Credit Cards

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.

Credit Cards: Evil Traps or Useful Tools?

Your credit scores are arguably the most important numbers in your life. After all, credit has an impact upon you when you apply for a mortgage, try to finance a vehicle, open a new utility account, and credit may even impact you when you apply for new insurance policy. In fact, building healthy credit scores is so important that you should consider it to be one of your top wealth building priorities. Building healthy credit scores is right up there on the financial importance scale with becoming debt free and saving for retirement.

In order to establish healthy credit scores, you have to prove to the credit bureaus that you can manage credit responsibly. One of the best ways to prove that you can manage credit responsibly is to open credit card accounts. However, for many people it can be very intimidating to have open credit cards. If you have ever made credit mistakes in the past or if you have ever overextended yourself financially and found yourself underneath a crushing load of debt then it is understandable why you may be a little gun shy where credit cards are concerned.

It can be very tempting to avoid credit cards all together if you have ever made credit card management mistakes in the past. Unfortunately, avoiding credit cards is likely to have negative repercussions where your credit scores are concerned. What you need to remember is that credit cards themselves are not evil. A properly managed credit card offers customers a lot of great benefits. Here are a couple of the best ones:

1. Fraud protection – If someone steals your cash, you have no reliable way to get your money back. If someone steals your debit card, your personal money is at risk rather than the bank’s money. If someone steals your credit card then the bank’s money is at risk, not your own.

2. Credit Building Possibilities – If you keep a $0 or very low balance on your credit cards and you always make your payments on time then you have the potential to receive a great increase in your credit scores. The longer you manage your credit cards correctly, the better the impact to your credit scores.

Those who are determined to live a “plastic-free” life with a cash only payment mentality will wind up paying more money in the long run than those who have credit cards but manage them properly. Remember, credit cards are not evil or bad. Racking up a ton of credit card debt by overusing your credit cards is bad, but can easily be avoided if you manage your credit cards properly.

Properly managed credit cards can be a powerful tool to help to build your credit scores. An individual with no credit scores (or low credit scores) will likely pay more for car insurance, home insurance, and utility deposits. Plus, while it would be nice to pay cash for a house, most of us have to take out a mortgage to purchase one. Without good credit scores you can expect to either be turned down for a mortgage or to pay a higher interest rate. A higher interest rate on your mortgage could cost you tens of thousands of extra dollars over the life of the loan.

Remember, just because you have low credit scores does not mean that you are a horrible person. Low credit scores simply mean that either you have made credit management mistakes in the past or that you have been the victim of unfortunate circumstances. Either way, you deserve a second chance and you can absolutely make a plan to begin rebuilding healthier credit again today. However, swearing off the use of credit cards is not a good strategy.

CLICK HERE to check out some great reviews for secured credit cards. It is best to do your research BEFORE you apply.

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.

Why Credit Avoidance Is a Bad Strategy

The title of this piece alone is enough to ruffle the feathers of the die-hard believers in the cash-and-carry lifestyle. So, before I even begin with my explanation of the many ways that swearing off credit can come back to bite you, let me begin by stating that you can still live a debt free lifestyle while building a solid credit score. Don't believe me? Has your favorite financial guru told you otherwise? Before you shake your head and move on to the next item in your newsfeed, take 5 minutes to hear me out. Trust me, you will be glad that you kept reading.

Your Credit Score Is NOT Your Debt Score

Despite what you may have heard, credit scoring models do not reward consumers for going into debt. In fact, the truth is quite to the contrary. The idea that you have to carry a lot of debt in order to have good credit scores is completely false. It is 100% possible for you to be debt free and still have very good credit scores.

Credit scoring models like FICO pay a lot of attention to a consumer's debt load. Many consumers find it surprising that a whopping 30% of their FICO credit scores come from what is known as the "Debt Category" of their credit reports. Credit scoring models are constructed so that the more you owe, the worse it is for your scores. This fact is especially true when it comes to credit card debt. However, if you have credit cards with zero balances you will be heavily rewarded in the credit score department. Having credit card accounts which you keep paid off shows the credit scoring models that you are a good credit risk. Conversely, charge up more credit card debt than you can afford to pay off in a month and not only will you waste money on interest fees but your credit scores will also suffer.

