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Apache is functioning normally

August 26, 2024 by Brett Tams

Is it possible to get a business loan with an EIN only? Yes, but it can be difficult unless the business has been around for a long time.

Lenders like to use a variety of factors to determine whether a borrower is a good candidate for a small business loan. When those factors are restricted to only a business’s financial history, it makes it harder to determine whether the applicant is a good investment. However, it is possible.

Below, we discuss how to apply for a startup business loan with an EIN and why you may want to consider doing so, as well as what you can do if your application is denied.

Key Points

• An EIN, or employer identification number, is a nine digit number given to a business, similar to a SSN given to individuals.

• While it may be possible to get a loan with just an EIN, most lenders will also want to look at your credit history, business financial statements, length in business, and business plan.

• Business loan options that may only require an EIN include equipment financing, invoice financing, invoice factoring, and merchant cash advances.

• To get the best rate on a small business loan, you’ll want to show lenders more than just your EIN, though. You’ll want to present a strong credit profile, solid financial statements, and a comprehensive business plan.

What Is an EIN?

EIN stands for employer identification number. It’s a nine digit number assigned to businesses by the IRS. Contrary to popular belief, you don’t need to have employees to obtain an EIN.

There are a few reasons why you may want an EIN:

1. Makes filing taxes easier

2. Enables business owners to open a business bank account

3. Helps business owners open a business credit card

Is it possible to apply for a business loan with an EIN? Yes, but to improve your odds you’ll want to ensure your business has a financial history. You can begin doing this long before your company is ready to make its first sale.

Does Your Business Have an EIN?

Unless you have specifically applied for an EIN, it’s unlikely your business has one. To get an EIN, you will need to submit an application through the IRS. If you have lost your EIN and can’t find the appropriate paperwork, you may be able to contact the IRS directly and obtain it. Otherwise, your EIN is a nine digit number that is unique from your SSN.

Can You Get a Small Business Loan With Just an EIN?

Obtaining a small business loan with just an EIN is possible, but it often requires more than just the EIN to secure financing. The EIN, issued by the IRS, is primarily used for tax purposes and identifies a business entity. While it is an essential piece of information for loan applications, lenders typically require additional documentation and criteria to approve a loan.

In addition to an EIN, lenders will look at:

• The business’s credit history: A strong personal credit score can provide assurance to lenders about the borrower’s ability to repay the loan. In the absence of an established business credit history, personal credit becomes even more critical.

• Business financial statements: This includes profit and loss statements, balance sheets, and cash flow statements. These documents help lenders assess the financial health of the business and its ability to repay the loan.

• A business plan: A comprehensive business plan may also be required to demonstrate the company’s strategy for growth and its potential for generating revenue.

• Collateral to secure the loan: Collateral can be business assets like equipment, inventory, or real estate. This provides security for the lender, reducing their risk in case the business fails to repay the loan.

While it is theoretically possible to get a business loan using just an EIN, the reality is that additional factors, such as credit history, financial documentation, and possibly collateral, play a significant role in the approval process, as well.

Recommended: 15 Types of Business Loans to Consider

How to Apply for a Startup Business Loan With an EIN Number

Applying for small business loans can be done with only an EIN, but it does take time to establish a business credit history. To improve your odds, follow the steps below:

1. Apply for an EIN.

2. Open a business bank account.

3. Apply for a business credit card with your EIN.

4. Make all payments to vendors and credit accounts through your business bank account. Ask vendors to report your on-time payments to Dun & Bradstreet, Experian®, and Equifax®.

5. Check on your business’s credit score.

6. Once your business has an established credit score, apply for start up business loans using your EIN number.

Why Should You Use EIN Over SSN?

Startup business loans with the EIN number only have a few benefits:

• Personal credit history may not be a factor

• Borrowers who don’t have a SSN can still apply for a business loan

• Application process may be easier

However, before you decide to solely rely on your EIN, using your SSN also has some benefits you may want to consider:

• Credit score may improve loan terms

• More financing options may be made available

• Eligibility requirements may not be as difficult to reach

Best Small Business Loans for EIN

Because some borrowers using only an EIN may seem to be more of a risk for lenders, it’s not uncommon for lenders to prefer loans that pose less of a risk.

The top business loans for 2024 for borrowers applying only with an EIN are:

• Equipment loans: Equipment loans are secured with the equipment itself, which makes them less of a risk to the lender. However, lenders may still impose a cap on how much they are willing to loan to borrowers applying only with an EIN. The good thing about equipment loans is that the loan term often mirrors the equipment’s useful life.

• Invoice financing: Use unpaid customer invoices as collateral to secure a business loan. Once payment is received, full repayment of the loan is expected.

• Invoice factoring: Sell unpaid invoices to a third party at a discount. That company collects payment on your behalf. Once they receive payment, they forward any remaining amount to you minus any fees.

• Merchant cash advances: With a merchant cash advance, borrowers receive a lump sum of cash from a lender. Instead of making monthly payments, a small percentage of each credit card sale is automatically sent to the lender. Neither monthly payments nor collateral is required since payment is guaranteed through sales.

Will My Loan Be Limited?

While it’s certainly possible to get a business loan with only an EIN, keep in mind that lenders use things like personal information, personal guarantees, and collateral to help protect themselves from lending to subprime borrowers.

Therefore, as a small business borrower, your financing options may be limited by only using an EIN during the application process because the lender has less information to go on. If your business has a short financial history, it’s safer to assume you pose a certain amount of risk.

Borrowers applying only with an EIN may find that there are less loan options, higher interest rates, and shorter loan terms.

Recommended: What to Know About Short-Term Business Loans

What to Do If You Aren’t Eligible

If your application is declined, you may consider remedying any issues with your personal credit report while also continuing to build your business’s credit score.

Remember, your credit report and your credit score are two different things. Your score is a result of the information within your credit report. Therefore, first check your credit reports and see if there are any errors. You can do so for free once a year through www.annualcreditreport.com. If you see any information that should not be there, begin the dispute process.

If there aren’t any errors, you may need to pay down your debt and begin to make all of your payments on time moving forward. If you have any older credit accounts, keep them open even once they are paid down. Also, if any friends and family have strong credit profiles and have accounts that have been open for a few years, you may ask to become an authorized user on their account. Their positive history will boost your personal credit profile.

Aside from bootstrapping and asking for help from friends and family, other options include small business grants and crowdfunding. Both are highly competitive, so you will want to consider still moving forward with the above recommendations just in case.

The Takeaway

An EIN is required for certain businesses, especially any that have employees. An EIN is a nine digit number that is essentially a social security number for your business.

Some business loans can be obtained with only an EIN, but many small business owners will find that their options are limited if they don’t also provide their personal information. Generally, businesses need strong, lengthy credit histories to obtain business loans with only an EIN.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

Can you build business credit with just EIN?

Yes, it is possible to build business credit with just an EIN. However, the first step would be to open a bank account using the EIN. From there, the business owner would make all payments to their accounts from that business bank account.

Can you get a small business loan with a bad credit score and just an EIN?

While it is possible to get a business loan with bad credit and just an EIN, loan options are likely to be limited.

What is the average time it takes to get approved for a small business loan with just an EIN?

The average amount of time depends on the loan and the loan amount. Some loans are disbursed within a very short amount of time, while others require a lengthier underwriting process and can take up to several months.

Can you apply for a SBA loan with just an EIN online?

You can apply for a business loan with only an EIN, but you will need to provide other information as well, such as a social security number or tax ID number and a written out business plan.

Are there any added fees to a small business loan with just an EIN?

Each lender may or may not have unique fees associated with the application process. However, applying with just an EIN is not normally the cause or justification behind standard lender fees.

Photo credit: iStock/JLco – Julia Amaral

SoFi’s marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Source: sofi.com

Apache is functioning normally

August 25, 2024 by Brett Tams

Credit scores measure your financial health at a given point in time. Ideally, your score increases as you build your credit history, so a sudden decline can leave you wondering why.

Several things can cause a credit score to fall 100 points (or more), and late payments are often at the top of the list. Here’s a closer look at why credit scores decrease.

Why Did Your Credit Score Drop 100 Points?

