Your FICO Score is a credit score that lenders use to determine your potential risk factor. That is, whether you are more likely to pay them back (low risk) or more likely to default on your payments (high risk). Your FICO Score is calculated using data collected from your credit report. Scores range from 300 to 850. The higher you are able to boost your score, the lower risk you’re considered to be. Typically, credit ratings range from “poor” to “excellent”.
Below are a few examples of credit scores and where they fall within this range:
With that said, average credit scores typically range from 600 to 750. Read on to find out why your FICO Score is important and how you can improve yours.
Having a high FICO Score reassures lenders that your track record has shown that you are likely to be able to keep up with your obligations to them. In return, they’re able to offer you their best interest rates and repayment terms. Being approved for credit under better terms can save you thousands of dollars, improve your overall financial health, and put you a step closer to achieving your personal finance goals.
Not only does an excellent credit score give you access to the best financial options out there, but auto insurers and property management agencies also evaluate your FICO score. This means a higher FICO score can get you to lower auto insurance rates and improve your chances of being approved for that place you’re hoping to rent. If homeownership is something you’re hopeful for, a good FICO score can also help get you there.
You may not know that you have more than one FICO Score. The Fair Isaac Corporation regularly updates the formulas they use to calculate FICO Scores and create new versions. Some versions are industry-specific and some are newer, like FICO Score 9. For more information, check out Fair Isaac Corporation’s website.
For this article’s purpose, we’re going to focus on the FICO Score formula most commonly used by lenders — FICO Score 8. Below we’ve provided a breakdown of the factors that make up your FICO Score 8 and the impact each of those factors has on your overall credit score.
Your payment history is the most important factor in your FICO Score. Does a one day late payment affect credit score? It won’t show up on your credit report, but lenders want to be sure that you can make your payments on time. If you have consistently made on-time payments to previous lenders, you will likely be able to make your payments to them.
The second most important factor in your FICO Score is how much of your available credit you’re using. If you’re using a large portion of your overall credit, lenders may perceive you as being overextended and at risk for defaulting on payments.
Lenders want to know the average age of all of your credit accounts, the age of your oldest and newest accounts, and when you last used your accounts. Showing consistency over the long term is important for demonstrating your ability to be consistent going forward.
There are different types of credit. Most credit accounts fall under one of two major categories: revolving or installment. Revolving credit accounts include credit cards, retail cards, and lines of credit. Installment accounts include things like auto loans, personal loans, and mortgages. Lenders like to see that you’ve demonstrated an ability to manage different types of credit accounts.
Every time you open a new credit account, it shows up on your credit report. Opening too many new accounts over a short period may mean that you’re taking on more than you can handle. This could mean that you’re at risk of defaulting on your payments to them.
Something to consider when you’re learning how to build a credit score is that your own credit profile is unique and lenders also look at other factors when making their lending decision, like your income and how long you’ve been with your current employer.
Now that you know what’s included in your FICO Score, you’re probably wondering how to raise FICO score. We’ve got you covered. Below we’ve provided some of the best recommendations out there.
You have to start somewhere. The first step to improving your credit score is knowing what it is and monitoring it regularly. You can do this by signing up for a free credit-monitoring service like Credit Karma or a paid credit-monitoring subscription service like PrivacyGuard. It’s important to keep in mind that these services provide very close estimates of your FICO Score, but they are not actual.
There are a few different ways to get your actual FICO Score, you can sign up at freecreditscore.com or see if your credit card company provides you with access to it as part of your cardholder benefits.
Regularly checking your credit report will help give you an idea of where you’re at, set goals, and catch any errors that need to be corrected.
According to the Federal Trade Commission, five percent of consumers have errors on their credit reports, resulting in less favorable loan terms. These errors could negatively affect your credit score. If you find any when reviewing your credit report, be sure to dispute them. You can do this by submitting a letter or an online dispute to the credit bureaus. It may take up to 45 days to receive a response from the credit bureaus. Assuring that your letter is as detailed as possible will help expedite the process.
The single most important thing you can do to increase FICO score is to make your payments on or before their due date. Life is busy and it isn’t always easy to remember to pay your bills on time, but missed payments are one of the factors that impact your credit score as they can stay on your credit report for up to seven years. Setting up automatic payments can be helpful to keep you on track. If you do this, make sure you have enough money in your bank account on the day that the payment is due to avoid a late payment fee from your lender or overdraft and insufficient funds (NSF) fees from your bank.
If you do miss a payment, get in touch with your creditor as soon as possible to make them aware of the situation. Maybe you got paid less this month because you were short on work hours due to illness, or you simply missed your due date because you had something going on in your life. They may have the ability to remove the late mark from your report if you have a legitimate reason and make your request in a timely manner.
