Credit cards and credit scores can be tough to fully grasp, which can often lead to large issues down the road. Many people choose not to be educated on credit simply because it can be so tough to understand, but ignorance certainly is not bliss when it comes to credit.
We’ve taken the top questions people ask about credit and answered them in simple, layman’s terms - so now you have no excuse not to understand!
When will credit inquiries affect my score?
There are two types of credit inquiries: a hard inquiry and a soft inquiry.
A hard inquiry happens when a lender uses the information from your credit report to decide whether or not to offer you credit and what types of terms you qualify for. These are typically done when you apply for a credit card, mortgage, or loan. They must be made with your permission, and these will show up on your credit report - so having too many can raise a red flag to other lenders. If it looks like you’ve been applying for too many types of credit, a lender is less likely to approve you.
A soft inquiry can be done without your permission and will not show up on your credit report. You know those pre-approved offers you get from credit card companies? This is how they’re getting that information. Plus, any existing lenders you have can perform a soft inquiry at any time to ensure you’re still approved for their offer.
How long do credit inquiries last on my credit report?
Credit inquiries are automatically removed every 2 years, but the more time that passes, the less they’ll affect your credit report. If a potential lender sees a hard inquiry on your report from a year ago, you’re more likely to get approved than someone who had a hard inquiry just a month ago.
What do lenders look at?
Lenders aren’t just looking at your credit score. They’ll typically also take a look at your tax-verified income and debt-to-income ratio.
A tax-verified income is how much money you’re bringing in, which makes sense as a lender would need to know how much you can spend.
On the other hand, a debt-to-income ratio is your total debt divided by your total take-home pay. This shows whether or not you’re responsible with your money and living within your means.
How can using my credit card affect my score?
If you regularly get close to maxing out any of your cards, you’re hurting your credit score. When lenders see that you’re getting close to your limit, they assume you’re at higher risk of not being able to pay them back, and thus are less likely to lend to you. If you come close to hitting your max each month, you’ve likely noticed your score take a hit. Be sure to pay your credit cards off as soon as you can, and make regular payments to keep this number low.
How can opening a credit card or taking out a loan positively affect my credit health?
If you’ve never taken out a credit card, gotten a loan, etc., you don’t have any credit. Sounds great, right? Wouldn’t no credit mean perfect credit? Nope! It’s actually tougher for someone with no credit to get a loan or an awesome credit card deal. That’s because lenders want to see that you’ve been able to make payments on time in the past and that you can handle debt. It’s impossible to do this if you have no credit history.
Why does my credit score vary?
Most people know only about their FICO score, which is the most popular with lenders. However, scores for mortgages, car loans, and school loans are factored differently than credit cards. Depending on what type of credit or loan you’re applying for, lenders will look deeper into your account, resulting in differing scores.