A credit score can drop by 100 points or more when there’s a significant change to your credit reports. Possible reasons for a credit score drop of 100 points or more include:

• Late payments

• Missed payments

• High balances relative to your credit limits

• Reduced credit limits

• Delinquencies and collection accounts

• Bankruptcy filing

• Foreclosure or repossession

• Judgments

• Multiple inquiries for new credit in a short timespan

• New credit accounts in your name1

These types of items can drag your score down. Paying off loans or closing credit card accounts can also cost you credit score points, even though you might consider them positive financial steps.

Identity theft and fraud can trigger a sizable drop in your credit score as well. If someone uses your identity to obtain loans or open lines of credit without your knowledge, that could leave you vulnerable to late or missed payments, delinquencies, and collection actions. A money tracker app can help you keep tabs on your credit score, and you’ll also get updates when it changes.

Track your credit score with SoFi

Check your credit score for free. Sign up and get $10.*

Should You Be Worried About Your Credit Score Dropping?

A credit score drop can be worrisome, especially if you weren’t expecting it. You may have cause for concern if you:

• Plan to apply for a mortgage or another type of loan soon

• Would like to refinance an existing debt that you have at a lower interest rate

• Suspect that someone may be using your identity to obtain credit fraudulently

Fluctuating credit scores could make it more difficult to get approved for new loans. If you are approved, a lower score could result in a higher interest rate.

Identity theft is a more serious matter. You may not even be aware that someone is using your identity to obtain credit in your name until you’re denied credit, or worse, sued for an outstanding debt you didn’t create.

Reasons Your Credit Score Went Down

Why did my credit score drop by 100 points for no reason? The short answer is that it didn’t. There must be some change to your credit report to result in a score decline.

Changes that can show up on your credit reports include:

• New accounts opened in your name

• Account closures

• Changes to your balances or credit limits

• Payment activity, including late payments or missed payments

• Delinquencies and accounts that are sent to collections

• Paid off balances

• Debt settlements, in which your creditors agree to let you pay off less than what you owe

• New inquiries for credit1

Inaccurate information can also harm your credit. Between 2021 and 2023, consumer complaints about credit report errors increased by 168%, according to the Consumer Financial Protection Bureau (CFPB). Credit report errors can range from payments being incorrectly reported to accounts listed as belonging to you that are not yours.2

In some cases, a credit score drop might be caused by someone else. This can happen when you cosign a loan for someone. As the cosigner, you’re legally responsible for the debt. Any activity relating to the account, including late or missed payments, can show up on your credit report.3

What Can You Do If Your Credit Score Dropped by 100 Points?

If your credit score drops by 100 points or more, the first thing to do is determine why. Obtaining copies of your credit reports can shed some light on what may be causing the decline.

Here are some things to look for as you review your reports:

• Missing or incorrect payment history

• Incorrect balance information

• Accounts that don’t belong to you

• Collections for debts that don’t belong to you

• Loan accounts you’ve paid off that still show a balance

• Open accounts that are listed as closed or vice versa

• Duplicate debts, meaning the same account is listed multiple times

If you identify what you believe is an error or inaccuracy, you have the right to dispute it with the credit bureau that’s reporting the information. Equifax, Experian, and TransUnion — the three major credit bureaus — all allow you to initiate credit report disputes online.4

Why did my credit score drop over 100 points when there were no errors? That’s trickier to answer, as it depends on the information in your credit file. If there are no errors or inaccuracies, then you’ll need to consider things like payment history, credit limits, and debt balances to see if they’ve had any impact on your score.

Examples of Credit Score Dropping

Hopefully, you never have to deal with a major credit score drop. But it may help to have some examples of what can cause your score to go down.

• You’re ready to buy a home and are shopping for a mortgage lender. You find the one you want to work with and apply for a loan. You’re approved, but the new inquiry and associated debt on your credit reports lead to a score drop.

• You cosign a car loan for your niece, on the promise that she’ll make the payments on time. She loses her job but doesn’t tell you and the loan payments go unpaid for six months. The lender repossesses the vehicle, which lands on your credit report and costs you credit score points.

• You make the final payment to your student loans. The account is now listed as closed and paid in full on your credit reports, but it lowers your score.

Again, not all things that lead to a credit score drop are negative. Paying off debt, for example, is something to celebrate even though it can ding your credit to a degree.

How to Build Credit

How long does it take to build credit? There’s no simple answer, as it can depend on what you’re doing (or not doing) to recover lost credit score points.

Some of the most effective strategies for building credit include:

• Paying bills on time to establish a positive payment history

• Keeping the balances on your credit cards low or paying in full each month

• Paying down debt that you already have

• Periodically requesting credit limit increases from your credit cards (but not running up new debt against them)

• Leaving older credit accounts open, even if you don’t use them

• Using different types of credit, such as loans and credit cards

• Limiting how often you apply for new credit

You can also build credit as an authorized user on someone else’s credit card. Authorized users have charging privileges on the card and account activity will show up on their credit reports, but they’re not legally responsible for the debt.5

Having a checking or savings account typically doesn’t affect credit scores. Banks can, however, report negative activity related to closed accounts to ChexSystems, a consumer credit reporting agency. A negative ChexSystems report could make it difficult to get approved for a new bank account.

Allow Some Time Before Checking Your Score

If you recently checked your credit following a score drop, you may want to wait a while before checking it again. Credit scores change when there’s new information added to your credit reports, whether it’s something positive or negative.

It may be helpful to check your credit monthly or quarterly if you’re working on rebuilding your score. That way, you can track your progress against any steps you’re taking to improve your score to see what’s working.

At a minimum, it’s a good idea to check your credit at least once annually. That can allow you to see what’s changed over the last year and look for any suspicious or potentially fraudulent activity.

Pro tip: Use a free credit monitoring service to get regular credit score updates.

Recommended: How to Check Your Credit Score Without Paying

Closing a Credit Card Account Can Hurt Your Score

Closing credit cards can hurt your score if you still owe a balance at the time you close the account. Your credit utilization ratio measures how much of your available credit you’re using. When you close a credit card with a balance due, you automatically increase your credit utilization ratio.6

For example, let’s say you have a combined credit limit of $20,000 across five credit cards. You owe $6,000 in total debt to your cards, which makes your credit utilization ratio 30% ($6,000 / $20,000 = 0.3).

Now, assume that you owe $5,000 to one card alone. That card has a credit limit of $10,000. You close it, cutting your total credit limit in half. Now you have a credit utilization ratio of 60% ($6,000 / $10,000 = 0.6).

Some experts say that 30% or less is an ideal credit utilization ratio to aim for, while others target 10% instead. The main thing to remember is that the lower your credit utilization is, the less harmful changes can be to your score.

In terms of how to lower credit utilization, you can do so by paying down credit card balances and/or increasing your credit limits.

What Factors Impact Credit Scores?

If you’re wondering what affects your credit score, it’s not just one thing. FICO credit scores, which are the most commonly used among top lenders, are determined by five factors.

• Payment history: 35% of your score

• Credit utilization: 30% of your score

• Credit age: 15% of your score

• Credit mix: 10% of your score

• Credit inquiries: 10% of your score7

VantageScores are based on some of the same factors, though they’re calculated differently. The VantageScore model was developed by the credit bureaus as an alternative to FICO scores.

Pros and Cons of Tracking Your Credit Score

Tracking your credit score can be beneficial but there are some potential downsides. Here’s a quick look at the advantages and disadvantages.

thumb_upPros:

• Monitor your progress over time

• Get to know which factors are helping or hurting your score the most

• Easier to spot suspicious activity or potential fraud

thumb_downCons:

• You may feel frustrated if your score isn’t climbing as quickly as you’d like

• Checking your score too often could cause you to obsess over even minor changes

• Keeping up with multiple credit scores could get confusing

Recommended: Why Did My Credit Score Drop After a Dispute?

How to Monitor Your Credit Score

Credit score monitoring services make it easy to track your credit scores and get notifications when there’s a change to your credit report. SoFi, for instance, offers free weekly credit score updates and access to a certified financial planner if you have questions about credit score changes.

