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How Banks and Credit Unions Must Prepare

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The challenges of the COVID-19 recession for lenders have not yet begun to bite in earnest, but banks and credit unions are going to start feeling it soon, according to an expert from Accenture.

The impact on credit of all kinds is going to be felt in different ways depending on the makeup of each financial institution’s portfolio and on the demographics of their consumer and small business borrowers. But as the summer of 2020 moved into fall, the Novocain was wearing off on the recession pain as certain credit relief efforts tailed off and as the impact of multiple stimulus programs ended.

Now lenders will begin feeling a nonperforming loan crisis that will differ from anything seen by most people in the industry today, with the exception perhaps of the oldest credit veterans. This recession’s impact on credit isn’t something that can be blamed on greed, bad credit modeling, overly aggressive marketing, the madness of crowds nor any of the villains of most crunches in memory. Shutdowns introduced to avert the spread of coronavirus slammed the emergency brake on a economy that still pointed to prosperity.

This overall view of where financial institutions stand comes from a report by Accenture and other sources. Chris Scislowicz, Managing Director of Accenture’s financial services practice, and Head of North American credit practice, told The Financial Brand that many lenders, with the exception of the very largest, are only now beginning to get a handle on where they stand on the credit side and what is likely to come.

Lenders Are in the Calm Before the Credit Storm

“The looming nonperforming loan crisis is going to manifest itself differently across consumer segments, across industry segments,” says Scislowicz. “It’s going to affect consumers, homeowners, small business owners and large companies.”

“The looming nonperforming loan crisis is going to manifest itself differently across consumer segments, across industry segments. It’s going to affect consumers, homeowners, small business owners and large companies.”
— Chris Scislowicz, Accenture

An Accenture report, “How Banks Can Prepare for the Looming Credit Crisis,” states that “We are in the calm before the storm, the moment in which payment holidays are not flowing through into consumer credit scores and where underlying business health is being masked by furlough and payroll protection schemes.”

That calm is ending, according to Scislowicz, and many financial institutions are figuring out where they stand. He explains that the drain of the Paycheck Protection Program and forbearance programs on lenders’ attentions and energies cannot be overestimated. In many organizations each stage of the PPP, the Main Street programs and more combined to divert staff and time away from more analytical tasks due to the nature of the health and economic emergency.

“The implications for the industry were pretty profound,” says Scislowicz, “in terms of pulling people off the line. But now the folks with key responsibility for portfolios are starting to take a hard look at things. They are asking, now that programs are winding down, what it means for their books of business.” While issues have already surfaced in commercial lending, that will be expanded as consumer credit forbearance begins to go away.

Matt Komos, Vice President of Research and Consulting at TransUnion, notes that two factors occurred in July 2020 that haven’t shown up in national credit statistics yet. First, credit relief offered to many consumers at the outset of the crisis began to end. Second, the $600 federal unemployment insurance payment boost went away.

57% of consumers reported that they have been economically hit by the COVID recession, according to TransUnion’s Financial Hardship Survey for July.

Here’s what to watch for: “I think the August numbers will give us a sense of what we might expect for the rest of the year,” says Komos. “That’s my preliminary assumption.”

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The Pain Begins Now For Lower-Income Consumers

“I was on the phone with a chief credit officer from a major superregional bank in mid-August,” says Accenture’s Scislowicz, “and he said that they were just starting to see delinquencies tick up.”

Accenture believes lenders will begin feeling more pain in late September to early October — the timing is approximate. From that point on, input from Accenture and other sources indicates, how well or how badly things go will hinge on the progress on COVID containment, Presidential election politics, regulatory attitudes, shareholder pressure on top management of banking companies, and the behavior and judgment of lenders themselves.

“The bottom 20% of the workforce has been hit hardest. People in many blue-collar jobs can’t work from home and have been hit harder by layoffs and closures.”

“Unlike the previous crisis, which was about speculation and overvaluation, what we have here is unemployment taking its toll,” says Scislowicz. Job losses keeps rising, with layoffs beginning to increase as companies reassess their near-term future.

“I think this could get pretty ugly on the delinquency front,” says Scislowicz.

In consumer and mortgage lending Scislowicz says patterns are shaping up differently than in the Great Recession. That crisis and its aftermath tended to vary around the country based on geographical factors that influenced market prices, he explains. The current crisis appears to depend on income level and the nature of the borrower’s employment.

