Credit Bad, No Credit Score, How to Build Credit – Question #2
Question Submitted by: Jan, Slidell, Louisiana
I refinanced our home into a poor loan with Countrywide. Our loan is now with Bank of America and we are two payments behind. Our credit is bad, any solutions?
Answer:
Jan – Thank you for your reaching out, and I know how difficult it can be when your credit is bad and you feel you have no options. It’s impossible to give you all your options with this information; however, here are a couple thoughts:
1) Your bank will not tell you this, but as long as you are paying any part of your payment, your bank will not negotiate with you on your loan modification. Myself and too many of my clients have gone through this – when you pay your bills, you don’t qualify for these programs. The irony of that statement amazes me every time I say it.
When dealing with the banks on the loan modification, be very nice (I guess most people with credit that’s bad are not that kind) and keep asking them for a solution. The banks are so overwhelmed that they cannot keep up with the requests they have and you won’t get their attention if you are paying.
2) There is no way around it; at the end of this process you will say, “My credit is bad.”
3) Your bank is going to tell you that you will be “unlendable” for 7 years because of credit bad. That is false. If you understand how to build credit, you can have a 720 credit score 5-6 years before those late payments fall off your credit report.
The key is to reestablishing your credit score is to start now. Also, don’t beat yourself up about this process, we have all had learning experiences over the past two years, and this too shall pass.
Credit Bad, No Credit Score, How to Build Credit – Question #2
Author: Philip Tirone
First Time Entrepreneur with No Credit wants Business Credit – Possible?
Credit Bad, No Credit Score, How to Build Credit – Question #1
Question Submitted by: Benjamin, Aliso Viejo, CA
How can a first time entrepreneur, with virtually no credit score, who is starting his own business, apply for business credit – the correct way, and not have to use personal collateral to obtain the credit?
Answer by Philip Tirone:
In short, especially in today’s market, you will need to learn how to build credit personally, before anyone gives you business credit without personal collateral. In short, they will consider your credit bad, and not lend to you.
This was possible before the mortgage meltdown, but now, it’s not possible and anyone that tells you it is, is just dreaming.
I’m a big believer in entrepreneurs! The key is that you start establishing your credit immediately, and the good news, since you have no credit, you will have a 720+ credit score in a very short time as long as you take the right steps. At that point, the lenders won’t consider your credit bad.
I recommend you attend our free 60-minute teleseminar, it’s jam packed with information, and at the end of the call you will be invited to enroll into our full program (that is why it’s free). Even if you don’t enroll in our program, you will find this very valuable.
If you can’t attend, here is a link to our full program, however, since you are a start up – I will give you our $997 program for whatever you can afford. I’m really committed to riding America of bad credit or no credit. The only way I can do that is with people like you, if you help me spread the word.
If you want to enroll, email me at Philip (at) 720CreditScore (dot) com and I will get you enrolled immediately.
Rich or poor… it doesn’t matter!
It doesn’t discriminate between people who make a ton of money…
And people who make just a little money.
One way or another, it will bite you.
I’m talking about bad credit…
See, I just read two articles (which I reference at the end of this email) that explain the big difference between bad credit and good credit in today’s economy.
Here are some of the shocking statistics:
- On credit cards, a consumer with a great credit score (720+) will pay about 12.9% in interest; a person with a 659 credit score will pay about 20.3% in interest.
This means that on a $5,000 balance, borrowers with poor credit who pay $150 a month will pay an extra $1,186 in interest. That’s almost double the interest paid by those with great credit.
And it means the borrower with poor credit will be making those $150 payments for eight extra months!
- The difference between a 740 credit score and a 679 credit score on a $10,000 five-year car loan is about $2,760 over five years—or an extra $552 a year.
- And on a 30-year mortgage, borrowers who take advantage of today’s low interest rates still end up paying an extra $3,312 each year in interest if their scores are low (on a $300,000 loan).
So let’s do the math and see how this adds up…
Let’s imagine two people:
1) Person #1 has great credit, a 30-year mortgage on a $300,000 house, $5,000 in credit card debt, and a new car loan of $10,000.
2) Person #2 has all of the above, but poor credit.
Over five years, Person #2 will pay an extra $20,506 in interest!
It bears noting that these days, borrowers with less-than-stellar credit might not even qualify for loans. The Wall Street Journal article notes that 90 percent of all loans originated in 2011 were given to people with high credit scores!
In one of the articles, the author writes: “Lenders say the premium for poor credit is necessary to manage their exposure to risk.”
What do you think? Is this “credit divide” fair? Leave a comment below, and let me know what you think!
