Does Paying Off the Credit Purchase Immediately Damage Your Score?

Any time you use your credit card or make a payment your actions may affect your credit score. Paying off a purchase you made with your credit card soon after making that purchase might, in some cases, lower your score, but typically only briefly and not by a lot. . While it's not always easy to predict what a specific action will do to your credit score because credit scoring companies use different score calculations, you can get a good idea of what an action will do by understanding the factors that influence credit scores.

Score Factors

A person's credit score is based on various factors, each of which impact the score differently. For example, the FICO score, one widely used credit score, is based on five factors: the consumer's payment history, amounts owed, the length of each item's credit history, the number of new forms of credit and the variety of types of credit the person has.

Balance-to-Credit Ratio

Part of your credit score depends on the amount you owe your creditors. With credit cards, the amount you owe is measured against your card's credit limit, known as a balance-to-credit limit ratio, according to Leslie McFadden, writing for Bankrate.com. Having a zero balance on a credit card may lead to a slightly lower score than having a card with, say, a balance equal to 10 percent of the card's limit. If you make a purchase and immediately follow it by paying off the card balance, therefore, your score may decrease slightly.

Using Your Cards

Having a zero balance on all your credit cards may hurt your credit score, and paying off a purchase soon after making it can lower the score if it reduces your balance to zero. However, making even a small purchase with your credit cards, especially after a period of inactivity, can raise the score again. Creditors use your payment history to judge how good a credit user you are, and even by making a small purchase and adding more information to your payment history you can increase your score by showing you are a responsible credit user.

Raising Your Score

If you make a purchase and quickly pay it off, and do so with a credit card that you have had for a long time but haven't used, this may improve your score more than having a zero balance may lower it. This is because your payment history counts for about 35 percent of your credit score and your credit history accounts for 15 percent while your credit utilization accounts for about 30 percent. A dormant card that hasn't shown up on your credit report for a while but which is suddenly resurrected with your purchase and payment may raise you score because it positively affects your payment history and length of credit.

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Arkansas Laws About Free Credit Scores

Your credit score, also known as a FICO score or credit rating, is the number that lenders use to determine your credit risk based on the information in your credit report. The number of accounts you have, your payment history and your degree of debt all influence your credit score. Each of the three credit bureaus may have a different score for you, since each may have different information. Arkansas consumers are subject to the same laws and protections offered to the rest of the country by the Federal Trade Commission (FTC).

Obtaining Your Credit Report and Score

In Arkansas, you are entitled to one free copy of your credit report each year. You can obtain this report by going to www.annualcreditreport.com and filling in the information requested. You can then download and print your report and check it for errors. Federal law also allows you to request a copy of your credit report any time that you are turned down for credit, such as a loan or credit card. These reports do not supply your credit score. In most cases, you will need to purchase a copy of your credit score from a reporting agency or directly from FICO at www.myfico.com. These generally cost around $8 per report.

Free Credit Reports and Scores

The Credit Card Act of 2009 requires that any services advertising "free" credit reports and scores disclose that these reports are not the same as those offered annually by the credit bureaus. In most cases, these "free" reports require enrollment in a monthly credit-monitoring service or the purchase of a credit score report.

How to Improve Your Credit Score

The best way to improve your credit score and ensure your access to the credit you need is to pay your bills on time, every time. Maintain low balances on the credit cards you do have. If you detect errors on your credit report, federal law allows you to contest the information on your report and have those errors corrected. If you are having trouble paying your bills, consider enlisting the help of a reputable debt management company to create a workable repayment plan. See the Resources section for a list of Arkansas credit counseling agencies approved by the Department of Justice.

Avoid companies that offer to repair or rebuild your credit for a fee, especially those companies that do not help you repay your debts. According to the Federal Trade Commission, only time and a concerted effort to repay your debt can improve your credit score.

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How Long Does it Take to Build Good Credit?

Although many people don't know their credit score at any given point, it is an extremely important part of a person's financial life. A good credit rating can open fiscal doors and loan opportunities that are closed to the majority of people. Unfortunately, however, it can be relatively hard to build good credit and it can take a long time to do so. Of course, the length of time that it takes to build a good credit score depends of several variables that are different from case to case.

Identification

In the United States, the most common credit rating that is used is referred to as the FICO (short for Fair Isaac Corporation) credit score. This type of rating was invented by engineer Bill Fair and mathematician Earl Isaac (the founders of the Fair Isaac Corporation) in the 1950s. FICO scores are given in a three-digit format and range between 300 and 850, with higher numbers representing a "better" credit score. There are a variety of ways to you can improve your FICO credit score and other such credit ratings.

Function

There are several main methods of building good credit, each with its own associated time frame. The first step is to secure a line of credit, usually a credit card or small loan of some type. It is important to always make payments on time and to make sure that you never overextend yourself financially and take out more debt than you can easily repay. It is also important to make sure that your debt remains relatively small in comparison to the credit available to you. All of these things will help to build your credit score in a positive manner.

