Do Taxes Affect Your Credit?

If you're like most Americans, you probably pay your taxes every year. So, you might be wondering does paying your taxes build credit, or does failing to pay taxes affect your credit score? This post provides you with everything you need to know about how paying your taxes or failing to pay your taxes affects your credit.

Does Paying Taxes Build Credit?

No, paying taxes does not build credit because your tax payments are not reported to the credit reporting bureaus. Therefore, paying your taxes on time will have no effect on your credit score. Also, failing to pay your taxes on time has no direct impact on your credit score because your payments are not reported to the credit reporting bureaus.

Although paying taxes has no direct impact on your credit score, it could have an indirect impact on your credit score.

For example, if you are having difficulty paying for your taxes out of pocket, and you use your credit card to make your tax payment, if you don't pay the minimum payment on your credit card when its due, a late payment notation is added to your credit report, significantly lowering your credit score.

Late Payment Marks

Late payments are negative marks that are added to your accounts when you fail to pay the minimum payment on your credit card. If a late payment mark is added to your credit report, it could cause a significant drop in your credit score.

Late payments remain on your credit report for 7 years from the date you missed your payment. After the 7 year period, the late payment mark is automatically removed from your credit report.

So, if you do decide to use your credit card to pay your taxes, you should make sure to make at least the minimum payment on time to avoid your credit card payment from being reported as late.

If you have the money in your checking account, you should consider paying directly from your checking account to avoid the convenience fees that the IRS charges for using a credit card.

Credit Card Interest

Not only will you be liable for paying the convenience fees, but if you don't pay off your credit card at the end of your billing cycle, your card issuer will charge you interest on the money you've borrowed using your credit card.

Credit card interest rates are very high, ranging from 15% to 30% for some credit cards, making them very expensive to use for paying tax bills. So, you should consider the amount of interest you will have to pay on the balance before using your credit card to pay your taxes.

Credit Utilization

Another thing to keep in mind when using a credit card is that charging your taxes to your credit card can potentially increase your credit utilization. Your credit utilization refers to how much of your available credit you're using. The higher your credit utilization, the lower your credit score will be.

If you plan on immediately paying off your credit card, this isn't something you should spend too much time thinking about. But, if you plan on leaving a balance on your credit card, you should consider how much of your available credit you will be utilizing.

As a rule of thumb, you should keep your credit utilization below 10% and never exceed 30% utilization. If you exceed 30% credit utilization, you will notice a significant drop in your credit score.

For example, if you have a $10,000 credit limit, and you use your credit card to pay a tax bill of $4,500, your credit utilization would be 45%, which places you above the 30% credit utilization, causing your credit score to drop.

So, consider your credit utilization before using a credit card to pay your taxes.

Does Failing to Pay Your Taxes Affect Your Credit Score?

Although failing to make your tax payment does not directly hurt your credit, the U.S Government is capable of selling the unpaid taxes you owe to a private collection agency. The collection agency can cause significant damage to your credit by placing a collection account on your credit report.

Collection Account

Collection accounts are very negative items that can appear on your credit report and cause your credit score to drop by 100 or more points. In fact, the higher your credit score, the bigger the drop you will experience as a result of a collection account being added to your credit report.

If a collection account is added to your credit report, it can remain on it for 7 years from the date you failed to make your tax payment. When a collection is first added to your credit report it will have a huge negative effect on your credit score. However, as the collection account ages, its impact on your credit score will lessen until it's ultimately removed from your credit report.

Paying a collection account after it has been added to your credit report will not remove it from your credit report. So, to avoid having a collection account added to your credit report, you should make your tax payment on time.

Property Tax Lien

In addition to a collection account being added to your credit report, if you fail to pay your taxes on time, the IRS can place a lien on your property. Although IRS Tax Liens no longer appear on your credit report, if the IRS places a lien on your property, it could sell your property and use the proceeds to recover some or all of the money that you owe them.

Does Paying Your Taxes Late Affect Your Credit Score?

No, paying your taxes late does not affect your credit score because your tax payments are not reported to the credit reporting bureaus. Also, any tax liens that result from late tax payments no longer appear on your credit report, therefore, they have no impact on your credit score.

That said, paying your taxes late may result in the addition of a collection account to your credit report, indirectly affecting your credit score.

Collection accounts are negative items that are added to your credit report whenever a collection agency takes over an unpaid debt of yours. Collection accounts remain on your credit report for 7 years and they have a substantial negative impact on your credit score.

To avoid having a collection account from being added to your credit report, pay your taxes on time. This will help you avoid the IRS commission a collection agency to collect the outstanding amount that's due by adding a collection account to your credit report.

What Are Some Other Consequences For Failing To Pay Your Taxes?

If you fail to pay your taxes on time, the IRS can place a tax lien on your property, allowing it to sell your property and use the proceeds of the sale to recover some or all of the money that you owe them. So, to avoid a tax lien, you should make your tax payments on time. If you don't have the cash to make the entire payment, ask the IRS about installment payments, where you make a certain number of payments until you've paid off the balance.

Another consequence that we discussed in much detail is that the IRS can task a collection agency to recover the outstanding amount from you. Once a collection agency is tasked, it will attempt to collect the outstanding amount from you.

In the process of collecting the outstanding taxes, the collection agency may add a collection account to your credit report, significantly lowering your credit score.

If a collection account is added to your credit report, it will lower your score and remain on your credit report for 7 years from the date you missed your tax payment. After the 7 year period, the collection account will automatically be removed from your credit report.

In addition to a lien being placed on your property and a collection account added to your credit report, failing to pay your taxes on time can result in the IRS assessing penalties and additional fees on your account.

Frequently Asked Questions (FAQs)

1. Do taxes affect your credit score?

No, taxes do not affect your credit score because your payments or lack thereof are not reported to the credit reporting bureaus. So, whether you pay or fail to pay, no negative payments will appear on your credit report. However, if the IRS tasks a collection agency to collect the taxes from you, a collection account could appear on your credit report, lowering your credit score.

2. Does the IRS report your payments on credit report?

No, the IRS does not report your tax payments on your credit report.

3. Can not paying taxes affect your credit score?

Yes, not paying your taxes can indirectly affect your credit score. For example, if you fail to pay your taxes, the IRS could contact a collection agency to have them collect your outstanding taxes. The collection agency can cause damage to your credit by placing a collection account on your credit report.

4. What happens to my credit if I pay my taxes late?

Paying your taxes late will have no impact on your credit as tax payments are not reported to the credit reporting bureaus.


Does Paying Gym Membership Build Credit?

If you're like many people, you probably have a gym membership to work out, and so you might be wondering does paying for a gym membership build credit? This post provides you with everything you need to know about how a gym membership affects your credit score.

Does Paying For a Gym Membership Build Credit?

Paying for a gym member does not build credit because your account status is not reported to the credit reporting bureaus. Therefore, making all of your payments on time will not improve your credit score. Also, missed or late gym membership payments are not reported to the credit reporting bureaus, so they will not directly affect your credit score.

That said, being seriously delinquent on your gym payments can indirectly cause damage to your credit score. For example, if you miss several gym payments, your gym may task a collection agency with collecting the outstanding amount due on your account.

The collection agency may cause significant damage to your credit by adding a collection account to your credit report.

A single collection account can cause your credit score to drop by 100 or more points. The higher your credit score, the bigger the drop will be.

If a collection account is added to your credit report, it will remain on your credit report for 7 years. After the 7 year period, the collection account will automatically be removed from your credit report.

Paying a collection account will not remove it from your credit report. In fact, a paid and unpaid collection account have the same negative effect on your credit score. So, make you gym membership payments to avoid having a collection account added to your credit report.

So, although gym membership payments are not like credit cards where missing a single payment can cause damage to your credit. But, if you're seriously delinquent and your account gets sent to collections, the collection agency can cause damage to your credit by adding a collection account to your credit report.

Why Does Paying For a Gym Membership Build Credit?

Paying for a gym membership does not build credit because most, if not all, gyms don't report your payments to the credit reporting bureaus. Since your account status is not reported to the credit bureaus, the information does not appear on your credit report. Therefore, it has no impact on your credit score.