Scislowicz says the bottom 20% of the workforce has been hit hardest. People in many blue-collar jobs can’t work from home and have been hit harder by layoffs and closures, overall.

At the same time that these consumers are suffering, those who still have jobs and who want homes have been bidding the prices of houses up as they pile into residential real estate in a time of extremely low rates, to the point where the housing supply is quite strained,.

“So you’ve got a strong dichotomy brewing between the haves and the have nots,” Scislowicz states.

A consumer survey conducted for Finicity in June 2020 found that people with household incomes of less than $50,000 appear to be getting hit harder by this recession. Some statistics from the firm’s research:

  • 50% have lost their job or had their income reduced, compared to only 31% of households with over $100,000 in income.
  • 73% are having trouble keeping up with bills and payments, versus 57% of those with income between $50,000 and $100,000 and 54% of those with household income over $100,000.
  • While 25% have tried to tap credit less often during COVID, 21% have had to use it more often. Another 23% have not attempted to use credit because they don’t think they would qualify.
  • 68% worry that the recession will damage their credit, while only 52% of people with over $100,000 in household income have that concern.

The TransUnion hardship study indicates that consumers are tending to not tap credit to meet income shortfalls, and those who have received some type of debt relief from lenders have been using that opportunity to pay down their debt more quickly than beforehand.

But the same research indicates that almost a third of renters surveyed said they will soon be unable to pay their rent. This will have ripple effects on landlords as well as on commercial real estate lenders financing multifamily housing.

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Be a Hero … for As Long As Possible

Something else that sets this recession and the credit impact of COVID-19 apart from past slumps is that there is comparatively little history on which to base planning.

“Lenders are going to have to make much faster decisions on credit risk than they have, historically,” says Scislowicz, “because they don’t have the luxury of time.”

Accenture believes that because this recession is not being placed at banks’ doorsteps this time around lenders have the opportunity to be heroes. Some of this has already been seen in early efforts to voluntarily offer credit relief, such as skip-a-pay programs. But this is a limited-time opportunity.

“It will last right up until the point where their shares start to suffer and their shareholders come after them,” says Scislowicz. “By that point they will have their own challenges.”

Initially, Scislowicz believes, regulators are likely to give lenders the leeway they need to continue to help consumer and business borrowers to make it through this rough period. He says that when the firm has spoken to its clients, which skew to the larger end of the banking industry, they are more concerned about shareholders than they are about regulators. “How long that leeway will last is anybody’s guess,” says Scislowicz.

“Accenture’s report warns against the possibility of using ‘blunt-instrument credit management based on short-term considerations rather than surgical intervention guided by forward-looking data and longer-term economics’.”

In early August 2020, recognizing that the first wave of voluntary assistance was winding down, federal regulators acting jointly through the interagency Federal Financial Institutions Examination Council, issued guidance on granting further relief while operating prudently.

“Well-designed and consistently applied accommodation options accompanied by prudent risk management practices can minimize losses to the financial institution, while helping its borrowers resume structured, affordable, and sustainable repayment,” the statement says.

Accenture’s report warns against the possibility of using “blunt-instrument credit management based on short-term considerations rather than surgical intervention guided by forward-looking data and longer-term economics.” Ideally, the report notes, thinking more broadly rather than focusing solely on asset recovery will lead to better outcomes for all.

“What we’re referring to is treating all borrowers the same,” says Scislowicz. He explains that the risk is that lenders will start putting consumers and small businesses into categories based on broad characteristics of their borrowings and making blanket decisions. “This includes such actions as deciding that anybody who has been delinquent for X number of days gets put into either foreclosure or special assets or what have you,” the analyst states.

Slice and Dice Your Portfolio to Find Best Solutions

“What we’re recommending is a more enhanced and segmented view of nonperforming loans than, frankly, many banks have used before,” says Scislowicz.

This suggestion applies particularly to small business lending, which represents so much of American employment and which has taken the COVID recession harder than other business categories. Scislowicz says the temptation to treat small firms identically won’t help lenders nor borrowers.

“Most banks serve niches of small business borrowers,” says Scislowicz. “They should be asking, ‘What do we think is going to happen to this segment and that segment?’”

One example he points to is dry cleaners. With work-from-home still continuing for many companies, he says, people aren’t getting business clothing cleaned very often.

