Manhattan Credit Union Helps Rescue Members From Loan Sharks

When he needed money, the Manhattan cook went from bank to bank, applying for loans as small as $500—but no one would lend to him because he didn’t have collateral to secure the debt.

“What I used to tell them is, if I had property, I wouldn’t be asking you for a loan,” said the 45-year-old, who spoke through an interpreter about his financial struggles and asked to remain anonymous. “Unfortunately, they would tell me, that’s how banks work. If you don’t have anything, we can’t lend you anything.”

The cook lives in the city with his wife and three children and also supports his mother, who remains in Mexico, the country he left 18 years ago. When his mom became ill not long ago and her costs rose, it became difficult for him to pay all his bills. Desperate, he turned to a loan shark for an infusion of $5,000. The loan shark charged 20% interest each month, the equivalent of 240% a year.

At such a high rate, he could only afford to cover the interest and periodically roll over the debt into a new loan.

Refinance rescue

While attending an English class at a community center, he found out about a loan shark refinance product offered by Neighborhood Trust Federal Credit Union in the city’s Washington Heights section. Through the nonprofit lender, he paid off the $5,000 loan as well as some additional credit card debt by borrowing the needed amounts at a 15% annual rate.

Now he makes monthly payments of $350 to the credit union, less than half what he was paying the prestamista, as this sort of predatory lender is known in Spanish. He’s also putting 2% of his earnings into a savings account while working to pay off the three-year credit union loan.

Charging more than 16% interest on a loan by an unlicensed lender is illegal under New York’s usury law. Even state-licensed lenders can’t charge more than 25% on debts of less than $2.5 million, according to the state Department of Financial Services. But that hasn’t completely eliminated high-rate, short-term loans made to residents by local lenders and over the Internet.

While there are no licensed payday lenders in the state, a quick search on Google Maps shows at least one doing business from a lower Manhattan office and advertising annual rates of over 500%. A 2014 survey of over 33,000 people nationwide shows that about 3% of New Yorkers use payday loans, according to the Pew Charitable Trusts in Washington. And then there are loan sharks.

For people who speak little or no English, don’t have regular work or face other challenges, getting credit or a loan to deal with an emergency can be difficult or impossible. That creates demand for the services of loan sharks and other alternative lenders, even if they are incredibly expensive.

High-priced help

Because of the high cost, most borrowers who go through these lenders can only afford to pay the interest and fees, and usually have to put off paying down the principal. So they typically “roll over” the loans. More than four out of five payday loans are rolled over at least once, and half are extended this way 10 times, with fresh fees charged each time, according to a 2014 Consumer Financial Protection Bureau study.

“People don’t understand,” says Rosa Franco, Neighborhood Trust’s director of lending. “This is short-term thinking.”

In 2011, the credit union started offering its loan shark refinance product to help people get out of debt. It focuses primarily on helping people with decent credit scores who turned to alternative lenders out of desperation. Under the program, clients can borrow up to $10,000 at a 15% annual rate to consolidate their debts.

As an example, Franco says a member seeking to refinance $6,000 in debts would initially be given $1,500 to start paying off that principal. Under the terms of the refinancing, the borrower agrees to put 10% of the savings from payments to the lender into a savings account to establish an emergency fund.

Rewarding good behavior

The borrower could also see a financial adviser at a nonprofit affiliate, Neighborhood Trust Financial Partners, or attend personal finance classes. If the contributions to the savings account are kept up as agreed, the credit union lends more money. Eventually, the original principal will be paid off and the borrower will only be making debt payments to the credit union while building an emergency fund.

Oftentimes, not-for-profit credit unions, which are member-controlled, are more willing than other financial institutions to work with people—even those with poor credit—because their structure gives them more flexibility. Still, programs specifically designed for those trying to refinance high-interest, short-term debts are uncommon. Some borrowers turn to online payday-loan consolidation websites, but those are often as unregulated and costly as payday lenders themselves.

The credit union had about 3,500 members and assets of almost $9 million at the end of last year. Even though it’s lending to a population generally seen as higher risk, borrowers have proven to be good bets.

