Find out what happens to credit scores when you apply for new credit or have an existing credit limit changed. Get the Money Girl book at http://MoneyGirlBook.com
Money Girl
323 MG Does Applying for Credit Hurt Credit Scores?
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A different future is closer than you think, with Capelli University. Learn more at Capella.edu. [MUSIC] Hi friends, welcome back to another episode of the Money Girl Podcast. [MUSIC] I'm Laura Adams. Just about every aspect of personal finance can be confusing. But if I had to pick one that seems to leave people scratching their heads the most, it would be credit. There are some common misunderstandings about what happens to credit scores when you apply for new credit, or have an existing credit limit changed. In this episode, I'll clear up any confusion by answering reader questions and tell you what you need to know to maintain excellent credit for life. [MUSIC] If you're a regular Money Girl reader or a podcast listener, I bet you already know a lot about credit. But if you're new to the subject, here's a quick primer. Your credit report is a history of your credit accounts and payment activity. It also includes your basic personal information and certain types of public data, like whether you've declared bankruptcy or are involved in a lawsuit. You're legally entitled to a copy of your credit report from each of the three nationwide credit agencies once a year at annualcreditreport.com. Although your credit report is full of information that you should review for accuracy at least every 12 months, it doesn't include your credit score. Your credit score is a rating that quantifies the potential risk you pose to a lender or merchant. The higher your score, the less risky you appear. There are hundreds of different credit scoring models in use today, each with its own scale and mathematical formula. A variety of companies, including the credit agencies, sell credit scores to consumers, lenders, and merchants. Your credit score is important because having poor credit is expensive, but don't fall into the trap of thinking that credit only matters if you're applying for a mortgage or a car loan. Many people who don't like the idea of having debt seem to discredit credit and say that it's insignificant. It's true that you'll pay much higher interest rates for loans and credit cards if you don't have excellent credit. For instance, poor credit could cost you a whopping $70,000 in additional interest on a $200,000 30-year mortgage. However, your credit also affects your finances in many less obvious ways that are actually unrelated to debt. For instance, having good credit means that you'll pay less for insurance on your car and home, except in California, Massachusetts, and Hawaii, where it can be a factor in setting rates. If you don't own a home, your credit typically is a factor in getting approved to rent an apartment or home. Credit also plays a big role in utilities, such as water, power, gas, cable, and wireless service. Applying for these services is applying for credit, so having poor credit makes it difficult to get them. You might have to pay a hefty security deposit, get someone with good credit to co-sign your application, or get a letter of guarantee from someone that says they'll pay your utility bill if you don't. And if I haven't already made my point that having good credit can save you money, did you know that it can also help you earn more? Many employers check prospective employees' credit reports before making hiring decisions. You could get turned down for your dream job if you have a credit report that makes you appear irresponsible with money. I received this email from Alex. I'm 23 years old and only have one credit card. I recently went shopping for engagement rings, and the salesperson offered to check into how much I could finance. Yesterday, to my surprise, a store credit card with my name showed up in the mail. I don't want the card. Is there a way to reverse the application as if it never happened, so it won't hurt my credit? This is a really common predicament. Many consumers get talked into applying for credit cards that they don't want, or think that they're just signing up for a store promotion. Never give any personal information to a store clerk unless you attend to apply for a new credit account. Unfortunately, there's no way to reverse a credit application. Even if you cancel a new credit card quickly, it still shows up as an inquiry and credit account on your credit history. But the good news is that inquiries have a minimal impact on credit scores and the negative effect decreases quickly over time. Here's another question that I received from a listener named Michelle. I recently requested a credit limit increase on one of my credit cards. I always pay them off in full each month and have excellent credit. But now I'm worried that my request will end up hurting my credit score. You might be surprised to know that increasing credit limits can only increase your credit scores. That's because your balance to limit ratio, known as your utilization ratio, is an important factor in how most credit scores are calculated. It's simply a comparison of your total balances on credit cards and lines of