Do Prepaid Debit and Credit Cards Affect Credit Score?

Prepaid debit and credit cards can build credit score, but not in the same ways as a secured or unsecured credit card does. Since prepaid cards are structured differently, understanding how they work and what benefits they provide helps clarify how they can build a credit score.

Since secured and unsecured credit cards are financial instruments that charge interest on a balance, a line of credit is directly established and recorded through either a bank account or credit card balance. Prepaid cards on the other hand can be used like debit and credit cards, but without a bank account and with different application requirements. These prepaid cards can build credit in the following ways.

• Prepaid cards and payment history

Fair Isaac Corporation, the creator of FICO credit scores claims the scores are based on bill paying, debt levels, credit history and types of debt.(1) Payment history, which accounts for 35 percent of a FICO score, can be improved with any type of payment method including prepaid debit and credit cards.  Some prepaid cards even help cardholders build a card history as described in the next point.

• Prepaid card fee payments

A prepaid card that helps build credit are the Eufora prepaid Preferred and Elite Mastercards. Eufora's creditbuilder program automatically withdraws a monthly payment that goes toward the prepaid card's annual fee. This payment history is then reported by Eufora to TransUnion and Experian credit bureaus to help build cardholder's credit scores.(5)

• Line of credit via prepaid card

A prepaid debit or credit card may also have a line of credit feature that doesn't require a credit check or good credit.  An example of this is the iAdvance Line of Credit on a the AccountNow Prepaid Visa Card.(4) This line of credit feature is described as being auto-paid and reported to credit bureaus by  DoughRoller, a detailed money blog that provides a wide range of financial information for deal hunters.(3) This type of account feature is actually a hybrid between a prepaid card and secured credit card that requires no credit check.

• No credit check required

According to www.creditcard.com, the Upside Visa Prepaid Card does not require a credit check and doesn't require a bank account like credit cards do. This allows persons with bad credit scores to benefit from debit and credit payment systems. Moreover, the Upside Visa Prepaid Card also allows online personal checks and direct deposit making it somewhat similar to an bank account debit card.(2)

• Builds responsible card use

A final way prepaid debit and credit cards help build credit scores is by using the cards in a similar way to credit and debit cards. Since they are prepaid, the card user gets in the habit of working on a cash basis, but still uses the prepaid card as a method of payment. This trains the mind to use cards responsibly and may carry over into use of secured and unsecured credit cards by virtue of habit.

Sources:

1. http://bit.ly/ggXQt (myFico.com)
2. http://bit.ly/qvVSi (creditcard.com)
3. http://bit.ly/3M8MdF (doughroller)
4. http://bit.ly/9koCGb (AccountNow)
5. http://bit.ly/aWfjRm (Eufora card)

Credit Repair Companies Versus Consumer Counselling

Credit repair and consumer credit counseling are different forms of financial assistance that help those who face large debt or out of control credit. In the case of credit repair, the goal is to rebuild credit rating or credit score with the help of a third party claiming to be skilled at negotiating with creditors and credit agencies.

Credit counseling is different from credit repair services as there may be a conditional requirement by either a lender or court.  For example, in the United States, consumers who file for bankruptcy are often required to receive consumer credit counseling as part of the bankruptcy filing procedure. Credit counseling may also involve debt management and debt settlement services.

Credit repair

According to the U.S. Federal Trade Commission (FTC), credit repair company's are often scams. The proliferation of such scams led to the rise of the Credit Repair Organizations Act which made it a requirement to receive a copy of any contracts before signing them. Even so, credit repair company's may be apt to creating misleading promises that consumers should be aware of.

The fact of the matter according to consumer advocates is that there's nothing a credit repair company can do for hundreds of dollars that an individual cannot. It may seem intimidating or complicated dealing with poor credit, but that doesn't have to be an excuse to lose money paying for a service that can be done for free. If there's nothing a credit repair company can fix after they receive your money, they don't pay it back.

To illustrate the above point, credit repair company's tout being able to correct erroneous information on a credit report if there is any at all. An individual can do this by visiting www.annualcreditreport.com and obtaining a free credit report then sending a dispute letter such as the one available at the Federal Trade Commission's website.