A large part of your FICO Score weighs on how much of your available credit you’re using. This is specific to your revolving credit accounts. That’s why it is important to know when to pay off debt versus saving and working towards paying off debt before it has a chance to accumulate. As a guideline, experts recommend using no more than 30% of your credit card balances (the less you use, the better). This Nerdwallet article explains how you can calculate your credit utilization ratio.
Suppose you’re already using 30% or more of your available credit and it will take you some time to pay down your balances. In that case, one other way to consider improving your credit utilization ratio is by increasing your credit limits. This may or may not be an option available to you. If you’re a long-time customer who pays on time regularly and your income has increased since you first opened your account, you have a good shot. What you’ll need to do is get on the phone with your creditor to see if they’re able to increase your credit limit. Be careful not to increase your credit limit if you have trouble controlling your spending or this could put you into more debt and lower your FICO credit score in the long run.
Another strategy to consider for improving your credit utilization ratio is to consolidate your debt. This is tricky because there are negative impacts to consolidating your debt (new credit inquiries, a new account opened, and a possible reduction in your average account age), but overall it could be a good option to consider if you can reduce your interest rates, lower your monthly payments, and make your payments on time. This also increases your overall available credit.
Once an account is sent to collections or charged off, it will remain on your credit report for 7 years. Try to pay your accounts off before they enter into those statuses. If they do get to that point, it’s still worth paying them off. Lenders are less likely to approve you if they see unpaid balances on your credit report.
Student loans have a long repayment period, so paying them on time, over time, is a great way to increase your FICO credit score. Student loan payments also offer a little more flexibility in their reporting. Federal student loans are reported late 90 days after a payment is due, while private student loans are reported late 30 days after a payment is due. Forbearance and deferment plans may also be available to temporarily put your payments on hold without impact to your credit score. Ensure you keep in touch with your student loan providers and know what options are available to you.
If you have never had a credit card or loan and you have no credit history, lenders may be unwilling to take a risk on approving you. One option to consider if you’re trying to build credit is to request to be added as an authorized user on your parent, spouse, or a close family member’s credit account. Be sure that it’s someone you trust and who trusts you. Come to an agreement with them on what you can spend and contribute every month toward their payment. When they make their payments on time, this will also reflect positively on your credit report. However, you have to be really cautious about this because if their payments are not made on time, it will reflect negatively on your credit report. Once you’ve established some credit history, you should be able to move off of their bank account and get an account of your own.
Utility companies do not report your on-time payments to the credit bureaus by default. In the past, utility accounts were not included in credit reports because they aren’t credit accounts. This is beginning to change as it becomes evident that consumers should be recognized for making these utility payments on time. Now, you can have certain utility bills, like your phone bill, reported on your Experian credit report by using their Experian Boost tool. This will only affect your Experian report, but it’s still worth a shot as some lenders may find it helpful.
A good FICO score is important to your financial health and it’s achievable, but it won’t happen overnight. It takes knowledge, creating good habits, and consistency over time. Play it smart and you’ll get there. And if you’re looking to start building credit, check out Possible Finance.
With our credit building loans, your repayments are reported to all 3 major credit bureaus - TransUnion, Equifax, and Experian - you’ll build a positive credit history with on-time payments.
Predatory lending generally refers to unfair lending practices that benefit the lender at the borrower’s overwhelming expense. This is accomplished through unfair and abusive loan terms. That can involve a variety of different methods and strategies, but most predatory lending practices typically uses a combination of:
All of these unfair lending practices are designed to benefit the lender, which also often means over-aggressive sales tactics to force you into deals. This lending practice is often designed to take advantage of the average borrower’s lack of understanding of loans and financial transactions. Many completely resort to lying and deception, and in worst cases, predatory lenders will threaten violence or litigation against borrowers in order to collect debts.
While predatory lenders can target anyone, they most often go for more vulnerable populations, like:
There is thankfully a wide range of low-risk, affordable options for people who need money quickly, like the alternative payday loans available from Possible Finance. However, those who don’t know about alternative options can easily fall prey to predatory lending practices.
People who are desperate for money or simply don’t know better are easy targets for predatory lenders. Knowing what to look for and avoiding them can prevent you from falling victim to this kind of abusive lending practice. Here are some common warning signs for a predatory loan.
Most legitimate lenders will look at your current income and check your credit before even offering a loan. If you are working with a reputable lender, they will not skip this step. This helps the lender assess how you have dealt with previous debts, your ability to repay future loans, and the potential impact of taking on more loans. A lender who does not, at the very least, consider your regular income likely does not care about your ability to repay.
A reputable lender will likely take the extra step of making sure you can repay the loan while also affording your everyday expenses. In fact, Possible Finance makes this a requirement for its loans. Predatory lenders will not consider your ability to pay for food, rent, and bills.