Regardless of which service you use to monitor your credit, keep track of changes as they’re reported. Specifically, look at which changes are positive and which are negative. That can guide you toward what you might need to do to improve your score.

The Takeaway

Seeing your credit score drop by 100 points or more can be disheartening, but it’s not the end of the world. There are things you can do to get your score back on track.

Tracking your money is a good place to start. Tools like a spending app connect all of your accounts in a single dashboard so you can understand the factors that are influencing your credit scores. You can also check your scores for free. It’s a simple way to take charge of your financial health while you work on building good credit.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

Why did my credit score drop 100 points when nothing changed?

It may seem as if nothing has changed on your credit reports, but there must be some type of change for your score to be affected. If your score dropped, take time to review your credit reports thoroughly. Even a seemingly minor change, such as a new credit inquiry, could make a dent in your score.

Why is my credit score going down if I pay everything on time?

Paying bills on time can help add points to your score, but it might still go down if you have a high credit utilization or apply for new credit frequently. Closing accounts could also hurt your score, even if you pay on time. Using a spending app to track bills and expenses can help you stay on top of your due dates.

How to dispute a credit score drop?

You can’t dispute a credit score drop, but you can dispute the information on your credit reports that you believed caused the drop. Keep in mind, however, that disputing credit report information isn’t guaranteed to improve your score.

Photo credit: iStock/kate_sept2004

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Source: sofi.com

Apache is functioning normally

August 25, 2024 by Brett Tams

Many Reddit users report receiving $10.xx checks for money owed to them as being American Express Business cardholders. Apparently there were $10 wireless credits not paid out and these are being sent out with interest. Some people got $20.xx check or $30.xx checking, presumably for some months combined. Some got even a dozen or more of these checks. It’s been sent even to people who are not aware of any missing credits, so keep an eye out and don’t throw out the mail too quickly.

Source: doctorofcredit.com

Apache is functioning normally

August 25, 2024 by Brett Tams

There are several explanations for why your credit score might fluctuate by a few points now and then. But if you’ve noticed that your score is down by as many as 20 points, and you can’t think of any reason for this dramatic drop, it’s a good idea to do some checking ASAP. This can help you determine what affected your score and what you should do about it.

Read on for some common reasons why your credit score could unexpectedly drop by 20 points, and how you can improve and protect your score going forward.

Track your credit score with SoFi

Check your credit score for free. Sign up and get $10.*

Why Did Your Credit Score Drop 20 Points?

The fact that you even noticed that your credit score took a dip is proof that you’re paying attention to your finances, so give yourself a high five for that. If there’s a problem — a credit reporting error, for example, or possibly identity theft — you’ve got a head start on getting it fixed. And if it’s something you did without knowing it could impact your score (at least not by this much) you can resolve to do better in the future.

Even if you’re doing everything right — including paying bills on time, keeping low credit card balances, and using credit score monitoring to track how you’re doing — you can’t always know from month to month what will happen to your credit score. That’s because credit scoring systems like FICO® Score and VantageScore® use information from a credit report to assess your creditworthiness and assign it a number from 300 (the lowest score) to 850 (the highest).

If the information in your credit reports is up to date and correct, your credit score will reflect that. But it’s up to each individual lender to decide when or even if it will report information to the three major credit reporting agencies: Equifax, Experian, and Transunion. And sometimes the reports can be incomplete or incorrect. If that’s happened to you, your score may drop, or it may not be as high as you think it should be.

What Factors Impact a Credit Score?

FICO® and VantageScore® use different formulas to calculate credit scores, but the same basic factors from your credit report can move your score up or down. And some things can have a bigger influence on your score than others.

Here’s how FICO® breaks down what affects your credit score:

• Payment history (35%): Your record of paying your bills late or on time can have the biggest impact on your FICO® Score. A spending app can help you keep tabs on upcoming bills.

• Amounts owed (30%): Even if you’re managing it well, carrying a lot of debt could affect your score. This category applies to the amount you owe overall, but it puts a priority on your credit utilization. Lenders generally like to see a credit utilization rate of 30% or lower.

• Length of credit history (15%): This category looks at the age of your oldest account, the age of your newest account, and the average age of all your accounts together.

• Credit mix (10%): Lenders also may want to see that you, as a borrower, can handle different types of financing, including credit cards, installment loans, retail accounts, and mortgage loans. So FICO® includes this in its credit scoring formula.

• New credit (10%): When you apply for some type of financing, whether it’s a new credit card or a new car, the lender may make what’s known as a hard credit inquiry, which could cause a dip in your score. The drop is typically small and temporary, but you might notice a bigger change if you make several credit applications at around the same time.

Should You Be Worried About Your Credit Score Dropping?

It’s normal to feel frustrated and concerned if your credit score drops suddenly, especially if you don’t understand what happened. But the good news is, it can be pretty easy to find out what’s up. If your financial institution, credit card company, or your favorite money tracker app offers you a way to get your credit score regularly, you may have access to a brief summary that explains what caused that number to go up or down. This can be a good place to start looking for clues as to why your score dropped by 20 points.

It’s also useful to know how to read a credit report so you can get the information you need to catch errors or spot identity theft. This can help you get to the bottom of what’s affecting your score and take steps to get that number back in line with what you think it should be. You have the right to request a free copy of your credit report from each of the credit bureaus once a year by visiting AnnualCreditReport.com.

Reasons Your Credit Score Might Go Down

It could be that something you did (or didn’t do) caused your score to drop, and you might not even know it. Maybe you closed an old account that you didn’t use anymore, or maybe you applied for a loan or new credit card. It’s also possible that you have an old unpaid balance hanging out there that you thought was cleared up but isn’t.

Examples of Credit Score Dropping

A combination of several factors could explain why your credit score seems to have suddenly and randomly dropped by 20 points. Here are some examples of why a credit score can go down:

You’re Using a Large Percentage of Your Available Credit

Are you close to maxing out all the credit you have available to you? Did you recently make a large purchase with your credit card that pushed you close to your credit limit? Even if you’re paying your bills on time, if your credit utilization rate is higher than 30%, it could explain a reduction in your credit score.

You Closed an Old Credit Card Account

It may seem counterintuitive (and super frustrating) that canceling a credit card can have a negative effect on your credit. But there are a couple of reasons why closing a credit card account can lower your credit score.

First, when you cancel a card, you reduce your available credit, which can cause a jump in your credit utilization rate. Second, closing an older account can affect the length of your credit history, which is another factor that goes into determining your credit score. It may make sense to close the account anyway if the card has high fees or if it’s hard to resist overspending. But if you do cancel a card, especially one you’ve had for a while, you can expect to see a temporary drop in your credit score.

You Made a Late Payment

Maybe you simply forgot to pay a credit card bill. Or maybe you failed to make a payment in a month when money was tight and figured you’d play catch-up with a bigger payment the next time. Either way, if the credit card company reported your late payment to a credit reporting agency, it could be the reason your credit score dropped. Remember: Payment history is the biggest factor in calculating your credit score.

You Made the Final Payment on an Installment Loan

When it comes to determining your credit score, your “credit mix” isn’t as big of a factor as your payment history or the amount of available credit you have. But if you recently paid off a car loan, personal loan, or some other type of installment loan — and your credit mix is now limited to just credit card debt — it could have an affect on your score.

That doesn’t mean you shouldn’t celebrate your accomplishment or that you should run out and apply for another loan. But it could help explain why your credit score is lower than you think it should be.

What Can You Do If Your Credit Score Dropped by 20 Points?

There are a few steps you may want to consider taking right away if you notice a big drop in your credit score.

Review Your Credit Reports

If you find an error on your credit report, such as a payment incorrectly reported as late, the Consumer Financial Protection Bureau (CFPB) recommends filing a formal dispute, in writing, with both the credit reporting company and the entity that provided the information (such as a credit card company). By law, the credit reporting company must investigate your dispute and notify you of its findings.

If you notice signs that you may be the victim of identity theft (such as unknown accounts or unfamiliar debt), you may choose to alert the credit bureaus. You can also report identity theft on the Federal Trade Commission’s site, IdentityTheft.gov.

