for loans and other products with favorable interest rates.
Good 670-739
A FICO score falling between 670 and 739 is considered a good credit score. The national average credit score stands in this range. This score indicates that you have generally been responsible with credit in the past and paid your bills on time. You may qualify for average rates, but it may become more difficult to be approved for some types of credit. You’ll likely have to shop around in order to find the best interest rates.
Fair 580-669
Individuals with credit scores within this range are below the national average and may have negative marks on their credit reports. If you have a FICO score in this range, you’ve likely missed payments or shown signs of high credit usage and delinquencies. This means you may not qualify for some types of credit, such as loans or credit cards. Few lenders will likely extend a credit line to you but offer high-interest rates.
Poor 300-580
This range is the lowest credit score rating on credit reports and is considered to be very bad credit. People with a FICO score in this range are seen as high-risk borrowers and may be unable to get approved for loans, lines of credit, or mortgages. They have several cases of missed payments, high balances, and high credit utilization ratios. Poor credit scores may also result from filing bankruptcy or having debt in collections.
“Credit invisibles” are those who do not have a credit score, which can be equally as problematic as having bad credit.
No Credit Score
It is possible to not have a credit score at all, which is known as being credit invisible. If you haven’t had a loan or credit card for several years, your credit score may not be able to be calculated because there is insufficient information on your credit reports.
Lenders may still allow you access to credit based on your other assets, but it usually requires additional verification of your assets and income.
How To Build Credit & Earn A Better Credit Score
Building and improving your credit score can be a challenging but rewarding experience. Your credit score will increase your access to financing products with lower interest rates and fees on everything from loans to mortgages. Below are some tips that can help improve your score:
Make all of your monthly payments on time – One of the most significant factors that go into calculating your credit score is your payment history. A history of on-time payments will help boost your credit score. If you miss payments, this can be reported to credit reporting agencies and damage your credit score.
Pay more than the minimum payment – By only making the minimum payment each month, you make it easier for yourself to accumulate more and more debt. Not paying your balance in full also increases your utilization ratio, which impacts your score negatively the higher your utilization becomes. Focus on paying off as much of the balance as possible each month.
Keep credit card balances low – Again, carrying large balances negatively impacts your credit score, so it is important to consistently keep your balances low if you can. If you have large outstanding credit card balances on your accounts compared to your available credit, lenders are also more reluctant to give you a new line of credit because they may view you as financially over-extended.
Keeping your credit cards open while maintaining low balances helps your credit utilization and, by extension, your credit score.
Keep your credit cards open – Closing a credit card account can hurt your credit score because you no longer get the benefit of its credit limit. Keeping your credit cards open even if you are not using them much allows the cards to help out your credit utilization metrics, boosting your credit scores.
Only apply for credit when you need it – Each time you apply for a new loan or credit card, lenders check your credit report, which results in a hard inquiry being added to your credit report. Having too many hard inquiries within the past year can impact your score negatively. If lenders see a lot of inquiries in your credit history, they may be concerned that you are taking on too much new debt and might not be able to make all of your payments on time.
Why You Should Never Trust a CPN to Boost a Credit Score Range
If you’re looking to boost or reset your credit score and come across a company that offers Credit Privacy Numbers (CPN), it’s best to stay away. A CPN is a nine-digit fake or stolen Social Security number that credit repair companies sell to people who want to repair their credit scores.
These companies instruct you to use the CPN in place of your Social Security Number when applying for credit. CPNs are generated randomly or stolen Social Security numbers, mostly from children, inmates, and senior citizens. Using a CPN is illegal, and when caught, you can face a hefty fine or even jail time.
Using a CPN instead of a stolen Social Security number, you may be committing an identity theft crime. Depending on your state and the statute of limitations, you could be jailed for a maximum of 15 years and face thousands in fines. Using a CPN to reset or boost your credit score is not worth the risk.
7 Fast Credit Building Strategies to Influence Your Credit Score Range
Credit scores have become an essential part of today’s society. It’s no longer just used for loan applications. Employers and landlords may also ask to review your credit score or credit history. In some cases, you may not get access to housing, utilities, or insurance if you have a low credit score.
If your credit score isn’t your ideal number, or is below the average credit score, there are several things you can do to help increase it. Here are seven fast strategies to help improve your credit score range:
1. Develop Your Credit File
Creating a positive credit file is the first step in building credit. This can be done by opening a credit line that is reported to the major credit bureaus. If you make on-time monthly payments and keep your revolving utilization ratio below 30%, this demonstration of good credit behavior will increase your credit score and, in turn, boost your credit score range. Higher credit scores will open doors to better financing options and lower rates.
2. Check Your Credit Reports
When building your credit score range, it’s critical to check your credit reports to know where you stand.
As mandated by the Fair Credit Reporting Act (FCRA), you can get your credit report for free once a year from each of the three credit bureaus. Additionally, during the COVID pandemic, the credit bureaus have volunteered to provide free credit reports to everyone on a weekly basis. This
Review each credit report for inaccurate information and dispute errors as necessary.
3. Dispute Credit Report Errors
Your credit score can be significantly lowered if your credit report contains erroneous negative items. However, the credit bureaus can be contacted if any errors are found. Your dispute letter must be investigated and responded to by the credit bureau within 30 days. If you find the information to be inaccurate, you can request that it be removed or corrected on your credit report.
4. Pay Your Bills on Time
Payment history is the most critical factor in your credit score, accounting for 35% of your score. No credit-building strategy will be effective if you do not consistently pay your bills on time. Late payments can remain on your credit report for up to seven years.
If you do this successfully, having a long history of on-time bill payments will help you achieve excellent credit scores. To avoid accidental missing or late payments, you can set up reminder notifications and automatic bill payments with your lenders.
5. Increase Your Credit Limit
Paying off credit cards and other revolving accounts may help boost your credit score range, but having a high amount of available credit will add points to your score. Consider increasing the limit on your lines of credit to decrease your utilization ratio. An ideal time to do this is after building up a history of responsible credit usage or when you have started a better-paying job.
According to the Consumer Financial Protection Bureau, your payment history, credit mix, debt owed, and length of your credit history are some important credit factors a credit card issuer will look at when determining your credit limits.
6. Catch Up on Delinquencies and Past Due Accounts
If you have missed payments in the past, try to resolve them as soon as possible. Bringing your delinquent accounts current will help improve your credit score, and paying off collections may help your score depending on which credit scoring model is used.
Since most negative information like late payments remains on your credit report for seven years, it’s important to start repairing your credit history as soon as possible.
If you have trouble with credit card debt, consider talking to a credit counselor to create a debt management plan. They may be able to negotiate lower monthly payments and interest with your creditors and help you pay off old collection accounts faster. Some may even work to get these negative marks removed from your report.
7. Get a Secured Credit Card
If you are just starting out or have had credit problems in the past, applying for a secured card can help you improve your credit score. When you apply for a secured card, you make a security deposit that the issuer will use as collateral if you are unable to pay.
Monthly payments on a secured credit card will help build your credit score. You should look for secured cards that report to all three major credit bureaus in order to take advantage of the credit-building benefits of credit cards.
The Dollar Differences in Credit Score Ranges
The difference between good credit and bad credit can add up to thousands of dollars of interest over your lifetime.
The higher your credit score range, the less risk you pose to lenders and the more likely you are to be approved for a loan with a lower interest rate.
For this reason, having a good credit score can save you thousands of dollars in interest costs.
However, those with low credit scores will have trouble getting approved for a loan, and those who do may be required to pay a higher interest rate to offset the increased risk of lending. Therefore, having a low credit score means you pay more for financing big-ticket items like a car or a home.
Why You Should Share What You Learned About a Credit Score’s Range
Sharing your knowledge about credit score ranges will help people understand the importance of maintaining a good credit score. To get financing for big-ticket items or a dream home, your credit score must reflect your financial responsibility. In the long run, consumers will save money and have easier access to credit when they have a history of good credit habits.
For lenders to feel confident that you are financially responsible, you should maintain a good credit mix of accounts including a checking account, savings account, and an investment portfolio.
Follow the credit tips above, such as maintaining a low credit utilization rate, making on-time payments, and not opening too many accounts at one time so that you can maintain a good credit score.
Conclusions on Credit Score Ranges
It’s important to understand credit score ranges and realize that they are a reflection of your creditworthiness.
