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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A Holiday, Charge-Card Reminder …

December 12th, 2011

Just a quick reminder…

Don’t get carried with your credit cards when shopping for holiday presents. Remember that one of the keys to a high credit score is to keep a balance that is no higher than 30 percent of the limit.

This means that if you have a $2,000 limit, your balance should not exceed $600.

Ever. Not even for one day. Even if you pay your bill in full each month.

You see, 30 percent of your credit score is based on your outstanding debt. And in large part, your outstanding debt includes something called the “utilization rate,” which is your balance as a percentage of your limit.

Credit bureaus give higher scores to people with low utilization rates, and they give lower scores to people with high utilization rates.

So keeping the right credit card balance is one of the most important things you can do this holiday season to protect your credit score.

For more ideas, be sure to download my free holiday booklet about saving money during the holidays, preventing the retail store scams, and protecting your credit score.

Click here for the holiday book about preventing real store credit card scams.

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Black Friday’s Retail Store Credit Card Scam

November 20th, 2011

With Black Friday just five days away, I’d like to take this opportunity to remind you to steer clear of retail store credit cards.

Of course, more than a few of the stores you visit on Friday will try to lure you in with big promises …

“You’ll save 10 percent on today’s purchase by applying for a retail store credit card,” they will tell you.

Just about every major clothing and electronics store has promotion aimed at getting people to sign up for a store-specific credit card.

But retail store credit cards will hurt your wallet and your credit score. Avoid them at all cost!

Here’s just one downside to consider: Many stores promote their store-specific credit cards by offering a 10 or 15 percent discount on same-day purchases if you open an account.

Let’s do the math and see how this adds up …

Imagine that you are buying a pair of $60 jeans from the Gap when the cashier tells you that you will get 10 percent off your entire purchase—$6—if you open a Gap credit card.

You figure it is a wise move, so you sign up on the spot. After all, you’ll save $6, or so you think.

But consider all the different ways you might end up spending MORE money:

- If you do not pay this and subsequent bills immediately, you will have to pay interest

- Especially during the holidays, you will be more likely to make purchases you cannot afford.

I should take advantage of this offer, you might think, piling a few more items in your shopping cart and justifying the excess purchases because you are buying gifts.

But you are probably not staying within your budget, so that $6 you “saved” will cause you to make a rash decision to blow your holiday shopping budget.

- You have added a credit inquiry to your credit report. Credit inquiries count for 10 percent of your credit score, so your score drops a few points.

This might not be a big deal, unless you plan to open another credit card, apply for a home loan, or get a car loan in the next few months.

If you do, you might pay higher interest rates, which means that $6 “savings” just cost you a bundle.

- Ever heard of retail therapy? Having credit cards in your wallet strengthens your ability to make emotional buying decisions by creating opportunities for you to charge things you do not need.

My point is that you most certainly do not save a single dollar by opening retail store credit cards.

Still not convinced? Think of it this way: Why would retail stores promote these cards with discounts unless they know they can eventually make money off the retail store credit cards?

There are other reasons retail store credit cards are a bad idea. Click here to read about the impact retail store credit cards have on your credit score.

Tags: credit cards, personal finance

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Build Your Credit Score in Five Minutes

May 18th, 2011

Want to know how to build your credit score in just five minutes?

I’ve got an easy tip that you can accomplish in about five minutes…

Ask your credit card company to increase your credit limit. This will lower your utilization rate and, as a result, help you build your credit score.

You see, the credit-scoring bureaus place a lot of emphasis on your balance-to-limit ratio (also known as your utilization rate). The lower your balance as a percentage of your limit, the higher your credit score will be. Credit bureaus prefer that your utilization rate is never higher than 30 percent, meaning that if your credit limit is $1,000, your balance is never more than $300.

So when a credit card company increases your limit, be sure you do not increase your balance.

A lot of people worry that asking for a limit increase will hurt their credit scores. While it is true that your credit card company might need to pull your credit report, the credit inquiry will hurt your score only nominally, and only for a few months. In the long run, the limit increase (coupled with a balance that stays the same or decreases) will help build your credit score.

And in some cases, you might be able to ask for a limit increase without having an inquiry added to your credit score.

If you are worried about adding another inquiry to your credit request, ask the credit card company these three questions before making a request for a limit increase.

1. “Do I qualify for a limit increase without having you run my credit report?”

If you do, simply ask for the full amount you want your limit increased to. If the creditor wants to run your credit report, remember that an inquiry will be added to your credit report, and your score will drop slightly. Ask the next two questions and decide whether you want to take the chance or not. Like I said, if your request is granted, the inquiry won’t matter because the limit increase will help your score in the long run. But if your request is denied, your score will suffer for a few months.

2. “Can I request the maximum increase, or must I provide you with a specific limit request?” If the creditor requires that you provide a dollar figure to which you want your limit increase, you will need to ask the third question. If not, you can request the maximum increase.

3. “If I request too much, will you deny the request completely, or will you make a counteroffer?”

If asking for too much means that creditor will deny the request completely, you might want to start by requesting a 10 percent or 20 percent increase, especially if your credit report is going to be pulled. If the creditor will make a counteroffer, request the full amount you need to raise your limit enough so that your balance is less than 30 percent.

If your request is denied, your score might drop a little due to the inquiry. But don’t worry too much about it—inquiries stay on your credit report for two years, but they only affect your credit score for twelve months. And inquiries from several months prior won’t impact your score more than a few points. Just work on lowering your balance, which will build your credit score by lowering your utilization rate.

Tags: build credit, credit cards, 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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