How Will Cancelling a Credit Card Impact My Credit Score?

Do you know the impact of closing a credit card account? It can take different forms.

Do you know the impact of closing a credit card account? It can take different forms.

Canceling your credit card doesn’t just mean it won’t work when you go to swipe it; the cancellation can also bear an impact on your credit score. The biggest impact is likely to come from the adjustment to your credit utilization ratio, which indexes how much of your available credit you’re currently using at any point. In some scoring models, credit usage is considered a very significant factor which can account for nearly a third of your credit score.

Increasing Your Credit Utilization Ratio
Your credit utilization ratio compares the balances on your revolving accounts, like credit cards, against the credit limits of those card accounts. If you use a small portion of your available credit, lenders may see this as a sign that you handle credit responsibly. When you close a card, you’re reducing your available credit. This increases your credit utilization ratio, and can negatively impact your credit score. For example, imagine that you have two cards that each have a $6000 credit limit. If you have a $3000 balance on one and zero on the other, your total credit utilization is 25%–because you’re using $3000 of your total available $12,000. If you were to close the account you’re not using, your credit utilization ratio would jump to 50%, because you’re now using $3000 out of only $6000 now.

Information Remains on Credit Report
If you close a credit card in the hopes that it will remove the negative information associated with that account from your credit report, you may not actually be achieving what you hope to accomplish. According to Experian, the negative information remains on your credit report for the same amount of time even if you subsequently close the account. For example, late payments stay on your credit report for seven years from the original delinquency date. If a payment was late one year ago and you close your account, that late payment still can affect your credit score for another six years—regardless of whether you close the account or not, the delinquency shows on your credit report for the same duration.

Credit Scoring Considerations
Timing matters when it comes to closing credit cards. Experian notes that if you’re planning to apply for credit in the next several months, you may want to consider keeping the credit card open. Having long-standing accounts open is usually considered a good thing for your credit. Plus, according to Experian, paying down debt first on your remaining credit cards is often seen as a responsible credit behavior. Taking care of your credit consists of many different factors, all of which can help show that you’re being seen as responsible when you apply for new credit at a given point.

Credit Score Not the Only Factor
When deciding whether or not to close a credit card, Experian cautions that your credit score shouldn’t be the only factor you consider. If you’re struggling with debt management, keeping the card active may only tempt you to spend more. Closing it can prevent you from racking up additional debt while you work to get out from under water. By avoiding temptation, you can focus on paying down your other cards on time each month, which is often considered an important factor in your payment history. When you check your credit report and score regularly, you’re taking positive steps to be more knowledgeable about your credit, and strengthen your financial well-being.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company.  © 2014 ConsumerInfo.com, Inc. All rights reserved.

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Paying Down Debt

Generally, paying off debt sooner saves you money.

Generally, paying off debt sooner saves you money.

If you’re currently in debt, every paycheck brings in new money that you can use to pay off old spending. When paying off debt, you can choose to use all of the money that you earn today to spend today, or to save for tomorrow. For most people, paying off debt isn’t complicated – you just have to send more money to the people you owe. However, a little discipline and a bit of strategy can go a long way to helping you cover more ground and get more debt paid off in less time.

Ground Rules
When you decide to pay off debt, most strategies to follow fall within two general camps. The first is to stop running up debt. Paying off one credit card while you run up another one won’t improve your overall debt picture. The other strategy is to always make at least the minimum payment on every account. Just because you are focused on paying off one bank card doesn’t excuse you from paying the others each month. Not paying every creditor on time could trigger late fees and result in late payments that show up when you check your credit report—just the type of thing you’ll want to avoid as you work to cut down your debt.

Finding Extra Money
Paying off debt can be a temporary situation, since once it’s paid off it’s gone. The more money that you can save up to pay off the debt, the faster it will be gone. Looking at it this way can make it easier to find extra money. You don’t have to go without your morning latté forever – just until you pay off your debts. Cutting unnecessary expenses, selling items that you don’t use online or at a garage sale, or even taking on a second job can all provide extra money you can use to pay down your debts.

Paying Strategically
Many financial experts recommend focusing your extra efforts on one account at a time. This strategy requires you to make minimum payments on every account but send all of your extra money to one of them. Once it gets paid off, you then go on to the next account. This helps to concentrate your money, so it can work harder for you.

