Credit Scoring

Stop - You Should Never Pay to Be Added to a Tradeline

The desire to earn better credit is not only understandable, it is also incredibly smart. The condition of your credit will have a big influence over your financial life.

Want to purchase a home or vehicle? Your 3 credit reports and scores play a big role in your ability to qualify for a loan and help determine the rate you will be offered if you are approved. Applying for a new job or promotion? Your credit reports might play a role again. In fact, the condition of your credit could be considered whenever you take out insurance coverage, open a new mobile phone account, and in many more situations than you probably ever believed possible.

Hopefully you already understand the importance of earning good credit and you are working to try to repair the damage from any past credit problems you may have encountered. Yet the truth is that the road back to healthier credit is not always a quick journey.

You can certainly do things to potentially help speed the process along such as establishing new, positive accounts and monitoring your three credit reports and scores closely. Even so, it may require a little patience and discipline on your part before you can expect to earn good credit again.

Tradeline Rentals

Because credit is so important and because improving your credit can sometimes be a slow and tedious process, you may find yourself tempted to take a few shortcuts along the way. The temptation is understandable, but taking shortcuts to try to improve your credit can actually be quite dangerous.

One such shortcut which you should avoid at all costs is known as tradeline renting.

There is no question that being added onto someone else's credit card account as an authorized user has the potential to help your credit scores. If a loved one adds you onto an existing, well managed credit card account (no late payments, low or $0 balance) the impact upon your personal credit scores might be very positive, once the account shows up on your credit reports. If the account has been opened for a while (aka it is "seasoned") and if the credit limit on the account is high then the positive credit score impact might be even more significant.

There is certainly nothing wrong with being added as an authorized user onto a credit card belonging to a friend or family member. As already mentioned, the authorized user strategy can potentially be a very effective step toward building or rebuilding your credit. If you are considering gaming the system by renting or "piggyback" on a stranger's credit card account as an authorized user, however, you could possibly find yourself in hot water, legally speaking.

The Danger of the Tradeline Rental Scam

The tradeline renting scam comes in a few different flavors. Typically it is a service which is facilitated by a broker or a middle man who, for a sizeable fee, will connect you with a stranger who has older or seasoned credit card accounts which are in good standing. Once you pay your fee, the stranger adds you onto their credit card account as an authorized user. The middle man pays the stranger with good credit a small portion of the fee collected from you and then puts the remainder in his own pocket.

It is arguable whether or not the practice itself of paying a stranger to add you as an authorized user is illegal. Some think yes, others think no. However, if you apply for any new loans after paying to be added to a stranger's credit card account then there is no question that you could run the risk of being charged with bank fraud. (Plus if you applied for your new loan over the phone or via mail, you may risk being charged with mail fraud or wire fraud to boot.)

Additionally, FICO's newer credit scoring systems have logic designed to detect piggybacking scams. As a result, even if you pay to be added onto a stranger's account, you might receive no benefit from the tradeline whenever a lender pulls your credit scores. With so many legitimate means of repairing poor credit, it simply is not worth the risk of renting a tradeline in an attempt to speed up the process.



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About the Author: Michelle Black is an author and leading credit expert with over a decade and a half of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter and Instagram.

What Is Revolving Utilization and Why Is It So Important to Your Credit Scores?

If you want to have great credit scores then pay your bills on time every month. The previous statement is great advice; however, it is incomplete. Simply paying your bills on time is not enough to achieve and maintain great credit scores. In fact, only 35% of your FICO credit scores are based upon your payment history. The other 65% of your FICO scores have nothing at all to do with how timely you pay your bills.

30% of your FICO credit scores, plus a significant portion of your VantageScore credit scores, are calculated based upon information found in the "Amounts Owed" category of your credit reports. The primary factors considered within this category are largely based upon those little pieces of plastic you carry around in your wallet: your credit cards.

What Is Revolving Utilization?

Revolving utilization is a term used within the credit world to describe how much or rather what percentage of your credit card limits are being used. Your revolving utilization ratio is also known as your debt-to-limit ratio or your credit utilization ratio. It measures how much of your credit limits are in use on each of your credit card accounts and expresses that calculation as a percentage. Here is a quick look at how revolving utilization is calculated.