Does Making Your Gym Membership Payment Late Affect Your Credit Score?

No, making your gym membership payment late will not affect your credit score because your account status is not reported to the credit reporting bureaus. Therefore, late payments are not reported to the credit reporting bureaus. That said, if your account is seriously delinquent, you could indirectly cause damage to your credit. This is so because if you're seriously delinquent, your gym could send your account to collections to recover some of the unpaid membership fees. In the process of collecting the unpaid gym dues, a collection agency can add a collection account to your credit report. A collection account can significantly lower your credit score. So, if you're seriously delinquent on your gym membership, you should consider paying any outstanding dues to avoid having your account sent to collections and a collection account added to your credit report.

What Damage Can a Collection Account Cause To Your Credit?

A collection account is a negative item that can be added to your credit report. A single collection account can lower your credit score by 100 or more points. The higher your credit score, the bigger the drop will be.

Once a collection account is added to your credit report, it will remain on it for 7 years from the date you first missed your gym membership payment. After the 7 year period, the collection account will automatically be removed from your credit report.

If you have a collection account on your credit report, not only will the collection account lower your credit score, but it will also make it more difficult to borrow money especially if the collection account remains unpaid.

Lenders don't like to see that you have an unpaid collection account on your credit report, so they may require you to pay it off or they may deny you credit.

So, it's best to avoid having your gym account from being sent to collections. So, if a collection account appears on your credit report, you should consider paying it off if you have the funds to do so.

That said, paid and unpaid collections accounts have the same effect on your credit score. So, paying a collection account will not reduce its impact on your credit score. Therefore, it's best to pay your gym membership on time to avoid having your account sent to collections and a collection account being added to your credit report.

Can You Remove a Collection Account From Your Credit Report?

You can only remove a collection account from your credit report if the collection account contains wrong information or was added to your credit report by error. Removing a valid collection account from your credit report is not possible.

That said, if a collection account has been wrongfully added to your credit report, you can file a dispute with the credit reporting bureau showing the collection account to have it removed from your credit report.

After you dispute a collection account, the credit reporting bureau will conduct an investigation to determine whether the collection account is valid. If the investigation reveals that there is an error in the collection account reported, it will remove it from your credit report.

However, if the investigation reveals that the account is valid and no errors appear in the information being reported, the collection account will remain on your credit report for 7 years from the date you missed your first payment. After the 7 year period, the collection account will automatically be removed from your credit report.

So, to avoid having a collection account being added to your credit report in the first place, you should make sure to pay off any outstanding membership dues before your account is sent to collections.

Frequently Asked Questions (FAQs)

1. Does paying gym membership affect your credit score?

No, paying for a gym membership does not affect your credit score because your payments or lack of payments are not reported to the credit reporting bureaus.

2. Can a gym membership ruin your credit score?

A gym membership can ruin your credit score in the event that you fail to pay your gym membership fee, causing your gym to transfer the outstanding amount due to a collection agency. In attempting to collect the outstanding debt from you, the collection agency may place a collection account on your credit report, causing significant damage to your credit.

3. Can cancelling a gym membership affect your credit score?

No, cancelling a gym membership has no effect on your credit score. That said, make sure to completely pay off your account to ensure that you owe nothing to the gym. This prevents an outstanding amount that's due from being reported to collections.

4. Does unpaid gym membership affect your credit score?

An unpaid gym membership could affect your credit score in the event that you're extremely delinquent and your account is sent to collection. A collection agency can lower your credit score by adding a collection account to your credit report.


Does Applying For Unemployment Affect Your Credit Score?

If you recently became unemployed, chances are that you're thinking about filing for unemployment to help you get through rough times. So, you might be wondering, does apply for or filing for unemployment affect your credit score? This post provides you with everything you need to know about how applying for unemployment affects your credit and credit score.

Does Filing For Unemployment Affect Your Credit Score?

No, filing or applying for unemployment benefits does not affect your credit score because it does not appear on your credit report, and therefore, it does not affect your credit score. Only the name of your employer may appear on your credit report. Your employment status and income information do not appear on your credit report and therefore do not affect your credit score.

So, when you file for unemployment, rest assured that doing so does not impact your credit in any way, shape, or form. That said, your employer information may appear on your credit report only if you provided the name of your employer on a credit application. Even though the name of your employer may appear on your credit report, your employer information has no impact on your credit as it's on there for identity verification purposes only.

That said, being on unemployment can indirectly affect your credit score. For example, if you were earning a higher income while being gainfully employed, going on unemployment may reduce the amount of money you receive. This could impact your ability to make your credit card and loan payments on time.

Your payment history makes up 35% of your credit score, and to maintain a good credit score, you must make your credit card and loan payments on time. Missing even a single credit card or loan payment can cause significant damage to your credit as a late payment notation is added to your account status.

A late payment can knock down your credit score by 100 or more points. So, it's imperative that you continue to make your payments to avoid significant damage to your credit.

That said, being on unemployment may make it difficult for you to continue making timely payments on your credit. For this reason, it could affect your credit score.

Also, unemployment could cause you to use your credit card more often to cover expenses that you cannot cover without them. Using your credit card too frequently can increase your credit utilization (how much of your available credit you're using), causing your credit score to drop.

As a rule of thumb, you should keep your credit utilization below 10% and never exceed 30%. If you exceed 30% credit utilization, you could notice a significant drop in your credit score. So, this is another way that relying on unemployment could negatively impact your credit score.

Is Filing For Unemployment Listed On Your Credit Report?

No, filing for unemployment is not listed on your credit report. So, any party that reviews your credit report will not know that you're receiving unemployment unless you disclose that fact to them.

That said, if you review a copy of your credit report, you might see a section titled "employers" that lists your current and past employers. This is the only employment information that can appear on your credit report.

The employer information that appears on your credit report is gathered from information that you provided to lenders when applying for a credit card or loan.

For example, if you go to your local Mercedes Benz dealership and submit a credit application to qualify for a lease or finance a vehicle, the employer information you provide on that application is submitted to the credit bureaus. So, if you listed the name of your employer, it may be provided to the credit bureaus, causing it to appear on your credit report.

That said, other than the name of your past or current employer, no other employment information is added to your credit report.

The other information that you'll find in your credit file is your personal information, such as name, DOB, social security number, addresses, and account statuses (credit cards, loans, negative information, and records of legal events affecting your credit score).

Does Receiving Unemployment Benefits Impact Your Credit Score?

No, receiving unemployment benefits does not impact your credit score because unemployment benefits are not reported to the credit reporting bureaus. Therefore, they neither appear on your credit report nor do they impact your credit score.

So, rest assured that receiving unemployment benefits has no impact on your credit score. That said, failing to repay credit card debt or loans as a result of your unemployment can impact your credit score.

Failing to pay credit cards or loans can impact your credit because late payments are reported to the credit reporting bureaus. A single late payment on a credit card or loan can cause your credit score to drop by 100 or more points. So, to maintain a good credit score even while unemployed, you should keep making your payments in full and on time.

Also, to prevent being unemployed from lowering your credit score, you should refrain from using your credit card as accumulating a large credit card balance can significantly lower your credit score, especially if you use 30% or more of your available credit. So, keep your account balances as low as possible to maintain a good credit score.

What Factors Affect Your Credit Score?