“Do you think that segment will rebound? Or will working from home be the new normal and will dry cleaners suffer in the long term?” asks Scislowicz. The point is that another type of small business just down the street — a medical practice or a pet store — may face an entirely different future. Right now lenders should be assessing each type of business and each individual business as specifically as possible.

This will challenge many institutions because the situation goes beyond what traditional training accounts for. The same focused analysis will be required on other fronts as well. Commercial real estate, for example, in categories besides multifamily housing, will succeed or fail in this slump based on the industry affiliations reflected in the tenant mix.

Blunter Approaches Will Be Inevitable While the Recession Lasts

Scislowicz acknowledges that lenders won’t always be able to avoid wielding broad credit management policies. It will hinge on markets and the individual institution’s own financial health, no doubt.

He says the duration of the recession will also affect how much lenders can tailor their credit responses to each segment and each borrower.

“The longer the recession lasts, the more blunt I think things will get, which is unfortunate,” says Scislowicz. “You’d like to think that the longer it lasts, the more surgical lenders could be. But as time goes on there will be pressure from shareholders as well as from regulators to take blunter approaches.”

For an industry that took much of the heat for the Great Recession, and suffered resulting trust issues for years afterwards, this isn’t a great prospect.

“It will be at odds with public perception and there will be public outcry,” Scislowicz predicts. “The bottom line is that if this goes too long, banks are going to be in an untenable position.”

This is an area where, for a time, credit unions will have the advantage of being able to think in terms of members, not having to be concerned about shareholders, says Scislowicz. That said, they will face regulatory pressures should credit conditions deteriorate badly.

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A Worst-Case Scenario: Lenders Amplify the COVID Recession

An inevitable challenge is that every lender at some level is not only a participant in the economy, but an influence on that economy, whether the scope of that influence is national, at the state level or in a small town.

“If banks suddenly put a hold on funding, we could find ourselves quickly in a different crisis. Similarly, if banks started to suddenly start foreclosing on homes rapidly, they could create a real estate crisis.”

“Banks have to make clear-sighted decisions about how parts of the economy should be restructured,” the Accenture paper states. “Too indulgent, and the economy won’t adapt to serve a post-COVID world. Too harsh, and banks risk becoming pro-cyclical amplifiers of the crisis. That is the fine line between being a hero and a villain.”

Scislowicz says this could happen in the current recession if lenders found that conditions become shaky enough that they decide to turn off the credit tap.

“Liquidity nearly dried up in 2010,” recalls Scislowicz. “If banks suddenly put a hold on funding, we could find ourselves quickly in a different crisis. Similarly, if banks started to suddenly start foreclosing on homes rapidly, they could create a real estate crisis.”

The firm isn’t saying that this kind of development will come, only that it could come if lenders aren’t careful.

“There are levers that lenders can pull and certainly some of those levers could make this recession worse,” says Scislowicz. Another potential risk, for example, is institutions liquidating assets too quickly, flooding the market involved and driving down prices.

Even being helpful to troubled borrowers has be done carefully.

“There’s the concept of lending into a problem, giving someone with a strong business model the funds to get through six more months,” Scislowicz explains. “But the catch is that nobody’s got a crystal ball on how long this is going to last. If we’re still sitting in our homes wearing masks in August 2021, the U.S. will be a very different place, and some very different actions will have to be taken.”

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The Pitfalls of Buying Furniture With In-Store Financing

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Furnishing your home can be expensive, and many shoppers find it difficult to cover the cost of doing so. To make these purchases more affordable for the average shopper, many stores offer qualified customers interest-free furniture financing. You also have other options available to you that aren’t offered by stores, like credit cards and personal loans.

How in-store furniture financing works

Many large retail stores offer bad credit furniture financing through store-branded credit cards and “buy now, pay later” furniture installment plans.

It’s fairly common for furniture retailers to offer a store-branded credit card with deferred interest financing plans, where you don’t get charged interest if you pay off the purchase in full within a set number of months. For example, you may be able to purchase furniture on your card and pay 0% APR for six months or longer, depending on the financing plan. But you could be on the hook for the interest you didn’t pay during the financing period — a phenomenon known as deferred or retroactive interest. Further, your APR will jump to 20% to 25% or higher, making repayment more expensive moving forward.

