The Fastest Way to Build Credit

September 27th, 2010

Question: What is the fastest way to build credit? I am applying for a business loan, and I need to bump my score up by about 60 points.

Answer: There are a lot of reasons you might want to raise your credit score, and raise it fast. In today’s environment, you might not qualify for a loan if your credit score is not at least 720. About 60 percent of employers run credit checks on potential employees. Landlords won’t rent to people with bad credit. You will pay more in interest if you have bad credit. The list goes on and on …

Fortunately, if you want to learn how to build credit fast, I have a great trick. This works best for married people, but single folks can use it as well. Let’s start by assuming you are married. Later, I will explain how to modify this example if you are single.

The Fastest Way to Build Credit: A Tip for Married People

To build your credit fast, transfer as much of your credit card debt into your spouse’s name. To do this, simply have your spouse “buy” your debt by paying your balance(s) with his or her credit card(s). Assuming you both have individual credit cards, this will cause your score to jump quickly.

You see, the credit-scoring bureaus place a lot of weight on something called a utilization rate. Each of your credit cards has a utilization rate, which is a number that describe how much of your limit you are utilizing. For instance, if a credit card has a $1000 limit and you have a $100 balance, you are utilizing 10 percent of your limit. Your utilization rate, therefore, is 10 percent.

Credit-scoring bureaus respond best if your utilization rate is below 30 percent, so if you want to learn how to fix credit, you should always lower your utilization rate.

Start by transferring balances to your spouse’s credit cards. Of course, this might lower your spouse’s credit score, but you will buy the debt back (thereby increasing your spouse’s score) once you have qualified for the loan.

In short, you will have better loan terms, and your spouse’s score will be lowered only temporarily.

The Fastest Way to Build Credit: A Tip for Single People

If you are single and also want to know the fastest way to build credit, you can modify this tip and use the same strategy with a family member or a loved one. However, be sure to put some structures in place so that your family member/loved one is protected. For instance, you might want to structure a proper contract by hiring a lawyer or using an online service such as Virgin Money. You might also give your family member/loved one collateral. Is your car paid off? Do you have an expensive piece of jewelry? One way or another, be sure that you never jeopardize family relationships just to raise your credit score!

And be sure to download our free ebooks about how to secure home and car loans during this tight lending environment.

2 Comments Read more »

Top Ten Things that Will Hurt Your Credit Score: Part II

September 22nd, 2010

In my last post, I talked about five of the top ten things that will hurt your credit score. Here are the final five:

Things That Will Hurt Your Credit Score #6:

Not Pulling Your Credit Report Regularly.

A lot of people worry that if they pull their credit report, they will hurt their credit score. While it is true that 10 percent of your score is based on the number of inquiries by lenders into your credit report, pulling your own credit report does not hurt your score. You can pull your own credit report each and every day, and your score will not budge.

In fact, failing to pull your credit report could hurt your score. How will you know if someone opens an account in your name? How will you know if your account limits are being inaccurately reported?

At a minimum, pull your credit report from www.720FICOScore.com at least every six months.

Things That Will Hurt Your Credit Score #7:

Closing an account.

15 percent of your score is based on the age of your credit accounts. The older your accounts, the better your score.

For instance, let’s say you have five accounts:

Account #1 is five years old,
Account #2 is twelve years old,
Account #3 is seven years old,
Account #4 is eight years old, and
Account #5 is nine years old.

The average age of all of your accounts is 8.2 years. Now let’s imagine that you close account #2, which is twelve years old. Now the average age of your accounts is only 7.25 years.

And this is just one reason closing an account can hurt your score. If you close an account, the account will show a $0 limit. So if you have a balance on this account, your balance-to-limit ratio will be sky-high.

Don’t forget, too, that 10 percent of your score is based on the type of credit you have. The credit-scoring bureaus like credit reports with a healthy mix of credit, and they prefer that you have at least three credit cards. If you close an account, you might have too few credit cards, or you might not have a healthy mix, both of which will hurt your score.

Things That Will Hurt Your Credit Score #8:

Collections.

