26 million consumers in America have no credit record whatsoever. On top of that, there are an additional 19 million consumers who do have credit files, but they do not contain sufficient credit information to be scored by a widely available credit scoring model. These consumers—in total making up nearly one in five American adults—are the “credit invisibles” and “credit unscorables.”
Due to a lack of credit history, these consumers are virtually invisible to the credit system. That means credit can be very hard or even impossible to obtain when it is needed. After all, we all know that “it takes credit to get credit,” since lenders often don’t want to take the chance of lending to someone with no prior credit record.
“Alternative data,” which involves using data sources other than traditional credit reporting information to make lending decisions, is a concept that is becoming increasingly popular as one possible solution to the problem of credit invisibility.
Let’s shed some light on the emerging topic of alternative credit data and how it could help or hurt consumers.
What Is Alternative Credit Data and How Does It Differ From Traditional Credit Data?
Traditional credit data refers to your credit report, credit scores, and the information they contain. In other words, traditional credit data primarily consists of information about how you manage your tradelines, which are the credit accounts you own.
When we are talking about credit, we are almost always discussing traditional credit data since that is what is used to make most lending decisions.
In contrast, alternative credit data is financial information about consumers that is not typically included in traditional credit reports. Examples of alternative credit data sources include rent payments, utility payments, full-file public records, and data from alternative financial service providers (ASFPs), such as payday lenders.
Traditional Credit Data Alternative Credit Data
Contains information about the tradelines in your credit report Information comes from other sources since there is insufficient credit data
Payment history for loans and credit cards Data from alternative financial service providers (e.g. payday lenders)
Credit utilization ratio Utility payment history
Delinquencies Rent payment history
Credit mix Consumer-permissioned data
Credit inquiries Full-file public records information
What Is the Purpose of Alternative Credit Data?
Alternative data includes data that consumers may choose to allow credit reporting companies to access, such as bank account balances.
For the millions of consumers who lack credit reports based on traditional credit data, building credit and obtaining credit is a challenge. Without a verified credit history, lenders cannot make an informed decision about whether to extend credit to a consumer.
One way the credit scoring industry is trying to address this problem is by creating new types of credit scoring algorithms that utilize different sources of data that are not contained within a consumer’s traditional credit report but still have predictive power with regard to a consumer’s credit risk.
These alternative data sources, such as rent and utility bill payments, are more accessible and more commonly used among those who are credit invisible.
The idea behind alternative credit data is that a consumer’s non-credit financial information can still be used to predict whether the consumer is financially responsible and creditworthy. This information can help lenders provide credit to consumers who may have a thin credit file or no credit file at all but who may still be creditworthy.
Therefore, using alternative data to make lending decisions could theoretically allow lenders to expand their customer base and earn more revenue while providing more credit to consumers who lack a traditional credit history.
How Do Consumers Benefit From Alternative Data?
The benefit to consumers, of course, is that many consumers who may be creditworthy but are invisible to the traditional credit system could potentially use alternative data as a path to building credit where they lacked one before.
For example, a consumer who gets a good credit score using an alternative data scoring method might now be able to get approved for an unsecured credit card, whereas they might have had to put down a deposit to get a secured credit card if the lender had only been able to use traditional credit data. This would allow the consumer to hold onto the cash they would have had to put down as collateral and instead save it for emergencies or some other use.
Applications of Alternative Credit Data
Consumers who are “credit invisible” but have a history of being financially responsible in other areas may benefit from the use of alternative credit data.
Although alternative credit data is still a relatively new field, major players in the credit industry are already working on developing new credit scoring tools that make use of alternative data.
FICO XD and FICO XD 2
FICO is working on developing new credit scoring models that can reliably assess the credit risk of consumers who are unscorable using traditional credit scoring methods.
The FICO Score XD “leverages alternative data sources to give [bankcard] issuers a second opportunity to assess otherwise unscorable consumers.”
Nerdwallet reports that the FICO XD model uses phone, utility, and cable payment data as well as things like information about your home if you are a homeowner, occupational licenses you may have, and your bank records.
Compared to traditional FICO scores, this model has the same credit score range of 300 to 850 and the same expected credit risk for each score group within that scale.
According to FICO, the XD scoring model can provide a score for more than half of all credit applicants that had previously been unscoreable, which adds millions of consumers to the scorable population.
Although only about a third of applicants that can be scored with FICO XD receive scores higher than 620, which is considered to be fair credit, the company claims that almost half of borrowers with higher FICO XD scores later go on to obtain credit and achieve traditional FICO scores of 700 or greater.
FICO XD’s newer version, FICO Score XD 2, works similarly but has been further refined to provide more accurate results.
Similarly, the FICO Score X incorporates alternative data sources for credit scoring, such as telecom payments, mobile payments, “digital footprint” data, and even data from psychological surveys to provide a way for international lenders to score previously unscorable consumers.
UltraFICO
The UltraFICO score, currently being pilot tested by Experian, will use “consumer-permissioned” banking data to enhance its scoring capabilities. In this case, what that means is that consumers can choose to contribute data about their checking, savings, and money market accounts in order to allow lenders to assess their creditworthiness by looking at their overall financial profile.
Some of the specific financial factors considered by the UltraFICO score include:
A history of positive bank account balances is a beneficial factor with the UltraFICO credit score.
How long you have had your bank accounts open How often you make banking transactions When your most recent bank account transactions occurred Verification that you often have money saved in your bank accounts A history of having positive bank account balances
FICO says this credit scoring model can help increase access to credit for “nontraditional borrowers” who have limited credit histories, particularly young consumers, immigrants, and those who are rebuilding their credit after experiencing financial distress.
The company also states that UltraFICO could potentially improve credit access for most Americans and could be especially helpful for those whose credit scores are in the “grey area” of the upper 500s and lower 600s or those whose scores just barely miss a lender’s credit score cutoff.
Seven out of 10 consumers who have had consistently positive banking habits in the past three months could get a higher UltraFICO score than their traditional FICO score, according to the company’s website.
Experian Boost Credit Score
Experian has also come up with their own alternative data solution called Experian Boost, which is a free service that allows users to provide access to their bank accounts in order to get credit for their on-time payments of bills such as electricity, water, gas, phone plans, cable, and even Netflix.
One major advantage with Experian Boost is that it only counts positive payment history, so missed payments will not hurt your score. If the program detects that you have missed a payment, it will remove that account from your credit file so that the late payment will not hurt your score.
Experian Boost lets you add positive payment history from your utility bills and some streaming services.
The New York Times has reported that the reason why Experian Boost does not consider negative information about your bills is that anything negative on your record will most likely end up on your credit report anyway, either because your utility provider may start reporting it to the credit bureaus or the account may get sold to a collection agency which then reports the collection account.
In addition, Experian says that you can disconnect your bank accounts if your FICO score decreases because of Experian Boost and that you can always reconnect your account later once your finances have improved.
According to Experian, consumers who sign up for Experian Boost receive an average boost to their FICO score of 13 points. Those who do not see a boost initially may see a larger effect over time if they keep their account connected as the program continues to check your account for payments you made on time and adding those to your credit profile.
If Experian Boost helps your credit but you later decide for whatever reason that you no longer want to use it, be aware that the positive payment history that was helping you will be removed from your credit profile, so it’s likely that your credit score will fall.
TransUnion FactorTrust
In 2017, TransUnion acquired FactorTrust, a company that provides lending data on short-term and small-dollar loans (e.g. payday loans), which are not reported in traditional credit reports and are often utilized by underbanked and credit invisible consumers.
This information will allow TransUnion to assess credit risk for a larger group of consumers.
In addition, TransUnion says that their small-dollar loan data will help lenders comply with the Consumer Financial Protection Bureau’s recent changes to payday lending rules meant to protect consumers.
Equifax DataX
In 2018, Equifax acquired a specialty credit reporting agency and provider of alternative credit data called DataX. Equifax stated that they plan to use DataX to help lenders improve financial inclusion and access to credit, especially for consumers who are underbanked.
DataX claims that they can help lenders better evaluate the credit risk levels of prospective customers by utilizing a “massive, proprietary consumer database that provides valuable insights on consumers not covered by traditional credit information sources.” This database contains demographic, financial, and credit data on millions of consumers.
The Downsides of Alternative Credit Data
In theory, alternative data sounds like a promising solution to the credit catch-22 and the problem of credit invisibility. According to FICO’s white paper on the subject, the use of alternative data allows millions of previously unscorable consumers to achieve credit scores that are high enough to get access to credit.
However, while the credit scoring and credit reporting companies only talk up the positives of their alternative data products, there are some drawbacks to this approach that also need to be considered.
Alternative Data May Perpetuate Credit Inequality
Although alternative data is marketed as a solution to credit invisibility, it’s possible that it could actually worsen credit inequality.
Despite FICO’s impressive claims, in the company’s white paper, we can clearly see how alternative data in credit scoring might not be so helpful to many consumers.
According to their research, about a third of the “newly scorable” consumers scored 620 or above using the alternative data score. These are the millions of consumers they refer to that may now be able to access credit.
But if only a third of consumers scored 620 or above, that means two-thirds of consumers now fall below 620 with the alternative data score, which is considered bad credit. That means there are twice as many of the newly scored consumers who end up with bad credit than those who end up with good credit after the alternative data model has been applied.
In many cases, having bad credit is even worse than having no credit, because instead of starting from scratch, you have derogatory information on your credit report that is going to weigh down your credit score. This can make it even more difficult to get your credit to a good place than if you had started with no credit history at all.
The results of FICO’s alternative data research bear out the concerns presented by the National Consumer Law Center (NCLC). According to the NCLC, if utility payments become part of the credit reporting system, this could result in millions of consumers getting negative marks and would disproportionately impact low-income consumers and people of color.
Although alternative credit data is pitched as a way to lift millions of consumers out of credit invisibility, in reality, it is another profit-generating tool created by the credit scoring and reporting companies to sell to financial institutions. Any benefit or harm to consumers is incidental to the primary goal of the banks making more money by lending to more consumers.
As you know from our article, “What Happened to Equal Credit Opportunity for All?” the credit scoring system was built upon and continues to perpetuate a history of financial inequality in our country.
Unfortunately, although it has the potential to help millions of consumers if implemented in the right way, it seems likely that alternative credit data may just end up being used to continue the legacy of inequality and discrimination that is still firmly entrenched in the credit industry and in our society in general.
Data Privacy Concerns
Another major concern with alternative data is privacy. In recent years, major data breaches have been happening left and right, including the 2017 Equifax breach that compromised the information of around 148 million consumers. The credit bureaus have shown with multiple egregious security breaches that consumers cannot trust them to safeguard their personal information.
Experian Boost, as well as other similar “consumer-permissioned” data reporting systems, require users to allow access to their bank account in order to report bill payments. For many, it may be hard to stomach the idea of giving FICO or the credit bureaus access to their personal information when they have repeatedly mishandled sensitive consumer data. Those who do choose to use such services do so at the risk of their information potentially being compromised.