Positive credit habits can open doors to financial opportunities that you would not be able to access otherwise, so start building up your credit history and credit scores now. Finally, make sure to keep up your good credit habits consistently to set yourself up for financial success in the future.
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!
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!
If you’re like most Americans, you probably have more debt than you would like to have. Almost 60% of Americans say they feel “weighed down” by debt, according to a survey by LendingTree. It’s no surprise that a majority of consumers share this sentiment considering that the Federal Reserve Board (FRB) says that Americans collectively owe a total of over four trillion dollars in debt as of August 2020 (that’s $4,123,499,210,000, to be precise).
Between mortgage loans, auto loans, student loans, home equity lines of credit, credit cards, personal loans, and more, Business Insider reports that the average American has $51,900 in debt.
Naturally, many people want to pay off their debt as quickly as possible. Once you are done making those hefty monthly payments, you can use your money to work for you instead of sending it out the door to your lenders.
If paying off debt is one of your financial goals, then this article is for you. We’ll be breaking down two of the most popular and effective ways of paying off debt: the debt snowball and the debt avalanche.
The Debt Snowball Method
The “debt snowball” strategy was popularized by Dave Ramsey and it is perhaps the most well-known technique for paying down debt.
How the Debt Snowball Works
The process of the debt snowball method is relatively simple. Here’s how it works:
Keep making the minimum payments on all of your debts. Take a look at your budget and see if you can free up some funds by cutting spending or increasing your income. Send as much money as you can toward your smallest debt until you have completely finished paying off that debt. Once you have paid off your smallest debt, direct the money that was previously assigned to paying off that account to the next smallest account. Repeat this process for each of your accounts in order of lowest to highest balances until you have no more debt!
Pros of the Debt Snowball Method
The debt snowball plan is not necessarily the most economically efficient, as we will discuss below, but there is a reason why it is still one of the most popular ways to gradually pay off debt.
The “debt snowball” strategy is the most popular and statistically the most successful method for paying off debt.
You get to enjoy the satisfaction of “small wins” as you pay off your lowest balances.
The effectiveness of the debt snowball approach lies in behavioral psychology rather than mathematical calculations.
When you use your resources to tackle your least intimidating debt first, it won’t be long before you can celebrate a small victory, and then another, and then another. This provides encouragement and motivation to keep going, which is a vital factor in the long-term sustainability of your plan.
You can quickly make progress on freeing up cash flow to direct toward other debts.
Every time you knock out a small debt, you can use the money that you were putting toward that bill to attack the next one, increasing your momentum with each debt that you finish paying off.
The debt snowball has the highest success rate.
Many financial experts recommend the debt snowball option because statistically, consumers are more likely to stay on track with their goals when they use the snowball approach, which is due to its powerful psychologically motivating effect.
Cons of the Debt Snowball Method
You will pay more in interest charges.
With the debt snowball option, since you are attacking your debts in order of their outstanding balances without considering their interest rates, it is likely that you will end up paying more in interest than if you were to work in order of the debt with the highest interest rate first to the debt with the lowest interest rate last.
It will likely take longer to pay off your debt.
Similarly, since you will be starting small and paying more money in interest overall, it could take longer to become debt-free than if you were to use a mathematically more efficient method.
The Debt Avalanche Method
The debt avalanche method is technically the faster and more economical approach to getting rid of your debt.
The debt avalanche, on the other hand, is all about the numbers. This path aims to reduce the amount of interest you pay so that you can pay off your debt faster and pay less money overall.
How The Debt Avalanche Works
The debt avalanche is very similar to the snowball strategy. The only difference is the order in which you pay off each debt. The process follows these steps:
Keep making the minimum payments on all of your debts. Send as much money as you can toward the account that has the highest interest rate. Keep doing this until the account is paid off. Take the money that was going toward that account and add it to your monthly payment toward the account with the second-highest interest rate until you eliminate the balance on that debt. Repeat this process until your debt is gone!
Pros of the Debt Avalanche Method
Without the psychological motivation of “small wins” at the beginning, the debt avalanche plan tends to be less effective because it is harder to stick to than the snowball method.
You will pay less in interest.
Since you are tackling the debts with the highest interest rates first, you will be able to wipe out the most expensive debt more quickly than if you were to prioritize the size of the balance instead.
The debt avalanche helps you get rid of your debt sooner.
Again, starting with the highest interest rates means you won’t have to deal with those high interest charges continually piling on as you pay off other accounts. Less interest means a lower total amount owed, so you could reach your goal faster with this method.
Cons of the Debt Avalanche Method
It might take a while to feel like you are making progress.
With the debt avalanche, you may not be starting with a small debt, so you might not get the chance to celebrate some small wins early on that you could get with the snowball approach. This is especially true if your higher interest rate debts are also your accounts with high balances. It could take a long time to finish paying off just one account.
It doesn’t account for emotions about money and debt.
While the debt snowball is meant to keep you going by providing quick emotional boosts, the debt avalanche focuses purely on the numbers. Calculations of how much you could save on interest may not be as exciting or motivating as the prospect of knocking out smaller accounts.
The fact that people tend to have strong feelings about money is not necessarily accounted for in the debt avalanche plan.
The debt avalanche is harder to stick to long-term.
Due to the above factors, the debt avalanche method can feel discouraging to some consumers. If it’s hard to see the dent you are making in your debt, you are more likely to give up on your goals and land right back where you started. As we mentioned above, the debt snowball tends to have a higher success rate than the debt avalanche.
Snowball vs. Avalanche Debt Payoff Calculator
Perhaps by this point, it is still not clear which of these two methods would work best for you. One tool that may be useful in making your decision is a calculator that can show you how much you will pay back in total and how long it will take you to get out of debt with both methods so that you can compare the results side by side.
To use a snowball vs. avalanche calculator, such as this one from MagnifyMoney, you will need to have the following information on hand to put into the calculator:
A debt snowball vs. avalanche calculator can help you determine the best approach for you.
The balance of each of your accounts The APR of each account The amount of the minimum monthly payment you make toward each account The total dollar amount that you can afford to pay toward your debt every month
Once you input your information and get your results from the calculator, you will have a clearer comparison of the two methods in numerical terms.
A Hybrid Approach
A third option is to use a combination of the two strategies to get the benefits of each.
For example, you could first focus on accounts with significantly higher interest rates than your other accounts, such as credit cards, like you would with the avalanche method.
Then, once you are finished with those, you could proceed to pay off the rest of your accounts with lower interest rates in order of smallest to largest outstanding balances. Since these accounts will all have relatively low interest rates, this way, you can still hit some of those smaller goals without sacrificing too much money in terms of interest.
Another potential benefit to this approach is that focusing on paying off your credit cards first can help your credit score rebound sooner, since revolving debt balances are far more damaging to your credit score than installment debt balances.
Summary: What Is the Best Way to Pay Off Debt?
When it comes to paying off debt, there is no easy, one size fits all answer. The best path forward depends not just on the nuts and bolts of your finances, but also your personality, behaviors, and motivations.
The debt snowball is a popular option that works well for many because the quick feeling of success each time you pay off a small debt can help keep you inspired to stay on track. The downside of this method is that you could pay more in interest and spend a longer period of time chipping away at your debt.
If you would rather minimize interest charges and speed up the process, and you don’t need those psychological boosts, then the avalanche method may work for you. However, keep in mind that not everyone has the discipline to stick with the debt avalanche for as long as it takes to see results.
You can also get creative and modify or combine the two approaches in a way that makes sense for your financial situation and your personality.
In addition, your debt payoff plan—no matter which method you choose—will only help you if you commit to getting and staying out of debt. If you are still spending too much and accumulating more debt, then you won’t get anywhere, even with the most powerful debt payoff strategies.
Ultimately, the best way to pay off debt is to choose a plan that you can stick to. The most important thing is to be able to reach your destination of becoming debt-free, regardless of which path you choose.
Balance transfers are a somewhat controversial topic in the world of credit repair and debt payoff.
They can be a wonderful tool for helping consumers get out of credit card debt without being crushed by sky-high interest rates. On the other hand, if you’re not careful, they can also enable you to get yourself even deeper into debt than you were before.
If you’re interested in learning more about how balance transfers work, the pros and cons of balance transfers, and whether or not one could benefit your credit, then look no further: this article contains everything you need to know about balance transfers.
What Is a Balance Transfer?
