People already know that bankruptcies, foreclosures, repossessions, and collections will hurt their credit scores. And it’s no big secret that late payments are one of the causes of bad credit. But I bet you don’t know about some of the things that hurt credit! Today’s blog is about the the dirty little secret that will hurt your credit score. Here is is …
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? Well, the credit-scoring system 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 because the credit-scoring bureaus will think you are using $300 of a $500 limit. And this hurts your credit score.
There are a lot of theories as to why the credit card companies do this. One is that credit card companies buy lists of borrowers whose limits are, for example, more than $10,000. The companies then send credit card offers with enticing interest rates to the people on these lists. Their goal is to encourage borrowers to switch cards. Your credit card company does not want your name on that list. They want to make sure that you remain a loyal customer. In an effort to keep you as a client, some experts say credit card companies report a lower credit limit than you actually have, or they do not report your limit at all. This makes you less appealing to other credit card companies. This might be good news for their client list, but it is bad news for your credit score.
Are you a victim of this scam? If so, take the following steps:
1. Pull your credit report from www.my720ficoscore.com.
2. If the credit card companies are inaccurately reporting any credit limit of yours, immediately begin the process of correcting this mistake. Remember, if you cannot get this mistake fixed, you can and should fight back!
Category: Credit Score
Rebuilding Credit After Bankruptcy
Like a lot of folks who start trying to rebuild credit after bankruptcy, you might be thinking of wiping your hands clean of credit. And it might make sense that the fastest way to move past the bankruptcy is to stop relying on the loans and credit cards that precipitated the bankruptcy.
But contrary to popular belief, using credit appropriately in the wake of a bankruptcy is the best way to rebuild credit after bankruptcy. Of all the bankruptcy facts, this one might be the most important. Indeed, you might be able to build your score to 720 within a couple of years of declaring bankruptcy if you follow a smart plan to re-establish credit.
This twofold plan to learn how to fix credit starts by opening new lines of credit and concludes with paying your bills on time and in full.
Rebuilding Credit After Bankruptcy Rule #1: Open new lines of credit!
You might hear claims that you can have a bankruptcy wiped from your record. Beware of these claims! There is no legal way to wipe a bankruptcy from your credit report. That said, time does heal. The credit-scoring bureaus—Equifax, TransUnion, and Experian—are more concerned with your recent behavior than they are with your past behavior. The trick, then, is to persuade the bureaus to pay more attention to your recent good behavior than to your past behavior. By establishing new credit and using it responsibly, you can prove to the bureaus that you are a new person—that the bankruptcy forced you to change your habits and establish smarter financial strategies.
After you have declared bankruptcy, open three new credit cards (Visa, MasterCard, or American Express) and one installment loan as part of your plan to rebuild credit after bankruptcy. Taking out a car loan is not advisable, in part because of the high interest rates you would assume, but also because of the debt you would add to your credit report. Instead, buy a new appliance, piece of furniture, or electronic using an installment loan. Then pay the loan off within six months.
Keep the credit cards active by using them at least every other month. Make only small charges (preferably less than 10 percent of the limit), and pay the balances in full.
Of course, with both the credit cards and installment loan, be aware of high interest rates. Because of your bankruptcy, you will likely not qualify for the best interest rates, which is why I stress the importance of paying the balances in full as quickly as possible.
Another note about opening new accounts: Insomuch as it is possible, open these accounts all at once and as soon as possible after the bankruptcy. The credit-scoring bureaus respond best to accounts that have been open for long periods of time. Your future credit score will benefit best if you open the accounts now.
By opening these new lines of credit, you can begin to rebuild your credit after bankruptcy by giving the credit bureaus new information on which they can judge your creditworthiness. Show them you have changed your patterns of behavior.
In this way, you can immediately begin proving to the credit bureaus that the bankruptcy allowed you to turn over a new leaf and change your payment behavior.
Rebuilding Credit After Bankruptcy Rule #2: Never, never make a late payment!
After a bankruptcy, the credit-scoring bureaus will have an eye on you, even as your score begins to climb. If you make a payment that is even one day late, the bureaus will assume you are back to your old ways, and your progress will be for naught.
To best rebuild your credit after bankruptcy, you must pay your bills immediately every single month. This means that you must live within your means. Be sure to read our article about how to create a budget, find money, and establish habits that best afford you to bounce back after a bankruptcy.