Some Lenders May Not Use Alternative Data Credit Scores
Since alternative credit data is still a relatively new development, one downside is that many lenders may not be using alternative data or credit scores based on it in order to make their lending decisions.
The credit industry is slow to change, as we talked about in “Do Tradelines Still Work in 2020?”, so it may take several years for alternative credit data to be widely adopted.
Therefore, at this time, there is no guarantee that your lender of choice will have the ability to access and use your alternative credit data.
Conclusion: Is Alternative Data Helpful or Harmful?
Alternative data has the potential to lift millions of consumers out of credit invisibility, which is a step toward providing equal credit opportunity to these consumers.
However, it has just as much potential to harm consumers and perpetuate credit inequality due to the issues we discussed above.
As with any credit reporting or credit scoring tool, we have to remember who these tools are designed for and who they are intended to serve: the banks.
Ultimately, the purpose of alternative credit data is to help lenders make more money by lending to a greater number of consumers. For consumers, the benefits and risks are not so clear cut.
If you have no credit record or a thin credit file, alternative credit data scoring systems may be worth considering and trying out. As with any major credit moves, be sure to do your due diligence as a consumer by researching how these programs work and how you can protect yourself and your credit if you do not get the results you are looking for.
What is your take on the issue of alternative credit data? Have you tried any of these alternative data services yourself? Drop a comment below to let us know your thoughts!
When President Trump signed a memorandum, on August 8, calling for a “lost wages assistance program,” many of the details were not yet worked out. This program was designed to replace the expired $600 unemployment benefit and called for states to provide 25 percent of the funding. Now, the program has taken shape, and 49 states are participating. Here’s what you need to know about the program and how to ensure you get the payments if you qualify.
Background
Earlier this year, the CARES Act provided for the Federal Pandemic Unemployment Compensation (FPUC) program, which provided $600 in additional unemployment benefits. That program expired, and there were concerns about what type of program should follow it. Congress did not pass another stimulus bill, and President Trump instead addressed the issue through executive action.
The result was the creation of the Lost Wages Assistance (LWA) program. This program is managed by FEMA, and the funds for the program come from the Disaster Relief Fund. Under the program, states were required to apply for grants from FEMA, and then the states would distribute those funds directly through their unemployment systems.
Are you eligible, and how much will you receive?
49 states have been approved for Lost Wage Assistance funding. That is every state except South Dakota, which declined the funds. In addition to being eligible for unemployment in a participating state, you must be eligible for at least $100 in unemployment benefits to receive LWA. As FEMA explains, this $100 can be from any of the following programs:
Unemployment compensation, including regular State Unemployment Compensation, Unemployment Compensation for Federal Employees (UCFE), and Unemployment Compensation for Ex-Service members (UCX) Pandemic Emergency Unemployment Compensation (PEUC) Pandemic Unemployment Assistance (PUA) Extended Benefits (EB) Short-Time Compensation (STC) Trade Readjustment Allowance (TRA) Payments under the Self-Employment Assistance (SEA) program
Eligibility is on a week-by-week basis for the six-week period that includes the week ending on August 1 to the Week ending on September 5.
How much will you receive? The program calls for $300 per week or $1,800 over the six-week time frame. However, some states have elected to pay an additional $100 per week, bringing the total to $2,400 for those who are eligible for the entire six weeks in those states.
Action to Take
Getting additional benefits should be fairly straightforward. The main step that may be required is that you may have to “self-certify” with your state’s unemployment office. This is a requirement from FEMA: “Claimants will be required to self-certify that they are unemployed or partially unemployed due to disruptions caused by the COVID-19 pandemic as part of the initial unemployment insurance claims process and or required weekly recertifications.”
If you are already receiving Pandemic Unemployment Assistance (PUA), then your state likely will not require additional certification. However, if you are not receiving PUA you will need to certify in your state’s online portal.
Ideally, you would have completed the self-certification already. But if you have not, and you would otherwise qualify for LWA, you should contact your state unemployment office or log in to the online portal and complete this step immediately.
Want More Help?
Remember that if you are not already receiving LWA funds, you should certify online or reach out to your state unemployment office to see what may be causing the delay. If you are having additional financial troubles as a result of the pandemic or a change in employment, credit counseling may help. You can work with a counselor in a free session and start making a plan to get through this challenging period while managing your credit and financial goals.
Your credit score is a seemingly simple three-digit number, but it can have a major impact on your finances. Without a high score, you may not be able to pursue some of your major financial goals. Or even if you can, those goals can actually turn into major challenges if you’re stuck with high interest rates because you had a low score. If you are preparing to improve your credit, you need to know the general ranges for scores so that you can set a specific goal for yourself. There are various tiers of credit scores, and being in a higher tier will generally bring the reward of better terms.
First, What’s the Average?
We’re going to talk about credit score categories in a moment, such as “poor,” “fair,” and “good.” But first let’s take a look at the average credit score. One initial point of clarification—while there are two major credit scoring models—FICO and VantageScore—we will focus primarily on the FICO score in this article, though we will make brief mention of the VantageScore as well. There are actually multiple FICO scoring models, and lenders use a variety of them, but the information here specifically relates to FICO® Score 8.
FICO most recently reported that the average credit score is 706. Credit scores nationwide can fluctuate significantly depending on the state of the economy. Back in 2009, the average was 686. COVID-19 and other economic factors may have a negative impact on the national average, but only time will tell. The average can be a useful baseline for comparing your own score. But, don’t let the average discourage you if your score is lower, because there are many ways to increase your score.
Source: FICO.com
The Breakdown
Using the FICO 8 scoring model, the credit bureaus agree (see Experian’s post here and Equifax’s here) to the following breakdown for score ranges. Again, remember that your lender may use a different model which could result in a slightly different breakdown. But, this should give you a good general idea of what to aim for.
Poor
A poor credit score is a score between 300 and 579.
Fair
A fair credit score is a score between 580 and 669.
Good
A good credit score is a score between 670 and 739.
Very Good
A very good credit score is a score between 740 and 799.
Excellent
An excellent credit score is a score between 800 and 850.
If you are curious about the breakdown for VantageScore 3.0, it looks like this:
Interestingly, the VantageScore ranges are narrower on the low end of the spectrum (including both a “very poor” and “poor” range, and broader on the high end (including only a “good” and “excellent,” without a “very good” range).
Why the Ranges Matter
Now that you know the ranges, here are three important reasons that they matter.
Access to Credit and Other Services
If your score is too low you may not have access to credit or, at the very least, you will likely have obstacles to credit. A score in the “very poor” range may mean that any applications for credit are denied. Your best bet may be a secured credit card, which requires you to make a deposit. While this is not ideal, a secured card can be an important tool in rebuilding your credit.
Also, remember that getting credit is not the only concern. Access to other products and services often depends, in part, on your credit history. Being in the “very poor” range can limit your ability to rent an apartment, enter certain contracts, or even get a job.
Favorable Credit Terms
Even if you can get credit, you will want the credit terms to be as favorable as possible. Bad credit terms, like high interest rates, will make your debt more expensive. They will also limit your purchasing power, which can prevent you from buying the home or car you want. Every time your score improves from one category to the next (say from “fair” to “good”), that should be paired with lenders offering you more favorable terms.
Here is a look at estimated mortgage rates by credit score and a look at auto loan rates by credit score. Note: these tools use different ranges and terminology for scores (for instance, the auto loan chart has ranges from “deep subprime” to “super prime”), but the general point still applies.
Goal Setting
Knowing the general credit score ranges can help you plan your goals for the future. Make a plan to check your credit score frequently, but especially as you make major changes (paying off a debt, opening a new card or loan, or changing your credit limit). You will also need to check your credit report often, as that report is the basis for your score. Keeping a close eye on these will help ensure that you move your credit in the right direction.
Want a free credit report review? An NFCC-certified counselor can review your credit report with you, and help you make a game plan for improving your financial standing. Learn more about the free credit report review, or get started here.
A lot of time, effort, and energy go into starting a business. Typically, you have to map out a business plan, prepare a variety of business and legal documents, and maybe even hire other people. This can take a lot of planning and careful consideration. In addition to these steps, you also want to set up your business for financial success. An important question you may be asking yourself at the outset of this new venture is “Do I need good credit to start a business?” The technical answer is “no.” You can start a business without good credit. The long answer is that good credit will enable you to do more with your business, potentially allowing you to scale and grow your business more quickly and with less risk.
No Credit Requirement at the Outset
The act of starting your business may not involve credit at all. This will depend upon your business plan and the type of service or goods you will be provided, along with the expenses you will encounter and the capital you have available when you start. But just as an example, a simple service-based business (like, say, a solo web designer) could be formed and function without credit.
Truly “starting” a business boils down to choosing your name, selecting your entity type, filling out the basic forms, and applying for any licenses required by your selections. The Small Business Administration has tips for each of these tasks. If you create a business that is a new separate entity (like an LLC, for example) you will definitely want to open a business bank account so that you can keep the business’ funds separate from your personal funds. Sole proprietors and partnerships can do this too, but it may not be as legally urgent as for other business types. The bank account can be a simple business checking account without any accompanying credit lines. If so, approval should be fairly easy and not require a strong credit history.
These steps alone may be sufficient for small, simple businesses to get up and running. If your business is more complex and needs more capital than currently available at the time you start the business, then credit may be necessary from the start.
Business Credit Can Help You Grow or It Can Hold You Back
Launch and scale: Credit can be essential for some businesses, and the core business idea may never come to fruition without credit. Even if a business does get off the ground without credit, it may not be able to adapt and take advantage of critical opportunities. Say a rare business opportunity becomes available—a new partnership, or the chance to get into a new market, for example. These moves often require more capital. Being able to quickly access more funding through a credit line could be a game-changer. Unfortunately, the SBA reports that in one survey, 27 percent of respondents said that they did have the funding to adequately support and grow their business. You do not want to be in that position when a rare opportunity presents itself.
Extra benefits: We have been talking about business credit in a general sense but one unique benefit of credit cards is the fact that many offer rewards. If your business has significant expenses, and you can put most of them on credit cards, you have the potential to rack up a lot of credit card rewards. Of course, you will want to pay the balances in full and avoid interest costs. But if you can do that, then the rewards can effectively become increased profits for your business. The rewards might even provide new equipment for your business to help it grow while not costing you anything out-of-pocket.
Increased separation from personal credit: We touched on this before when discussing bank accounts, but you will want to build a separation between your personal financial identity and your business financial identity. In some cases, this is legally essential for bank accounts to ensure that you do not “commingle” funds. But a similar principle applies to credit. Early on in the life of a business, creditors may use your personal credit history in determining whether to give credit to your business, and they may require a personal guarantee on financial commitments. This means that you and the business will be liable for the debt. In fact, on most “small business credit cards,” this is always a requirement.