Considerations

There are several major considerations involved in determining how long it will take a person to build a good credit score. The first consideration, and generally the most important one, is previous credit history. Those with an extremely poor credit rating or a lot of bad credit history will find it extremely difficult to build good credit. A bankruptcy, for instance, generally has a major negative impact on a person's credit score for around 10 years.

Another thing that seriously impacts the length of time required to build good credit is a person's yearly income. Whether it's fair or not, those with high salaries will be able to build good credit much more rapidly than those who earn less money.

The last element that is crucial is the availability of a co-signer with established credit. Those who can secure loans with the help of a parent, guardian, friend, relative or spouse who is willing to co-sign on the loan will find that is much easier to get a relatively good loan and to quickly build good credit.

Time Frame

The exact time frame that is required to build good credit varies significantly based on the variables mentioned previously. A person with no previous credit history who secures a loan, is never late on payments and who makes a good amount of money will be able to build a relatively good credit score within six months to a year. Those who have a terrible credit history, a severely low credit score and less income often require upwards of a decade to repair their credit and get it back to a decent score.

Warning

There is no real shortcut to building your credit score, though many people claim that there is. Sound financial planning, reasonable spending and sober handling of credit are what is required, and it just isn't a process that can be sped up easily. Always be skeptical of those who claim they can rebuild your credit quickly, particularly if they want compensation in return. There are many scams out there that seek to take advantage of those who are desperate and who are least capable of bearing any unnecessary financial burden.

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Insider Tips for Fixing Your Credit Report

A credit report is like a gateway to financing opportunities, low interest rates, new housing and employment. If you have a bad credit report, the doors to these opportunities may close. This report tells a story about your credit worthiness, spending history and financial past. If you need to fix your credit report, it is never too soon to get started.

Your Credit Report

The most important aspect of fixing your credit report is knowing what information is recorded on the report. The Federal Trade Commission (FTC) states that you can get a free annual report from the credit bureaus'-- Experian, TransUnion and Exifax---central website, Annual Credit Report.com. For a fee, you can order more than one report in a 12-month period.

Check your report to figure out why your credit score is low. Late bill payments could be the problem. Or, there could be errors on your report. Look for statements saying that you spent more than your credit limit when you did not; that you had late payments that you actually turned in on time; or that you had new credit cards for which you did not apply.

Reporting Errors

Make a list of any errors you find on each report, listing the oldest accounts first with their corresponding dates. Write to each applicable credit bureau regarding the errors, citing each individual error, its date and the reason for your dispute. In your letter, ask the agency to amend the incorrect information. It is a good idea to include documents that support your claims, such as bank statements, receipts and canceled checks, as well as a copy of your credit report. According to the FTC, you should highlight the errors on the copy of the report you send. Save a copy of the letter and mail the original to the credit bureau via certified mail. The FTC states it can take up to 30 days for a credit reporting agency to begin the investigation on your claim.

Budgeting

If your credit report has a low score because of less-than-perfect spending habits, follow the FTC's advice to create a budget. Set money aside for necessary expenses, create an allowance for unnecessary items and work toward paying your debts and saving money. Necessary expenses are those that help meet basic needs and debt payments, such as housing bills, groceries, car payments and insurance. Unnecessary expenses may include trips to the nail salon or a gym membership. As you create a budget, note bill due dates on a calendar. If you have an electronic calendar on a computer or cell phone, use the feature that reminds you of events so you do not forget to pay your bills on time.

Piggyback

When you piggyback, someone with a good credit score adds you as an additional cardholder on one of his credit cards so his good credit starts to reflect on you. You should only piggyback with an individual who has good credit and a good payment history because a delinquency can reflect poorly on your credit score. Moreover, your bad spending decisions with the shared credit card account reflect poorly on the other person. If you find someone who will allow you to piggyback on his credit, it may be best to never use the credit card that comes in your name.

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What Credit Score Is Considered Good Credit?

Today, credit scores are used by potential employers, landlords, insurance companies, banks, mobile phone companies and other entities that may wish to extend goods or services on credit. Having a good credit score can be the difference between landing a dream job or getting a new apartment...or not.

What is a Good Credit Score?

In 2010, a 720 score is considered the minimum threshold for good credit. That's about 100 points higher than before the housing market crashed and the current recession began in 2008. The median credit score for all consumers is 725, although the gap between the percentage of consumers holding scores below 600 and those with scores over 800 is getting wider.

For home mortgages, however, it seems that a score of 740 is now the minimum needed to avoid a higher loan interest rate, according to Rodney Anderson, a Texas-based mortgage lender.

Where Does Your Credit Score Come From?

The credit score was crafted in 1989 as part of a joint project between Equifax, one of the three major credit reporting bureaus, and the Fair Issac Corp., a global financial services firm. The original purpose of establishing credit scores was to predict the likelihood of a person repaying his debt on time. Credit scores may range from 300 to 850. They paint a picture of a person's creditworthiness at a specific point in time.

