Does a Refund Anticipation Loan Affect Your Credit?

Tax preparation companies earned more than $600 million off of taxpayers in 2009 from fees for loan servicing, according to Consumer Federation of America and the National Consumer Law Center. Although the CFA and NCLC consider refund anticipation loans predatory, the loans have the benefit of being unlikely to affect your credit rating.

Identification

A refund anticipation loan, or RAL, does not affect your credit because it is not an actual loan, but an advance on your refund. The tax preparation firm does not care whether you are a good or bad credit risk. In the past, tax preparers pulled a debt indicator report from the federal government to determine if the IRS would offset your refund check, but the IRS stopped this practice in 2010. A debt indicator does not affect a credit rating, either.

Potential

You might end up with a smaller than anticipated refund if the IRS discovers a mistake with your return and adjusts your refund. If the remaining refund cannot repay the anticipation loan, you will have a negative balance with the tax preparer. If you cannot repay the loan, the firm can send the delinquent debt to a collection agency or sue you -- both options can damage your score by 100 points or more.

Predatory Lending

Tax refund loans have one of the highest annual percent rates of any type of loan. The average RAL has an APR in excess of 24 percent, according to Rachel Ochman of SmartMoney. If you are considering this type of loan, you might have financial problems, such as defaulted loans, that hurt your credit. Alternatively, you might not have a checking account or any creditable accounts that would boost your credit rating to provide alternatives to the RAL..

Tips

Modern technology has improved refund processing so much that anticipation loans are obsolete, according to Kay Bell of Bankrate. If you E-File your return, which you can do for free, and provide your bank account information for a Direct Deposit, you should receive your refund within two weeks. You may have other, less expensive options to a RAL available to you, such as a credit card.

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Will Not Using Credit Affect Scores?

In an ironic twist of fate, not having any debt is usually worse for your credit score than carrying some existing balances. Once you gain a line of credit, however, the FICO scoring system will not ding you for failing to utilize credit, except some factors in the equation may hurt if you do not use an account every so often.

Identification

The credit bureaus cannot give you a credit score until you establish a sufficient amount of credit history, according to the Privacy Rights Clearinghouse. Also, the accounts you own must report to a credit agency for them to appear on your profile. Despite popular conception, the credit models employed by the credit bureaus do not lower your score for having too much available credit.

Potential Damage

If you stop using a line of credit, the lender will not send any new data to the credit bureaus and the account will eventually become dormant, which lowers an important part of the FICO score calculation -- credit utilization. Credit utilization equals your outstanding balance over your available credit limit. When a card goes dormant, you lose the limit on the card and thereby raise your credit utilization ratio.

Not Having a Good Mix

Ten percent of your credit score comes from types of credit used, according to the Fair Isaac Corp., the company that developed the FICO scoring model. Only carrying one type of debt, such as a single revolving account, does not display a wide variety of credit accounts.

Tip

Use your credit card every few months, even if you just put a small charge, like your cellphone bill, on it. If you have a good credit score, do not rush out and open up an installment account just to raise it. Adding debt to your profile lowers your credit score and so does applying for new accounts.

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Is Checking Your Credit Score Bad?

Nearly all people of legal age who have taken out a loan or a line of credit are issued a credit score by credit reporting companies. This score is a measurement of the likelihood that the person will back a loan on time and in full. According to U.S. law, a person is legal entitled to check his credit score once a year free of charge. Some companies, particularly lenders, may also check your score in certain instances, such as when you apply for loans. Some types of credit inquiries car harm your credit score.

Types

According to the financial reference website Bankrate.com, there are two types of credit score check -- hard inquiries and soft inquiries. A soft inquiry happens when you check your own credit score, when a company is prospecting your credit score while deciding whether to extend you a line of credit, and when an employer looks at your score. Meanwhile, a hard inquiry is when a lender looks at your score when you apply for a line of credit.