Prioritize Timely Payments

The biggest factor in determining your credit score is your payment history, so keeping track of your bills is important. If payment deadlines tend to get away from you, you may want to set up online bill pay to reduce your bill-paying burden. Or you can put payment due dates on a physical or digital calendar, then set up alerts on your phone so you know it’s time to pay.

When you pay a bill, be sure to note the details, such as the date, amount, and confirmation number if paid online.

If You Can, Delay Applying for New Credit

You may want to wait until your credit score comes back up a bit before applying for a new credit card or loan. If you want to get the best interest rate or you’re worried about getting approved, you’ll want your credit to be shipshape. It also can be a good idea to avoid authorizing several companies to do a hard credit pull if you’re shopping for a mortgage, car loan, or credit card.

How Can You Build or Repair Your Credit?

If you’ve been working to improve your creditworthiness, even a small dip in your credit score can be disappointing. But you don’t have to let a negative fluctuation deter you from your goal.

How can you continue to build your credit? Besides paying your bills on time, managing your credit utilization, and having a good credit mix, you also can help lenders see that you’re a good risk by paying down high-interest debt — and keeping it paid off.

How Can You Monitor Your Credit Score?

There are several ways you can check your credit score without paying. Many credit card companies and financial institutions offer free credit reporting and scoring as a benefit to cardholders. (You may have to opt-in to begin receiving this service). If your personal information was compromised in a data breach, you may be offered free credit monitoring for a specific period of time. You also can pay for a credit monitoring service to get regular updates.

Allow Some Time Before Checking Your Credit Score?

Though credit score updates can occur at any time, checking about once a month should provide a good gauge of how you’re doing. (You can check your own credit score any time you like without any negative impact.)

If you get a free credit score from your bank or credit card, you’ll probably receive a new score monthly. With a credit monitoring service, on the other hand, you may receive an alert any time there’s a significant change in your score or some type of suspicious activity.

Pros and Cons of Tracking Your Credit Score

Tracking your credit score can help you protect your credit and may provide added incentive to keep working on your financial health. Here are some pros and cons to consider:

thumb_upPros:

• Tracking your score can help you spot a problem or possible fraud or theft so you can quickly take action.

• If you plan to apply for a credit card, mortgage, or some other type of loan, you’ll have a better idea of what your creditworthiness looks like to lenders. Your score helps lenders decide if you’re a risky borrower or a fairly safe bet.

thumb_downCons:

• If you know that even small fluctuations in your score will make you nervous, you may want to limit how often you check it.

• It may take a while before your score reflects the good (or bad) moves you’ve made. You may want to allow at least one full billing cycle to pass before checking on why your number didn’t move even though you expected it to.

Recommended: Why Did My Credit Score Drop After Dispute?

The Takeaway

A 20-point drop in your credit score can be worrisome. But there are several steps you can take to determine what caused such a significant change and then try to fix it.

It also can be helpful to be proactive instead of reactive when it comes to your credit score. By paying attention to the factors that can have the biggest impact on your credit, such as your payment history and credit utilization, you can keep working to build and protect your credit.

See exactly how your money comes and goes at a glance.

FAQ

Why did my credit score drop 20 points randomly?

It may seem as though your credit score dropped randomly, but there’s usually something behind a dip of 20 points or more — and it’s worth looking into. It could be a late payment, an error on your credit report, a sign of identity theft, or some other reason.

Why did my credit score drop and I don’t know why?

A change in your credit score reflects a change in a credit report. It may be that you made a late payment and you didn’t think your credit card company would report it. Or maybe you made a major purchase that changed your credit utilization rate. If you’re concerned, you may want to check your records against your most recent credit reports.

Is it normal for a credit score to drop 25 points?

A credit score can drop for many reasons. Though a 25-point dip is something you’ll probably want to check into (if you can’t figure out why it happened), there are steps you can take to dispute information in your credit report and repair your credit score.

Photo credit: iStock/milan2099

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

SORL-Q324-002

Source: sofi.com

Apache is functioning normally

August 24, 2024 by Brett Tams

Your credit reports show how long your credit accounts have been open. Having a longer credit history can improve your credit score, albeit not to the extent other factors can. (It makes up 15% of your credit score.) On the flip side, if you close an old account, you shorten your credit history — which can potentially lower your score.

Credit Mix

The variety of your credit accounts — like personal loans, credit cards, and mortgages — is 10% of your credit score. And managing different kinds of credit can help improve it. Paying off a specific type of credit, such as a car loan or mortgage, can have the opposite effect, as it reduces the diversity of your credit mix.

New Credit Applications

When you apply for a new line of credit, lenders check your credit report to determine the risk of lending you money. This check, known as a hard inquiry or “hard pull,” can drop your credit score by a few points for a short time, though it stays on your report for two years.

But keep in mind, when calculating your score, FICO, the scoring model most lenders use, only looks at credit pulls from the past 12 months. And new credit only makes up 10% of your credit score.

Recommended: What Is a FICO Score?

How to Pay Off Debt and Help Your Credit Score

Paying off debt may lead to a temporary dip in your credit score, but its benefits far outweigh any drawbacks. In fact, there are steps you can take build your credit as you whittle down your debt load:

• Make on-time payments: Always make payments on time, whether it’s your credit card balance or mortgage. Punctual payments positively impact your score the most.

• Prioritize high-interest debt: Pay off credit cards with the highest interest rates first to reduce debt risk.

• Pay off cards with a low credit limit: This can help keep your debt-to-credit ratio in check.

• Keep credit utilization low: Aim to use less than 10% — and no more than 30% — of your available credit.

• Clear small balances on multiple cards: Having zero balances on more cards is better for your score.

• Pay off past-due bills: Prioritize the most recent ones. This shows new lenders that you’ve settled your debts.

How Long Does It Take for Your Credit Score to Improve After Paying Off Debt?

Luckily, a drop in your credit score is generally brief. After you pay off your debt, your score should bounce back within a month or two because credit bureaus typically update your credit information every 30 to 45 days.

You can check your credit score without paying. If it doesn’t improve right away, don’t worry. The paid-off debt will stay on your credit report for up to 10 years. If you made payments on time, this positive history can help boost your credit score in the long run.

Ways to Increase Your Credit Score After Paying Off a Loan

Once your debt is settled, you may want to turn your focus to boosting your credit score. Some steps you may have taken as you paid down the debt will serve you well at this point, such as making on-time payments and keeping credit utilization low. But there are other strategies that can help:

• Build a long credit history: Keep older accounts open so you can build a long history of responsible credit use. The longer your history of on-time payments, the better your score may be.

• Apply for credit sparingly: Only apply for new lines of credit when needed. Too many applications in a short period can negatively impact your score.

• Review your credit reports: Regularly review your credit reports for any errors or inaccuracies. If you spot anything out of the normal, make sure to dispute any mistakes. This way, you can ensure your score reflects accurate information.

How to Get Credit Score Monitoring

Using a credit monitoring service can help you keep tabs on your credit score. These services notify you when there are changes to your credit reports, which can help you catch any suspicious activity. While comprehensive monitoring services are available, there are ways to monitor it yourself:

• Ask for a free copy of your credit report: You’re entitled to a free credit report every year from each of the three credit bureaus. Visit AnnualCreditReport.com to get started.

• Check for complimentary credit monitoring: Some accounts offer free credit score monitoring. Call your bank or credit card company to see if you qualify.

• Freeze your credit reports: If you suspect a data breach or theft of your Social Security number, consider freezing your credit report. This restricts access to your credit information, stopping thieves from opening new accounts in your name. Note that freezing or unfreezing your credit is free and doesn’t affect your credit score.

• Set up fraud alerts: You can place a fraud alert on your credit report if you think you’re a fraud or identity theft victim. Creditors will verify your identity by calling you when a credit application is made. It’s free to request and lasts for one year without affecting your credit score.

The Takeaway

There are many reasons why your credit score dropped 40 points after paying off debt. You may see a temporary dip in your credit score due to changes in your credit mix, history length, and utilization ratio.

To help boost your score, make on-time payments, use less credit, maintain old accounts, apply for new credit sparingly, and regularly check for errors in your credit reports. These habits can help you maintain a strong credit score. And if you need help managing your finances as you pay off debt, consider enlisting the help of a spending app.