Here are a few examples of store-branded credit cards and their special financing options:

6 furniture stores that offer financing
RetailerType of financingStandard purchase APRSpecial financing offer
Ashley Furniture HomeStoreCredit card29.99% VariableDeferred interest financing on qualifying purchases for six or more months.
Bob’s Discount FurnitureCredit card28.99% VariableDeferred interest financing on purchases of over $399 for six or 12 months.
IKEACredit card21.99% VariableZero percent interest for six, 12 or 24 months on purchases of $500 or more for the IKEA Projekt card.
Conn’s HomePlusCredit card29.99% VariableZero percent interest for 48 months on purchases of $3,999 and more.
Value City FurnitureCredit card29.99% VariableDeferred interest financing on qualifying purchases for six or 12 months. Zero percent interest financing for 36 months with 36 equal monthly payments.
WayfairCredit card26.99% VariableDeferred interest financing for six, 12, 18 or 24 months on orders of $200 or more.

Other furniture stores with financing options, including Wayfair, may offer point-of-sale loans through third-party companies like Affirm. These loans can come with a fixed APR of up to 30% with a short repayment term. This can be a good option if you prefer fixed payments, can repay the loan over the allotted term and qualify for an affordable APR.

Pros and cons of financing your furniture in-store

In-store furniture financing can be an affordable way to make your purchase — if you can pay off the debt on time. When it comes to store-branded credit cards, you’ll want to avoid deferred interest and the potentially high standard APR by paying off your debt during the special financing period. With point-of-sale loans, make sure the monthly payments and repayment term are feasible as missed payments can damage your credit.

Consider the following pros and cons of using in-store furniture financing before signing up for a new credit account or loan:

In-store financing: Pros and cons
ProsCons
  • May qualify for 0% APR for a limited time
  • Convenient application process at checkout
  • Opportunity to build credit
  • May have to pay deferred interest after the special financing offer expires
  • Potentially high APR and/or short repayment term
  • May need good credit to qualify

You may qualify for 0% APR, if you meet requirements

In-store financing could be a good deal if you pay off the money you borrow within the zero-interest financing period.

For someone who doesn’t have enough savings to cover the furniture, it might make more sense to take advantage of a deal like this instead of tapping into an emergency fund. However, you’ll want to make sure you pay off the total debt before your term ends to avoid retroactively accrued interest.

You can get new furniture right away

With furniture financing available at checkout, you can apply for credit or a loan to pay for the items that you’ve been eyeing, even if you don’t have the cash on hand to purchase them.

The trick here is to make purchases that you can afford to pay off in a short period. Special financing offers on store-branded credit cards may only last six or 12 months, sometimes longer depending on the size of your purchase. Loans like those offered by Affirm may offer loan terms based on your purchase amount, as well.

Oftentimes, furniture retailers will work with a financial institution that issues in-store credit cards. If these credit companies report on-time payments to one or more of the three credit bureaus, you may find your credit score steadily increasing over time. Check with retailers before you apply for a card to see whether or not you can take advantage of this opportunity.

You may have to pay deferred interest

Store-branded credit cards with 0% APR special financing offers come with deferred interest. That means interest accumulates on your principal during the financing period, starting from your original date of purchase. If you own a credit card with a deferred interest offer and don’t repay your entire principal amount before the financing period ends, you may find yourself owing hundreds of dollars or more in these retroactive interest fees.

Store credit cards have high standard purchase APRs

On top of owing deferred interest going back to the beginning of the date of purchase, the credit card company will continue to charge interest until you repay the full amount owed.

Remember that in-store credit cards carry high interest rates — higher than a typical credit card’s interest — so once the regular APR kicks in and you’re hit with all the deferred interest charges, the charges can rack up rather quickly.

May need good credit to qualify

People with bad credit or no credit might not qualify for furniture financing, since many stores require that you sign up for their partner bank’s credit card in order to do so.

But here’s the thing: Even the act of applying for new credit can temporarily ding your credit score. For that reason, make sure to ask the store if it offers prequalification, an approach that assesses your creditworthiness without conducting a hard credit pull. You can get a good idea of whether you’ll get approved for financing, without hurting your credit score in the process.

Alternatives to in-store financing

Budget, save up cash and pay upfront

If you want to buy furniture, you’ll end up paying for it one way or another. So instead of getting a furniture loan, you might consider saving up the cash to pay for it.