Credit Limit: $5,000
Balance: $3,500
Revolving Utilization: Balance ($3,500) Divided by Limit ($5,000) = Revolving Utilization (70%)

Why Is Revolving Utilization Considered in Your Credit Scores?

Your revolving utilization is an important consideration in your credit scores for one very simple and important reason: it is statistically predictive of higher credit risk. When you carry outstanding credit card debt on your credit reports you represent a higher credit risk than someone whose reports show paid off credit card balances.

All debt is not created equal. When you take out a mortgage loan or an auto loan, for example, you are opening an installment account. Credit cards, by comparison, are revolving accounts. Installment debt is much less risky for lenders to extend because the debt is generally secured by some sort of collateral (aka your house or your vehicle) which the lender can seize and resell in the event you stop making your payments. However, credit card debt is different.

Because of the nature of credit card debt, it is much more predictive of increased credit risk than installment debt. Think about it. If you begin to struggle financially due to an illness, divorce, job loss, or even poor financial management habits like overspending, which is the first obligation you will probably allow to slide in the event that you have more bills than money at the end of the month? Most likely you will not skip your mortgage payment, your rent, or your auto loan payment if you can help it. Credit card payments, however, are much more commonly skipped in the event of a financial shortage.

Additionally, increased credit card balances might indicate that a financial problem is looming. If a consumer loses his job then it is very common to rely upon credit cards to help finance every day expenses until a new source of income can be secured. As you can easily see, if your reports show that you are revolving balances on your credit cards from month to month, especially high balances when compared with your credit limits, it might make you appear to be a higher credit risk in the eyes of a lender.

The Good News

Although revolving unpaid credit card debt on your credit reports from month to month will almost certainly lower your credit scores, you can currently regain those lost points rather quickly, as soon as you start to eliminate the debt. The other goods news is that the score increase you may be eligible to earn from paying down your credit card balances and lowering your credit utilization can be earned incrementally (instead of an "all or nothing" scenario). In other words, as you pay down your credit card balances little by little you should begin to experience small credit score increases. You do not have to pay a credit card balance all the way down to zero on your credit reports before you can hope to receive a score boost.


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About the Author: Michelle Black is an author and leading credit expert with over a decade and a half of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter and Instagram.


The Difference Between Hard Inquiries and Soft Inquiries

Credit scores, like FICO and Vantage Scores, are based upon a variety of factors. For FICO scores the factors which make up an individual's credit scores fall into 5 categories. The least influential categories, Mix of Credit and Inquiries, each account for 10% of a consumer's credit scores.

While 10% may seem like a small percentage, and it is small in the grand scheme of your credit scores, it is not an insignificant number of points. FICO credit scores range from 300 - 850. That's a total of 550 points that any given consumer has the opportunity to earn for her credit scores. Since the Inquiry Category accounts for 10% of those points there could be a potential 55 points up for grabs (depending upon the score card being used to determine the consumer's scores).

Why Inquiries Appear on Credit Reports

Whenever anyone requests to see a copy of your credit report a record known as an inquiry is placed on your credit report. In fact, most consumers do not realize that the reason that the credit bureaus place inquiries (aka records of credit pulls) on their credit reports is due to the fact that the Fair Credit Reporting Act [FCRA 15 USC Sec. 1681g(a)(3)(A)] requires the credit bureaus to record whenever a consumer's credit report is accessed for a period of at least 1-2 years, based upon the type of inquiry. In an effort to comply with the FCRA the credit bureaus have made a blanket policy that all inquiries will remain on a consumer's credit report for 2 years.

Hard Inquiries

Credit inquiries can be sorted into one of two categories - those that may have the ability to negatively impact a consumer's credit scores and those which do not have the ability to negatively impact a consumer's scores. Inquires which have the potential to cause credit score damage are known as "hard" inquiries. Not all hard inquiries will automatically cause credit score damage and, in special circumstances, numerous hard inquiries might be counted as only "1" inquiry for credit scoring purposes. Below are some examples of hard credit inquiries.