A balance transfer is exactly what it sounds like: it is the process of transferring a balance from one credit card to another, typically one with a lower interest rate. By transferring your balance from a higher-interest card to a lower-interest card, you can save money on interest while paying down your debt.
Essentially, it’s kind of like using the lower-interest credit card to pay off the higher-interest card.
If you carry a credit card balance from time to time, you may have received from balance transfer offers in the mail from various credit card issuers, eager for you to apply for their credit card and transfer your debt to it. And you may have wondered, what’s in it for the banks? Why do they want to take on debt that you have with another bank?
A balance transfer is a way for a bank to get you—and your debt—to switch over to them from a competitor. To incentivize you to do this, they may offer a great deal on your balance transfer, such as 0% interest on your balance for 18 months.
Of course, the bank doesn’t make any money when you are not paying interest, so what are they gaining from this?
Firstly, the banks charge a small fee for each balance transfer (typically around 3% – 5%; more on this below). They also earn money on transaction fees when you swipe your card if you make purchases with the new card.
In addition, the bank is hoping that they will eventually be able to make money off of you in one or more of these scenarios:
You still have a balance left on the account when the promotional low-interest offer ends, and they can then begin to charge you a higher interest rate on the remaining balance. You make purchases with the card, which they can charge the normal interest rate interest on, and which makes it more likely that you will still have a balance at the end of the introductory period. You miss a payment for two months in a row and get a 60-day late on the account, which allows the bank to increase your interest rate to a high penalty APR of up to 29.99%.
If you make any of the above mistakes, then your account suddenly becomes very profitable for the bank instead of interest-free credit for you.
If you miss a payment for 60 days, your credit card issuer can bump up the APR from 0% to a high penalty rate.
The banks know that a certain percentage of customers will ultimately end up generating profit for them, which means that offering balance transfers is an effective marketing tool even if some customers “beat the system” by paying off their entire balance without paying a cent of interest.
If you’re smart about making a plan to avoid potential pitfalls, you may be able to save yourself a lot of money and pay down your debt faster by using a balance transfer to your advantage.
What Is a Balance Transfer Credit Card?
A balance transfer credit card is a credit card that has terms that were specifically designed to encourage customers to transfer a balance to the card. It can still be used for purchases, just like a normal credit card (although that’s usually not a good idea, as we’ll explain later on), but its primary purpose is for balance transfers.
What Is a Good Balance Transfer Credit Card?
A good balance transfer credit card is any card that offers a low balance transfer fee and an introductory period during which there is a low APR or, ideally, no interest charged at all.
In addition, in the interest of minimizing costs, you’ll probably want to look for cards that do not charge an annual fee.
To summarize, the perfect balance transfer credit card would ideally have the following three things:
0% introductory APR for at least 12 – 18 months 0% introductory balance transfer fee No annual fee
However, it is more typical to find cards that have a combination of two out of the three. For example, you might apply for a balance transfer card that has a 0% APR for 18 months and no annual fee but a 3% balance transfer fee.
Some balance transfer credit cards may also double as reward cards that offer cash back or rewards points on purchases. While this might be a nice feature to have down the road, it’s best to avoid making purchases on your new balance transfer card while you pay off the balance. The promotional balance transfer APR usually doesn’t apply to purchases, which means they will begin to accumulate interest at the regular rate immediately.
Although some balance transfer credit cards may also offer cash back rewards, it’s best to avoid using them for purchases until you have finished paying off your balance.
Plus, the credit card company can choose to apply your payments first to the balance you transferred, instead of new purchases, so it’s possible that interest on those charges could keep racking up until you are finished paying off your entire balance transfer.
Which Balance Transfer Card is Best?
For specific credit cards that are good for balance transfers, you can browse online resources, such as Credit Karma’s list of the best balance transfer cards. Creditcards.com and NerdWallet have similar roundups of their favorite balance transfer cards.
Compare and contrast the terms for each card you are interested in to find the best balance transfer deal. Many resources also estimate what credit score range you may need in order to get approved for different cards.
Using an Existing Card for a Balance Transfer
You don’t necessarily have to apply for a new credit card in order to transfer a balance—you may already have a credit card that you could use for a balance transfer. Sometimes banks will offer balance transfer promotions with 0% APR to their existing customers, so keep an eye out for any balance transfer deals from your credit card issuers.
You could even consider potentially transferring a balance to another credit card without any sort of promotional offer if it already has a significantly lower interest rate.
How Does a Balance Transfer Work?
When you apply for a new balance transfer credit card or accept a promotional balance transfer offer with an existing card, you provide information about the account you want to transfer a balance from.
Alternatively, if you are applying for a new card, you could wait and see what credit limit you are approved for first, and then contact the issuer of your new card to set up a balance transfer.
Once you have been approved for the new card (if applicable) and submitted your balance transfer information, the issuer of the card you are transferring a balance to will contact the other bank in order to pay your balance.
It may take a few weeks for the transfer to be completed. In the meantime, you will need to keep making payments on your existing account as usual so that you don’t miss a payment while waiting for the balance to be transferred. Once the transfer has gone through, then you can start making payments toward the new account.
What Is a Balance Transfer Fee?
Most credit card issuers will charge a fee for conducting a balance transfer. This fee is a certain percentage of the balance you are transferring. Typically, balance transfer fees range from 3% to 5%. They may also have a minimum fee of around $5 to $10 that is assessed for smaller balances.
For example, if you want to transfer $5,000 and the balance transfer fee is 5%, then you would be charged $250 for the balance transfer ($5,000 x 0.05 = $250).
Your credit card issuer may supply you with balance transfer checks, which you can use to pay off the balance on your higher-interest credit card.
You pay the balance transfer fee to the bank that provides the credit card that you are transferring the balance to. The bank will simply add the fee to your balance. In the above example, when your balance transfer is complete, you would end up with a balance of $5,250 on the account.
What Is a Balance Transfer Check?
If you regularly carry a balance on your credit cards from month to month, then you may have seen balance transfer checks before. Credit card issuers often send them in the mail along with a promotional balance transfer offer.
Balance transfer checks are checks that the issuer of your balance transfer credit card may supply to you which you can then use to pay off the balance that you want to transfer from another card. To do so, you would simply make out the check to the credit card company you want to pay for the amount you want to transfer.
Some banks may allow you to write the checks to yourself and deposit the money directly into your bank account, which you can then use to pay another credit card company. If this option is available to you, before rushing out and cashing the checks in your name, first check to see whether the credit card issuer will consider it a cash advance, in which case you would likely get charged a cash advance fee as well as a higher interest rate on the balance.
Can You Transfer a Balance Online?
While using balance transfer checks is one way to complete a balance transfer, it is often easier and faster to complete the process online or over the phone.
If you apply for a balance transfer card online, it is likely that you will have the chance to provide the account information for the account you’d like to transfer a balance from so that your new credit card company can make the payment for you.
You can request a balance transfer online as part of your application for a new balance transfer credit card.
Alternatively, you can call your new credit card issuer and provide the necessary information to complete the balance transfer over the phone.
Can You Transfer a Balance Between Products From the Same Bank?
You can usually transfer a balance between most banks, and you can sometimes even transfer other types of balances, such as installment loan debt, to a credit card.
Typically, however, credit card issuers will not allow you to transfer balances between different credit cards you have with the same issuer, including branded cards that are issued by the same bank.
For example, if you have two different credit cards with Chase, you likely wouldn’t be able to transfer a balance from one to the other. However, you could transfer your balance from your Chase card to, say, a Bank of America or Discover credit card.
The reason for this is that the banks are trying to use balance transfers as an incentive to gain new customers, which equate to new sources of revenue. An existing customer transferring a balance between two cards with the same bank doesn’t create any profit for the bank, so they have nothing to gain by offering balance transfers between their own credit cards held by current customers.
What Types of Debt Can You Transfer to a Balance Transfer Card?
Some credit card issuers may allow you to transfer other types of debt, such as installment loans.
Other types of debt that you may be able to transfer to a balance transfer credit card include student loans, personal loans, home equity loans, and auto loans. NerdWallet has a detailed list of the types of transfers that are accepted by several major credit card issuers.
Since installment loans typically have significantly lower interest rates than credit cards, it usually only makes sense to transfer installment debt to a credit card if you are confident in your ability to pay it off while you still have 0% interest on balance transfers.
What Is a Balance Transfer Credit Limit?
