Build Your Credit with Do-It-Yourself Credit Tricks

January 26th, 2012

Okay. You want to build your credit score, but you don’t want to pay a bundle.

Here are a few tricks that will help turn a bad score into a good credit score.

An obvious place to start is with your credit cards.

Here’s a little trick that can really boost your FICO score. (By the way, even though it’s perfectly legal, not one consumer in a thousand knows this technique.)

Most credit cards have a limit: a maximum credit line.

You are allowed to borrow against that credit line up to the maximum amount.

But, you should NOT!

Why not?

Lenders don’t like to make loans to consumers who are constantly “maxing out” their credit cards, because they consider them spendthrifts.

In fact, if the balance on any one of your credit cards is more than 30 percent of the credit line, your FICO score will be penalized.

So how do you reverse that trend … and raise your FICO score?

Here are two easy methods that work and won’t cost you a dime:

Transfer balances from one credit card to another, so that none of the balances exceed 30 percent of the credit limit. If necessary, obtain another credit card and transfer some of your balances to it. (But keep in mind that you should never have more than five credit cards, and that you should transfer your balance after you have secured the credit card and know the limit.)

Ask the credit card companies to increase your credit limit so that your current balance falls under 30 percent. If you can get the credit card company to raise your limit from $10,000 to $25,000, then you can safely borrow up to $7,499 – and not just $3,000 – on it without jeopardizing your credit.

Now here’s another trick …

You probably don’t know this, but credit card companies routinely under-report the limits on their customers’ credit cards – or, even worse, don’t report them at all. Let’s say your true limit is $10,000. The credit card company might report your limit as only $5,000 to the credit bureaus .

So if you have a $4900 balance, you appear to be “maxing out” the credit card, which will hurt your score.

Why do credit card companies do this? Because it keeps their competitors from offering you other cards.

When competing credit card companies see high limits from another card issuer, they have found credit-worthy borrowers whom they can solicit through the mail.

On the other hand, customers with low limits are not as desirable.

So many credit card companies report incorrect limits just to protect their customer base. But this could be hurting your credit score by causing the bureaus to think you are closer to maxing out your cards.

So what should you do? Simple: Just check your credit report to make sure the bureaus have the correct information. If not, call your credit card company and tell them they must correct the mistake – knowingly reporting incorrect limits is illegal. If you raise heck, the credit card companies will report the correct information.

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Credit Inquiries Won’t Hurt, As Long As …

May 15th, 2011

“But Phil,” my client was saying, “I don’t want to pull my credit report. Won’t that hurt my credit score because of the credit inquiry?”

My response was, “Nope. A credit inquiry won’t hurt your credit score—at least, not if it is soft.”

Let me explain …

The only kind of credit inquiries that hurt your credit score are “hard” inquiries. Hard inquiries are defined as inquiries into your credit score by a lender for the purpose of determining whether to extend you a loan.

All other inquiries are considered “soft” inquiries, and while they appear on your credit report, they do not hurt your score. So pulling your own credit score is considered a soft inquiry. Likewise, if a landlord or a potential employer pulls your report, the inquiry will not hurt your score. A lender’s inquiry might even be considered soft if it is done to determine whether to change your interest rate.

In other words, pull away! Checking into your own credit report is considered responsible behavior, and you won’t be punished for doing so.

So how many times can you pull your credit report? As many as you want. You can pull your own credit report every single day of the year, and your score won’t drop a single point. But if you have more than two credit inquiries by a lender within a six-month timeframe, your score will probably dip a few points.

Tags: credit inquiries, credit score

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How to Improve Your Credit Score in 5 Easy Steps

March 7th, 2011

Credit Score Dice There are a variety of reasons why you’d want to improve your credit score. You could be getting ready to make a big purchase such as buying a house, or you may want to make sure your options are open in the case of an financial emergency. In fact, in today’s world, your credit score is a key element to financial freedom. In addition to higher interest rates, low credit scores can affect your life in many other areas as well. Companies run credit checks before employment, and low credit scores can affect your auto insurance rates. All of these are great motivators for making improvements, but there isn’t always a great amount of information on exactly how to improve your score.

To help address these concerns, we’ve compiled a list of five ways you can improve your credit score. Some actions may have an immediate
positive result, while others will help improve your score over time. It’s important to remember that there are no fast fixes, however, your efforts will be rewarded with lower interest rates and better credit opportunities. To get started, read on…

1. Keep your credit balance below 30% of your credit limit.
Credit bureaus determine whether you are living within your means by evaluating how much debt you obtain in relation to your credit limit. This is referred to as your utilization rate. The bureaus reward consumers with a rate of 30% or lower. That means if you have a $1,000 credit limit, you will never want your credit balance to exceed $300. In fact, to be safe, it’s better to aim lower than the 30% rate because some credit card companies erroneously report lower credit limits, which would result in a higher utilization rate.

2. Make your monthly payments on time every month.
Your credit history is one of the largest factors in determining your credit score, with your recent activity weighing in considerably. In fact, your payment history makes up roughly a third of your credit score. That’s more than any other factor. If you’re at a loss as to where to start building your credit, creating a good payment history would be the best place to focus.