However, other credit products may not require a personal guarantee, therefore giving you access to pure business credit. One factor in getting approved for such products will be the credit history of the business (including the business’own credit score), so it is important to build a good financial and credit history in the business from day one. Note: building a business credit score typically requires an Employer Identification Number (EIN). Having an EIN is not required for all business types, but can be applied for. Therefore, if you have a type of business not required to have an EIN but want to build your business credit, it may make sense to apply for an EIN.
The dangers: The dangers of business credit are not much different than the dangers of personal credit, but the stakes may be higher. If you have access to credit personally and access to credit through your business, that could lead to a substantial total credit limit. If you were to take a significant business risk or manage your credit improperly, there is the potential to face an astronomical level of debt without the income necessary to pay it off. And depending on your business, your credit decisions may not just impact you but could affect your employees too.
Recap
You do not need good credit to start a business. In fact, there is no requirement that a business use credit at all. However, for some business models, credit will be essential. Early on, creditors will use your personal credit history in determining the terms of any credit they offer the business. But over time, you can put separation between your personal credit and your business credit, which has several advantages. At the end of the day, the same general principles of smart credit management in personal finance apply to business finance. Should you need any assistance with your business or personal credit, the NFCC is here to help.
It’s a question we hear all the time from people who are new to the tradeline industry. Perhaps you have even asked it yourself. In this article, we explain how tradelines work and how they can affect your credit.
What Are Tradelines to Your Credit?
While the term “tradeline” simply means any credit account, in our business, it usually refers specifically to authorized user (AU) tradelines, or authorized user positions on someone’s credit card. An AU tradeline is an account on which you are designated as an authorized user, which means you are not liable for the charges incurred on the account. However, the tradeline can still affect your credit file.
How Do Tradelines Work?
When someone is added as an authorized user to someone else’s account, often the full history of the account is then reflected in the records of both the primary account holder and the AU. This is because credit records do not report the date the AU was added to the account. So, as soon as the AU is added, their credit report may begin to show years of history associated with the account.
Therefore, authorized user tradelines can be used as a way to add credit history to someone’s credit report.
One common example of this is when a parent designates their child as an authorized user of one of their credit cards as a way to help them start building credit early in life. In fact, this practice of building credit as an authorized user, often called “credit piggybacking,” is frequently promoted by banks and financial education sites.
What Are Tradelines Used For?
Parents often use piggybacking as a strategy to help their children build credit early in life.
As we mentioned, tradelines can add years of credit history to your credit report. The power of a tradeline is always relative to what is already in your credit file, so if you are interested in building credit as an authorized user, make sure to choose a tradeline that surpasses what you already have in your credit profile.
How Do Tradelines Affect Your Credit?
Adding quality tradelines to your credit file can influence many of the variables that are related to your credit, such as your average age of accounts, age of oldest account, overall utilization ratio, number of accounts, mix of accounts, and more.
The most important factor that tradelines bring to the table is age, because with age also comes perfect payment history. These two factors combined are the most significant influence on one’s credit.
Due to the power of these factors, adding AU tradelines to your credit file is often preferable over opening new primary tradelines. This is because new primary tradelines will have no age and will probably have relatively low credit limits, which can drag down important metrics in your credit file.
Authorized user tradelines, which are authorized user positions on someone’s credit card, can be used to build credit history.
In contrast, authorized user tradelines already have significant age and high credit limits.
Can You Buy Tradelines?
The tradeline industry took this concept of “piggybacking credit,” as it is often called, and created a marketplace where tradelines could be bought and sold. Essentially, people who want to add tradelines to their credit file can pay a fee to be an authorized user on someone else’s credit card, even if the two parties are complete strangers.
Tradeline companies serve as the intermediary, protecting the privacy of both the cardholders and the authorized users and facilitating the transaction.
A marketplace now exists where consumers can pay a fee to piggyback on others’ tradelines as authorized users.
Tradelines have been around since the advent of the modern credit system. Virtually as long as credit cards have existed, people wanted to be able to share access to their account with others, such as spouses, children, or employees.
However, the role of authorized users was not always considered equally by the credit bureaus. Until the Equal Opportunity Credit Act of 1974, creditors often used to report accounts that were shared by married couples as being only in the husband’s name. This prevented women from building up a credit history in their own names.
In response to this unequal treatment, ECOA was passed to prohibit discrimination in lending.
Regulation B is a section of ECOA that requires creditors to report spousal AU accounts to the credit bureaus and consider them when evaluating credit history. Since lenders generally do not distinguish between AUs who are spouses and those who are not, this effectively requires that credit bureaus must treat all AU accounts the same.
The Equal Credit Opportunity Act prohibits credit discrimination.
It was as a result of this policy that the practice of “piggybacking credit” emerged as a common and acceptable way for consumers with good credit to help their spouses, children, and loved ones build credit.
Thanks to ECOA, authorized user tradelines are still weighted very heavily in credit scoring models.
For more on the history of AU tradelines and the policies and regulations that govern our industry, read our article, “Do Tradelines Still Work in 2019?”
Are Tradelines Legal or Illegal?
While Tradeline Supply Company, LLC does not provide legal advice, we can answer this common question by referring to official proceedings and statements from the authorities.
The issue of tradelines and credit piggybacking went all the way up to the U.S. Congress in 2008, when FICO tried—unsuccessfully—to eliminate authorized user benefits from its credit scoring model. They ultimately reversed their stance and decided to keep factoring AU benefits into credit scores thanks to the Equal Credit Opportunity Act of 1974.
The Federal Trade Commission and the Federal Reserve Board have also weighed in on this topic. In 2010, the Federal Reserve Board conducted a large-scale study on piggybacking and found that over one-third of the credit files that could be scored had at least one AU account in their credit profile, which shows that piggybacking credit is an extremely common practice.
After the issue of piggybacking credit was discussed in Congress, FICO admitted that it could not legally eliminate authorized user benefits.
Learn more about your legal right to use authorized user tradelines in our article, “Are Tradelines Legal?”
How Do I Add Tradelines to My Credit Report?
To add tradelines to your credit report, you can either open your own primary accounts or you can be added as an authorized user to someone else’s credit account. For many people, it is difficult to start building credit on their own because creditors are hesitant to lend to someone with no credit history, which is why the authorized user route is an appealing option.
If you are seeking to add authorized user tradelines to your credit report, you can either ask someone you trust to add you to one or more of their accounts or purchase tradelines from a tradeline company. The benefit of buying tradelines as opposed to asking for a favor from someone you know is that all of our tradelines are guaranteed to have perfect payment histories and low utilization.
How Much Does It Cost to Buy Tradelines?
Our tradelines range in price from $150 to around $1,500 depending on two main variables:
The tradeline’s age The tradeline’s credit limit
Our tradelines stay on your credit report for about two months.
Generally, the older the tradeline is and the higher the credit limit is, the more powerful it will be and the higher the price will be (and vice versa). We delve into further details and examples of the cost of tradelines on our FAQ page, “How Much Do Tradelines Cost?”
How Long Does a Tradeline Stay on Your Credit Report?
Our tradelines stay on your credit report for two reporting cycles, which is approximately two months.
After the two months of being an active authorized user is complete, you will be removed from the account and the tradeline will then appear as closed. A closed tradeline will often remain on your credit report for several years.
However, your strategy may vary depending on your specific goals. There are some situations in which the credit limit can be more important. Our in-depth tradeline buyer’s guide that has all the information you need to help you choose a tradeline.
In choosing the right tradelines for you, It is helpful to be able to calculate how a tradeline could affect your average age of accounts and utilization ratios. Try out our custom tradeline calculator, which does the math for you!
How many tradelines you need depends on your specific situation. There are different cases in which buyers may want to get two or three tradelines, or sometimes even more, but there are other cases in which one tradeline will suffice.
If you really want to maximize your results and you have the budget to do so, buying multiple high-quality tradelines is the way to go. However, if you have budget constraints to deal with, it is usually best to focus your resources on one excellent tradeline.
Historically, only those with privilege and wealth have been able to use the strategy of credit piggybacking. Those who do not have family members with good credit to ask for help, or could not afford the high cost of tradelines, had nowhere to turn, so their options for building credit are often extremely limited and very costly.
To us, it does not seem fair that some people have the option of credit piggybacking but others do not. By offering tradelines at affordable prices, we aim to bridge this gap and help provide a chance at equal credit opportunity for all.
With the recent killings of yet more Black people at the hands of police, the long-held rage and grief of America’s Black communities have boiled over into nationwide civil unrest and protests demanding justice, equality, and the end of police brutality.
As our nation collectively reckons with its history of slavery and its legacy of violence toward Black people that continues today, we want to shed some light on the economic inequalities faced by Black Americans.
We do not pretend to have all the answers or solutions to these large, structural issues that are deeply embedded within the fabric of American society. However, we feel that it is our responsibility to provide educational resources on these topics so that each citizen can understand the issues we are facing and make informed decisions about how to combat inequality in our own lives and in our society as a whole.
The Racial Wealth Gap
Get ready for this staggering statistic: according to data from the Federal Reserve, the typical Black household has only about 10 cents for every dollar of wealth held by the typical White household.
According to the U.S. Joint Economic Committee, Black Americans are more than twice as likely to live below the poverty line as White Americans, with Black children, in particular, being three times as likely to live in poverty as White children.
Not only that, but the chasm between Black and White household wealth, instead of getting smaller, is actually getting wider and wider over time, even for Black Americans with higher education.
This chart from the Center for American Progress shows the racial wealth gap widening over time.
Origins of the Racial Wealth Disparity
The racial wealth gap in America has existed from the moment that the first Africans were taken from their land and brought to the colonies in 1619.
For over two and a half centuries, enslaved Black people were used as a source of wealth by White enslavers who claimed them as property, but they had no way of accumulating wealth for themselves. They were forced to work for nothing and were not allowed to keep any of the wealth they generated.
Even after slavery was legally abolished in 1865, that certainly did not create a level economic playing field.
For at least another century, various laws and policies continued to block Black people from attaining wealth, and discrimination is still pervasive today.
Government-Sanctioned Housing Discrimination
Take the National Housing Act of 1934, for example. Passed in the wake of the banking crisis that kicked off the Great Depression, this act created the Federal Housing Administration (FHA). The FHA made it easier for White Americans to afford homes by providing mortgage insurance to protect mortgage lenders from borrower defaults.
Unfortunately, the FHA outright refused to insure loans to Black consumers and even consumers who wanted to live in areas near Black neighborhoods. This practice of “redlining” not only restricted where Black families could buy homes, but it also affected the types of funding they could get and the terms of those loans. (Without FHA insurance, Black home buyers were forced to accept inflated prices and fees as well as predatory contracts pushed by deceitful contact sellers.)