See exactly how your money comes and goes at a glance.

FAQ

How long does it take for a credit score to update after paying off debt?

You can expect your credit score to update within a month or two as long as you continue practicing good credit habits like making on-time payments. Credit bureaus usually refresh your information every 30 to 45 days.

Why is my credit score going down even though I pay on time?

Paying on time is just one part of your credit score. Other factors, like how much credit you’re using or the length of your credit history, can also cause your score to drop, even if you don’t miss any payments.

How to increase credit score after paying off debt?

To keep your credit score strong after paying off debt, follow a few key tips. For example, always make your payments on time, avoid using too much of your available credit, and apply for new credit only when you really need it. Also, review your credit score regularly so you can spot discrepancies.

Photo credit: iStock/Erdark

SORL-Q324-003

Source: sofi.com

Apache is functioning normally

August 23, 2024 by Brett Tams

Lowering your debt to improve your credit score means that you are considered less of a risk to a lender. And with a higher credit score, you will qualify for better financing terms. However, in some cases, paying off a car loan or other type of financing can have the opposite effect and actually lower your credit score.

Here’s a look at why your score could suffer if you pay off a loan. We also look at how you can avoid a drop in your credit score when your financial situation changes.

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Why Did My Credit Score Fall After Paying Off My Car?

A credit score drop could be a direct result of paying off a car loan — or a completely unrelated reason. For example, if you apply for a loan or new credit card, the lender may do a “hard pull” to check your credit score. Too many credit checks within a short period could cause a temporary drop in your credit score, even if you don’t sign for the loan.

If you pay off a car loan, the loan will remain on your credit report for up to 10 years. As long as you always make your payments on time, the loan will continue to have a positive effect on your credit history. Newer accounts, however, have more of an impact on your credit score. So, if you close an old account that you dutifully paid off, your current credit standing could worsen because your regular payments to that old account are no longer taken into consideration.

In addition, when you pay off a car loan, your credit mix changes because you now have one less account in your name. This change can lead to a drop in your credit score.

Let’s take a closer look at factors that affect a credit score and how paying off a car loan can impact them.

Credit Score Contributing Factors

Auto loan lenders typically look at your FICO™ Score or your VantageScore. We’ll focus on the FICO Score because it’s probably the most popular. Four main factors make up your FICO credit score with varying weights. Here’s a look at each of them.

Payment History

Your payment history makes up 35% of your FICO Score, and it is a measure of how likely you are to pay back your debts. The score looks at whether you pay your credit card bills, your mortgage, and any installment loans on time. A few late payments on credit cards or a mortgage won’t ruin your score, but any bankruptcies or collections may. If you need help spotting upcoming bills and managing payments, tools like a money tracker app can help.

Credit Utilization

Your credit utilization rate makes up 30% of your FICO Score. This is the amount of revolving credit versus the total amount of credit available to you. The lower your utilization percentage, the better your credit score because it shows you are not maxing out your credit — so you’re better able to pay back a lender.

Your total available revolving credit includes the amount you can spend on credit cards and lines of credit like home equity lines of credit (HELOCs). Your credit utilization rate is based on the numbers on your credit report, and this data may lag behind your current limits and balances by a month or more.

A car loan has no impact on your credit utilization rate. However, it can affect your total debt and your debt-to-income ratio.

Length of Your Credit History

The length of your credit history accounts for 15% of your FICO Score. A longer credit history will have a positive effect on your FICO Score. Your credit history takes into account how long your credit accounts have been open, including the age of your oldest account, the age of your newest account, and the average age of all your accounts. So when you close an older credit card account, you may see a drop in your score — regardless of whether you’ve paid off your car loan.

Credit Mix

Your credit mix is the type of credit you have — for example, credit cards, mortgage, HELOCs, installment loans, student loans, and car loans. Your credit mix accounts for 10% of your FICO Score. If you are successfully managing a variety of financing types, it will be reflected in your FICO Score. After you pay off a car loan, your credit mix decreases, and your credit score may dip as a result.

New Credit Card Applications

When you apply for a new credit card, the provider will do a hard inquiry on your credit score that could cause it to dip slightly. A new account will reduce the average age of your accounts, which could also lower your score.

On the other hand, a new credit card account will increase the amount of credit available to you, which might lower your credit utilization rate. It might also diversify your credit mix, and if you make payments on time, it could build a stronger payments history.

Recommended: 8 Reasons Why Good Credit Is So Important

How to Pay Off Debt and Help Your Credit Score

Paying off debt should boost your credit score, but in some cases, it can damage it. For example, if you pay off debt and close credit card accounts, you may not be able to demonstrate to the credit bureaus that you make regular payments and practice responsible fiscal management.

Here are some ways to pay off debt that are unlikely to lower your credit score.

• Pay due amounts on time. Your payment history is the most important component of your credit score. You can improve it by paying off your credit card balances in full each month and also paying your mortgage on time.

• Pay off high-interest debt. High-interest credit cards can trap you in a spiral of debt if you don’t pay off the balance each month. Pay off these cards first so you reduce the likelihood that you will fall behind on payments and rack up interest charges. This will benefit your credit score because lenders will consider you less of a risk.

• Pay off debt with cards with low credit limits. If you are maxing out the credit limit on a card with a low credit limit, your credit utilization rate may be high because you have more debt than you have accessible credit. That makes you a high risk to a lender and will reduce your credit score.

Try to keep your credit utilization rate below 30%, and ideally around 10%. By paying off credit card debt with a low credit limit, you reduce your debt load but maintain access to the credit, improving your credit utilization rate.

• Pay off your student loans (maybe). Paying off your student loans may or may not be beneficial. It will reduce your debt-to-income ratio; however, regular student loan payments contribute to a healthy payment history. Also, student loans add diversity to your debt mix, so paying off this type of installment loan might negatively impact your credit score.

• Pay any past-due bills. Paying off old debts that are late shows lenders that you pay what you owe. Pay the most recent bills first.

How Do I Keep My Credit Score From Dropping?

Practicing good fiscal management will help keep your credit score from dropping. Keep in mind that closing old credit card accounts and paying off some debts may backfire. Maintain a credit utilization rate that’s below 30%, and most importantly, pay your bills on time.

How Long Does It Take for Your Credit Score to Improve After Paying Off Debt?

Paying off debt may not necessarily improve your credit score, and your score may show a decrease initially. However, in most cases, your score should reflect a better credit utilization ratio in one or two months.

Keep in mind that a car loan has no impact on your credit utilization score.

Recommended: How Often Does Your Credit Score Update?

Ways to Increase Your Credit Score After Paying Off a Loan

If your credit score dropped when you paid off a car loan or other loan, do some research to find out why. Then, there are various things you can do to remedy the situation and build back credit.

• Avoid late payments. Setting up automatic payments and using a spending app can help you to avoid missed payments.

• Check your credit utilization rate. Check that by paying off a debt and closing an account, you have not raised your credit utilization rate to over 30%. Aim to spend no more than 10% of your total available credit.

• Avoid closing out older credit accounts. Keep older credit accounts open, even if you never use them. This will lengthen your credit history.

• Limit new credit inquiries. Be careful when shopping for new credit cards or loans. Hard inquiries by lenders within a short period (around 14 days) will lower your credit score. Try to find lenders that will prequalify you for financing without a hard inquiry.

• Improve your credit mix. Try to use both credit cards and installment loans responsibly by making regular, timely payments.

However, remember that a variety of loan types will only have a small impact on your credit score. It’s not advisable to take on extra debt just to fulfill the need for a diverse credit mix.

How to Monitor Your Credit Score

When it comes to credit score monitoring, you have plenty of options.

Federal law allows you to view a free copy of your credit report from each of the three national credit bureaus (Experian, TransUnion, and Equifax) at AnnualCreditReport.com.

You can also use a credit score service. Some sites provide a free credit score to users. Others may provide credit scores if you pay a monthly subscription fee.

Some credit card companies, banks, and lenders have started to provide credit scores for their customers. Check your statement, or you may be able to access it online after logging into your account.

If you find information you believe is inaccurate or incomplete on your credit reports, you can also file a dispute with the credit bureau that provided the report.

