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.