Consumer credit counseling

Consumer credit counseling generally has a more specific and legal function. In regard to pre-bankruptcy counseling, consumer credit counseling is also required to be free for those who cannot afford according to the FTC. The U.S. Department of Justice provides a search form on its website that allows consumers to find a legitimate consumer credit counseling service.

Bank of America distinguishes consumer credit counseling into two groups. Those two groups are debt management agencies and debt settlement companies. Both may provide consumer credit counseling, but the latter is an alternative to bankruptcy that can have a negative influence on one's credit report and costs more. Debt management companies are more educational and help consumers proactively eliminate debt while building credibility.

Credit counseling and debt management companies can also help individuals avoid foreclosure in some instances. For example, the U.S. Department of Housing and Urban Development sponsors an approved housing counseling agency program nationwide. These approved credit counselors can assist with existing and future credit and debt obligations. Thus, consumer credit counseling is not necessarily exclusive to bankruptcy proceedings, but also serves as a financial planning mechanism that helps individuals manage their debt.

Sources:

1. http://bit.ly/aXYN5p (Federal Trade Commission)
2. http://bit.ly/PtC5l      (Department of Housing and Urban Development)
3. http://bit.ly/bhQe4Z  (Overnight Credit Repair Services)
4. http://bit.ly/cuELwf   (Bank of America)

How loans affect your credit score

Loans affect your credit score plain and simple. How loans affect your credit score is another matter entirely as this article will demonstrate. Credit scores are derived from credit reports that illustrate your credit profile in detail.

A credit score is the result of a quantitative analysis of one's credit variables, some or all of which are within a credit report, and is often computed by a company called Fair Isaac and called a FICO score (myfico.com) Consequently, understanding how a FICO score is computed can help you understand how loans affect your credit.

Types of loans and their influence on credit

There are so many types of loans that it would be unreasonable to apply the same credit influence to each kind. This is because different loans have different interest rates, risk, terms of service, guarantees, fees etc. Since these differences affect credibility in varying ways determining how these loans affect your credit requires a specific look at the different loans available, a few of which are listed as follows:

• Credit cards
• Vehicle Loans
• Mortgage loans
• Business loans
• Student loans
• Equity loans
• Secured loans

To determine how these loans specifically influence credit, a closer look at the credit score reveals their influence. As noted above, loans' affect on credit depends on a number of factors and are illustrated in the Understanding Your FICO score' document available through www.myfico.com. Some of these factors used by FICO are listed below with approximate weighted percentages of affect on credit score. The term credit' refers to money lent via various loan type(s) to the borrower who's credit score is in question.

• Credit/payment history (35% of credit score)
• Length of credit history (15% of credit score)
• Types of credit in use (10% of credit score)
• Amounts owed (30% of credit score)
• New credit (10% of credit score)

In the case of credit card loans, the amount of available credit used negatively affects credit score if it rises above 40%. Additionally, the total amount of debt from a loan and/or group of loans determines how indebted a borrower is i.e. amount owed. If loan payments have been missed, those missed payments will have a greater impact on credit score if they are closer in time to the present. Taking on a lot of debt or applying for several new loans at once can also negatively affect credit score because it statistically adds to a negative debt profile when this happens.

Since amount of debt owed only affects near 30% of total credit score, having a lot of debt does not automatically rule out having a good credit score. Rather, if this is the case, it does imply other factors such as paying bills on time and not applying for new loans become more important in keeping your credit score good. Further points to consider include having different types of loans and paying them off, and banking with the same institutions can improve the credit mix score and credit history aspect of the credit score. Too many credit cards can also impact your credit score negatively even if the credit isn't used. Some tips to keep your credit score up when borrowing through loans are listed below.

• Have 3 or less credit cards
• Use less than 40% of available credit
• Pay off a variety of different loans over time
• Bank at the same institution for a long time
• Avoid late payments
• Refrain from multiple new loans

Summary

Loans affect credit score in 1) the way they are paid off, 2) the amount of the loans and 3) the frequency and type of loans applied for and borrowed. Since credit history constitutes a considerable part of credit scoring, how one has borrowed in the past can also be influential even if the loans don't exist or have been paid off.

This article has illustrated how debt in the form of loans influences personal credit score and offers tips and information on how to potentially improve credit score from loans. Loans can be used to help build credit scores but only in certain circumstances and as defined by the credit score reporting agency involved.