Here are all of the factors that affect your credit score:

  1. Payment History - Your payment history makes up 35% of your credit score, so it's important to make your payments on credit cards, car loans, personal loans, student loans, and mortgage to keep your account in good standing so that that this factor positively affects your credit score. Missing even a single payment on such accounts could cause significant damage to your credit, so make sure to make all of your payments on time for the best impact on your credit score.
  2. Credit Utilization - Your credit utilization refers to how much of your available credit you're using. The lower your credit utilization, the better this factor affects your credit score. Your credit utilization makes up 30% of your credit score, so to build good credit, you must maintain a healthy credit utilization. As a rule of thumb, you should keep your credit utilization below 10% and never exceed 30%. If you use more than 30% of your available credit, you will notice a significant drop in your credit score. For example, if you have a total credit card limit of $10,000, you should keep the balances on your accounts below $1,000 (10%) and never leave a balance of $3,000 (30%) or more as this will significantly reduce your credit score. So, if you have high credit card balances and you want to improve your credit score, you should pay down the balances on your credit cards as your credit utilization accounts for a huge chunk of your credit score.
  3. Length of Credit History - The length of your credit history is the third largest factor impacting your credit score. This factors favors persons who have old accounts that are open. It looks at the average age of all of your accounts. The older your accounts, the better your credit score will be. So, if you want to improve your credit, keep old accounts open even if you rarely use to the boost the average age of your accounts.
  4. Credit Mix - Your credix mix, which refers to the diversity of open accounts on your credit report accounts for 10% of your credit scores. The more types of open accounts you have, the better this factor impacts your credit score. So, having diverse open accounts, such as credit cards, auto loans, student loans, or mortgages can boost your credit score. So, it's worth having account diversity since this provides a boost to your credit score. Credit diversity boosts your credit score because it shows lenders how you're handling repayment of different types of debts.
  5. New Credit - The number of hard inquiries and new accounts on your credit report account for 10% of your credit score. For this factor to positively impact your credit score, you shouldn't have too many hard inquiries nor too many new accounts opened within a short period of time. The less hard inquiries and new accounts you have, the better your credit score will be. Whenever you apply for a credit card or loan, a hard inquiry is placed on your credit report, slightly lowering your credit score. Although a single hard inquiry doesn't lower your credit score by much, you should avoid too many credit applications because several hard inquiries could significantly lower your credit score. So, for the best impact to your credit score, avoid submitting too many credit applications within a short period of time.

Frequently Asked Questions (FAQs)

1. Can someone who checks your credit report know that you've filed for unemployment?

No, if someone checks your credit report, they will not be able to know that you've filed for unemployment as it does not appear on your credit report. Also, unemployment information is part of the public record, so no one can tell whether you've filed for or received unemployment benefits without you disclosing that information to them.

2. Does collecting unemployment affect your credit score?

No, collecting unemployment does not affect your credit score because unemployment does not appear on your credit report. Since it doesn't appear on your credit report, it's not factored into your credit score.

3. Does employment affect your credit score?

No, unemployment does not affect your credit score because it does not appear on your credit report. Therefore, it is not factored into your credit score.

4. Does unemployment lower your credit score?

No, unemployment does not appear on your credit report, therefore, it cannot lower your credit score.


Does Your Job Affect Your Credit Score?

Whether you have a job or you're unemployed, you might be wondering, does your job affect your credit score? This post provides you with everything you need to know about how your job affects your credit score.

Does Your Job Affect Your Credit Score?

Although the name of your employer may appear on your credit report, your job does not affect your credit score. Also, whether you're employed or unemployed, your employment status does not appear on your credit report nor does it affect your credit score.

Having a job does not affect your credit score because even though your employer information may appear on your credit report, the credit scoring models do not take it into account when calculating your credit score.

For example, whether you're an award-winning surgeon or a trash collector, your job has no impact on your credit score.

So, at this point, you might be wondering, where does the employer information on your credit report come from?

The employer information that appears on your credit report was likely provided by you on a credit application for a credit card or loan.

For example, if you went to a dealership and submitted a credit application for an auto loan if you list the name of your employer on the application, the dealership might provide your employer information to the credit bureaus. If the credit bureaus receive the name of your employer, it will be added to your credit report.

That said, your employer information has no effect on your credit score because it's not indicative of how you have handled repayment of debt, so it's not factored into your credit score.

So, even though you may have lost your job, your loss of employment does not affect your credit score. In fact, the fact that you lost your job does not even appear on your credit report.

Failing to Make Credit Card and Loan Payments On Time

That said, losing your job could indirectly affect your credit score. For example, if you don't have enough money to make your credit card and loan payments on time, you could cause significant damage to your credit.

This is so because your payment history makes up 35% of your credit score. When you make your payments on time, this factor boosts your credit score. However, missing even a single payment on a credit card or loan could cause significant damage to your credit. So, try to continue making your payments on time to avoid having your loss of employment affect your credit score.

Becoming Too Reliant On Credit Cards

The second way that losing your job could affect your credit score is if you become too reliant on your credit cards.

If you end up using too much of your available credit limit, you could hurt your credit score because your credit utilization makes up 30% of your credit score. The more of your available credit you use, the lower your credit score will be.

As a rule of thumb, you should keep your credit utilization below 10% and never exceed 30%. If you use 30% or more of your available credit, you will notice a significant drop in your credit score.

So, if you've become unemployed, you should refrain from over-relying on your credit cards if you do not have a way of paying them back. This is so because you may increase your credit utilization, lowering your credit score.

Why Doesn't Your Job Affect Your Credit Score?

Your job doesn't affect your credit score because employers do not report your job to the credit reporting bureaus. In fact, there is no way for your employer to report your job to the credit reporting bureaus. The only reason your employer information may appear on your credit report is from a credit application that you submitted along with the name of your employer. Employment information and income information do not appear on your credit report. Even though your employer may appear on your credit report, it does not affect your credit score because the credit scoring models do not take into account your employer information.

What Does Affect Your Credit Score?

Now that you know that your job or lack of job has no impact on your credit score, let's discuss some of the items that do affect your credit score:

  1. Payment History - Your payment history affects your credit score. In fact, it makes up 35% of your credit score and looks at whether your making payments on your credit cards, loans, and other types of debt. If you make all of your payments on time, this factor will boost your credit score. However, if you miss payments on credit cards or loans, you could cause significant damage to your credit. Missing even a single payment can lower your credit score by 100 or more points, so make sure to make all of your payments on time so that this factor positively impacts your credit score.
  2. Credit Utilization - Your credit utilization refers to how much of your available credit you're using. Typically, the higher your credit utilization (the more of your available credit you're using), the lower your credit score will be. As a rule of thumb, you should keep your credit utilization below 10% and never exceed 30%. If you use more than 30% of your available credit, you will notice a significant drop in your credit score. So, keeping your credit utilization low is important as this factor makes up 30% of your credit score.
  3. Age of Accounts - The average age of your accounts makes up 15% of your credit score. The older your accounts, the better your credit score will be. So, if you have old accounts that are open, such as an old credit card, you should keep it open so that it continues to provide a boost for your credit score.
  4. Credit Mix - Your credit mix refers to the diversity of accounts on your credit report. It makes up 10% of your credit score. Typically, this factor rewards those who are handling different types of debts, such as credit cards, car loans, student loans, and mortgages. The more diverse your accounts, the better your credit score will be.
  5. New Credit - New open accounts and hard inquiries account for 10% of your credit score. The older your accounts and the less hard inquiries you have on your credit report, the better this factor impacts your credit score. Whenever you submit a credit application, such as a credit card application or loan application, a hard inquiry is added to your credit report, slightly lowering your credit score. Although a single hard inquiry will not lower your credit score by much, if you accumulate too many hard inquiries within a short period of time, you will significantly lower your credit score.

Frequently Asked Questions (FAQs)

1. Does being unemployed hurt your credit score?

No, being unemployed does not hurt your credit score because the fact that you're unemployed does not appear on your credit report, therefore, it has no impact on your credit score.

2. Does having a job affect your credit score?

No, having a job does not affect your credit score. That said, having a job can help you make your credit card and loan payments on time, boosting your credit score.

3. Does having a job increase your credit score?

No, having a job does not increase your credit, but if you do use your income to pay your credit cards and loans on time, you can improve your credit score. This is so because your payment history makes up 35% of your credit score, so making your payments on time can provide a nice boost to your credit score.

4. Is your employment status listed on your credit report?

No, your employment status is not listed on your credit report, therefore, it does not affect your credit.


Does Carrying a Balance On Your Credit Card Help Your Credit Score?

If you're like most Americans, you likely have a credit card and you may be wondering whether carrying a balance on your credit card helps your credit score? We will answer this question in much detail below.

Does Carrying a Balance On Your Credit Card Help Your Credit Score?