When you get approved for a balance transfer credit card, the card issuer will assign you a credit limit, which is the maximum amount of credit that you can carry on the card. Often, the amount that is available for balance transfers may either be the same as your total credit limit, meaning you can use your entire credit limit for balance transfers.
Other times, the credit card company may impose a separate balance transfer credit limit, which is the maximum amount of credit that you can use for balance transfers.
The balance transfer credit limit is not an additional amount that can be added on top of the total credit limit; rather, it is a specific portion of your total credit limit that can be used for transfers.
For example, if you get approved for a card that has a $5000 credit limit and a $4,000 credit limit, that means you can use $4,000 of the $5,000 of available credit for balance transfers. If you use the full balance transfer credit limit, after that, there will be $1,000 of your credit limit remaining, which will only be available for purchases.
It’s important to remember that balance transfer fees count toward your credit limit, so unless you find a card with no balance transfer fees, you won’t be able to transfer the full amount of your credit limit.
Therefore, you should calculate the total amount of the fees you will be charged before transferring to make sure you are staying below your credit limit. As an example, if your balance transfer credit limit is $10,000 and the balance transfer fee is 3%, that means you should transfer a balance of no more than $9,700 to leave room in your credit limit for the $300 fee ($10,000 x 0.03 = $300).
Although there is no hard limit on how many balance transfers you can do, it’s usually recommended to transfer a balance no more than once or twice.
How Many Balance Transfers Can You Do?
When it comes to the number of balance transfers allowed on one card, it depends on the policy of your balance transfer card issuer. For example, they may limit you to a maximum of three balance transfers when applying for the card, in addition to keeping the total amount transferred under your balance transfer credit limit.
More generally, in theory, you could do as many balance transfers as you like. In reality, of course, transferring a balance several times isn’t the best idea.
Having a lot of balance transfers on your record might lead creditors to assume that you don’t intend to or aren’t able to pay back your credit card debt quickly and that you are just transferring your debt between different credit cards to avoid paying interest, according to Discover.
Eventually, creditors might stop approving you for balance transfer cards, leaving you with a high interest rate when your promotional APR expires.
Plus, transferring a balance multiple times before paying it off might make you feel like you are making progress, when you are really just moving your debt around from one card to another without implementing an effective plan to pay it off.
Instead of falling into a cycle of endless balance transfers, which won’t help you pay off your debt, make sure you have stopped the cycle of spending that may have gotten you into debt in the first place and ask yourself whether you can create a plan to feasibly pay off your debt after your first balance transfer.
Will a Balance Transfer Close My Account?
If you are wondering whether the account that you transferred a balance out of will be closed after the balance transfer is complete, rest assured that it will not. The only thing that will happen is the balance of that account will decrease by the amount of the transfer.
Closing your credit card account is up to you. If you would like to close your account once there is no longer a balance on it, then you can contact your credit card issuer and request for them to close your account. You may want to close the account if it has an annual fee or if you think that having no balance on the account might encourage you to max it out again.
A balance transfer will not automatically close your old account. In fact, you should keep the old card open and in good standing so that it can help your credit utilization ratio.
However, unless you have a strong reason to close the account, such as the examples above, then it is typically recommended that you leave the account open.
As you may know from our article on how closed accounts affect your credit, the main reason that keeping accounts open is preferable is that they can only help your revolving credit utilization ratio when they are open. By closing an account, you take away the credit limit of that account from your utilization ratio, thus increasing your overall credit utilization.
So if you want to help out your credit score by maintaining a low credit utilization ratio, consider keeping the account open after the balance transfer. You don’t have to spend a lot on the card to keep it open.
Instead, you can charge something small every few months or use it for a recurring subscription service charge and simply pay it off when the bill is due. Even better, set up automatic bill pay so you don’t have to worry about remembering to pay the bill, which is a great credit hack!
How Much Does a Balance Transfer Cost?
To determine the cost of a balance transfer, all you have to do is simply multiply the amount of debt that you want to transfer by the balance transfer fee that your credit card issuer will charge.
For example, if you plan to transfer a balance of $8,000 and the balance transfer fee that will be assessed is 5%, then the fee associated with your balance transfer will cost you $400 ($8,000 x 0.05 = $400).
This amount would be added to the balance of the account that you are transferring to for a total new balance of $8,400.
However, the cost of a balance transfer may not be limited to the balance transfer fee. It is important to consider the interest that will be charged on your balance transfer as well.
If you can take advantage of a promotional 0% interest rate, then, obviously, you do not have to worry about interest charges as long as you pay off the balance by the end of the promotional period.
On the other hand, if you think you do not think that you will have finished paying off the balance by the end of the promotional period, then you should take into account the interest that will be applied once the time is up.
Some balance transfer deals may offer a low interest rate for a longer period of time rather than a 0% APR. If this is the case for you, then you might want to try out a credit card repayment calculator, such as this one from Credit Karma, to help you determine how much you could end up paying in interest.
It’s important to do the math before committing to a balance transfer offer in order to ensure it’s a smart move financially.
Will a Balance Transfer Save You Money?
A balance transfer may very well save you a significant amount of money, but it’s not necessarily a guarantee. As with most things in the world of credit, the potential costs and benefits depend on your individual situation and must be considered on a case-by-case basis.
If you are a typical consumer who has a few thousand dollars of credit card debt, then most of the time, it is probably fair to assume that a balance transfer could save you money if done correctly. That’s because many credit cards today have interest rates of 15% – 20% and often even higher, up to nearly 25%!
If you are paying that much in interest on any significant amount of credit card debt, then you could almost certainly save money by finding a balance transfer deal with a low interest rate and a low balance transfer fee.
However, it’s still important to crunch the numbers to make sure that a balance transfer is an option that makes sense for you. In order to easily determine whether a balance transfer could save you some money, you can use a balance transfer calculator.
Alternatively, if you’d rather do the math yourself, you can again use the credit card repayment calculator. Follow the steps below:
First, find out how much money it would take to pay off your debt without doing a balance transfer by entering the numbers that are applicable to your current credit card repayment scenario (i.e. the balance owed and interest rate of your current credit card and your expected monthly payment or ideal payoff time). Then, enter the figures that would apply if you were to transfer your balance to a different card. For example, you could plug in the interest rate from a promotional balance transfer offer that you have been pre-qualified for. Also, don’t forget to add on the balance transfer fee to your balance owed in this scenario, which you can easily figure out as we described in the above section. Once you’ve done that, the repayment calculator can tell you how much money you would end up paying toward your debt if you were to transfer your balance. Finally, compare the two results that you got in step 1 and step 2. If the number that you got in step 1 (your current repayment scenario) is lower than the number from step 2 (the balance transfer scenario), then that means you would pay less by staying the course with the repayment strategy you have now. If instead, the amount you calculated in step 2 is lower than the amount you calculated in step 1, then that indicates that a balance transfer with those parameters could save you money!
Comparing balance transfer offers and reading the fine print can help you decide whether a balance transfer will save you money in the end and which balance transfer card is best for you.
Beware of Retroactive Interest Rate Increases
One more important thing to consider when assessing the costs and benefits of a balance transfer is whether you will be charged retroactive interest if you cannot pay off the full balance by the end of the introductory low-interest period.
A retroactive interest rate increase means that you can be charged a higher interest rate on the balance you already transferred to the account in the past, back when you had a lower interest rate.
In other words, not only will you be charged interest on the balance that has not yet been paid, but you will also have to pay the higher interest rate “backdated” to the date you first transferred the balance—and on the original balance amount.
While it is rare for most major credit card issuers to charge retroactive interest, also called deferred interest, many retail store cards and some co-branded credit cards often do.
Although the Credit Card Accountability Responsibility and Disclosure Act (also known as the CARD Act) of 2009 banned banks from arbitrarily increasing credit card interest rates, retroactive rate hikes are still allowed if the contract you signed with your bank permits it.
Make sure to check the terms of your balance transfer card carefully so that you don’t get hit with a ton of surprise interest charges down the road. In addition, be aware that the banks are legally required to give you a minimum of six months at the introductory rate before they are allowed to ramp up the interest rate on your account.
Is a Balance Transfer Good for Your Credit?
In most situations, it is likely that a balance transfer can be beneficial to your credit, especially if you go the route of =opening a new credit card to which you can transfer your balance.