The Takeaway

Paying off a loan, such an auto loan, can have an unexpected negative effect on your credit score. This may be because of a decrease in your credit mix, a change in the length of your credit history, or another factor that contributes to your credit score.

It’s important to monitor your credit report and your credit score and understand why any changes occur. That way, if your credit score drops, you can take steps to remedy the situation, such as paying off the balance on credit cards, improving your credit mix, and watching that your credit utilization rate stays below 30%.

See exactly how your money comes and goes at a glance.

FAQ

Why did my credit score go down after paying off my car?

If you pay off a car loan, the loan will remain on your credit report for up to 10 years, and as long as you always make your payments on time, the loan will continue to have a positive effect on your credit history. If you remove that loan, your current credit standing could worsen because you have less of a credit history.

How long does it take for your credit score to go up after paying off my car?

In most cases, your score should go up in one or two months if other factors do not come into play, such as a limited payment history or closing an unrelated credit account.

Why is my credit score going down even though I pay on time?

A change in your credit history could cause your credit score to drop. For example, if you apply for new loans or credit cards within a short timeframe, the hard checks conducted by lenders may cause a temporary drop in your score even if you don’t sign for the loans. Also, if you close out old credit cards, you could be shortening your credit history, which will lower your credit score.

Photo credit: iStock/milan2099

SORL-Q324-011

Source: sofi.com

Apache is functioning normally

August 23, 2024 by Brett Tams

A passbook loan is a loan that allows you to borrow against the money you have in your savings account. In other words, your savings serve as collateral for the loan.

While you will likely have to pay interest when borrowing money in this way (which you wouldn’t have to do if you used your savings directly), a passbook loan can help you build credit if your financial institution reports the activity to the credit bureaus and you manage the loan well. Passbook loans may also be a valuable financial tool if you’re having trouble securing a personal loan or find their interest rates to be higher than you can afford.

Keep reading for all the details about how passbook loans work, plus their pros and cons.

Understanding Passbook Loans

Here, learn more about the definition and history of passbook loans as well as how they usually work.

Definition and Historical Background

Passbook loans (often called share-secured or savings-secured loans) are a way to borrow funds, typically at a lower interest rate, by using your savings as collateral.

Passbooks are physical books that record a bank account holder’s transactions. These passport-sized books originated in the 18th century; bank tellers and postmasters could record account transactions in them. For example, a bank teller could write the date of a transaction, the amount deposited or withdrawn, and the amount of money available to the customer. In the late 20th century, bank statements began to make their appearance and replaced passbooks to a large degree. (For those who want them, however, passbook accounts are still available from some financial institutions and can provide a customer with a classic booklet to track transactions.)

A passbook loan borrows from the name of these old-fashioned books. With passbook loans, you use your savings account, held at the same institution, as collateral for a loan, and you may pay a relatively low interest rate. Putting the money in your account up for collateral, however, means your lender can seize that cash if you default on your loan payments.

How Passbook Loans Work

Here’s how a passbook loan works:

• First, you’ll have to find a bank or lending institution that offers passbook loans. Most banks don’t offer them, so you might consider checking at a credit union.

• Once you find a potential lender and establish a savings account or a certificate of deposit (CD) there, the financial institution will usually let you borrow up to 90% to 100% of the money in your savings account. For example, if you have $20,000 in your savings account, you may be able to borrow $18,000 to $20,000. Check with the lender to learn the exact amount.

• Once you receive the loan from your financial institution, it’s important to note that you can’t access your savings. The financial institution might put a hold on your account, or you might have to hand over your savings passbook until the loan is repaid.

• As you repay your loan with interest, your lender will usually release the amount you repay from your withheld savings.

• Your payments may be reported to the national credit bureaus, but check with your lender to be sure. Timely payments can help build your credit score, while making late payments on your passbook loan can damage your score.

Obtaining a Passbook Loan

Next, take a closer look at the usual eligibility and requirements, interest rates, and repayment terms for passbook loans.

Eligibility and Requirements

You’ll need a funded savings account or certificate of deposit to be eligible for a passbook loan, and it’ll typically have to be held at the institution you plan to borrow from. These types of loans are usually easier to get and less risky to the lender because they use collateral to back them (unlike unsecured loans, which don’t require collateral).

Interest Rates and Repayment Terms

It’s important to understand passbook loan interest rates (the amount you repay in addition to the principal), particularly because you’re basically paying interest on your own money.

These loans can offer some of the lowest interest rates of any type of loan, likely because, since they are secured, they pose less risk to your financial institution. For instance, BankFive charges passbook loan rates of 3.00% to 3.50% APR (annual percentage rate) over the interest rate of the savings account used as collateral.

You repay the loan in regular, monthly installments over a specified period, such as three years.

Application Process

You’ll have to fill out an application for a passbook loan. Each bank or credit union has its own application. Simply request the application from your financial institution. Depending on the lender’s requirements, you may be able to complete the application online, in person, over the phone, or via mail.

You may find the paperwork simpler and shorter than what is required for other kinds of loans. That can reflect the fact that you are already a customer of the financial institution and that you are borrowing against your own money.

Advantages and Disadvantages of Passbook Loans

It’s important to consider the pros and cons of passbook loans before you pursue one.

Benefits of Passbook Loans

First, the upsides of passbook loans:

• Lower interest rates: Passbook loans typically carry a lower interest rate than other types of loans, which means the amount you pay back (principal plus interest) could total less than what you’d pay for other types of loans.

• Credit building: Passbook loans may help you build credit, provided your lender reports the loan activity to the credit bureaus and you make your payments on time.

• Few approval requirements: You usually don’t have to meet as many approval requirements to get a passbook loan as you would with other types of loans. That’s because your savings account, typically at the same financial institution, serves as collateral.

Potential Drawbacks and Risks

Now, the downsides of passbook loans:

• Credit may not improve: Though unlikely, your lender may not report your passbook loan payments to the credit bureaus. In that case, a passbook loan might not help you build your credit, even if you are meticulous about paying it back on time. It’s wise to check this point in advance. (Also, you must manage the debt responsibly to build credit if the lender does report your activity.)

• Uses your account as collateral: If you fail to make your payments on your passbook loan, your financial institution can take the money from your savings account.

• Cannot access your money while you borrow: You cannot access your savings account when you borrow money using a passbook loan. This can put you in a tricky situation if you need money immediately.

• Paying the bank for your own funds: At a basic level, a passbook loan means you’re paying the bank to borrow your own money.

• Restricted amount: In a best-case scenario, you can only borrow the amount you have in the bank. So if you have $3,000 in your savings account but are hoping to borrow $10,000 via a passbook loan to buy a car, you won’t be able to do so.

Alternatives to Consider

Passbook loans may not be the right fit for your situation, so you might consider these options instead.

• Personal loans: Personal loans, which generally range between $1,000 to $50,000, are unsecured loans that come from a wide variety of financial institutions, including banks and credit unions. You can use them for any purpose, including home improvements, debt consolidation, and more. Personal loans may cost you more in interest compared to passbook loans, and repayment terms usually range from two to seven years.

However, you typically don’t need collateral for a personal loan, unless it’s a secured personal loan.

Use a personal loan calculator to learn more about how much a personal loan might cost you.

• Credit-builder loans: If you have little to no credit, a credit-builder loan may help you improve your credit score. These loans, which usually range between $300 and $1,000, involve depositing money into a certificate of deposit (CD) or savings account, which the lender holds as collateral. You don’t receive a lump-sum disbursement upfront, as you do with many loans. Instead, you make fixed monthly payments toward the loan (principal plus interest). Your lender may release some of the borrowed funds when you make a monthly payment, or they might hold the full amount till you make the final payment. Interest and fees are usually deducted from the amount you receive. This activity is reported to credit bureaus and contribute to an uptick in your score.

• Secured credit cards: You may want to consider a secured credit credit card instead of a passbook loan. A secured credit card is a credit card that requires a security deposit, which becomes your line of credit. If you don’t make your payments on time or default on your loan, your lender can take your deposit. However, using the credit card responsibly can help you build credit because your lender typically reports your payments to the three major credit-reporting agencies — Experian®, Equifax®, and TransUnion®.