Carrying a balance on your credit card does not help your credit score. In fact, carrying a balance on your credit card can actually hurt your credit score because it increases your credit utilization. Credit utilization refers to how much of your available credit you utilize. The more of your available credit you use, the lower your credit score will be. So, if you've been told that carrying a balance helps your credit, now you know that doing so does not, and can actually lower your credit score.

Keeping the balance on your credit card as low as possible is one of the best things that you can do to help your credit after making all of your payments on time. This is so because your credit utilization accounts for 30% of your credit score. The lower your credit utilization, the better your credit score will be. So, if you're considering leaving a balance on your credit card in hopes of raising your credit score, now you know that paying down your balances is one of the best things that you can to improve your credit score.

As a rule of thumb, you should strive to keep your credit utilization below 10% and never exceed 30% credit utilization. If you exceed 30% credit utilization, you will significantly lower your credit score. So, always pay off as much debt as you can afford to pay off. For example, if you have a total credit limit of $10,000, you should not allow your credit card balance to exceed $3,000.

Additionally, to help your credit score, you should make all of your payments on time. Your payments account for 35% of your credit score, so making them on time is the best thing you can do to boost your credit score. Missing even a single payment on your credit cards or loans can cause significant damage to your credit score. So, make sure to make all of your payments on time.

Some people believe that to keep their account active, they must keep a balance on their credit card. This is not the case. Using your credit card for small monthly payments is sufficient to keep your account from being closed for being dormant (unused).

So, if you were wondering whether carrying a balance on your credit card helps your credit score, now you know that it does not. You will just be paying interest for no reason. Therefore, if you have a credit card with a balance, pay it off if you can afford to do so because doing that will save you money on interest.

Why Should You Avoid Carrying a Balance On Your Credit Card?

1. Avoid Paying Interest On Your Credit Card Balance

You should pay down the balance on your credit card to avoid paying interest on your credit card balance. Credit cards often charge consumers high-interest rates on the balances they carry on their credit cards. Interest can be avoided by paying off the credit card in full at the end of your billing cycle. So, if you want to save money on interest, pay off your credit card at the end of each billing cycle.

2. Reduce Your Credit Utilization

You should avoid carrying a balance on your credit card to reduce your credit utilization (how much of your available credit you're using). Reducing your credit utilization is good for your credit score because it accounts for 30% of your credit score. The lower your credit utilization, the better your credit score will be. As a rule of thumb, you should keep your balances below 10% of your available credit and never use 30% or more of your available credit. If you utilize more than 30% of your available credit, you will significantly lower your credit score.

3. Prevent Yourself From Accumulating Too Much Debt

Paying off your credit card instead of carrying a balance allows you to stop yourself from accumulating too much debt. Spending and accumulating debt can happy quickly and while you least expect it. So, paying off your credit cards and avoid leaving a high balance on your credit card accounts.

What is a Good Balance to Carry On Your Credit Card?

Carrying no balance on your credit card is the best thing that you can do for your credit because the lower your credit utilization, the better your credit score will be. However, we know that life happens sometimes and it's not possible to pay off your credit card. As a rule of thumb, you should utilize no more than 10% of your available credit and never exceed 30% credit utilization. If you use more than 30% of your available credit, your credit score will drop.

For example, if you have credit cards with a limit of $10,000, you should keep the balances on your credit cards below $3,000 for the best impact on your credit score.

If you find yourself utilizing too much of your available credit, you should contact your card issuer and request a credit limit increase. If your request is approved, your credit limit will be increased, lowering your credit utilization. That said, before you request a credit limit increase, you should be aware that your card issuer may add a hard inquiry to your credit report when it reviews your credit report to make a decision on your request for a credit limit increase. Nevertheless, a single hard inquiry will only lower your credit score by a few points. Just don't ask for too many credit limit increases within a short period of time, and you should be good.

Bottom Line

The bottom line is that carrying a balance on your credit card is not good for your credit nor is it good for your credit score. One of the best things that you can do for your credit score is to pay off all the balances on your credit cards. This is so because the lower the dollar amount of your available credit you use, the better your credit score will be. So, the next time your close friend or relative tell you that carrying a balance improves your credit score, now you know that it does not improve it and could actually lower your score.


Will Paying Off a Personal Loan Early Hurt Your Credit Score?

If you've taken out a personal loan and you have some extra cash, you might be wondering, does paying off a personal loan early hurt your credit score? We will answer this question in much detail below.

Will Paying Off a Personal Loan Early Hurt Your Credit Score?

Oftentimes paying off a personal loan early can either have no impact on your credit score or can hurt your credit score because it can potentially reduce your credit mix, which refers to the diversity of the active accounts on your credit report. This is especially true if the loan you're paying off is your only personal loan. Your credit mix accounts for 10% of your credit score, the more diverse the type of active accounts on your credit report, the higher your credit score will be.

That said, the drop caused by paying off a personal loan early is temporary and if there is nothing negative on your credit report, your credit score should rebound within just a few months of paying off your personal loan.

Paying off a personal loan early will not remove it from your credit report. Paid off personal loans where you haven't missed any payments, remain on your credit report for 10 years from the date you paid off the loan. After the 10 year period, the loan is automatically removed from your credit report.

However, if you've paid off a personal loan where you've made late payments on the account that were reported on your credit report, such loans will remain on your credit report for 7 years from the date you missed your first payment on the loan. After the 7 year period, the loan will be automatically removed from your credit report.

Why does paying off a personal loan hurt your credit score?

Paying off a personal loan early can lower your credit score because your paid-off account will show up as closed on your credit report, reducing your credit mix. Having a diverse credit mix accounts for 10% of your credit score, so closing the account may lower your credit score, especially if it's your only personal loan or installment account.

Also, paying off a personal loan may hurt your credit score because open accounts that you're actively making payments on show lenders how you're managing your credit right now, whereas paid-off accounts only show lenders how you've handled debt repayment in the past.

So, if you want to improve your credit score, you should keep your personal open and avoid paying it off early. Continuing to make payments on your personal loan can be better for your credit score than paying off the loan early.

Keeping your personal loan open for longer can improve a thin credit file. A thin credit file is one that does not contain sufficient credit information. Paying off a personal loan for longer can help you remedy a thin credit file. So, even if you have the funds to pay off your loan early, it could be beneficial to keep the loan open for longer to establish good credit history.

Additionally, keeping a personal loan open for longer improves your credit mix. Your credit mix refers to the diversity of the accounts that are currently open, such as credit cards and installment accounts. Personal loans are a type of installment account that can improve your credit mix and raise your credit score.

Should You Pay Off Your Personal Loan Early?

When deciding whether to pay off your personal loan, there are a couple of things that you should consider, here are some of those things:

1. Interest On Your Personal Loan

If the interest rate on your personal loan is very high, it may make sense for you to pay off the loan early in order to avoid paying interest on the outstanding amount that's due. However, before you go ahead and pay off your personal loan, you should first check with your lender to see if they charge a pre-payment penalty. A pre-payment penalty is a penalty fee that lenders charge to those who pay off their loans early. Also, if you have a precomputed interest loan, this means that the total interest was calculated and fixed at the beginning of the loan. So, if you were to pay off the loan early, you would already be paying the interest on the loan. If you have a precomputed interest loan, you will not save any money on interest as you would be paying it by paying off the loan. So, consider these things before rushing to pay off your personal loan early.

2. Lowering Your DTI (Debt to Income Ratio)

If you're applying for a home loan or financing a vehicle, your lender may require you to lower your debt to income ratio, meaning you must pay down some of your debts to be approved for credit. Most lenders require your debt to income ratio to be below 43%, and ideally, your DTI should be 31% or less. Paying off a personal loan can be a way to reduce your debt to income ratio, making it more likely that you'll be approved for a home loan or other types of credit. So, if you're going to purchase a home and need financing in the near future, you should consider paying off your personal loan to lower your DTI in order to be approved.

3. Other Types of Debt

If you have a lot of open credit cards and other loans with debt, it may make sense for you to pay off your personal loan in order to tackle paying off your other debts. This is especially true if you have other personal loans, credit cards, student loans, and auto loans. Even if paying off your personal loan causes a small drop in your credit score, don't worry too much about it as the drop is likely temporary. In fact, your credit score will likely improve within a short period of time.