Credit Matters In More Ways Than You Think

If you have experienced a financial disaster, bankruptcy, illness, or just plain bad financial decision making in the past then the idea of swearing off credit all together and adopting a cash-and-carry lifestyle can be tempting. Deciding to close your accounts and never again apply for another credit card or loan is a drastic decision, but plenty of people have proven that it is possible to live a life free from these traditional "trappings" of the credit world. However, what followers of this cash-and-carry lifestyle fail to consider is the fact that pretending their credit doesn't matter can cost a lot of money in the long run.

Thinking that your credit will only have an impact on your life if you intend to apply for a credit card or a loan is completely unrealistic. Like it or not, we live in a very credit driven world. Here are just 7 of the negative consequences to not having good credit.

Without good credit:

1. It can be hard to qualify for an apartment.

2. Getting a cell phone contract can be very problematic.

3. Higher insurance premiums are probably in your future.

4. Getting a job or a promotion may be difficult.

5. Security deposits on utility accounts are higher.

6. Receiving a security clearance for a job could be very tough.

7. Qualifying to purchase a home might be impossible.

The Truth About Credit "Temptation"

Again, I agree with those who believe that debt is bad. Excessive debt will waste your hard-earned money, it will lower your credit scores, it can be bad for your marriage, and it can cause you a lot of worry and stress. However, the idea that swearing off credit cards in order to avoid the temptation to go into debt is an overly simplistic approach to a complicated problem.

The root of the problem which people who are afraid of credit need to address is the fact that having credit cards is not what caused their financial and credit problems. Problems of this nature are almost always caused by poor money management habits. Saying that credit cards cause people to go into debt is like saying that spoons make people fat.

Closing your credit card accounts is not going to eliminate the temptation to over spend. In fact, for the person who has truly mastered proper money management habits, the temptation to charge more than he/she can afford to pay on a credit card is no greater than the temptation to spend too much on a debit card. Cutting up your credit cards is simply not the answer to your financial problems.

If you have made credit or money mistakes in the past, you are not alone. Don't allow the mistake of your past to define you. Instead of feeling defeated and ashamed you can challenge yourself to try again.

You should not allow let fear or misguided advice cause you to believe that a life free from the world of credit is your answer. After all, in reality there is no such thing as leading a life which is unaffected by your credit. You can embrace this knowledge or you can try to hide from it. Either way, your credit is always going to have a big impact upon your life.  

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.

Why Do the Credit Scores I See Look Different Than the Credit Scores My Lender Sees?

“Help! I’m really confused! I got all 3 of my credit scores online last week and they looked really good. Today I applied for a mortgage and the scores the lender pulled look totally different. All 3 scores are about 50 points lower than the scores I saw online. Thankfully, my scores were still high enough to get a mortgage loan, but why are the scores so much lower today?”

In the credit world there are few things which frustrate and upset consumers more than discovering the sometimes vast difference between consumer credit scores and the credit scores used by lenders. Popular TV commercials for credit monitoring websites often confuse consumers and lead them to believe that they have only one credit score. However, the truth is that there are actually hundreds of different types of credit scores. The idea that you have one "official" credit scores is a complete myth.

Consumer Scores Vs. Lender Scores

While there are hundreds of credit scores available, most of these scores can be boiled down into one of 2 categories - consumer scores or lender scores. (Insurance companies often use credit based insurance risk scores as well, but for the purpose of this article those scores will fall into the "lender" category as well.) Consumer scores are scores that are accessible to you individually. You can purchase these scores from the credit bureaus directly, from FICO directly, or from a host of consumer credit monitoring websites. Some websites will offer you free credit scores in exchange for signing up for a trial offer of their credit monitoring services. Other websites will offer you a free score from 1 of the 3 major credit bureaus in exchange for your email address and the right to advertise financial services to you. CLICK HERE if you would like to compare websites where you can access your 3 consumer credit scores.