Recommended: What Is the Average Interest Rate on a Personal Loan?

Using Passbook Loans for Different Purposes

There are many uses for funds borrowed via a passbook loan, such as:

• Purchases, such as a new laptop

• Expenses, like homeowners insurance or summer camp for the kids

• Debt consolidation, such as paying off your credit card bill

• Buying a car

• Home improvement projects

• Wedding costs

• Medical or educational expenses

• Vacations

Ultimately, you can use a passbook loan for whatever you want.

Future of Passbook Loans

Will passbook loans be part of the future financial landscape? Given all the other financial products currently available (such as the personal loans described above), consumers may not want to pay interest to borrow against their own savings.

Decline in Popularity

Passbook loans are not very common, having seen their popularity ebb over the years. Their usefulness is often limited to those who want to build their credit in this particular way or are seeking an especially low interest rate. If you find yourself in that situation, you may want to check with various lenders, especially credit unions, to see what’s available.

On the other hand, market data indicates that personal loans are gaining popularity.

The Takeaway

Passbook loans are a way of borrowing money against your savings, which can be useful for some people looking to build their credit. Ultimately, however, you end up paying a financial institution to borrow your own money with a passbook loan.

If you’re looking to access funds for debt consolidation, home improvement projects, a wedding, or other needs, you might want to consider a personal loan instead.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Are passbook loans still available today?

Yes, passbook loans are still available today. Not every lender offers them, so search online for options. You may find that credit unions are more likely to fund these loans.

Can I get a passbook loan without a savings account?

Typically, you need a savings account or a certificate of deposit (CD) account for a passbook loan, typically with the institution you intend to borrow from.

What happens if I default on a passbook loan?

If you default on a passbook loan, your lender could seize your savings (the loan’s collateral) to repay the delinquent balance. Defaulting on your loan can also hurt your credit score.

Photo credit: iStock/Jinda Noipho

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q324-006

Source: sofi.com

Apache is functioning normally

August 22, 2024 by Brett Tams

“Applications were lower last week, led by a 15% decrease in refinance activity despite the 30-year fixed mortgage rate declining for the third consecutive week,” Kan said. He noted that refinance applications, though lower, were 23% higher than a month ago, and recent weeks have shown the strongest readings since 2022. FHA refinance applications, however, … [Read more…]

Apache is functioning normally

August 22, 2024 by Brett Tams

A minor drop in your credit score — like the less-than-five-point drop you’ll temporarily encounter after a hard inquiry when applying for credit — is nothing to sweat in the long term. But a 40-point drop is more worrisome.

Are you asking yourself, “Why did my credit score drop 40 points after paying off debt,” following a credit dispute or for no reason at all? We’ll break down what might be happening to your score below.

Why Did Your Credit Score Drop 40 Points?

Your credit score is a number based on several factors that appear on your credit reports from various credit bureaus. And in fact, you have more than one credit score, though the most common one people refer to is your FICO Score. Because it’s complex — and there’s more than one — there are many reasons your credit score may have dropped 40 points.

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Reasons Your Credit Score Went Down

There are several reasons your credit score could have gone down. Here are the main culprits:

• You made a late payment (or several late payments), which were reported to the credit bureaus. A spending app can help you track upcoming bills so you don’t miss a due date.

• You paid off a loan or credit card, which decreased your average age of credit and your credit mix and also affected your credit utilization.

• You applied for a new loan, which resulted in a hard inquiry.

• You’ve increased your credit utilization, perhaps by maxing out your credit cards.

Often, a sudden 40-point decrease in your credit score is the result of two or more of these actions happening all at once or close together. A hard inquiry, for instance, results in only a five-point decrease in your credit score. But if that hard inquiry was for a credit card that you immediately maxed out and then missed a payment on, you’re much more likely to see a larger decrease in your credit score.

There’s one other important reason your credit score may have dropped 40 points: You could be the victim of identity theft, meaning someone is using your personal information to open new lines of credit in your name and then maxing them out to purchase things for them.

Recommended: How Do I Check My Credit Score Without Paying?

Should You Be Worried About Your Credit Score Dropping?

A minimal drop in your credit score is no cause for concern, but a larger drop, such as 40 points, should be alarming.

If your credit score dropped because of your own actions — overspending on credit cards, missing payments, etc. — do your best to get your financial habits back on track. Tools like a money tracker can help you monitor your spending and credit score.

However, if your credit score dropped by 40 points for no reason, you could be the victim of identity theft. Check your credit reports for signs of suspicious activity. If you notice any, you need to freeze your credit reports and begin the remediation process. Here’s how to report identity theft.

What Can You Do If Your Credit Score Dropped by 40 Points?

If your credit score has dropped by 40 points, here are some things you can do:

• Make on-time payments. Ensure all your bills are paid on time and in full, every month.

• Reduce your credit utilization. Stop swiping your credit card unless you can immediately pay it off. Pay off as much of your card as you can, but resist the temptation to spend more with it. Lowering your credit utilization is crucial to repairing your credit score.

• Keep old accounts open. Average age of credit is one of the major factors that affect your credit score. Keeping an old account open, even if you don’t use it, will help keep your score from falling further.

• Review your credit report for errors. Simple reporting errors could be hurting your score. It’s a good idea to familiarize yourself with common credit report errors and how to dispute them.

• Report identity theft. If someone has opened a credit card in your name, follow the proper steps to report the identity theft to the lender, the credit bureaus, and the authorities.

Recommended: Why Did My Credit Score Drop After a Dispute?

How to Build Credit

While establishing and improving credit takes time, there are several steps you can take now to help repair your score after a 40-point drop. Here are some basic actions you can take:

• Make on-time payments. Turn on autopay for all your bills, and make sure there’s always enough money in your checking account to cover the costs.

• Stop spending on credit. Having a credit card with a high credit limit makes it easy to spend more than you should. But you should only use a credit card if you have the money to pay it off immediately (or for emergencies).

• Keep old cards open. Don’t forget — old cards that you don’t use help keep your credit utilization down and help keep your average age of credit higher.

• Monitor your credit. Regularly monitor your credit report and dispute any errors.

• Don’t apply for credit often. Apply for credit only if you absolutely need it, like to buy a car or a house.

What Factors Impact Credit Scores?

Several factors impact your two main credit scores (FICO Score and VantageScore). The two scoring companies use different algorithms to calculate your score; we’ll focus on FICO because it’s more common.

Here are the five major factors that affect your credit score — and how much weight each one has on your score:

• Payment history: This accounts for 35% of your score. Lenders want to see that you make on-time payments for all your debts. Mortgage and rent payments, utility bills, and other loan repayments (such as credit cards or personal loans) will show up on your credit report.

• Amounts owed: This is your credit utilization, and it accounts for 30% of your score. Creditors love to see that you have a high credit limit available to you, but that you use very little of it. This shows you’re a responsible borrower.

• Length of credit history: This accounts for 15% and is why keeping old cards and accounts open is important. It demonstrates to lenders that you’ve been borrowing responsibly for a long time.

• Credit mix: This makes up 10% of your FICO Score. Lenders like seeing that you can manage a healthy mix of credit accounts (credit cards, installment loans, home loans, etc.).

• New credit: If you open too much new credit all at once, that sends a sign to creditors that you may be a high risk. This makes up 10% of your score.

Allow Some Time Before Checking Your Score

After a major drop, it’s tempting to want to monitor your credit score every day for signs of an upswing. But be patient — it can take time before you see an improvement.

While credit score updates happen fairly often, they don’t happen on a set date. That’s because a lender or creditor can send information to the main credit bureaus at different times, which will impact when a score changes. That said, you can plan on an update occurring at least every 45 days.

Closing a Credit Card Account Can Hurt Your Score

Considering closing a credit card account? You may want to think twice, as doing so could negatively impact your credit score.

When you close a credit card, the amount of your available credit decreases. This, in turn, may lead to a higher credit utilization, which as we mentioned above counts for 30% of your score. Closing a card also decreases the length of your credit history, which makes up 15% of your score.

However, there might be times when closing a credit card makes the most sense for you, such as a separation or divorce or a card with a high annual fee. The good news is, there are ways to cancel a credit card without affecting your credit score.