Furthermore, it discouraged investment and development in primarily Black areas, which led to the decline of many communities and of property values in those areas.
While many White families were buying up houses using government-sponsored, low-interest mortgage loans, Black families did not have this luxury, which meant they were shut out of an important opportunity to accumulate wealth in the form of home equity.
Ultimately, the racial wealth gap cannot be explained or fixed by the behaviors or decisions of individual Black people. It is the result of 400 years of structural racism and oppression in America, and solving it likely requires dramatic and large-scale policy changes.
The Federal Housing Administration insured mortgages to help make it more affordable for consumers to obtain mortgages and purchase homes—but only for White Americans.
Employment
The rate of unemployment of Black people is twice as high as the unemployment rate of White people.
Racism and prejudice undoubtedly play a significant role in this, as research has shown that Black people today still face the same amount of hiring discrimination that they did in the 1980s.
The Center for American Progress wrote the following in 2011, when the economy was starting to slowly recover from the Great Recession; however, the information unfortunately still holds true today in 2020, especially in the midst of the COVID-19 recession:
“The unemployment rates for African Americans by gender, education, and age are much higher today than those of whites, and these unemployment rates for African Americans rose much faster than those for comparable groups of whites during and after the Great Recession. The unemployment rates for many black groups in fact continued to rise during the economic recovery while they started to drop for whites…It is now painfully clear that African Americans are still facing depression-like unemployment levels.”
“…there are unique structural obstacles that prevent African Americans from fully benefiting from economic and labor market growth—obstacles that deserve particular attention when unemployment rates for African Americans stand at the highest levels since 1984.”
In addition, Black workers are more likely than White workers to have low-wage jobs, which leads to Black families having lower average incomes than those of White families. White annual household incomes are about $29,000 higher than Black annual household incomes.
People of Color Are Bearing the Brunt of the Recession
It is impossible to ignore the effects of the economic recession that has begun as a result of the COVID-19 pandemic, which is disproportionately impacting Black and Hispanic communities, just like the Great Recession did in 2007 – 2009.
Job Loss
Pew Research Center reports that Hispanic and Black adults are being the most affected by the loss of millions of jobs due to the coronavirus.
This is primarily because people of color are overrepresented in many low-wage jobs within the industries that have had to shut down during the pandemic, such as food service, retail, and hospitality. These are also jobs that cannot be done remotely. Consequently, Black employees are especially vulnerable to being laid off.
Furthermore, not only are Black workers often the first to be let go during recessions, but they are often the last to be re-hired when the economy recovers. According to the Center for American Progress, it’s important to recognize “…that black labor market prospects are hit much harder by recessions and that it takes longer for African Americans to recover from an economic downturn.”
Business Closures
A study from the Stanford Institute for Economic Policy Research on the impact of COVID-19 on small business owners revealed that the percentage of Black-owned small businesses that have been forced to close due to the pandemic (41%) is more than twice the percentage of White-owned businesses that have closed for the same reason (17%).
The Paycheck Protection Program, which is part of the CARES Act, was intended to “provide small businesses with funds to pay up to 8 weeks of payroll costs including benefits.” However, some have pointed out that the program is likely to be perpetuating racial inequality by giving the role of distributing funds to banks that have a demonstrated history of discrimination against Black borrowers.
Housing Insecurity
Evictions have been temporarily paused in many areas since many renters have lost their jobs during the pandemic and can not afford to pay rent. Once these eviction bans are lifted, however, it is predicted that Black and immigrant tenants will make up the majority of those displaced by the coming housing crisis.
According to Politico, “Black and Latino people are twice as likely to rent as white people, so they would be most endangered if the protection from removal is ended.” Furthermore, Black and Latino households usually spend a greater portion of their income on rent than White renters. Any disruption in income could spell disaster for these vulnerable groups of tenants.
Poor women of color, specifically, are much more vulnerable to eviction than any other demographic group, with one in 17 being evicted each year, compared to only one in 150 for poor White women.
The consequences of having an eviction on your record are severe. It can be nearly impossible to find safe and affordable housing since many landlords refuse to rent to tenants who have previously been evicted. This leads to many low-income Black women being forced into homelessness and dangerous living conditions.
If the landlord passes the bill for unpaid rent onto a debt collector, then it becomes a collection account, which shows up on your credit report and can heavily impact your credit for up to seven years. Similarly, if a landlord seeks a court judgment against you for unpaid rent, the judgment could appear in the public records section fn your credit report.
Credit Difficulties
With less wealth and lower average incomes than White households, Black and Hispanic households are less equipped to weather financial emergencies without getting behind on bills, which is the number one cause of bad credit.
A recent Pew Research study determined nearly half of Black adults surveyed reported that they are worried about not being able to pay all of their bills over the next few months.
For a list of tips and resources on getting through the COVID-19 pandemic with your finances and your credit intact, even if you are having a hard time paying your bills, read “How to Protect Your Finances and Credit During the Pandemic.”
Medical Debt
It is well known that many Black communities deal with higher pollution levels and “food deserts” where access to affordable, healthy foods is often not possible.
And since Black Americans are more than twice as likely to be in poverty than White Americans, they are therefore more likely to experience food insecurity, inadequate nutrition, a lack of healthcare, and the stress of constantly worrying about money on a daily basis.
All of the stressors listed above have been shown to have lifelong consequences on the physical and mental health of poor people, including strong negative effects on the immune system. This means low-income individuals (especially low-income people of color, who also suffer from the effects of “weathering”) are less able to fight off infections and more likely to live with various chronic illnesses that can make the coronavirus more deadly.
As we mentioned, Black workers are overrepresented in lower-wage jobs and more likely to get laid off, which puts them at risk of losing their health insurance coverage or, often, not even having access to health insurance in the first place.
When you put all of these factors together, it creates the perfect storm for Black individuals to get sick with COVID-19, suffer more severe complications that could lead to being hospitalized, and not have the resources to cover extremely expensive hospital stays.
Even if the illness is less severe for some, who may be able to recover after staying at home for a few weeks, they still have to deal with the high cost of missing work while sick and isolated at home. Losing out on even one paycheck can be devastating for low-income households who have not had the option of building up savings.
Naturally, when you combine serious illness with no health insurance and no safety net, the result is massive medical debt. Research has shown that Black Americans are 2.6 times more likely to have medical debt than White Americans and are also nearly twice as likely as White people to be contacted by debt collectors and to borrow money due to medical debt.
When consumers cannot afford to service their medical debt, or if they have to stop paying other bills in order to be able to make their medical debt payments, they will inevitably end up missing payments, defaulting on debts, having accounts go into collection, and possibly even filing for bankruptcy in extreme cases.
All of these derogatory items are severely damaging to one’s credit and therefore tend to make credit more expensive and less accessible to consumers who struggle with medical debt. This impact is long-lasting since negative information stays on your credit report for seven years or even up to 10 years in some bankruptcy cases.
For those who cannot afford adequate healthcare, getting sick depletes scarce resources, limits future opportunities, and stunts financial growth for many years, thus continuing the downward financial spiral.
Racial Disparities in the Credit System
Since race and ethnicity are not legally allowed to play a role in credit scores, you might think that consumers of all races would have equal opportunity in the credit system. Unfortunately, however, this is not the case.
Black and Hispanic consumers, on average, tend to have lower credit scores than non-Hispanic White and Asian consumers, even after controlling for other variables such as personal demographic characteristics, location, and income. Black borrowers pay higher interest rates on auto loans and other installment loans than non-Hispanic White borrowers who have the same credit score. Black and Hispanic consumers experience higher denial rates than other groups with the same credit score.
Black and Hispanic Americans are more likely to be credit invisible (lacking a credit record) than White and Asian Americans—15% of Black and Hispanic consumers lack a credit record, compared to just 9% of White and Asian consumers. Black and Hispanic consumers are also more likely than White consumers to have credit records that cannot be scored by widely used credit scoring models—13% of Black adults and 12% of Hispanic adults are unscorable, versus only 7% of White adults. (The Consumer Financial Protection Bureau (CFPB) did not provide the percentage of Asian consumers who cannot be scored but said that “the rates for Asians are almost identical” to those of White consumers.)
Since credit invisibility and unscorability are more common among Black consumers, it should not be surprising to learn that Black households are more than twice as likely as White households to use payday lending. Payday loans are an expensive and usually predatory type of credit, in contrast to traditional sources of credit, such as banks, credit unions, and credit card issuers.
Credit Options Are Limited by Circumstances
In our credit system, there are some people who have the privilege of starting out with good credit and stable finances simply due to the circumstances they were born into, while many others are not so fortunate.
As we talked about in our article about equal credit opportunity, there are five main factors, referred to as the “five C’s,” that influence a borrower’s performance when it comes to paying back debt:
Capacity: the amount of income that is available to pay off debts Collateral: the value of assets backing a loan, such as your car or your house Capital: the value of assets that do not explicitly back a loan, but may potentially be used to repay it Conditions: events that can disrupt a borrower’s income or create unexpected expenses that affect a borrower’s ability to make loan payments, such as a job loss Character: the financial knowledge, experience, and/or willingness of a borrower that is relevant to their ability to manage financial obligations
As much as some people may like to believe that getting good credit is simply a matter of determination and hard work, in reality, each of the five C’s is subject to external forces and influences that may be beyond the control of the borrower.
When it comes to your capacity to pay off debts, for example, your income may be limited by the availability of jobs where you live and the types of jobs you can qualify for. Hiring discrimination and other challenges prevent many Black individuals from earning to their full potential, which results in a reduced capacity to pay off debt compared to White folks.
In order to have collateral and capital, you need to have valuable assets, which is a privilege that not everyone enjoys.
A borrower’s “character” depends on their upbringing and education, which for many people does not include adequate financial education.
And while anyone could be faced with unexpected conditions that may lead to financial hardship, people who are financially and socially privileged are in a much stronger position to recover, while others who are less fortunate could face financial ruin from even a single emergency.
Lacking Access to Credit Has Consequences
The reality in our country is that centuries of systemic inequality continue to have an impact on all of these five C’s in countless ways, which contribute to higher rates of credit invisibility and poor credit in Black communities.
As the CFPB states, “…the problems that accompany having a limited credit history are disproportionally borne by Blacks, Hispanics, and lower-income consumers.”
For example, data show that 42% of consumers in communities of color have debt in collections, compared to only 26% of consumers in White communities. Delinquency rates or default rates for medical debt, student loan debt, auto loans, and credit card debt are higher for communities of color across the board.
This makes a lot of sense when you think about the fact that Black and Hispanic borrowers have lower incomes and less wealth that they can use to service their debts compared to White borrowers.
The consequences of these disparities are far-reaching. Here are just a few of the repercussions of having no credit or bad credit:
It is more difficult to obtain credit, from credit cards to installment loans. Credit is more expensive—it comes with higher interest rates and fees and may require a larger down payment or security deposit upfront. Insurance rates may be more costly for those with bad credit. It may affect your employment opportunities since surveys have shown that around 20%-25% of employers conduct credit checks as part of the hiring process for some positions.