If you want to read the articles in their entirety, here are the links:
Fed Wrestles with How Best to Bridge U.S. Credit Divide
by Jon Hilsenrath
The High Cost of Low Credit Score
by AnneMarie Andriotis
– Philip Tirone
Quick Credit Tip: Become an Authorized User
Learning how to become an authorized user on a credit card is a strong and quick strategy for building your credit, and building it fast. In fact, I have seen people’s scores jump as much as sixty points just by becoming authorized users.
Before discussing the mechanism for becoming a an authorized user on a credit card, let us take a look at the definition of an authorized user. An authorized user is a person who has permission to use another person’s credit card. The credit-scoring bureaus treat an authorized user just like they treat the account holder. If the account is delinquent, the authorized user’s credit score will suffer. If the account is in good standing, the authorized user’s credit score should improve.
For this reason, people with bad credit scores can become an authorized user as a strategy for building their credit scores.
To go about this properly, you will need to do several things. First and foremost, choose a family member (preferably a relative who lives with you) with good credit. The credit-scoring bureaus only include authorized users who are related to the account holder. If you have the same address and same last name as the account holder, the credit-scoring bureaus will be more likely to consider your authorized user status as valid.
Next, make sure the credit card company reports authorized users to the credit bureaus. You can simply call the credit card company and say: “I want to become an authorized user. Will you report my status as an authorized user to the credit bureaus?”
If the creditor does not report authorized users, this strategy will not help repair your credit score, so you should find a different credit card to which you can be added as an authorized user.
This brings me to my next point. In trying to implement what you have learned about how to become an authorized user, you might find that your family members are hesitant to add your name to their accounts, especially if you have a history of bankruptcy, repossession, or other financial disasters. What if you buy a bunch of things using the credit card that you cannot afford? The account holder will then be forced to either pay the bill or harm his own credit score. (And your relationship with the account holder might also be harmed.)
Here are some strategies so that the account holder can protect himself or herself:
1. First, the account holder should tell the credit card company not to issue a card to you. If you do not have a physical credit card, you will have a very hard time making purchases!
2. The account holder should not disclose the account number, credit card expiration date, and card security code from you.
In other words, you will be added in name only, without the ability to use the credit card. You can borrow the account holder’s positive credit history, but you will not be able to tarnish the account’s standing.
Keep in mind that account holders will not be affected by your behavior on any accounts that are separate. So long as the account holder does not allow you to access the authorized user account, his credit score will not suffer.
But yours will surge, so long as the account holder keeps the balance low (preferably below 30 percent of the limit) and continues making on-time payments. In fact, you might be shocked at how quickly your score starts to improve. After all, learning how to become an authorized user is among the most powerful tricks for repairing your credit.
Tip – ID fraud and smartphones, by 720 Credit Score
I recently read that smartphone owners experience a greater incidence of fraud and identity theft, and here’s why…
About 32 percent of smartphone owners save login info on their device, and 62 percent of them don’t use a password on their home screen, which means anyone who finds their phone can access their login info!
Here’s another problem with keeping personal info in your Smartphone – anyone who repairs it can download your personal info, and then use it to wipe your accounts clean or apply for credit in your name.
As the owner of 7 Steps to a 720 Credit Score, I’ve seen the effects identify fraud first-hand, so I wanted to pass this information along to you …
Protect yourself by:
- Putting a password on the home screen of your Smartphone
- Storing personal information in a file that cannot be accessed by someone who gets a hold of your Smartphone. If you ever need to get your phone repaired, the repair technician will have access to everything on your phone, so be sure to keep sensitive information somewhere else!
Any other tips for keeping your Smartphone safe? Post them below!
Sincerely,
Philip X. Tirone
P.S. Another thing you might consider is turning off your phone’s “location services,” which stores your location within every photo you take—this is bad news particularly if you have children. Imagine that you take a picture of your toddler eating spaghetti, and then post it online. Unless you disable location services, anyone who saw the picture could find the exact address of your home!
How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 3
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.
What Is the Fastest Way to Build Credit?
Check Your Credit Report Limits
Credit card companies often omit or inaccurately report credit card limits, and this causes your score to drop. About half of all consumers are missing at least one credit limit on their credit reports. And in other instances, credit card companies intentionally report a lower limit than you have.
Why does this hurt your credit score?
The credit-scoring formula places a lot of weight on something called a utilization rate. The utilization rate represents your credit card balance as a percentage of your limit. If your limit is $1000 and your balance is $300, you have a 30 percent utilization rate. If your balance increases to $500, your utilization rate would increase to 50 percent. In other words, you would be utilizing 50 percent of your available limit.