  • Credit Card Applications

  • Mortgage Applications

  • Auto Loan Applications

  • Collection Agency Skip-Tracing

  • HELOC (Home Equity Line of Credit) Applications

Soft Inquiries

Inquiries referred to as "soft" are treated differently by credit scoring models than "hard" inquiries. Soft inquiries are still able to remain on consumer credit reports for 2 years; however, soft inquiries do not have any impact upon credit scores whatsoever. They will not help nor hurt a consumer's credit scores. Here are some examples of soft credit inquiries.

  • Checking Your Own Credit Reports

  • Promotional Inquiries (Think pre-approved credit card offers)

  • Your Current Lenders Checking Your Credit Reports

Inquiries and Your Credit Scores

Consumers often find it frustrating to learn that certain inquiries have the ability to negatively impact their credit scores. The reason that hard inquiries may lower your credit scores is because inquiries can be a reliable indicator of credit risk. In other words, when FICO reviews credit reports samples it finds a trend which demonstrates that people who apply for a lot of credit in a short amount of time are more likely to pay their bills late. People who apply for credit less often are less likely to pay their bills late. Therefore, people with fewer hard inquiries are usually rewarded with higher credit scores.  

About the Author: Michelle Black is an author and leading credit expert with over a decade and a half of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter and Instagram.

How Do I Know When Something Has Been On My Credit Report for Too Long?

Overcoming past credit problems can sometimes be a long, tedious process (especially if you are going it alone without professional assistance). However, thankfully there is a strict time limit regarding how long past credit mistakes are allowed to haunt your credit reports. In other words, most negative credit information is not allowed to remain on a consumer's credit report forever.

What Determines When Items Are Removed from Credit Reports?

The Fair Credit Reporting Act (FCRA) provides set-in-stone guidelines to the credit reporting agencies - Equifax, Trans Union, and Experian - which instructs them when an item must be removed from a credit report. That date is known by a couple of different names: the "FCRA compliance date" and/or the "purge date." Depending upon the type of credit item in question, the purge date will be different. However, the credit reporting agencies (CRAs) always rely on the information provided to them from data furnishers - aka your creditors - in order to determine the date when an item should be purged from your credit report. (The exception to this rule is in the case of public records where the credit reporting agencies proactively seek out this information and no "data furnisher" is involved.)

As mentioned above, the time frame for removal varies depending upon the type of credit report item in question. Due to the difference in purge date timelines, the subject of when an item should be removed from a credit report creates a lot of confusion amongst consumers, and even among many professionals as well. Check out this handy guide if you need help determining when an item should be purged from your credit reports.

2 Years

Inquiries - After a period of 2 years, inquiries are removed from your credit report by the credit reporting agencies (CRAs). The FCRA [15 USC Sec. 1681g] (a)(3)(A) requires that the CRAs maintain a record of employment inquiries for a minimum of 2 years and other inquiries for a period of 1 year. As a policy the CRAs maintain most inquiries, regardless of their purpose, for 2 years.

7 Years

Charge-Offs - These accounts must be purged from your credit report after 7 years from the date of the charge-off.  

Judgments - After 7 years from the filing date a judgment is required to be purged from your credit reports. However, creditors do have the option to try to re-file the judgment and, if the re-filing is granted, the judgment could remain on your credit report for an additional 7 years.

Repossessions and Foreclosures - The purge date for repossessions is 7 years from the date of the original terminal delinquency (when the account became 6 months past due without being brought current again) on the original loan.

Collections - Collection accounts are required to be purged from your credit reports after a period of 7 years from the date of default on the original account. Collection agencies are not legally permitted to tamper with the purge date in any way. This practice is known as "re-aging" and is prohibited under the FCRA.

Released Tax Liens - Tax liens which have been paid and released must be purged from your credit reports after a period of 7 years from the date of release.

Chapter 13 Bankruptcy - The purge date for a chapter 13 bankruptcy is 7 years from the date the bankruptcy is discharged. However, as it can take several years for a repayment plan to be completed, the maximum amount of time a chapter 13 bankruptcy is allowed to remain on a credit report is 10 years from the date of filing, even if 7 years from the date of discharge has not yet passed.