Who Has the Privilege of Receiving Financial Support From Others?
Perhaps another “C” could be added to the list: community.
Often, the difference between good credit and bad credit or no credit at all often comes down to having a strong financial support network.
If you think about the five C’s of credit performance (capacity, collateral, capital, conditions, and character) we described above, each factor can be influenced or controlled by the financial resources available to you within your social circle.
According to the Urban Institute, “Financial support received can be saved or invested in an education or a home and it can be used to cover unexpected costs, helping families remain stable through financial emergencies.”
Having been deprived of generational wealth for centuries, Black households have fewer financial resources to draw on when a friend or family member is in need, and they receive less financial support from those in their networks compared to the amount of support that White families receive.
The Federal Reserve reports that while 71% of White Americans say they would be able to get $3000 from friends or family if they needed to, only 43% of Black Americans could say they would be able to do the same.
Another example of uneven access to financial support by race has to do with large monetary gifts and inheritances. The same report by the Urban Institute quoted above states that Black and Hispanic families are five times less likely to receive large financial gifts or inheritances than White families. For those who do benefit from large gifts and inheritances, Black families receive an average of $5,013 less than White families. It is estimated that this disparity explains 12% of the racial wealth gap.
From these examples, we see how a person’s family connections can enhance their access to capital and collateral, which can then make it easier to obtain and successfully pay off credit obligations. Conversely, not having access to those resources and possibly even having to support your own friends and family makes it much more difficult to manage debt.
An article in Forbes about the racial wealth gap summed it up well: “Those who have neither emergency savings nor flush friends and family to tap are more likely to take high-rate loans from payday lenders, skip needed medical care, fall behind on rent, mortgage or other bills or even have trouble paying for food.”
Piggybacking for Credit: Only for “Friends and Family”?
Being part of a privileged community does not only make it easier to access capital. It also means that you may be able to acquire a positive credit history before you have even used credit or opened your own primary accounts, thanks to the help of friends or family.
Achieving good credit early on in life is often the result of having friends and family members who also have good credit and who can share their positive credit history with someone who is just starting out. This process is called credit piggybacking because you can “piggyback” on someone else’s good credit in order to build up your own credit profile.
Ways to piggyback for credit include opening an account with a cosigner or guarantor, opening a joint account with someone who has good credit, or becoming an authorized user on someone else’s tradeline. Becoming an AU on a seasoned account is usually the preferred method for building credit fast because you can add years to your credit history simply by being added to the account, whereas the other methods involve opening a new primary account and waiting for it to age.
Unfortunately, when it comes to credit piggybacking, we see the same patterns of inequality along racial lines.
Many Consumers Are Already Benefiting From Credit Piggybacking
A study on AU accounts conducted by the Federal Reserve Board revealed that over a third of scoreable consumers in the United States have at least one AU tradeline in their credit profiles.
However, when the prevalence of AU tradelines is broken down by race, twice as many White consumers have AU accounts as Black consumers: only 20% of Black consumers have AU accounts, compared to 40% of White consumers.
In addition, the statistics showed that Black individuals have fewer AU accounts, on average, than White individuals, and when Black consumers do have AU tradelines in their credit profiles, the tradelines have less age and higher utilization rates of the tradelines held by White consumers.
What About “Equal Credit Opportunity”?
Despite the fact that one in three scorable consumers in our nation are already taking advantage of authorized user tradelines, there are still some who oppose the tradeline industry because they feel that those who purchase tradelines are “cheating the system.”
Yet these same people and institutions usually have no qualms about recommending that parents help their children build credit by allowing their children to be authorized users on their credit cards, or that a spouse who has good credit designates their partner as an authorized user for the purpose of building credit.
Most, if not all, of the big banks promote this strategy, often even explicitly saying that the authorized user does not need to be given the card to use, which makes it clear that it is solely for the purpose of getting that tradeline to appear on the authorized user’s credit profile.
As you can see, just like in many other aspects of our society, there is a double standard when it comes to who is “allowed” to benefit from AU tradelines.
While the banks publicly encourage their customers and their customers’ “friends and family” to use this credit-building tactic, they also claim that this opportunity should not be available to others who turn to the tradeline industry because they simply do not have the option of going to family or friends for credit help.
It does not seem fair or equal to promote a powerful credit-building strategy for those who are already privileged enough to have support from their social network while at the same time saying that it is wrong or should not be allowed for those who have fewer opportunities to get ahead.
How Can We Create Equal Opportunity for All?
Unfortunately, the racial economic divide in this country runs deep, as it has been perpetuated by American systems for generations.
For this reason, Black consumers disproportionally struggle with low incomes, less wealth, poor credit or no credit, and fewer opportunities to get ahead in life financially. This makes it more difficult to simply pay the bills and stay afloat, let alone to save money, invest in assets, and build wealth.
So what can we do to start to bridge the divide?
To address the disparity fully, it’s clear that large-scale economic policy changes on a national level will be needed.
The actions of individual consumers and businesses, while they cannot solve the problem as a whole, can help people take steps to improve their finances and credit.
Education on the Credit System and Personal Finance
Sadly, basic financial education is not something that most people are exposed to, neither in school nor at home.
Research is mixed on the topic of whether enhanced financial education in school would significantly help with the issue of economic inequality in our country. However, it can make a big difference to individuals to educate themselves on money management and the credit system and become empowered with this information to make better financial decisions.
We understand the importance of being educated about credit, knowing what the weaknesses in the credit system are, and understanding the steps you need to take to improve your credit. When you become familiar with how the credit system works, you have more power to make it work for you, instead of the other way around.
You can start taking control of your financial future with the knowledge and the power of these resources at your fingertips.
Tradelines and Equal Credit Opportunity
For those who lack a positive credit history, there are not many options to get started on building their credit profile, since most lenders base their decisions on your credit score and your track record of successfully managing credit in the past. Just like trying to get a job with no work experience, It can seem nearly impossible to get credit if you have not already had experience with credit before.
This is why we are so passionate about what we do at Tradeline Supply Company. We fill the void that so many consumers are looking for in their quest to start building or rebuilding their credit.
Our goal is to help create equal opportunity by making tradelines affordable and accessible to all consumers, not just the wealthy and the privileged.
Conclusion
While the wealthy have always had easy access to credit and strategies for building credit, the same cannot be said for the many people in America who are on the other, less fortunate side of the massive wealth gap.
At the same time, income inequality and the racial wealth gap keep growing larger, leaving more and more people behind who are struggling to build credit, manage their finances, and create a strong financial foundation for themselves and their families.
Systematic, government-legitimized discrimination against Black folks deprived Black communities of the opportunity to grow and thrive economically for hundreds of years. To this day, even though we claim to value equality, there are serious financial disparities in our systems that Black families bear the brunt of.
Although we alone cannot repair this injustice, we will continue to do our part in helping to provide equal opportunity to all consumers and create a more level playing field in our economy.
Using a credit card is easy — you use the card to buy things and then pay the credit card bill.
A credit card can sometimes be difficult, however, when dealing with your credit file. From a missed payment to a loan that isn’t yours that’s incorrectly listed on your credit report, there are all kinds of ways your credit score can drop. And not all of them are from something you did wrong.
Consumers have protections under the law regarding their credit reports — which is where credit scores and credit problems are listed for lenders to check before offering you credit. Errors on a credit report can drop your credit score, making it harder to get a loan, credit card, rent an apartment, or qualify for insurance coverage, among other things.
The main law that protects consumers from credit errors is the Fair Credit Reporting Act, or FCRA. Here are some of the rights you have under this law and how to use it to protect your credit:
View credit reports
The FCRA entitles you to review your credit file from each of the three main credit bureaus for free once every 12 months. You can do one check every four months from each of the three — Equifax, Experian and TransUnion — if you really want to be on top of it.
Start by going to AnnualCreditReport.com to request your credit file online. Only use that website and don’t use a copycat site that charges fees for what should be a free service. You’ll need to verify your identity to get online access. You can also request your credit file through an automated phone system or the mail.
The FCRA applies to all consumer reporting agencies. You can also look at reports from other consumer reporting agencies that collect noncredit information about you. These include rent payments, insurance claims, employers and utility companies. The Consumer Financial Protection Bureau lists the reporting companies and how to request a free report from each.
Check your credit score
The law allows you to request a credit score, though it’s legal for credit agencies and other businesses to charge you a fee for this service. Some credit cards provide scores for free, so check with your credit card issuer first.
A credit score isn’t the same as a credit report. Information in a credit report determines a credit score, and each credit bureau can use a different scoring model that requires it to provide different information. You have different credit scores, depending on which factors are weighed more heavily.
Monitoring your credit is vital. Make sure that you review your credit report for any inaccuracies.
Know who can view your credit report
The FCRA doesn’t allow a credit reporting agency to share your credit file with someone who doesn’t have a valid need. Some inquiries, such as from a potential employer or landlord, require your written consent. And, they can only check your credit report, not your credit score.
The credit reporting agencies can share your credit report for legitimate reasons, such as when you’re applying for credit, insurance, housing or with a current creditor.
Disputing errors
Getting a credit report in your hands can lead to all sorts of eye-opening concerns. Anything that’s listed as negative should be checked for accuracy. Here are some things to look out for:
Eviction that wasn’t legal. Creditor listed that you didn’t have an account with. Loan default. Wrong name. Wrong address. Wrong Social Security Number. Incorrect loan balance. Closed account reported as open. A loan you didn’t initiate.
Some errors may be simple to resolve and others you may need to do more research on before disputing them to ensure they’re incorrect.
For example, you may not recognize the name of a creditor and assume you don’t have an account with them. But it may just be a store credit card you recently applied for that is listed by the issuing bank’s name. Or maybe a home or auto loan was sold to a new loan servicer.
Other errors could be reason to suspect identity theft, or there could just be wrong information that’s bringing down your credit score.
If you suspect identity theft, such as someone taking out a credit card in your name, then file a police report and report it to your credit card company and the credit reporting agencies.
To dispute erroneous information, use certified mail to send the credit bureau a letter and copies of documents explaining the error. If a loan still shows an outstanding balance and you have written proof that it was paid off, for example, send a copy to the credit agency.
Credit agencies have 30 days to investigate and respond to your dispute, unless they deem it frivolous.
If it corrects an error, it must send you a free copy of your credit report through AnnualCreditReport.com so you can see that the corrections have been made.
A time limit to negative information
The FCRA doesn’t allow credit bureaus to report negative information that’s more than seven years old, though it allows some forms of bankruptcy to remain on a credit report for 10 years.
There’s also a time limit for positive credit information such as on-time payments and low balances — up to 10 years after the last date of activity on the account.