The credit-scoring formula responds more favorably to people who have a utilization rate that is no higher than 30 percent. Now let’s imagine that you have a $300 balance on a credit card with a limit of $1000. Your utilization rate is 30 percent. Good news for your credit score, right?
Not so fast. If the credit card company is only reporting a $500 limit, you will appear to be carrying a 60 percent utilization rate. And this hurts your credit score. So if you want to raise your credit score fast …
1. Check your credit report and make sure that your limits are being properly reported.
2. If they are not, call your credit card companies immediately and tell them that misreporting limits is against the law. Correcting the error should cause your score to jump quickly.
Become an Authorized User
One of the first pieces of advice I give to people who have suffered severe financial crises is to become authorized users on credit cards. Authorized users are allowed to use credit cards but have no contractual obligation to pay the bills. For this reason, a person does not need to have a high credit score to qualify for authorized user status on a credit card. However, the credit card’s history will often be reported on the authorized user’s credit report, so long as the authorized user is related to the account holder.
Becoming an authorized user on a family member’s credit card will quickly raise your credit score (even after a bankruptcy or other financial disaster) by allowing you to “borrow” the account holder’s clean credit history. However, the account holder—fearful that you will rack up huge charges you cannot or will not repay—might be reluctant to add your name to his or her account. Let the account holder know that she or he can be protected.
Becoming an authorized user on a family member’s credit card will quickly raise your credit score (even after a bankruptcy or other financial disaster) by allowing you to “borrow” the account holder’s clean credit history. However, the account holder—fearful that you will rack up huge charges you cannot or will not repay—might be reluctant to add your name to his or her account. Let the account holder know that she or he can be protected.
- First, the account holder should shred the credit card that arrives for you.
- Second, the account holder should never give you the account number, credit card expiration date, or card security code.
In this way, your credit score will increase while still protecting the account holder from any irresponsible behavior on your part. Authorized users usually see a quick jump in their score. After twelve or eighteen months, you might be able to remove yourself from the account and qualify for loans on your own.
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.
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!
Teaching Children About Credit: Step Two
Last week, I told you Step One of my plan for teaching children about credit.
This week, we’ll talk about the next step.
Allow your children to make pre-approved and controlled purchases using the authorized user account you established for them during Step One.
By giving your children access to the physical credit card and allowing them to make purchases, and then insisting they pay their bill at month’s end, you will go a long way toward teaching children about credit.
And if they make mistakes, push their budgets, and cannot pay their bills, even better! Let me explain.
I’ll start by putting into perspective exactly how this step works. Depending on your family’s finances and level of comfort, you can allow your child to make as large or as small of a purchase as you want, so long as:
1) The purchase does not push your utilization rate over 30 percent; and
2) You can pay the amount in full if your child is unable to do so by month’s end.
The important thing is that you insist your child pay interest on any payments that are not made in full by month’s end.
And if your children want to buy something you suspect they will be unable to pay back within a month’s time, I suggest you allow them to learn a lesson by making a mistake, so long as you are prepared to pay the bill at the end of the month. This financial expense will be worth the valuable lesson you will be teaching children about credit.
Obviously, we want our children to be responsible all of them time. But the reality is that they will make mistakes when learning something new. Wouldn’t you rather that they have already made a few mistakes in the safety of your home? I know I want my children to know what constitutes a high interest rate and how much debt they can reasonably carry without hurting their pocketbook. I want them to plan for paying off whatever debt they might accumulate. And I don’t expect them to simply stumble into this knowledge.
They will need to learn it somewhere, and this starts by allowing them to make mistakes along the way.
Consider two scenarios. In the first scenario, your daughter leaves for college without ever having experienced use of a credit card. On her first day of school, she walks by a booth in which a credit card company is promising approval. Your daughter signs up on the spot and receives a $500 credit limit on her first credit card.
The next week, she receives another credit card in the mail. She didn’t sign up for it, it just arrived. This credit card has a $1,000 credit limit. During the first week, your daughter goes on a shopping spree and maxes out her credit cards. And then she receives the bills, which have a minimum payment of $30 each.
She puts them on her desk and forgets about them. After all, she does not have a system of paying bills, and she is short on cash. The next month, her minimum payment on each card is $135, which includes the original $30 minimum payment, the next month’s minimum payment, and a $40 late payment. As well, because the late payment and interest have pushed her over the limit, she now has a $35 over-the-limit fee on each card.
Within one month, your daughter’s finances suddenly became desperate. She doesn’t have an extra $270 to pay both bills. What is she going to do? Turn to you to bail her out? Ignore the situation until it is turned over to a collection company? Hopefully, she will come to you for help, but regardless, the situation is not ideal.