While plenty of modern transactions are done digitally, no lender should require electronic payments. More specifically, no lender can demand access to your bank account for payment collection. Many legitimate lenders may ask for access to allow for convenient automatic payments, but this is by no means the only option they will provide for receiving payments.
Predatory lenders may use your bank account as their own personal ATM and make constant payment requests and withdrawals until your account is empty, at which point you may have to deal with an excess of overdraft fees.
Reputations can be hard to gauge, but before you ever sign a loan agreement, make sure you do some research on the lender. The Better Business Bureau frequently offers customer ratings and reviews, allowing you to see any potential complaints prior borrowers have made so you can avoid signing up for a predatory loan. The Federal Trade Commission also offers scam alerts, while the Consumer Financial Protection Bureau has a complaints database that allows you to look up lending companies by state.
All lenders are legally required to state the APR (annual percentage rate) of the loan. This includes the full sum of the interest rate plus any upfront fees. Any fees that are hidden in the fine print will arbitrarily increase upfront costs and inflate the APR. Both of those components only make it harder for the borrower to repay the loan while adding significant costs upfront, easily trapping the borrower in a cycle of debt.
All lenders depend on risk-based pricing, like basing interest rates on your credit history. However, even if you have bad credit, the interest rate on your loan should still be manageable given the repayment period. Predatory lenders will abuse this, charging interest rates in the triple digits to borrowers who are already at a high risk and more likely to default.
Predatory lenders are also more likely to add unnecessary services and products onto your loan as a means of making more money upfront. For example, it is not uncommon for predatory lenders to add on insurance to your loan amount. They can then add the insurance premiums to the loan amount, which then increases how much you pay in interest. The predatory lender earns commissions on these premiums or may ask for several years of premiums paid in advance.
Approval periods can take anywhere from a few days to a few weeks depending on the type of loan that you are applying for. Predatory lenders will try to rush you through the approval process, forcing you to sign paperwork before reading any of the loan term agreements. This allows them to get money more quickly into their pockets while preventing you from thinking too hard about the loan term agreements.
Loan flipping refers to a process wherein a lender coerces a borrower to refinance their loan again and again without ever benefitting from that refinancing. While that refinancing might initially appear to put money back into your bank account, the high interest rates, increased fees, and prepayment penalties of a refinanced loan render that extra money irrelevant. That puts more money in the lender’s pocket while trapping the borrower in constant debt burdens.
Predatory lenders will frequently misrepresent the terms of the loan or completely lie about those terms. That can be difficult to truly determine without reading every bit of your agreement, but be aware of language like:
Alternately, a lender should not ask you to lie in order to push an approval. This is another way for lenders to rush the process and partake in unfair lending practices, but it can lead to severe legal problems later on. Do not lie about your income, credit, or any other aspect of your finances, even if your lender says that you can.
A good lender from a reputable financial institution will not pose any of the above warning signs, but simply put, a good lender will essentially be fair and transparent. A good lender:
The good news is that there are plenty of alternatives to predatory, high-cost loans that will not hurt you or force you into a cycle of debt.
Traditional or instant payday loans have a high potential to be predatory because they often come with unnecessarily high interest rates and short repayment periods, but payday alternative loans (PALs) offer fairer terms with the same short turnaround time. Payday alternative loans from federal credit unions usually come with lower interest rates and longer repayment periods. Furthermore, while credit unions will not base your loan on your credit history, they will report repayments to the major credit bureaus, which can help borrowers improve their credit scores.
Payday loans from Possible Finance are a similar alternative. Possible Finance’s payday loans offer quick approval with repayment installments over several months with rescheduling when necessary. Furthermore, Possible does not require good credit, but we do report repayments to the three credit bureaus, allowing you to build your credit.
Installment loans allow you to borrow all your loan money at once while repaying the loan in fixed monthly payments (installments). For borrowers with bad credit, lenders will look at your existing debt, your regular income, and your monthly transactions to determine your financial behavior and your qualifications.
Short-term bank loans refer to a wide range of loans. Payday loans are technically within the “short-term loan” umbrella, but short-term bank loans provide you with a loan that is designed to be repaid within one year. Short-term bank lenders will perform credit checks, look at your paystubs, and otherwise determine your financial history to determine your ability to repay. You may still have to deal with high interest rates, but short-term bank loans will generally be fairer and much more transparent about their terms.
Predatory lending is unfortunately an inherent part of the industry that likely is not going anywhere soon. However, being careful, knowing the right red flags, and being aware of other financing options can ensure that you don’t become a victim to predatory lenders. Possible Finance offers a great option for those looking for quick cash without the high risks, high costs, and potential abuse of predatory lending. To learn more about our alternative payday loans, contact Possible Finance today.
for an online payday loan or go in-person through a payday lender at a physical branch, depending on where you live. Upon approval, you receive the payment in the form of cash, check, or through a direct deposit into your bank account.