10 Years

Chapter 7 and 11 Bankruptcies - Chapter 7 and 11 bankruptcies must be purged from your credit report 10 years after the filing date.

Non-Discharged and Dismissed Bankruptcies - These 2 categories of bankruptcies are also required to be purged from your credit reports after 10 years from the filing date has passed. 

Never

Federal Student Loans - The FCRA does not govern how long negative student loan account information is allowed to remain on your credit reports. Instead, federal student loan credit reporting is governed by the Higher Education Act. Unpaid federal student loans are not required to be removed from your credit report...EVER.

Unpaid Tax Liens - There is no purge date associated with unpaid tax liens. In other words, unless you pay a tax lien it can remain on your credit reports, damaging your credit scores forever.

Immediately

Withdrawn Federal Tax Liens - If you have paid a federal tax lien or entered into an arrangement to pay a lien in full then you may be eligible to receive a withdrawal of the lien under the IRS Fresh Start Program. Currently the credit reporting agencies do not report withdrawn tax liens on consumer credit reports so if you dispute a withdrawn lien and include proof of the withdrawal the lien can be removed from your credit reports immediately.

What to Do about Re-Aging

If an account is currently showing up on any of your credit reports which is past its purge date, then you may have been the victim of re-aging. Re-aging occurs when a data furnisher (usually a collection agency) either accidentally or purposely reports an incorrect purge date to the credit reporting agencies. Re-aging can be disputed with the credit reporting agencies directly and it is very helpful if you can provide proof as well.

About the Author: Michelle Black is an author and leading credit expert with over a decade and a half of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter and Instagram.

The Ideal Credit Card Balance to Optimize Credit Scores

As a reader of the GreatCredit101 Blog you already know that credit cards can be a very powerful tool - when used properly - to help drive your credit scores upwards. A credit card with a $0 or very low balance can potentially help to give your credit scores a substantial boost. However, many consumers and even professionals within the mortgage and real estate industries are often confused regarding the best possible balance a consumer can carry on their credit cards. Let's take a look at the truth.

FICO rewards consumers (with points added to their credit scores) when the consumer has a 0% utilization ratio on a credit card or, in laymen's terms, a $0 balance. However, FICO rewards consumers just a little bit more when they have a 1% utilization ratio. What does a 1% utilization ratio look like? Here are a few examples:

1. On a credit card with a $300 credit limit a balance of $3 = a 1% utilization ratio. 2. On a credit card with a $500 credit limit a balance of $5 = a 1% utilization ratio. 3. On a credit card with a $1,000 credit limit a balance of $10 = a 1% utilization ratio.

This means that if a consumer has a credit limit of only $300 and they are carrying a $10 balance then the consumer is above the 1% utilization ratio and, therefore, is not receiving the full potential score benefit from that card. In fact, the consumer is losing some of the points that he or she would receive if the same card had a $0 balance. However, on a credit card with a $1,000 credit limit then carrying a $10 balance is a good idea in order to receive the maximum points available. Don't look at a zero balance as a bad thing. It is awesome. But, a 1% balance on a credit card is one rung higher on the awesome scale.  

Another factor to consider is how difficult it is to actually have a precise 1% balance show up on a consumer's credit report vs. a $0 balance. Let me give you another example. Joe Consumer wants to boost his credit scores as much as possible before applying for an upcoming mortgage loan. Joe has a VISA with a $300 limit. Joe knows that 1% credit card utilization ($3 on his $300 VISA) can help to improve his scores. So Joe goes to his local mall on July 1st and charges $50 on his VISA. Unbeknownst to Joe, VISA reports the $50 balance on July 3rd. On July 5th Joe pays the $50 balance down to $3 which equals a 1% utilization ratio on his VISA card. However, on July 10th when Joe's loan officer pulls his credit report the balance on his VISA is being reported as $50 NOT $3. Joe's limit of $3 will not be reported to the credit bureaus by VISA until August 3rd (assuming that Joe does not use the card for any additional purchases in the meantime). Because Joe's VISA is at a $50 balance, which is a little over a 16% credit utilization ratio, Joe lost potential points that he could have gained with a $0 limit.