How It Compounds
Paying down debt makes it easier to pay down other debts. As a simple example, imagine that your monthly minimum payments are $37.50 on a $1,500 balance, $25 on a $1,000 balance and $25 on a $500 balance, totaling $87.50. If you can come up with an extra $125 per month and throw it all on your $500 card, it’ll be paid off in about four months. Then you’ll have the extra $125 plus the $25 you were using to pay the original card; you can add this $150 to the $25 minimum to pay off your $1,000 card. When it gets paid off, you get to add the $175 that you were paying to the $37.50 you were paying on your biggest debt. Once you’re done, you end up with $212.50 a month that you don’t need to spend on debt payments anymore. What a relief!

Debt for Debt
One strategy that might help you pay off your high interest rate debts more quickly is to consolidate them into a low interest rate loan. You may be able to do this with a balance transfer to a low interest credit card or with a line of credit. Lowering your interest rate means that more of your money goes to your debt and less goes to interest. However, if you do this and run your balances back up on your cards, you could end up with more debt rather than less.

The important thing to remember is that you can make changes to pay down your debt and get it under control. Making a plan today can help you avoid letting it snowball into something you feel overwhelmed by.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.

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Does Getting Declined for a Loan Affect My Credit Score?

Getting declined for credit doesn’t have to be a public matter. Learn why.

Getting declined for credit doesn’t have to be a public matter. Learn why.

Nobody likes getting turned down, whether it’s for a date, job application or a loan. However, when it comes to loan applications, the good news is that the lender’s decision on your application by itself won’t affect your credit score. In fact, your credit report won’t show the outcome of the application so future lenders won’t be able to tell if you were turned down or simply didn’t take the loan.

Inquiries Still Count
Any time you apply for a loan and the lender pulls your credit score, it appears on your credit report as a hard inquiry, regardless of the outcome. For example, say you submit an application for a credit card and the issuer pulls your credit score. The inquiry attaches to your credit report at that point, so it doesn’t matter if you get approved, denied or withdraw your application later. So, while getting turned down doesn’t have any impact on your credit report, your original loan application does.

Inquiry Impact
Inquiries count for approximately a tenth of your credit score in certain scoring models and remain on your credit report for two years. They generally have a small negative impact on your credit score. However, there isn’t a magic number for how much each inquiry can impact your credit score because, according to Experian, everyone’s credit history is different. In addition, as an inquiry gets older, it has a smaller impact on your credit score.

Monitoring Credit Inquiries
Regularly checking your credit report allows you to monitor who checks your credit. When you check your own credit, the report shows everyone who has pulled your report for a credit application within the last two years. In addition, you can see the information in your credit report that is used to figure your credit score. Understanding how your score is calculated can help you make wise financial decisions in the future so you can limit the chances of a loan application being denied.

Remember, getting declined for a loan doesn’t have to be the end of your financial well-being. This brief overview of the impact that a loan denial can have on credit scores can help shed some light on a factor you likely haven’t encountered before, but it can go differently for each person depending on their circumstances. Do make sure that you’re doing your homework to stay connected with your financial landscape—keep surprises at bay by checking your information regularly, especially before you next apply for a loan.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.

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6 Tips for Recent College Grads

Are your finances ready for life after graduation?

Are your finances ready for life after graduation?

Now that you’ve graduated college, it’s time to make an important financial decision: Will you allow your finances to rule you, or will you rule your finances? I’d highly recommend the latter. Managing your money for the first time can be overwhelming, but there are lots of ways to keep your finances clean and humming along. Here are six financial management tips for recent college grads.

  1. Choose Your Organizational System
    You can organize your documents electronically (which also saves money and protects the environment), or you can store them manually in a filing system. Think carefully before you decide on a system – there are pros and cons to each. It’s basically a matter of personal preference, but it’s better to choose one method and stick to it than to dabble in both.
  2. Shred Unnecessary Documents
    If you plan to store documents manually, remember that you don’t have to keep everything. Any document that’s also available online, such as bank statements, can be shredded after you’ve reviewed it. Tax returns and documents that contain beneficiary information should be stored permanently. Every six months, go through your entire filing system and pare it down to what’s absolutely necessary. This will help keep your files clean and relatively simple.
  3. Organize Due Dates
    Paying bills is a nuisance, but it’s particularly bothersome if you have to do it several times per month. Instead, contact your billing and credit card companies to see if you can adjust your due dates. The goal is to consolidate due dates to the same time each month so you only have to pay bills once.
  4. Bundle Your Services
    Get your Internet, cable, and smartphone services from the same company to further consolidate monthly bill-paying. Do the same with your homeowners, auto, and life insurance policies if your provider offers all three. If it doesn’t, check the competition. It’s a good idea to shop around for policies and services to ensure you’re paying the lowest rate.
  5. Back Up Documents
    Make sure you have access to back up financial records in case you experience a computer or home disaster. Purchase an external hard drive or check out a cloud service, such as Dropbox or Carbonite. The first two GBs of storage on Dropbox are free, while Carbonite costs $59 per year, but provides unlimited storage space.
  6. Pay Bills Online
    Paying your bills online streamlines the bill-paying process, and allows you to see immediately that your payment was received. It also gives you a better reference for balancing your checkbook and reviewing monthly bills. Just make sure you create a strong password and change it frequently to prevent possible identity theft.