Effects

Soft inquiries do not harm your credit score at all. Although these inquiries are visible to you when you view your report, they are not visible to others. However, hard inquiries will remain on your score for two years and will negatively affect your credit score for a single year. However, the total reduction in your score is usually very small.

Significance

Generally, the only time that a credit check can harm your credit score is if the credit check derives from a borrower's attempt to secure new credit. For example, if the credit check is made by a mortgage company to whom the borrower is applying, or by an auto financing company, this will pull down the borrower's score.

Misconceptions

According to the Privacy Rights Clearinghouse, you do not need to be concerned if you have recently applied to a number of lenders, such as when applying for a loan for a home or a car. Generally, similar inquiries made within 30 days generally count as only a single inquiry, Your credit score is affected as if only one inquiry had been made.

Explanation

The reason that a hard inquiry harms your credit score is that credit companies consider attempts to take out new credit to be a risk factor in defaulting on loans. People who take out more loans are generally considered to be at a higher likelihood of defaulting; by this same rationale, people who apply for loans receive a small ding to their credit score, as it may be a sign of financial trouble.

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Can an Authorized User Affect a Credit Score?

An authorized user is a person who has a credit card that draws from the primary cardholder's credit line. The primary cardholder is still fully responsible for the payments on the account. Although the act of adding an authorized user does not affect the cardholder's credit score, the authorized user's charges can.

Utilization Rate

The main way in which an authorized user can affect the cardholder's credit score is through the debt-to-limit ratio or utilization rate. When the authorized user spends on the credit card, it brings the debt on the card closer to the limit. CNN Money recommends keeping the debt to under 30 percent of the limit to avoid lowering a credit score.

Missed Payments

If the authorized user unexpectedly charges thousands of dollars on the card, the cardholder may be unable to afford the minimum payments. Missing payments will hurt the cardholder's credit score.

Prevention/Solution

To avoid ending up with more charges from the authorized user than anticipated, cardholders should ask the credit card company to set a lower credit limit on that card. In addition, cardholders should only add authorized users who they trust to spend responsibly.

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How Does Credit Accumulate?

Introduction

Credit is one of the most important financial aspects of your life. It affects whether you can buy a new car or house or qualify for a loan, and the type of job you are able to obtain. Here's how exactly can you accumulate not only credit, but good credit.

Credit Cards

Credit cards are one of the most common and popular ways to accumulate credit. A credit card can come from a variety of lenders and constitutes a line of cash that the lender loans out to the card holder up to a specific limit. You gain credit from the credit card lender by paying your bills on time and keeping your card balance at a low percentage to the available credit limit.

Loans

Loans are another way to accumulate credit. Like credit cards, loans act as a line of cash that a lender loans to you to use for personal or business matters. The only difference is that a loan usually comes as cash all at once and is considered settled once the balance is paid back while a credit card continues with the same available line of credit until you cancel the credit card or neglect to pay your monthly bills. You accumulate credit through loans by paying off your loan within the agreed time line in your loan terms. Loans may be for houses, cars, school or a host of other items.

Financing

Financing is another way to accumulate credit. Financing is a tool most often used by businesses for their clients or for stores for their customers. A line of credit works like a credit card or loan in that the lender extends to you a line of cash or gives you merchandise in exchange for the promise that you will pay them back. You accumulate credit through this by paying back the item in monthly payments by the terms of the agreement. You accumulate credit through this by paying on time.

Conclusion

There are two different kind of credit that you can accumulate. You can either accumulate bad credit, or good credit. Good credit is achieved by staying vigilant and abiding by the terms of your credit agreements. Paying on time is crucial to accumulating good credit. On the other hand, you can accumulate bad credit by paying late or not honoring the credit terms and agreements.

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Does Opting-Out Improve My Credit Score?

Adults in the United States commonly receive dozens of credit card offers in the mail every year, most of which end up in the trash. People who would prefer to not get these can opt out of receiving pre-screened credit card offers. This action has no direct effect on the individual's credit score.