Lender scores are almost always some version of a FICO score. There are a few lenders which have begun using VantageScore (a score sold by the credit bureaus themselves) in recent years, but FICO is still the most popular lender score in use today by a landslide. FICO scores themselves even come in many varieties (FICO Mortgage Score, FICO Auto Score, FICO Personal Finance Score, FICO Installment Loan Score, etc.) and each different FICO score variety typically has different versions in use as well. If today you were to pull a copy of your consumer credit scores, have a mortgage loan officer pull your credit scores, and have an auto lender pull your credit score then you have almost a 100% chance of getting a different set of numbers every time. Credit scores can vary pretty wildly depending upon where they are pulled.

Focus On Healthy Credit

If you are feeling frustrated or overwhelmed as you try to keep track with all of the different possible credit scores, you are not alone. Remember the statement above revealing that you have hundreds of credit scores? It would be practically impossible for a consumer to keep track of each one of these scores individually. Instead of spending time and energy focusing on the numbers it is much better to focus on the health of your credit as a whole.

The fact of the matter is that all credit scores come from the same place. Your credit scores are calculated from the information which is contained in your credit reports. If your credit reports show that you routinely make late payments on your accounts, your scores will suffer regardless of who pulls them. If you have clean credit reports with no collections, no late payments, and low credit card balances then your scores will likely be in great shape regardless of who pulls them. You may have hundreds of scores, but you only have 3 credit reports. You may not be able to control your credit scores, but you can absolutely control your credit management habits. 

About the Author:
Michelle Black is an author and leading credit expert with over a decade 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 Facebook here. 

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.

Collection Accounts: Are “Pay for Delete” Deals Real?

“Dear Michelle,

I am so upset right now! I just applied for a mortgage and was turned down because of 3 medical collection accounts on my credit. All of the accounts are from the same collection agency. The worst part is that I didn’t even know these accounts existed. They are from an ER visit last year and I gave my insurance information to the hospital when I was treated. I called my insurance company and they told me that I had a deductible on some of the tests which I still owe. But the hospital never even let me know that I still owed a bill! They just put collection accounts on my credit and destroyed my credit. I read online that I should try to work out a “pay for delete” deal with the collection agency but when I called the collection agency they said no. What can I do?”

The scenario above is a very common occurrence and, as you can imagine, it can be truly heart breaking to find out you do not qualify for a mortgage due in large part to collection accounts you never even knew existed. While it is never a bad idea to settle a legitimate debt, the reality is that simply settling the debt will not do much to help your credit scores. The balance of a collection account is not the primary factor which lowers a person’s credit scores, but rather it is the fact that the delinquency occurred in the first place. Settling an account does not erase the history of the delinquency. Enter the “pay for delete” strategy.

Is “pay for delete” real? Can it help your credit? Plus, what is a “pay for delete” in the first place? Let’s take a look.

What Is a “Pay for Delete” Deal?

The term “pay for delete” is used to describe the action of paying off a collection account in order for the account to be deleted from your credit reports. First of all, it is true that “pay for delete” deals actually exist. However, they are extremely difficult to obtain and even harder to uphold if the collection agency decides not to honor the agreement after receiving payment.

Why “Pay for Delete” Deals Are So Rare

“Pay for delete” deals are not illegal. That is a myth, regardless of where you may have heard it. However, “pay for delete” deals are frowned upon very heavily by the credit reporting agencies themselves – Equifax, Trans Union, and Experian. Collection agencies depend heavily upon the ability to report to the credit bureaus in order to remain profitable. After all, the #1 factor which motivates consumers to pay collection agencies is the fact that a collection account is damaging their credit scores. In order to report accounts to the credit bureaus, collection agencies must sign service agreements. Most of these agreements have language which directly warns collection agencies not to delete paid accounts from consumer credit reports. If a collection agency is caught deleting paid accounts from credit reports then they could actually lose their ability to report accounts to the credit bureaus.

Why “Pay for Delete” Deals Are Hard to Enforce

Sometimes collection agents will agree to a “pay for delete” deal in an effort to collect payment from a consumer. Collection agents work on commission and, let’s face it, sometimes they are manipulative and even dishonest in their debt collection attempts. Many people who had a collection agent agree to a “pay for delete” settlement have found that the collection account remained on the credit report after payment was received. If you do negotiate a “pay for delete” deal with a collection agency, then it is absolutely crucial to get the agreement in writing before you release any funds for payment.

