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Is carrying a credit card balance actually a good idea to try to improve your credit rating? – That’s Rich!

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CLEVELAND, Ohio – If you’ve been intentionally carrying a balance on your credit cards with hope of improving your credit score, you just may be making an expensive decision without getting any closer to your goal.

Count the balance-carry strategy as a giant myth, says Howard Dvorkin, chairman of the personal finance website debt.com.

“There are so many myths out there. And people invent new ones,” Dvorkin said during a recent telephone interview. “The No. 1 myth is the stupidest myth: ‘I should carry a balance on my credit cards so it shows activity.’ That is not going to help you. That is an expensive, expensive way to try to improve your credit. It just doesn’t have any impact on it.

“If you want to improve your credit, pay your credit cards on time and don’t carry a balance. … Pay your bills on time. Period. That’s 35% of your credit score according to FICO. Nothing else comes even close that.”

Though Dvorkin attributes secrecy behind the FICO logarithm to the spreading of myths about precise math behind creating the credit risk score commonly used by lenders, FICO does offer up some of the details.

1. Payment history (35%)

Pay your your bills on time and you’ll have a great number for this part of your overall credit score. FICO, through its consumer division known as myFICO, offers some words of relief for those who have had a handful of late payments: “A few late payments are not an automatic ‘score-killer.’ An overall good credit history can outweigh one or two instances of late credit card payments.”

But the fewer problems, the better: “Payment history is the biggest score factor, so it’s important to pay close attention to it and make sure your bills are paid on time.”

This is based on things like car loans, mortgages, student loans and credit cards. Also, bankruptcies can count against you for seven to 10 years.

If there’s a problem paying these bills, see if you can work out an affordable payment plan. Sometimes you might be able to negotiate a better interest rate. Financial advisers say to reach out to the companies you owe; some payment to them is often better than no payment at all.

2. Amounts owed (30%)

FICO with this metric is trying to determine whether you are overextended on debt. Less important than total debt is what percentage of your available credit is in use.

There are five factors: (1) Amount owed on all accounts; (2) amount owned on specific types such as credit cards or loans with regular payments; (3) how many accounts have balances; (4) are you close to maxing out revolving accounts such as credit cards; and (5) how much is still owed on installment loans.

Two notes on this. Even the balance on a credit card paid off in full will show up. FICO uses the last reported balance. But in some cases, a low “credit utilization ratio” can be better than not using any of your available credit, according to FICO.

Getting beyond these generalities that FICO shares, nailing down precisely what matters is difficult.

“I think the real reason there is so much confusion,” Dvorkin said “is that it’s a secret logarithm. They don’t like to talk about it.”

3. Length of credit history (15%)

FICO says it takes into account the age of the oldest and newest accounts, plus the average. Because of this averaging, if you recently paid off a credit card, you shouldn’t necessarily close it.

If you’re trying to build credit, FICO advises, “use your card, but keep the balances low and pay on time.”

But what if you have difficulty getting credit because you have a limited credit history, or perhaps a bankruptcy or other financial problems in your past?

“Try a secured credit card,” Dvorkin said, explaining that these cards require a deposit to act as security. For example, you may be asked to make a $200 deposit for a $200 credit limit.

“Every major credit card issuer has a secured program. Some are better than others. … Secure cards allow you at some point to flip over to a regular card. It could take months. It could take years. But at some point they typically allow you to change.”

The secure credit cards work like regular credit cards, with monthly payments. This is not to be confused with a debit card, which Dvorkin said does not help improve a credit rating because the withdrawals are automatic soon after purchase, almost like a check.

4. Credit mix (10%)

The thinking here is that someone showing an ability to manage different types of loans is a lower risk. This means creating a mix of revolving accounts such as store and bank credit cards in combination with installment loans such as those for a home, car or school.

At 10% of the total grade, this isn’t a big factor, but it can make a difference in achieving the very best scores.

5. New credit (10%)

Too much new credit is not a good thing. FICO believes opening several new accounts in a short period of time tends to signal a greater credit risk.