Conscientious borrowers

“So far the delinquency is nonexistent,” says Franco—fewer than 1% have failed to meet their obligations under the program, she says. “They know that if something happens in the future, they don’t want to close the door on an organization that has helped them in the past.”

Even though the program has a high success rate, it also has its challenges. Because weekly payments are required, employees have to monitor the activity at the same pace, and the workload can be overwhelming.

For the Manhattan cook, Neighborhood Trust has helped ease a crisis that led to sleepless nights and a feeling of desperation. Today, he’s working two jobs and aims to make good on his obligations.

“Because they gave me a chance, I’m going to try to pay it off faster, so that they can keep trusting me,” he says. He’s also taking classes on money management and on starting a small business.

“Now I have much more confidence and I feel like advancing myself and putting more effort into it,” he says. “Because if somebody has faith in you, that gives you faith in yourself.”

Setting an example

Neighborhood Trust’s success with a program that defies conventional lending wisdom begs the question: Could other lenders replicate what it has done?

“I’m not sure how many financial institutions are willing to look beyond the numbers,” Franco says. She notes that loan applicants must be assessed more holistically, including examination of their payment histories, measures they’ve taken to improve their finances and the state of their credit scores.

When banks only consider credit scores, many people can fall through the cracks. Building personal relationships is key to the program’s success, Franco says.

“It says something about loyalty,” she says. “It says something about thinking about the future.”

---

Shark in the water image via Shutterstock.

The post Manhattan Credit Union Helps Rescue Members From Loan Sharks appeared first on NerdWallet Credit Card Blog.

Source Article http://ift.tt/1y39EC7

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Manhattan Credit Union Helps Rescue Members From Loan Sharks

When he needed money, the Manhattan cook went from bank to bank, applying for loans as small as $500—but no one would lend to him because he didn’t have collateral to secure the debt.

“What I used to tell them is, if I had property, I wouldn’t be asking you for a loan,” said the 45-year-old, who spoke through an interpreter about his financial struggles and asked to remain anonymous. “Unfortunately, they would tell me, that’s how banks work. If you don’t have anything, we can’t lend you anything.”

The cook lives in the city with his wife and three children and also supports his mother, who remains in Mexico, the country he left 18 years ago. When his mom became ill not long ago and her costs rose, it became difficult for him to pay all his bills. Desperate, he turned to a loan shark for an infusion of $5,000. The loan shark charged 20% interest each month, the equivalent of 240% a year.

At such a high rate, he could only afford to cover the interest and periodically roll over the debt into a new loan.

Refinance rescue

While attending an English class at a community center, he found out about a loan shark refinance product offered by Neighborhood Trust Federal Credit Union in the city’s Washington Heights section. Through the nonprofit lender, he paid off the $5,000 loan as well as some additional credit card debt by borrowing the needed amounts at a 15% annual rate.

Now he makes monthly payments of $350 to the credit union, less than half what he was paying the prestamista, as this sort of predatory lender is known in Spanish. He’s also putting 2% of his earnings into a savings account while working to pay off the three-year credit union loan.

Charging more than 16% interest on a loan by an unlicensed lender is illegal under New York’s usury law. Even state-licensed lenders can’t charge more than 25% on debts of less than $2.5 million, according to the state Department of Financial Services. But that hasn’t completely eliminated high-rate, short-term loans made to residents by local lenders and over the Internet.

While there are no licensed payday lenders in the state, a quick search on Google Maps shows at least one doing business from a lower Manhattan office and advertising annual rates of over 500%. A 2014 survey of over 33,000 people nationwide shows that about 3% of New Yorkers use payday loans, according to the Pew Charitable Trusts in Washington. And then there are loan sharks.

For people who speak little or no English, don’t have regular work or face other challenges, getting credit or a loan to deal with an emergency can be difficult or impossible. That creates demand for the services of loan sharks and other alternative lenders, even if they are incredibly expensive.