Once your finances are organized, you can make other important financial decisions. First, pay off your credit card debt, then start an emergency fund. And as soon as you can, start saving for retirement – the earlier you start, the more you’ll save.

Are you a recent college grad? Do you have tips for managing your finances?

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisons.

Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.

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What Credit Score Do I Need to Get Approved for an Auto Loan?

Learn how your credit score can impact the choices you make when you purchase a new car.

Learn how your credit score can impact the choices you make when you purchase a new car.

Purchasing a new car is a major expense that everyone can’t always afford in one lump sum. Many people take out a loan to help finance their purchase. However, just because you’re in need of a car, that doesn’t mean you’ll automatically be approved for the financing that you may require. By educating yourself on how your credit report and credit score can play a role in your financing options beforehand, you can avoid surprises and be realistic about your options for an auto loan and its relative interest rate.

Minimum Scores
There’s not one single number across all auto lenders that serves as a threshold to be approved for a car loan, in part because your credit score isn’t the only factor used in determining your approval. However, according to Edmunds.com, you’re going to have a harder time if your credit score falls below 620, because at that point you’re considered a “subprime” borrower. You might still be able to get a loan, but you’ll likely need to pay a higher interest rate and might also be required to pay a higher down payment to show that you’re still a good credit investment for the lender.

Impact of Higher Scores
Don’t be content to have just the bare minimum credit score necessary to get approved for an auto loan: as your score increases, the interest rate you pay on your car loan could decrease. This could save you hundreds or even thousands in interest over the life of the loan. For example, as of late 2013, according to Cars Direct, a person with a credit score above 740 would receive, on average, a 3.2 percent interest rate.

Checking Your Credit Ahead of Time
Before you go to apply for a car loan, Edmunds.com recommends checking your credit report. This allows you to see what your report consists of, so you can ensure that all your best credit behaviors are being reported. In addition, if you check your credit score ahead of time, you may get a better idea of what the interest rate on your loan might be, so you can set a better and more realistic budget for your total loan amount.

Applying for Auto Loans
When you’re ready to apply for an auto loan, doing your loan shopping in a short period of time can help you minimize the impact of the loan inquiries that are placed on your credit report. According to Experian, most credit scoring formulas count all inquiries for auto loans within a relatively brief period of time, generally 14 days, as just one inquiry when calculating your credit score. That way, as long as you do all your car loan applications within two weeks, your credit score should be affected by only one inquiry, no matter how many banks or other lenders you explore within that period for that purpose.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.

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Can You Tap Into a Roth IRA for College and Education?

A Roth IRA distribution can be used for college tuition.

A Roth IRA distribution can be used for college tuition.

Roth individual retirement accounts are designed to help you save for your retirement, but they can also be used for college costs if you’re in a tight spot financially. The Internal Revenue Service allows you to withdraw the money you contributed to your Roth IRA at any time without penalty or taxes. But if you withdraw earnings – which you won’t touch until you’ve taken out all of your contributions, they’re taxable.

If you’re under 59 1/2, the earnings are usually hit with an additional 10 percent early withdrawal penalty. But, qualified higher education expenses allow you to avoid the penalty. Whether you’ve used up all of your loan options, or you don’t want your credit score potentially affected by taking out a student loan, tapping your Roth IRA can provide much-need college funds with a minimal tax hit.

  • Request a distribution from your Roth IRA by contacting the financial institution that holds your account. Each financial institution has a slightly different form, but you have to provide your name, identifying information, account number and how much you want to withdraw.
  • Spend your distribution on higher education expenses. To qualify for the penalty exception, which saves you the 10 percent additional tax on early distributions of earnings, you must spend it on tuition, required fees, books, supplies and equipment at a college, university or trade school. If the student is enrolled at least half-time, room and board also count as qualifying expenses. You won’t have to submit receipts with your tax return, but you should keep them just in case you get audited.
  • Report the distribution on your income taxes. If you took out only contributions, you won’t owe any taxes or penalties and you just have to note the amount withdrawn. But if you took out some of your earnings, too, those earnings count as taxable income. As long as you spent the money on qualified educational expenses, you don’t owe the early withdrawal penalty, but you must fill out Form 5329 to report the withdrawal to the IRS.

