How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 3

I’m excited about this week’s update to my eight-part series—How to Build Credit Before You Buy a Home or Make Another Major Purchase! Today’s lesson in how to build credit comes straight from Step Two of my book, 7 Steps to a 720 Credit Score. Step Two is: Have at least three revolving credit lines.

Credit bureaus give higher scores to people with three to five revolving credit card accounts, which include major credit cards such as Visa, MasterCard, American Express, and Discover, as well as store-specific retail cards, such as a Macy’s card, Chevron card, Gap card, etc. If you do not have at least three active credit cards, you should open some.

But, there’s a caveat: Open three major revolving credit cards, not three retail credit cards. If you have retail credit cards, be sure to read my article entitled, “Retail Credit Cards.” In short, this article explains that:

• Retail credit cards are not the best credit cards to help you along your path to learn how to build credit. Credit-scoring bureaus respond most favorably when people have three to five credit cards, so why waste one of them on a card that can be used only at specific stores.

• These credit cards often end up costing you more than you will save with the one-time discount you might receive when you open the account.

One thing to keep in mind when opening new credit cards and learning how to build credit: You credit score will initially take a hit when you open a credit card. The credit-scoring bureaus use a formula to calculate credit scores, and 10 percent of this formula considers inquiries by lenders into your credit score. Anytime you apply for a credit card, the credit card company will make an inquiry into your credit score, so your credit score will drop a bit at first. Don’t worry! Just know that in six months, your credit score will start to rebound, so long as you keep the balance below 30 percent and pay your bills on time. For this reason, if you have to open more than one card, open them all at once. Don’t prolong the agony! If you open one now, and another in six months, you will have to wait a year before your score starts to build. If you open them both now, your credit score will start to climb within six months (so long as you implement all the other steps).

If you have poor credit, you might not be able to open a typical credit card. In this case, consider opening a secured credit card. Lenders that offer secured credit cards will require you to make a deposit that is equal to or more than your limit, thereby guaranteeing the bank that you will repay the loan. If you do not make your monthly payment, the deposit is applied toward your balance.

Another option for borrowers with poor credit is to be added as an authorized user to an existing account in good standing. Authorized user accounts help you borrow a family member’s positive credit history while you learn how to build credit on your own.

If you have more than five credit card accounts, do not close the accounts. Most credit experts agree that once you have opened the excess accounts, the damage is done. In fact, closing them might hurt your score and will never help you if you want to learn how to build credit. If you have more than five credit cards, we sure to read the blog called “Closing Credit Card Accounts” so that you know exactly what to do if you have more than five credit cards.

Be sure to come back next week for the fourth blog post of my eight-part series: How to Build Credit Before You Buy a Home or Make Another Major Purchase. And, don’t forget to register for my free teleseminar that teaches you how to negotiate with banks for lower interest rates.

How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 2

This week, I am continuing my eight-part discussion of the seven simple steps I created in my book, 7 Steps to a 720 Credit Score, to teach people how to build credit before buying a home or making another large purchase.

This week, I want to jump right into Step 3 of the book. This simple step can guarantee big jumps in your credit score. Step 3 is one of the most important things you can do to increase your credit score quickly.

Step #3 is “Verify the Accuracy of Your Reported Credit Limits.” In other words, make sure that the credit card companies are reporting your proper credit card limits to the credit bureaus.

A dirty little secret about credit card companies is that many of them do not report your proper limits to the bureaus. Instead, they report a limit that is lower than your actual limit. Let’s say you have a $10,000 limit on your Visa. The credit card company might report your limit as only $5,000. Step 3 of the book explains why they do this, so please read the book if you want to understand their motivation. In today’s lesson, I want to focus on how to build credit and why improperly reported limits are bad news for your credit score.

One of the biggest components of your credit score is the balance-to-limit ratio you have on your credit cards. The lower your balance as a percentage of your limit, the better your credit score. If the credit card company reports a lower limit than you actually have, then your balance will appear to be higher as a percentage of your limit. In some cases, credit card companies do not report any limit at all. When this happens, the credit bureaus assume that your limit is $0. If this happens, then any balance you have could hurt your credit score because your balance will always appear to be over the $0 limit.