High-priced help

Because of the high cost, most borrowers who go through these lenders can only afford to pay the interest and fees, and usually have to put off paying down the principal. So they typically “roll over” the loans. More than four out of five payday loans are rolled over at least once, and half are extended this way 10 times, with fresh fees charged each time, according to a 2014 Consumer Financial Protection Bureau study.

“People don’t understand,” says Rosa Franco, Neighborhood Trust’s director of lending. “This is short-term thinking.”

In 2011, the credit union started offering its loan shark refinance product to help people get out of debt. It focuses primarily on helping people with decent credit scores who turned to alternative lenders out of desperation. Under the program, clients can borrow up to $10,000 at a 15% annual rate to consolidate their debts.

As an example, Franco says a member seeking to refinance $6,000 in debts would initially be given $1,500 to start paying off that principal. Under the terms of the refinancing, the borrower agrees to put 10% of the savings from payments to the lender into a savings account to establish an emergency fund.

Rewarding good behavior

The borrower could also see a financial adviser at a nonprofit affiliate, Neighborhood Trust Financial Partners, or attend personal finance classes. If the contributions to the savings account are kept up as agreed, the credit union lends more money. Eventually, the original principal will be paid off and the borrower will only be making debt payments to the credit union while building an emergency fund.

Oftentimes, not-for-profit credit unions, which are member-controlled, are more willing than other financial institutions to work with people—even those with poor credit—because their structure gives them more flexibility. Still, programs specifically designed for those trying to refinance high-interest, short-term debts are uncommon. Some borrowers turn to online payday-loan consolidation websites, but those are often as unregulated and costly as payday lenders themselves.

The credit union had about 3,500 members and assets of almost $9 million at the end of last year. Even though it’s lending to a population generally seen as higher risk, borrowers have proven to be good bets.

Conscientious borrowers

“So far the delinquency is nonexistent,” says Franco—fewer than 1% have failed to meet their obligations under the program, she says. “They know that if something happens in the future, they don’t want to close the door on an organization that has helped them in the past.”

Even though the program has a high success rate, it also has its challenges. Because weekly payments are required, employees have to monitor the activity at the same pace, and the workload can be overwhelming.

For the Manhattan cook, Neighborhood Trust has helped ease a crisis that led to sleepless nights and a feeling of desperation. Today, he’s working two jobs and aims to make good on his obligations.

“Because they gave me a chance, I’m going to try to pay it off faster, so that they can keep trusting me,” he says. He’s also taking classes on money management and on starting a small business.

“Now I have much more confidence and I feel like advancing myself and putting more effort into it,” he says. “Because if somebody has faith in you, that gives you faith in yourself.”

Setting an example

Neighborhood Trust’s success with a program that defies conventional lending wisdom begs the question: Could other lenders replicate what it has done?

“I’m not sure how many financial institutions are willing to look beyond the numbers,” Franco says. She notes that loan applicants must be assessed more holistically, including examination of their payment histories, measures they’ve taken to improve their finances and the state of their credit scores.

When banks only consider credit scores, many people can fall through the cracks. Building personal relationships is key to the program’s success, Franco says.

“It says something about loyalty,” she says. “It says something about thinking about the future.”

---

Shark in the water image via Shutterstock.

The post Manhattan Credit Union Helps Rescue Members From Loan Sharks appeared first on NerdWallet Credit Card Blog.

Source Article :http://bit.ly/1uU4Bp2

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Why Does My Credit Score Drop When I Apply for a Loan?

If you keep a close eye on your credit score, you might notice that it drops shortly after you apply for a new credit card or loan. We’ll break down the reasons for the dip, and explain how your score changes in different scenarios.

What does a loan application have to do with my FICO score?

Lenders use your credit score to decide whether they can trust you to pay back a loan (or rent an apartment, or make payments on your phone bill, etc.) Doing things that can be considered risky, like carrying a high balance on your credit cards or missing your payments, will lower your score. So why would a new application be considered risky?