Collection accounts are particularly harmful because they are always preceded by late payments. A collection account should stay on your credit report for seven years from the date of activity that sent the account into collections. For instance, if you fail to pay your credit card bill on March 1, 2010, this is the traditional course of action:

1. A 30-day late payment will be added to your account on approximately April 1.

2. A 60-day late payment will be added to your account on approximately May 1.

3. A 90-day late payment will be added to your account on approximately June 1.

4. A 120-day late payment will be added to your account on approximately July 1, and the account will be sent to collection.

5. Assuming you make no further payments on the account, the collection will remain on your credit report for seven years after the original late payment. In other words, it will fall off your credit report on approximately March 1, 2017.

Things That Will Hurt Your Credit Score #9:

Paying a bill in collections.

Now let’s add a payment into the mix. Let’s assume all of the above, but that in March 2012, you make a partial payment on the collection account. Guess what? This renews the date of last activity, meaning that the collection account will stay on your report until March 2019!

It’s crazy but true. Paying a collection account will often hurt your credit score.

In 7 Steps to a 720 Credit Score, I describe this process in detail, and I provide you with all the forms and worksheets necessary to get that collection account off your credit report!

Things That Will Hurt Your Credit Score #10:

Late payments.

You probably already knew that late payments will hurt your credit score. Here’s the good news: The credit-reporting bureaus pay more attention to recent behavior than past behavior. If you follow the steps for building your credit score, the damage will be all but erased in as little as two years!

Tags: credit score

2 Comments Read more »

Top Ten Things that Will Hurt Your Credit Score: Part I

September 17th, 2010

You might be surprised by some of the things that will hurt your credit score. Over the next two blog posts, I’ll reveal the top ten things that will hurt your credit score, in no particular order.

Things That Will Hurt Your Credit Score #1:

No credit.

I always say that no credit is just as bad as bad credit. The credit-scoring systems have certain criteria by which they determine a person’s credit score. Without that information, they have no way of telling whether a person is creditworthy. Better safe than sorry, they think, and they assign a poor credit score to that person.

Ideally, you should have between three and five credit cards, an installment loan, and a mortgage.

Things That Will Hurt Your Credit Score #2:

Bankruptcy.

You probably already know that a bankruptcy is one of the worst things that can happen to your credit score. Not only does the bankruptcy hurt your score, but so do the late payments and collection accounts that led up to the bankruptcy.

Here’s what you don’t know: You can repair credit after bankruptcy in as little as two years!

Things That Will Hurt Your Credit Score #3:

High credit card balances.

Your credit score is comprised of 22 criteria, and a whopping 30 percent looks at your outstanding debt. Among other things, the credit-scoring bureaus want to see a low balance-to-limit ratio. If you carry a balance that exceeds 30 percent of your credit card limit, your score could be lowered. For instance, if you have a limit of $1000 on your MasterCard, keep your balance below $300 at all times.

Things That Will Hurt Your Credit Score #4:

An incorrect credit limit.

Here’s a dirty little secret that will hurt your credit score: Almost half of people have a credit card limit that is being incorrectly reported to the credit-scoring bureaus. Say, for instance, that your MasterCard has a $1000 limit. The credit card company might be reporting your limit as only $500.

Now let’s imagine that you have a $250 balance on that credit card. This is only 25 percent of the $1000 limit (see #3). But because of the credit card company’s mistake, your balance-to-limit appears to be 50 percent!

Failing to correct this mistake is one the ten biggest credit mistakes to avoid.

Things That Will Hurt Your Credit Score #5:

A foreclosure, repossession, judgment, or lien.

Ouch. Each of these things will cause your credit score to drop. The key to recovering after a foreclosure, repossession, judgment, or lien is to be proactive. You can raise your score to 720 in just two years if you start the process of rebuilding your credit score.

Too often, though, people feel overwhelmed by their finances, so they adopt a do-nothing approach and hope the problem just disappears. This only delays recovering. Instead, decide that you are going to take simple steps to rebuilding your credit, and that you are going to start today. If you follow an easy plan to rebuild your credit, your score will start to increase, and in just two years, you can enjoy all the perks of a 720 credit score.

Be sure to come back next week for #6 through #10 of the top ten things that will hurt your credit score.

Tags: credit score

1 Comment Read more »

Good Debt / Bad Debt: The Third Inappropriate Use of Credit

September 9th, 2010

In the good debt versus bad debt arena, I’ve already identified two of the most inappropriate uses of credit:

Today, I’m going to take a look at the third inappropriate use of credit.