When Should You Avoid Paying Off a Personal Loan Early?

Here are some situations in which you should avoid paying off a personal loan early:

1. Interest On Your Personal Loan is Very Low

If you've taken out a personal loan and the interest rate on your personal loan is very low, paying it off may not be worth parting with your cash. For example, if you have a personal loan at a 5.0% interest rate, and you have credit card debt at 15%, it will make more sense for you to pay off your credit card debt before tackling your personal loan debt because you will be paying significantly more on the debt you've accumulated on your credit cards.

2. Keep Your Cash On Hand

Experts have come to a consensus that every person should have three to six months' worth of expenses saved up for an emergency. So, if you have extra cash burning a hole in your pocket, you should save it up and only make the monthly payment on your personal loan until you've saved up at least three to six months' worth of expenses. Once you've established an emergency fund, it makes sense to contribute more money to pay off your personal loan debt.

3. Your Personal Loan is Substantially Paid Off

If your personal loan is substantially paid off an you only have a few payments remaining, it doesn't make sense to pay it off early because you will not save much on interest by paying it off early. In this case, it makes sense to continue making payments on the loan in order to improve your credit via timely monthly payments. It will only make sense to pay off your loan early if you need to lower your DTI quickly in order to qualify for a large purchase such as borrowing money to buy a home or finance a vehicle.

Conclusion: Should you pay off your personal loan early?

If you have extra cash on hand and you don't mind your credit score temporarily drop some points, you should go ahead and pay off your personal loan. However, if you're planning on making a large purchase, such as a home, in the near future and your debt to income ratio is within a good range, you should hold off on paying off your personal loan to maintain the best credit score possible while qualify for a mortgage.

Also, it may make sense to pay off a personal loan if you don't have credit card debt that you're paying a high interest rate on. If you do have credit card debt, you're better off paying down your cards because the interest rate on credit cards is typically much higher than that of personal loans.

So, ultimately it's up to you, but now you have the knowledge necessary to weigh the pros and cons of paying off your personal loan early.

Frequently Asked Questions (FAQs)

1. Why does my credit score drop when I pay off a loan?

When you pay off a loan, including a personal loan, you're essentially closing down an installment account. Closing an installment account can lower your credit score because it may reduce your credit mix (diversity of accounts on your credit report). Your credit mix accounts for 10% of your credit score, and may be reduced when you pay off a personal loan.

2. Will my credit score increase if I pay off a personal loan?

It is unlikely that paying off a personal loan will increase your credit score. In fact, your credit score will either stay the same or drop a few points when you pay off a personal loan. Your credit score may temporarily drop because you're closing an installment account which can reduce the diversity of your accounts.

3. Should I pay off my personal loan early?

If your personal loan is your only loan, you should hold off on paying it early as it can reduce your credit mix and result in a lower credit score. Also, you should pay off other higher interest rate debt before paying off a personal loan. It really all depends on your situation. This blog post discusses the pros and cons of paying off a personal loan early, weigh them and make your decision.

4. Can paying off a personal loan hurt my credit?

Yes, paying off a personal loan can result in a slightly lower credit score. That said, a drop in your credit score is likely to be temporary and so long as nothing negative on your credit report appears, it should rebound within just a few short months.

5. What debt should I pay off first?

You should pay off your highest interest rate debt first.


What is a Thin Credit File?

If you're just beginning to build your credit and you attempted to check your credit report and credit score, you may have received the notification that you have a thin credit file. What does a thin credit file mean, and how can you avoid receiving this notification in the future? We will explain the answers to these questions in much detail below.

What is a Thin Credit File?

The term thin credit file refers to having a limited credit history because there is not sufficient information in your credit report based on which a credit score can be generated for you. Typically, consumers who are just beginning to build their credit may receive this notification because a credit score cannot be calculated for them.

Having a thin makes it very difficult to be approved for credit cards or loans. That said, this can easily be remedied by opening credit cards, loans, or other types of debt and making payments on time to establish a good credit history.

Having good credit is essential to doing thing, such as financing a vehicle, buying a home, taking out a personal loan, or even renting an apartment, in some cases. That said, everyone who begins building their credit history begins with a thin credit file where there is insufficient information in his or her credit file. So, don't be discouraged if you've received this notification.

You may receive the thin credit file notation in the following situations:

  1. You're an adult and you just began to establish your credit
  2. You're young and you've just started to build your credit
  3. You've never opened a credit card or taken out a loan
  4. You recently immigrated to the United States and you're just starting to build your credit
  5. You used credit in the past, but years have passed since you've used credit
  6. You don't use credit cards and don't take out a loan, and rely primarily on the use of cash

Regardless of which situation you find yourself in, if you only recently opened a credit card or taken out a loan, you will begin to build credit. That said, it takes some time for your card issuer or lender to furnish information to the credit bureaus. Once your new credit card or loan history is sent to the credit bureaus, you will begin building your credit file. After just a few months of having your credit card or loan, you will likely stop receiving the thin credit file notification as your credit report will have enough information based on which a credit score can be calculated for you.

Thing You Can Do to Stop Receiving a Thin Credit File Notification

If you've received a notification stating that you have a thin credit file, here are some ways to avoid receiving it in the future:

1. Open a Secured Credit Card

If you've applied for a regular credit card and were denied because you have limited credit history (aka thin credit file), you should try applying for a secured credit card. Secured credit cards are significantly easier to be approved for than regular unsecured credit cards. Secured credit cards work the same way as do regular credit cards, and they can help you build your credit so that you can avoid being denied in the future for having limited credit history.

The only difference between a secured credit card and a regular credit card is that with a secured credit card, you must place a cash security deposit with the card issuer. Usually, your deposit determines your credit limit. For example, if you apply for a Bank of America Secured Credit Card, you must place a minimum deposit of $300, and you will be given a $300 credit limit.

If you use the credit card responsibly and make all of your payments on time, your card issuer will usually refund the security deposit to you within six to twelve months of opening the account. At that point, your card issuer may convert your secured credit card into a regular non-secured credit card.

Secured credit cards are a great way to build credit and they function as do regular credit cards, meaning you can use them just as you would a regular credit card, and your account status is reported to the credit reporting bureaus as is a regular credit card.

Make payments on your secured credit card, and your payments will be reported to the credit bureaus, boosting your credit score. That said, make sure to make all of your payments on time as missing even a single payment can cause significant damage to your credit score.

2. Take Out a Credit Builder Loan

If you have a thin credit file and you want to improve your credit file in order to qualify for regular credit cards and unsecured personal loans, you should explore the option of taking out a credit builder loan. A credit builder loan is different from a regular personal loan in that you're required to make all of the payments on the loan first. After you've made all of the payments, you will receive the funds from the loan. Meanwhile, all of the payments you've made on the loan will have been reported to the credit reporting bureaus, boosting your credit score and establish a credit file for you. You can find credit builder loans at some banks and many credit unions.

3. Become An Authorized User

The quickest way to fatten your credit file is to become an authorized user on someone else's credit card. That said, you should only become an authorized user on another person's credit card if you trust them to use the account responsibly. When you become an authorized user, all of the account history associated with the credit card is added to your credit report, instantly creating credit history for you. As an authorized user, you will be issued a credit card with your name on it, and you can use it as can the primary account holder. However, only the primary account holder is responsible for making payments on the account. So, you should only add yourself as an authorized user on someone's account if they trust you to use the card responsibly and you trust them to make payments on time. If the primary account holder misses payments, your credit will be negatively impacted.

4. Find a Co-signer & Take Out a Loan

If you have a thin credit file, one way to build credit is to finance a vehicle by asking a close friend or relative to cosign the car loan with you. When someone cosigns a loan with you, his or her credit is factored in and you're more likely to be approved if you have a cosigner who has good credit. This is especially true if you have a thin credit file. That said, if you default on the loan, you will damage your own credit as well as the cosigner's credit because you're both responsible for the repayment of the money borrowed.

What Are the Consequences of Having a Thin Credit File?