Well, from the lender’s perspective, asking for a new loan probably means you need cash, which might mean you can’t repay the loan. It may not be true – you might be taking out student loans that you’re confident you can repay, or you’re signing up for a credit card to get the miles – but they’re making their best guess on what a new application means for your creditworthiness. And by that logic, a new application means a slightly lower score.

The special cases

Typically, every new loan application lowers your score. For instance, applying for three credit cards in quick succession will ding your credit three times. However, on big loans like mortgages or student loans, you have a window of time (usually around 45 days) when you can apply for as many of those loans as you want with the same effect as applying for one. This is because lenders expect you to compare rates for those loans – when you’re going to be taking out hundreds of thousands of dollars, it pays to shop around – so they won’t punish you for being financially savvy.

When checking your score doesn’t lower it

Since applying for a loan lowers your score, you might think that it drops every time someone checks it. However, credit reporting agencies make a distinction between “hard inquiries,” which affect your score, and “soft inquiries,” which don’t.

Hard inquiries (or “hard pulls”) happen when you authorize someone else to check your score in the process of applying for something, like a credit card or personal loan. These are the ones that’ll ding your FICO score – typically around 5 points, according to MyFico.com. You should avoid incurring too many hard inquiries in a short timeframe.

Soft inquiries (“soft pulls”), on the other hand, don’t affect your credit score. These are inquiries that either you’re making in the process of checking your credit score, or that a lender is making without your knowledge in order to pre-approve you for a loan. The biggest takeaway here is that you shouldn’t worry about checking your credit score – you won’t see a dip because of it.

What about non-lenders that make inquiries, like cable TV providers or apartment landlords? It depends: Some make hard inquiries, and others soft. The best way to find out is to ask them directly. But be sure to check your own score early and often, to avoid unpleasant surprises.

Sled image via Shutterstock

The post Why Does My Credit Score Drop When I Apply for a Loan? appeared first on NerdWallet Credit Card Blog.

Source Article :http://bit.ly/1pJhrFt

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Why Does My Credit Score Drop When I Apply for a Loan?

If you keep a close eye on your credit score, you might notice that it drops shortly after you apply for a new credit card or loan. We’ll break down the reasons for the dip, and explain how your score changes in different scenarios.

What does a loan application have to do with my FICO score?

Lenders use your credit score to decide whether they can trust you to pay back a loan (or rent an apartment, or make payments on your phone bill, etc.) Doing things that can be considered risky, like carrying a high balance on your credit cards or missing your payments, will lower your score. So why would a new application be considered risky?

Well, from the lender’s perspective, asking for a new loan probably means you need cash, which might mean you can’t repay the loan. It may not be true – you might be taking out student loans that you’re confident you can repay, or you’re signing up for a credit card to get the miles – but they’re making their best guess on what a new application means for your creditworthiness. And by that logic, a new application means a slightly lower score.

The special cases

Typically, every new loan application lowers your score. For instance, applying for three credit cards in quick succession will ding your credit three times. However, on big loans like mortgages or student loans, you have a window of time (usually around 45 days) when you can apply for as many of those loans as you want with the same effect as applying for one. This is because lenders expect you to compare rates for those loans – when you’re going to be taking out hundreds of thousands of dollars, it pays to shop around – so they won’t punish you for being financially savvy.

When checking your score doesn’t lower it

Since applying for a loan lowers your score, you might think that it drops every time someone checks it. However, credit reporting agencies make a distinction between “hard inquiries,” which affect your score, and “soft inquiries,” which don’t.

Hard inquiries (or “hard pulls”) happen when you authorize someone else to check your score in the process of applying for something, like a credit card or personal loan. These are the ones that’ll ding your FICO score – typically around 5 points, according to MyFico.com. You should avoid incurring too many hard inquiries in a short timeframe.

Soft inquiries (“soft pulls”), on the other hand, don’t affect your credit score. These are inquiries that either you’re making in the process of checking your credit score, or that a lender is making without your knowledge in order to pre-approve you for a loan. The biggest takeaway here is that you shouldn’t worry about checking your credit score – you won’t see a dip because of it.