Opening a New Balance Transfer Credit Card
If you open a new balance transfer credit card, this can help your credit by adding available credit to your credit profile and thereby decreasing your overall utilization rate.
Opening a new account does have some drawbacks for your credit, such as the small negative impact of the hard inquiry and the reduction in your average age of accounts. These factors may hurt your score slightly. However, the benefit to your credit utilization will likely outweigh these factors, especially over time, as the impact of the inquiry diminishes and as you keep paying down your balance.
Transferring a Balance Between Existing Cards
The other balance transfer scenario is when you do not open a new balance transfer credit card, but rather, you transfer a balance between credit cards that you already own.
A balance transfer could potentially help both your individual and overall credit utilization ratios.Photo by Marco Verch, CC 2.0.
In this case, there is not as much potential to boost your credit score because you are not adding any additional available credit, which means your overall utilization ratio will stay the same. However, you may still be able to benefit by manipulating your individual utilization ratios.
As you know from our article about the difference between individual and overall utilization ratios, your individual utilization ratios can often be even more important than your overall utilization ratio. For this reason, if you max out even one credit card, that can have a significant impact on your credit.
If you can use a balance transfer to adjust your individual utilization ratios to more ideal levels, then this could improve your credit score. Let’s consider an example to help illustrate how this would work.
Example: Credit Card A has a $1,000 credit limit and is maxed out with a $1,000 balance, so it has an individual utilization ratio of 100%. Credit Card B has a $5,000 limit and no balance, so its utilization ratio is 0%.
What happens if we transfer the $1,000 balance from Card A to Card B?
Card A will then have a $0 balance and 0% utilization ratio, while Card B will then have a $1,000 balance and a 20% utilization ratio ($1,000 balance / $5,000 credit limit x 100% = 20% utilization).
Before the balance transfer, one of the accounts had a $0 balance and the other was completely maxed out. After the balance transfer, one account again has a $0 balance, but the other is only at 20% utilization, which is certainly a lot better than 100% utilization!
This example shows how it’s possible to use a balance transfer to improve the credit utilization portion of your credit score without actually changing the amount of debt you have.
If you’re considering trying this strategy, use our tradeline calculator to help you calculate both your individual and overall utilization ratios so that you can decide whether a balance transfer could help your credit utilization.
Do You Need Good Credit to Qualify for a Balance Transfer Credit Card?
Generally, good or excellent credit is needed in order to qualify for the best balance transfer offers, such as a long 0% APR introductory period and/or no balance transfer fees.
Generally, the best balance transfer offers are reserved for consumers with good or excellent credit.
According to NerdWallet, consumers who have good credit (i.e. a 690 or higher FICO score) might be able to qualify for a balance transfer card with an introductory 0% APR for a period of 12 to 18 months. Some cards may offer even longer introductory periods of up to 21 months.
In addition to having a high credit score, credit card issuers also want to see that you’re not already maxed out on all of your credit cards, which indicates to them that you are desperate for credit and may not be able to pay back all of your debt obligations.
Money Under 30 says that you’re most likely to get approved for a balance transfer card if you can get your overall revolving utilization ratio under 50%. Having at least a few years of credit age under your belt is also a good sign to lenders.
If you have fair credit (580 – 669 FICO score), then it will be more difficult to get a good balance transfer card. You may be able to qualify for a balance card transfer that doesn’t have all the perks of a balance transfer card for excellent credit. For example, it may have a shorter introductory period, a higher APR, or a higher balance transfer fee.
In this case, it’s even more important to do the math before going through with your balance transfer in order to make sure it will still save you money overall despite the fees.
Consumers who have a bad credit score are unlikely to qualify for a balance transfer credit card. Lenders don’t want to take on your debt if they think you are not likely to pay it back, which is what a low credit score indicates. However, there are other things you can do to reduce your credit card debt even if you have bad credit.
What to Do if You Can’t Get a Balance Transfer Card
If you’re not able to get approved for a new balance transfer credit card, don’t give up hope on paying off your debt. There are still a few options that may be a good fit for you.
Transfer Your Balance to a Card You Already Have
Check your existing roster of credit cards and see if any of them 1) have a lower interest rate than what you’re currently paying on your balance and 2) have enough available credit for a balance transfer. If the answer to both questions is yes, then it might be worth transferring your balance to the lower-interest card. However, you should always run the numbers first to be sure.
Get a Secured Balance Transfer Credit Card
Although the offers won’t be as appealing as those for excellent credit, it may be possible to qualify for a secured credit card with a lower introductory balance transfer APR than the rate you’re paying now. Keep in mind that you will need to have some cash on hand for the security deposit required for a secured credit card.
Having someone with good credit cosign with you may improve your chances of getting a better balance transfer offer.
Get a Co-Signer to Boost Your Chances of Approval
As you may recall from our article about “The Fastest Ways to Build Credit,” getting a co-signer with good credit can help you get approved for credit that you might have trouble qualifying for on your own.
If you can find a co-signer willing to accept responsibility for the debt if you cannot repay it, then you may have better chances of getting approved for a decent balance transfer card.
Get a Personal Loan to Pay Off Your Credit Card Debt
Another option for paying down debt with fair credit or bad credit is to apply for a personal loan and use the funds to pay off your credit cards, which is known as a debt consolidation loan. A debt consolidation loan allows you to combine all of your debt into one loan with one monthly payment and a lower interest rate.
However, personal loans for bad credit and fair credit can come with high interest rates and fees, so be sure to read the terms carefully before committing and steer clear of predatory lenders. In addition, watch out for loans that have prepayment penalties, especially if you know you’ll want to try to pay off your loan early.
Ask Your Credit Card Issuer for a Better Interest Rate
Don’t be afraid to call your credit card issuer and ask for a lower interest rate. Most people who request a better rate are successful!
One of the easiest credit hacks that can help save you money on interest and pay down your credit card debt faster is to call your credit card issuer and simply ask them for a lower interest rate. Make your case by explaining why you’ve been a good customer and why you feel that they should lower your rate.
Most people who do this are successful in getting a lower interest rate, so why not give it a try? One phone call could save you a significant amount of money on interest charges and help reduce your credit card debt burden.
Seek Credit Counseling and Create a Debt Management Plan
In extreme cases of credit card debt, it may be necessary to consider working with a credit counseling organization to create a debt management plan. With this option, a credit counselor can help you outline a plan to repay your debt and negotiate with your creditors on your behalf to lower your monthly payments and interest rate.
Keep Building Up Your Credit Score Until You Can Qualify for a Balance Transfer Card
Hopefully, you can use one or more of the above strategies to help make a dent in your debt repayment, but it’s also important to keep focusing on improving your credit over time. With time, patience, and good credit management, you may be able to qualify for a good balance transfer card in the future.
A balance transfer is a good idea when you have determined that it will save you money in the long term and when you have a plan to pay off your balance in the time allotted.
Generally, balance transfers may be a viable option for those with less than $15,000 in debt who can also afford to repay the balance in 21 months or fewer, according to NerdWallet.
On the other hand, a balance transfer may not make sense if you don’t have very much debt or if the interest rate you are currently paying is already fairly low. In these cases, it may not be worth paying the balance transfer fee just to save a little bit of money on interest.
Another important step in deciding whether a balance transfer would be a smart financial move for you is to think about your own psychology and behavior patterns. If you think that having extra credit available to you as a result of a balance transfer may tempt you to spend even more on your credit cards, then a balance transfer may ultimately do more harm than good.
How to Make Sure a Balance Transfer Will Work for You
If you’ve decided that a balance transfer might be a good debt repayment strategy for you, follow these tips to avoid paying interest and ensure that your balance transfer actually saves money in the end.
Choose the right balance transfer credit card.
Choose a card that’s going to be a good fit for you. Look for one with no annual fee, a long 0% APR introductory period, and low balance transfer fees. Read the terms of the card closely and watch out for contracts that allow for retroactive or deferred interest charges.
Crunch the numbers first.
Instead of just assuming a balance transfer is always a good idea, you need to do the math first to ensure that you’ll actually come out ahead in the end.
Don’t miss any payments.
Becoming 60 days late on a payment could sabotage your promotional interest rate and land you with a high penalty APR instead. Not only that, but you would get a derogatory mark on your credit report. Set up automatic bill pay on your account so that you never miss a payment.
Make a plan to pay off your balance before the introductory APR expires.