Sadly, even if you receive the agreement in writing the collection agency may not honor the agreement. If the collection agency chooses to go back on their word they you have little recourse with the credit bureaus either. The credit bureaus will not likely honor a “pay for delete” agreement, even in writing, since you are asking for accurate information to be removed from your credit reports. (If you are requesting for an inaccurate account to be deleted from your credit then that is a different story.)

There is nothing wrong with trying to negotiate a "pay for delete" settlement agreement with a collection agency, but if you strike out due to one of the reasons above remember that all hope is not lost. Time is your ally where negative credit history is concerned. The more distance you put between yourself and the occurrence of the delinquency on your credit report, the better. Yes, collection accounts can harm your scores for 7 years from the date of default on the original account but the account will affect your scores less and less as time passes. Opening secured credit card accounts (and managing them correctly) will not erase negative credit history, but it can be a step in the right direction for your credit as well.

Think you may have collection accounts harming your credit scores? CLICK HERE to see your 3-bureau credit scores right away.

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.

3 Big Myths That Can Hurt Your Credit

Let's face it, there is a lot of bad information floating around the internet about the subject of credit. Credit myths abound and blindly following information or advice from someone who is not truly qualified to give credit advice can cause some serious damage to your credit scores - not to mention it could cost you a lot of money. Even many financial "gurus" give alarmingly bad advice on their television programs, radio shows, and in books which can backfire on the consumers who follow the bad advice. Here are 3 big credit myths which you need to be aware of in order to avoid getting burned.

Myth #1: Closing Unused Credit Cards Will Help Your Credit Scores

Closing unused credit cards can potentially cause your credit scores to take a nose dive, though perhaps not for the reason you may think. You may have heard the idea that closing a credit card account causes you to lose the value of the age of the account, thus lowering your credit scores. Thankfully for consumers, this idea is a complete myth. Closing credit cards does NOT cause you to lose the value of the age of the card (at least not until the card has been closed for a full 10 years). In fact, closed credit card accounts even continue to age on your credit report.

However, closing a credit card account does have the potential to have a negative impact upon your balance to credit limit measurements - aka your revolving utilization ratio. When you close a card you no longer have access to the credit limit on the account. Therefore, especially if you owe a balance on the card which you close, it will appear to the credit bureaus that you owe more than you are authorized to use on the card which will have a very bad impact upon your credit scores.

Even if you do not owe money on the card you close it could still very likely harm your scores to close the account. Credit scoring models also care about your aggregate revolving utilization ratio (the relationship between the balances on all of your credit cards and the limits on your open credit cards). Closing an unused credit card will cause the limit on that account to no longer be included in the calculations for your aggregate revolving utilization ratio thus raising your aggregate utilization ratio if you have a balance on any credit card account. If your aggregate utilization ratio goes up, your scores will almost certainly go down.

Myth #2: You Should Carry a Balance On Your Credit Cards

Many people believe that it is wise to carry a balance on your credit cards from month to month in order to earn higher credit scores. This is another stubborn credit myth which simply refuses to die. In reality, credit scoring models reward consumers who do not carry any debt, especially those who carry zero credit card debt.

Having open credit cards on which you do not revolve balances from month to month is a huge plus in the credit score department. Consumers who only charge what they can afford to pay off on a monthly basis show the credit scoring models that they are responsible and a low credit risk for future lenders. Plus, as an added bonus, consumers who pay off their credit card balances every month do not waste a lot of money on interest fees.

Myth #3: Checking Your Credit Reports Will Lower Your Credit Scores

Whenever you or anyone else obtains a copy of your credit report a record of the credit pulled, known as an inquiry, is placed on your credit report. Some inquiries do have the potential to lower your credit scores, but when you pull a copy of your own credit report it is impossible for that inquiry to harm your scores. In fact, if you wish you can check your own credit reports and credit scores 500 times a day and it will not harm your scores in anyway whatsoever.

It is wise to be very selective about allowing a lender to pull your credit reports so that you do not have an excessive number of "hard" inquiries which do have the potential to lower your scores. However, you should never feel nervous to check your own credit reports and scores. Don't forget, every consumer has the right to access a free credit report from each of the 3 credit bureaus annually at annualcreditreport.com. If you want to access your credit scores from though, it will cost you a separate fee from each credit bureau. CLICK HERE to compare more places to access all 3 of your 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.