To complete a payday loan application, you are required to provide paystubs from your employer showing your current income. Your loan principal is typically based on a percentage of your predicted income. At the time of application, the direct lender of the guaranteed payday loan will also do a hard credit pull to check your credit score and credit history, affecting the terms of the loan.
Currently, 32 states have capped maximum loan amounts on payday loans.
Delaware, Idaho, and Illinois have maximum caps at $1,000, giving them the country’s highest max caps.
California and Montana have the lowest payday loans set at $300.
Maine, Utah, Wisconsin, and Wyoming have no maximums on their payday loans. Other states, including New Mexico and Nevada, will limit payday loans to 25 percent of your monthly income.
These loans must be paid back in a single payment due on the payday borrower’s next payday. A borrower can also pay back the loan once they have received income from a pension, Social Security, or another source. Specific due dates are set in original loan agreements, but they are typically set two to four weeks from the initial loan date.
The repayment itself can come in various forms. Payback usually comes in the form of a post-dated check for the full loan amount, including all fees. You can also pay off the loan with:
Generally, payday loans do not have any initial effect on your credit score. Payday loans are not reported to the three major credit reporting agencies in the country, so they will not show up on credit reports. Some lenders may check your credit when they set the loan terms. Hard credit pulls can harm your credit score, but any individual credit check is generally negligible. They otherwise will not show up on your credit report even after accepting the loan.
However, that all changes if you become delinquent on your payday loan. Falling behind or consistently being late on payments result in your lender selling your account to a third-party collection agency. These third-party agencies usually report delinquent accounts as “collection accounts” to the credit reporting agencies. Payment history is one of the most significant factors that influence your credit score, so an account that goes into collections will undoubtedly harm your credit score. This information can stay in your credit file for years and have a lasting effect on your credit.
However, unlike traditional payday loans, Possible Finance reports to credit bureaus with the intent of building up your credit. While this does mean that your credit score may potentially dip if you miss payments, Possible’s terms are designed to help you gradually improve your credit, even if you don’t have credit or have poor credit when you start.
Knowing if a payday loan is right for you and your financial situation often comes down to weighing out the pros and cons.
Probably the most notable advantage to payday loans is that they are relatively easy to access. Going through cash lenders, you can apply for a payday loan and receive the respective funds within just 24 hours. The application process itself can take mere minutes, where traditional loans can take a few days to go through approval. At Possible Finance, you can even apply for a payday loan alternative through an app on your phone.
Traditional loans usually require a lot more in the application process, including a Social Security number, photo ID, proof of income, a credit check, and verification to repay the loan at the end of the term.
Requirements for a payday loan are generally more lenient. To apply for a payday loan, you must be at least 18 years of age and have:
Note that the exact requirements can vary from state to state. Some state laws will have more intense requirements as a means of protecting you. Along with the above, Possible Finance has a few additional requirements for its payday loan alternative. We require that your linked checking account has:
Most payday loans do not require the payday lending party to make a credit check, depending on the state. Other loan types will usually require a hard credit check. As mentioned, too many hard credit checks can affect your credit score. No credit check also means that you do not necessarily need good credit to get approval for a payday loan.
Unlike mortgages, auto loans, and car title loans, payday loans are unsecured, meaning they do not take collateral. This means that, if you do not pay your loan, the lenders cannot seize an agreed-upon piece of personal property as repayment.
That said, most payday lenders still have access to your bank account as an agreed condition of your loan. These lenders also have other means of collecting payment if you default, like enacting lawsuits or selling your account to collection agencies.
One of the most significant drawbacks to payday loans is their extremely high interest, making them drastically more expensive than other types of loans. The typical personal loan will charge interest ranging from 4 to 36 percent, while a credit card typically charges 12 to 30 percent interest. Payday loans charge about 400 percent interest on average, although some states and lenders may charge upwards of 700 percent interest. Possible Finance maintains a lower APR of about 150 percent on most loans.
For example, a two-week payday loan with a fee of $15 per $100 equates to an APR of about 400 percent. For a $500 payday loan, you would be paying an extra $75, for total loan repayment of $575.
Unsurprisingly, it is common for a payday borrower to have trouble paying back their loans because of the information mentioned above. According to the Consumer Financial Protection Bureau, about 20 percent of borrowers default on their payday loans, either on their first loan or after reborrowing. Over 80 percent of payday loans get rolled over or reborrowed within 30 days.
Part of this problem also comes from the application process. Traditional loans involve the lender confirming that you can repay the loan while still meeting necessary, everyday living expenses before loan approval. Payday lenders do not go through this process, which can result in an endless cycle of debt.