If you have a thin credit file, you will face significant difficult opening credit cards, taking out personal loans, and obtaining financing for a home. You will face difficulty because most lenders rely on information in your credit report and your credit score when deciding whether to lend you money. Without that information, they have no way of telling how you've handled past finances, and how likely you are to pay the money you're seeking to borrow. When there is sufficient information in your credit report, lenders can look at that information and assess your creditworthiness. So, if you've been denied a credit card or loan for having a thin credit file, follow the steps outlines in the section above to build your credit.

If You Have a Thin Credit File, Will You Have a Credit Score?

If you have a thin credit file, you will likely not have a credit score. You won't have a credit score because there is too little information on your credit report based on which a credit score can be calculated for you. To obtain a credit score, you must have credit cards, loans, or other types of credit that report your account statuses to the credit report. The reported accounts will give the credit reporting bureaus information based on which they can calculate a credit score for you. That said, to have a credit score, you do not need 10 accounts, all you need to have is at least one account open for a minimum of six months. One account that reports to the three major credit reporting bureaus for at least six months.

How Many People in the United States Have a Thin Credit File?

According to Experian, approximately 62 million Americans have a thin credit file. So, if you thought you were the only one to have a thin credit file, think again. Having a thin credit file means that they have very few, if any, open accounts that report to the credit reporting bureaus. If you have a very thin credit file, you may not have a credit score as there is simply too little information in your credit report based on which a credit score can be calculated for you.

Frequently Asked Questions (FAQs)

1. What is a thin credit file and why is it bad?

Having a thin credit file is defined as having too little information in your credit report based on which a credit score can be calculated for you. For example, if you do not have any credit cards or loans, you will have a thin credit file, and will likely be denied credit.

2. How do you fix a thin credit file?

You can fix a thin credit file by opening credit cards, taking out personal loans, and making payments on those accounts. Your account status will be reported to the credit bureaus, and your credit report will be populated with credit information. This allows a credit score to be calculated for you, and allows lenders to assess your creditworthiness.

3. How can I thicken my credit file?

You can thicken your credit file by opening credit cards and taking out loans. Your lenders will then furnish your account status to the credit reporting bureaus, thickening your credit file.

4. How can I quickly build credit?

You can quickly build your credit by opening credit cards and taking out loans and paying them on time, keeping your account balances low, and refraining from applying for too much new credit within a short period of time.


Should You Cancel Unused Credit Cards?

If you have too many credit cards, you might be wondering whether you should cancel your unused credit cards? This post provides you with everything you need to know about canceling unused credit cards.

Should You Cancel Unused Credit Cards?

You should not cancel unused credit cards because canceling them could cause your credit score to drop. Canceling your credit card could cause a credit score drop because it may increase your credit utilization, reduce your credit mix, and reduce your average account age. We will now explain the reasons why you should not cancel credit cards even if you do not use them in more detail below.

Canceling an unused credit card could increase your credit utilization because when you close a credit card account, you're losing the credit limit associated with your account. If you carry balances on your credit cards, you will increase your credit utilization. An increase in credit utilization can potentially lower your credit score.

Your credit utilization (how much of your available credit you're using) accounts for 30% of your credit score. The lower your credit utilization, the better the impact of this factor will be on your credit score.

For example, if you have 2 credit cards, one credit card with a $10,000 credit limits and a second credit card with a $5,000 credit limit. If you have a balance of $3,000 on your first credit card and a $0 balance on your second credit, you're utilizing 20% of your total available credit. However, if you close your second credit card with a $5,000 limit, you will now be utilizing 30% of your total available credit, which can significantly lower your credit score.

As a rule of thumb, you should strive to keep your credit utilization as low as possible for the best impact on your credit score. Experts agree that you should keep your credit utilization below 10% and never exceed 30% credit utilization. Using more than 30% of your available credit will cause a significant drop in your credit score.

The second reason you should not cancel or close an unused credit card is that it has the potential to reduce your credit mix, also known as the diversity of your accounts. If this is your only credit card, closing it could reduce your credit mix. Your credit mix accounts for 10% of your credit score, so closing a credit card account can potentially reduce your mix of credit, lowering your credit score. So, for the best impact on your credit score, you should avoid closing unused credit cards.

The third reason you should avoid closing an unused credit card is that it can reduce the average age of your accounts. The average age of all of your accounts makes up 15% of your credit score. So, the older your accounts, the better of an impact this factor will have on your credit score. Closing down a credit card reduces the average age of your accounts. So, for the best impact on your credit score, you should keep old accounts open for longer, especially if they have a positive payment history associated with them.

Conclusion - Keeping your old credit card accounts open by charging small amounts on them and making payments in full can do wonders for your credit score because it allows you to keep your credit utilization low, it diversifies the types of accounts that you have, and it contributes to an older account age. These are all great things for your credit score.

CSP Pro Tip - If you have a credit card that you rarely use, you should use it for small purchases and make payments on it to avoid having the account shut down for being dormant.

How Does Cancelling An Unused Credit Card Affect Your Credit Score?

Cancelling an unused credit card or credit card that you rarely use can negatively affect your credit score for a number of reasons.

First, canceling an unused credit card can result in a higher credit utilization (how much of your total available credit you're using). Higher credit utilization can lower your credit score, especially if closing your credit card results in a credit utilization of 30% or more. As a rule of thumb, you should keep your credit utilization below 10% and never exceed 30%. Exceeding 30% credit utilization can significantly lower your credit score. So, consider whether closing your credit card would increase your credit utilization prior to closing your account.

Second, closing an unused credit card can slightly lower your credit score because it may reduce the diversity of your account. Your credit diversity, also known as credit mix, accounts for 10% of your credit score. Whenever you close an account, you can potentially reduce the diversity of your accounts, lowering your credit score. So, if this is your only credit card, you should avoid closing it for your credit mix factor to have the best impact on your credit score.

Third, canceling an unused credit card will reduce the overall age of your accounts. Your account age makes up 15% of your credit score. The older your accounts, the better this factor will impact your credit score. So, to increase your account, you should keep old accounts that are in good standing open for longer, meaning you shouldn't close your credit card account for this impact on your credit score.

What Should You Do With Your Unused Credit Card Instead of Cancelling It?

If you have an unused credit card and you're debating whether to keep your credit card open or close it, we will share some things that you can do with your unused credit card instead of cancelling it.

The best way to make use of a rarely used credit card is to use it as a card for making some of your monthly recurring payments. For example, you can use it to make automatic monthly payments for your cell phone bill, Netflix subscription, cable subscription, and other recurring monthly bills. This keeps your account active and avoids having the account being canceled by your card issuer for being dormant (unused).

That said, make sure to set up payment reminders to make your credit card payments on time. Missing even a single payment on your credit card account can cause significant damage to your credit score. Continuing to use your credit card responsibly and making on-time payments will further boost your credit score.

When Does It Make Sense To Cancel An Unused Credit Card?

It makes sense to cancel an unused credit card if you're paying a high annual fee on your credit card and you're not taking full advantage of the perks and rewards offered by your credit card. That said, you should keep the negative consequences to your credit score in mind before closing an unused credit card.

For example, if you know that you're going to be making a large purchase, such as buying a home or financing a vehicle in the near future, you should hold off on canceling your unused credit card as it will likely cause a drop in your credit score. After making your purchase, then close the credit card if you see that's the correct course of action.

How to Properly Cancel and Close Unused Credit Card Accounts?

If you've determined that closing your credit card is something that you want to do, here is how you can properly close your credit card account so you don't run into any trouble.

  1. Cancel all of the automatic payments being charged onto your account
  2. Pay off the balance on your credit card, leaving a $0 balance on the card
  3. Contact your credit card issuer and confirm that the balance on your credit card is at $0
  4. Ask them to cancel the credit card
  5. Ask your card issuer to follow up with a letter or email confirming that the account has been closed with a $0 balance

CSP Pro Tip - If you want to cancel multiple credit cards, it's best if you do not cancel all of them within a short period of time, space out the closure over a course of several months. This will help you avoid a large increase in your credit utilization. You should keep credit cards with high limits open so that you can benefit from a low credit utilization rate.