Direct Effects

Opting out of receiving pre-screened credit offers does not impact your credit score at all. Although the companies sending these offers pull your credit report and appear in the "inquiries" section of the report, these are categorized as soft inquiries. A soft inquiry is one that was not initiated in response to your application for credit. Soft inquiries do not affect your credit score at all. Therefore, stopping the soft inquiries will not improve your credit score.

Indirect Effects

Opting out might indirectly affect your credit score if you apply for credit you do not need just because you are receiving offers in the mail. Each time you submit an application for a credit card, this creates a hard inquiry that lowers your credit score slightly. In addition, opening a new credit account hurts your credit score as well. In this sense, opting out can improve your credit score indirectly by removing the temptation to get more unnecessary credit cards.

Other Considerations

When you receive pre-screened credit card offers in the mail, this puts you slightly at risk for identity theft. This is because someone could steal your mail and apply for one of the credit cards in your name. This can damage your credit score until you notice the identity theft, at which time you can repair your credit, although it can take some time and effort. Receiving pre-screened credit card offers can have some benefits, namely that some of the best credit card promotional offers are only available to people who choose to receive pre-screened offers. If you are in the market for credit, receiving these offers can help you choose the best card.

How to Opt Out

The only official method for opting out of pre-screened credit card offers is to use the Opt Out Prescreen service. Opting out through the website stops all credit offers for five years. You can also opt out for five years by calling 888-567-8688. If you would like to permanently opt out, you will need to print the form from the website and mail it to Opt Out Prescreen.

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Change in How Credit Scores Are Calculated

The FICO score has long been the industry standard for determining the creditworthiness of potential borrowers. The VantageScore was developed from 2003 to 2005 by the three credit bureaus, Experian, Equifax and TransUnion, before being released to lenders. The FICO score is still the primary score that is used by lenders to determine whether you will receive credit. The VantageScore is still being used on an experimental basis to determine whether it should replace the FICO score as the industry standard.

Score Components

The FICO score bases your credit score on five factors, but the VantageScore uses six factors. Both formulas look at your payment history and how much credit you have recently applied for. The FICO score groups three of the VantageScore factors into one: the percentage of your credit that you are using, your outstanding balances and your amount of available credit are grouped into total amounts owed. The VantageScore groups two of the FICO score factors--how long you've had credit and the types of credit you have used--into one factor referred to as depth of credit.

Component Percentages

Though they use similar factors, the factors are weighted differently in FICO scores and VantageScores. For the FICO score, 35 percent is based on your payment history, 30 percent on the balances you owe, 15 percent on the length of your credit use, 10 percent on how much credit you've applied for recently and 10 percent on the mix of credit you've used. The VantageScore weights your payment history at 32 percent, your use of credit at 23 percent, your amounts owed at 15 percent, your depth of credit at 13 percent, your applications for new credit at 10 percent and your available credit at 7 percent.

Scoring Scale

Both FICO scores and VantageScores report your credit worthiness as a number. FICO scores range from 300 to 850, with 850 being the best credit score. VantageScores range from 501 to 990, with 990 being a perfect score. VantageScores also give a letter grade to each score. A score between 501 and 600 is an F, between 601 and 700 is a D, between 701 and 800 is a C, between 801 and 900 is a B and any score over 900 is an A.

Detailed Reports

VantageScores claim to be more detailed than FICO scores in terms of how negative information affects the score. According to Experian, the VantageScore takes into account not only whether the individual has negative credit information, but also how often that negative information occurs. For example, the VantageScore claims to differentiate between customers who have one or two negative reports from customers with a dozen or more negative reports.

Effects of VantageScore

The VantageScore was created to better judge the creditworthiness of people without lengthy credit histories. The FICO score reports that individuals who have less than six months of credit history or have not used credit in six months as being unable to be scored, resulting in those people usually not receiving loans even though they might be a low-risk borrower. The VantageScore extends the inactive period from six months to two years. The VantageScore is looked upon as a better predictor of creditworthiness for individuals with three or fewer credit accounts.

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