Unlike these predatory lenders, Possible Finance checks to make sure that you can safely borrow money without harming your current finances. Our team makes sure that you can repay the loan while still meeting all your necessities and everyday expenses.
Payday loans are suitable for those with low credit because their approval does not depend on your credit score. At the same time, they don’t improve your credit at all. Payday lenders do not report to the major credit bureaus unless you default or go to collections, in which case they will only drive your credit score down.
The terms of most payday loans allow lenders to access your bank account if you do not pay on the due date. Alternately, lenders can have you write a postdated check that they can cash. However, they can cash the check or withdraw money regardless of if you have enough money in your account, leading to an added overdraft fees or insufficient fund fees from your bank. The lender can also charge returned or failed payment fees resulting in even more repayment issues.
This is ultimately your decision to make. Payday loans are useful if you need cash immediately, especially if you have low credit or otherwise have trouble getting approved for other loans. Ostensibly, the risk is low if you can pay them back on time, whether that means already having enough money in your account or knowing you can get enough money in time. However, given the high expenses and the potential for predatory lenders, you need to be extra careful about your decision. It’s important to work with a trusted lender or seek alternatives.
The good news is that you do have a wide range of alternatives to payday loans. Start with a typical personal loan or small consumer loan. If you have less-than-adequate credit, you might be looking at a high-interest rate, but the rate will be significantly lower than 400 percent. Some lenders specifically work with potential borrowers who have bad credit. Personal loans can take more time for approval, and the requirements can vary based on the lender.
If you are a member of a federal credit union, you may be able to apply for a payday alternative loan (PAL). These are nearly identical to payday loans. However, the interest rate is considerably lower, with a maximum APR of 28 percent. The repayment period also occurs over a much longer period of one to 12 months. However, these are not offered by every credit union.
Possible Finance also offers a unique payday loan alternative that offers fairer terms designed to help you build credit over a more extended repayment period. To learn more about payday loans along with Payday Loan Debt Assistance, visit Possible Finance.
A credit score is a three-digit number ranging from 300 to 850, which signifies your “creditworthiness,” or your general ability to repay borrowed money. The higher the number, the better your credit, though some creditors will grade this credit based on a certain range. The exact ranges and standards can vary based on the creditor and the type of credit score.
A credit score can have a significant role in your finances. Essentially, lenders and financial institutions can use your credit score as a means of predicting your ability to pay back loans on time. A lender could be a bank, credit card company, and even a car dealership. A non-lender, most notably a landlord or property manager, can also perform a credit inquiry and make decisions based on it. For example, a property manager may require you to have a good credit score to sign a lease.
Higher credit scores give you more options and flexibility and greater access to credit products. A borrower with a score of 750 or above may qualify for 0 percent financing on cars, or they can apply for credit cards with a 0 percent introductory credit card interest rate.
That said, a low credit score does not immediately disqualify you from making purchases. However, you may have to put down a deposit or pay higher interest rates on an auto loan, for example. Continuing with the car example, your insurance payments might be higher as well. For a mortgage, a lending institution may require a co-signer or have a shorter repayment term.
Your credit starts almost as soon as you borrow money in any form. Whether you apply for a credit card, take out a student loan or business loan, the information and data go directly to the three major credit bureaus in the United States (Equifax, Experian, and Transunion). These three credit bureaus store and report all of this information to calculate your credit score. As you apply for more loans, open credit accounts, and borrow money throughout your life, the credit bureau will update your credit score.
This section will cover which of the following factors most impact your credit score. Five main factors impact your credit score.
Your total amount owed to lenders accounts for up to 30 percent of your credit score. This amount shows the sustainability of your spending and can predict potential financial problems later on.
The factor includes:
Credit utilization ratio refers to the amount of credit you use to the total amount of credit you have. Generally, the lower the number on these factors, the better your score.
Essentially, having a long history of good credit makes for more accurate and predictable borrowing compared to a few months of fair to middling credit. Keep in mind that creditors usually use your open accounts’ average age or the age of your oldest open account, not the age of your first-ever account.
This shows that you have a diverse mix of accounts and how recently you used them. Having credit cards, personal loans, mortgages, car loans, and student loans shows a more well-rounded borrowing history than having just a handful of credit card accounts.
New credit factors into about 10 percent of your score, which refers to the number of new accounts you have applied for or opened recently. While there’s nothing inherently wrong with opening a new line of credit, opening or applying for too many accounts at once can show that you are desperate for more credit, which is usually a red flag.
