How to Fix a Bad Credit Score the Easy Way

October 6th, 2010

People who have fallen onto tough financial times always want to know how to fix a bad credit score. In their attempt to learn how to build credit, they will spend thousands of dollars on credit repair services that promise to wipe their credit reports clean of all errors. Some people even try to create a new credit identity, as if they can sweep past errors under the rug.

The big secret, though, is that most of these services do not work. At best, these credit “repair” services will only temporarily suppress credit problems by using illegal methods to briefly suspend errors from your report—errors that will resurface only after the company has walked away with your dollars. At worst, they will expose you to lawsuits by using illegal methods of attempting to remove delinquent information from your credit report.

The good news is that there are tons of ways to fix your credit score that are both effective and legal. If you want to learn how to fix a bad credit score, keep these two components in mind:

How to Fix a Bad Credit Score, Rule #1: Be strategic.

As you can tell, I am not a fan of credit repair strategies that purport to increase your credit score by surreptitious methods. However, there are legal and effective strategies you can use to raise your credit score fast:

1. Build your credit score fast by adding yourself as an authorized user to a family member’s credit card, so long as it is in good standing.

2. One of the fastest ways to build credit is to transfer your credit card balances to your spouse.

3. Read 7 Steps to a 720 Credit Score, where you will learn more strategies for building a credit score.

How to Fix a Bad Credit Score, Rule #2: Focus on current behavior.

Think of it from the credit bureaus’ perspective. Wouldn’t you be much more impressed with someone who positively changed his behavior than someone who tried to weasel out of past mistakes? Instead of arguing with the credit-scoring bureaus about all of your late payments, try taking a few simple but effective ways to let the credit-scoring bureaus know you have changed your habits.

This strategy works because credit-scoring bureaus place more weight on current behavior than on past behavior. If you made a mess of your credit score two years ago, the credit-scoring bureaus will pay less attention to this if you are making smart decisions today. This means that you should:

Pay your bills on time.
Keep your credit card balances as low as you can – preferably below 30 percent.
Keep three to five credit cards active. Use them at least once a month, but pay your balances as much as possible each month.
Open new lines of credit after a financial disaster, like bankruptcy or foreclosure. The credit-scoring bureaus need proof that you can manage several lines of credit. If you wipe your hands of credit, they will not have this proof, and your credit score will not increase. Your bad credit score will increase if you have between three and five credit cards, as well as an installment loan, all in good standing. Bear in mind that your credit score will initially drop upon opening a new line of credit. But after six months of timely payments, it will begin to increase.

So here’s the big secret: If you want to know how to fix a bad credit score, don’t turn to credit repair companies that make promises that seem too good to be true. Repairing a credit score is simple, but it cannot be achieved with the wave of a wand.

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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.

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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

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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

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Part II: What does a credit score mean?

August 18th, 2010

In “Part I: What does a credit score mean?” we took a look at the meaning of credit scores in being approved for a loan and in obtaining the best interest rates.

“Part II: What does a credit score mean?” looks at:

What a credit score means in your job hunt.
What a credit score means for your insurance premiums.
What a credit score means in your search for a rental unit.

What does a credit score mean when searching for a job?

More than half of employers run credit checks on potential job candidates at least some of the time. This means that you must learn how to improve your credit score if you are one of the millions of unemployed Americans, particularly if you are applying for jobs that require you to handle money.

A potential employer considers a person’s credit score an indication of how reliable they are. And if the job requires you to handle money, a low credit score could also mean that you are financially strapped and might be tempted to skim a little money from the register. Whether you are a financial advisor or local hardware store cashier, a low credit score means that you might be less employable.

If you have a mediocre or bad credit, be sure to read my post about credit scores and jobs so that you can learn strategies for combating this problem.

What does a credit score mean for your automobile insurance premiums?

In some states, a low credit score will increase your auto insurance premiums! Auto insurers have found a correlation between a person’s credit score and the number of accidents in which they are involved, so the lower your score, the higher your premium.

What does a credit score mean for your rental application?

Landlords almost always run a person’s credit score before approving a rental application. The last thing a landlord wants to do is evict a tenant, a time-consuming and costly process. If your score is too low, you might have a problem finding a lease to sign. Be sure to read my article about renting and credit checks.

What does a credit score mean? A high credit score means that you are more employable, pay lower insurance premiums, and have more housing opportunities. A low credit score means you should learn how to improve your credit score!

Tags: credit score