Keeping your educational goals on track can be a difficult task, but being able to leverage some of your savings in a flexible way can help keep those goals within reach. Knowing your options can help you decide on the best plan for your needs as they change over time.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company.   © 2014 ConsumerInfo.com, Inc.  All rights reserved.

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Can a Student Pay Bills With a Student Loan?

Excessive student loans can hurt your chances of being approved for loans in the future.

Excessive student loans can hurt your chances of being approved for loans in the future.

Technically, according to the U.S. Department of Education, you can only use your student loan money to pay for qualified education expenses at your school. However, once the money is in your hands, there is limited oversight for how you spend the money, which can make it very tempting to rack up substantial student loan bills for non-educational purposes.

Qualified Expenses
According to the U.S. Department of Education, qualified educational expenses include not only your tuition, but also “room and board, fees, books, supplies, equipment, dependent child care expenses, transportation, and rental or purchase of a personal computer.” Your school can give you a list of the costs of attendance so that you know how much is allotted to each category of expenses. Some of your bills will qualify to be paid with student loans, like your rent, utilities, food and school supplies. But it’s not just free money—you’re not supposed to use your student loans for vacations, or closing out old expenses, like paying off old credit cards.

Limited Oversight
When you take out student loans, the money usually goes directly to your school to fund your tuition. After that, any excess amount gets paid out to you as a refund. For example, say you borrowed $15,000 and your tuition and fees charged by the school is only $9,000. You would then receive a $6,000 check that you could then spend on other bills, like your rent or books. Though you’re not supposed to use the money for non-educational expenses like vacations, and you’re required to sign a statement saying you’re using the loan proceeds for educational purposes, U.S. News notes that students can find themselves in substantial debt because they borrow extra to live extravagantly. This could result in charges of fraud, which carry could result in fines, jail time, or both.

Loss of Tax Deduction
One of the ways the government tries to make education more affordable is allowing you to deduct a certain amount of qualifying student loan interest each year. If you use your student loans for expenses that aren’t qualified, you can’t deduct any of the interest on the loans as “student loan interest” when tax time comes. For example, say that you took out a $20,000 student loan and spend $19,000 of it on qualified expenses and $1,000 on paying off old credit card debt. Technically, you’re not allowed to deduct any of the interest.

Long-Term Effects
While student loans may feel like free money because they’re so easy to get for most people, you will have to pay them back. And, like other debts, they show up on your credit report. Don’t worry, just having student loans isn’t a death threat for your credit score. If you borrow responsibly and pay back your debt as agreed, it can help your score. But, if you’ve lived lavishly and racked up excessive debt with late payments or are defaulting on, you’re going to have a very hard time getting approved for additional loans, such as a car loan or mortgage, in the future.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company.   © 2014 ConsumerInfo.com, Inc.  All rights reserved.

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Does My Banking Activity Affect My Credit Score?

Not all banking transactions impact credit scores, or even appear on your credit report.

Not all banking transactions impact credit scores, or even appear on your credit report.

Most people keep their money in the bank, whether in in a checking account, savings account or certificate of deposit. Most of the time, what you do with your bank account won’t show up on your credit report. However, there are certain instances when it can impact your credit score.

Opening Bank Accounts
Opening a new checking account could have an impact on your credit score. That’s because some banks pull your credit report before allowing you to open a new account.  For instance, when you go to open a checking account, the bank may pull your credit score which may result in a “hard inquiry” on your credit report. According to Experian, these types of inquiries may lower your score slightly, but will never be the only reason you’re denied credit. Inquiries also stay on your credit report for approximately two years, so they’re not a permanent fixture there.

Overdraft Protection
Some banks offer overdraft protection, which allows you to withdraw funds for more than the balance in your account. Depending on your bank, it may report your overdraft protection amount as a line of credit, which would show up on your credit report. If you withdraw funds for more than your balance and don’t pay back the money to the bank, the bank may turn it over to a collection agency, which will report it to the credit bureaus as a debt you are late in repaying.