Now that there is an understanding of what a credit score is and how it is created and used, financially responsible individuals need to know the different types of credit scores being evaluated today. There are currently two main types of credit scores:
The Fair Isaac Corporation, also known as FICO, introduced the credit score model over 25 years ago and is presently the industry leader for credit scoring within the United States. The score was the first of its kind that financial institutions and other lenders could utilize to gain insight regarding the people they would potentially lend and distribute their funds to.
FICO scores are reportedly used for at least 90 percent of lending decisions. They are favored exclusively for home mortgages through Fannie Mae, Freddie Mac, and other government-sponsored home lending entities. If you are having trouble with your score, here are some tips on how to increase your FICO score.
Although FICO scores are the predominant favorite in the world of credit scores, VantageScore, another credit reporting agency, is gradually gaining traction among lenders and consumers. It is seen as favorable because the three national credit bureaus created it: Equifax, Experian, and TransUnion.
It is also important to note that both FICO and VantageScore have released new credit scoring versions due to evolving lender credit-granting requirements, overall demand for credit, and consumer credit use. Currently, the most used FICO version is FICO® Score 8. There are several unique features included in FICO® Score 8 such as high credit card usage, isolated late payments, authorized user credit, and more.
Vantage’s newest version is VantageScore 4.0, which uses machine learning and incorporates trended credit data newly available from all three credit bureaus. Ultimately, both FICO and VantageScore’s versions help lenders make more informed and fair decisions.
A credit report displays a summary of your credit accounts, including your payment history and other information reported to credit bureaus from lenders and financial institutions. Credit reports come from the three credit bureaus in the country, and your reports from each may not be the same.
Potential creditors and lenders can request a credit report to decide whether to provide you with a loan or extend your credit line. Utility companies can also check your credit report for insurance reasons.
While credit scores and credit reports are intrinsically linked, they are not the same or interchangeable. Your credit score is a single number denoting your creditworthiness.
Credit reports are much more comprehensive, showing:
If you are new to credit, you may be wondering how to build your credit score. You may be surprised to find that improving your credit score is relatively easy. Start with a simple credit card. Use the card normally, but make sure not to exceed 30 percent of the total to ensure a good credit utilization ratio. Above all, make sure that you pay your credit card on time.
Another approach to increasing your credit score is by applying for and successfully paying off a credit building loan. These particular types of loans are designed entirely to build your credit score, allowing you to be a more financially stable and reliable individual in the eyes of a banking institution or lender.
How does this all work? Just follow these simple steps:
From there, you can consider a credit building loan mentioned above or start a secured credit card. Possible considers all individuals’ financial situations, offering credit building loans to people who may appear to have poor credit or a shorter credit history. A secured credit card requires a refundable security deposit. The issuing entity holds the security deposit as collateral until you close the account, which reduces the risk for banks and credit unions.
Even if you don’t use it, closing a credit card essentially removes that credit amount, lowering your overall credit card utilization and may contribute to a lower score.
A no credit check loan is a loan in which the online lender does not do any type of credit check or pull any type of credit report on you as the borrower before lending you the money.
Traditionally, direct lenders base their decision on giving you a payday loan on a variety of factors, but one of the most important is your “creditworthiness”. Creditworthiness, or how suitable you are to receive credit, is often based on your reliability in paying money back in the past among other factors. Since most of the time, a lender doesn’t know anything about you, they turn to outside sources to get a better idea about your creditworthiness through a credit check. This is where credit bureaus such as Expedia, TransUnion, and Equifax come into the picture. Credit bureaus each have their own formulas they use to calculate your “credit score” turning your credit worthiness into an easy number. The mostly widely used credit score number is the FICO score, which can range from 300 on the low end to 850 on the high end. When a lender inquires about your creditworthiness, there are a couple of types of credit checks that are typically pulled, each with different implications.
If you’ve ever heard of a “Soft check” or a “Hard pull” these refer to the two types of credit checks. When reviewing your credit score or applying for a new loan it’s crucial to know the difference between the two credit checks and how these checks can impact your score. Whether soft or hard, each is also considered a credit inquiry and they are ways to get a “credit rating” on you specifically.
A soft credit check or soft pull occurs anytime you or a creditor “looks” at your credit. Soft checks are important as they are the only type of credit check that does not impact your credit score. While a soft check won’t change your credit score, they are still listed on your credit report when performed by a lender.
Since soft checks don’t affect your credit score, many lending companies will pull this information to pre-approve customers that match their products. Employers also tend to use soft checks if they are pulling your credit for a job application. Interestingly, any time you check your score through a credit bureau or other service, you’re performing a soft check on yourself.
Unlike soft checks, hard checks can impact your credit score. Hard checks are used by lenders to pull more in-depth information while making a final loan decision and are usually one of the last steps when applying and accepting a loan.
Since these types of credit checks have such an impact on your score, any hard pull requires your consent in order to be processed. It’s generally a good idea to review your credit report for new inquiries. If you see hard checks you don’t recognize, it’s a good idea to follow up with your bank and lender in order to prevent fraud.