I know this might seem a little confusing, which is why I really want you to read Step 3 if you have questions.

If your limit is not properly reported to the credit bureaus, your credit score could drop twenty points per credit card or more! If you have two or three credit cards that are failing to report limits, your score could drop forty to sixty points, all because the credit card companies are misrepresenting your credit limit!

Talk about learning how to build credit! If you fix these errors, your score could increase sixty points overnight!

This week’s assignment for how to build credit is to review the credit report that you pulled last week (“How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 1”). Pay close attention to the credit cards, which will be referred to as “revolving cards” on your credit report. Look to make sure that:

1. The credit card companies are reporting a credit limit, and
2. They are reporting the proper limit.

If your credit card companies are reporting your proper limits, you are way ahead of the game, but make sure you review your credit report regularly—at least every six months—to make sure this problem hasn’t surfaced. Statistically speaking, 46 percent of people have improperly reported credit card limits, so there is a good chance that you will face this problem at some point in your life.

If you have a credit card limit that is not being reported properly, you can definitely benefit from this lesson in how to build credit! Here are the steps to correct this problem:

1. Make sure you don’t charge any more money on that card until you read Step 1 of 7 Steps to a 720 Credit Score. Any balance you have on that credit card could significantly hurt your credit score because it will increase the balance-to-limit ratio.
2. Call the credit card company immediately and find out why it is not reporting your proper balance. You will get better results if you remain polite and friendly to the credit card company representative, who will most likely tell you one of two things: 1) the bank has a policy against reporting proper limits; or 2) Your card does not qualify to have the correct limit reported. Regardless of which answer they give you, your next action steps are the same.
3. Kindly and respectfully tell the person on the other line that if they do not report the proper limit, then you will be forced to transfer the balance because you are trying to implement the steps you learned about how to build credit. This threat might do the trick as credit card companies do not want to lose customers.
4. Ask the representative if there is any way around this. Ask the person to be creative: There has got to be something! When you ask these sorts of questions (kindly, of course), the representative might come up with a way around the rules.
5. The representative might tell you that if you start paying an annual fee, the company will be able to report your balance. Do so! The $50 you pay per year in annual fees will help you in your journey to learn how to build credit. However, if this requires opening a new card, don’t do anything yet! Many banks will tell you that you need to qualify for a new card in order to get your credit limit reported properly. I only want you to do this if you have already read Step 2 of the book, which we will review next week.
6. Regardless of the outcome of your conversation, you should also send Templates 1 and 2 from the workbook. (If you do not have our complete package, visit www.7StepsToExcellentCredit.com).

If this process does not work, you need to do one of two things to properly implement the steps for how to build credit:

1. If the credit card balance is not being reported at all, pay off the card, or transfer the balance as soon as possible. Remember that having $1 on that card will hurt your credit score!
2. If the balance is being reported improperly, then you can continue to use the card so long as you keep the balance below 30 percent of the reported credit limit at all times. If your true limit is $10,000 but the credit card company is only reporting it as $5,000, you will need to keep your balance no more than $1500, or 30 percent of $5,000.

Remember to read the book if this is a lot of information that seems confusing. And join us next week for Part 3 of my eight-part series: How to Build Credit Before You Buy a Home or Make Another Major Purchase.

How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 1

During my twelve years in the mortgage business, I have often been asked how to build credit before buying a home. In fact, the reason I became a credit expert initially was to help my clients learn how to buy a home. But I quickly learned that buying a home isn’t the only reason to have great credit. If you want the best auto loan, you should have great credit. If you want the best credit card offers, great credit is the key. In fact, if you just want the best premium on your car insurance, you should have a great credit score.

Over the next eight weeks, I’m going to outline my seven-step plan on how to build credit. Here is a summary of what to expect over the next eight weeks:

• Part 1: How to Build Credit Before You Buy a Home or Make Another Major Purchase. During this week’s lesson, we will discuss where to get your credit report and credit score.