This strategy will keep you from the risk of having to pay high interest retroactively if you can’t repay the loan within the promotional period. You’ll also own your furniture sooner and pay less for it in the process.

Go to a rent-to-own furniture retailer

Rent-to-own furniture stores offer affordable installment payment plans for those who need it. With a rent-to-own plan, you can walk in and buy the furniture you need immediately, and gradually pay for ownership over a predetermined number of weeks or months.

Rent-to-own furniture retailers often don’t require credit checks, and you have the freedom to end your contract at any time. However, rent-to-own payment plans can be much more expensive than if you bought the furniture on credit or cash outright.

If you have other options available to you, you may want to consider them instead as you’ll likely save more money with those choices. However, rent-to-own plans may be a good alternative for those who need furniture immediately but don’t have the cash upfront, or for those with bad or no credit.

Use a credit card with a 0% APR promotional offer

If you’re able to land a credit card with a 0% introductory APR, chances are its terms will be better than the ones a furniture retailer can offer you. Even if you only qualify for a regular credit card, they’ll usually still carry a lower interest rate than retail store cards, which can save you a bundle if you’re left making furniture monthly payments after the promo period ends.

If you’ve got a credit card offer with a 0% percent introductory rate on purchases, compare its regular interest rate with that of the furniture store credit card. Make sure to choose the lower-cost option, in case you cannot pay off the balance by the time the promotional period is up.

You could use a personal loan to finance furniture purchases. This option comes with a set repayment schedule, fixed interest rate and relatively quick approval process. Depending on the lender, you could borrow as little as $1,000 or as much as $50,000 or more.

However, lenders will conduct a credit check on all applicants so you’ll want to have good credit or better to qualify. The best repayment terms are reserved for those with excellent credit, although those with a good credit score can still land attractive offers.

Unlike credit cards, though, you won’t find lenders offering 0% interest on personal loans so you’ll pay more than you would if you paid with cash upfront. To save as much money as possible, carefully weigh the offers you receive and calculate your savings with each before you make your decision.

Compare multiple lenders at once with our comparison tool below:

APR

As low as 2.49%

Credit Req.

Minimum 500 FICO

Origination Fee

Varies

LendingTree is not a lender. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. Terms Apply. NMLS #1136.


As of 17-May-19, LendingTree Personal Loan consumers were seeing match rates as low as 2.49% (2.49% APR) on a $20,000 loan amount for a term of three (3) years. Rates and APRs were based on a self-identified credit score of 700 or higher, zero down payment, origination fees of $0 to $100 (depending on loan amount and term selected). Terms Apply. NMLS #1136

Information contained on this page is provided by an independent third-party content provider. Frankly and this Site make no warranties or representations in connection therewith. If you are affiliated with this page and would like it removed please contact pressreleases@franklymedia.com

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Why Are There Different Types of Credit Scores?

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You probably know that you should be checking your credit score on a regular basis—but which credit score should you check? Do you need to know both your FICO credit score and your VantageScore, or is checking one credit score enough? How are FICO and VantageScore different from each other, anyway—and why are there multiple types of credit scores in the first place?

Originally, there was just one credit scoring service, the FICO credit score, created in 1989. The three major credit bureaus (Equifax, Experian and TransUnion) developed VantageScore in 2006 as an alternative to the FICO score. Both FICO and VantageScore offer different types of credit scores depending on what kind of information lenders are requesting and which credit score model is being used.

What does this all mean for you and which credit scores should you be tracking? Let’s take a closer look at how credit scores work, the different types of credit scores and what you need to know about VantageScore versus FICO.

What is a credit score?

A credit score is a three-digit number that represents your creditworthiness. Lower credit scores indicate that you are more likely to be a credit risk, while higher credit scores indicate that you are more likely to be a responsible borrower.

Although there are different types of credit scores, the two main credit scoring models—FICO and VantageScore—use a 300-850 point credit scoring scale. Each credit score falls within a specific credit score range and helps lenders understand how you have used credit in the past and how you are likely to use credit in the future.

What are the main credit scoring models?

Most types of credit scores fall under two main scoring models: FICO and VantageScore. The differences between VantageScore vs. FICO are relatively minor, in the sense that a person with a good FICO score is likely to have a good VantageScore as well. Likewise, a person with a bad credit score under the FICO scoring model is probably going to have bad credit in the VantageScore model.

