Investing in cryptocurrencies comes with significant risk. You could lose all the money you invest. Please read our risk warning here.
At the moment, cryptocurrency and the technology behind it, blockchain, are two of the most talked-about things in the world. But what do you know about it? And more importantly, does it have any impact on your credit score?
There's no doubt that cryptocurrency is making waves in the financial world. More and more people are buying and trading it, and the number of merchants accepting this form of payment is growing. But if you're considering dipping your toes into the cryptocurrency waters, one thing to consider is how it might affect your credit. The answer depends on the type of cryptocurrency you own, what you do with it, and if you used credit to purchase it.
Credit Score
Your credit score is a number that represents how risky it is to lend you money. It's used to determine whether you're likely to repay a debt. The higher the number, the more likely you'll pay it back.
Having an 850 credit score, the highest possible score, also helps find an apartment or get utility service easily. A landlord or utility company might look at your score before deciding whether to rent or provide service. A high credit score can also be helpful for other things, like getting approval for a credit card and knowing what interest rate you'll pay once it is approved.
Your credit score affects all kinds of financial decisions you might want to make. One big one is getting a mortgage or auto loan. The better your credit score is, the better terms you'll get on those loans. A bad score could mean you're denied altogether.
You can repair your credit score in less than 30 days by disputing the negative items on your credit report that are bringing down your score. The process is simple and can result in an excellent credit score in as little as four weeks.
You can do this yourself by using one of the many online software programs that walk you through the process step-by-step. Or, you can use a reputable company with credit repair services to help you with the process.
The reason these companies can help you improve your credit score quickly is that they know which disputes will be effective and which ones won't. They hire people who know how to dispute things on your credit report so that the bureaus will take them off and your credit score will go up.
The Ways Cryptocurrency Affects Your Credit
Bitcoin and other cryptocurrencies are traded on exchanges. These are websites where people buy and sell these coins. In some cases, users of exchanges have to provide personal information like their name, address, and Social Security number. Because these sites need this information, they must follow laws against money laundering by telling the authorities about any suspicious activity.
So if you use an exchange, whether for trading purposes or for investing, your transaction history can become part of your credit history. Here are several ways that cryptocurrency can affect your credit score:
1. Improved Credit Score
Like any currency, cryptocurrencies are volatile and, at best, speculative investments. However, some people have used them to build credit scores. It's possible to repair a bad credit score by using cryptocurrency. Cryptocurrency can have a positive impact on your credit score.
They can help you get approved for loans and other types of credit. Financial institutions use the data on your cryptocurrency transactions to determine whether you're a good risk or not. The most notable example is Bitcoin, which has been used to build credit scores.
The most important thing to remember is that the data is based on how much you spent, not how much you own. If you keep track of your spending carefully and pay off your bills on time, you should be able to keep up your perfect credit score with cryptocurrency as part of it.
2. Cryptocurrency Exchanges
Different cryptocurrencies use different exchange methods. Some are like cash, while others are like online accounts. Many cryptocurrencies use exchanges to transfer coins between users.
These exchanges act like e-wallets, which have become popular for managing money online in recent years. The idea is that you can add money to your account with a debit or credit card, or sometimes directly from your bank account, and then make purchases with merchants who accept that particular e-wallet as payment.
That means you can load up an e-wallet account with a credit card and buy cryptocurrency. If you don't pay off your credit card balance entirely each month, your balances will eventually affect your credit.
3. Credit Card Purchases
Using a credit card to buy cryptocurrency is a bit trickier. This kind of transaction could be thought of as the same as cash, so it could be charged cash advance fees. Most issuers will treat these transactions like any other purchase, but some issuers have decided not to approve them since they're often considered high risk. You can always try another issuer if one denies your request.
4. Credit Cards and Cryptocurrency
While most people use cash or checking accounts to make cryptocurrency purchases, you might be tempted to buy cryptocurrency using a credit card. Avoid this temptation. It's not a good idea to purchase an investment on a credit card since investments can be extremely volatile, especially ones as unpredictable as cryptocurrencies.
If you use a credit card to buy a cryptocurrency and the currency's value drops significantly the next day, you could end up owing a lot of money on your credit card. Top-rated credit repair companies are working on creating alternative credit scores that look at other factors besides traditional credit history when assessing someone's likelihood of paying back a loan. For example, they might base these scores on social media posts or shopping behavior.
5. Taxes
You can't use it as an excuse not to pay taxes on your cryptocurrency. The IRS considers cryptocurrency a property, not a currency. It expects you to report capital gains or losses when you buy, sell, trade, or otherwise exchange cryptocurrencies. This includes using it to buy goods and services.
You can earn money in the form of cryptocurrency, just like you can with dollars or euros. For tax purposes, anyone who makes money in any currency has to report it. Crypto traders also have to report their income from trading crypto. The IRS has made it clear that there are no exceptions here.
The length of time you hold the cryptocurrency affects the tax rate.
- Short-term investments – held for less than a year are taxed at your ordinary-income tax rate.
- Long-term investments – held for longer than a year are taxed at the long-term capital gains rate, which is lower than the ordinary income tax rate.
Conclusion
Like any other commodity, cryptocurrency is a medium of exchange that requires some form of currency. Even though cryptocurrency is still new to the market, it is becoming more and more popular and is quickly becoming an alternative way to pay.
However, it is still not universally accepted as a form of currency. It would help if you were careful when using your credit cards, as there are risks involved with using them to buy cryptocurrency. If you are thinking of purchasing crypto, it would be best to pay with cash so that your transaction record is kept private.