Now consider the second scenario whereby you took a proactive approach to teaching children about credit. Your daughter is 16 and asks you if she can buy a DVD that costs $49.99. Because you can afford to pay the $49.99 added expense regardless of whether your daughter pays you back, you give her the credit card for this one purchase and tell her that she must pay you in full by month’s end or you will charge interest and a late payment fee. You explain that interest will be 29.99 percent, the typical interest rate assigned to new credit users, and the late payment is $40.
Because you want your daughter to experience the situation as it would play out in the real world, you send her one email notice, letting her know that the bill is due in one month’s time. Then you don’t speak to your daughter about the debt until the first day of the following month. You learn that your daughter forgot to make the payment. She now owes $49.99 for the DVD, plus $1.25 in interest and a $40 late payment fee—a combined total of $91.24.
Because you are committed to teaching children about credit, you sit her down and review the rules of credit card companies, showing her evidence that your terms are reasonable. In fact, you explain that in the real world, she is also over the preapproved limit that you, the creditor, set—$49.99. In the real world, she would also have to pay an over-the-limit fee, which would bring her total to about $126.24.
If she was unable to pay that balance down to at least $49.99, she would be charged an over-the-limit fee for each subsequent month as well. Tack on compounding interest and that $49.99 DVD is going to cost your child $196.24 in a few shorts months.
Instead, you offer your child a deal. She pays the $91.24, plus monthly interest, in three monthly installments, and you waive the over-the-limit fee. Next time, you won’t be so generous. Like any creditor, you will stay on top of her about making the payment. You might even call her cell phone early in the morning on a weekend to make sure she is planning to pay the bill on time.
Your daughter has just learned an important lesson in a safe environment in which you can protect your credit and her credit at the same time. So when she walks by that booth on the college campus, she will be better educated to make good decisions about credit habits.
How Often Should I Allow My Child to Use the Authorized User Accounts?
The answer to this question is as individual as the child. The frequency at which your children ask to use the authorized user accounts is a good indication of how responsible they are. If your children ask a few times a year and always pay the bills in full, you can be fairly certain that they are responsible with credit. If they ask a few times a month and often have trouble paying the bill in full at month’s end, then you probably want to grant access less frequently, making sure that one debt is paid in full before another line of credit is granted.
You will also want to spend time on subsequent steps making sure you are teaching children about credit education.
Related Articles
Teaching Children About Credit: An Introduction
Teaching Children About Credit: Step One
I cheated…
I’ve entered a bodybuilding contest.
If you know what I look like, you know that I’m not the bodybuilder type—not at all.
For those of you who don’t know what I look like, here’s a picture …
Now, in the interest of full disclosure, I should tell you that the category I entered is “Men’s Overall Fitness.” So I won’t be wearing a Speedo or showing off my massive biceps (which I don’t have and never will).
Anyway, the reason I’m telling you this is because I’ve been hitting the gym twice a day and being careful about the food I put into my body.
I won’t be wearing a Speedo, but I will be standing in front of a panel of judges wearing swim trunks. And since I like to win, I’m obsessive about doing everything I can to win …
But then on Monday night, the family went to dinner, and when Lily took the kids into the restroom, I snuck some dessert!
It was the first time I’d slipped since entering the contest.
And I know from the past that once I slip, it’s all downhill from there—at first it’s just once, and then it’s once a week, and next thing you know, I’m eating ice cream for breakfast.
Does this sound familiar? You’ll be doing just fine with your diet, and then you go on vacation, attend a birthday party, or have some other occasion where you give yourself permission to eat something, and all of a sudden, you are sitting on the couch munching on Doritos every afternoon.
But the truth is that any goal worth achieving is hard work. Fixing credit, addressing financial problems, losing weight, gaining a new skill – these are all things that require a ton of commitment and hours and hours of work.
We are bound to slip up, make a few errors along the way.
Letting one error get the best of us …
Well, that’s just nonsense.
What if we just got back on the horse? What if we took the mistake, learned a lesson from it, put that lesson in our back pocket, and just kept on truckin’?
Wouldn’t that be a lot better than eating a bag of Doritos?
So this week, let’s all recommit to an important goal, whether it’s financial, personal, physical, professional …
I’m recommitting to fitness. And if I’m feeling really brave, I’ll post the picture of me in the fitness contest!
What are you going to recommit to? Leave a comment below and let me know!
– Philip Tirone
Dean Graziosi Interview
You can listen to this interview here right away here:
Or, download it by clicking this link.
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