Here’s what you need to know about the different types of credit scores:

FICO model

The FICO credit score was first developed in 1989 by Fair, Isaac and Company (now called the Fair Isaac Corporation). According to MyFICO, over 90 percent of top lenders use FICO credit scores to make lending decisions.

FICO offers many different types of credit scores. If you are taking out an auto loan, for example, a lender might check your FICO Auto Score. If you are applying for a credit card, a lender might look at your FICO Bankcard Score. If you don’t have much of a credit history yet, you can sign up for UltraFICO to have your banking activity factored into your credit score.

FICO regularly updates its credit scoring models to reflect changes in the industry and provide a more nuanced perspective of an individual’s creditworthiness, although these models can take some time to roll out. FICO recently released the FICO Score 10 suite, for example—but the FICO Score 8 model is still the most widely-used FICO credit score.

The FICO credit score ranges:

  • Exceptional: 800-850
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 300-579

VantageScore model

The VantageScore model was created in 2006 in a collaboration by the three major credit bureaus. Equifax, Experian and TransUnion created VantageScore as a way to provide an alternative to the FICO scoring model. Although VantageScore uses many of the same factors to determine your credit score, it weights these factors differently.

Under the FICO scoring model, for example, your payment history is the biggest factor affecting your credit score. Under the VantageScore model, your credit card balances and credit utilization ratio are the most influential factors in credit scoring.

Like FICO, VantageScore regularly updates its credit scoring models. The VantageScore 4.0 model, for example, became commercially available in 2017 and uses trended data to track changes in credit behavior over time. FICO’s Score 10 Suite also incorporates trended data into its credit scoring decisions—but VantageScore got there first.

The VantageScore credit score ranges:

  • Excellent: 781-850
  • Good: 661-780
  • Fair: 601-660
  • Poor: 500-600
  • Very Poor: 300-499

Other credit score models

FICO and VantageScore aren’t the only two credit scoring models out there. Equifax, for example, has created its own credit scoring model—and unlike the 300-850 point scale used by the most popular FICO and VantageScore models, the Equifax model uses a 280-850 credit score scale.

Other credit score providers offer credit scores that might sound unique, but are actually based on the FICO or VantageScore models. When you check your TransUnion credit score, for example, you’re actually getting a credit score based on the VantageScore 3.0 model. The personal finance app Mint offers “free Mint credit scores,” but these are also based on the VantageScore model—Mint hasn’t created its own credit scoring system.

Check the fine print to learn whether your credit score provider is using FICO, VantageScore or some other kind of credit scoring model. If you’re looking for a free credit score, try to pick credit score providers that use FICO or VantageScore.

Why do you get different scores from different credit bureaus?

Sometimes, one credit bureau might give you a different VantageScore or FICO credit score than the other bureaus. If you make a large purchase that uses a significant percentage of your available credit, for example, your credit score is likely to drop until you pay off your high balance. But it might drop more quickly with one credit bureau than with the other two.

Why? Because each credit bureau is continually adding new information to your credit file—but the three credit bureaus don’t always receive the same information at the same time.

So if you check your Equifax credit score on the first week of the month, your Experian credit score on the second week of the month and your TransUnion credit score on the third week of the month, you might get slightly different scores depending on how your credit activity has changed over the past three weeks.

There’s one more reason why you might have different credit scores with different credit bureaus. If one of your credit reports contains an error, it could affect your credit score. Since millions of Americans have errors on their credit reports, it’s a good idea to review your credit reports with each bureau on a regular basis and dispute any incorrect information you find.

How credit scores are calculated

Credit scores are calculated by analyzing the information in your credit report and assigning a numerical value to the data. This three-digit number reflects your credit history and the way you use credit. It also lets lenders know whether you are likely to be a credit risk. If you have a history of on-time payments, for example, your credit score is likely to go up—but if you start missing credit card payments, your credit score is likely to go down.

Here’s how FICO and VantageScore credit scores are calculated. Note that FICO weights each attribute by a specific percentage, while VantageScore merely identifies which attributes have the most influence on your credit score.