3. Maintain three to five credit cards and one installment loan.
Credit bureaus need to see credit history to determine whether you are a good investment. To provide this, you need to show credit activity. Having three to five credit cards that never go over the 30% utilization rate and a monthly installment loan that is reported to the credit bureaus each month will help to establish your credit habits. Keep in mind that retail credit cards are NOT a good option. This is due to the fact that they typically have very high interest rates and you are forced to shop at their location to keep the card active. If you do not shop there on a frequent basis, you may find yourself making unneeded purchases to maintain current credit history.

4. Check your credit report for inaccuracies and report them.
Did you know that nearly 80% of all credit reports have errors on them? These errors can negatively affect your score and therefore increase your interest rates resulting in higher payments. As a beginning step to building your credit, you should always get your credit report and check for errors. If you find any, you’ll want to report the credit errors to the appropriate credit bureaus.

5. Don’t close older or unused credit accounts.
Fifteen percent of your credit score is derived from the age of your credit cards, with older credit accounts giving you a better score. If you close these accounts, your average age immediate lowers and can result in a lowered credit score. Instead of closing these accounts, use them to pay small recurring fees such as Netflix or gym memberships. Then set up an auto-payment from your bank to pay the credit card a day afterwards. This way, you never have to actually use the card, however, you still reap the benefits of active payment history and an aged credit card.

For more information on how your credit score is determined, download our free eBook, What Your Bank Won’t Tell You About Credit.

Tags: build credit, credit report, credit score

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The Truth About Closing Credit Card Accounts

March 1st, 2011

When you’re in over your head or you’ve had a bad experience with something, your natural reaction is pretty much always going to be to steer clear of the cause for some time. With credit, this typically means cutting up credit cards and closing credit accounts. Unfortunately, when it comes to your credit score, this is one of the worst knee-jerk reactions you can have. On the surface, getting rid of your accounts makes a lot of sense. You’re having debt issues, so get rid of the source of the problem and your credit problems will start to disappear. The little known fact is that this can actually make your credit issues even worse.

Let’s look at this a little closer. Fifteen percent of your credit score is derived from the age of your credit cards, with older credit accounts giving you a better score. This part of your credit score is based on the average age of your accounts. As a result, every time you terminate older accounts, you drive down the average age of your accounts considerably and risk decreasing your credit score.

Another factor to consider is your recent credit history. The credit bureaus base their evaluation of your credit worthiness on your account activity. If you close your accounts, there’s no activity for them to evaluate. This can result in a lowered score because they have no current data to determine whether you are a responsible borrower.

In addition to your account activity and age of your credit cards, your credit score is also affected by your overall utilization rate. Your utilization rate is your percentage of debt compared to your credit limit. Credit bureaus reward consumers who keep their utilization rate below 30 percent. If you close an account, there’s a good chance your rate will go up and can directly affect your credit score.

If you are having issues with paying a card, some options you might want to consider include transferring some of the debt evenly across other cards so you keep your utilization rates below 30% on all cards. If you’re not able to do that, start reducing your debt and making your way to the 30% utilization rate by making regular monthly payments. A steady history of payments will demonstrate to credit-scoring bureaus your ability to manage your accounts and will eventually improve your credit score. You’ll want to pay special attention to the oldest accounts with the highest limits and lowest interest rates.

For more information about your credit score, download our free ebook, 10 Biggest Credit Mistakes.

Tags: credit cards, credit scoring myths

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Build Credit: Debunking the Lower Credit Limits Myth

February 23rd, 2011

Credit Cards Similar to the belief that no credit equals good credit, having lower limits can actually be extremely harmful to your credit score. To understand how this works you need to understand utilization rates, or what we call the 30% rule. Credit bureaus look to see that you are maintaining less than 30% of your credit limit at all times. If you go over the 30% marker, you are considered to be living above your means and this will be reflected in your credit score.

The problem with lower limit credit cards is that it is far too easy to go over the 30% rule. If you only have a $250 credit limit, you can never have a balance of over $75 without creating a negative reaction to your credit score. In addition, many credit card companies report your credit limit lower erroneously. Meaning you may be right under $75 each month, but your credit limit is being reported at $200 instead, putting you over the 30% limit.

In some cases, when you’re rebuilding your credit you may have to work with these lower balances. This will take careful planning to avoid any issues with errors. However, if you have higher balances, you do not want to ask for your rates to be lowered. You can never have “too much available credit.”

The best way to make sure you don’t go over the 30% rule is to use auto payments. You’ll want to schedule a monthly payment for a bill such as a gym membership or other monthly payment you need to make to be taken directly from your credit card. Then, from your bank account, schedule another auto payment to pay the credit card for the same amount.

This may sound like taking a few extra steps, but it keeps your accounts active and you can control exactly what spending is happening on your cards so you don’t go over the 30% limit.

To learn all all the facts on your credit score, get the book that will walk you through the 7 steps to a 720 credit score.

Tags: credit cards, credit score, credit scoring myths

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