credit to your total credit limits. Lowering credit limits or closing a credit account causes your utilization ratio to increase, which typically hurts your credit. However, if you're like Alex and want to close a new account quickly, the net effect of opening it and closing it should be a wash on your utilization ratio. To maintain excellent credit for life, focus on what you can control by following these quick and dirty tips. Pay all of your credit accounts and bills on time. Maintain a utilization ratio that never exceeds 20%. Use credit accounts but never take on more debt than you can afford. Have one or two credit cards that you use on a regular basis and pay off in full each month. And check your credit report for errors that may be dragging down your scores. Now that we're in Q4, it's a good time to start thinking about making memories with the people you love most before the end of the year. We put a lot into the time we spend with our loved ones. So you want to extend that care, comfort and peace of mind to what happens when you're gone. 41% of people don't have the life insurance coverage they need. Policy genius makes finding and buying life insurance a breeze. With policy genius, you can find life insurance policies at start at just $292 a year for a million dollars of coverage. And some options are 100% online and let you avoid unnecessary medical exams. Policy genius combines digital tools with the experience of real licensed agents. You can compare quotes from America's top insurers side by side for free with no hidden fees. They have an amazing licensed support team that helps you get what you need fast so you can get on with your life. They answer questions, handle paperwork and advocate for you throughout the process. Policy genius is the country's leading online insurance marketplace. And even if you already have life insurance through work, remember it may not protect all your family's needs or follow you if you leave your job. So save money and time on providing a financial safety net for your family. Head to policygenius.com or click the link in the description to get your free life insurance quotes and see how much you can save. That's policygenius.com. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then I XL is a right for your family. I XL is an online learning program for kids covering math, language arts, science and social studies. I XL has interactive practice problems for topics from pre-K to 12th grade and everything is organized by grade and subject. As kids practice, they get positive feedback, awards and explanations for wrong answers. I XL figures out what your kids need more help with and recommends more topics to practice. They're videos, lessons, sample problems and learning games too. One subscription to I XL gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder I XL is used in 95 of the top 100 school districts. I think the positive feedback that I XL gives is really crucial when it comes to learning. So make an impact on your child's learning, get I XL now and money girl listeners can get an exclusive 20% off I XL membership when they sign up today at I XL dot com slash money girl. This at I XL dot com slash money girl to get the most effective learning program out there at the best price. At Credit Union of Colorado, banking doesn't have to be like this. Big national banker here just saying we like to apologize to you for that thing we did. Was it selling your information, canceling your personal loan? Who can say that's for the lawyers to figure out? So just know it's not going to happen again until it does again. At Credit Union of Colorado, we have better interest rates and seamless mobile banking all while having a heart. Credit Union of Colorado. Honestly, good. Learn more at honestlygood.org federally insured by NCUA. For more money tips and advice, be sure to follow me on Facebook, Twitter or Google+, also sign up for the free money girl newsletter. You'll find links to everything I've mentioned in a transcript of this show on the money girl page at quickandertytips.com. Just look for episode number 323 called what happens to credit scores when you apply for credit. And we have a beautiful new website redesign that I'd love for you to check out. Again, you'll see it at quickandertytips.com. I'm glad you're listening to Ching. That's all for now, courtesy of Money Girl, your guide to a richer life. Is it time to reimagine your future? The right business skills may make a difference in your career. At Capelli University, we offer a relevant education that's designed to focus on what you need to know in the business world. We'll teach professional skills to help you pursue your goals, like business management, strategic planning, and effective communication. And you can apply these skills right away. A different future is closer than you think with Capelli University. Learn more at Capella.edu. It's time to get the world talking about black-led brands. We all have our favorites, but we can't give them all to ourselves. So if you feel like a black-able beauty, tell somebody. If the lip bar is giving you a lip for every drip, let them know. And if your hair is doing the doo, shout that out too. 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