• Part 2: How to Build Credit Before You Buy a Home or Make Another Major Purchase. Next week, we will take a look at Step Three of my book, 7 Steps to a 720 Credit Score. In this step, we verify the accuracy of your reported credit limits to make sure that you receive the best credit card score you can get.

• Part 3: How to Build Credit Before You Buy a Home or Make Another Major Purchase. Next, I will explain Step Two of my book: Have at least three revolving credit cards.

• Part 4: How to Build Credit Before You Buy a Home or Make Another Major Purchase. This blog entry will explain Step One of my book: Keep your credit card balances under 30 percent of your credit limit. This blog will be especially important for people who need to know the facts of bankruptcy as it will explain how to rebuild credit after a financial disaster.

• Part 5: How to Build Credit Before You Buy a Home or Make Another Major Purchase. This is dedicated to Step Five of the book: Remove high priority errors from your credit report.

• Part 6: How to Build Credit Before You Buy a Home or Make Another Major Purchase. Part 6 is for those who have struggled to pay their bills on time. Here, I will teach you to negotiate before paying a bill in collection.

• Part 7: How to Build Credit Before You Buy a Home or Make Another Major Purchase. Part 7 is dedicated to the most important section of my book, Step Seven. In this step, we create a structured plan to protect your credit.

• Part 8: How to Build Credit Before You Buy a Home or Make Another Major Purchase. Finally, we will jump back to Step Four: Have at least one helpful active or paid installment loan on your credit report.

Moving on to this week’s lesson …

Part 1: How to Build Credit Before You Buy a Home or Make Another Major Purchase

If you want to learn how to build credit, you should start by taking a couple of preliminary action steps:

1. Run your free credit report from www.AnnualCreditReport.com.
2. Buy your credit score, but not from AnnualCreditReport.com. You will need to get the right credit score. Let me explain what I mean.

As I explain in my book, credit-scoring bureaus (Experian, Equifax, TransUnion) provide four different types of credit scores: the consumer score, the auto formula score, the Rental Score, and the FICO score. At least 90 percent of lenders use the FICO score, and 0 percent use the consumer score. Let me repeat that: 0 percent use the consumer score.

When you purchase your own credit score from most online sites, you will almost always be buying your consumer score. But it’s worthless—total garbage because not a single lender will ever review your consumer score. The consumer score is much different than the score that the lenders use to determine what interest rate they will give you.

Let me give you an example. One day I went to the government’s website, www.AnnualCreditReport.com, ran my credit report, and paid for my credit score. (Many people don’t know that you can get a free credit report from www.AnnualCreditReport.com, but not a free credit score. On a side note, I think this is completely unfair and misleading to the consumer.)

Speaking of unfair and misleading, www.AnnualCreditReport.com provides the consumer score. That’s right: Hardworking Americans spend their money on a worthless credit score. And let me illustrate just how worthless this score is. The same exact day, I ran my credit score through my mortgage company, which uses the FICO score. On the same exact day, my FICO score was 237 points lower than my consumer score.

227 points! If I had relied on my consumer score, I would have thought my credit score was 237 points higher than it actually was. You can see why this is a big problem.

I see this all the time! People come to me for loans and tell me they have a great credit score. But in reality, they have a great consumer score, but not a great FICO score. They have a high consumer score, which no lender will ever see, so they have an artificial sense of security regarding their credit score. Then they are shocked when their loan terms are less-than-desirable.

That is why I tell people to only buy their scores from one location: http://www.720FICOScore.com.

When you go to http://www.720FICOScore.com, you will have to pay $31.90 for your score, but it is worth it because you will see the same score the banks will see. You will have an accurate picture of your credit score.

When you buy your scores from www.720FICOScore.com, you will receive both your TransUnion and your Equifax score. For now, don’t buy your Experian score as Experian no longer provides consumers with a FICO score.

If money is an issue right now and you do not want to buy your credit scores, that is okay, For now, just download your free credit report. Eventually, you will want to look at your score; for now, we will start reviewing your credit report and looking for problem areas.

That’s it for this week! At most, this will take you 20 minutes. Come back next week for Part 2: How to Build Credit Before You Buy a Home or Make Another Major Purchase.