People with shorter credit histories run a risk of being penalized by this more than those with longer credit histories. Plus, remember, the average length of credit history also plays into the overall score; and a lot of new credit would drive the average down.

Why it matters

The better your credit the less loans usually will cost you.

“A 750 score or above, that’s a very good credit score. A score of 600 or 650, not so good,” Dvorkin said. “You’re typically going to pay a higher interest rate (with a lower credit score). It could cost someone thousands of dollars over the course of a car loan. Or on house loans, tens of thousands of dollars. A lender uses a bad credit rating as an excuse to charge you more.”

But, at the same time, Dvorkin pointed out that credit can be repaired, given time.

“Another myth is that once your credit is bad, it’s bad forever. That’s incorrect. It is easy to repair over time if people take the time to do it,” he said. Dvorkin’s checklist of advice includes:

* Sign up for a secured credit card, as noted earlier, if you can’t get approved for a regular credit card.

* Pay off your credit card balances each month.

* Don’t charge a lot. Remember, the last balance, even when paid off by the due date, will show up as an outstanding “loan.”

* Don’t max out your available credit.

* Don’t rush to close all old credit cards, though there’s no need to keep open everything you’re not using.

* Check your credit report for errors.

Free credit reports

You’re entitled to a free copy of your credit report each year, though during the pandemic you can actually get one every week, advises the Federal Trade Commission.

“Your credit score is derived from your credit reports, which contain just the raw data of how much you owe and how quickly you pay it all back,” Dvorkin explained. “Think of it like the difference between a basketball and a basketball player. The basketball is your credit report. It can’t score a basket on its own. But when a Cavalier throws it through the net, it suddenly becomes a score.”

The credit report details go far beyond the FICO score you may have seen reported on credit card statements or elsewhere. When I pulled my credit report recently, it was good to see it accurately reported that I had no bankruptcies, judgments or liens.

But in the pages upon pages of credit card and loan histories – current and old – I spotted one credit card listed as open that I thought was closed. That’s something I need to check on.

“People need to see what is on their credit report,” Dvorkin said. “Fifty percent of all credit reports have an inaccuracy. … Closed accounts. Late payments that you knew nothing about. Maxed out accounts.”

You can choose to get a copy of each of the available reports – from Equifax, Experian and TransUnion – or you may choose to get just one at a time. Instructions are included for how to request corrections.

Requests for the report can be made via the internet at annualcreditreport.com, by calling 1-877-322-8228, or by completing an Annual Credit Report Request Form and mailing it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, Georgia, 30348-5281.

Rich Exner, data analysis editor, writes cleveland.com’s and The Plain Dealer’s personal finance column – That’s Rich! Follow on Twitter @RichExner.

Email questions and suggestions to [email protected]. Include your hometown and first name for publication. And to help me sort through the clutter of my email box, try to remember including “That’s Rich!” in the subject of the email.

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How to claim your unemployment tax break under new stimulus; other coronavirus-related tax matters

Here’s what’s in the latest COVID-19 relief bill, including $5,600 in stimulus payments for a family of 4

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Here’s how to claim missing or bigger stimulus payments in filing 2020 taxes; young adults, new parents, others may now qualify

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How Do I Sell My Vehicle With Joint Ownership?

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A joint auto loan is when two borrowers have rights and responsibility to the same vehicle and loan. If you have a cosigner, then you, the primary borrower, have all the rights to the vehicle. Here’s what you need to know when you need to sell your car with two people responsible for the loan.

Selling a Joint-Owned Vehicle

Joint owners are typically spouses or life partners who combine their income to meet income requirements or get a larger loan amount. Both co-borrowers are responsible for paying the car loan and have 50/50 rights to the vehicle, so both their names are listed on the title.

Since your co-borrower has the same rights and obligations to the vehicle as you, you must get their permission to sell the car. In most cases, they also need to be present for the sale to sign the title. This may not always be the case, though, so it’s important to know how to read your car’s title.