How to Monitor Your Credit Score

You can monitor your credit score in a number of ways. Your bank or credit card issuer may offer credit score insights in your mobile banking app, and you can check your FICO Score for free with Experian. Several money management apps offer free credit score monitoring, including access to your FICO Score or VantageScore.

Pros and Cons of Credit Monitoring

Credit monitoring services offer several advantages, but there may be drawbacks to consider.

Pros

• Real-time alerts when your score changes

• Analysis and insights to help change borrowing behavior

• Identity theft protection

Cons

• Potential cost

• May not offer insights to all three bureaus

The Takeaway

A sudden, unexpected drop in your credit score can be scary. This is especially true if you’re trying to build credit and have been responsibly paying your bills on time and keeping your credit utilization in check. It’s wise to use credit monitoring services so you’re always updated when something changes on your credit report, as it can help you spot errors or even stop identity theft before it gets out of hand.

See exactly how your money comes and goes at a glance.

FAQ

Why is my credit score going down if I pay everything on time?

Even if you make on-time payments, your credit score can drop if you open too many new accounts at once or use up all your available credit every month. A major drop in your credit score could also indicate errors on your credit report or, even worse, identity theft.

Why has my credit score gone down when nothing has changed?

If nothing has truly changed in your finances, your credit score would likely only drop because of an error on your credit report or identity theft. It’s always important to monitor your credit to stay aware of these things. If it’s not a case of error or identity theft, consider your recent credit actions: Did you max out a card or close an old account? These can lead to drops in your credit score.

Why did my credit score drop 40 points when nothing changed?

If your credit score dropped 40 points and nothing changed on your end, check your credit reports with all three major credit bureaus immediately. It’s possible there is an error or that you are the victim of identity theft, meaning someone is using your name to open new credit accounts.

Photo credit: iStock/Miljan Živković

SORL-Q324-001

Source: sofi.com

Apache is functioning normally

August 22, 2024 by Brett Tams

About 43 million Americans hold federal student loan debt and, for some, paying off that debt can be a burden. Many borrowers have access to programs that can pause or reduce their payments, but a new survey finds some borrowers may be forgoing the proper channels and stopping repayment entirely in hopes of student loan forgiveness.

Nearly one in three (31%) student loan borrowers have slowed the repayment of their loan(s) because they hope to see their loans reduced or forgiven by the federal government, according to a recent NerdWallet survey conducted online by The Harris Poll among more than 600 U.S. adults who currently have student loans. And nearly one in four (23%) have stopped their student loan payments altogether for the same reason.

Notably, the survey didn’t ask whether borrowers who slowed or stopped their repayments did so after entering into forbearance or deferment plans. Further, student loan delinquencies have remained largely unchanged since the COVID-19 payment pause ended last October, according to data from the New York Fed. This is likely due to a one-year “on-ramp” grace period set to expire Sept. 30, during which the Department of Education is not reporting any borrowers who miss payments as delinquent.

A worry for borrowers, and a top election issue

Despite the Supreme Court blocking the Biden Administration’s broad plan to cut up to $20,000 in student loan debt per eligible borrower last June, the White House has forgiven roughly $168.5 billion over the last four years, largely through existing forgiveness programs like Public Service Loan Forgiveness and income-driven repayment plans. The president’s current “plan B” student loan forgiveness plan would reduce or eliminate loan debt for a more targeted group of individuals.

There’s no guarantee this plan or anything resembling it will go into effect. Just as legal challenges derailed the administration’s first, broader push for debt relief, lawsuits could force the administration or its successor to further scale back this set of proposals. This fall’s elections could also determine how debt relief proceeds — if at all.

Borrowers seem to have taken note.

A quarter (25%) say they are concerned recent student loan forgiveness efforts will be reversed by the courts. And more than one in five (22%) say that student loan forgiveness is one of the most important issues when choosing a presidential candidate.

Not paying student loans can hurt you

There are consequences if you fail to keep up with your student loan payments.

If you have federal student loans, loans become delinquent as soon as you miss a payment. Loan servicers can begin charging late fees 30 days after that. After three months, servicers may begin reporting the debt to credit reporting agencies, dragging down your credit score. Eventually, student loans enter default and your loan holder will be able to garnish your wages and withhold tax refunds and Social Security payments from you.

The default process happens even faster for student loans held by private lenders.

Pick the repayment plan that’s right for you

While the repercussions of not paying student loans can be serious, the good news is you have several repayment options for federal student loans. (Private student loan repayment options vary by lender.) Use the Education Department’s loan simulator to estimate your monthly bills and overall repayment journey under different repayment plans.

Standard repayment: Under this plan, you’ll pay the same amount each month for a decade. This is generally the fastest way to pay loans off, and therefore you may pay less total interest. You’re placed into this plan by default when repayment begins.

Income-driven repayment: If payments under standard repayment seem too high, you can apply for income-driven repayment (IDR). Under IDR plans, you’ll pay a portion (usually 10-20%) of your discretionary income each month for a set period of time (usually 20-25 years), after which your remaining debt will be forgiven.

Graduated payment: Consider the graduated payment plan if an IDR plan isn’t a good fit, but you want to lower your monthly bill right now. Under this 10-year plan, your payment will start low and increase every two years. The advantage is you’ll be able to free up money in the short term for other needs. The downside is you may end up paying more in interest than under the standard repayment plan.

Extended repayment: If you owe more than $30,000 in loans, you can apply for the extended repayment plan. This plan gives you up to 25 years to repay your loans and you can choose to pay the same amount each month or a gradually increasing amount as under the graduated plan.

Borrowers seem to be taking advantage of these options, as a third (33%) say they’ve changed their student loan repayment plan in order to make their payments more manageable, according to the recent survey.

Before defaulting on your loans, consider deferment, forbearance or an IDR plan

If you simply can’t afford to make any student loan payments right now, you still have options: namely, deferment and forbearance. More than a quarter (27%) of student loan borrowers have used one or both of these programs to pause their federal loan payments, according to the survey.

Both pause your payments and protect your credit from taking the hit it otherwise would if you simply stopped making payments. But the similarities end there.

First, look into deferment. Under deferment, interest does not accrue on your subsidized federal student or Perkins loans while payments are paused (interest will continue to accrue on unsubsidized federal or private student loans).

You must meet a qualifying life event in order to qualify for deferment. Qualifying events include attending school at least half time, being active duty military or in the Peace Corps, experiencing unemployment or earning less than 150% of your state’s poverty guidelines, receiving some forms of public assistance or undergoing cancer treatment.

If you don’t qualify for deferment, consider forbearance. Under forbearance, interest will continue to accrue on your loans (whether federal student loans or private loans) while repayment is paused, and you’ll be limited to a 12-month break from payments.

An income-driven repayment plan can also help you manage payments. If you’ve lost your income, or you earn under a certain threshold, you may qualify for $0 payments under an IDR plan — and you’ll still make progress towards IDR forgiveness while making these $0 payments. Even if you don’t qualify for $0 payments, IDR plans can lower your bills to a more manageable level.

METHODOLOGY

This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from July 16-18, 2024 among 2,076 U.S. adults ages 18 and older, among whom 625 have student loans. The sampling precision of Harris online polls is measured by using a Bayesian credible interval. For this study, the sample data is accurate to within +/- 2.5 percentage points using a 95% confidence level. This credible interval will be wider among subsets of the surveyed population of interest. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact [email protected].

Disclaimer

NerdWallet disclaims, expressly and impliedly, all warranties of any kind, including those of merchantability and fitness for a particular purpose or whether the article’s information is accurate, reliable or free of errors. Use or reliance on this information is at your own risk, and its completeness and accuracy are not guaranteed. The contents in this article should not be relied upon or associated with the future performance of NerdWallet or any of its affiliates or subsidiaries. Statements that are not historical facts are forward-looking statements that involve risks and uncertainties as indicated by words such as “believes,” “expects,” “estimates,” “may,” “will,” “should” or “anticipates” or similar expressions. These forward-looking statements may materially differ from NerdWallet’s presentation of information to analysts and its actual operational and financial results.

Source: nerdwallet.com