The point of a balance transfer is to tackle your debt faster while saving on interest, but in order to do so, you need to be able to pay off your balance before the end of the 0% APR introductory period. Make a plan to finish paying off your debt before your interest rate goes up and do your best to stick to it, even if your cash flow is a little tight for a while.
Don’t spend on the balance transfer credit card—or your old card.
Although it might be tempting to use your new balance transfer card for purchases or to run up the balance on your old card again after clearing the balance from it, this is just going to make it even harder for you to get out of debt.
In fact, having extra available credit from opening a new credit card means you could potentially get yourself into an even bigger mess than you were in before.
If you can’t pay off your balance by the end of the introductory period, consider whether you might want to do another balance transfer to a different card.
If you’re going to use a balance transfer as a way to help you pay off debt, then you first need to make sure you have addressed the spending habits that got you into debt in the first place, or the strategy could backfire and end up costing you more instead of saving you money.
If you don’t finish paying off your balance by the end of the promotional period, consider transferring your balance again to another 0% interest card.
Even the perfect plan can go awry when something unexpected happens, such as if you lose your job and can’t pay as much toward your debt as you would like. In other cases, your balance may simply be too large to realistically pay off during the introductory period.
Either way, if for some reason you aren’t able to finish paying off your balance by the end of the introductory promotional offer, then you may want to consider taking advantage of another 0% APR balance transfer offer. This will allow you to have some additional time to pay down your balance without accumulating interest.
Conclusion: Is a Balance Transfer Worth It?
A balance transfer can be a valuable option for those in the process of paying down high-interest debt. It could help you consolidate your payments, save money on interest, and chip away at your debt faster.
However, it’s not an instant cure-all for credit card debt.
You need to change the behaviors that got you into debt before looking into a balance transfer, otherwise, you might end up right back where you started, or even worse off than you were before.
If you do choose to do a balance transfer, it’s imperative to read the fine print, be aware of the terms of your balance transfer offer, and have a realistic strategy in place for paying off the balance.
For a quick summary of the main points of this article, check out NerdWallet’s video about balance transfers below.
Credit repair can be a long and arduous process, especially if you have very bad credit. Getting results from credit repair can take months, and it takes years to build or rebuild a solid credit history.
However, there are some “credit hacks” that you can use to improve your credit on a much shorter time scale.
In this article, we’re going to tell you the best credit hacks to improve your credit score as well as credit card hacks that work to help you save you money on interest. In addition, we’ll also provide some credit-building hacks for those with thin credit files and credit repair hacks to help you fix bad credit.
Here are the credit hacks we’ll be covering in this article. You can click on the bulleted list items below to jump directly to each hack.
Now let’s delve deeper into each credit of these credit hacks.
Credit Score Increase Hacks
Pay down high-balance cards first to improve your credit utilization
If your focus is primarily on boosting your credit score fast, you may want to consider paying down your high-balance cards first. The reason for this can be explained by the importance of individual credit utilization ratios, which refers to the utilization ratios of each of your revolving accounts.
From what we have seen, individual utilization ratios may be even more important than your overall utilization ratio. Having one or more maxed-out accounts, for example, can drag down your score even if your overall utilization ratio is low.
Therefore, by paying down your high balances first, you can get those accounts out of the high-utilization danger zone and into a utilization range that is less damaging to your credit score.
Pay off low-balance accounts to reduce the number of accounts with balances
One of the factors that are considered within the overall “credit utilization” category is the number of accounts that have balances. Having fewer accounts with balances is better for your score. In fact, the ideal credit utilization scenario is having a zero balance on all but one of your accounts and having one account with a utilization ratio in the 1-3% range.
Therefore, if you can pay some of your accounts down to zero, you should see a boost to your score. Accounts with small balances are low-hanging fruit because you don’t have to spend as much money to get them to a zero balance.
Time your payments so that you have a $0 balance on your statement date
To ensure that your credit report shows low credit utilization, time your payments so that you have a low balance (or no balance) when your accounts report to the credit bureaus.
When it comes to credit utilization, you might think that as long as you pay your credit card balance in full by the due date every month, then you should show a 0% utilization for that account. However, this assumption is not necessarily correct. The reason for this is that the date when your credit card issuer reports to the credit bureaus is often not the same as your due date.
That means that your account is reporting at some other time during the month when your card does have a balance on it. If you use a significant portion of your credit limit, that utilization could be hurting your score.
To correct this, if you want to have your accounts show a 0% utilization ratio, try using this credit hack: Instead of waiting for your statement to arrive and then paying your balance on the due date a few weeks later, you need to pay your balance to $0 before the statement closing date. Then, your statement will close with a $0 balance and that’s what will report to the credit bureaus.
Alternatively, you can pay your bill on your normal schedule and then refrain from using your card for the next entire billing cycle. Since you have paid off the balance and not made any new charges, your account will show a $0 balance at the end of the reporting cycle.
Either way, if you can shift the timing of your payments so that your account reports a 0% utilization, that could provide a significant benefit to the credit utilization portion of your credit score.
Credit-Building Hacks
Build credit fast by piggybacking on someone else’s good credit
One of the easiest and fastest ways to build credit is called credit piggybacking, which refers to the practice of becoming associated with someone else’s good credit for the purpose of helping you build your own credit history.
Piggybacking credit can help you build credit quickly, whether you open a joint account, get a cosigner, or become an authorized user.
There are three main ways to piggyback credit.
Get a co-signer or guarantor
Having a co-signer or guarantor with good credit can go a long way toward helping you qualify for credit because the co-signer or guarantor is essentially promising to assume responsibility for the debt if you default.
The downside of this strategy is that since the position of the co-signer or guarantor comes with a lot of risks, it can be difficult to find someone to take on this role for you.
Open a joint account
Since both applicants are considered when opening a joint account, you can benefit from your partner’s good credit as well as the fact that the income of both applicants can be counted. If you maintain the joint account for a while, this can allow you to build up a credit history with a primary account.
However, many banks no longer offer joint credit cards, so your options for opening a joint account may be limited. Plus, if your relationship with the other account holder ever takes a turn for the worse, it can make managing the account difficult, and you may end up needing to close the account altogether.
Become an authorized user
Becoming an authorized user on a seasoned tradeline (i.e. a credit account that already has at least two years of positive payment history associated with it) is the fastest way to build credit. Instead of opening your own primary account and waiting for it to age, you can add years of credit history to your credit profile within a few weeks or even days.
Consider applying for a credit-builder loan
If you have bad credit or if you have never used credit before, you might be feeling discouraged about the prospect of getting credit anytime soon. It can feel impossible to get credit if you have a thin credit file or a history of derogatory marks on your credit report.
A credit-builder loan can be a useful tool for those struggling to build credit. Here’s a summary of how they work:
Credit-builder loans are typically for small amounts (e.g. a few hundred to a thousand dollars). A credit-builder loan functions like a backward version of a traditional loan: instead of receiving the funds upfront and paying the money back later, you first make all of the monthly payments and then receive the loan disbursement once you have already paid off the loan. For this reason, these types of loans are low-risk for lenders, which is why even those with bad credit or thin credit can still qualify (provided your income is sufficient for you to make the monthly payments). The lender reports your payment history to one or more of the major credit bureaus, which allows you to build a credit history.
For more information on how these loans work and whether a credit-builder loan might be a good strategy for you to consider, check out our article, “Credit-Builder Loans: Can They Help You?”
Credit Card Hacks
Increase your credit limit
Increasing your credit limit is one of the best credit hacks. Check out our article for more tips on how to request a credit line increase.
Increasing your credit limit can be one of the easiest and fastest ways to boost your credit score. However, you’ll want to strategize a little before requesting credit line increases from your lenders.
If your financial situation has improved since opening your credit cards, it might be a good time to request a credit line increase. For example, if you have received a raise at work or your credit score has increased, that could indicate to lenders that you can handle a higher credit limit responsibly. Wait until you have been a responsible cardholder for at least six months and you don’t have too many inquiries on your credit report to make your request. Also, don’t request an increase if you have already requested one within the past six months. Check with your credit issuer to see whether they will need to do a hard inquiry or soft inquiry. If you don’t want to get a hard inquiry on your credit report, ask if there is an amount they may be able to approve without doing a hard pull on your credit. You can make your request for a credit limit increase online or over the phone. Be prepared to provide some financial information and to explain why you are asking for additional credit. Calling your bank and talking to a representative may give you more opportunities to negotiate than if you make the request online.