Source: http://www.myfico.com

Learning From Bad Credit

Bad credit can be caused by irresponsible financial practices or via no fault of one's own. The Fair Isaac Corporation reports the average consumer carries 13 credit responsibilities generally consisting of credit cards and installment loans. Moreover, in 2009 the U.S. Federal Trade Commission (FTC) reports 278,078 potentially credit damaging, identity theft complaints were made according to the FTC's identity theft clearinghouse and consumer sentinel.

This doesn't include the 721,418 fraud complaints from the same year. Such identity theft can lead to bad credit in addition to faulty credit reporting and individual factors such as late payment of bills.

Poor credit in an economic system sometimes forces individuals to learn from the resulting situations. However, a bad credit situation isn't always the fault of the individual. If the bad credit is due to individual reasons, it doesn't have to be a terrible thing. Having bad credit can leave one with new options and as the saying goes, "when one door closes, another may open."

Knowing what that new door is indicative of learning from bad credit. More specifically, creditors are more likely to be reluctant to lend to persons with bad credit in effect asking one to improve the credit score before any new money is loaned. How an individual learns from the bad credit may lead to different outcomes. This article will illustrate ways an individual may choose to learn from the bad credit.

Report identity theft and faulty credit reporting

The first step in learning from bad credit is knowing what caused the bad credit. Unfortunately, this may involve some research for no fault of the individual if one's identity, credit cards or other financial information has been stolen and in the case of poor credit reporting on behalf of financial institutions. To find out if the bad credit is one's own fault the following steps may be helpful:

• Check bank statements for erroneous or suspicious charges
• Call the bank or credit card company to report lost or stolen cards
• Request an immediate investigation and reversal of false charges
• Order a free credit report(s) from http://www.annualcreditreport.com
• Request a marketing freeze by calling 1-888-opt-out to minimize financial risk

Allow experience to show the way

In the case of an individual bad credit score, one can either learn to not be so dependent on credit companies, learn to build credit scores or choose renunciation the credit institution altogether. In either one of these cases, one is learning from the experience of bad credit, and making a decision for oneself about how to move forward with life. A first step one may take in learning from bad credit is to acknowledge and identify what is going on. The following are signs of bad credit:

• Low credit score
• Late payments on bills
• High interest rate
• Financial stress

After the bad credit is identified, one may then begin the process of thinking about it, reacting emotionally to the situation, or simply not caring. Which ever method one chooses the bad credit presents some unique opportunities:

• A chance to recognize one's financial situation
• A financial reality, in which one must either act or live without credit
• An excuse to not spend money
• The beginning of a new credit life, and the end of an old chapter in one's life
• A way to learn about protecting one's credit identity and profile

Immediate solutions and building new credit

It is not the end of the world when bad credit strikes. There are several ways to deal with the situation. In the case of identity theft, one can file a identity theft report. The Federal Trade Commission is a Federal organization that may be of assistance in this matter. If the credit problem is due to faulty financial reporting by a financial institution, one may need to produce paper work proving the fault and request the credit reporting agency correct the credit report. To rebuild bad credit caused by personal reasons, a step by step process may be followed. A few tips with which to deal with the bad credit are below:

• Ask the credit company or lenders for debt re-negotiation
• Contact a reputable credit counseling service
• Stop spending as much or re-budget
• Consult people one feels comfortable talking about such matters with.
• Consider legal options

The above methods may provide some immediate assistance to the situation but are not necessarily a long-term fix or cheap. Credit counselors, credit card companies and others may try to help one achieve a second chance, but what one does with that chance is up to the individual. One can learn a number of things from bad credit such as how to deal with credit card companies, what remedies are available and what steps must be taken to report financial reporting problems and theft issues.

After dealing with the immediate problem, one may then learn how to build new credit through obtaining secured credit cards, paying bills on time, identifying the ways credit scores rise etc. The whole process could take weeks to years depending on the severity and how complicated the situation is.

In summary, bad credit is not usually a pleasant experience that may or may not be caused by individual fault. In identifying, acknowledging and reacting to bad credit one may learn either directly or indirectly, how to deal with the bad credit, build new credit and take new approaches in the future. In these ways, bad credit is a learning experience, and in some cases a somewhat involuntary learning experience.

Sources:

1. http://www.myfico.com (Fair Isaac Corporation)
2. http://www.ftc.gov (Federal Trade Commission)