When people refer to credit scores, they’re almost always talking about your FICO credit score. The FICO credit score was introduced over 25 years ago in an effort to quantify risk based on a few variables. The exact formula for calculating this credit score is a closely guarded secret, however, repaying loans on time, payment history, and keeping debt small are some proven ways to increase your credit score.
As with most industries the credit reporting industry has seen rapid change in the past decade as new business and established companies seek to innovate on older techniques. Some of these alternative credit reporting companies, such as Clarity, are smaller branches of the three major bureaus. Others, like Innovis, have grown almost as large as the other bureaus. These alternative credit reporting companies use a collection of similar data as well as other less common data to compile a view on your creditworthiness.
No credit check loans are loans where your lender completely skips the credit check entirely. Instead of looking at your credit score and your credit report, lenders will look at alternative data to help determine your creditworthiness.
Through this, lenders are able to get a more holistic look at the customer, excluding credit history, before making a decision on lending you money. Payday lenders tend to look at your income and employment to make a lending decision. Instead of pulling your FICO score, Possible looks at alternative data such as your bank account history to determine whether to give you a loan.
Credit scores are calculated based on your credit history. Basically, the longer your history of balancing debit and repaying loans, the higher your credit score will climb over time.
According to research by Experian in 2017, about 25% of American adults have a “thin” credit file. A “thin” file usually lists between 1-4 credit accounts and can make it difficult to find qualifying loans. Another 16% of adults have little or no credit history, making them essentially invisible in credit checks. Less-than-perfect credit is absolutely quite common.
Because of this, people with thin files or a lack of credit history can find themselves in a catch-22. They don’t have enough credit history to qualify for loans, credit cards, and other debt, and they can’t build credit because they don’t have any outstanding loans, credit cards, and other debt. Unfortunately, by relying on credit scores alone, lenders lock out those who have no to little credit history or are trying to rebuild after accumulating bad credit.
For those with thin files, there are a few options for building credit history. Secured credit cards and credit builder loans can offer a foot in the door but require a larger up-front cash commitment. Short-term loans, payday loans, installment loans, and payday alternative direct lenders can offer options for building credit. Lender rates and fees tend to be higher and provide a shorter period to repay due to the higher risk lenders take on by extending this type of credit to borrowers.
Learn more about payday loans and payday loan alternatives to determine if that’s the right option for you. Personal loans can also help build credit history but personal loans can be harder to qualify for due to minimum credit scores even if the fees are lower.
If you’re considering a no credit check loan, there are simple factors considered to qualify as a loan applicant. An individual will qualify for a no credit check loan if they…
The only thing no credit check loans have in common, is the absence of a credit pull or credit inquiry on the borrower. Many types of loans have a no credit check alternative. However, few of these are no credit check long term loans. These loans tend to be most common with short-term and payday loans.
Personal and payday loans are the most common types of no-credit check loans. The Loan amount may vary from a few hundred dollars to thousands. These loans can serve as instant loans due to their oftentimes quick approvals. Since payday loans are inherently more risky for lenders and are considered unsecured loans, they tend to have higher interest rates and fees and shorter repayment periods. While almost all personal loans, student loans, car loans, mortgages, etc. are reported to the credit bureaus, traditional payday loans tend to be unreported. If you’re looking to build credit, make sure your lender regularly reports to the credit bureaus. Here at Possible, we directly report to the credit bureaus so your credit can be built over time. Without consistent reporting, your credit score will never improve, no matter how often payments are made on time.
Installment loans are loans that are approved for a set amount and cannot be increased until the current loan is completely paid off. These limitations help lenders limit their risk while helping customers gain access to larger loans as they demonstrate reliability. A long term Installment loan is paid back over time in specific amounts and because there are multiple repayments, as long as the lender reports payments to the credit bureaus, you build credit history. Like payday loans, short term installment loans can tend to have higher interest rates, especially if you start missing payments. A Possible loan is also considered an installment loan that builds credit history.
The primary purpose of a credit builder loan is to build credit history. Those with no credit history or bad credit can use credit builder loans to try to improve their credit score. Credit builder loans usually involve borrowing money which is immediately deposited into a bank account controlled by the lender.
Loan amounts usually range from $300 to $1,000. Rates and fees are low on a credit builder loan although there can sometimes be an origination fee. Once the loan is fully repaid, you can access the loan and control of the bank account is given to you. Credit builder loans are available at many banks and credit unions.