So, how does this hack improve your credit score?
Your credit utilization ratio, also called your debt-to-credit ratio, makes up about 35% of your FICO score and about 20% of your VantageScore. It’s defined as the ratio of how much debt you owe to the amount of credit you have available. This can be calculated for your revolving credit accounts in aggregate by adding up all of your balances and dividing by the sum of all your credit limits for those accounts.
Ask your credit card issuers for lower interest rates
This is another credit card hack that is easier and quicker than you might think. All you need to do is call up each of your credit card issuers and ask them to lower your interest rate.
Try calling your credit card issuers and asking for lower interest rates—odds are good that they will grant your request.
Again, you’ll want to do a little homework before asking for a lower interest rate. Research interest rates on cards from other issuers and see if your bank can match a lower number. Explain why you’ve been a good customer and why you feel your rate should be lowered. Also, describe how your financial situation may have improved since you opened the card.
You can find a detailed script to help you negotiate on creditcards.com.
Although this tip doesn’t directly affect your credit score, it can still be hugely beneficial, especially if you are one of the 37% of American households that carry balances on their credit cards from month to month.
Lowering your interest rate decreases the debt burden that comes from interest charges each month, allowing you to pay off your debt faster. Paying off your debt faster means improving your utilization ratio, which leads to a better credit score!
Although this hack isn’t guaranteed to work, the worst that could happen is that your lenders deny your request and your interest rates stay the same. On the other hand, it could save you hundreds or even thousands of dollars in interest. Plus, you can be optimistic about your chances: polls show that over three-quarters of consumers who ask for a lower interest rate are successful in their request.
Set up automatic bill payments
Setting up automatic payments is one of the best things you can do for your credit, especially if you struggle to remember due dates or if you have accidentally missed payments in the past. Payment history is the number one factor that influences your credit score, so even one late payment can have a serious impact on your credit.
Setting up automatic payments for all of your accounts can help prevent you from accidentally missing a payment.
Take human error out of the equation by setting up automatic payments for all of your loans and credit cards. That way, you’ll never accidentally miss a payment, so you can continue to build up a positive payment history each month without even thinking about it.
Pay down high-interest balances first to save money on interest and pay off debt faster
When it comes to paying off debt, the way to save the most money on interest is to pay off your high-interest balances first. This method is called the “debt avalanche” because you’re starting with the highest interest rates and working your way down from there. (In contrast, the “debt snowball” method involves paying your debt in order of smallest to largest balances).
Transfer your balances to a card with a lower interest rate
Another popular way to get some relief from paying those astronomical interest charges every month is to transfer your credit card balances to another credit card that has a lower interest rate.
This hack works best if you have good enough credit to qualify for a balance transfer credit card. These credit cards are marketed specifically for this purpose and they typically come with special introductory offers, such as 0% APR on balance transfers for a certain number of months.
A balance transfer can help you save money on interest charges and may improve your credit utilization ratio.
Here’s how the balance transfer process works:
When you apply for the balance transfer credit card, you tell the credit card issuer the amount you want to transfer and which bank(s) you want to transfer a balance from. Once you have been approved for the balance transfer card, the credit card issuer essentially pays off your balances at the other banks with the credit on your new card. Your debts (plus a balance transfer fee, usually around 3-5%) have thus been transferred to your new card. Since your balance transfer card likely has a low promotional interest rate or perhaps even zero interest for a while, you have some extra time to pay off your debt without being crushed by interest, which means you can pay off your debt faster.
As a bonus, this credit card hack can also help your credit utilization, because you are adding some available credit to your credit profile by opening a new account.
The pitfall to watch out for with this method is that it opens up the possibility of you running up your credit cards again and potentially ending up even deeper in debt than you were before. If you think having access to additional credit is going to tempt you to spend more, then it’s probably best for you to avoid this credit hack.
Credit Repair Hacks and Bad Credit Hacks
Dispute inaccurate information on your credit report (such as inquiries or derogatory items)
Check your credit report for errors that could be damaging your score and dispute them with the credit bureaus.
If you have any errors on your credit report that are bringing your score down, such as credit inquiries or derogatory items that don’t belong to you or are otherwise being reported incorrectly, then this hack could definitely give your credit a boost.
First, you need to obtain a copy of your credit report to check for errors. You can order one from each of the three credit bureaus for free once a year at annualcreditreport.com and you can order your Innovis credit report for free directly from their website.
Then, thoroughly check your credit report for any inaccuracies, such as late payments that you actually made on time, duplicate accounts, or negative information that is more than seven years old (which means it should have been deleted by the credit bureaus already).
To fix the errors on your credit report, you can dispute the items with the credit bureaus by following the instructions found on each of your credit reports. However, there are a couple of other things you should keep in mind in order to ensure your dispute process goes smoothly.
Look up a sample credit dispute letter, such as the sample letter offered by the Federal Trade Commission, that you can use as a model for writing your own letters. Write one dispute letter for each credit report error and send in your letters one at a time. If you try to dispute several items at once, you run the risk of the claim being dismissed as “frivolous.” Be sure to include as much evidence as possible that supports your claim when submitting your dispute. Without documentation proving that the item is being reported incorrectly, the credit bureaus could dismiss your dispute. Send your letters along with the necessary documentation via certified mail so that you can get proof that the bureaus received them. In addition, you should also talk to the creditor that is reporting the inaccurate date to the credit bureaus in order to fix the problem at the source and prevent the error from showing up on your credit report again in the future.
Once the credit bureaus receive your dispute letters, they have 30 days to investigate the issue. If they cannot verify the information to be accurate, then they have to either update the item with the correct information or remove the item from your credit report.
For this credit hack, dispute collection accounts on your credit report that are inaccurate or outdated to have the credit bureaus update them or delete the collections altogether.
As we discussed above, if a collection account on your credit report is being reported incorrectly or doesn’t belong to you, then you can certainly dispute the inaccurate information and have the credit bureaus update or remove the item.
If, on the other hand, the collection accounts on your credit report are legitimate, then your options for removing them are limited.
Some consumers try to negotiate a “pay for delete” arrangement with the debt collector, in which the debt collector agrees to stop reporting the collection to the credit bureaus in exchange for you paying some or all of the debt. However, this strategy is risky and it does not always work in the consumers’ favor. If you do try this approach, be sure to get the agreement in writing from the collection agency.
In addition, deleting a paid account might not even increase your credit score depending on which credit scoring algorithm is being used. Simply paying the collection may be enough to boost your credit score, since some scoring models (FICO 9, VantageScore 3.0, and VantageScore 4.0) don’t penalize you for having paid collections on your credit report.
If you want to delete a collection account without paying it, unfortunately, your only legitimate option is to wait for the collection to be removed from your credit report automatically, which happens seven years after the date that you were first delinquent on the account.
Time your credit inquiries carefully when shopping for credit
If you’re planning to shop for credit in the future, you’ll probably be getting some hard inquiries from lenders on your credit report.
Lenders typically need to check your credit history before they can decide whether or not to extend you credit, so when you apply for a loan or credit card, the lender will often request a “hard pull” of your credit report from one or more of the credit bureaus.
While it’s unlikely that inquiries alone will ruin your credit score, since each inquiry can potentially subtract a few points from your credit score, it is still important to be mindful of the frequency and the timing of your credit applications in order to minimize the impact of inquiries on your credit report.
Thankfully, though, you can still shop around for the best loan without being punished by the credit scoring algorithms. FICO and VantageScore know that it’s financially smart to shop for the best rates, not risky. Therefore, they each have ways of accounting for this behavior so that your loan applications don’t have an outsize impact on your credit score.
When applying for credit, try to minimize the impact of credit inquiries by grouping your applications within a specific time frame.
FICO scores group together inquiries that occur within a certain time frame for student loans, auto loans, and mortgages. Older FICO scores allow a 14-day window for consumers to apply for multiple loans of the same type (such as mortgages), while newer FICO scores allow a 45-day window.
Each inquiry for the same type of loan within the given time period gets grouped together and only counted as a single inquiry. However, note that this rule does not apply to credit cards, for which each inquiry will be counted separately.
With VantageScore, all inquiries that are made with a 14-day period are grouped together, regardless of the types of accounts—even credit cards.
To simplify this information into a general rule, if you can complete all of your hard credit inquiries for a given type of loan within 14 days of each other, then the inquiries will be grouped together and you can avoid ending up with way too many inquiries on your credit report.