Rejections based on credit report
If your application for credit, job, insurance or housing has been denied because of information in your credit report, the law gives you the right to know this information.
The landlord, employer or other entity that denied your application must notify you and give you the name, address and phone number of the credit reporting agency that provided the information.
The FCRA allows you to get a free copy of your credit report from that reporting agency within 60 days of the action against you. That’s in addition to the three free credit reports allowed annually.
To best deal with a potential rejection ahead of time, it’s smart to check your credit report before applying for credit, rental unit or related use of your credit report and check it for errors. Give yourself enough time to fix them.
Go to court
If these actions or a complaint with the CFPB doesn’t resolve your dispute, you may be able to sue for damages in state or federal court. You can sue a credit reporting agency or related parties for violating any of the above rights.
However, it’s worth knowing that your right to legal action doesn’t start until after the creditor or credit reporting agency has been notified of an error and has a chance to fix it. In other words, you’ll only be awarded damages if the adverse action happened after you reported the error.
So if you didn’t get approved for a mortgage because of a mistake on your credit report, it’s unlikely you’ll be compensated for losing out on the house if you lost out on it before reporting the mistake.
Most of the time, when we talk about credit, we are talking primarily about the impact of open accounts. But are we underestimating the importance of closed accounts? Let’s shed some light on the less commonly addressed question of how closed accounts can affect your credit.
What Is a Closed Account on a Credit Report?
A closed account on your credit report is simply any credit tradeline that has been closed, whether it was terminated by the customer or the creditor.
There are several different reasons why an account may be closed.
If you don’t use your account for several months, it could get shut down for inactivity. Photo by Hloom on Flickr.
If you don’t use a credit card for several months, for example, you could get your credit card closed for inactivity. In this case, your credit report might say “account closed by credit grantor” for that account since the lender was the party who terminated the account.
Other reasons a credit card may be closed by the creditor include:
The credit card issuer is no longer offering that type of credit card or is replacing it with a different card The credit card issuer determined that there was fraudulent activity on the account The card was stolen or lost
Consumers may also want to close their own credit accounts from time to time, in which case the account might be notated as “account closed by consumer.” As an example, if one of your credit cards increases its annual fee or if you no longer feel that the fee is worth it, you might decide to close that account.
What Do Closed Accounts Mean on Your Credit Report? Closed Accounts and Credit Utilization
Use our tradeline calculator to calculate your credit utilization ratios.
Now that you know what a closed account is and why an account may be closed, you may be wondering what a closed account on your credit report means for your credit.
The main impact of closing an account on your credit is the effect on your utilization ratio. By closing an account, you are reducing your total available credit limit, which could increase your overall utilization ratio if you have balances remaining on your other accounts.
Therefore, if you have balances on any of your other cards, you probably don’t want to close an account that is helping to keep your overall utilization down, as well as improving your ratio of low-utilization to high-utilization accounts.
On the other hand, if you pay down all your other credit cards to 0% utilization, you can safely close an account without impacting your credit utilization.
Many people believe that once an account is closed, it will no longer count toward your credit age. However, according to an article by credit expert John Ulzheimer in The Simple Dollar, this is a myth.
“Credit scoring models like FICO and VantageScore do indeed consider the age of your oldest account and the average age of your accounts when calculating your credit scores. However, closing an account does not remove its history — including its age — from your credit reports.
Not only will the history of a closed account remain on your credit reports, but credit scoring models will continue to consider the age of the account as well. And, even better, a closed account continues to age. So, if you closed a five-year-old credit card today… in 12 months it’s going to be a six-year-old credit card.”
Are Closed Accounts on Your Credit Report Bad?
Closed accounts on your credit report are not inherently a bad thing. In fact, they can often be a good thing, as we will elaborate on below.
Closed accounts on your credit report, unless they are derogatory, are not bad for your credit. In fact, they are probably giving your credit a boost.
However, derogatory closed accounts can definitely have a negative impact on one’s credit.
For example, if you had a credit card closed due to delinquency, meaning the creditor closed the account because you had stopped paying it, the account likely still has a balance owed.
Having a closed credit account with a balance on your credit report could really hurt your credit. According to some sources, closing a credit account removes its credit limit, so a credit card account closed with a balance would be considered maxed out or over-limit.
Credit utilization is a major influence on your credit score, so maxing out your utilization by having a credit card account closed with a balance could result in a big dip in your score.
However, other sources say that a closed account with a balance will be treated as an open account until the balance is paid off, at which point you can expect some damage to your score, especially if you have balances on your other credit cards.
The specific way that closed accounts are treated may depend on which credit score algorithm is used to calculate your score as well as other variables in your credit profile.
Should I Pay Off Closed Accounts on My Credit Report?
If your account was closed with a balance but remains in good standing, maintain its good standing by continuing to make payments until the account is paid off.
If your account was closed due to delinquency, the first thing to do is call your credit card issuer to check the status of the account. If the debt hasn’t been sold to a collections agency yet, you’ll want to start paying off the account immediately to prevent it from going to collections. You could end up with bad credit if you have a collection account on your file.
If the account is already in collections, however, whether or not you should pay it off is an entirely different question that depends on your individual situation.
See our article on collection accounts on your credit report for more information on how to handle collections.
Open vs. Closed Accounts on Credit Report
In the tradeline industry, we often get questions about whether closed accounts have an impact on one’s credit and, if so, what value they hold relative to open accounts.
It is possible to have a good credit score without having any open accounts. Photo by CafeCredit.com, CC 2.0.
This is an important question, because generally when you buy tradelines you are an active authorized user for two reporting cycles, and after you are removed from the account, it will begin to show as a closed account on your credit report.
Therefore, it is useful to know what impact the tradeline might have after it converts to a closed tradeline.
From what we have seen, closed accounts often can still be a very powerful influence on one’s credit score.
Remember, the age of a closed account still factors into your credit, and accounts continue to age even after they have been closed. Age and payment history go hand-in-hand and together make up 50% of a FICO score, and since closed accounts can still contribute to these factors, this implies that closed accounts can still have a strong effect on your credit.
However, closed accounts may have a diminishing impact over time, since credit scores tend to prioritize recent events.
Can You Have Good Credit With Only Closed Accounts?
It is possible to have a good credit score while only having closed accounts in one’s credit report. We have seen examples of people with credit scores in the 700’s who only had closed accounts in their credit file.
Can I Have Closed Accounts Removed From My Credit Report?
If you have closed accounts on your credit report that are not delinquent or hurting your credit, then there is no need to remove them. They may actually be helping your credit, even though they are closed.
Accounts that were closed in good standing should automatically fall off your credit report after 10 years, while delinquent closed accounts will fall off your credit report after 7 years.
How to Get Rid of Closed Accounts on Your Credit Report
If your credit card has been closed, you can try calling your credit card issuer to ask if the account can be reopened, but don’t wait too long.
If a closed account on your credit report is reporting inaccurately, then you can dispute it and have the credit bureaus update the account with the correct information or remove it.
Contact each credit bureau or check their websites for instructions on how to dispute accounts on your credit report.
If a Credit Card Is Closed, Can It Be Reopened?
In some cases, consumers may be able to reopen closed credit cards.
If your account was closed due to fraud or delinquency, banks typically do not allow these accounts to be reopened.
If it was closed voluntarily on your part or closed due to inactivity, however, you might have a chance to reopen the account if you don’t wait too long.
Only some banks will allow this, and those that do have varying time limits as to when you can reopen an account, so check with your credit card issuer.
If you’re within the time window and your account is eligible to reopen, here’s how to reopen a closed credit card account:
Call the phone number provided on the back of your credit card (or if you don’t have the physical card anymore, look up the phone number for the customer service department for that card). Be ready to provide your personal information and answer security questions. Explain why you closed the account and why you are requesting to reopen it.
Some issuers may require a hard inquiry before they can approve your request, which could cause a small, temporary drop in your credit score.
If your bank doesn’t allow you to reopen the card, the next best solution might be to re-apply for the same card or apply for a new credit card altogether.
Take-Home Points About Closed Accounts
Accounts may be closed voluntarily by the consumer or closed by the creditor due to inactivity, fraudulent activity, or delinquency. Closed accounts are not necessarily bad and can even help your credit. Closing an account could affect your credit utilization. Closed accounts still contribute to your credit age and they continue to age even after they are closed. Closed accounts can still have a powerful impact on credit scores. Continue paying off accounts that were closed with balances to prevent them from going to collections. You can dispute closed accounts that are not reporting correctly. You may be able to reopen a closed credit card account depending on the circumstances.
FICO, the company behind the creation of the original FICO credit score and its many subsequent iterations, has announced the latest model in their line of credit scoring algorithms: the FICO Score 10 and the FICO Score 10 T. The “T” in the latter scoring model stands for “trended,” which reflects the incorporation of trended data over time into the algorithm.
Thanks to not only the trended data but also a few other major changes, the new scoring models are claimed to be superior to all previous FICO scores.
Although the majority of consumers are not likely to see a dramatic change in their credit scores, some groups of consumers may experience more extreme shifts. Ultimately, the new FICO scores are predicted to widen the gap between consumers with good credit versus those with bad credit.
However, none of that matters until FICO 10 and 10 T actually start being used, which could still be a few years away.
Keep reading to get all the facts on FICO 10, including what makes it different from previous FICO score versions, the impact it will have on credit scores, and when we will start to see lenders adopting it. Most importantly, we’ll tell you how to get a good credit score with FICO 10.
Why Did FICO Come Out With a New Credit Scoring Model?
The whole point of a credit score is to communicate a consumer’s level of credit risk to lenders so that lenders can make less risky decisions when granting credit. Lenders want to avoid extending credit to borrowers who are likely to default on a loan because defaults represent losses for the company.
So, the more accurate a credit scoring model is at predicting consumer credit risk, the more useful it is to lenders. With a predictive credit scoring model, lenders can make more informed lending decisions, which helps their bottom line.
For this reason, the goal of each new credit score is to make it better than the last version at predicting credit risk, and that is exactly what FICO 10 is designed to do.
Consumer Debt Is on the Rise—But So Are Credit Scores
According to The Balance, consumer debt has increased to record levels, and yet the average credit score in the United States has also increased to 706 as of September 2019. This can be attributed partly to economic conditions over time, but there is another major factor that has the banks worried.
The national average FICO score has been on the rise for the past decade and it surpassed the 700 mark in 2018.
It has now been 12 years since the Great Recession of 2008, which means almost all of the delinquencies and derogatory marks on consumers’ credit reports from that period of financial hardship have been removed from their records. Therefore, creditors can no longer see how consumers handled the recession and whether they were able to pay all of their bills when the economy went south.
Couple this with the fear of another possible economic recession on the horizon, and you can understand why lenders have started to feel concerned that delinquencies and defaults may soon begin to rise to a level that is not reflected in consumers’ high credit scores.