While traditional lenders overlook a growing portion of the public, new types of lending have appeared to fill in the gap. One of the more radical shifts has been the appearance of “peer to peer” lending markets. Peer to peer lending matches borrowers with individual lenders to finance loans without the backing of any major banks or financial institutions. These loans tend to have decent interest rates due to the competitive nature of the market and some lenders may be more willing to approve lenders with lower credit scores than traditional banks. While P2P lending can be a great alternative to payday loans, most lenders will not report to the credit bureaus, making it difficult to build credit. Since lenders will be working directly with an individual rather than a company, P2P lending offers less services and support than lending with a bank or other established money lender.
A title loan requires an asset from the borrower as collateral for use by the lender. Because these are secured loans and there is less overall risk of loss for the lender, no credit checks are common. One of the most popular types of title loans is one that uses a car as collateral called car title loans. Loan terms and interest rates can vary significantly depending on your lender.
While no credit check loans can be a helpful tool in building credit, it’s important to understand the strengths and weaknesses of the process before making a decision.
Your current credit score isn’t taken into account. If you have bad credit history or a lack of credit history, no-credit check loans can be a great entry point to building credit.
Your credit score isn’t impacted by applying. With poor credit, it can be difficult to be approved for new loans. And with every hard credit check, your score can go down, a short-term financial issue.
Better chances for approval. No credit check lenders usually have their own criteria for lending money. Payday lenders and other companies may take a look at a few high-impact factors such as your income and employment history, while still others will create a complex system to better understand your creditworthiness.
No credit check loans, such as short-term loans and payday loans, tend to have much higher rates and fees than traditional loans. This is usually caused by the higher risk of lending. Depending on the company you work with, payday and short term loan rates can vary between 100% to over 700% APR (annual percentage rate).
Your options are limited when it comes to getting a no-credit-check long term loan. Long term loans are rarely available for those with little to no credit. If they are, they tend to be secured loans in which important things like your car or house are used as collateral.
These loans tend to be smaller in dollar amounts and last a shorter time frame. Since no credit check loans tend to be riskier, lenders usually extend smaller loans to be repaid within a few months with at most monthly payments. Balancing your debt and keeping track of your repayment schedule is important to stay out of a debt cycle. Since the payback periods tend to be shorter, individual payments tend to be larger. Some lenders will increase the amount of money available for use as you build repayment history.
If you have decent credit, a plethora of options for loans are available for you instead of no credit check loans. However, if you have little to no credit, your options become much fewer. A few of the best alternatives to no credit check loans include:
Keep in mind that all of these alternatives have their benefits and risks so it’s important you take these into account before you take action.
While the decision process for no credit check loans may differ between companies, most follow a similar roadmap. Lenders will generally need to: verify your identity, collect information on your financial health, assess the risk in lending money to you, and finally, make a lending decision based on their assessment. Let’s take a look at how this process works with an application with Possible.
In order to prevent fraud and identity theft, a lender will need to verify your identity before extending a new loan. This process usually involves a lender needing a driver’s license, social-security number, or other documents that can prove your identity.
At Possible, we require a state issued ID and a valid social security number in order to verify your identity with government records. We also ask for a selfie at the time of the loan application to make sure nobody else uses your information to apply.
After a lender knows who you are, they’ll need to collect information in order to make a lending decision. This is where the credit checks can happen. Your lender will leverage your credit score as a measure of your ability and willingness to repay the loan.
When applying for a Possible loan, you’ll link your bank accounts. Since we don’t look at your FICO score or a credit report, we rely on the information you give us. Our system is able to look at information such as your bank balance, income, and history of returned payments in order to give us a better idea of your financial health and creditworthiness.
Now that a lender has collected the information they need, they can begin the process of assessing the risk of your loan. Each lender has a different process for underwriting loans, each using and interpreting your information differently.
With a Possible loan, we look at your overall financial health to make sure our loans are able to help without adding financial burden. Factors such as your income and the number of other loans you have open help us avoid over-lending and doing more harm than good.
Once a lender has evaluated the risk of extending a new loan to a borrower, they decide on the amount of funds available to you. With a line of credit, this will be the total amount you can borrow while more structured loans will give you access to a set amount of funds. Short-term cash advances or payday loans will have a smaller amount of money available to you.
Possible loans are repaid through multiple installments. Once we have a better picture of your financial health, our algorithms help us determine the amount we can safely lend to you. We look at a variety of things like recent income and current bank balance before making a financing decision.
At the end of the day, there’s only one thing shared between types of no-credit check loans and that’s the lack of a credit check. It’s crucial to fully understand the terms of any loan you are applying for as well as researching the company you’ll be working with. While many companies offer no-credit and low-credit loans to help customers with bad credit to build credit history, predatory lenders also operate in this space, hoping to capture customers without much prior knowledge about lending. We started Possible to provide an alternative to traditional predatory payday lenders and give our customers access to cheaper, more flexible, and kinder loans that build long-term financial health.