What about non-lenders that make inquiries, like cable TV providers or apartment landlords? It depends: Some make hard inquiries, and others soft. The best way to find out is to ask them directly. But be sure to check your own score early and often, to avoid unpleasant surprises.

Sled image via Shutterstock

The post Why Does My Credit Score Drop When I Apply for a Loan? appeared first on NerdWallet Credit Card Blog.

Source Article http://ift.tt/1y39EC7

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Low Mortgage Rates Mean Now Is a Good Time to Refinance

Thinking about refinancing any of your long-term debt? You might want to do it sooner than later. Mortgage rates have hit levels unseen in more than a year and are near historic lows, but they may not stay that way for long.

On average, 30-year fixed-rate mortgages hit this year’s bottom in mid-October, according to the Mortgage Bankers Association in Washington. Rates are the lowest the country has seen since mid-2013 and remain close to the lowest in 50 years, according to loan buyer Freddie Mac, as the Federal Home Loan Mortgage Corp. is known.

Personal loans are also still relatively cheap, averaging 10.73% on a 24-month note from a commercial bank in September. The average rate hit 9.57% in May, the lowest level in at least 40 years, according to Federal Reserve data.

However, rates on 30-year fixed mortgages are likely to steadily increase over the next two years, according to industry forecasts. The MBA estimates the average will begin rising as early as the first quarter of fiscal 2015 and end the year at 5%. It also estimates rates will climb to around 5.4% in 2016.

With the recent slide in mortgage rates and the outlook for increases, borrowers have submitted debt refinancing applications by the thousands. Applications surged in mid-October to the most since last November, the mortgage bankers’ group says. The average loan balance involved rose to $306,400, the highest level in the history of the organization’s weekly market survey.

Why debt will cost more

If you’re paying more than 5% interest on any long-term debt, now is a good time to look into refinancing. Lowering your interest rate can save you thousands in interest payments on a mortgage during the course of the loan. If you’re not a homeowner but have been carrying high-rate credit card balances, a personal loan can also cut your interest expenses. If you have a late-model car that you’re still paying for, a new loan secured by it could also reduce how much you’ll pay for the credit.

Borrowing costs are expected to spiral higher partly because the Federal Reserve decided to halt an asset-purchasing program that’s helped lower pressure on long-term rates. The effort began in response to the 2008 recession. However, the Fed hasn’t changed its stance on holding short-term rates near zero for a “considerable time.” So while it will take time for borrowing costs to increase significantly, today’s rates – and great deals on refinancing – may not last much longer.

Easier lending standards

In the years before the subprime mortgage market meltdown in 2007, which prompted the financial crisis that led the Fed to cut rates to near zero, lending standards were so lax that it seemed like you needed only a pulse to qualify for a home loan. Requirements are much tougher now. But if you have good credit you may find a sympathetic ear at a credit union or community bank.

Fannie Mae, as the Federal National Mortgage Association is known, and Freddie Mac, along with their regulator, the Federal Housing Finance Agency, are working on an agreement to loosen loan criteria on mortgages. Because of their roles in the secondary market for mortgages, the two government-sponsored enterprises effectively set rules that lenders follow so they can sell this type of debt to investors.

When the housing bubble burst, banks were stuck repurchasing mortgages and thus are more hesitant to lend to those with weak credit out of default fears. New guidelines are expected to let lenders better manage risk by taking into consideration “compensating factors.” Essentially, they encourage financial institutions to lend more freely and responsibly to those with lower credit scores and to reduce down payment requirements on new purchases.

Right now, homeowners who are most likely to get a green light to lock in low rates are those with:

• regular income and employment


• a good credit score


• high equity in their homes


• few other debts, such as student or big car loans

Above all, if you’re considering refinancing, you need to do it for the right reason – saving money. Interest isn’t the only factor to consider, but you’re most likely to benefit if you can shave at least 1 percentage point off your current rate. Usually, you’ll save more if you refinance early in your loan’s term. You also need to figure out your financial goals, how long it’ll take to recoup related costs, and how long you’ll likely keep your property. Then crunch the numbers to see if it makes economic sense.