Monitoring Your Credit
Whether you’re curious as to how your bank is or isn’t reporting your accounts to the credit bureaus, or just interested in keeping tabs on your credit score, checking your credit report and score regularly can help you understand what affects your credit score and how it impacts your life. In addition, making on-time payments on your lines of credit is one of the best ways to keep your credit healthy—something that staying connected with your credit can show over time.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company.   © 2014 ConsumerInfo.com, Inc.  All rights reserved.

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Buying New vs. Buying Used: Pros and Cons

Keeping emotion out of the equation can help you land the best deal for the long run.

Keeping emotion out of the equation can help you land the best deal for the long run.

One of the first decisions you’ll make before buying a car is whether you’ll choose to look at new or used vehicles. New cars and used cars both offer certain advantages to buyers, and which is better for you at the time of your search is a unique decision based on both your own desires as well as your financial capability. Your credit can also play a role in determining whether you should buy new or used, since available capital and financing rates depend largely on your credit score.

Financing
Many buyers look to finance the purchase of their vehicle whether new or used, as even used cars typically cost tens of thousands of dollars. If you’re not in a position to pay cash for your car in full, you may need to apply for a car loan from either the dealer or an outside financial institution. As with most loans, the higher your credit score, the lower the interest rate you can generally get on a car loan.

One of the advantages of financing a new vehicle, says Car and Driver, is that you can usually get a lower interest rate than on a used car loan. This is because new vehicles haven’t been hit with depreciation – yet – but the second they leave the lot, the car will start depreciating. However, a new car will also generally cost you more over time simply due to the higher cost hit upfront.

Customization
When you buy a new car, you can potentially get it just the way you want it—it’s a chief advantage of buying a new vehicle. If you’re a patient buyer, you can custom order the vehicle with all factory options to your exact specifications. If you’re in more of a hurry, you can list your desired build and email dealers to see if your desired car already exists on a lot. If not, dealers can often locate a car very similar to your request and secure it for you. With a used car, you’ll have to choose from vehicles that are currently available in the marketplace. This means you may have to compromise on one or more factors that define your ideal vehicle, like color, drivetrain or interior options.

Warranty and Maintenance
According to Kelly Blue Book, the warranty that accompanies many new cars offers peace of mind that you can’t generally match when you buy a used car. Manufacturers offer warranties of between three and 10 years on new cars, during which time you may only be liable only for “wear and tear” items such as tires and brakes. With a used car, you’ll generally have only a short bit of warranty left—or possibly none at all. When the warranty expires you’ll be responsible for all repair costs, which generally grow as a car ages. These expenses can eventually outweigh the lower cost you originally paid for the car.

Depreciation
Depreciation is perhaps the most significant negative factor in buying a new car versus a used one. New cars typically lose 25 to 45 percent of their value in the first few years of ownership—with a major chunk disappearing as soon as they drive off the lot. If you can wait out those first few years and buy used, the first buyer will have absorbed the majority of the car’s depreciation and sorted out any early settling-in service issues. In terms of absolute price, you can often get a good deal on a car that’s just a few years old.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company.   © 2014 ConsumerInfo.com, Inc.  All rights reserved.

Posted in Auto, Budgeting | Leave a comment

When Will My Late Payment Disappear From My Credit Report?

Learning how long late payments stay your credit report in important for understanding your score.

Learning how long late payments stay your credit report in important for understanding your score.

Keeping up with credit card payments can sometimes feel impossible. As just one of many bills to pay, it can be easy to miss getting your payment in exactly on time each month. While your creditor may charge you a late fee as well as some interest, that kind of small misstep doesn’t usually appear on your credit report.

Rather, creditors are more likely to report late payments when you’ve missed the whole billing cycle, sharing that information with the credit bureaus to show up on your credit report for other potential lenders to see. That late payment will appear on your credit report for some time, though its impact can gradually lessen as time goes on.

On your credit report, negative information usually appears for a minimum of seven years. So, your late credit card payment will appear for seven years from the initial date the account was reported delinquent. Also, if the late payment eventually progresses to become a default, the seven year period for the information to appear still starts from initial date the account was reported delinquent.

However if you miss a payment to then get back on track, and later happen to miss a second payment, the seven year term for the second missed payment starts at the date of that second time you missed a payment, since those two are seen as separate events (even though they happened in the same account).

The good news is that during the time a late payment appears on your report, its impact can lessen gradually. If you’ve recently fallen behind in your payments multiple times, now is a good time to reevaluate your habits and find ways to improve your credit behavior.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company.   © 2014 ConsumerInfo.com, Inc.  All rights reserved.

Posted in Credit Cards, Credit Reports | Leave a comment