Also known as the FICO score, a credit score not only dictates whether a borrower gets credit, but also determines the cost of that credit. Holders of low credit scores, if deemed creditworthy, likely have to pay higher interest rates on loans or higher insurance premiums.

Factors Affecting Your Credit Score

The credit score is calculated using an algorithm owned by the Fair Issac Corp. The credit bureaus do not store credit scores, but rather, calculate it when the score is requested based on a number of factors: the types and amounts of credit held; the person's payment history; the amount of outstanding debt; the length of the person's credit history; and how frequently and how recently the person has taken on new debt.

What Does Your Credit Score Mean?

Holders of credit scores at the upper echelon of 720 or higher may see increasing competition--in the form of more credit card offers--for their business.

Those with credit scores beneath 700, in the midst of today's recession, will find it increasingly difficult to obtain credit. Scores between 620 and 700 are now considered marginal and anything below 600 is seen as a poor risk.

What You Can Do About a Bad Credit Score

Nothing but time and attention to the good money management practices as well as to one's credit report will affect a change in one's credit score. Negative, but accurate, information cannot be removed legally.

Americans are entitled to a free copy once a year or when credit has been denied in the past 30 days, from any of the three major credit reporting agencies: Experian, Equifax and TransUnion--one from each a year.

To raise one's credit score, one must: pay bills on time; pay down debt; minimize new credit; and demonstrate the ability to make purchases and pay them off promptly.

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How to Interpret a FICO Credit Score

FICO credit scores are created by the Fair Isaac Corporation to help lenders determine how creditworthy a prospective borrower is. The FICO credit score uses information found in your credit report and translates it into a number between 300 and 850, with higher numbers representing more creditworthy borrowers. Once you have determined where you fall, examine the five factors that effect your score: your payment history; the amount you owe and the amount of credit available to you; length of credit history; types of credit you use; and new credit applications. Though the formulas for calculating credit scores are not released, looking at your credit report can help you determine which components are hurting your score.

Instructions

1

Compare your score with the national average to determine where you rank. Only 13 percent of individuals have credit scores above 800 points, while 14 percent have credit scores below 600. Individuals with scores above 720 will usually qualify for the best interest rates.

2

Examine your payment history on your credit report, which accounts for 30 percent of your score. If you have late payments, delinquent accounts or defaults on credit owed your score will be lower.

3

Examine your use of credit, which accounts for 30 percent of your score. If you are using a large percentage of your available credit your credit score will be lower. To figure out what percentage of your credit you are using, divide your total credit owed by your total credit limits.

4

Examine your length of credit. There is only so much you can do about how long you've had credit, but it accounts for 15 percent of your score so if you have a limited history that may explain why your score is lower.

5

Examine your types of credit, which account for 10 percent of your score. If you only use credit cards, your score will be lower than if you used multiple types of accounts.

6

Examine the inquiries on your credit report, which account for 10 percent of your score. If you have a number of applications in a short period of time, your score will go down because you are viewed as a greater credit risk. An exception to this is if you are applying for a home loan or a car loan. As long as multiple applications for these types of loans are received in a short period of time, the score will treat them as a single inquiry.

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List of Businesses That Check Your Credit Score

When a particular business wishes to evaluate the likelihood that a client will be able to pay back a loan, it typically runs a credit check on the person. These businesses can be financial institutions that loan money or other types of companies, such as those that provide products or services before compensation has been provided.

Lenders

Most institutions that are considering lending money to someone will generally want to know the person's previous credit history. These institutions include mortgage issuers and auto lenders. A credit history will give the company a general idea of the likelihood that the person will pay back the loan. In many cases, the company will base the rate of interest on the person's credit score. Those with lower scores typically pay more in interest.

Landlord

When a landlord is considering a rental application, he will generally attempt to check the person's credit score. Although the landlord is not lending the tenant money, he is allowing him access to the space, with the proviso that the tenant pay rent in advance each month. If the tenant fails to pay, the landlord may be forced to go through a time-consuming and expensive eviction proceeding. By taking only tenants with good credit scores, some landlords hope to prevent this from happening.

Insurance Companies

Insurance companies use a number of factors to determine whether the people they cover will be likely to incur a claim against the company. Generally, insurance companies will base the rates they charge clients based on the estimated likelihood that the person will force the insurance company to make a payout: those with a higher likelihood generally pay higher rates. Some insurance companies use credit scores to calculate this.

Cell Phone Companies

Cell phone companies typically bill clients at the end of each month for the charges incurred during the previous month. While some companies bill ahead of time, most set their rates so that the customer may incur additional fees each month depending on how he uses the phone, meaning those charges cannot be pre-billed. Before issuing phones, many cell phone companies will check the credit score of clients: those deemed a high risk of missing payments may be asked to put down some form of collateral.

Employers

Many companies that hire employees choose to run a credit check on prospective hires. Although some states have regulations against using a person's credit score to discriminate against her for a position, many do not. The employer may use the credit check to get a better understanding on the job candidate's background as well as a sense of his ability to be responsible.

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