Because of these economic factors, the credit scoring system needed an overhaul that would take into account the changing economic climate as well as changing consumer behavior and allow for better predictions of credit risk and default rates.
FICO 10: More Accurate Predictions of Credit Risk
FICO predicts that FICO 10 will lower defaults on auto loans by 9% and defaults on mortgages by 17%.
Due to the changes made to the scoring model that we discussed above, especially the inclusion of trended data for the FICO score 10 T, FICO claims that the new scores perform better than all previous FICO scores by substantially lowering consumer default rates.
Here’s what else FICO has to say about their new products:
“By adopting the FICO® Score 10 Suite, a lender could reduce the number of defaults in their portfolio by as much as ten percent among newly originated bankcards and nine percent among newly originated auto loans, compared to using FICO® Score 9. The reduction in defaults is even higher for newly originated mortgage loans, at 17 percent compared to the version of the FICO Score used in that industry. These improvements in predictive power can help lenders safely avoid unexpected credit risk and better control default rates, while making more competitive credit offers to more consumers.”
How Is FICO 10 Different Than Previous FICO Scores?
Although FICO routinely updates their credit scoring algorithms every five years or so, this will be the first time that they are releasing two different versions of the same general scoring model: FICO 10 T, which uses trended data; and FICO 10, which does not use trended data.
Both FICO 10 and FICO 10 T will be drastically different than the previous FICO score, FICO 9. FICO 9 was designed to be very forgiving to consumers, which led many to believe that it produced credit scores that were higher than they should have been.
With FICO 9, for example, medical collections were given less weight than other types of collections, which was a benefit to consumers struggling with medical debt.
Furthermore, FICO 9 completely ignored paid collection accounts, meaning that if you had a collection on your credit report but then paid the balance, it would no longer affect your credit score. Many felt that this change contributed to FICO 9 overestimating the creditworthiness of consumers, which in turn led to the scoring model not being accepted by many industries.
In contrast, the FICO 10 scores represent a swing back in the opposite direction. It is designed to be less lenient toward consumers with risky credit behaviors in order to avoid understating consumers’ credit risk. In that sense, it is probably more similar to FICO 8 than to FICO 9. However, FICO 10 also rewards consumers who have successfully managed their credit.
To accomplish this, FICO made some significant changes in creating their latest set of credit scoring algorithms.
Trended Data
The new FICO 10 T score is the first FICO score to look at trended credit data.
The FICO 10 T score will incorporate trended data, which means that it will not just consider your credit profile as a “snapshot” in time, but rather, it will take into account your credit behavior over the previous 24 to 30 months and how your credit profile has changed in that time.
VantageScore 4.0, a competing credit scoring model, has been using trended data since it debuted in 2017. Now, FICO is following suit with their 10 T score.
Because of the more extensive temporal data set FICO 10 T has to draw from, it is even more predictive of a borrower’s credit risk than the basic FICO 10 score, which can only see a “snapshot” of your credit report at a given point in time.
For consumers, the trended data factor is especially significant for the credit utilization portion of your credit score. Of course, credit scores already looked at your payment history from the past seven to 10 years, but until now, they only looked at your credit utilization ratios at a given point in time.
This means that with most credit scoring models, even if you max out your credit cards one month and your credit score suffers as a result, as long as you pay down your cards again by the next month, your score can still bounce right back to where it was before you maxed out the card.
With FICO score 10 T, however, it won’t be so easy to recover from high balances, because a record of being maxed out could stick around for the next 24 to 30 months.
In addition, if your balances have been climbing higher over the last two years or if you have been seeking credit more aggressively, you could be penalized by FICO 10 T, because this kind of behavior indicates a higher risk of you defaulting in the future.
On the other hand, if you have been managing your credit well and your debt levels have been decreasing over the past two years, you will be rewarded for that behavior.
Personal loans from online lenders have exploded in popularity, but it’s best to avoid them if you want to get a high FICO 10 credit score.
Personal Loans Will Be Penalized
The vice president of scores and analytics at FICO, Joanne Gaskin, has said that the most significant change to the scoring algorithm is the way it treats personal loans.
Personal loans are growing faster than any other type of consumer debt, even credit cards. Consumers are turning to personal loans to consolidate credit card debt more frequently than in the past, and the proliferation of financial technology companies has made personal loans easier to qualify for and more accessible.
With older FICO models, personal loans are treated the same as any other installment loan. Since the balances of installment accounts don’t affect credit scores as much as the utilization ratios of your revolving accounts, with most scoring models, taking out a personal loan to consolidate credit card debt (essentially converting revolving debt into installment debt) would benefit a consumer’s credit score.
However, many consumers who take out personal loans to pay off revolving debt don’t change the spending habits that got them into debt in the first place. Consequently, after getting a personal loan and paying down their credit cards, they may run up their cards again and find themselves even deeper in debt.
According to FICO, the credit risk of such consumers is higher than you would think based on their credit scores using previous FICO models. To account for this, FICO 10 is treating personal loans as their own category of credit accounts and is potentially penalizing consumers for taking out personal loans.
With FICO 10 T, recent missed payments will matter even more than they already do with other FICO score versions.
Therefore, with FICO 10, the strategy of consolidating credit card debt with a personal loan might not help your credit score as much as you hope and might even hurt it. However, the negative impact of taking out a personal loan can be mitigated by steadily working to reduce your overall debt level.
On the other hand, if your overall debt load stays the same or continues to increase after you take out a personal loan, that could hurt your credit score because it shows lenders that you are getting deeper into debt and not managing your credit well.
Recent Missed Payments Will Be Penalized More Heavily
Payment history has always been the most important part of a FICO credit score, but it is even more important with FICO 10 T, the trended data score.
Using historical data, it can assign late and missed payments even more weight based on your behavior in the past 24 months. For example, if you’ve been getting progressively farther behind on payments over time, the negative impact on your credit score could be even greater than it would with a previous FICO score.
If you have delinquencies that are at least a year old, though, then those older negative marks on your credit report won’t hurt your score as much, according to MSN.
How Will the FICO 10 Scoring Model Affect Credit Scores?
Overall, it is predicted that the new FICO 10 scoring models will have a polarizing effect on consumers’ credit scores, which means that some consumers who have bad credit scores may see them drop even further, while those who have good credit scores because they are on the right track may be rewarded with even higher scores.
40 million consumers are likely to experience a credit score drop of 20 or more points with FICO 10 compared to previous models. This could push some consumers over the edge into a lower credit rating category.
FICO has estimated that approximately 100 million consumers will probably experience minor changes of less than 20 points to their scores. The company also estimates that about 40 million consumers will see their credit scores drop by 20 or more points, while another 40 million could see their scores increase by the same amount.
You are likely to see a credit score drop if you took out a personal loan to consolidate debt but then kept accruing more debt instead of paying it off, or if you have credit card debt that you are not paying down.
You are most likely to see a credit score increase if you have been penalized for having high balances from time to time, since the temporal data from FICO 10 T will help to average out the peaks in your utilization rate.
While a decrease of 20 points in your credit score isn’t catastrophic, it could be enough to make a difference in your chances of being approved for credit or the interest rates you could qualify for. This is especially true for those whose credit scores sit near the lower border of a credit score category.
For example, if someone with a credit score of 595 with FICO 8 is considered to have fair credit. If FICO 10 gave them a credit score that is 20 points lower, their credit score would be 575, which is considered bad credit. That could very well make or break your chances of getting approved for a loan or a credit card.
On the other hand, the inverse is true for those who stand to gain 20 points. If a 20 point increase pushes a consumer over the edge from fair credit to good credit, for example, this could certainly be beneficial when applying for credit.
It’s estimated that 80 million consumers will see a significant change in their credit scores with FICO 10, which may move them into different credit score ranges.
Less Severe Score Fluctuations
As you may recall from How to Choose a Tradeline, the more data there is contributing to an average, the more difficult it is to affect that average.
Since FICO 10 T looks at your credit utilization for an extended period of time instead of just the current month, it is likely that your credit score will not change as drastically from month to month based on your utilization ratios at the time.
In other words, your utilization data from the past 24 to 30 months will have a stabilizing effect on your score that will protect it from being heavily penalized if you occasionally have high balances. For example, if you spend extra on your credit cards in December to prepare for the holidays, your score that month won’t be hurt as much as it would without the trended data (as long as you pay it off quickly).
Greater Emphasis on Trends and Recent Data
FICO 10 T will especially reward consumers who have a trend of improving their credit over time.
The inclusion of trended data with FICO Score 10 T and extra emphasis on recent data means that your credit score is not based solely on what your accounts look like today, but instead, it will give more importance to whether your credit is getting better or getting worse.
Hypothetically, it’s possible that two consumers with the same amount of debt and derogatory items could have different credit scores based on the trend in their debt levels.
If one consumer has $10,000 of credit card debt, but they have been making progress on paying that down from a starting point of $20,000 of debt, then their credit score would be helped by FICO 10 T because their debt level is demonstrating a trend of improvement over time.
If the other consumer also has $10,000 of credit card debt, but they used to only have $1,000 of revolving debt, that trend shows that they are getting deeper into debt, and their FICO 10 score would be hurt by that pattern of increasing debt.
A Polarizing Effect on Credit Scores
One of the major effects of FICO 10 is that it is likely going to polarize the pool of consumers’ credit scores. In other words, those near the top of the credit score range will get even higher, while those with low credit scores will sink even lower along the scale.
According to CNBC, consumers with scores of lower than 600 will experience the largest reductions in their credit scores with FICO 10. Those with scores of 670 and above could possibly gain up to 20 points.
This creates a distribution of credit scores that is more concentrated at the two extremes, as opposed to most consumers’ credit scores being concentrated around the average.
Unfortunately, that means the negative effects of the new FICO scores will disproportionately impact consumers who are already struggling with debt. This will make it even harder for consumers to get out of debt and may force them to seek out costly, predatory loans, which only accelerates the downward spiral of debt.
This perpetuation of inequality in the credit scoring system is not new, but it seems that FICO 10 will only serve to increase credit inequality rather than improve it.
Ultimately, FICO’s clients are the banks, and their products are designed to give banks the upper hand, not consumers.
When Will the New FICO Score Be Rolled Out?
By widening the divide between consumers with good credit and those with bad credit, it seems that FICO 10 will exacerbate credit inequality.
According to FICO, the FICO Score 10 Suite of products will be available in the summer of 2020. The vice president of scores and predictive analytics at FICO, Dave Shellenberger, told The Balance that Equifax will be adopting the new score shortly thereafter.
As to when lenders will actually start to use the new credit scoring system, that is a different question.
Lenders Are Slow to Adapt to New Credit Scoring Systems
The financial industry adapts very slowly to systemic changes. As we discussed in “Do Tradelines Still Work in 2020?”, there are many, many different versions of FICO, and the majority of lenders are still using versions of the score that are years or even decades old.