Closing An Unused Credit Card Without Hurting Your Credit Score

There is a way to cancel an unused credit card without hurting your credit score, but for this method to work, you must have two credit cards with the same card issuer. For example, if you have two Bank of America Credit Cards, and for some reason, you want to close one of your accounts, you can ask your financial institution to transfer over the credit line from one of your cards to the other card.

This prevents the closure of your account from increasing your credit utilization since you're shifting the credit limit that would have been lost to another credit card.

For example, if you have two credit cards with Bank of America, one with a $5,000 credit limit and a second card with a $4,000 credit limit. You can ask them to transfer over your $4,000 credit limit to your credit card with a $5,000 credit limit, giving you a total of $9,000 credit limit on a single credit card after canceling the second card. This way there will be no increase in your credit utilization.

The Bottom Line

For the best impact on your credit score, you should keep old credit cards open. You should avoid closing them to keep your credit score as high as possible. This is especially true if you plan on making major purchases in the near future, such as financing a vehicle or even taking out a loan to buy a home. So, consider the consequences of closing an unused credit card vs the benefits, and then make your decision. If you have any general questions or comments, please feel free to leave them in the comments section below.

Frequently Asked Questions (FAQs)

1. Why should you avoid canceling unused credit cards?

You should avoid cancelling unused credit cards because it can potentially increase your credit utilization, reduce your credit mix, and reduce the overall age of your accounts, which can all lower your credit score. For the best impact to your credit score, you should keep old account even if they're not used very often open.

2. Do unused credit cards affect your credit score?

Yes, unused accounts in good standing can positively affect your credit score. So, even if you rarely use them, you should keep them open for the best impact to your credit score.

3. Is it bad to have a credit card that you rarely use?

There is nothing wrong with having a credit card that you rarely use. However, you should keep in mind that if you do not use your credit card for a long period of time, your card issuer may consider the account as dormant, and may therefore either lower your credit limit or close your credit card.

4. What is the major disadvantage of closing an unused credit card?

The major disadvantage of closing a credit card is that it can potentially increase the amount of total available credit that you're using, lowering your credit score.


Can a Secured Loan Help You Build Credit?

If you were thinking about taking out a secured loan, you may be wondering whether a secured loan can you build credit? We will answer this question in much detail below.

Can a Secured Loan Help You Build Credit?

Yes, a secured loan can help you build credit so long as you make all of your payments in full and on time. Secured loans can help you build credit because your account status is reported to the three major credit reporting bureaus, so any payments you make should help your credit score. Your payment history accounts for 35% of your credit score, so making payments on any type of loan helps improve your credit score. However, missing even a single payment on your secured loan can cause significant damage to your credit score. So, make sure to make all of your payments on time for the best impact on your credit score.

Having said that, you should approach secured loans with caution because if you fail to repay your secured loan, your lender may seize the asset securing the loan. So, if you fail to repay, not only will you cause significant damage to your credit, but you will also lose the asset you placed as collateral for the loan. For example, if you used your car as collateral, if you fail to repay, you will lose your vehicle.

For these reasons, you should only take out a secured loan if you really need the money, and if you can repay the loan as originally agreed between you and your lender to avoid losing your collateral and causing damage to your credit.

What is a Secured Loan?

A secured loan is a loan where a person places collateral, such as cash, stocks, personal property, real property, or any other type of collateral in exchange for borrowing money. If the borrower fails to repay the loan on time as originally agreed, the lender has the right to take the collateral to recoup its losses. Lenders are more likely to make secured loans because they take less of a risk when doing so because if you fail to pay, they can take your collateral and sell it to recoup their money. They do not have to take you to court and sue you to recover their money.

Secured loans are great for someone who has bad credit or has not yet built his or her credit because they are easier to obtain than unsecured, regular personal loans. Unsecured regular personal loans require good credit because the lender is lending you the money based on your creditworthiness and there is nothing securing the loan, so the lender is taking a bigger risk by not requiring collateral.

Should You Take Out a Secured Loan?

You should only take out a secured personal loan if you know you can afford to make the monthly payments on the loan on time. This is so because missing even a single payment on the loan can cause significant damage to your credit. Even worse, if you default on the loan, you will lose the collateral you've placed to secure the loan.

So if you believe that there is a chance that you'll fall behind on your loan payments, you should avoid taking out a secured loan to keep your property and avoid damage to your credit.

However, if you have the ability to make all of the loan payments on time, you can definitely used a secured loan to improve your credit. This is so because the status of your secured personal loan is likely to be reported to the credit bureaus. Making payments on loans will help you build your credit.

In fact, your payment history accounts for 35% of your credit score. So, having a loan account where you've made all your payments on time can significantly help you improve your credit score.

Having said that, secured loans are not for everyone. If you've defaulted on past debt obligations, you should approach them with extreme caution. This is so because if you default on a secured loan, you will lose your collateral and cause significant damage to your credit.

Options Other Than Secured Loans That Can Help You Build Credit

Here are some options other than secured loans that can help you build credit:

  1. Regular Credit Card - If you want to build credit or improve your credit, you should consider applying for a credit card that you have a reasonable chance of being approved for. Oftentimes, card issuers provide you with the minimum credit score required for approval, so choose a card that's suitable for your credit score and apply for it. If you're approved great, you can use your new credit card to build your credit. Making payments and keeping a low balance on your new credit card will help you build your credit very quickly. Just make sure to make all of your payments on time, missing a single payment can cause significant damage to your credit.
  2. Secured Credit Card - If you applied for a regular credit card, but were denied, you should consider applying for a secured credit card. Secured cards work the same way as do regular credit cards and they can be a great tool for building credit from scratch or rebuilding your credit. The only major difference between a secured credit card and a regular unsecured credit card is that you will have to place a security deposit with the card issuer to obtain a secured card. The security deposit determines your credit limit. For example, if you place a $500 security deposit, you will be issued a credit card with a $500 credit limit.
  3. Become an Authorized User - A third option for improving your credit without taking out a secured loan is to find someone, such as a close relative who has good credit, and asking them to add you onto their credit card as an authorized user. Adding yourself as an authorized user allows you to obtain the good credit history behind the credit card. For example, if your brother or sister adds you as an authorized user to their credit card, the entire credit history behind that credit card will appear on your credit report as if you had the account, boosting your credit score. That said, some people may be unwilling to add you as an authorized user because only the primary account holder is responsible for making payments on the account. You, as an authorized user, are not liable for making payments on the account.
  4. Take Out a Personal Loan - A fourth option to improve your credit is to take out a regular unsecured personal loan. Personal loans are a great option for someone who has good credit. If you don't have good credit, you should consider asking a close friend or relative to cosign the loan with you. If they have good credit, your chances of being approved are very good. That said, you should know that if someone cosigns a personal loan with you, both of you are liable for repaying the money borrowed. If you miss payments or default on the personal loan, you will cause significant damage to your credit and your cosigner's credit, so make sure to only take out a personal loan if you can afford to pay it off.
  5. Financing a Car - A fifth option that you have is to finance a vehicle. Now you shouldn't go out and buy a new car just to build your credit, but if you do need a car, you should consider financing it instead of paying it off. Financing a vehicle involves taking out an installment loan to pay it off. The payments you make on a car loan will boost your credit so long as you make your payments on time. Missing even a single payment can cause significant damage to your credit. So, make sure to make all of your payments on time.

Secured vs Unsecured Loans - What is the difference between secured and unsecured loans?

At this point, you might be wondering what is the difference between a secured loan and an unsecured loan. The major difference between the two types of loans is that with a secured loan, you are placing a security deposit in the form of cash, personal property, or real property to secure the loan. If you default on the secured loan, your lender can take your property and sell it to recoup the money it allowed you to borrow.

With a regular unsecured personal loan, you are borrowing money based on your creditworthiness. The risk for lenders is larger with regular unsecured personal loans because if you default, the lender is left with nothing since there is no collateral that can be sold to recoup their money.

That said, sine unsecured loans are riskier for lenders, they typically come with higher interest rates. The higher interest rates are meant to compensate lenders for taking a risk by lending you money.