Therefore, my recommendation in most cases is still that a $o balance on a credit card is the best way to go to help boost credit scores. If you have time to play around with your balance for at least 60 days prior to a loan to try to reach the perfect 1% credit card utilization ratio - go for it! Never turn down extra potential points. However, if you know that you are going to be applying for a large auto loan or mortgage within the next 45 days then your best bet is to keep a $0 balance. Either way you go - $0 balance or 1% credit utilization ratio - you will be showing the credit bureaus that you are a good credit risk. While you have the right to fully utilize the entire credit limit on your credit card accounts you are choosing to exercise discipline and financial restraint. In other words, you are not maxing out your credit cards each time the shoe store comes out with its hottest new releases. Showing the credit bureaus that you have this discipline and restraint can result in a reward - extra points for your credit scores!

Have credit card debt that you need to consolidate? CLICK HERE to compare consolidation options.

About the Author:

About the Author: Michelle Black is an author and leading credit expert with over a decade and a half of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter and Instagram.

Incorrect Personal Data on Credit Report

Errors occur on credit reports. This is a fact, and it's not really breaking news to anyone at this point either. In fact, the Federal Trade Commission released a study in 2013 which suggests that somewhere between 20 million and 42 million consumers have errors on their credit reports (depending upon the FTC's variable definition of an error).

Consumers have the right to accurate credit reports, a right which is afforded to them under the Fair Credit Reporting Act (FCRA). According to the FCRA, any information which is included on a consumer's credit report needs to be error-free and this includes the personal data which is listed on a consumer's credit report as well.

The Personal Data Section

Not only do credit reports contain information regarding your debts, they also contain a large amount of your personal information as well. The personal data section of a consumer's credit report contains information such as the consumer's name, her aliases (AKAs), her maiden name, her social security number, her date of birth, her address, her previous addresses, and her employer.

Personal data is often referred to as "cosmetic" credit report information. Yes, the information is listed on a consumer's credit report, but it has no influence on a consumer's credit scores. The reason why personal data is not used to calculate credit scores is because it is inconsistent (often provided by the consumer on credit applications) and is not a reliable indicator of credit risk.

How to Check for Personal Data Errors

Thanks to the Fair and Accurate Credit Transactions Act (FACTA) which amended the FCRA in 2003, consumers have the right to access a free copy of their 3 credit reports every year via www.annualcreditreport.com. The best way to ensure that your credit reports remain error free is to check your credit reports regularly. Ultimately, it is up to the consumer and no one else to verify that the information appearing upon her credit reports remains accurate.

NOTE: Consumers do not have free annual access to their credit scores thanks to FACTA. That is a myth. If you wish to pull your credit scores online it is best to compare the different credit score offers ahead of time. CLICK HERE to check out some great credit score and credit monitoring reviews.

Why Incorrect Personal Data Can Be Problematic

As mentioned above, credit report errors in the personal data section of a consumer's credit report are cosmetic. These errors will not help or harm a consumer's credit scores. However, that does not mean that incorrect personal data errors should be ignored. In fact, personal data errors could indicate the possibility of attempted (or successful) identity theft. Furthermore, mistakes in the personal data section of a consumer's credit report could also indicate the possibility of more serious credit errors made by the credit bureaus themselves or by a creditor (or creditors) reporting the data.

How to Correct Incorrect Personal Data

Thanks to the Fair Credit Reporting Act (FCRA), consumers have the right to dispute any information on their credit reports which is believed to be inaccurate. Whether the information is cosmetic or otherwise, if it is listed on a consumer's credit report then it is required to be accurate. When disputing inaccurate personal information (i.e. incorrect name spellings, incorrect dates of birth, incorrect social security numbers, etc.) it is helpful to provide supporting documentation to help prove how the information in question should be reported. As with any other type of dispute, the credit bureaus are required to complete their investigation within 30 days or less in most cases.

About the Author: Michelle Black is an author and leading credit expert with over a decade and a half of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter and Instagram.