If you determine you can save a bundle, then you shouldn’t sit it out – lock in the best deal you can while interest rates remain low.

---

Image of time as the key via Shutterstock.

The post Low Mortgage Rates Mean Now Is a Good Time to Refinance appeared first on NerdWallet Credit Card Blog.

Source Article http://ift.tt/1y39EC7

Read More

Low Mortgage Rates Mean Now Is a Good Time to Refinance

Thinking about refinancing any of your long-term debt? You might want to do it sooner than later. Mortgage rates have hit levels unseen in more than a year and are near historic lows, but they may not stay that way for long.

On average, 30-year fixed-rate mortgages hit this year’s bottom in mid-October, according to the Mortgage Bankers Association in Washington. Rates are the lowest the country has seen since mid-2013 and remain close to the lowest in 50 years, according to loan buyer Freddie Mac, as the Federal Home Loan Mortgage Corp. is known.

Personal loans are also still relatively cheap, averaging 10.73% on a 24-month note from a commercial bank in September. The average rate hit 9.57% in May, the lowest level in at least 40 years, according to Federal Reserve data.

However, rates on 30-year fixed mortgages are likely to steadily increase over the next two years, according to industry forecasts. The MBA estimates the average will begin rising as early as the first quarter of fiscal 2015 and end the year at 5%. It also estimates rates will climb to around 5.4% in 2016.

With the recent slide in mortgage rates and the outlook for increases, borrowers have submitted debt refinancing applications by the thousands. Applications surged in mid-October to the most since last November, the mortgage bankers’ group says. The average loan balance involved rose to $306,400, the highest level in the history of the organization’s weekly market survey.

Why debt will cost more

If you’re paying more than 5% interest on any long-term debt, now is a good time to look into refinancing. Lowering your interest rate can save you thousands in interest payments on a mortgage during the course of the loan. If you’re not a homeowner but have been carrying high-rate credit card balances, a personal loan can also cut your interest expenses. If you have a late-model car that you’re still paying for, a new loan secured by it could also reduce how much you’ll pay for the credit.

Borrowing costs are expected to spiral higher partly because the Federal Reserve decided to halt an asset-purchasing program that’s helped lower pressure on long-term rates. The effort began in response to the 2008 recession. However, the Fed hasn’t changed its stance on holding short-term rates near zero for a “considerable time.” So while it will take time for borrowing costs to increase significantly, today’s rates – and great deals on refinancing – may not last much longer.

Easier lending standards

In the years before the subprime mortgage market meltdown in 2007, which prompted the financial crisis that led the Fed to cut rates to near zero, lending standards were so lax that it seemed like you needed only a pulse to qualify for a home loan. Requirements are much tougher now. But if you have good credit you may find a sympathetic ear at a credit union or community bank.

Fannie Mae, as the Federal National Mortgage Association is known, and Freddie Mac, along with their regulator, the Federal Housing Finance Agency, are working on an agreement to loosen loan criteria on mortgages. Because of their roles in the secondary market for mortgages, the two government-sponsored enterprises effectively set rules that lenders follow so they can sell this type of debt to investors.

When the housing bubble burst, banks were stuck repurchasing mortgages and thus are more hesitant to lend to those with weak credit out of default fears. New guidelines are expected to let lenders better manage risk by taking into consideration “compensating factors.” Essentially, they encourage financial institutions to lend more freely and responsibly to those with lower credit scores and to reduce down payment requirements on new purchases.

Right now, homeowners who are most likely to get a green light to lock in low rates are those with:

• regular income and employment


• a good credit score


• high equity in their homes


• few other debts, such as student or big car loans

Above all, if you’re considering refinancing, you need to do it for the right reason – saving money. Interest isn’t the only factor to consider, but you’re most likely to benefit if you can shave at least 1 percentage point off your current rate. Usually, you’ll save more if you refinance early in your loan’s term. You also need to figure out your financial goals, how long it’ll take to recoup related costs, and how long you’ll likely keep your property. Then crunch the numbers to see if it makes economic sense.