If you have it, take a look at your vehicle’s title for the names listed on the back where you sign to transfer ownership. For example: let’s say your name is Jane and your co-borrower’s name is Joe. You’re likely to see either:

  • “Jane and Joe”
  • “Jane or Joe”
  • “Jane and/or Joe”

If you see “and/or” or the connector “or”, this typically means only one person needs to be present for the sale of the car. But if you see “and” this means both of you need to be present to transfer ownership – this is usually the case with joint ownership.

In all three cases, you still need the permission of the co-borrower to sell the vehicle even if they don’t have to be physically present to sign the title. If you sell it without the co-borrowers consent, it may be considered a crime because it’s their property, too. Moving forward, discuss the sale with your co-borrower to avoid potential legal trouble.

Selling a Car With a Cosigner

How Do I Sell My Car With Joint Ownership?If you have a cosigner on your car loan, then things become easier. A cosigner doesn’t have any rights to the vehicle and their name isn’t on the title. Their purpose is to help you get approved for the auto loan with their credit score, and by promising the lender to repay the loan if you’re unable to. A cosigner can’t take your vehicle, sell it, or stop you from selling it yourself.

However, it’s nice to let them know if you do decide to sell the car because the auto loan is listed on their credit reports. If you can, reach out to them about your plans to sell the vehicle. The car loan’s status impacts them and could affect their ability to take on new credit when it’s active.

If you sell the vehicle and the lien is successfully removed from the title, then you’re both in the clear.

Removing the Lien From a Vehicle’s Title

If you still have a loan on your car, then your number one priority is paying off your lender. Your lender is the lienholder, and you can’t sell a vehicle without removing them from the title – they own the car until you complete the loan. This typically means paying off the loan balance until naturally during the loan term, or getting enough cash to pay it all off at once from a sale.

When you’re selling a car with a loan, you want to get an offer for your vehicle that’s large enough to cover your loan balance and to remove the lien. If you don’t get a large enough offer, then you need to pay that difference out of pocket before you can sell the vehicle. Or, you may be able to roll over the remaining loan balance onto your next car loan if you’re trading it in for something else.

Looking to Upgrade Your Ride?

Many borrowers ask for help to get the car they need. If you need more income on your loan application to meet requirements, asking a spouse or life partner to chip in can do the trick. If you have a lower credit score, then a cosigner with good credit could help you meet credit score requirements.

But what if you want to go it alone on your next auto loan and your credit isn’t great? A subprime lender could be the answer. Here at Auto Credit Express, we’ve been connecting credit-challenged consumers to dealerships with bad credit resources for over two decades, and we want to help you too.

Fill out our free auto loan request form and we’ll look for a dealer in your local area that’s signed up with subprime lenders. These lenders assist borrowers with many unique credit circumstances to help them get the vehicle they need. Get started today!

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Fixed-rate student loan refinancing rates sink to new record low for the second straight week

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Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.

The latest trends in interest rates for student loan refinancing from the Credible marketplace, updated weekly. (iStock)

Rates for well-qualified borrowers using the Credible marketplace to refinance student loans into 10-year fixed-rate loans hit another new record low during the week of May 3, 2021.

For borrowers with credit scores of 720 or higher who used the Credible marketplace to select a lender, during the week of May 3:

  • Rates on 10-year fixed-rate loans averaged 3.60%, down from 3.69% the week before and 4.32% a year ago. This marks another record low for 10-year fixed rate loans, besting the previous record of 3.69%, set last week.
  • Rates on 5-year variable-rate loans averaged 3.19%, down from 3.23% the week before and up from 3.04% a year ago. Variable-rate loans recorded a record low of 2.63% during the week of June 29, 2020.

Student loan refinancing weekly rate trends

If you’re curious about what kind of student loan refinance rates you may qualify for, you can use an online tool like Credible to compare options from different private lenders. Checking your rates won’t affect your credit score.

Current student loan refinancing rates by FICO score

To provide relief from the economic impacts of the COVID-19 pandemic, interest and payments on federal student loans have been suspended through at least Sept. 30, 2021. As long as that relief is in place, there’s little incentive to refinance federal student loans. But many borrowers with private student loans are taking advantage of the low interest rate environment to refinance their education debt at lower rates.