Good Debt / Bad Debt, Inappropriate Uses of Credit #3: Holiday Shopping Sprees

It’s only September, and some stores already have their Christmas decorations on display. It’s a little ridiculous, but the truth is that before we know it, Thanksgiving and then Christmas will be at our doorsteps. Use your credit cards wisely to avoid a holiday hangover.

Many parents want to create memories for their children, so they go overboard when it comes time to shop for the holidays. But remember that your children will remember the time they spent with you more than they will remember the gifts they received. Want proof? Think back to your own childhood. How many gifts do you remember? Probably not many.

The holidays are supposed to make a person feel peaceful. If you use credit to finance gifts, decorations, or wardrobes, you will add stress to your life. Always, always leave the credit cards at home during the holidays.

Instead, follow this plan to keep you on the “good debt” side of the good debt / bad debt equation:

1. Start by creating a holiday spending budget.

Too many people head to the mall without any idea of how they want to spend, which sets them up to overspend. Determine how much you can afford to spend by completing a budget. Make a list of the people for whom you will buy gifts, and assign a dollar amount to each person.

2. Leave the credit cards at home.

“I’ll just put it on my credit card, and I’ll pay it off when the bill comes.”

How many times have you said this? The problem is that life tends to get in the way between the time you charge something and the time the bills comes.

Even to the most disciplined shopper, credit cards are a little like Monopoly money, but if you use cash only, you will limit your spending to the cash in hand.

3. Create “wallets.”

Before heading to the stores, review your budget and create envelopes with the names of each person you are going to purchase a present for (Son, Mom, Dad, etc.). Within each envelope, place the appropriate amount of cash you have budgeted for this person—no more and no less. Each of these envelopes represents the wallet you have for each person on your list.

Though you might want to bring a small amount of extra cash for parking and lunch, leave all credit cards at home, including your debit cards. When you purchase a present, use the money from the appropriate “wallet.”

This method will create a psychological barrier to impulse shopping. If you are tempted to splurge on a gift, you will be dissuaded when you consider whose wallet you will withdraw money from in order to cover the impulse shopping.

Want to know more about good debt versus bad debt? Be sure to read 7 Steps to a 720 Credit Score to help you build strong credit-management habits.

Tags: budget, credit, debt, personal finance

1 Comment Read more »

Good Debt / Bad Debt: The Second Inapppriate Use of Credit

September 3rd, 2010

Good Debt / Bad Debt: The Second Inappropriate Use of Credit

Last week, I introduced the discussion of good debt versus bad debt by explaining the worst use of credit out there: using credit to dig yourself out of debt when you do not have a budget that proves the loan will solve your financial problems.

Today, we talk about the second inappropriate use of credit: retail therapy. In the good debt/bad debt debate, this one is a no-brainer.

Good Debt / Bad Debt, Inappropriate Use of Credit #2: Retail Therapy

If you use your credit cards to buy things because you are bored or depressed, you are creating bad debt. Retail therapy makes you feel worse in the long run, particularly if you are maxing out your credit cards to finance the shopping spree. Not only is this expensive, it also hurts your credit card score. Find less expensive and more effective means of coping.

Here is a list of things you can do that will actually make you feel better and preserve your credit score. And you will notice that none of them cost a single penny:

* Invite your friends over to play card games.

* Snuggle in for movie night with a carton of ice cream.

* Write a letter to someone you love.

* Invite an old friend for a bike ride, run, or picnic in the park.

* Re-read a favorite book.

* Call your best friend with the goal of making her laugh so hard she gasps for breath.

* Take your kids to the park for a play date.

* Take a couple of hours to start that project you have been postponing.

* Wash your car, give your dog a bath, or clean out your closet. These might not seem fun, but I guarantee you will feel much more productive after conquering a chore than you will after a day of abusing your credit cards.

If these suggestions don’t work, at least make a commitment to use cash to finance your retail therapy. Sell some of those old clothes you found when you cleaned out your closet online. Then use the cash you earn from your online sales to pay for your shopping spree.

In fact, there are a ton of ways to find extra cash. Be sure to sign up for our free teleseminar about how to improve your credit score to take advantage of them and learn more about good debt versus bad debt.

Tags: budget, credit, debt, personal finance

1 Comment Read more »