Nevertheless, if you default on an unsecured loan, you will not lose your property because there is nothing securing the loan. However, defaulting will cause significant damage to your credit when late payments are reported to the credit bureaus. If the debt is sold to a collection agency, a collection agency may cause additional damage by adding a collection account to your credit report.

Frequently Asked Questions (FAQs)

1. Will a secured loan build credit?

A secured loan, if used properly, can help you build credit. However, for a secured loan to help you build credit, you must make all of your monthly payments on time. Missing even a single payment on a secured loan can cause a missed payment mark to be added to your credit report. A missed payment mark can significantly reduce your credit score. So, make sure to make your payments on time and a secured loan will help you build credit.

2. Are secured loans worth it?

Secured loans can be used as an effective tool to borrow money and build credit. However, you must use them responsibly and make monthly payments on time for them to build your credit.

3. Is it bad to get a secured loan?

It's only bad to get a secured loan if you believe that you're going to default on repaying it. Secured loans can be an effective tool to build your credit. However, if you take out a secured loan and miss payments on the loan, you will cause significant damage to your credit. Additionally, if you default on your secured loan, you will lose your collateral (the money or property securing the loan).

4. What are the main advantages of a secured loan?

The main advantages of secured loans is that they're easier to get than regular non-secured loans since lenders have collateral they can take if you default. Also, they can be used as a great tool to build credit. Additionally, they often come with a lower interest rate than regular loans since the lender is taking less of a risk since there is collateral involved.

5. Do secured loans hurt your credit?

Secured loans do not hurt your credit. They can hurt your credit if you miss payments on them or default on making your monthly payment.


What Happens If I Apply For a Credit Card and Get Denied?

If you applied for a credit card and your application was denied, you might be wondering, what happens after you denied for a credit card? We will provide you with everything you need to know about what happens after you apply for a credit card and get denied.

What Happens If I Apply For a Credit Card and Get Denied?

If you apply for a credit card and you get denied, nothing negative will be added to your credit report. However, a hard inquiry will be placed on your credit report regardless of whether you're approved or denied a credit card. A single hard inquiry will only lower your credit score by a few points. Hard inquiries remain on your credit report for 2 years from the date that you applied for a credit card. If you're denied, the credit card issuer is legally obligated to send you a letter known as an adverse action letter, explaining to you why you were denied the credit card you applied for.

Here are some common reasons why you may have been denied the credit card you applied for:

1. Negative Information - There may negative information on your credit report, such as missed payments, repossessions, or bankruptcy making it difficult for the lender to approve you for a credit card.

2. Limited Credit History - You may have been denied a credit card because you have little credit history. Typically, lenders like to see that you have aged open accounts that are in good standing to approve you for a credit card. So, if you're applying for a credit for the first time, it's likely that you have what is known as a thin credit file, making it difficult for the lender to approve you. This is so because lenders want to make sure that you're likely to repay your debts on time, and with no history, they have no assurance that you'll make your payments on time.

3. High Credit Utilization - If you have open credit cards with high balances, this means that you're likely using too much of your available credit. Card issuers and banks do not want to lend money to people who have too much debt. Too much debt means there is a large likelihood that you'll default on your monetary obligations, and so it's a common reason for being denied a credit card. Typically, you should only utilize 10% of your available credit and never exceed 30% utilization. If you use more than 30% of your available credit, not only are your chances of being denied for a credit card high, but the high utilization could also lower your credit score.

4. Too Many Credit Card and Loan Applications - If you've submitted too many credit card and loan applications within a short period of time, this may be grounds for denial of a credit card. This is so because every time you submit a credit card or loan application, a hard inquiry is added to your credit report, alerting future lenders and creditors that you've recently been seeking credit. Lenders and credit card issuers do not like to see too many credit applications within a short period of time because it indicates that you're actively seeking credit, which may signify financial difficulty. Lenders only want to lend money to people who can pay back the money they borrow.

5. Late Payments - If you have late payments on your credit report, this may be the reason you were denied a credit card. This is so because lenders want to lend money and issue credit cards to persons who will pay on time. If you have late payments on your credit report, this shows lenders that you have failed to honor your obligation to make your payments on time, making it less likely for them to lend you money. The more recent the late payment, the more likely it is that you will be denied a credit card.

What Should You Do If You Applied for a Credit Card and Got Denied?

If you applied for a credit card and were denied, it's very difficult to be approved for the credit card you applied for. You can try to contact the card issuer and ask them to consider other sources of income that you did not include in your credit card application, such as alimony, child support, and other sources of income. But, doing so is unlikely to change the decision of the card issuer.

Additionally, if you have other credit cards with the card issuer you applied with, you can ask the card issuer to shift some of your other credit lines to the new credit card you applied for. Some card issuers will be willing to do this because they're not taking on additional risk by simply moving some of your existing credit lines to a new credit card. That said, your credit line on a different credit card will be cut short as it's used on another credit card.

That said, if you ask the card issuer to reconsider your credit card application and the reconsideration is unsuccessful, you shouldn't rush to apply for another credit. Submitting too many credit applications within a short period of time will make it very difficult to be approved for a credit card. Instead, you should focus on improving your credit score by paying down your account balances, making your payments on time, and keeping old accounts open and in good standing.

After you've improved your credit for three to six months, you should only then submit a credit card application for a credit card that you're reasonably likely to be approved for. Check the requirements for the credit card you want to apply for before applying. If your credit score falls within the card issuer's requirements, submit an application, but if the card requires a higher credit score than yours, you should refrain from applying. This saves you from an unnecessary hard inquiry from being added to your credit report.

Does Applying for a Credit Card and Getting Denied Hurt Your Credit Score?

Merely getting denied for a credit card will not hurt your credit score as no negative information is added to your credit report for being denied. However, whenever you apply for a credit card, a hard inquiry is added to your credit report regardless of whether you're approved or denied for the credit card. That said, a hard inquiry will only lower your credit score by only a few points (3 to 5 points). The impact a hard inquiry has on your credit score will lessen as the hard inquiry ages. Experts agree that a hard inquiry only impacts your credit score for 12 months, and after 2 years, hard inquiries are removed from your credit report automatically. If a hard inquiry remains on your credit report for more than 2 years, you can file a dispute with the credit reporting bureau showing the hard inquiry to have it permanently removed from your report.

How To Improve Your Credit Score Before Applying For Another Credit Card?

There are a number of things that you can do to improve your credit score before applying for another credit card, here are some of those things:

1. Payments - Make your credit card and loan payments on time. Your payment history has the biggest impact on your credit score because it accounts for 35% of your credit score. So, making your payments on time will help you maintain and improve your credit score. Missing even a single payment can cause a significant drop in your credit score. You can ensure that your monthly payments are made on time by setting payment reminders and automatic payments.

2. Account Balances - Reducing the balances (amount owed) on your credit cards, student loans, personal loans, and other types of debt will improve your credit score. This is so because your credit utilization accounts for 30% of your credit score, so paying down your balances will boost your credit score.

3. Credit Applications - If you want to improve your credit score to qualify for a credit card in the future, you should refrain from submitting too many credit applications within a short period of time. Hard inquiries account for 10% of your credit score, so reducing credit applications will improve your credit score. Also, lenders do not like to see that you've been applying for too many credit cards or loans as it indicates that you're actively seeking credit. So, keep credit card and loan applications to a minimum. As a rule of thumb, you should have no more than 2 to 3 hard inquiries on your credit report for the best chances of being approved.

4. Old Accounts - You should keep old accounts that are in good standing open because they have a positive impact on your credit score. Even if you rarely use your old account, keep it open for the best impact to your credit score.

5. Credit Report - You should frequently review your credit report. Periodically reviewing your credit report can uncover hidden negative items on your credit report. It is not uncommon to find negative information impacting your credit, such as a collection account that you had no idea about. So, check your credit report and address any negative items on your credit report.

Bottom Line - What Happens If You Get Denied For a Credit Card?

If you get denied a credit card or your credit card application is not approved, no negative information will be reported on your credit report. However, a hard inquiry is placed on your credit report regardless of whether you're approved or denied for the credit card. That said, you should space out credit card applications for the best chances of being approved.