What is a Tradeline and How Does it Work?
A Trade Line or Tradeline is an industry term used to describe the accounts listed on your credit report. Every time you open a new account, you are activating a new tradeline, but this isn’t the only way they can be created and there’s much more to this term than a simple definition.
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How are Tradelines Created?
A tradeline is created when a new account is opened on your credit report, but it can also be created when your debt is sold to a new lender. Not much changes on your side—it’s the same debt and in most cases, it involves the same interest rate and monthly payment—but there’s a big difference for the industry as it’s now in the hands of a different company.
A tradeline can also be created when your credit card number changes and other major changes occur in your accounts.
These accounts are created when lenders provide necessary information to the credit bureaus. Lenders have agreements with credit bureaus that facilitates the transmission of payment information, thus making it easier for future lenders to determine the creditworthiness of an individual.
Not all lenders or creditors transmit this data, however. It’s highly unusual for a lender not to supply tradelines to the credit bureaus, but it’s not unheard of. As an example, online payment services like PayPal have been known to supply lines of credit based purely on an individual’s account history. If a lot of money is coming into that PayPal account and has been for a number of years, they know the user can be trusted. Of course, this changes if multiple payments are missed and the borrower defaults.
What Information do Tradelines Use?
A tradeline contains a complete history of that particular account and allows lenders and borrowers to delve further into the specifics. A simple way of understanding this is to imagine tradelines as files on your computer. By looking at the files on the whole, you can see how much space is being used and will be given a general idea of what file types you have, what they mean, and how much they are impacting your hard drive space. But if you want more information, you need to access the file data—this, in essence, is what a tradeline is.
This “file data” will include information such as:
- Lender Name: The name of the company in charge of the debt or line of credit.
- Account Number: The number on the account is shown in partial form.
- Account Type: Is it a mortgage, an auto loan, a credit card?
- Activation Date: The date that the account was created.
- Last Activity: A date showing the last activity on the account.
- History: A full history of all payments made into the account since it was established.
- Balance: The current balance of the account displayed in full.
- Loan/Credit Amount: The full amount of the initial loan or the current line of credit.
- Last Payment: The full amount of the last payment made.
- Account Status: Is the account active, in collections, etc.,
- Delinquencies: All delinquency data for the last 7 years.
Can You Buy Tradelines?
You can, but you probably shouldn’t.
Tradelines are sold at a premium (often several hundred dollars) to help borrowers improve their credit reports. If you don’t have any active tradelines on your credit report and are being refused credit because of this inexperience, it can seem like your only solution. It’s a Catch-22, and because it’s not your fault, it’s a highly frustrating one. But there are solutions that don’t involve buying tradelines.
The issue with this practice is that credit scoring systems are becoming increasingly adept at spotting it. After all, the practice of buying established tradelines goes against everything that credit scoring systems were designed for.
The idea is that these systems can be used to tell lenders whether an individual is capable of meeting repayments and being responsible with their debt. Scores increase or decrease based on their competence with regard to these debts. If they are simply buying already established lines, then those scores are artificially inflated and don’t paint the whole picture.
It goes without saying, therefore, that credit scoring systems are fighting this practice and finding increasingly effective ways to negate it.
Another issue with buying established tradelines is that many companies selling them are scams. It’s the perfect scam for them because they know the vast majority of their customers are desperate and willing to do anything, making them the perfect victims.
Alternatives to Buying Tradelines
You don’t need to buy tradelines to start building credit. If you’re being refused loans and credit cards because you don’t have a credit history, then sign up for a secured credit card instead. You can use the $300 or so that you were going to use to buy the tradeline, to secure against the credit card.
You then simply need to use that card in place of debit and cash. A secured card has a limit you create with your deposit, so you can’t go above it or accumulate debt that you can’t afford. In a few months, you will have an active, clean tradeline that you can use to begin establishing a strong credit score.
This method can also help if you’re being refused new credit/loans because you have a low score. Alternatively, use the money to clear some of your debt, increase credit card limits where possible, and put all your expendable income into clearing balances. Within a few months, you will have made substantial ground in improving your credit report and your score should increase as a result.
How do Tradelines Impact Credit Scores?
Tradelines are integral to your credit report as they are used to calculate your credit score. As discussed in our guide to How Your Credit Score is Calculated, a lot of data goes into creating this score and all that data comes from your tradelines.
The credit bureaus record the size of the credit, the extent of the debt, the payment history, and all derogatory marks to complete a full credit analysis and use this to build a detailed score.
Of course, this also means that if you don’t have any tradelines active on your account, you won’t have a credit score. If you have too many of them, your credit may also suffer, especially if they are active all at once or if multiple tradelines have derogatory marks.
How Many Tradelines is Ideal?
Credit scoring agencies have been very tight-lipped with regards to an ideal range and it’s anyone’s guess as to what constitutes “too many”. The only thing you can do as a borrower is to keep them to a minimum; only open accounts when you really need them.
You should also seek to close them sooner rather than later, as this will keep your credit report in good standing and bolster your score. There is an exception for credit cards, however. Not only has your score already taken a hit by acquiring these cards, but by closing them you could drastically reduce your credit utilization score, which accounts for close to a third of your total credit score calculation.
It’s also worth noting that if you open too many tradelines in a 24-month period, you may be refused new ones.
Can You Remove Tradelines?
A credit bureau can legally include tradelines on your account if those tradelines are accurate, complete, and fall within the legally allowed credit reporting timeframe.
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If a tradeline doesn’t belong, you are entitled to dispute it and have it cleared. This should be done with the credit bureau as opposed to the lender, but you can also involve them (and the police) if you believe that these unauthorized tradelines are the result of ID fraud.
Identity theft is a growing problem in the United States and millions of Americans are stung by it every year.
How Long do Tradelines Stay on your Credit Report?
Assuming the information is accurate, complete, and not disputed, an open account will remain on your credit report indefinitely. If this account is closed with positive information, it will remain on your account as per the credit bureau’s guidelines; if it’s negative, it will be cleared within 7 to 10 years.
Summary: What you Need to Know About Tradelines
The average borrower doesn’t need to know much about tradelines and doesn’t really need to concern themselves with how these operate.
It’s nice to know what’s going on behind the scenes and if you’re curious you may have asked yourself some of the questions addressed in this guide. However, the vast majority of people asking questions related to tradelines are doing so because they’re looking for shortcuts, which means they’re often straddling the line between legal and illegal; moral and immoral.
Remember that building credit takes time.
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It’s best to avoid taking big risks or doing anything drastic because doing so could jeopardize your financial future and make this lengthy process even longer and more frustrating.