If you determine you can save a bundle, then you shouldn’t sit it out – lock in the best deal you can while interest rates remain low.

---

Image of time as the key via Shutterstock.

The post Low Mortgage Rates Mean Now Is a Good Time to Refinance appeared first on NerdWallet Credit Card Blog.

Source Article :http://bit.ly/1wLxbZc

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5 Reasons Your Credit Score Is Lower Than You Thought — and What to Do About It

The only thing worse than getting a nasty surprise is getting a nasty surprise about your finances. For instance, you check your credit score and discover it’s much lower than you anticipated. You wonder, “What went wrong?”

Here are 5 unexpected reasons your credit score is lower than you thought it would be — and how to fix it.

1. You carry a high balance on your card every month (even though you pay it off)

If you make it a priority to pay off your credit card balance in full when the bill arrives, you’re doing the right thing. But if your charges tend to run high every month, you might still be doing damage to your credit score.

Here’s why: Your credit utilization ratio, which is the amount of credit you have in use compared with your total credit limit, heavily influences 30% of your credit score. But the problem is that your issuer might not report your balance to the credit bureaus after you make a payment — they could send that information over at any point during the month. Consequently, your score could get dinged if a high, mid-cycle credit utilization ratio is reported.

The solution is to make multiple payments throughout the month to avoid using more than 30% of your available credit at any time. This will ensure that no matter when what you owe is reported to the bureaus, you’ll be in good shape.

2. You apply for every new card that hits the market

If you’re a rewards hound, the impulse to apply for the latest-and-greatest piece of plastic out there is natural. But caving in to temptation whenever a new card hits the market could end up doing harm to your credit.

Every time you apply for a new credit card or loan, you’ll lose points from your score. If several hard inquiries hit your report within just a few months, the hit will be bigger. This is because too many applications are associated with a higher credit risk.

Your best bet is to think carefully before obtaining new credit, and only move forward with the application if it’s a card or loan you really need.

3. You’re in collections and don’t know it

Payment history makes up the largest portion of your FICO credit score, a whole 35%. If you’ve missed a payment for so long that one of your accounts has gone into collections, this will clearly have a large, negative impact on your credit.

But the trouble is, some people who are in collections don’t know it. This is especially common with medical debts, because there’s sometimes confusion around whether the patient or the insurer is expected to pay. In the meantime, the doctor’s office gets tired of waiting for the cash and sells the account to a collector.

The only way to know if an account in collections is what’s dragging down your score is to pull your credit report and review it for negative information. Don’t worry, you won’t have to pay for this — you can get a free copy of each of your three credit reports (one from each bureau) every year from AnnualCreditReport.com.

If you do find an account in collections on your report, it’s a smart idea to pay it off. It will still appear on your credit report, but the newest generation of the FICO scoring model is going to ignore paid collections accounts. When it’s adopted, your score should go up if you paid up.

4. You just recently got your first credit card or loan

Fifteen percent of your FICO credit score is determined by the length of your credit history. If you’ve only recently gotten your first credit card or loan, this could be the cause of a lower-than-expected score.

The only thing you can do in this situation is to keep using credit responsibly (which means paying your bills on time and in full) and wait for time to pass. Before you know it, your score will be in great shape.

5. There’s an error on your credit report

According to a 2013 study by the Federal Trade Commission, one in five consumers had an error on at least one of their credit reports. Although many of these errors aren’t significant enough to affect a person’s credit score, some are. So if you’re surprised at how low your score is, a mistake on your credit report might be to blame.

Again, you’ll need to review each of your credit reports to see if an error is causing your score to lag. If you find one, be sure to start taking steps to have it corrected immediately — the sooner it’s fixed, the sooner your score will begin to bounce back.

How low can you go? image via Shutterstock

The post 5 Reasons Your Credit Score Is Lower Than You Thought — and What to Do About It appeared first on NerdWallet Credit Card Blog.

Source Article http://ift.tt/1y39EC7

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