Credit Bad? Want to Learn How to Build Credit?

How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 4

I’m excited about this week’s lesson in How to Build Credit Before You Buy a Home or Make Another Major Purchase! In fact, this is among the most important lessons in my entire book, 7 Steps to a 720 Credit Score.

Step One of my book is: Keep your credit card balances under 30 percent of your credit limit.

As you are learning how to build credit, your balance on any one credit card should not be more than 30 percent of your limit. For instance, if you have a $1000 spending limit on your Discover card, keep your balance at no more than $300, even if you pay your credit cards in full each month. The debt you carry on a credit card in proportion to your balance is called a “utilization rate,” and credit bureaus respond more favorably if your utilization rate is low.

If your utilization rate is too high, do one or more of the following:

1. Transfer balances so that each card has a 30 percent balance or less; and/or
2. Pay your balances down to 30 percent; and/or
3. Call your credit card company and ask it to increase your limit so that your balance is less than 30 percent; and/or
4. Call your credit card company and ask it to lower your interest rate so that your balance stops climbing so quickly; and/or
5. Open another credit card account and transfer balances accordingly (but be sure to refer to part 3 of our series on how to build credit before you buy a home or make another major purchase). Remember, you never want to have more than five credit cards.

Okay, so let’s talk reality for a minute. If you are able to implement these strategies, fantastic! But if you are like a lot of people, you are struggling right now to make ends meet, much less pay your debt down. If you are in this scenario, I offer two suggestions to help you learn how to build credit:

1. Attend my free teleseminar, which will help you learn how to build credit and how to negotiate with the banks for lower interest rates.
2. Keep your balance as low as possible on as many cards as possible. If you cannot achieve a 30 percent utilization rate, shoot for a 50 percent utilization rate.

Now let’s talk about credit cards with no preset spending limit, such as many American Express cards. On these cards, credit bureaus report your credit limit using the highest balance you have ever had on your credit card (called the “high credit limit”). This throws your utilization rate out of whack if you generally spend the same amount from month to month. To avoid exceeding your target utilization rate on these cards, you can try this tactic: Spend one month “hiking up” your balance as high as possible, thereby increasing the high credit limit to a high enough mark that you do not exceed the 30 percent utilization rate in subsequent months. Of course, your credit score will take a hit during this month, but if you are not planning on making any large purchases in the next few months, this strategy will be well worth the temporary setback to your credit score.

And finally, remember that you must always check the limits that the credit-scoring bureaus are reporting. Part 2 of my series—How to Build Credit Before You Buy a Home or Make Another Major Purchase—discusses this in full.

Come back later this week for Part 5 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 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.