Get a rapid rescore from your mortgage lender
Once you’ve tried some of these credit hacks and optimized your credit report, the fastest way to see your results reflected in your credit score is to get a rapid rescore. For those who are about to apply for a mortgage but need to quickly update their credit report first, a rapid rescore can be an extremely valuable tool.
To trigger a manual update of your credit report, obtain verification of your tradeline’s new status from your creditor and then forward the letter to the credit bureaus.
Since rapid rescores can only be provided by mortgage lenders, if you’re not in the market for a mortgage but you need to update your credit report in a hurry, you’ll need to update your tradelines manually.
To do so, once you have made the desired changes to your tradelines (e.g. paying down your balances or correcting errors), contact your creditors and ask them to send you a letter verifying the new account information. Then, forward this letter to the credit bureaus so they can update the information in your credit report.
By initiating the update manually, you can bypass the period of time that you would otherwise have to wait until your next reporting period.
Conclusions on Hacks to Improve Your Credit
While there is no substitute for the time and effort required to establish and maintain a respectable credit history, that doesn’t mean that you can’t try some of these credit-boosting hacks to help you improve your credit right away and perhaps even save some money on credit card interest and fees.
Just make sure not to lose sight of the most important goal, which is to build good credit over time and keep your credit report in good condition long-term.
Let us know what you think of these credit hacks! Which are the best credit hacks in your opinion? Do you have any creative credit hacks that you would add to this list?
Bad credit is something we all fear, but what is actually considered poor credit and how could it affect you? In addition to explaining what bad credit is and why you need to avoid it, we’ll also provide some strategies in this article to help you fix bad credit.
What Is a Bad Credit Score?
The definition of “bad credit” varies depending on which credit scoring system you are talking about. Since FICO 8 is the scoring model most widely used by lenders, we will focus on FICO when discussing the question of what is considered bad credit.
The FICO 8 credit scoring system assigns consumers a number to represent their creditworthiness, with the lowest credit score possible being 300 and the high end of the scale being 850.
A high credit score shows lenders that they can be fairly confident that a consumer will repay debts because they have demonstrated responsible behavior when it comes to credit in the past.
A low credit score, on the other hand, means that someone represents a higher risk to lenders because they are thought to have a higher probability of defaulting on a loan.
According to Credit Karma, a FICO score between 300 to 579 is considered a poor credit score, while a fair credit score is between 580 and 669. In contrast, an excellent credit score is between 800 and 850.
Credit scores between 300 and 579 are considered poor credit.
What Gives You Bad Credit?
As we mentioned, a bad credit score means lenders perceive you as a high-risk borrower. Therefore, what causes bad credit is poor management of credit and risky behaviors that indicate you may have a higher probability of default.
For example, being late on payments or missing payments altogether can really hurt your credit because payment history is the most important factor of a credit score.
High credit card utilization can lead to bad credit. Photo by Natloans
What causes bad credit specifically? Here are some more examples:
Late or missed payments Defaulting on a loan Charge-offs Collection accounts Judgments Settlements Bankruptcy Foreclosures or repossessions Maxed out or high-utilization credit cards Too many inquiries at one time Too much new credit
Sometimes people have bad credit because of things they can’t control, like having a medical emergency that leads to huge hospital bills that they can’t afford to pay. In fact, the majority of consumer debt in collections is medical debt, according to Magnify Money.
Bad Credit Loans
If you have bad credit, you’re likely going to have a hard time getting loans with favorable terms or possibly even getting approved for a loan in the first place. Since a bad credit score represents a high risk for the lender, loans for people with poor credit typically have higher interest rates and may require collateral or a down payment—if the lender is willing to approve the loan at all.
Personal Loans for Bad Credit
Payday loans can come with interest rates of up to 400%. Photo by Aliman Senai.
Personal loans for bad credit are few and far between. Usually, at least fair credit is needed to be considered for a loan. Bad credit loan lenders may charge very high interest rates since they are taking on a lot of risk by lending money to someone with poor credit. These higher interest rates may translate into thousands of dollars of additional interest payments over the term of a loan.
Very bad credit loans such as payday loans often have astronomical interest rates of up to 400%, which makes it nearly impossible for many consumers to get out of debt.
Bad Credit Car Loans
Bad credit auto loans, also known as subprime auto loans, are often considered “second-chance” loans because they are typically the next option for those who have been rejected for traditional auto loans. Although there is not necessarily an official dividing line between which credit scores are considered prime and subprime when it comes to auto loans, credit scores below 620 tend to be considered subprime.
Car loans for bad credit, similar to personal loans for bad credit, are associated with much higher costs than prime auto loans. Since lenders of second-chance auto loans are taking on additional risk, these loans often have significantly higher interest rates and more fees than auto loans for consumers with good credit. Additionally, car loans for bad credit may come with penalties for paying off the loan early.
Bad credit car loans can have triple or more the interest rate as prime auto loans. Photo by QuoteInspector.com.
According to Investopedia, “While there is no official subprime auto loan rate, it is generally at least triple the prime loan rate, and can even be five times higher.”
Credit Cards for Bad Credit
If you have bad credit, your options for getting a credit card will be limited, and you will most likely not be able to get the perks associated with premium credit cards, such as low interest rates, high credit limits, and rewards. Credit cards for poor credit may also come with annual or even monthly fees.
Subprime credit cards often require you to make a deposit with the lender as collateral. These cards are known as secured credit cards since they are secured by your deposit, which the lender can keep if you fail to make payments on the card. Sometimes, the lender may be willing to switch you to an unsecured card after you have shown a history of consistent on-time payments.
As we’ve seen with loans for bad credit, credit cards for bad credit, both secured and unsecured, will likely have high interest rates, sometimes as high as 30% or more.
How to Fix Bad Credit
Having a bad credit score is expensive. It makes getting any kind of credit more difficult and more costly because bad credit lenders tack on high interest rates and fees to compensate for the higher financial risk of poor credit loans.
Bad credit doesn’t just dramatically increase the cost of credit. It can also affect other aspects of your life, such as your insurance premiums, your ability to find housing, and even your job, since many employers now check prospective employees’ credit reports. Therefore, most people with bad credit want to fix it as soon as possible.
Here are some strategies that you can try if you need to fix bad credit.
Credit Repair
If you have bad credit as a result of identity theft or extensive errors on your credit report, you’ll likely need to undergo credit repair in order to clean up your credit file.
Some people opt to try their hand at DIY credit repair, while others may prefer to hire a trusted credit repair company to get help with the dispute process and potentially faster results. [Disclosure: This article contains affiliate links.]
Either way, it’s important to be aware of best practices when disputing credit report errors. It’s best to submit your dispute by sending a letter along with documentation to verify your identity and support your claim. Trying to dispute errors online or over the phone may not yield the best results.
In addition to disputing inaccurate information with the credit bureaus, it’s also important to contact the company that is furnishing the data so that the error doesn’t get reported again in the future.
Rebuilding Credit
Improving bad credit takes time and patience. While credit repair companies may claim to have tactics that can boost your credit fast, the reality is that these tactics are usually limited to removing inaccurate information from your credit report. If you remove everything from your credit report, what are you left with?
The best way to fix bad credit, beyond correcting inaccuracies, is to rebuild it with more positive credit history over time. In other words, you need to add more positive accounts to your credit profile and keep them in good standing while they age. At certain age levels, these accounts should begin to boost your credit profile with that positive payment history.
Rebuilding credit with positive credit history helps to fix bad credit.
One option that can help people re-establish credit is opening a credit-builder loan, which works in the reverse order of a traditional loan. Instead of receiving the loan amount up front and then making payments to the bank to pay off your debt, with a credit-builder loan, you make all the payments first and then receive the funds after you have finished paying off the loan. Since these loans are much less risky for lenders, they can be offered to those struggling with bad credit or lack of credit history.
Generally, though, building credit by opening new accounts can take at least two years to see much of a positive effect. The best way we have seen to bypass this two-year waiting period is by piggybacking on the good credit of others.
Have you been affected by bad credit? What did you do about it? Tell us your story in the comments.
Financial and lending institutions use credit scores to determine how likely someone is to repay a loan. According to FICO, the average credit score in the United States stands at 716, but that number varies significantly by state. Credit scores range from 300 to 850, and each number corresponds to a different level of credit risk.
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