Before FICO 10, the latest version had been FICO 9, which has largely gone unused by lenders.
FICO 8 is the credit scoring model that is currently being used by the three major credit bureaus and it is also the most widely used model among lenders today. FICO 8 debuted in 2009, which means it has now been around for over a decade.
There are certain industries that rely heavily on FICO score versions that are even older than FICO 8. In the mortgage industry, the most popular FICO scores are versions 2, 4, and 5, the earliest of which debuted in the early 1990s. Auto lenders may use FICO scores 2, 4, 5, or 8, while credit card issuers use models 2, 3, 4, 5, and 8.
Furthermore, many industries and even some large lenders have their own proprietary FICO scoring models which have been customized for that particular institution and the consumer base they serve.
Lenders have amassed huge troves of data based on a specific credit scoring model. Having reliable data is crucial to minimizing risk during the underwriting process. If lenders were to change to a new scoring model, all of the credit scoring information they have collected so far would no longer be applicable, since it was calculated using a different algorithm.
It is likely that the FICO 10 T score will take longer to implement than the basic FICO 10 score because FICO 10 T will require businesses to train employees to use a new set of reason codes.
They would essentially be starting from scratch, which would mean taking on more risk until they have tested the new model for long enough to understand how it works for their businesses. Because of this, lenders are often reluctant to upgrade to a newer scoring model and slow to implement it.
Therefore, we can make an educated guess that it will most likely take at least a few years for FICO 10 to gain traction with lenders on a large scale. According to Shellenberger of FICO, it may take “up to two years” before lenders start using the new model, although based on past examples, it seems likely that it could take a lot longer than that.
FICO 10 T Will Be More Challenging for Lenders to Adopt
According to FICO, the standard FICO 10 score uses the same “reason codes” as older FICO scores. Reason codes, also referred to as “adverse action codes,” are the codes that lenders must provide if they have rejected your application for credit based on information from your credit report. These codes usually consist of a number and a brief statement of something that is impacting your score in a negative way, such as revolving account balances that are too high compared to your revolving credit limit.
Because FICO 10 shares the same reason codes with previous versions of FICO scores, this means it will be compatible with lenders’ current systems, at least with regard to reason codes.
In contrast, FICO 10 T comes with a new set of reason codes, which means it will be a more extensive undertaking for banks to implement the new score and train employees on how to use it.
For this reason, it seems likely that the basic version FICO 10 may see widespread use among lenders before FICO 10 T does.
How to Get a Good FICO 10 Credit Score
Although some significant changes have been made to the FICO 10 credit scoring products, the overall principles of managing credit remain the same. Most importantly, make all of your payments on time, every time, and try to keep your credit utilization low.
However, there are a few specific points to keep in mind if you want to get a good credit score with FICO 10.
Think twice about taking out a personal loan
Since personal loans will be more heavily penalized with FICO 10 scores, you’ll want to avoid taking out a personal loan unless it’s absolutely necessary. Instead of relying on personal loans to support your spending, try to save up for large purchases in advance, and start funneling some cash from each paycheck into an emergency fund in case you run into financial hardship.
If you do end up needing to use a personal loan, try to pay it down as quickly as you can. In addition, don’t run up the balances on your revolving accounts again, because the FICO 10 T algorithm does not reward this behavior, and your credit score will reflect that.
Consider setting up automatic payments for all of your accounts so that you never accidentally miss a payment.
Never miss a payment
Avoiding late or missed payments is of the utmost importance with any credit score, but it is even more important with the new FICO scoring system. Late and missed payments may be assigned more weight based on your recent credit history, especially missed payments that occurred within the past two years.
To avoid missing any payments, set up all of your accounts to automatically deduct at least the minimum payment from your bank account before your due date each month. Also, it’s a good idea to get into the habit of checking your accounts regularly to make sure there haven’t been any errors or issues with processing your automatic payments.
If you do accidentally miss a payment, pay the bill as soon as you notice and consider asking your lender to waive the late fee. If you manage to catch up before 30 days have gone by, then you can avoid getting a derogatory item added to your credit report.
In the event that you find yourself with a 30-day late (or worse) on your credit report, then you will need to be extra vigilant about making payments on time for at least the next one to two years if you want your score to recover.
Pay off your credit cards in full every month
Paying off your credit cards in full is always a good idea in general because that way, you can avoid wasting money on interest fees. In addition, paying off your full balance each month prevents your credit utilization from increasing from month to month, as opposed to carrying over a balance and then adding more to it each month.
With trended data playing a large role in your FICO 10 T score, consistency is key, and paying your bills in full every time will help boost your score.
If you want to get a good credit score with FICO 10 and FICO 10 T, try to keep your revolving debt low by paying off your credit cards in full every month.
Lower your credit utilization ratios
With FICO 10 T, it will be more important than ever to be vigilant about maintaining a low credit utilization ratio. Since the trended scoring model accounts for patterns in your credit utilization over the past 24 months, it won’t be so easy to get away with maxing out your credit cards one month and then quickly paying the balance down to improve your score again the next month.
High credit utilization at any point in the past two years could be factored into your credit score, especially if your utilization has been increasing over time.
For this reason, if your credit is being scored with the FICO 10 T model, you’ll get the best results if your credit utilization has been consistently low or if it has shown a pattern of decreasing over time.
However, just because you pay off your credit card in full every month doesn’t mean it will report a zero balance. The balance that reports to the credit bureaus is the balance that you have at the end of your statement period. If your balance happens to be high on that date, then it could negatively affect your score, even if you pay off the balance soon after.
One way to get around this is to pre-pay your credit card bill before your due date and your statement closing date. That way, the balance will be low when the card reports to the credit bureaus, which is better for your credit score.
Another helpful credit hack is to spread out multiple smaller payments throughout the month so that the balance never climbs too high to begin with.
Requesting a credit line increase can be an easy way to improve your utilization rate, but this method should be used with caution if you think it might encourage you to rack up more debt.
Increase your credit limit
One way to easily lower your utilization rate is to increase your credit limit. Spending $1,000 on a card with a credit limit of $5,000 is a lot better than spending the same amount on a card with a credit limit of $2,000.
Increasing your credit limit might be easier than you think. It could be as simple as calling up your card issuer on the phone or applying for a credit line increase online. Most people who ask for a higher credit limit get approved, according to creditcards.com.
However, this strategy is not encouraged for consumers who may be tempted by the higher credit limit to spend even more on the card.
For tips on how to get a larger credit limit, as well as some pitfalls to watch out for before requesting an increase, check out “How to Increase Your Credit Limit.”
Work to improve your credit health over time
With FICO score 10 T including more information about your credit history over the past 24 months, it will be important to demonstrate an improvement in your credit over time. Consumers who have been working to manage their credit responsibly and who have reduced their amount of revolving debt over time will be rewarded.
On the other hand, those whose credit health has been declining due to increasing debt levels or a series of missed payments will see their credit scores take a dive.
Will the New FICO 10 Score Affect the Tradeline Industry?
First, remember that it’s likely that it’s going to take at least a few years for FICO 10 to be widely adopted by lenders (if lenders choose to use it in the first place, which they may not), which means that nothing is changing for the tradeline industry in the near future.
Secondly, many lenders may choose to adopt only FICO 10 and not FICO 10 T because it will be technically easier to implement. For lenders using FICO 10 without the trended data, there is no change to how authorized user tradelines work.
However, things get more interesting when considering the impact of FICO 10 T on buyers and sellers of tradelines. Until FICO 10 T is adopted by major lenders, we can only speculate as to the changes that will result, but here is one possibility.
What If FICO 10 T Reveals a Tradeline’s Balance History?
One concern that consumers may have is that FICO 10 T will expose a tradeline’s previous high balance if it had one at any point during the past 24 to 30 months. That may be true, but we also know that FICO 10 T places a lot of importance not just on the numbers themselves, but on how they change over time.
All of the tradelines on our tradeline list are guaranteed to have a utilization ratio of 15% or lower. If a tradeline had a higher balance at some point in the past two years or so, then it would show a trend of the balance decreasing, since the balance would have been brought down to under 15% in order to participate in the tradeline program.
FICO 10 T rewards downward trends in utilization, so it seems that authorized user tradelines would still provide value even if higher balances can be seen in the past.
If a tradeline has not had a high balance in the past two years, then that means it will show a pattern of consistently low utilization, which is also beneficial.
Conclusion: What Does the New FICO 10 Credit Score Mean for Consumers?
A lot of speculation and bold claims have been circulating about the new FICO scores, FICO 10 and FICO 10 T. Naturally, consumers and tradeline sellers alike are concerned with the question of how these new scores might affect authorized user tradelines.
It is true that FICO has made some significant changes to their latest credit scoring model, and it’s also likely that some consumers may experience marked increases or decreases in their credit scores compared to previous FICO scoring models. Fortunately, however, there is no need to panic.
Follow the general guidelines of good credit to get a high score with any credit scoring model.
First, let’s remember that FICO 10 is not in use yet, and it’s probably going to take a few years or more for the majority of lenders to adopt it. In addition, the scoring model that people are most concerned about, FICO 10 T, will take even longer than FICO 10 to reach mainstream popularity since it requires lenders to learn how to start using a new set of reason codes.
For this reason, consumers do not need to worry about lenders seeing the past two years of their credit histories just yet. However, knowing that widespread use of trended data may be on the horizon, you may want to start preparing your credit now. That way, when trended data credit scores become more popular, your credit will be strong and ready to withstand the changes.
To achieve a high credit score with FICO 10 and FICO 10 T, avoid taking out personal loans if you can, as they will be penalized more heavily than in the past. It’s also important to demonstrate either an improvement in your credit over time or consistently good credit habits, which will be rewarded.
Aside from these special considerations, FICO 10 and FICO 10 T still rely primarily on the same credit score factors you are already familiar with: payment history, credit utilization, length of credit history, credit mix, and new credit. While the peripheral details of different scoring models may vary, the core components always remain the same.
Ultimately, if you work on developing good credit practices in these general areas, your credit will be in great shape no matter which scoring model is used.
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.
26 million consumers in America have no credit record whatsoever. On top of that, there are an additional 19 million consumers who do have credit files, but they do not contain sufficient credit information to be scored by a widely available credit scoring model. These consumers—in total making up nearly one in five American adults—are the “credit invisibles” and “credit unscorables.”
The FCRA entitles you to review your credit file from each of the three main credit bureaus for free once every 12 months. You can do one check every four months from each of the three — Equifax, Experian and TransUnion — if you really want to be on top of it.
FICO, the company behind the creation of the original FICO credit score and its many subsequent iterations, has announced the latest model in their line of credit scoring algorithms: the FICO Score 10 and the FICO Score 10 T. The “T” in the latter scoring model stands for “trended,” which reflects the incorporation of trended data over time into the algorithm.
Balance transfers are a somewhat controversial topic in the world of 