How FICO calculates your credit score

  • 35 percent—payment history
  • 30 percent—amounts owed
  • 15 percent—length of credit history
  • 10 percent—credit mix
  • 10 percent—new credit

How VantageScore calculates your credit score

  • Extremely influential—total credit usage, balance and available credit
  • Highly influential—credit mix and experience
  • Moderately influential—payment history
  • Less influential—age of credit history
  • Less influential—new accounts

How to check your credit score

There are many different ways to check your credit score. Many banks and credit card issuers provide free credit scores to account holders, and apps like CreditWise® from Capital One and Discover® Credit Scorecard will let you check your credit score even if you don’t have a Capital One or Discover credit card.

You can also sign up for a credit monitoring service. These services not only give you updated credit score information, but also track your credit report for potential signs of identity theft. Some credit monitoring options are free, while others come with a monthly or annual subscription cost.

You might even be able to access your credit score through a budget tracking app. Mint, for example, offers users unlimited access to their VantageScore credit score.

Here are some of the best ways to check your credit score online:

 

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Should I Trade In a Paid-Off Vehicle?

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Trading in a vehicle that’s paid off is a great way to put some money toward your next car purchase. Trade-ins are very common, and they often help bad credit borrowers meet auto loan eligibility requirements.

Vehicle Trade-Ins

If you completely own your car, you’re in a good position when you want to trade it in. If you still have an active loan, some or all of your trade-in amount needs to be put toward your auto loan balance. Auto lenders place a lien on the title which stops borrowers from selling a vehicle that isn’t paid off. Once the loan is paid off – either by finishing the loan term or paying it off with a lump sum – the lender releases the lien, which allows you to sell the car.

Should I Trade In a Paid-Off Car?However, if your loan is completely paid off you don’t have to worry about getting a high enough offer to pay off your loan. This makes the whole process less stressful and when you accept a dealer’s offer for your trade-in, you can pocket the full amount or put it toward your next vehicle.

In order to get the most out of your trade-in, you should get a few different estimates by getting it appraised with a few dealerships. Call around to at least three dealers in your area before you accept an offer. We also recommend contacting at least one franchised dealership that sells your car’s brand. This way, you have more estimates and can accept the largest offer possible for your trade-in. Most trade-in offers are good for around one week, giving you time to weigh your options.

Sell it or Trade it In?

Selling your own vehicle privately means listing it in the right places, waiting for a bite, and then handling the paperwork by yourself. This typically means being available for test drives with interested buyers, drafting a bill of sale, possibly heading to the bank with the buyer, signing the titles, and transferring ownership at the Department of Motor Vehicles or the Secretary of State. If you’re not prepared to take on these steps, selling your car yourself can be a hassle.

Trading in your car with a dealership can take the burden off your shoulders, all you have to do is get the vehicle appraised and let the dealer handle the rest. This is a good option, but you may not get as much for your trade-in as if you sell it yourself. Often, trade-in value is less than a private-party value because dealerships usually prep trade-ins to be sold on their lot. Since dealers are the ones that determine your car’s actual cash value (ACV), your trade-in offer can depend on the condition of your vehicle, its mileage, the dealer’s current stock, and much more.

If you own your car and you want to skip the hassle of selling it yourself, then trading it in to a dealership is a logical choice. Plus, you can use its trade-in value to lower the price of your next vehicle. If you’re looking to get into another auto loan, trading your current car is like getting two birds with one stone.

Bad Credit and Trade-Ins

Trade-ins are very common and can help borrowers that need some cash down for their next auto loan. If you completely own your vehicle, your trade-in offer can help even more than if there’s still a lien on the title.

Many lenders require down payments if your credit score is less than perfect. Subprime lenders who work with credit-challenged borrowers typically require a down payment of at least $1,000 or 10% of the vehicle’s selling price to qualify for an auto loan. However, you don’t have to use just cash to meet this requirement – you can use trade-in equity, too.

Get Matched to a Special Finance Dealership

If you want to sell your current car, and get in touch with lenders that can assist with bad credit, then consider a special finance dealership. You can skip the hassle of looking all over for a lender, and the dealer can handle the trade-in paperwork for you. Finding one of these dealerships can be tough, but we want to make it easier.

Trading in your current, paid-off car is a great way to satisfy a down payment requirement. You can also apply for financing with a special finance dealership if your credit score isn’t stellar. Here at Auto Credit Express, we want to help you find a dealer that has the resources to assist bad credit borrowers.

Get started right now by filling out our free auto loan request form. We’ve created a nationwide network of dealerships, and we want to match you to one in your local area.

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