If you qualify to refinance your student loans, the interest rate you may be offered can depend on factors like your FICO score, the type of loan you’re seeking (fixed or variable rate), and the loan repayment term. 

The chart above shows that good credit can help you get a lower rate, and that rates tend to be higher on loans with fixed interest rates and longer repayment terms. Because each lender has its own method of evaluating borrowers, it’s a good idea to request rates from multiple lenders so you can compare your options. A student loan refinancing calculator can help you estimate how much you might save. 

If you want to refinance with bad credit, you may need to apply with a cosigner. Or, you can work on improving your credit before applying. Many lenders will allow children to refinance parent PLUS loans in their own name after graduation.

You can use Credible to compare rates from multiple private lenders at once without affecting your credit score.

How rates for student loan refinancing are determined

The rates private lenders charge to refinance student loans depend in part on the economy and interest rate environment, but also the loan term, the type of loan (fixed- or variable-rate), the borrower’s credit worthiness, and the lender’s operating costs and profit margin. 

About Credible

Credible is a multi-lender marketplace that empowers consumers to discover financial products that are the best fit for their unique circumstances. Credible’s integrations with leading lenders and credit bureaus allow consumers to quickly compare accurate, personalized loan options ― without putting their personal information at risk or affecting their credit score. The Credible marketplace provides an unrivaled customer experience, as reflected by over 4,300 positive Trustpilot reviews and a TrustScore of 4.7/5.

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Provident Financial calls time on doorstep lending business

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Provident Financial has confirmed plans to shut its 141-year-old doorstep lending arm, as its full-year results highlighted the strain the coronavirus pandemic and growing customer complaints have put on subprime lenders.

The Bradford-based company reported a pre-tax loss of £113.5m for 2020, compared with a £119m profit the previous year. The biggest drag was a £75m loss in its consumer credit division, which includes home credit.

Malcolm Le May, Provident chief executive, said: “In light of the changing industry and regulatory dynamics in the home credit sector, as well as shifting customer preferences, it is with deepest regret that we have decided to withdraw from the home credit market.”

Jason Wassell, chief executive of the Consumer Credit Trade Association, which represents alternative and high-cost lenders, said the decision showed that “the current regulatory framework does not work for the market, or its customers”.

“The result in this case is that access to credit will be reduced for hundreds of thousands of people.”

Provident built its name as a provider of home credit, or doorstep lending, which involves a team of local agents who regularly visit borrowers to collect repayments and discuss their products.

Proponents believed agents’ local expertise and personal relationships with borrowers allowed them to achieve better results than traditional bank lending to people with bad credit scores, but the approach has increasingly been superseded by digital models in recent years.

Provident’s business has also been affected by a series of self-inflicted and external difficulties. Its consumer credit division has been lossmaking since a botched effort to modernise the unit in 2017, which led to a pair of profit warnings and an emergency rights issue. More recently, its recovery has been hampered by an increase in customer complaints that prompted an investigation by the Financial Conduct Authority.

The complaints rise has been driven by professional claims management companies, echoing a broader trend across the subprime lending industry which has also affected companies such as Amigo, the guarantor lender. Executives also accuse the Financial Ombudsman Service, which adjudicates on customer complaints, of overstepping its mandate and encouraging huge volumes of complaints.

Provident said it would wind down or sell the consumer credit division, with either option expected to cost it about £100m. 

The move will see Provident exit the most controversial areas of high-cost credit to focus on what it describes as “mid-cost” lending through its Vanquis credit card business and Moneybarn vehicle finance arm. Vanquis and Moneybarn both remained profitable during 2020, despite more than a quarter of Moneybarn customers requesting payment holidays at the height of the pandemic.

The results were slightly better than average analyst forecasts, and the company said Vanquis and Moneybarn had both reported “improving trends” during the first quarter of 2021. Shares in Provident nonetheless dropped more than 10 per cent in early trading.

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